Automotive supplies retailer AutoZone (NYSE:AZO) seems to be firing on all cylinders. From in-store growth to rising e-commerce spending to a surging commercial business, customer demand has been strong from multiple directions over the last few years.
AutoZone's stock price has risen at a 31% annual rate over the last three years compared to roughly 7% for the S&P 500. And while financial performance has slowed this year due to the economic backdrop, AutoZone is one specialty retailer that should have little trouble getting back in the fast lane.
Let's take a look at what's been driving the company's success and why it has more fuel in the tank.
Why is AutoZone Stock Doing Well?
AutoZone has more than 6,400 locations in the U.S., Mexico, and Brazil. The stores carry a broad range of parts and accessories for cars, SUV's, and light trucks. In addition to selling auto products to retail customers, AutoZone delivers parts to local repair and service stations as well as to dealerships through its nearly 5,000 commercial programs.
Aided by positive trends in the used car market, it has been the beneficiary of strong demand in both the DIY retail and commercial segments. AutoZone's quality product assortment and fast delivery service has appealed to its growing customer base and allowed it to grab market share in the auto parts space. And as a retailer, going 'above and beyond' in the customer service department is a main tenant of the AutoZone growth engine.
Like other retail business, AutoZone has also found success by adopting an omni-channel model that includes a growing e-commerce presence. Next-day home delivery and curbside/in-store pickup have given customers new ways to get what they need fast. This is a departure from the traditional auto parts business where customers would have to wait for days or weeks to get what they needed to get safely back on the road.
What Will Drive AutoZone's Future Growth?
Of course, there have been fewer vehicles on the road this year amid pandemic restrictions and the changing ways we conduct business and personal appointments.
After delivering earnings growth of 6%, 17%, and 26% in 2017, 2018, and 2019, respectively, bottom-line growth is expected to be in the low single digits in fiscal 2020. Looking into 2021, however, earnings growth is forecast to speed up to 7.5%—and double-digit growth may follow soon thereafter.
Why? AutoZone has a proven business model that should continue to work as market conditions normalize. If it ain't broke, don't fix it!
For starters, the company plans to continue the expansion of its retail footprint in the U.S. and internationally. Like in real estate, 'location, location, location' is the key concept for AutoZone. It will need to continue to strategically place its stores in areas where customer demand is strong and has an element of urgency.
Depending on the geographic market, AutoZone stores range from relatively small outfits to its 'mega hubs'. The latter group of stores located in major metropolitan regions will be leaned on as a primary growth contributor. These sprawling auto parts retail spaces are the ultimate one-stop shopping experiences for auto enthusiasts and commoners alike. Its here where AutoZone sees some of its biggest ticket purchases and daily transaction volume. The company plans to at least double its mega hub footprint from 35 to as many as 90 stores over the next few years.
Meanwhile, the commercial business is perhaps the most underappreciated growth catalyst. CEO Bill Rhodes called it AutoZone's "largest growth opportunity in FY2020". It could very play that part in FY21 as well. Local repair shops and auto dealers that used to shun the auto retailer are now turning to AutoZone first because of its product availability, fast turnaround, and dependability. It’s a trend that appears to have some staying power.
An increasing customer comfort level with ordering auto parts online should support a complimentary growth channel for years to come. AutoZone's loyal customer base and hard to pass up promotions (like free next day delivery on orders of at least $35) will make it hard for competitors to wrangle away market share.
Should Investors Buy the AutoZone Dip?
On September 22nd, AutoZone will be reporting fourth-quarter results before the market open. The Street is expecting EPS of $23.01 which would represent just 2% growth over Q4 of last year.
But with commuters and delivery trucks gradually getting back on the road over the summer months, we could see the consensus estimate get beat. And this wouldn't be surprising considering AutoZone has a history of meeting or exceeding earnings expectations, having not missed quarterly EPS estimates since 2017.
While most retail businesses have been scaling back on staffing, AutoZone has been growing its workforce to keep pace with demand. Last month it announced plans to hire 20,000 new workers into store sales associate, management, and delivery roles. This bodes well for not only the recent quarter but is a healthy sign of continued growth down the road.
With AutoZone stock correcting with the broader market in recent days, should investors buy ahead of earnings?
AutoZone shares now trade around 19x forward earnings, compared to a 25x forward multiple for the consumer discretionary sector.
Given the uncertain market conditions, betting on the fourth quarter performance is a bit of a crapshoot. But for an undervalued stock that hasn't corrected much over the last few years and has good growth prospects, it may as good a time as any to hop in.
AutoZone looks to be in the driver's seat to build on its position as the country's leading auto parts retailer.
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