Auto sales in the U.S are on the rise as consumer spending has picked up pace. People are now willing to make bigger expenditures and buy new cars instead of continuing with the old ones and getting them repaired frequently. New car sales climbed 5.4% to 1.58 million vehicles in the month of August, the highest in the last 11 years. But this has affected sales of the auto parts retailers since new cars would require fewer repairs as compared to old ones.
Thus, retailers such as AutoZone (AZO, Financial) are having a tough time in boosting their revenue. This was clearly reflected in its fourth-quarter results, which were reported recently. Although the bottom line expectations were met, the top line failed to please the investors, sending its shares down.
Insight into the quarter
Revenue for the quarter surged 4.5% to $3.05 billion, over last year. However, the top line was below the analysts’ estimate of $3.07 billion. The primary drivers of higher revenue were new store openings and same store sales growth – one of the key metrics to gauge the performance in the retail industry. AutoZone opened 83 new stores in the U.S. along with 28 outlets in Mexico and 1 in Brazil. Further, same store sales grew 2.1% during the quarter. This resulted in a higher top line. However, revenue could have been better if auto sales wouldn’t have moved north.
Sales were also driven by higher demand in the commercial segment. Commercial sales increased 5.3% over the previous year’s quarter. On the other hand, sales of auto parts declined 1.5% during the period. However, revenue from the commercial segment makes only 17.5% of AutoZone’s business. Thus, an increase in this segment does not drive revenue much.
On the other hand, peers such as O’Reilly Automotive (ORLY, Financial) and Advance Auto Parts (AAP, Financial) derive 40% of their revenue from commercial sales. Given the growth of this segment, each of them are benefiting largely from this uptrend. In fact, both Advance Auto and O’Reilly have registered a share price appreciation of 19.4% and 18.1%, respectively, since the beginning of the year. On the other hand, AutoZone’s share price has increased by 5.4% only during the same period.
Advance Auto Parts has expanded its business through its latest acquisition of General Parts International in January this year. This has enabled the retailer to become the largest auto parts retailer.
Some positives to be considered
AutoZone managed to expand its gross margins by 500 basis points to 52.3%. Also, its bottom line rose to $11.28 per share from $10.42 per share in the prior year, beating the analysts’ estimate by $0.02 per share. The company managed its costs well and repurchased shares, which increased the earnings per share.
The auto parts retailer has been expanding its e-commerce operations through its website and through its acquisition of AutoAnything, an online retailer of auto parts. Since online retail has become very popular, expanding the e-commerce segment looks like a smart move.
Bottom line
AutoZone delivered a mixed quarter, mainly because of strengthening auto sales in the U.S. Also, its efforts to build the e-commerce and the commercial segment should help in growing its business. However, growing market for new cars is a matter of concern for all the industry players. Hence, investors should stay on the sidelines and think twice before they put their money on AutoZone.
