There are still some businesses reporting their most recent quarterly results. AutoZone (AZO 1.53%) is one of them. The aftermarket auto parts retail chain beat Wall Street estimates when it came to diluted earnings per share (EPS). However, it missed the mark on the top line, which is likely what led investors to sell off shares.
If you're looking to buy this consumer staple stock while it's trading 15% below its all-time high, here are three facts you should know first.
Long-term fundamentals
On the Q3 2024 earnings call, CEO Philip B. Daniele called out a "difficult macro environment" that is impacting the business. AutoZone reported 3.5% and 7.5% sales and diluted EPS gains, respectively. While these latest figures aren't that exciting, investors should zoom out. Over the long term, this company has posted strong fundamental performance.
Between Q3 2014 and Q3 2024, AutoZone saw its revenue increase at a compound annual rate of 6.1%, with EPS rising at an annualized clip of 15.8%. This growth has come from a combination of an expanding store footprint and same-store sales gains.
Selling auto parts and accessories sounds very boring, but returns have been anything but that. In the past decade, shares have soared 417%, which demonstrates that this is a wonderful business,
AutoZone's success comes down to the fact that demand for its products is durable and steady, regardless of what kind of economic environment we are in. Consumers always need their cars to work properly. If there's a recession happening, perhaps people are less inclined to buy a new vehicle, instead focusing on extending the useful lives of their existing ones.
And when the economy is in a strong position, consumers drive more, increasing the wear and tear on their cars. Again, this supports ongoing demand for AutoZone.
NYSE: AZO
Key Data Points
Competitive strengths
If a company produces impressive financial performance for an extended period of time like AutoZone has, then it must possess some valuable competitive strengths. In this instance, I believe investors should understand how having large scale is important.
In the U.S., the aftermarket auto retail industry is fragmented. The top 10 companies represent just over half of the revenue. This means that there are a lot of smaller chains and independent stores out there that compete with the heavyweights.
AutoZone is in a favorable position to steal market share over time because its scale has helped create a well-known brand that consumers can trust. Plus, there aren't many rivals that have the omnichannel capabilities, as well as the inventory availability, that AutoZone does.
Remember again how important it is for people to have functioning vehicles. The retailer that always has the right parts on hand will win the customer's business, with price generally being a secondary factor. It also helps that there are 6,364 AutoZone locations in the U.S., giving it broad reach.
Capital allocation policy
In the past five years, AutoZone's gross margin and operating margin have averaged a superb 53% and 20%, respectively. This is a very profitable enterprise that also generates a ton of free cash flow, to the tune of $2.1 billion in fiscal 2023.
AutoZone doesn't pay a dividend, but that doesn't mean executives aren't keen on returning this excess capital to investors. Their method of choice is conducting share buybacks.
Just in the last decade, the leadership team has reduced the outstanding share count by a whopping 47%. You'd struggle to find businesses that plow so much capital back into buying back the stock like this one does. Given that shares trade at a below-market price-to-earnings ratio of 19.5 (as of May 22), investors should be pleased with this decision.
If you're considering buying shares of AutoZone, understanding its fundamental performance, competitive edge, and share buyback policy is critical.
