AutoZone (AZO +0.05%), the largest auto parts chain in the U.S., has outperformed the S&P 500 for over 15 years and continues to report impressive results. The company just posted fiscal Q4 earnings and crushed revenue estimates by $100 million, growing sales more than 11% year over year.
So is it time to add AutoZone to your portfolio? Let's take a closer look at this auto parts stock.
The right part at the right time
Founded over 43 years ago, AutoZone revolutionized the auto parts industry with its vision of "clean, well-organized auto parts stores and excellent customer service." Although competitors including Advance Auto Parts and O'Reilly Automotive have entered the market, AutoZone stands alone at the top.
The company operates 6,000+ stores across 50 states and 700+ stores in Mexico, in addition to locations in Puerto Rico and Brazil. Like Amazon's, AutoZone's success hinges on its excellent customer service, ample selection, and, most importantly -- product availability.
In a retail environment with seemingly endless niche parts and pieces, a major challenge for AutoZone has been ensuring that parts are in stock when customers need them. To meet this challenge, AutoZone has developed a truly unique inventory management approach. The company's inventory model consists of AutoZone stores, hubs, and mega hubs -- stores that carry over 100,000 unique products -- all to make sure the right part is in the right place when a customer needs it.
For over 20 years, AutoZone has fine-tuned its distribution network, designating stores with expanded inventories as hubs. Each hub serves as a local distribution center and can deliver to other stores in its network as early as the same day. This ability to quickly adjust inventory levels has helped drive "tremendous momentum" for AutoZone, according to CFO Jamere Jackson.
A foggy road ahead
AutoZone faces retail wide headwinds including staffing and supply chain challenges amid rising freight and raw materials costs. These factors make forecasting particularly difficult, especially when combined with inflation and rising interest rates. With so much uncertainty in the marketplace, the company struggles to provide a realistic outlook.
As AutoZone CEO Bill Rhodes explained during the company's Q4 earnings call, "While we continue to be encouraged with the current sales environment, it remains difficult for us to forecast near-to-midterm sales."
However, he did go on to say that stronger-than-expected June and July sales boosted the company's confidence for the near term. AutoZone also expects to see robust commercial sales momentum carry into fiscal Q1 of 2023.
Longer-term, the imminent mass adoption of the electric automobile could pose a threat to AutoZone's viability. As more people transition to EVs, which require less DIY maintenance and have fewer moving parts than traditional vehicles, AutoZone will inevitably have to adapt to the changing market. For now the company is healthy, but a pivot or two may be required for AutoZone to remain relevant in a market set for a major upheaval.
NYSE: AZO
Key Data Points
Record sales per store
Closing out fiscal 2022, AutoZone reported notable same-store sales growth of 6.2% year over year, outpacing last year's Q4 growth of 4.3%. The company also broke its previous record for average weekly sales per store by 18%, reporting a new record of $17,000 per store. Total revenue rose 8.9% vs. last year to $5.3. billion for the quarter.
In terms of commercial sales, the company posted its sixth straight quarter of greater-than-20% growth and a fourth-quarter record of more than $1.4 billion in sales. In another record, AutoZone's domestic commercial sales accounted for 30% of all domestic auto parts sales -- the previous record stood at 26%.
Earnings per share grew 13% in the fourth quarter to $40.51, more than 5% over analysts' estimates. For the year, AutoZone's earnings grew to $117.19 per share, an annual increase of more than 23%.
While the company is hesitant to provide guidance, the trajectory for AutoZone certainly looks promising. New investors might want to start building a position, and existing AutoZone shareholders should consider buying dips like the one that occurred in May. If current sales trends continue into 2023, watch for this aftermarket auto parts retailer to keep outperforming the S&P 500. While the electric car revolution won't happen overnight, AutoZone should be prepared to adapt as the market dictates.
