An Investment in This Aftermarket Retailer Should Be Rewarding

AutoZone , an aftermarket auto parts retailer, posted fourth-quarter results that did not meet estimates. An uptick in overall consumer spending in the U.S., along with an increase in car sales for the month of August, seem to be among the key reasons why AutoZone's performance could not meet analysts' expectations.

Since more people bought new cars instead of getting old ones repaired, demand for parts was not up to the mark. Hence, AutoZone's same-store sales grew just 1%, compared to 2.1% in the same quarter last year.

The results in details
However, one bad quarterly report doesn't make AutoZone unattractive. Its revenue for the quarter came in at $3.1 billion, an increase of 12% over last year. Its earnings also jumped 23% to $10.42 per share, beating estimates by $0.05 per share.

One of the key drivers for the increase in sales was growth in both auto parts sales and commercial sales, which grew 10% and 17%, respectively. 173 new programs that opened during the quarter helped the commercial business grow. In fact, the company has been focusing on this segment and has opened a total of 762 new programs in the last two years.

AutoZone has been expanding its footprint by adding new stores every quarter. The company opened 69 new stores in the U.S. and 21 stores in Mexico during the period. The retailer has been expanding into new markets, as evidenced by the addition of two new stores in Brazil. It plans to open 15 stores in Brazil in the coming years, strengthening its footprint in the region.

Comparison with peers
When compared to peers such as O'Reilly Automotive and Advance Auto Parts , AutoZone might not look very attractive at first glance. Its price appreciation compared to peers is depicted in the chart below:

AZO Chart

AZO data by YCharts

Among the three players, O'Reilly has provided the highest return (377.7%) to investors in the last five years. The company's loyalty program and promotions have attracted customers, enabling it to register great numbers each quarter. O'Reilly's acquisition of VIP Parts, Tires & Service added more than 50 stores, expanding its footprint in regions such as New Hampshire and Maine.

However, even AutoZone has performed well, with a 243.7% increase during the same period. AutoZone has also made acquisitions in order to grow; its acquisition of AutoAnything, an online auto parts retailer, was a move to expand its online operations . In fact, the acquisition has started bearing fruit, as the company posted a 93.6% increase in its e-commerce business over the last year .

Advance Auto Parts has been expanding as well. Along with increasing its presence in local markets, the company recently acquired 124 BWP stores to strengthen its commercial business segment.

Coming back to AutoZone, the aftermarket retailer has also initiated a customer loyalty plan that will capture data from the past year in an attempt to understand the shopping patterns of its customers and, accordingly, provide loyalty benefits. This will help the retailer attract more customers, as it will be able to target customers based on their purchasing history.

Margin comparison
Although O'Reilly has provided higher stock price appreciation over the last five years than its peers, its EBIT margin is not as good as AutoZone's. However, both retailers operate at a higher margin than Advance Auto Parts.

AZO EBIT Margin Quarterly Chart

AZO EBIT Margin Quarterly data by YCharts

Despite the inclusion of AutoAnything, which operates at lower margins, AutoZone has the highest EBIT margin of 20.55%. On the other hand, O'Reilly is trying to sell high-margin items, but has a lower EBIT margin. However, Advance Auto Parts has the lowest margin of 12.59% and has provided the lowest return in the last five years.

Conclusive thoughts
The new law passed for reinstitution of payroll taxes has reduced the take-home income of people. This might stop people from making new car purchases and maintain the older ones for longer periods. AutoZone is well-prepared to take advantage of this opportunity with more than 5,000 stores, expansion in Brazil, and larger e-commerce operations. Demand for auto parts, and AutoZone's overall growth, make this company attractive.

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The article An Investment in This Aftermarket Retailer Should Be Rewarding originally appeared on

Pratik Thacker has no position in any stocks mentioned. The Motley Fool owns shares of O'Reilly Automotive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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