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Here's Why AutoZone Does Not Look Like a Good Investment

July 11, 2014 | About:
kcpl

kcpl

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AutoZone (AZO) has been doing well as it benefited from an increase in the average age of vehicles. According a report from Polk, along with AutoZone, its industry peers such as Advance Auto Parts and O’Reilly Automotive have also benefited from this vehicle aging problem. The report also mentions that the average age of light vehicles in the U.S. has touched an all-time high of 11.4 years at the beginning of the year. This has fueled the growth of aftermarket retailers tremendously.

Favorable market

The market conditions have been favorable for the industry as a whole. Moreover, the technological advancement of modern day vehicles has further enhanced their growth prospects. As a result, the auto parts retailers and service providers are anticipating greater opportunities because of the complex nature of technological innovations used in the vehicles.

AutoZone’s recent results were better than the consensus estimate, mainly on account of its focus on the commercial market. The company also benefited from the cold weather conditions that prevailed during the period. In fact, these retailers are one of the few industries who actually benefit from an extreme cold weather. Going forward, AutoZone’s move into commercial markets can help the company to further enhance its business.

It has made considerable progress in this direction, as it started a commercial program in 125 stores last quarter, which was well-above the 37 programs that it had started last year. As a result, the company reported 14% increase in its sales as compared to last year. Looking ahead, AutoZone is focused to improve the availability of commercial parts at its hub locations apart from adding inventory at its distribution centers.

Competition

However, the retailer has to face tough competition from its peers O’Reilly and Advance Auto, which have a greater share in the commercial segment as compared to AutoZone. That means AutoZone has to catch-up a lot of ground to compete with them.

AutoZone’s balance sheet does not look pretty, as it has a massive debt of $4.17 billion. And instead of trying to reduce it, the company is buying back shares. The company boosted its share purchase authorization by $750 million and repurchased $292 million worth of shares in the previous quarter.

On the other hand, Advance Auto has been gaining considerable momentum with the help of its strategic moves. The company has acquired General Parts International, which will make Advance Auto the largest auto-parts retailer in North America.

In addition, Advance Auto has made a strategic move by making a deal with Worldpac, which is a supplier of replacement parts for imported vehicles. This will strengthen Advance Auto’s position in the commercial market even better. The commercial market is currently worth around $40 billion. Therefore, keeping this in mind, the company wants to make the most of it by expanding its network.

As a part of its expansion plan, the company had acquired 124 stores of BWP Distributors earlier this year, which has strengthened its presence in the Northeastern market. Thus, Advance Auto is best positioned to benefit from the commercial market.

A bit different from the other two retailers, O’Reilly is focusing on both the commercial and do-it-yourself markets. This is in spite of the fact that the company sees faster growth in its commercial business. O’Reilly gets 40% of its revenue from the commercial market. Currently, it is focused to improve the availability of parts in its stores. Keeping this in mind, O’Reilly has planned to relocate its distribution center in Lewiston, Maine, to Devens, Massachusetts, which will improve its presence in the Northeast.

In addition, as a part of its aggressive expansion strategy, the company also has plans to open distribution centers in Lakeland, Florida, and Naperville and Illinois. For the year 2014, it has planned to open a total of 200 new stores as compared to 109 stores last year.

Conclusion

We have considered the performance of three auto-parts retailers; all of them are focused to grow their market share. But, from the investment point of view, all three are not equally positioned. AutoZone has a huge debt, which if unchecked, could bring its stock down. On the other hand, both Advance Auto and O’Reilly are better positioned than AutoZone.


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