AutoZone (AZO, Financial) has been one of the investor favorites for quite some time, which cheered its shareholders with significant return. The stock began its upside rally in 2010, growing more than 600% in the past five years and even now it seems to have sufficient fuel to take it to new highs. The company recently reported its second-quarter results with year-over-year growth in both revenue and profits and also exceeded the street expectations. While it is interesting to watch the company grow consistently, let’s see whether it will have the same momentum in the days ahead.
Impressive growth
AutoZone’s second-quarter revenue rose 7.7% from a year ago to $2.12 billion, while earnings increased to $6.51 a share compared to $5.63 a share last year. It is rare to see all the metrics of a company rise year over year and at the same time top the analysts’ consensus, which in fact is a reflection of its strong performance in the past years. And it won’t be surprising to expect a similar momentum from the retailer in the future as well.
AutoZone delivered across all frontiers including both retail and commercial business and is proceeding well with the integration of its recent acquisition, Interamerican Motor Corporation. This new addition has increased AutoZone’s inventory across the chain by $11,000 per store. The IMC branches carry around ten times the inventory per location that an average AutoZone store carries. This is good news for the company considering its inventory turnover, which is 1.4 times the industry average .
Better times ahead
IMC is the second-largest distributor of OE quality import replacement parts in the U.S and 18 with branches and a strong management it offers considerable opportunities. AutoZone is counting on this new acquisition to deliver growth on various fronts both in the domestic as well as in the international market for years to come.
In addition, the company expanded its retail business with the opening of 36 new stores and also opened 29 net new commercial programs. It is encouraging to see the pace of its international expansion; it currently has 8% of its total stores outside of the U.S. While these new openings continue to add to its top line, the company is also testing different delivery frequencies from its distribution centers to increase sales.
The tests performed by the company have revealed that increased delivery frequency enhances sales and improves inventory productivity by reducing safety stops. In the past year it has tested more than 150 stores and based on the success of its initial result it has decided to expand the test to more than 300 additional stores. The early results are encouraging with marginal rise in its top line. It is yet to devise its long-term strategy, but based on its current findings it will increase the delivery frequency to most of its stores.
Conclusion
The company currently has a trailing P/E of 20.61 and its forward P/E looks impressive at 17.22, reflecting that its earnings will improve in the future. The stock had a strong rally and considering its growth initiatives we could expect the same to continue in the coming years.
