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Why AutoZone's Stock Could Surge Higher

- By Robert Stephens, CFA

Increasing investment in digital opportunities could boost AutoZone Inc.'s (AZO) stock performance. The company has launched new initiatives that are expected to enhance the customer experience, such as next-day delivery. It is opening new stores in international markets, with Brazil expected to become a larger growth opportunity than Mexico.

Inventory expansion is set to improve comparable sales, with additional megahubs expected to open this year. New commercial programs are forecast to increase its commercial segment's market share, while investment in new technology could enhance the customer experience.

Although the introduction of tariffs and stiffer competition are risks facing the company, relatively inelastic demand for its services and a large inventory of products provide it with an economic moat. Having risen 2% in the last year versus a fall of 8% for the S&P 500, it could have investment potential.



An inventory expansion initiative could improve the company's financial outlook. This involves adding more distribution centers so that local stores have a wider range of merchandise available. This has contributed to improving comparable sales, with customer needs being met more often and with greater immediacy. Following the opening of two additional megahubs last quarter, it now has 170 hub stores and an additional 26 megahubs. It plans to open up to 10 hubs in the current fiscal year, with the majority expected to be megahubs.

AutoZone is working to reduce non-selling tasks in its stores to allow staff to focus on sales activities. It is investing in new technology in order to improve its electronic catalog and point-of-sale systems, with the goal of enhancing the customer experience.

Sales in its commercial business grew 11.3% last quarter. It opened 25 net new programs and is on target to open 150 net new commercial programs in the current fiscal year. Around 85% of its domestic stores have a commercial program, with this figure expected to rise as it aims to increase its market share within the segment.


Investment in the company's omnichannel capabilities includes initiatives to improve its in-store systems and websites. It has seen a continued increase in online traffic, with programs such as ship to home and in-store pickup catalyzing sales growth. It has also recently launched a next-day delivery program that is available to customers in 85% of U.S. markets. Over 100,000 products are available for next-day delivery, while a return of online promotions is expected to boost sales. Although online sales currently represent less than 5% of total sales, this figure is expected to rise rapidly.

AutoZone's international performance has improved. It opened three new stores in Mexico last quarter, and expects to open 40 new stores in the country during the current fiscal year. It plans to double its store numbers in Brazil to 40 by the end of fiscal 2019. It believes the Brazilian market has the potential to be significantly larger than Mexico.


The introduction of tariffs on a broad range of categories could pose a threat to the company's financial outlook. Although the U.S. has agreed to postpone plans to increase tariffs from 10% to 25%, the potential for an increasingly protectionist trade policy remains in place. AutoZone also faces rising competition from Amazon's entry to the industry. This may negatively impact consumer demand - especially when immediacy is not a motivating factor in the sales process.

Tariffs have not caused a material cost increase for the business so far, since it has been able to negotiate and offset them based on the strength of the U.S. dollar. The wider industry is relatively inelastic due to car repairs being continually in demand. This could allow product cost inflation to be passed on to customers. The company's broad range of inventory means it is likely to have a competitive edge over Amazon (AMZN), particularly when a customer requires a quick fix.


Omnichannel growth opportunities could catalyze AutoZone's financial performance. New initiatives such as "buy online, pickup in store" may enhance the customer experience and provide a competitive advantage. Expansion in international markets could boost sales growth and improve diversification.

Inventory expansion has proven to be popular with customers, contributing to higher comparable sales. Its commercial segment may make further market share gains as new programs are set to open.

Increasingly protectionist trade policies may be offset by the company's ability to pass higher costs onto consumers. Having outperformed the S&P 500 in the last year, the stock could generate high returns.

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This article first appeared on GuruFocus.