VOL. 132 | NO. 221 | Tuesday, November 7, 2017
By Andy Meek
A new Raymond James analyst report covering the auto parts industry suggests a few slightly concerning trends for retailers like AutoZone Inc., including a decrease in the growth rate of vehicle miles driven and an uptick in gas prices.
Raymond James analysts Dan Wewer and Mitch Ingles argue that it amounts to a “slightly negative near-term read-through for automotive aftermarket retailers.”
It’s another indication of how the numbers haven’t all broken AutoZone’s way this year, with several trends turning against the company for the first time in years.
One of them was the company’s hot earnings streak – double-digit earnings per share growth each quarter that AutoZone had enjoyed, uninterrupted, for years until that run ended earlier this year. The Raymond James report points to other industry trends the Memphis-based auto parts giant is definitely keeping an eye on.
Ideally, gas prices would stay lower so that consumers drive more. The more vehicle miles driven increases the likelihood of needing a replacement part.
“Our view is that the industry over-earned in 2015, benefiting from vehicle miles driven growing 3.5 percent – the largest increase in 20 years,” the analysts write. They estimate the industry will return soon to a total annual growth rate of a modest 2 percent to 2.5 percent.
“We are not ringing the bell that it is time to reverse our decade-long bullish call on the auto parts retailers, but this is a risk factor to which we are giving more attention,” they continue, adding that they continue to recommend the retailers Advanced Auto Parts and O’Reilly Automotive with “Strong Buy” ratings.
Raymond James downgraded AutoZone to a “Market Perform” rating earlier this year, an assessment that the high-flying days for the company’s stock, for the time being, are no more.
AutoZone will hold its annual meeting in Memphis next month, on Dec. 20, at the J.R. Hyde III Store Support Center Downtown. It will be the typical gathering of shareholders, with matters up for a vote that include ratifying the appointment of Ernst & Young LLP as the company’s independent registered public accounting firm; electing directors; and holding an advisory so-called “say on pay” vote in which shareholders can endorse or not endorse the compensation of top AutoZone executives.
AutoZone will also be asking shareholders to vote on the frequency of such advisory votes, giving shareholders the option to recommend yearly votes or votes every two or three years (the company recommends holding the vote every year).
That meeting, meanwhile, will cap a year in which AutoZone’s stock price has fallen about 26 percent since the beginning of the year as of press time.
The company’s response to negative news is for executives like CEO Bill Rhodes to remind analysts frequently the company is intent on managing for the long-term.
This year especially, though, showed how short-term hits can dent the best-laid plans and ambitions, slowing a company’s growth rate.
The most recent quarter also shows how much weather can impact the company’s operations in an unplanned way. AutoZone said that the round of hurricanes that hit various points in the U.S. in recent months resulted in the company having to close more than 600 stores, all of which have since been reopened.
The company ended its most recent fiscal year with 0.5 percent same-store sales growth, which is essentially flat. AutoZone has also acknowledge in its just-released annual report that one of the risks to its business is the possibility it may not be able to sustain its historic rate of sales growth.
The company said it has grown its store count from 5,006 locations on Aug. 25, 2012, to 6,029 locations on Aug. 26 of this year, an average of 4 percent per year. With that, annual revenue also increased from a little more than $8 billion in fiscal 2012 to almost 11 billion in fiscal 2017.
“Annual revenue growth is driven by the opening of new locations, the development of new commercial programs and increases in same-store sales,” the company notes in its annual report. “We open new locations only after evaluating customer buying trends and market demand/needs, all of which could be adversely affected by persistent unemployment, wage cuts, small business failures and microeconomic conditions unique to the automotive industry. Same-store sales are impacted both by customer demand levels and by the prices we are able to charge for our products, which can also be negatively impacted by the economic pressures mentioned above.
“We cannot provide any assurance that we will continue to open locations at historical rates or continue to achieve increases in same-store sales,” the report states.
All that said, 2018 may represent a welcome turning of the page for the company. The Raymond James analysts, for example, note that industry revenues don’t tend to suffer back-to-back weak years, because auto parts replacement is often something that can only be deferred for too long, especially when it comes to safety and failure-related parts.
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