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AutoZone: Further Growth Ahead After 40% Rise

Even though AutoZone Inc.'s (NYSE:AZO) stock has gained 40% over the last year, it appears to offer good value for money.

The company, which provides auto parts across the U.S., Mexico and Brazil, is increasing the size of its store estate and investing in new technology. This could boost its bottom line and its stock price over the long term.

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New store openings

AutoZone opened 209 new stores in fiscal 2019 as part of its ongoing expansion program, including 28 locations in Mexico and 10 stores in Brazil during the fourth quarter. This should help reduce its reliance on the U.S. market and diversify its operations.

The business has scope to further expand its presence in Brazil. According to its fourth-quarter update, AutoZone's store numbers in Brazil could eventually surpass the number of locations it currently has in Mexico. This should provide it with an increasing presence in Brazil at a time when the country's economy is forecasted to grow 2.5% per annum through 2024.

The company also opened 11 mega hubs in fiscal 2019, expanding its presence in the U.S. The mega hubs provide additional coverage to its local markets through adding products that were not previously available in its local network, increasing the size of its total addressable market. Its fiscal 2019 results detailed plans to open an additional 35 to 55 mega hubs in the U.S. over the medium term. This could catalyze its financial performance and increase its market share.

Technology investments

In order to boost its online presence, the company will expand its next-day delivery program. The program allows consumers in around 85% of its U.S. markets to order as late as midnight for delivery the next day. AutoZone will expand the program into new areas, which could increase the size of its potential customer base and broaden its appeal to new customers.

In addition, the company is investing in new technology to reduce customer wait times. For example, it introduced new point-of-sale systems in the fourth quarter and improved its electronic catalogue to provide a more seamless transaction experience for its in-store customers. This could boost the company's customer loyalty levels and improve its competitive advantage versus industry peers.

Potential risks

AutoZone's financial prospects could be negatively impacted by the ongoing trade dispute between the U.S. and China. It has decided to pass the cost of tariffs on to its customers, which means the retail prices of its products have risen by as much as 25% during fiscal 2019. This could reduce demand for its products and negatively impact its sales prospects.

Additionally, the business recorded a 7.6% increase in its operating costs in the fourth quarter, driven by growing labor costs that may continue to rise due to a shortage of workers across the retail sector.

In response, AutoZone is simplifying and reducing its employee workloads in order to provide higher levels of customer interaction. It is investing in staff training to provide its employees with greater product knowledge, which may improve the in-store customer experience and lead to cross-selling opportunities. It is also investing in a variety of IT initiatives that could improve its efficiency over the long run and mitigate the impact of tariffs.

Outlook

Analysts forecast the company will post a 10% increase in earnings per share in fiscal 2021. The forward price-earnings ratio of 16.5 suggests AutoZone offers a wide margin of safety given its long-term growth prospects.

Disclosure: The author has no positions in any stocks mentioned.

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This article first appeared on GuruFocus.