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What AutoZone Wants Investors to Know

By Demitri Kalogeropoulos - Dec 30, 2018 at 10:17AM

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Management sees economic trends turning in their favor for 2019.

Investors predicted that AutoZone (AZO 1.89%) would have good news to report as it kicked off its fiscal 2019, and in early December, the auto parts retailer met those elevated expectations. The corresponding stock price jump made AutoZone one of the market's best performers in the second half of 2018, a time when most equities posted significant losses.

If you believe management, the business has much more room to expand from here. CEO Bill Rhodes and his executive team outlined their reasons for optimism in a conference call with investors. Below are a few highlights from that chat.

Gaining share

Our [do-it-yourself] market share gains were strong in the first half of last fiscal year, and that growth materially subsided in the second half. Recently, our market share has continued to grow and improved slightly, which we consider encouraging as we are lapping the large gains we made this time last year. -- Rhodes

A customer shops for windshield wiper fluid.

Image source: Getty Images.

AutoZone posted a 3% boost in comparable-store sales, which trailed the expansion pace of rival Advance Auto Parts. However, the figure marked an acceleration over the prior quarter and looks even better when you factor in temporary demand swings tied to last year's hurricane strikes. Altogether, management was happy with the performance since it indicated that the business strengthened compared to the prior fiscal year.

Digital sales updates

While our online sales are small, substantially less than 5% of our total sales, the omnichannel experience has been very important for the customer experience, so we will continue to invest in our digital platform. -- Rhodes

The retailer made a few big moves aimed at bulking up the online sales channel, including adding thousands of products, rolling out enhanced delivery options, and cutting prices. These initiatives helped drive higher traffic and order volumes. Still, most customers are researching products online before heading to a store to pick it up with the aide of an employee's advice. These habits don't necessarily protect AutoZone from the threat of online giants like Amazon, but they do support management's contention that their industry is a bit more protected from e-commerce intrusions.

Looking beyond the weather

The second quarter is always our most challenging. -- Rhodes

Executives were cautious about promising too much in terms of growth for the fiscal second quarter, since the gains tend to be driven by unpredictable events like weather and the timing of income tax refund receipts. Their outlook for the broader year is decidedly bright, though, and supported by several positive macro trends. Average car ages are climbing for the first time in years, for one, which tends to lift demand for maintenance products. A slowdown in the economy, should it happen, would similarly lift sales by causing a delay in new car purchases. "We know when economic times get difficult," Rhodes pointed out, "our customers turn to us more frequently ... to help them stretch their resources."

Finally, AutoZone shouldn't have trouble passing along any higher costs that come down the pike from tariffs or general inflation. Historically, the auto parts industry hasn't struggled in this regard since car maintenance isn't really an option in most cases, executives pointed out.

These trends all combine to make auto parts retailers, and AutoZone in particular, relatively immune to mild recessions. As for its longer-term outlook, that will depend on management's ability to stay relevant with shoppers through planned improvements to the browsing experience. For 2019, those include better in-stock levels powered by investments in the supply chain and higher-quality service standards that result from efforts to free up employees to spend more time with clients.

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