AutoZone's Attractive

Our $810 fair value estimate for narrow-moat

The firm’s 2% revenue increase and 15-basis-point operating margin dip year to date lag our full-year targets of 3.5% growth and 20-basis-point expansion. Contrary to our expectations, second-quarter sales softness that was attributed to delayed tax refunds did not reverse, resulting in expense deleverage. Still, we are encouraged that same-store sales increased 2% in the last seven weeks of the quarter, leading to a 0.8% full-quarter dip.

We do not believe that plans to curtail high-frequency store inventory replenishment will impede AutoZone’s commercial sales potential. Historically, stores received deliveries weekly, though about 2,300 locations (out of 5,381 in the U.S.) moved to thrice-weekly to improve availability. After seeing little benefit, management is moving many of these stores to twice- or once-weekly deliveries. While we believe retailers with a more commercial-heavy sales mix (such as O’Reilly, which has long featured multiple deliveries per week across its network) require an accelerated schedule, we expect AutoZone’s do-it-yourself focus—about 80% of sales—justifies a slower pace. Much of AutoZone’s store network is located to attract DIY customers, so we believe there is a limit to many of the stores' ability to draw commercial clients, suggesting the need for a tailored approach. Still, we expect AutoZone to build commercial share from the low to midsingle digits over the next decade as increased attention on the sector pays off amid industry consolidation.

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