AZO - AutoZone: Where To Buy Old Faithful

Summary

• There are concerns that this could be a tough winter, one that is very snowy and wet and that wreaks havoc on cars.
• AutoZone, Inc. is not immune from the rising inflation costs and margins have been hit.
• Comparable sales continue to grow.
• AutoZone, Inc. is a company that prioritizes EPS growth.

AutoZone, Inc. ( AZO ) is a longtime BAD BEAT investing favorite stock to purchase on any meaningful downturn. This stock is one to long-term, as the company really has boosted shareholder value year after year. Every AZO stock dip is met with share repurchase activity. This is a top dog in the auto parts sector.

While this retailer is not immune to the inflationary environment, it continues to expand at a reasonable pace, excels at inventory management, and focuses on its margins. The company is a compounder that invests in itself. This stock has created a lot of wealth for our members since we were buyers under $600 . The company just reported earnings , and we think on the big market pullback this week, you should be looking to buy AZO below $2,300 again. At that level, we want to reiterate that it will be time to reenter the stock.

AutoZone's operations have been impacted by what is happening in the car market and the broader economy, but the company has held up very well, all things considered. It is the type of retailer that will still do well in a mild recession ad people fight to keep their cars on the road longer. Who wants to buy a new car when rates are still being raised? We think cars will remain on the road longer as consumers wait for better financing opportunities in a few years. It remains our opinion that this company will thrive moving forward and that you should buy.

There are concerns that this could be a tough winter one that is very snowy and wet and that wreaks havoc on cars. And consumers, although there are many competitors in the auto part space, seem to long favor AutoZone. Whether their market share dominance continues remains to be seen, but we see it as likely. We think the future is bright, and that while the near-term is questionable, the longer-term picture looks solid. Let us discuss.

Q4 highlights

In its fiscal Q1, AutoZone registered sales of $4.0 billion, which was a nice 8.6% year-over-year increase, and was a decent beat versus consensus analyst estimates by $130 million, and well above our expectations for $3.80 billion. As sales continue to be strong, we want to understand what's driving these sales. We will make this very simple. We think the most critical metric you should focus on is the movement in comparable sales. Comparable store sales were up 5.6% in the quarter.

The thing is that we want to see AutoZone is able to continue to focus on increasing sales while controlling expenses, particularly those impacting gross margins. This is a tough inflationary environment. We expect margins to face some pressure due to this and it is unclear if the costs can be passed entirely to the consumer. Inflation is hurting them too. That said, the company delivered gross margins that did indeed slip from last year.

Profit margin was 50.1%, which is strong on its own but dipped from a year ago by 242 basis points. The big driver of the higher costs was freight, along with the accelerating growth in the commercial line impacting the mix. However the company kept operating expenses flat and we think this should be applauded. So, we saw big sales growth, decent sales margins, and the operating expenses were held firm. Still operating profit dipped some due to the gross margin pressure. Keep in mind that the great buyback program is over the years has helped keep EPS rising, even if net income itself fluctuates.

Sure enough, net income for the quarter decreased 2.9% from last year, following operating profit lower. Net income hit $539 million. But due to the constant reinvestment of cash to repurchase and retire shares, EPS increased 7% to $ $27.45, surpassing our expectations by $2.00 per share. We love the growth, and think that a pullback is coming and should be bought.

Strength in 2023 likely?

We reiterate our bullish stance on our expectations for comparable sales continuing to be positive, even in a tougher economy. The tough economy is a benefit in some ways as consumers fight to keep their cars on the road longer. We are projecting for the entire year 2023 comparable sales growth of 5%-8% AutoZone also continues to strategically open new shops to fuel future growth. With new store openings, and those opened in the last three quarters, sales should continue to grow in the low single-digits, barring major recession, which we simply do not see happening.

On the market weakness, you should be buying AutoZone under $2,300 in our opinion. It is a great buying level because we see EPS for fiscal 2023 growing. The valuation is a touch stretched but the pullback helps. If sales grow in the low double digits on the back of strong comps, excluding any future buybacks, we anticipate fiscal 2023 EPS of $120-$130. That is growth over last year and this suggests that under $2300, the valuation is looking strong again. At the midpoint, this is 18.4X FWD EPS and that is a level that can usually be bought. We will add that as shares decline, the valuation gets even stronger.

Take home

We call AZO stock old faithful. It truly continues to grow EPS even if it's through massive buybacks. Margins remain very healthy even if they are falling a touch. The valuation for the growth is fair. Under $2300 you can buy a quality company at a fair price. AutoZone, Inc. is a great long-term investment.

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