AutoZone (AZO 0.96%) is set to announce results for its fiscal fourth quarter on Tuesday, Sept. 18. The stock has dramatically outperformed the market in the three months since its last report, which implies that investors are expecting to hear good news from the auto parts specialist as it closes fiscal 2018 and looks ahead to the new year.
There are some good reasons for that rising optimism, including faster growth in the industry and a generally strengthening economy.
Let's take a closer look at how those trends might have powered improved results from AutoZone's business this past quarter.
Image source: Getty Images.
Sales rebound
Sales at existing locations expanded by less than 1% in the most recent quarter, which marked a slowdown from the previous quarter's 2.2% improvement. Yes, the growth pace missed management's expectations, but investors have two good reasons to expect a better result with the new report.
First, management said in the late May conference call that sluggish sales in that quarter were driven by the unusually cold weather across the U.S. through March and April. When temperatures finally warmed up during the first few weeks of May, executives said, revenue growth accelerated as well. AutoZone predicted that it would capture much of the revenue it missed in the fiscal third quarter in the fourth quarter, which ended in late August.
Second, peers in the industry have been reporting better results. Rival Advance Auto Parts in mid-August revealed that sales growth returned to positive territory in the summer months. And, while citing an "improving demand environment," the retailer raised its full-year sales outlook. It's likely that those favorable conditions lifted AutoZone's sales, too.
Steady profitability
AutoZone's earnings have been expanding at a healthy clip lately, with profit up 17% over the last nine months to $33.75 per share. However, dig a bit deeper into that metric, and you'll see some areas of concern. Selling expenses are rising thanks to higher wages and increased investments in the digital selling channel, for example. The retailer also noted a significant decline in demand in its e-commerce segment after it raised prices there to compare more consistently with its in-store pricing.
CEO Bill Rhodes and his executive team still planned to expand gross margin slightly for the fiscal year while spending a bit more in other areas of the business. Investors will find out next week whether customers responded to these investments, which include higher inventory stocking levels and better employee training, by increasing their spending at AutoZone stores. Rising sales, along with improved shopper traffic, would support that bullish reading.
Looking ahead
At this time last year, AutoZone executives said they were cautiously optimistic that they would be able to improve upon the 1% same-store sales uptick the retailer managed in fiscal 2017. Last quarter's slowdown threatened that goal, but a strong finish to the year could still push the retailer ahead of its modest top-line targets.
Looking forward, AutoZone might have even more bullish comments to make about the upcoming fiscal year. Customer traffic trends are improving in the industry, and the retailer has made progress on a few key growth initiatives, especially around the customer shopping experience both in stores and online. Assuming even modest success on these projects, AutoZone has a good shot at generating significantly better sales in fiscal 2019 while the chain prepares more aggressively for a shift toward a multichannel selling environment.
