AutoZone and peers slip amid concerns over DIY auto parts demand

Sep. 19, 2022 12:10 PM ETAutoZone, Inc. (AZO)ORLY, AAPBy: Clark Schultz, SA News Editor7 Comments

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Shares of AutoZone (NYSE:AZO) turned lower in midday trading on Monday to reverse a premarket gain with a drop of 2.54% to $2,110.61.

On the bull side, Truist Securities analyst Scot Ciccarelli said AutoZone's (AZO) quarterly results were particularly impressive given the company’s heavy DIY exposure and the pressures that lower/middle income consumers are under. "We believe this industry continues to benefit from same SKU inflation and think that AutoZone continues to gain market share, especially in the larger/more fragmented commercial segment," he stated.

Truist kept a Buy rating on AZO and price target of $2,174 in place.

Evercore ISI (In Line rating, price target $2,180) thinks the results showed some evidence of consumer trade down with AZO growing the topline and winning market share. AZO’s core consumer is said to be still spending to fix their vehicles, even though inflationary pressures are squeezing discretionary spending in areas like apparel and electronics. On a valuation basis, analyst Greg Melich and team believe AZO re-rating to a 17X is justified by share gains and do-it-for-me momentum, yet the upside to a premium to the market is called tough to hold as top line slows and buyback aided growth seeps into the mindset.

"Aftermarket retailers remain relatively well positioned in our view due to the aging fleet, auto shortage, pro recovery, and pass through power amidst the inflationary backdrop... Still, auto-parts is a slow turning industry, with margin pressure from increased commercial exposure and LIFO charges relating to freight costs."

Evercore also warned that inventory was up 22% for the auto parts retailer in FQ4.

Meanwhile, Bank of America noted that sales for the AZO do-it-for-me channel rose 22% during the quarter, but thinks do-it-yourself sales will decelerate in the medium term.

"We continue to expect overall demand for DIY auto parts to slow in 2022 as drivers get back on the road (and out of the house/garage), and as stimulus benefits wane. As AZO faces difficult comparisons, gross margins continue to compress on a YoY basis, and operating leverage and net income growth will be more difficult to achieve." wrote analyst Elizabeth Suzuki.

That kept BofA in the bear camp with an Underperform rating on AZO.

O'Reilly Automotive (ORLY) fell 0.85% following the AZO report and Advance Auto Parts (AAP) was down 0.55%.

Dig into more details on the AutoZone FQ4 earnings report.

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