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VOL. 132 | NO. 253 | Friday, December 22, 2017

Analysis: AutoZone May Be Set Up for Stronger 2018

By Andy Meek

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Analysts who cover the stock of AutoZone Inc. are split into two sizable camps at the moment. Some 44 percent think the stock is worth rating a “buy,” while more than 50 percent think investors that already own shares should hold on to them and do nothing for now.

Historical patterns in auto parts sales and anticipation that this winter won’t be as mild as the past two bode well for AutoZone’s business in 2018. (Daily News File/Lance Murphey)

It’s been that kind of year for the Memphis-based auto parts retailer, which has always had its believers in the investment community, in part of because of earnings that have consistently grown by a pretty big margin quarter after quarter. But that was not the case this year for the company, which has seen its numbers dented by factors that include a few consecutive mild winters, which don’t put as much strain on cars.

AutoZone shares are down around 11 percent for the year. A Barron’s headline this spring pegged the company – which had more than 6,000 stores as of mid-November – as “Not So Immune After All.” The company’s leadership would, of course, push back against the notion it ever claimed to be resistant to factors outside of its control, but the fact remains.

AutoZone had a less-than-stellar 2017.

Shares got hit in September after the company posted a weak 1 percent increase in same-store sales. Company chairman, president and CEO Bill Rhodes blamed the results partly on Mother Nature, telling analysts the shortfall was primarily thanks to “continuing headwinds resulting from two consecutive mild winters.”

But it’s not just mild weather that was the problem. In the weeks leading up to the fiscal fourth-quarter earnings AutoZone posted in September, the company said hundreds of its stores felt the effects of hurricanes that hit the U.S.

AutoZone had to temporarily close more than 600 stores at some point as a result of the storms.

An analyst note from Raymond James earlier this year struck a note of disillusionment.

“While valuation metrics for (AutoZone) remain attractive, most of the key metrics we use to evaluate retailers have taken a turn for the worse over the past two quarters,” the note reads. “We believe we have been sufficiently patient with AutoZone, but the poor (fiscal third-quarter) results can no longer support a Strong Buy rating.”

To be sure, it’s not just an AutoZone issue. One reason strong same-store sales numbers may be harder to come by going forward is the reality of the competition. AutoZone, Advanced Auto Parts and O’Reilly Auto Parts had more than 15,000 stores between them as of mid-year, which means customers have a growing pie of options to choose from.

On the positive side, things may be poised to break AutoZone’s way again soon. Financial industry website Seeking Alpha crunched some data that suggest the current winter season will still be mild, but not as much as the last two, and that precipitation, including snow, should be up. That analysis, based on Farmers’ Almanac forecasts, suggests the southeastern U.S., which includes Tennessee, is in for a “chilly, wet” winter.

Among other considerations:

• Analysts think 2018 may be better for the company just based on the historical patterns. The auto parts industry doesn’t usually see back-to-back weak years. Why? Auto parts replacement is often something that can only be put off temporarily.

• The Amazon factor is still a question mark. The online retail giant does offer parts that tend to be priced at a discount to the industry, but Amazon’s offering still hasn’t replaced the immediacy of AutoZone’s brick-and-mortar presence.

• AutoZone has a big growth area in its commercial program. It has been consistently expanding the number of its stores that offer parts delivery to businesses like garages and dealers. That, again, is another nut Amazon has not cracked in a big way, for now.

“Thus far, Amazon hasn’t solved its same-day problem with auto parts,” reads a Seeking Alpha analysis from September. “If it does, AutoZone will suffer. Until then, we are bullish on the name for commercial reasons. With the expectation of a harsher winter this year than in past years, we believe there will be an uptick in same store sales, and will be watching this closely in the coming quarters.”

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