AZO earnings update – management keeps executing, stock remains buy

When I think of why I own AutoZone (AZO), two things stand out to me:

• Impressive share purchase program
• Misunderstood business bears think is in secular decline but is actually growing

As a refresher, AutoZone provides automotive replacement parts and has ~6K stores, with most in the US but a growing presence in Mexico (660+ stores) and Brazil (50+ stores).

The company reported Q4 2021 yesterday (they have the rare fiscal year that ends in August) and proved out both points again. Same store sales were up 4.3% against a tough comp and EPS for the full year was up 32% to $95/diluted share on the strength of some admittedly COVID enabled sales (everyone doing work on their cars) and share repurchases.

Impressive share repurchase program

The company is down to about 22mm diluted shares outstanding (10Q hasn’t come out so this is on a 16 week average basis) from 24.1mm at FYE 2020 (-8.7%), 25.5mm at FYE 2019 (-13.7%), 27.4mm in FYE 2018 (-19.7%). It’s worth reiterating this company is a buyback machine:

If you want to really zoom out, AZO has decreased its share count by 27.9% since the end of 2016 and over 90% since 1998 (yes, not a typo – CFO pointed this out in opening remarks).

Even better, the business is not in secular decline. Earnings on an absolute basis have grown over that same time period. Even lapping a real tough 2020 comp (remember everyone was fixing up their cars this quarter last year), they still improved sales and earnings year over year:

Versus 2020, 2021 earnings were up 32% (yes, not a typo), to $95.19. The stock now trades at ~17x LTM earnings, cheaper on a trailing basis than the market’s (I’m using SPY’s) forward one of 20+.

Not in secular decline – in fact, growing

I don’t expect AZO to shrink earnings on an absolute basis (they are opening new stores and ROIC this quarter was 41%, historically has been 30%+) and I think share count conservatively will decrease by at least 5% each year. If you think the company can get another 5% boost in earnings growth and trades at 16x+ in its FYE 2024, we could see a $2,000+ share price ($126.4 FYE 2024 earnings * 16), which is 21%+ upside from here.

While this isn’t the most exciting pick and upside is limited relative to more speculative, it’s important to remember AZO has grown sales in recessions and just has an amazing history of executing. This is a “go-to-sleep-at-night” name for me and I’m content to hold forever.

Why don’t I fear the imminent decline of AZO as all vehicles become electric and its parts become worthless? Simply put, there’s no evidence this story is playing out in the 3-5 year future and the below-market multiple of the stock already shows this business has low expectations. EV sales are <3% of US sales right now and have been for years (2020 actually was a decline from 2019 in EV sales on percentage basis). Even a large bump in that percentage wouldn’t change the fact that nearly the entire US auto fleet is non EV and takes time to replace.

I support electric vehicles and want to see them grow (I worked for an EV company for two years), but AZO provides a valuable service for the world’s existing auto fleet and helps them get better MPG. As always, invest independently of what you want for the world.

Some more reasons why I think AZO has a bright future from the call and various notes:
– The company gained 300bps+ of market share during COVID and per management has retained it. Bill Rhodes (CEO) is very excited about this:

And as we began to lap those largest share gains in our company’s history, we anticipated we might lose some of that share. We haven’t lost any of it. I mean, it’s on the margin, it’s slightly positive, slightly negative month-on-month, but we basically grew our share in that data set by 10%. So we moved from roughly 30% share to 33% share. I‘ve never seen anything like that and I’m really proud of our organization for sustaining that share over time.

• Commercial and DIY (Do it Yourself) continue to be great performers, both setting quarterly records
• 29 new stores opened in Mexico and 5 in Brazil
• Company has $1.2bn of cash on balance sheet (3.4% of market cap)
• Company sees “tremendous market opportunities both in the US and Mexico” and thinks “Brazil can be a very big market for us.” They just hired a new head of international growth. Market could be underestimating the growth ahead
• As expected, inflation and supply chain are impacting AZO. “Most difficult supply chain environment I’ve ever seen” per Rhodes. Overall though, management did not seem concerned long term
• The auto parts industry per management grows about 4% a year but has exploded 25% over the last 18 months. Sales will go down a bit in the next year as stimulus checks go away. That said, I continue to think the impact of new stores opening and share repurchases will move earnings up more than a few percent same store sales decline
• Good Rhodes quote:

I hope in 2023, we’re back to whatever normal is. It will be interesting to see what happens in the sales environment as we enter whatever the new normal is. I can understand people think that the sales environment might be challenged as we lap these enormous growth in FY ’20 and ’21, I would have thought the same thing a year ago. I‘m getting more and more confident that some of this is structural and some of this is permanent. What percentage? Your guess is as good as mine, because I’ve never seen a global pandemic before.

Again, this is an easy name to own. Management cares about shareholders and outlook is fine.