AutoZone Earnings: Growth Slows as Inflation Moderates, but Long Term Remains Bright; Shares Rich

Our $2,050 per share valuation of narrow-moat AutoZone AZO should not change much after the firm posted lackluster third-quarter results (1.9% same-store sales growth in the period ended May 6). Our reaction would have mirrored the trading price’s mid-single-digit percentage swoon after the news were it not for a time value of money adjustment that should offset much of the impact. However, we attribute much of the underperformance to transitory factors including wet March weather and difficult comparisons rather than a material change in the firm’s trajectory, so our long-term forecast still assumes mid-single-digit top-line annual growth rates and roughly 20% operating margins. We suggest investors await a more attractive entry point, as we believe the current trading price leaves little room for error.

AutoZone’s year-to-date sales are up 7.9%, somewhat ahead of our 7.5% full-year target, although we expect a slowdown as year-on-year inflation moderates in the fourth quarter. The firm’s 19.1% operating margin so far in this fiscal year is down by around 75 basis points, slightly worse than our expectation of a 60-basis-point decline for fiscal 2023 as wage costs remain elevated. Thus, our near-term margin targets should moderate slightly.

While AutoZone’s commercial sales growth rate slid to 6% from its recent double-digit clip, we believe the firm still has much room to grow in a segment that only comprises around 30% of its domestic sales. We believe AutoZone still has ample room to build on its mid-single-digit market share as it builds sales relationships, improves part availability through its expanding mega-hub store network, and demonstrates the superiority of its service offering relative to subscale rivals that still comprise 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 DIY markets leverages distribution and inventory investments.