In an increasingly anachronistic industry, AutoZone (NYSE:AZO) has managed to stay relevant. This dynamic proved true during the recent market selloff. Since Oct. 1, and just prior to its first-quarter fiscal 2019 earnings report, AZO stock gained slightly more than 6%.
Despite massive changes in the automotive landscape, the auto-parts retailer has consistently offered value for shareholders. Last September, management authorized an additional $1.25 billion share buyback on top of its existing repurchase program. Furthermore, AZO “has spent more than $1 billion on share repurchases for nine years in a row.”
Moreover, not all industry changes are necessarily negative for AutoZone stock. Although car sales have flatlined over the years, this dynamic also implies that more people are holding onto their rides. Logically, this benefits AZO as drivers must spend more on parts. Either that or they will hire repair shops to do the work.
This was a key reason why I picked AZO stock as a smart money investment earlier this year. Since my article’s publication date, shares have exceeded expectations, gaining nearly 36%. But after such a robust turnaround, is time to reconsider the bullish thesis?
While AutoZone stock has hit fresh highs, the current levels aren’t dramatically above 2016’s upper price band. What traders see is a company that has historically struggled to move convincingly past the $800 psychological price point. A similar story has developed for rival Advance Auto Parts (NYSE:AAP).
Additionally, both auto-parts retailers are squaring off against Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT). Since the two stalwarts have strong online channels, they impose an acute cost threat to AutoZone’s business.
Presumably, management must address these concerns to spark renewed momentum in AZO stock. Will Q1 deliver, or are we headed toward a breakdown?
AZO Earnings Delivered the Goods
By most measures, the auto-parts store put up impressive numbers. As such, it’s not at all unreasonable to assume that AutoZone stock will enjoy a near-term boost. At the same time, shareholders who are already profitable may want to sell into this strength.
Consensus for earnings per share settled at $12.21. This target was notably biased toward the optimistic end of the spectrum, which ranged from $11.56 to $12.68. Actuals came in at $13.47, or a resounding 10% positive surprise.
In the year-ago quarter, AZO produced an EPS of $10, slightly edging its consensus target calling for $9.81. The latest report marks a long string of consensus-beating performances in Q1, going back to at least FY 2015.
For revenues, covering analysts forecasted the company to ring up $2.64 billion. Unlike EPS, the sales estimate was near the lower end of forecasts, which ranged from $2.6 billion to $2.7 billion. The parts retailer matched the consensus target.
Another positive metric is domestic same-store sales, which increased 2.7% in Q1. Prior to the disclosure, analysts anticipated a 2% increase. This affirms that for now, AutoZone serves a viable consumer base.
But are these figures good enough to convince shareholders of AZO stock to continue staying onboard?
While the profitability aspect impressed, the growth picture was a bit disappointing. For instance, the latest sales haul represented a modest 2% lift from the year-ago quarter. However, in Q1 fiscal 2018, the company managed a 4.9% year-over-year gain.
Overall, the results should encourage the markets. However, the earnings report also demonstrated that AutoZone’s historical moat against competitors is slowly but surely fading.
Time to Take Profits In AZO stock
Stepping forward from Q1, I believe the rational strategy is to take profits off the table. During the first half of this year, when AZO stock suffered a sharp decline, acquiring shares made sense. Now, the risk-reward balance is less favorable.
First, reliability overall for compact and mid-sized vehicles have noticeably increased since the 2000s decade. So while drivers, especially millennial ones, are maintaining their rides without buying a new one every few years, their cars are less likely to break down. That’s a tough challenge to overcome, which may eventually impact AutoZone stock.
Further down the road, electric vehicles will likely outpace traditional variants. While we’re still well away from EVs completely overtaking fossil-fuel powered cars, we should acknowledge that AZO stock faces a long-term uphill battle.
Second, most of AutoZone’s customers, roughly 80%, work on their own vehicles. As more millennials and Generation Z climb the corporate ladder, this revenue trend severely threatens the company’s core business.
Why? Millennials don’t know how to do anything that doesn’t involve fingers tapping on glass screens. According to a report from Forbes columnist Larissa Faw, most young drivers don’t know how to check their tire pressure. Moreover, the increasing complexity of automobiles means that what used to be a garage hobby now takes an advanced degree. This represents a huge demographic threat to AutoZone stock.
Obviously, the auto-parts retailer offers many positives; otherwise, I wouldn’t have recommended it earlier. But since then, AZO stock has more than done its job. Now is a great time to drive home with some of those profits.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.