EUR 850.00 For Business Accounts Only

Morningstar | Mixed End to Fiscal 2018 Leaves Our Long-term Thesis In Place for AutoZone

We do not plan a large change for our $760 per share valuation for narrow-moat AutoZone after it reported full-year fiscal 2018 earnings that trailed our top-line expectations but with better profitability. The results do not change our long-term targets and are consistent with our favorable view of the industry and AutoZone, so our long-term average targets of 4% top-line growth and high-teens adjusted operating margins over the next decade are intact.

In fiscal 2018, AutoZone reported $11.221 billion in revenue against $2.134 billion in adjusted EBIT versus our $11.258 billion and $2.131 billion targets. Management cited several factors in accounting for the shortfall, including category and supply chain changes as well as mild and wet weather in the western United States. We see the headwinds as transitory, though wage pressure should still lead to roughly 100 basis points of adjusted operating margin degradation in fiscal 2019 to around 18% from fiscal 2018's 19%.

AutoZone's digital strategy continues to evolve, with the firm initially ending promotions targeted at online ship-to-home shoppers but then reversing course when sales slumped as competitors remained aggressive. The company's experience reinforces our view that the customers that digital-only retailers target differ from their in-store counterparts, with more willingness to wait for a component to arrive and a level of sophistication that renders the in-store support that differentiates leading brick-and-mortar retailers moot, creating more price sensitivity. We expect AutoZone and its peers to succeed in offering an omnichannel DIY experience that leverages their trained in-store personnel and digital tools to allow customers less familiar with vehicle repairs to research online and pick up in store after receiving diagnostic support and basic installation guidance.

We have a favorable view of AutoZone's move to offer next-day home delivery in markets covering about 80% of the U.S. population. With roughly 80% of its sales sourced from DIY clients, we anticipate the move will allow AutoZone to leverage its proximity to customers, with its vast distribution network allowing it to offer quick access to a wide range of components, including parts not in stock at the shopper's local store.