AutoZone Pulls Back Into Buying Opportunity

There's Nothing Not To Like In AutoZone's Q3 Report

We have been consistent supporters of AutoZone NYSE: AZO throughout the pandemic. The company's exposure to both the OEM and aftermarket car industry Including the do-it-yourselfers and Commercial Auto Service makes it more than well exposed to the current economy. The Q3 results not only reinforce this idea but point to continued improvement throughout the remainder of calendar 2021. We, like a growing number of analysts, view the post-earnings-release weakness in share prices as another buying opportunity in this great stock.

Analyst Garrett Nelson of CFRA says they like the stock because Azo is the most levered to the DIY Auto Repair Market. He and his team view the record-high U.S vehicle age and the used-car market strength as a powerful tailwind for AutoZone. Wells Fargo analyst Zachary Fadem calls AutoZone a worthy long-term trade with upward revisions anticipated. Wells Fargo shares the $1700 Wall Street high price target with two other firms. That compares to the consensus estimate of $1,512, an estimate that has risen more than 13% over the past three months. 

Commercial Business Drives AutoZone Revenue To A new High

AutoZone had a great fiscal Q3 driven by strength in both the DIY and the commercial business. The company reported revenue of 3.65 billion dollars which is up 31.3% from last year and beat the consensus by $400 million dollars or 1200 basis points. A portion of the strength is due to an increased store count, the company added 32 new stores Internationally over the last quarter, but AutoZone reports strong comp sales as well.  On a comp-store basis, sales increased 28.9% versus the consensus of 15.2% with notable strength in the commercial part of the business. The commercial business, currently the companies best growth Avenue, expanded  44%  over the past year.

Moving down to the earnings, the gross profit as a percentage of sales fell a little more than 1% to 52.4% but let's take that with a grain of salt. The margin loss is due to the company's expansion into the high-growth commercial segments of the business and those efforts are paying off. Looking forward, Auto Zone says it intends to accelerate the company's growth rate as it boosts penetration into the commercial market so we should expect margins to remain under pressure in the near term. The good news is that the accelerated revenue growth helped leverage operating expenses. Operating expenses as a percentage of sales came in at 30.4% or down 550 basis points from last year.

“The investments we are making in Commercial pricing, service, and assortment are strengthening our competitive position in this large, fragmented market. We intend to accelerate our Company’s historical Commercial growth rate as we increase our penetration in this market ... Additionally, we remain committed to investing appropriately in a safe and productive environment for our customers and AutoZoners. As we opportunistically invest capital in our business, we remain committed to our disciplined approach of increasing operating earnings and cash flow, and of utilizing our balance sheet and capital effectively,” said Bill Rhodes, Chairman, President, and Chief Executive Officer.

The real takeaway from this quarter's earnings report is on the bottom line. The company's GAAP earnings of $26.48 are nearly double last year's Q3 results and beat the consensus by $6.72. What this means for investors is that AutoZone will be able to continue to fund growth as well as aggressively buy back its shares. AutoZone bought back more than 663000 shares over the past quarter for about 900 million dollars. At the end of the quarter, the company had $1.3 billion remaining under the repurchase program worth about 4% of the company's market cap. We will not be surprised to see this figure get larger.

The Technical Outlook: AutoZone Pulls Back Into A Buying Opportunity

Shares of AutoZone were moving lower even before the Q3 report was released. The market, if not the analysts, was expecting the strength.  In our view, this is setting the stock up for the next great buying opportunity. Because the indicators are bearish and momentum is still on the rise we expect to see this stock fall to the $1350 level if not to $1300 before it's all said and done.  At that time, if the stock begins to put in a bottom will be ready to start buying shares again.