Over the past six months, AutoZone’s shares (currently trading at $2,904) have posted a disappointing 18.2% loss, well below the S&P 500’s 14.3% gain. This may have investors wondering how to approach the situation.
Given the weaker price action, is now the time to buy AZO? Find out in our full research report, it’s free.
Why Is AutoZone a Good Business?
Aiming to be a one-stop shop for the DIY customer, AutoZone (NYSE: AZO) is an auto parts and accessories retailer that sells everything from car batteries to windshield wiper fluid to brake pads.
1. Store Growth Signals an Offensive Strategy
The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.
AutoZone operated 8,031 locations in the latest quarter. It has opened new stores at a rapid clip over the last two years, averaging 4.1% annual growth, much faster than the broader consumer retail sector.
When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.
2. Surging Same-Store Sales Show Increasing Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
AutoZone’s demand has been spectacular for a retailer over the last two years. On average, the company has increased its same-store sales by an impressive 3.4% per year.
3. Operating Margin Reveals a Well-Run Organization
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
AutoZone’s operating margin has generally stayed the same over the last 12 months, averaging 18.7% over the last two years. This profitability was elite for a consumer retail business thanks to its efficient cost structure and economies of scale. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Final Judgment
These are just a few reasons why we think AutoZone is a great business. With the recent decline, the stock trades at 16.8× forward P/E (or $2,904 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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