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    Autozone Inc (AZO)

    AutoZone, Inc. is the leading retailer and distributor of automotive replacement parts and accessories in the Americas, with operations in the U.S., Mexico, and Brazil . The company offers a wide range of products for cars, sport utility vehicles, vans, and light-duty trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products . AutoZone's business is divided into two primary segments: Auto Parts Stores and Other, which includes ALLDATA and E-commerce . The company's sales are primarily driven by failure and maintenance-related categories, which together accounted for approximately 86% of total sales in fiscal 2024 . AutoZone also provides commercial sales programs and sells products through its websites, including www.autozone.com and www.autozonepro.com, but does not derive revenue from automotive repair or installation services .

    1. Auto Parts Stores - Operates retail locations offering a comprehensive selection of automotive replacement parts, maintenance items, and accessories for various vehicles.
    2. Other - Encompasses ALLDATA, a provider of automotive diagnostic and repair software, and E-commerce platforms for online sales of automotive products.
    Initial Price$2745.66May 30, 2024
    Final Price$3181.48August 30, 2024
    Price Change$435.82
    % Change+15.87%

    What went well

    • AutoZone is successfully gaining market share in both DIY and commercial segments, with strategies such as opening Hubs and Mega-Hubs to improve inventory availability and customer service, leading to sequential improvements in commercial sales growth. ,
    • The company is benefiting from a growing and aging car park, with the average vehicle age increasing to 12.6 years, providing a tailwind as cars last longer and require more maintenance, supporting demand for AutoZone's products and services.
    • AutoZone is maintaining a disciplined investment approach, balancing SG&A expenses with sales growth, while continuing to invest in growth initiatives like IT improvements and payroll to enhance the customer experience and drive future growth.

    What went wrong

    • Underperformance in Discretionary DIY Categories: AutoZone's discretionary DIY categories, such as accessories and performance parts, have been challenging for at least a year, and improvement is uncertain until the pressured consumer gains economic relief and confidence improves.
    • Muted Retail Inflation Leading to Low Average Ticket Growth: The company is experiencing lower than historical levels of retail inflation, resulting in muted average ticket growth and dampening revenue growth. This trend may continue until product cost inflation returns.
    • Upcoming Headwinds from LIFO Credits and FX Volatility: AutoZone benefited from approximately $40 million of LIFO credits this year, which will become a headwind next year. Additionally, significant FX volatility could negatively impact their P&L due to the size of their international operations.

    Q&A Summary

    1. Gross Margin Outlook
      Q: What is the outlook for gross margin improvement?
      A: Management expects to continue driving gross margin improvements through strong merchandising and supplier negotiations. While there's a slight early drag from adding a couple of distribution centers, they believe merchandising margin improvements will power growth moving forward. They are closely watching industry pricing and anticipate that as inflation returns, they can push retails harder. They remain disciplined and have a positive outlook for FY '25.

    2. Earnings Growth Algorithm
      Q: Can you return to double-digit EPS growth soon?
      A: Management maintains that the long-term algorithm of consistent, steady growth and margin expansion remains unchanged. Near-term factors like FX headwinds and LIFO may impact quarterly results, but they believe growth initiatives and macro improvements will accelerate the top line, key to achieving the algorithm. They feel good about business fundamentals but acknowledge that in the current environment, it's tough to achieve double-digit EPS growth quarter-over-quarter. Long term, they expect to return to it.

    3. FX Impact and LIFO Credits
      Q: How will FX and LIFO affect EBIT growth?
      A: Management highlighted about $40 million of LIFO credits this year, becoming headwinds next year. Depending on inflation, about half might be offset. On FX, they are transparent about current spot rates and potential P&L impacts but are not predicting where FX will land. With significant international profitability, FX swings can impact results, but they will update as the year progresses.

    4. Commercial Sales Growth and Hubs
      Q: When will commercial sales accelerate?
      A: Management anticipates sequential improvement in commercial sales, viewing it as a progressive build due to the pressured consumer impacting both DIY and commercial segments. They are enhancing store assortments, opening more Hubs and Mega-Hubs to bring inventory closer to customers, and streamlining customer service to improve speed on hard-to-find parts. They are confident in their strategies and expect continuous growth.

    5. Impact of Consumer Behavior
      Q: How are DIY and commercial markets performing?
      A: The DIY market is down low single digits, mainly due to pressure on discretionary categories like accessories and performance parts, and slower ticket growth amid lower retail inflation. Improvement is expected when the pressured consumer gains economic relief and confidence improves. In the commercial market, which has been flat to slightly declining, they have accelerated sales growth and are excited about initiatives like more Hubs and Mega-Hubs to enhance growth.

    6. Pricing Dynamics and Ticket Average
      Q: Is competitive pricing affecting ticket averages?
      A: Management hasn't seen radical changes due to competitors investing in price. They monitor pricing closely and focus on wholesale distributors in their strategies, seeing no material changes. The lack of average ticket growth is attributed to cost factors rather than competitive pricing. As costs increase, they will pass them to consumers, resulting in retail average ticket inflation.

    7. Investments in SG&A
      Q: How will SG&A growth be managed in 2025?
      A: Management will continue to invest in a disciplined way to support growth initiatives, including store payroll and IT to improve customer and employee experience. They are responsible in managing SG&A, ensuring efficiency, especially in a softer sales environment. They balance investment in growth while being disciplined when the top line is softer.

    8. Car Park Dynamics
      Q: Is there an air pocket in car park growth?
      A: Management doesn't anticipate an air pocket or headwind from cars coming off warranty or lower new car sales during the pandemic. Cars are lasting longer, with the average vehicle age increasing to 12.6 years, and expected to rise further. Fewer cars are being scrapped, and technological improvements mean cars stay on the road longer. They view this as a positive tailwind for the business.

    9. Inflation Returning
      Q: When will inflation return and what are the drivers?
      A: Historically, the industry has seen 3% to 5% inflation in average ticket and 1% to 3% decline in transactions, driven by parts inflation and technology enhancements. Over the last year, product costs haven't increased much due to hyperinflation during the pandemic. They expect inflation to return in 2025 and revert to normal trends. If tariffs occur, they will pass those costs to consumers, leading to price increases and potential gross margin improvement.

    10. Q1 and FY '25 Outlook
      Q: What is the outlook for Q1 and store growth?
      A: Management expects Q1 to be similar to the last quarter, with the consumer under the same pressure. They anticipate modest improvement but don't see catalysts for significant change until possibly after the December timeframe. They plan to open 20-plus Mega-Hubs in FY '25, with the majority opening in the latter part of the year. Store growth will reaccelerate but is back-end loaded due to timing.

    NamePositionStart DateShort Bio
    William C. Rhodes, IIIExecutive Chairman, Customer SatisfactionJanuary 2024William C. Rhodes, III serves as the Executive Chairman of AutoZone. He was appointed to this role in January 2024. Prior to this, he served as AutoZone's President and CEO and has been a director since 2005 .
    Philip B. Daniele IIIPresident and Chief Executive Officer, Customer SatisfactionJanuary 2024Philip B. Daniele III was appointed as the President and CEO of AutoZone in January 2024. He was CEO-Elect in June 2023 and has been with AutoZone since 2005, holding several key management positions .
    Jamere JacksonChief Financial Officer, Customer SatisfactionSeptember 2020Jamere Jackson was named Chief Financial Officer of AutoZone in September 2020. He leads the Finance and Store Development teams and serves on the Board of Directors for Eli Lilly & Co .
    Thomas B. NewbernChief Operating Officer, Customer SatisfactionSeptember 2023Thomas B. Newbern serves as the Chief Operating Officer at AutoZone. He was named COO in September 2023 and has been with AutoZone since 1985, holding various key positions .
    William R. HackneyExecutive Vice President – Merchandising, Marketing and Supply ChainSeptember 2023William R. Hackney was named Executive Vice President in September 2023. He rejoined AutoZone in October 2022 after a brief retirement and has been with the company since 1983 .
    Kenneth E. Jaycox, Jr.Senior Vice President – Commercial, Customer SatisfactionJuly 2024Kenneth E. Jaycox, Jr. was named Senior Vice President – Commercial at AutoZone in July 2024. Before joining AutoZone, he served as Senior Vice President and Chief Commercial Officer for United States Steel Corporation .
    Lindsay W. LehmanSenior Vice President – Marketing, Customer SatisfactionNovember 2023Lindsay W. Lehman was named Senior Vice President – Marketing at AutoZone in November 2023. She leads the Marketing and E-commerce teams and joined AutoZone in 2020 .
    Dennis W. LeRicheSenior Vice President – Store Operations, Customer SatisfactionJune 2021Dennis W. LeRiche was named Senior Vice President – Store Operations in June 2021. He served as Divisional Vice President – Store Operations from 2015 to 2021 .
    Richard C. SmithSenior Vice President – Human Resources, Customer SatisfactionDecember 2015Richard C. Smith was named Senior Vice President – Human Resources in December 2015. He has been with AutoZone since 1985, previously holding the position of Divisional Vice President – Store Operations .
    Jennifer M. BedsoleSenior Vice President, General Counsel & Secretary, Customer SatisfactionApril 2023Jennifer M. Bedsole was named Senior Vice President, General Counsel & Secretary at AutoZone in April 2023. Prior to joining AutoZone, she was a partner with the law firm of Baker, Donelson, Bearman, Caldwell and Berkowitz P.C. .
    K. Michelle BorninkhofSenior Vice President and Chief Information Officer, Customer SatisfactionApril 2021K. Michelle Borninkhof was named Senior Vice President and Chief Information Officer at AutoZone in April 2021. Before joining AutoZone, she served as CIO and VP for U.S. Technology at McDonald's .
    Eric S. GouldSenior Vice President – Supply Chain, Customer SatisfactionFebruary 2021Eric S. Gould was named Senior Vice President – Supply Chain in February 2021. He served as Vice President – Supply Chain Replenishment from 2017 to 2021 .
    Domingo J. HurtadoSenior Vice President – International, Customer SatisfactionSeptember 2018Domingo J. Hurtado Rodr\u00edguez was named Senior Vice President – International at AutoZone in September 2018. He has been with the company since 2001, leading the company's expansion in Mexico .
    1. Given that your domestic DIY comp was down 1.1% for the quarter, and discretionary categories have been under significant pressure for at least a year, what specific strategies are you implementing to stimulate growth in the DIY segment and offset these declines?
    2. With a $32 million headwind on sales and $8 million on EBIT this quarter due to foreign exchange rates, how do you plan to mitigate the impact of FX on your international business, especially as you continue expanding in markets like Mexico and Brazil?
    3. You've invested over $1 billion in CapEx in FY '24 and plan similar investments in FY '25, particularly in new Hubs, Mega-Hubs, and distribution centers; can you provide clarity on the expected return on these investments and the timeline for them to materially contribute to earnings growth?
    4. Despite opening new commercial programs, average weekly sales per program remained flat at $16,700; what challenges are preventing growth in sales per program, and how do you plan to accelerate your commercial business to meet your growth objectives?
    5. Considering the difficulty in achieving your long-term EPS growth algorithm in the near term due to factors like LIFO and FX headwinds, what specific measures are you taking to return to double-digit EPS growth, and how will you drive margin expansion in this challenging environment?
    Program DetailsProgram 1
    Approval DateJune 19, 2024
    End Date/DurationN/A
    Total additional amount$1.5 billion
    Remaining authorization amount$1.7 billion
    DetailsThe Board authorized an additional repurchase of common stock.

    Q1 2025 Earnings Call

    • Issued Period: Q1 2025
    • Guided Period: N/A
    • Guidance:
      • Sales Trends: Modest improvement expected in DIY and commercial sales trends, with better performance anticipated in Q2 and Q3.
      • Interest Expense: Planning for interest expenses in the $108 million range.
      • Tax Rate: Suggest modeling a tax rate of approximately 23.4%.
      • Foreign Exchange Impact: Expect a $55 million drag on revenue, a $16 million drag on EBIT, and a $0.63 per share drag on EPS.
      • Store Openings: Focus on accelerating store growth with more Hubs and Mega-Hubs planned .

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: Q1 FY 2025 and FY 2025
    • Guidance:
      • Foreign Currency Impact: Expect a $55 million drag on Q1 revenue, a $16 million drag on EBIT, and a $0.63 a share drag on EPS. For FY 2025, anticipate a $265 million impact on revenues, a $90 million impact on EBIT, and a $3.64 a share impact on EPS.
      • Interest Expense: Planning for interest expenses in the $108 million range for Q1 FY 2025.
      • Tax Rate: Suggest modeling a tax rate of approximately 23.4% for Q1 FY 2025.
      • Inflation and Pricing: Expect like-for-like SKU retail inflation in the low single digits for FY 2025.
      • Store Openings: Plan to open 20+ Mega-Hubs in FY 2025 with about 70 Mega-Hubs in the pipeline .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024
    • Guidance:
      • Leverage Ratio: Committed to a leverage target of 2.5x.
      • Interest Expense: Planning for interest expenses in the $148 million range for Q4.
      • Tax Rate: Suggest modeling a tax rate of approximately 23.2% for Q4.
      • LIFO Credits: Expect approximately $10 million in LIFO credits in Q4.
      • Capital Expenditure: Expect to spend close to $1.1 billion in CapEx for the fiscal year.
      • Store and Mega-Hub Expansion: Continue opening new Mega-Hubs and Hubs, with a long-term goal of over 200 Mega-Hubs .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      • Sales Growth: Expect continued sales growth across domestic and international store bases.
      • Commercial Business: Focus on growing domestic commercial business.
      • International Business: Plan to accelerate new store openings internationally.
      • Mega-Hub Expansion: Continue aggressively opening Mega-Hubs.
      • Capital Expenditures: Expect to spend close to $1.1 billion in CapEx.
      • Gross Margin and Operating Expenses: Committed to managing operating expenses in line with sales growth.
      • Share Repurchase Program: Committed to returning cash to shareholders with over $2.1 billion remaining under share buyback authorization .

    Competitors mentioned in the company's latest 10K filing.

    • National, regional and local auto parts chains
    • Independently owned parts stores
    • Online automotive parts stores or marketplaces
    • Wholesale distributors
    • Jobbers
    • Repair shops
    • Car washes
    • Auto dealers
    • Discount and mass merchandise stores
    • Hardware stores
    • Supermarkets
    • Drugstores
    • Convenience stores
    • Home stores
    • Other retailers that sell aftermarket vehicle parts and supplies, chemicals, accessories and tools

    Recent developments and announcements about AZO.

    Financial Reporting

      Earnings Report

      ·
      Dec 10, 2024, 12:28 PM

      AutoZone, Inc. has released its earnings results for the first quarter of fiscal 2025, ending November 23, 2024. Net sales for the quarter were $4.3 billion, marking a 2.1% increase from the same period in fiscal 2024 . The company's same store sales increased by 1.8% on a constant currency basis, with domestic same store sales rising by 0.3% and international same store sales by 13.7% .

      Gross profit as a percentage of sales was 53.0%, an increase of 16 basis points from the previous year, driven by higher merchandise margins. However, operating profit decreased by 0.9% to $841.1 million. Net income for the quarter was $564.9 million, down from $593.5 million in the same period last year, and diluted earnings per share were $32.52, slightly lower than last year's $32.55 .

      AutoZone's inventory increased by 8.7% compared to the same period last year, and the company opened 34 new stores during the quarter, including 23 in the U.S., six in Mexico, and five in Brazil, bringing the total store count to 7,387 .

      The company repurchased 160 thousand shares of its common stock during the quarter at an average price of $3,156 per share, totaling an investment of $505.2 million. AutoZone has $1.7 billion remaining under its current share repurchase authorization .

      AutoZone's CEO, Phil Daniele, expressed satisfaction with the quarter's results, highlighting improvements in DIY same store sales and domestic commercial sales, which increased by 3.2%. The company remains focused on growth initiatives and improving customer service to enhance market share .