Morningstar | AutoZone Starts Fiscal 2019 Nicely; Our Outlook Remains Intact
After a solid start to the fiscal year, we plan a low-to-mid single digit percentage uptick for our $790 per share valuation for narrow-moat AutoZone. The likely uplift reflects the time value of money and strong first-quarter profitability. Our thesis on the business and the industry remains intact, and we continue to expect mid-single-digit top-line growth against high-teens adjusted operating margins over the next decade. We suggest investors await a more attractive buying opportunity before building a position in a firm whose competitive standing and prospects we nonetheless view favorably.For the quarter, AutoZone reported 2.0% top-line growth against an 18.5% adjusted operating margin, versus our 4.5% and 18.1% respective full-year targets (our revenue numbers are slightly back-loaded on account of the timing of AutoZone’s fiscal 2018 divestitures).
AutoZone’s commercial effort was particularly strong, with 11% quarterly growth that marked its briskest expansion since fiscal 2015. We have long held that AutoZone can leverage its leading DIY franchise (about 80% of sales) to build penetration in a market that we expect to grow more quickly considering vehicles’ increasing complexity. With fuel prices moderating and stronger new vehicle sales cohorts entering the company's sweet spot (cars and trucks aged roughly seven years and older), we continue to see opportunities for AutoZone to grow while holding profitability near recent levels despite wage pressure and recent tax cut-fueled investments. The commercial sales effort should be a meaningful part of that growth, though we expect progress will be somewhat slow as it will take time for the firm to usurp long-held relationships between repair shops and their small, independent or regional part providers. As such, we expect AutoZone’s low-single-digit commercial segment market share to reach the mid-single-digits by the end of our 10-year explicit forecast.
AutoZone is a retailer and a distributor of automotive replacement parts and accessories. The company operates stores in the United States, including Puerto Rico and Saint Thomas, Mexico, and Brazil. Each store carries a product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. In addition, the company has a commercial sales program that provides commercial credit and delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. The company also sells the ALLDATA brand automotive diagnostic and repair software.
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