By Teresa Rivas
What's bad news for car owners is good news for AutoZone and its shareholders.
Few things can strike fear into the hearts of drivers like a "check engine" light, and with good reason. Auto repair costs have outpaced inflation in recent years, while the average cost of buying a new vehicle is well over $48,000 -- hovering just below 2022's all-time highs -- and could jump higher, depending on tariffs.
Shares of Memphis-based auto-parts retailer AutoZone, at $3,614.27, have held up remarkably well during the recent market turbulence, perhaps not surprising, given the industry's reputation as being close to recession-proof. However, they've sold off on the most recent round of tariff threats, which affect key auto components like steel and aluminum.
With consumers feeling nervous about inflation and the health of the economy, the stock seems ready for yet another victory lap, especially after reporting a quarter that was stronger than it seemed.
That looks like a buying opportunity.
AutoZone's fiscal second quarter, reported on March 4, included a bottom-line miss and disappointing comparable sales of 0.5%, but -- to borrow an overused phrase -- looking under the hood shows a brighter picture. Foreign exchange was a big part of the problem, given AutoZone's expansion in areas like Mexico and Brazil; on a constant-currency basis, total same-store sales were up 2.9% and international comps were up nearly 10%, flipping from an 8% decline when accounting for foreign-exchange rates. While AutoZone's do-it-yourself business did show some softness, particularly with discretionary purchases, its do-it-for-me segment sales accelerated, as did its commercial sales to auto body shops and mechanics.
"This is a defensive, resilient distribution business you can buy at a market multiple with the chance for earnings acceleration," says Andrew Choi, a portfolio manager at Parnassus Investments. "We really believe these guys are one of the best distribution models out there. You can compare them to best-in-class companies like Costco Wholesale, Ferguson Enterprises, and Home Depot, and AutoZone can hold its own against any of them. But the multiple doesn't reflect the durability of its growth, despite the stock's outperformance."
The shares trade at 23 times forward earnings, above the five-year average of 17.6 times but cheaper than major rival O'Reilly Automotive, at close to 30 times. Yet to Choi's point, earnings per share are set to accelerate after a two-year lull: Consensus calls for EPS to jump nearly 13% in fiscal 2025, which begins in September, to $169.60, and more than 10% the following year.
That figure is further bolstered by AutoZone's continuous share repurchases. In the recent quarter, the company reduced its share count by more than 3% on a year-over-year basis. AutoZone's stock buybacks have cut its number of shares outstanding by roughly half over the past decade, from 31.7 million to 16.7 million in February 2025.
Focus Partners Wealth portfolio manager Christopher Conway is particularly enthusiastic about the commercial business, which grew more than 7% in the quarter. "It's a longer story, but certainly one I'm most optimistic about," he says. "It's a fragmented market, and the beauty of that business is that when those customers need the part, they need the part."
Like Choi, he thinks it's another area where the company's logistics can shine: "It shows why their distribution capability is such an advantage."
AutoZone and O'Reilly's distribution savvy is one reason the industry hasn't succumbed to pressure from Amazon.com, like so many other retailers. Long-term struggles at peer Advance Auto Parts -- which are also benefiting AutoZone as that company retreats from some states -- show the secret sauce to quick delivery isn't easy to replicate.
Raymond James analyst Bobby Griffin reiterated a Strong Buy rating on AutoZone following the company's results and raised his price target by $150, to $4,000, citing not only its strong commercial momentum but also "resilient gross margins and long-term growth drivers." In fact, with the former consistently above 50%, AutoZone enjoys some of the highest margins in retail outside of luxury-goods makers.
Then there are tariffs. Whichever levies are ultimately imposed, AutoZone shouldn't see a tremendous impact, given its high margins, diverse supply chain, and the nondiscretionary nature of car parts.
Given that the situation can change rapidly, it's hard to handicap where tariffs will shake out for AutoZone, but company management said it was confident that the industry would behave rationally on pricing (likely passing on at least some costs to customers, for example) and wouldn't be too disrupted.
"The majority of AutoZone's business isn't discretionary, and the average [item] price is around $30," says Choi, noting that passing on 10% higher costs to shoppers is less likely to make them balk than it would at the dealership. "It's not a massive purchase, especially if the difference is your car works or doesn't."
Moreover, if consumers are wary about the economy or job security, they're more likely to repair than replace their cars.
The average vehicle in the U.S. is more than 12 years old today, meaning those repairs are getting more frequent. So, even if consumers feel like they're running on fumes, they'll still be taking trips to AutoZone.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 19, 2025 01:00 ET (05:00 GMT)
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