AutoZone Cruises Through Volatile Winter Months

We don’t expect to materially alter our $1,950 per share fair value estimate for narrow-moat AutoZone AZO after the firm posted solid second-quarter results. We’re encouraged investments behind its commercial expansion initiatives persist, despite industrywide cost pressures, particularly in labor and freight. Even after a low-single-digit downdraft, shares trade at a premium; we recommend investors seek a more attractive entry point.

Domestic same-store sales popped 5.3%, aided by a 13% lift in its commercial segment (implying market share gains) and modest DIY 2.7% growth. In the quarter, DIY traffic remained fairly resilient, declining just 2% (an improvement from down 4% in the first quarter). We surmise enduring demand across categories is bolstered by elevated interest rates, which curtail new car purchases, pushing consumers to repair their vehicles, despite high-single-digit price inflation. Within commercial, AutoZone’s initiatives aimed at bolstering its reach (through both an expanded hub and IT network) should ensure it continues to gain acclaim with professional customers (commercial up to 30% of sales from 28% in the quarter). In light of the harsh winter weather experienced thus far, repair demand is likely to remain heightened over the coming months, buttressing our 5% fiscal 2023 sales forecast.

Input, freight, and labor inflation impacted cost of goods sold, coupled with higher operating expenses (IT and payroll investment), and weighed on AutoZone’s operating margin, down 40 basis points to 18.2% operating margins, lagging our 19% full-year estimate. While management noted that mid-single-digit labor inflation is still double its normalized range and is not expected to abate, we anticipate input and freight costs will continue to moderate throughout fiscal 2023. Even against a challenging labor market, we see operating margins averaging 20% throughout our forecast as distribution and scale benefits should support improvement.