AutoZone Inc.
/ (AZO-NYSE)Current Recommendation / NEUTRAL
Prior Recommendation / OUTPERFORM
Date of Last Change / 10/23/2009
Current Price (10/22/09) / $139.10
Target Price / $146.00
SUMMARY
AutoZone is well positioned to take advantage of continuing growth opportunities that exist in each of its businesses such as retail, commercial and ALLDATA. The company is focused on an aggressive expansion of its Hub store, acceleration of store maintenance and expansion in the size of commercial sales force. However, AutoZone relies heavily on its private label brands that could hinder its business. Vendor consolidation and appreciation in gas prices are other threats facing the company. As such, we have downgraded the stock to a Neutral recommendation with a target price of $146.SUMMARY DATA
52-Week High / $166.8252-Week Low / $89.09
One-Year Return (%) / 31.28
Beta / 0.51
Average Daily Volume (sh) / 1,052,294
Shares Outstanding (mil) / 54
Market Capitalization ($mil) / $7,474
Short Interest Ratio (days) / 4.56
Institutional Ownership (%) / 56
Insider Ownership (%) / 3
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 4.2
Earnings Per Share (%) / 12.3
Dividend (%) / N/A
P/E using TTM EPS / 11.8
P/E using 2010 Estimate / 10.5
P/E using 2011 Estimate / 9.4
Zacks Rank *: Short Term
1 – 3 months outlook / 3
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / N/A
Industry / Ret/Whl-Auto Pt
Zacks Industry Rank * / 82 out of 217
OVERVIEW
AutoZone Inc. (AZO) is one of the nation’s leading specialty retailers of automotive replacement parts and accessories, operating in the Do-It-Yourself (DIY) retail, Do-It-for-Me (DIFM) commercial and other customer markets. Sales in DIY retail represented 84% of the company’s revenue in 2008, DIFM commercial sales represented 11% and the remaining 5% generated from other sales.
As of August 29, 2009, AutoZone had 4,229 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 188 stores in Mexico. Each automotive parts store carries an extensive product line for cars, SUVs, vans, and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products such as fresheners, cell phone accessories, and drinks and snacks. Over 60% of its domestic stores also have a commercial sales program, which provides for the delivery of parts and other products to local repair garages, dealers and service stations.
AutoZone sells the ALLDATA brand automotive diagnostic and repair software, and offers ALLDATA repair subscription, ALLDATA(r), online and on DVD, which offers comprehensive factory-correct repair information to DIY customers. The company also sells in-house brands of automotive batteries such as Duralast, Duralast Gold and Valuecraft, which are manufactured by the U.S. automotive parts producer, Johnson Controls.
REASONS TO BUY
Ø AutoZone uses its significant cash flow to open new stores every year and maintain a mid-single-digit square footage growth rate. In fiscal 2009, the company opened 140 new stores in the U.S. and 40 in Mexico. AutoZone is also focused on growing same-store sales by expanding private label offerings, which now account for 25% of sales.
Ø AutoZone is the leader in the DIY retail market in the U.S. with a 13% share. The average age of cars on the road is rising, which is raising the demand for auto parts necessitated by greater repair needs. Mexican revenues are likely to be robust due to an abundance of old cars in Mexico and a shortage of quality parts. AutoZone aims to tap this market potential by category management efforts and supply-chain initiatives in the retail segment.
Ø In the DIFM commercial segment, AutoZone has a 1.3% market share. Management is of the belief that the company can increase its share in the segment by focusing on improving marketing initiatives to boost sales.
Ø AutoZone is aggressively repurchasing its shares. In fiscal 2009, the company repurchased 9.3 million shares of its common stock for $1.3 billion at an average price of $140 per share. Each 1% reduction in shares outstanding increases earnings growth by 3%.
REASONS TO SELL
Ø AutoZone has a high degree of reliance (50%) on its private label brands, which could hinder its commercial business. Consequently, the company could face increased costs on account of higher staffing levels at the stores on top of rising occupancy costs.
Ø The appreciation in gas prices remains a threat to AutoZone as it has a negative impact on miles driven and deferment of purchases by its customers.
Ø In recent years, several of AutoZone’s vendors have merged. Vendor consolidation could materially affect the prices at which the company purchases its products.
Ø AutoZone’s stockholder deficit in the last three quarters increased to $433 million as on August 29, 2009 from $187 million as on February 14, 2009.
RECENT NEWS
AutoZone Meets Estimates – September 23, 2009
AutoZone reported a 3.1% year-over-year fall in its profit to $236.1 million or $4.43 per share for the fourth quarter of its fiscal year ended August 29, 2009. However, excluding the additional week in last year's fourth quarter results, the profit increased from $227.9 million, or $3.63 per share. The company has also managed to come close to the Zacks Consensus Estimate profit of $4.45 per share.
Net sales were $2.2 billion for the quarter, an increase of 1% from the comparable quarter a year ago. Excluding sales from the additional week included in the prior year's quarter, sales were up 7.1%, and domestic same store sales, or sales for stores open at least one year, increased 5.4% for the quarter.
Gross profit as a percentage of sales remained 50.3%, the same as the year-ago level. While gross margin was positively impacted by the continued leverage of distribution costs due to improved efficiencies and lower fuel costs, it was offset by a shift in the sales mix to lower margin products. Operating expenses as a percentage of sales increased to 31.6% from 31.4% last year.
However, excluding the impact from last year's additional week, operating expenses as a percentage of sales were flat compared to last year. Leverage from increased sales was largely offset by continued investments in the enhanced Hub stores and an acceleration of its store maintenance program.
For fiscal 2009, sales increased 4.5% to $6.8 billion, while domestic same-store sales were up 4.4%. Operating profit increased 4.6% on an operating margin of 17.3%.
Net income increased 2.4% to $657 million for the year, while earnings per share increased 16.8% to $11.82 from $10.04. Excluding last year's extra week, net income increased 5% from $625.8 million and earnings per share increased 19.7% from $9.81. Excluding results from last year's additional week, sales increased 6.6% and operating profit increased 7.2% to $1.18 billion.
AutoZone's inventory rose 2.7% from the comparable period of last year. However, inventory per store declined 1.4% to $500,000 from $507,000 last year. Net inventory – merchandise inventories less accounts payable – decreased on a per-store basis to $20,000 from $25,000 last year. The company believes the continued refinement of its Hub and satellite store network heading into the new fiscal year will continue to help mitigate inventory growth while accelerating late model parts coverage.
Share Repurchase Program
AutoZone repurchased 3.8 million shares of its common stock for $587 million during the quarter at an average price of $154 per share. For the fiscal year, the company repurchased 9.3 million shares of its common stock for $1.3 billion at an average price of $140 per share.
Store Openings
During the quarter, AutoZone opened 58 new stores, closed one store, and replaced three stores in the U.S. and opened 20 stores in Mexico. As of August 29, 2009, the company had 4,229 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 188 stores in Mexico.
Financial Position
AutoZone had cash and cash equivalents of $92.7 million as on August 29, 2009. Total debt amounted to $2.73 billion as on that date. The company had a stockholder deficit of $433 million as on the above period. In fiscal 2009, AutoZone had a net cash flow of $673 million before share repurchases and changes in debt.
VALUATION
Currently the shares of AutoZone are trading at 10.5X our 2010 EPS estimate of $13.22. The company’s current trailing 12-month earnings multiple is 11.8X, compared to the 90.5X average for the peer group and 27.2X for the S&P 500. Over the last five years, AutoZone’s shares have traded in a range of 10.6X to 16.7X trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on forward earnings estimates. The current 48% discount to the peer group for 2010 is slightly below the lower end of the historical range. Our long-term Neutral recommendation on the stock indicates that it would perform in line with the market. Our $146 target price, 11.0X our 2010 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of AZO. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 859 companies covered: Outperform- 19.3%, Neutral- 74.6%, Underperform – 5.9%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 217 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 217. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.