AutoZone: Is The Growth Over?

| About: AutoZone, Inc (AZO)
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Summary

I initiated coverage in December 2016.

Shares have traded sideways to down.

Q2 earnings are out and I discuss the ramifications.

I initiated coverage on AutoZone (NYSE:AZO) in December with a hold rating but did think it would be a nice buy on a pullback. Since then, the stock did pull back, and I think that it is set to be bought again for a trade. I say this because, over the last year plus, it has traded sideways in a rather defined range, which allows investors to pick their spots. Longer term, it makes for an investment, because as you are likely aware, the name is pretty much the top retailer and a leading distributor of vehicle parts and accessories in the United States.

On top of that, many stores have a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations, and public sector accounts. One reason for the stock's recent struggles is that growth has become a concern.

Is the growth over? I would say that the rapid growth is over, but there is room for more. AutoZone has certainly offered stellar returns, essentially, for almost anyone who has purchased the name prior to 2016. But what about going forward? To understand where the stock may be heading, I will turn to recent performance and discuss expectations moving forward.

The company just reported fiscal Q2 results. AutoZone delivered sales of $2.3 billion, which was a small 1.4% year-over-year increase. That is not the kind of annual growth we would be looking for in a name like this, and it is one reason the stock has stalled. What I think is a stronger indicator is same-store sales. AutoZone saw flat same-store sales. This is a negative and not the type of growth we expect to see from a stock that trades at nearly 20 times current earnings.

What about actual earnings? Let's face it, the growth in sales is certainly nothing to write home about, but net income for the quarter was up 3.7% versus last year's comparable quarter. I would contend this growth is well below what I would like to see given the multiple on the name, but the earnings are strong. Net income came in at $237 million. Earnings per share, however, came in at $8.08, up 8.8% from the $7.43 last year.

This increase is more in line with my expectations for a stock such as AutoZone, but we must realize that a strong repurchase plan helped boost its per share results. Digging a bit deeper, we see that gross profit was 52.7% of sales, down 9 basis points from last year. Why the decrease? The company saw higher shrink expenses and supply chain costs. Operating expenses as a percentage of sales were up from last year to 35.9%.

Given the somewhat negative indicators that suggest stalled growth, you may see the 8.8% increase in earnings per share as strong. Again, the company has had a lucrative share buyback program in place, which explains most of this growth. In the present quarter, the company repurchased $198 million worth of stock. That is about 256,000 shares. What is more, the company still has $585 million left in its repurchase authorization. I would expect this to be fully extinguished and eventually a new reauthorization for further purchases. Speaking about the results, Bill Rhodes, Chairman, President and Chief Executive Officer stated:

"I would like to thank all AutoZoners across the organization for their tremendous efforts during what ultimately turned out to be a challenging quarter. Our sales performance in the last three weeks of our quarter was significantly challenged by well-publicized timing delays in IRS tax refunds, which negatively impacted our profitability for the quarter. While this quarter's results were below our expectations, our AutoZoners' ongoing commitment to providing customers with Trustworthy Advice will allow us to continue to succeed for years to come. Our objective remains to continue to provide great service to our customers and deliver strong, consistent performance for our shareholders as we remain committed to our approach of increasing operating earnings and utilizing our capital effectively."

While there was not much that can be done about the IRS refund issue, the growth seems to have more of an issue than just this. Performance was below expectations, but the name will continue to do what made it great, managing its stores effectively. This is what will drive another record year as AutoZone focuses on quality.

In this quarter, AutoZone opened 33 new stores, including 3 in Mexico and one in Brazil. As of February 11, 2017, AutoZone had 5,872 stores in total. Turning to inventories, these increased 8.7% over the same period last year, driven by new stores and increased product placement. Inventory per location was $665,000 versus $633,000 last year and $647,000 last quarter.

What's the takeaway? Great company but not the best investment right now. It is a good trading stock, with action moving mostly sideways as the growth has stalled for now. Now, as far as the outlook is concerned, there are expectations for sales increases of 3-5%, and earnings growth of 10-15%. Therefore, I think the stock is pricey here as an investment. I think it's a hold longer term, but a great trading vehicle shorter term.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.