AutoZone Earnings Preview: Car Wreck on the Way?

Autozone (AZO) is set to report earnings before the bell Tuesday and the CC is scheduled for 10 am. The street is calling for earnings of $1.91 and Revenue of 1.44 billion.

Increased competition in this space has really hurt the performance of the smaller stand alone players like AZO and The Pep Boys (PBY). Walmart (WMT), Costco (COST) and Sears (SHLD) have all moved into this space in an aggressive manner. The overall retail environment is also providing problems for the auto parts retailers and I think this will make it very difficult for AZO to meet it's revenue projections.

AZO is the largest independent Auto Retailer and I do not believe they will be able to continue their expansion to drive sales. I believe they will need to do some acquisitions (maybe in PBY now that it is beaten up) but this will not help their share price short term as they would most likely add onto the 2 billion in debt that they already have. Their balance sheet leaves much to be desired with almost no net tangible assets.

AZO has managed to keep up EPS growth in part by buying back 340 million dollars worth of shares in FY 2006 and 4.7 billion dollars worth of shares from 1998-2006.They have around 65 million shares currently outstanding. With such anemic revenue growth they will not be able to continue growing the bottom line growth much longer and borrowing money to buy back more shares isn't exactly a great way to solve that problem in the future being that they don't have the cash.

Another thing to look it is that the Big 3 US automakers have lost significant share to the Japanese makers and not trying to put down US auto engineering but the Japanese auto's are shown to need less maintenance then their US counterparts.

The company already has around 4,000 stores and as of late September California, Ohio and Florida were in the top 5 states for number of AZO stores. Being that these are the 3 states suffering the most from the sub prime issues and PBY blamed weakness in these markets for some of their issues I think AZO is more likely to disappoint this qtr then to beat.

I don't expect some huge miss as AZO has consistently managed to come in close to their estimates over a long period of time but I do think this qtr will highlight the lack of revenue and real bottom line growth prospects facing AZO for the reasons mentioned and that this is not a problem that they will be able to solve quickly in the current domestic economic environment.

Disclosure: Author is Short AZO.

Comments

[Love to short:]

As much as I believe there are many great opportunities to get short in this market, AZO is not one of them. Keep in mind that if you are going to go short ahead of earnings, factor in expectations before making your decision. Expectations were so low for this AZO, that it made it easy to surprise on the upside.

2007 Dec 04 12:17 PM

[haha:]

really nice to see you short AZO, and I didnot follow your suggesstion and close my position before the earning.

Today i bought more, it is really fun!

Good luck with your short! hope you add more and give another nonsense analysis

Haha

2007 Dec 04 03:53 PM

[haha:]

really nice to see you short AZO, and I didnot follow your suggesstion and close my position before the earning.

Today i bought more, it is really fun!

Good luck with your short! hope you add more and give another nonsense analysis

Haha

2007 Dec 04 03:54 PM

[Second Guess:]

The 20% increase in AZO share price today was probably in large part due to short sellers scrambling to cover their positions as AZO somewhat surprisingly eclipsed their expected numbers. Everyone in the "aftermarket" is at least beginning to be affected by the slowing economy and $3.00 gas. AZO is no exception and if not this quarter than most likely next quarter, this ride will slow down and the stock price will quickly reflect it. Mr. Lampert needed this "win" after his recent issues at Sears and Citigroup. He's not one to bet against, but then again, stock repurchase plans only last for so long. I am short, going forward from the $120.00 range.

2007 Dec 04 07:52 PM