Analyst Fret Over AutoZone's Slowing Growth
AutoZone (NYSE: AZO) surprised the market with a stronger-than-expected report and provided a favorable outlook but the analysts aren't so sanguine. Bank of America, for one, says there are speed bumps clouding the outlook for growth. Among them is the onset of increasingly difficult revenue comparisons coupled with the diminishing tailwinds of stimulus spending. While demand for DIY Auto Services and parts should remain high, Bank of America sees margin compression weighing on earnings. With the entire S&P 500 on the brink of an earnings reset, we do not find this news favorable for share prices. The worst part of the news is that Bank of America never mentions the potential impact of supply chain disruptions that are having an effect on other parts of the market.
"We continue to expect overall demand for DIY auto parts to slow in 2021 as drivers get back on the road (and out of the house/garage), and as stimulus benefits wane. As AZO continues to face difficult comparisons, while gross margins continue to compress on a YoY basis, operating leverage and net income growth will be more difficult to achieve."
AutoZone Posts Surprisingly Strong Quarter
AutoZone had a surprisingly strong quarter despite the cloudiness of the outlook. The company posted $4.91 billion in net revenue which is good for a gain of 8.1% over last year. This not only beat the consensus estimate by 750 basis points but is a quarterly acceleration of business that set a seasonal and record high. The company says domestic store comps are up 4.3% over last year with notable strength in the commercial line of the business. While retail sales were mostly flat from last year, commercial sales are up 21%. It is noteworthy that sales are strengthened by the addition of 110 new stores as well, that's a store count increase of 1.1% for the quarter.
Moving down to the earnings portion of the report, the company experienced margin pressures at both the gross and operating levels. At the gross level, margins contracted 82 basis points while at the operating level SG&A expenses increased by 30 basis points. In both cases, the company says margin pressure is due to Investments in growth that include higher wages so we do not think these pressures will subside soon. As for earnings, the company reported $35.72 in GAAP earnings good for a gain of 15% over last year and 2000 basis points better than expected.
“The investments we are making continue to strengthen our competitive positioning in all the sectors and markets we compete. We are optimistic about our growth prospects heading into our new fiscal year,” said Bill Rhodes, Chairman, President, and Chief Executive Officer.
The Technical Outlook: Indecision In The Wake Of Autozone Earnings
Shares of AutoZone are up more than 2.25% in the wake of the earnings report and may move higher but there are caveats. Price action over the past four trading sessions is generally bullish but the candles tell a different tale. The group of four candles, four spinning top candles, amounts to a Spinning Top pattern which is a pattern of indecision. The market might go higher and it might go lower but it's not sure right now. Considering that revenue growth is slowing, and earnings growth is coming under pressure, it is our opinion shares of AutoZone are ripe for a correction. Data from Pricetargets.com shows the consensus price target is in line with current price action which implies the stock is fairly valued. The low price target and trend of analyst sentiment suggest, however, the consensus estimate will move lower over the next few weeks and months.
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