AutoZone: Is This The End Of The High-Growth Era?

| About: AutoZone, Inc (AZO)


AZO reported disappointing fiscal Q2 results last week.

The company reported flat same-store sales and failed to grow its earnings per share at a double-digit rate for the first time after 41 consecutive quarters.

The management attributed the poor performance to the postponement of the tax refunds. Therefore, investors should closely monitor the results of the ongoing quarter to determine whether this is true.

AutoZone (NYSE:AZO) reported its fiscal Q2 results last week. Its shareholders were disappointed by the results, as the company grew its earnings per share [EPS] by only 9% and hence it did not maintain its exceptional record of 41 consecutive quarters of double-digit EPS growth. Therefore, investors are now wondering whether the recent deceleration signals the end of the high-growth era or it is just a temporary setback.

First of all, the earnings report was quite disappointing in many aspects. To be sure, AutoZone reported flat same-store sales in Q2, which is quite unusual for this company. However, this has occurred in very few quarters in the past and the company has always managed to return to its growth trajectory. For instance, the sales of the company decreased 1.6% in Q4-2014 but they grew by approximately 8% in the following 4 quarters. Therefore, the flat comparable sales do not necessarily signal the end of the high-growth phase.

However, this is only the second time in about 20 quarters that the company misses the EPS analysts' estimates. Even worse, its operating EPS actually increased only 4% during the last quarter. The 8.8% EPS increase on the headlines resulted from the adoption of a new accounting standard by the company in Q2, which boosted the EPS by $0.37. Moreover, the income before taxes remained flat in Q2. Therefore, the 4% increase in the net income merely resulted from a reduced tax rate in the last quarter. All in all, the company experienced pronounced deceleration in Q2.

The management attributed the poor performance to the postponement of the IRS tax refunds. As the management has repeatedly emphasized in previous years, the timing of the tax refunds markedly affects the Q2 and Q3 results. Therefore, the recent deceleration could be attributed, at least in part, to the postponement of the tax refunds. It is also remarkable that AutoZone experienced 2.2% growth in its same-store sales in the first 9 weeks of Q2 whereas its same-store sales declined 6.3% in the last 3 weeks of the quarter. Therefore, it will be critical to monitor the performance of the company in the ongoing quarter to determine whether the timing of the tax refunds is the real reason behind the recent poor performance. Investors should also note that the negative momentum in the last 3 weeks of Q2 may signal that the Q3 performance is at risk of turning out lackluster once again.

It is also worth noting that the company continues to benefit from favorable trends in its business environment. More specifically, total miles driven have maintained their uptrend, as they increased 1.6% in October, 4.2% in November and 0.5% in December. In addition, while the gasoline price has climbed since early last year, it is still at relatively low levels, which do not impart a negative effect on the driving behavior of consumers. As these factors are likely to remain favorable for AutoZone for the foreseeable future, the company should be able to maintain decent growth rates in the upcoming quarters.

On the other hand, the company is also facing some potential threats. More specifically, the new administration currently considers implementing a border tax, which will negatively affect the margins of the company if it eventually materializes. That's why the CEO of AutoZone was among the executives who met with the President last month for this issue. In addition, Amazon (NASDAQ:AMZN) recently struck new deals with auto parts manufacturers. As the giant online retailer has exerted immense pressure on numerous retailers, it is only natural that the shareholders of AutoZone are worried about the impact of that move. On the one hand, AutoZone offers superior technical assistance to its customers, which Amazon certainly cannot offer. On the other hand, Amazon will certainly exert pressure on the prices of the products, particularly to those for which the consumers do not need technical assistance from experts.

Finally, investors should realize that the excellent growth trajectory of the past makes it harder for the company to keep growing at double-digit rates. As the company keeps growing, it is only natural that it is approaching a saturation point. For instance, its management recently mentioned that 80% of the US population lives within 8 miles from a store of AutoZone. While the management used that piece of information to substantiate its edge over Amazon, this piece of information also shows that there is diminishing room for future growth.

To sum up, AutoZone recently reported markedly disappointing results. Its same-store sales were flat while its EPS failed to grow at a double-digit rate for the first time after 41 consecutive quarters. While the management attributed the relatively poor performance mainly to the timing of the tax refunds, it will be critical to monitor the performance of the company in the ongoing quarter to determine whether this is actually true. If the results of the current quarter do not exhibit a much brighter picture, then the shareholders should probably realize that the company is likely to grow at single-digit rates from now on. On the other hand, the management of the company has always proved excellent in its execution and hence the odds of a rebound should not be underestimated.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AZO over 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.

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