For the past decade, AutoZone (NYSE:AZO) has been a nice ride for investors. During this time, the average annual return was an amazing 22.42%.
So it should be no surprise that AutoZone’s latest quarterly report showed lots of strength. Earnings come to $301.5 million, or $7.18 per share — up from last year’s $268.9 million, or $5.66 per share. Revenues increased by 8.1% to $2.46 billion, with domestic same-store sales up 4.5%. However, the stock price did not move much on the news. No doubt, Wall Street anticipated the good performance.
So looking ahead, will AutoZone be able to crank out more lucrative returns? To see, here’s a look at the pros and cons.
Pros
Scale. AutoZone is the largest U.S. retailer and distributor of replacement parts and accessories, with more than 4,600 stores. Because of this, the company can realize substantial efficiencies in procurement and inventory management. Such things are important as the industry is fairly commoditized.
Room to grow. The “Do-It-Yourself” auto aftermarket segment is about $44 billion per year. Of this, AutoZone has only about 15% of the share. In fact, the company has only 1.8% of the total market for the “Do-It-For-Me” category. The market has a size of roughly $57 billion.
Margins. AutoZone has its own brands, which include Valucraft, AutoZone, Duralast and Duralast Gold. These have allowed for better differentiation. What’s more, the brands provide higher profit levels. For example, in the latest quarter, the company increased its gross margins from 50.5% to 51.2%.
Cons
Competition. Of course, it is intense. AutoZone must deal with large operators like O’Reilly Automotive (NASDAQ:ORLY), Pep Boys (NYSE:PBY) and Advance Auto Parts (NYSE:AAP). It even faces competition from big-box retailers such as Wal-Mart (NYSE:WMT).
Macro changes. Historically, a key driver of revenue growth has been the overall number of miles driven in the U.S. However, during the past couple years, things have been mostly flat. One factor is the recession. There also is pressure from high oil prices, which have resulted in less income for discretionary spending.
Internet. True, AutoZone has a decent website. But it still looks more like an Internet 1.0 approach. To remain competitive, the company really does need to get more aggressive with its digital strategy.
The Verdict
AutoZone is an incredibly well-run organization. Besides its sophisticated logistical platform, the company also has invested heavily in employee training. This has proven quite helpful in creating repeat business.
At the same time, AutoZone should see long-term opportunities in foreign markets. Already, the company is making inroads in Mexico, which now has 279 stores. AutoZone also has plans to expand into Brazil.
Yet the key factor for AutoZone is its measured growth. Consider that the company has posted 20%-plus increases in earnings per share for the past 11 months.
It’s this kind of track record that drives stock prices. And it looks like AutoZone has the platform to keep up the momentum. So all in all, the pros outweigh the cons for the stock.
Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
