Why AutoZone Is Underperforming Peers in 1Q18


Mar. 22 2018, Updated 10:02 a.m. ET


In the previous two parts of this series, we looked at the recent financial performances of Advance Auto Parts (AAP) and O’Reilly Automotive (ORLY). AAP and ORLY are still trading in the positive territory in 1Q18 so far unlike AutoZone. As of March 20, APP and ORLY have risen 14.6% and 2.9%, respectively, while AZO has lost about 8.8% in 1Q18 so far. By comparison, other auto stocks (XLY) such as Toyota (TM) and Honda (HMC) have also gone up by 1.6% and 1.0% YTD (year-to-date). Now, let’s find out what could be driving pessimism in AutoZone stock in 1Q18.

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Earnings miss and weak sales growth

In its fiscal 2Q18, which ended February 10, 2018, AutoZone’s adjusted earnings went up by 9.3% YoY (year-over-year) to $8.47 per share. However, the company missed Wall Street analysts’ consensus estimates of $8.92 per share. Like peers Advance Auto Parts and O’Reilly Automotive, AZO has been struggling with a softening sales growth rate. In fiscal 2Q18, AutoZone reported revenues of $2.4 billion, up 5.4% YoY, but its domestic same-store sales growth rate fell to 2.2% from 2.3% in the previous quarter.

AZO didn’t open any new mega hub stores in 2Q18 as it guided during its 1Q18 earnings conference call. The company plans to open about ten mega hubs stores in fiscal 2018, two of which were already opened in 1Q18.

Hopes in 2018

In fiscal 2Q18, AutoZone’s gross profit was at $1.3 billion, about 5.9% higher than its $1.2 billion in 2Q17. With this, the company’s gross margin came in at 52.9%, nearly flat as compared to 52.7% a year ago.

In its fiscal 2016 and 2017, AutoZone’s business has been negatively affected by mild winters in parts of the US. In its fiscal 2018, the company’s management expects a return of normal patterns in the country, which should be positive for AZO’s business growth.


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