Can AutoZone Get Back In the Zone?

| About: AutoZone, Inc (AZO)

By Brad Lightner

Due to the weak economy, Americans are resorting to keeping their vehicles longer, leaving automakers like General Motors (NYSE:GM) and Ford (NYSE:F) struggling with new car sales. One statistic shows that the average age of vehicles has increased by over 40 percent since the 1960s in the United States, while Americans’ incomes have increased more than new car prices over the same time period. This being said, many people who keep their older cars have to maintain them by going to auto parts stores to purchase necessities such as new batteries or alternators. One of the industry leaders is AutoZone, Inc. (NYSE:AZO), which is shown in their stock price in the past six months. AutoZone will continue to flourish through the summer months because they are the industry leader and their online demand has increased amidst the decline in new auto purchases.

AutoZone is a specialty retailer that sells automotive replacement parts and accessories. It is one of the leading retailers in this segment and has 4,092 stores in the U.S. and Puerto Rico and 148 stores in Mexico. Its products include maintenance items, accessories, new and remanufactured automotive hard parts and non-automotive products. The company also provides commercial sales to garages, dealerships, service stations, and government agencies.

AutoZone continues to out shine the pack with the highest sales-to-square foot ratio, along with higher gross, net, and operating margins than any of its peers. The company had an ROIC of 28.4% in 2008, beating the sub-industry, which had an average ROIC of 8.6% and the S&P Consumer Discretionary sector which had an average ROIC of 2.5%. Another reason why AutoZone has had success is because of its same-store sales. In its second quarter, it recorded an increase in same-store sales of 6%, up from its first quarter which had a decrease of 1.5%. AutoZone is also seeing a healthy store increase of 4% in the U.S. in 2009, along with a solid buy-back program that should support a share-net increase of nearly 16%.

Many consumers have turned to the internet to do their purchases, and AutoZone has seen increased traffic in online purchases through its website, From 2006 to 2008, AutoZone’s online sales grew at a rate of 17%, and by 2010 the website is expected to have sales of nearly $329 billion. Another helpful factor to its online use is its program called Z-net, which is its electronic catalog that can be accessed in its stores and also online. This program allows customers to find the exact parts that they need and also tells them which store has it available in stock so they can purchase the part as soon as possible. By using Z-net, AutoZone provides efficient and prompt services to its customers, a good reason for them to keep coming back to the stores.

Today’s economy has seen a steady decline in new car sales, especially gas-guzzling trucks and SUVs. Standard and Poor’s reports show that there should be a decrease in sales around 18% for 2009 to 10.8 million purchased in the year. One reason why these sales have fallen dramatically is because of the difficulty for Americans to receive loans for these vehicles. Another reason why people are not buying new vehicles is because of the insurance rates that are being currently offered and the expenses of taking out another policy. Although dealerships are offering plenty of cash back on new vehicles, Americans are continuing to hold back on purchasing new vehicles, and this trend will continue until the economy becomes healthier.

One factor that will play a role in the stock price of AutoZone is oil prices. As the summer months come, gas prices are expected to rise slightly, which will cut into the discretionary spending of Americans. If and when gas prices increase through Memorial Day, AutoZone might see a slight decrease in sales, but nothing that will amount to the company missing earnings when it reports later in May. As far as earnings go, analysts are expecting that AutoZone will have earnings per share of $2.90, while they reported earnings of $2.49 one year ago. AutoZone is expected to report earnings on May 27th before the bell.

The one big question that everyone is asking themselves is whether or not AutoZone is oversold. It has had a tremendous run in the past six months, and some may believe that this trend will not continue going into the summer. I believe that after AutoZone reports its earnings later this month, it will be the beginning of a productive summer as the company will continue to defy the decline in new automobile purchases with its increased internet sales.

Disclosure: None.