Autozone Edges Past Advanced Auto Parts In Q1 2022

Autozone Is The Better Choice, And A Better Buy 

With the average age of U.S. cars on the road reaching new highs, it is no surprise that auto parts dealers are doing well. While both Advance Autoparts (NYSE: AAP) and Autozone (NYSE: AZO) put in strong quarters, the results make it clear which is the better buy. On the one hand, we have Advance Auto Parts with tepid growth, growth below the consensus, and weak guidance while on the other we have stronger growth, outperformance, and a positive outlook. In our book, this is a no-brainer but that doesn’t mean there isn’t opportunity in both stocks. While Autozone may be the better buy, Advance Autoparts offers a discount relative to its peer and pays a nice 3.25% dividend where Autozone does not. 

Autoparts Dealers Grow On Top Of Tough Comps 

Both AAP and AZO reported growth for the quarter but, in both cases, the growth was underpinned by inflation as much as comp-store strength and demand within the industry. The problem we have with Advance Auto Parts results is the $3.37 billion in revenue is up only 1.2% compared to the stronger 6.0% posted by Autozone. On a comp basis, Autozone also outperformed wth a gain of 2.6% domestically versus a much weaker 0.6% for Advance Auto Part. This is important to note because Advance has been outperforming for the last two years at least with revenue up 28.9% versus the smaller 25.3% 2-year comp reported by AAP. 

Moving on to the margin and earnings, the news is equally skewed in favor of Autozone. While Advance Auto Parts was able to maintain gross margin relative to last year (and increase the adjusted margin), Autozone was not. The caveat here is that Autozone only reported a 54 basis point decline in the gross margin and both companies experienced operating margin shrinkage due to deleveraging related to last year’s strong sales growth. The salient point here is that Autozone managed to produce stronger revenue and deliver margins well above the consensus while Advance Auto Parts did not. On the bottom line, Autozone’s $29.03 in GAAP EPS is up almost $3 compared to last year and beat the Marketbeat.com consensus compared to slower YOY growth and weak performance from Advance Auto Parts. 

Autoparts Are Good For Capital Returns 

Both Autozone and Advance Autoparts return capital to shareholders, the difference is in how they do it. Advance Auto Parts pays a dividend and buys back shares, those activities were worth $0.4 billion to shareholders during the calender Q1 period. Autozone doesn’t pay a dividend but it does buy back shares, it repurchased $0.9 billion worth during the period making it the clear winner. Autozone still has over $2.0 billion left under the current buyback authorization and can be expected to increase it when it runs out.  As for Advance Auto Parts dividend, it is yielding well over 3.0% and comes with a positive outlook for growth. The company is focused on becoming a respected dividend growth stock and on track to deliver annual increases well into the future. The caveat here is that we expect the astronomical 79% distribution CAGR to slow to more reasonable levels. 

The Technical Picture: Autozone Is In A Different League 

The charts make it clear to us that Autozone is the better choice. The company has been outperforming since well before the pandemic began and is on track to continue doing so. While both companies are solid investments and worthy of attention, if you have to choose one over the other, we favor Autozone.