AutoZone, like its main rival O'Reilly Automotive, benefits from strong secular trends. Americans prefer to maintain their vehicles or buying second-hand ones rather than new cars, given economic uncertainty, inflation and of course, declining purchasing power. All this benefits the two main players, which blanket the US market. In the equation, we should not forget Advance Auto Parts, the sector's number three, which is nonetheless weaker than its competitors.
Even so, AutoZone's Q1 figures revealed some margin weakness. Indeed, margins came in two points below what they were in the same period last year. This slip is attributed to the weight of an accounting charge (related to the LIFO method). Tariffs are adding pressure, although the group has juggled this fairly well, insofar as price increases have been passed through to end products.
At the same time, there are more reassuring points to note, such as the opening of 53 new stores during the quarter. AutoZone continues to gain market share in one of the few sectors where demand clearly favors physical presence over online commerce.
In addition, business is robust: demand is strong from both retail customers and particularly professional clients, whose continue to post double-digit growth. Private-label brands continue to advance, while the aforementioned decline in profitability should be put into perspective in light of the future contribution from the 350 new stores opened over the year.
Visibility is therefore far from as bad as some might suggest. Expected growth for the coming fiscal years is as strong as in the past. Consequently, at the current price, the company is trading at just 19x next year's expected earnings, a level fairly low compared with the average of the past three fiscal years.
The sector as a whole is benefiting from favorable momentum. The pullbacks in O'Reilly Automotive and especially AutoZone seem exaggerated given the current context.
