AutoZone Earnings: Commercial Struggles Should Fade, but Price Leaves Little Room for Error

We anticipate raising our $2,070 fair value estimate for narrow-moat AutoZone AZO by a low- to mid-single-digit percentage, mostly due to the time value of money. But with the shares trading in 2-star territory, we think the current price is predicated on loftier expectations that might prove difficult to achieve.

AutoZone’s fiscal 2023 sales were up 7.6%, slightly ahead of our forecast for 6% growth. Gross margin of 52% was negatively affected by 16 basis points from a noncash net LIFO charge. Along with 5.6% same-store sales growth, full-year operating margin improved 90 basis points to 21.5%. In all, we don’t anticipate a material change to our long-term forecast for mid-single-digit top-line annual growth and roughly 20% operating margin.

AutoZone’s commercial sales grew roughly 9% in fiscal 2023, a marked decline from 27% in 2022. Although exogenous factors (regional weakness and lack of winter) weighed on performance, management admitted that execution was lacking. These factors appear short-term, and improvements in technology and continued opening of hubs should support a return to better growth. We continue to believe the firm still has much room to grow in the commercial segment, which only constitutes around 30% of its domestic sales. We think AutoZone still has ample room to expand its mid-single-digit market share as it builds sales relationships, improves part availability through its expanding megahub store network, and demonstrates the superiority of its service offering relative to subscale rivals that still make up the majority of the commercial market. We continue to believe a robust dual-market presence is ideal for auto-parts retailers, as a strong presence in the commercial and do-it-yourself markets leverages distribution and inventory investments.