AutoZone's Earnings: 3 Things to Watch

AutoZone (NYSE: AZO  )  is the nation's largest automotive parts retailer, with 4,685 stores in the United States, and 321 in Mexico. After its most recent quarter disappointed, and competitor Advance Auto Parts  (NYSE: AAP  )  made a major acquisition, we need to know if AutoZone can keep its competitors at bay.

AutoZone is reporting first quarter earnings on Tuesday; here are three key things to watch. 

Sizing up the competition
In recent years, AutoZone has shown terrific growth in a very bullish sector. Really, since the recession in 2009 there's been a huge shift in consumer sentiment, with American's owning their cars for longer than ever. According to the research firm Polk, the average age of all U.S. auto's is 11.4 years, and it's expected to grow 20% by 2018. American's are owning their cars for longer, and auto parts retailers are benefiting.

The entire industry, including successful companies such as O'Reilly Automotive  (NASDAQ: ORLY  )  and Advance Auto Parts, are benefiting. Both Advance and O'Reilly's share prices have more than tripled since 2008, and Advance recently completed a major acquisition of Carquest, which should help it rival AutoZone's revenues as number one in the sector. 

From a valuation standpoint AutoZone looks attractive, considering that it trades at a cheaper multiple to earnings than both O'Reilly and Advance. And despite its weak quarter, it has grown EPS at 22% over the past five years, compared to O'Reilly's rate of 23% and Advance Auto Parts rate of only 18%. 

AZO PE Ratio (TTM) Chart

AZO P/E Ratio (TTM) data by YCharts

Still, in its most recent quarter, Advance Auto Parts grew earnings by 17.4%, and O'Reilly grew earnings by 28%. Both companies showed faster growth than AutoZone did most recently, so even with a great valuation AutoZone will need to prove that it is the best of breed. 

Same-store sales
The fact that AutoZone missed analysts expectations during the past quarter wasn't the real problem, as net income still grew by double-digits. The only really scary aspect of the report was that domestic same-store sales only grew 1%. While top-line revenue grew faster due to international sales and new store openings, the slowing of same-store sales could hinder growth if it continues.

If new stores are opened at a faster rate than same-store sales grow, cash flow could decline and pull the bottom out of this growth company.

Overall the last quarter looked ok. Investors should keep a keen eye on same-store sales, and hope that comparable sales grow faster than that 1%, as that was the biggest real concern.

International growth and new stores
Over the past year AutoZone has opened a whopping 90 new locations, including 21 international locations. These stores provide a great opportunity for growth.

So, while we'll be watching domestic same-store sales, let's also see how quickly things have taken off at the new locations. My hope is that management elaborates on the reception, the ability to ramp-up, and how the stores are affecting the bottom line. Most importantly, my hope is that management reports a positive sales number for stores open one year, as that will be key. We really want to see the stores that are open one year report faster same-store sales growth than older stores to justify the cost involved with these new stores.

If we can see clearly that these stores are taking off, we'll know that AutoZone hasn't reached a saturation point, and growth will still be ahead.

Think like an owner
Thinking like a business owner is the key to profitable investing. Truthfully, AutoZone has had a really great run in recent years. Still, if we owned a business we'd want to see how it stacked up against competitors, and we'd watch same-store sales growth while making sure we weren't over-expanding. 

These are key elements to retail, and after a so-so quarter, they're the keys to AutoZone's future success. So let's watch for these key factors, and hope that the company is delivering. 


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