On Sep 19, 2013, Zacks Investment Research maintained a Neutral recommendation on AutoZone, Inc. (AZO). The company is focusing on boosting sales through the expansion of stores and also follows an aggressive share repurchase program. However, AutoZone’s rising debt and interest burden, rising gas prices and the company’s heavy reliance on its private label brands may affect its margins.
Why the Reiteration?
AutoZone uses its significant cash flow to open new stores every year and maintain a mid-single-digit square footage growth rate. In the first three quarters of fiscal 2013, the company opened 84 stores in the U.S. and 20 stores in Mexico.
The ample cash balance also facilitates capital deployment through share buybacks. In the first three quarters of fiscal 2013, AutoZone repurchased more than 2.2 million shares for $827 million.
Moreover, the average age of cars on the road is rising (reaching 11.3 years), which is increasing the demand for auto parts. However, AutoZone has a high degree of reliance on its private label brands (50%), which could hinder its commercial business.
Rising gas prices are also a threat to the company as it has a negative impact on miles driven and leads to deferment of purchases by its customers. AutoZone is suffering from rising debt. The company’s total debt increased to $4.0 billion as of May 4, 2013, from $3.6 billion as of May 5, 2012. This is increasing the interest expense as well.
AutoZone sells the ALLDATA brand automotive diagnostic and repair software, online and on DVD, which offers comprehensive factory-correct repair information to Do-It-Yourself (:DIY) retailcustomers and offers ALLDATA repair subscription. The company also sells in-house brands of automotive batteries such as Duralast, Duralast Gold and Valuecraft, which are manufactured by the U.S. automotive parts producer Johnson Controls Inc. (JCI).
Other Stocks to Consider
AutoZone currently carries a Zacks Rank #4 (Sell). Some companies worth considering in the auto parts business are CarMax Inc. (KMX) and O'Reilly Automotive Inc. (ORLY). Both these companies carry a Zacks Rank #2 (Buy).