Ageing vehicles on road, lower fuel prices, and an improving economy are leading to an increase in miles driven, which are perfect tailwinds for the automotive aftermarket retailers like AutoZone (AZO, Financial), Advanced Auto Parts (AAP, Financial), and O Reilly Auto (ORLY, Financial).
The average age of vehicles on the U.S. roads was 11.4 years in 2014 and this is expected to remain at same levels in 2015, and by 2019 this will go up to 11.7 years. AutoZone posted third-quarter fiscal 2015 results, winning on earnings but missing on top-line estimates.
Third-quarter review
Domestic comparable-store sales, or comps, grew 2.3% year-over-year. On the back of comps growth and new store openings, consolidated sales grew 6.5% year-over-year to $22.49 billion. Analysts were expecting $10 million more.
Gross profit increased to 52.3% of sales, versus 52% in the year-ago quarter, as a result of improved merchandise margins, partly offset by Interamerican Motor Corporation (IMC) acquisition last fall. Also, as a result of IMC acquisition, operating expenses as a percentage of sales went up from 31.5% to 31.6%.
On the back of top-line growth, earnings per share increased 13.1% year-over-year to $9.57, beating analysts’ expectations by $0.05.
Growth tailwinds
The miles driven data, as show below for last one year, clearly shows that it is on the rise, increasing 3.9% year-over-year as at the end of March.
Increase in miles driven will mean more sales of spare parts and consumables, more so as the age of vehicles on the U.S. roads is already at an all time high, and is projected to grow through to 2019. This is corroborated by AutoZone’s failure categories outpacing both maintenance and discretionary categories during the quarter.
Store count expansion is another growth driver. During the quarter AutoZone opened 27 new stores. In addition AutoZone also opened seven stores in Mexico and two in Brazil. Currently just 8% of sales come from outside the U.S., and the company sees huge growth opportunity both within and outside U.S. AutoZone will be opening couple of additional stores during the fiscal year. The automotive aftermarket retailer exited the third-quarter with a store count of 5,512, including 418 stores in Mexico, 7 stores in Brazil and 18 IMC branches.
Shopping for growth has been in AutoZone’s DNA. Last year it acquired IMC, and currently the integration process is on. Once integration is completed, it will further drive profitability and sales. IMC now has 18 branches and offers an impressive growth opportunity in the long run.
AutoZone also changed its store replenishment frequency from once a week to many times a week so that the stores have adequate stocks of moving items at all times. In all, 900 stores are now being replenished between three and five times a week and the company is already seeing a lift in sales, though did not provide a specific number for this.
Investor friendly
During the quarter, AutoZone repurchased 763,000 shares for $515 million, more than what the company had done in the first half of the year. The retailer currently has $778 million remaining for repurchase and this will drive bottom line growth as and when AutoZone repurchases more shares.
Wrapping up
Increase in miles driven and ageing cars on the roads are perfect tailwinds for the company. The stock closed lower as a result of mixed earnings results. However, the company has been one of the great performers in the auto parts business.
For the next five years, analysts expect compound annual growth of 13.40%. Hence, this is a good stock to accumulate on the dip.
