We have downgraded the recommendation on AutoZone (AZO) from Outperform to Neutral. This reflects the company’s heavy reliance on private label brands and threats from its vendor consolidation and appreciation in gas prices, which act contrary to significant growth opportunities that exist in each of its businesses such as retail, commercial and ALLDATA.
AutoZone is one of the nation’s leading specialty retailers of automotive replacement parts and accessories, operating in the Do-It-Yourself (DIY) retail, Do-It-for-Me (DIFM) commercial and other customer markets. DIY retail sales represented 84% of the company’s revenue in 2008, DIFM commercial sales represented 11% and the remaining 5% generated from other sales.
AutoZone sells the ALLDATA brand automotive diagnostic and repair software, and offers ALLDATA repair subscription, ALLDATA online and on DVD, which offers comprehensive factory-correct repair information to DIY customers.
AutoZone has a high degree of reliance (50%) on its private label brands, which could hinder its commercial business. In recent years, several of the company’s vendors have been merged. This could materially affect the prices at which the company purchases its products. Further, the appreciation in gas prices remains a threat to the company as it has a negative impact on miles driven and deferment of purchases by its customers.
Nevertheless, AutoZone is the leader in the DIY retail market in the U.S. with a 13% share. In the DIFM commercial segment, the company has a 1.3% market share, which the management believes could increase by focusing on improving marketing initiatives.
AutoZone uses its significant cash flow to open new stores every year and maintain a mid-single-digit square footage growth rate. The company is also focused on growing same-store sales by expanding private label offerings, which now account for 25% of sales.
Read the full analyst report on “AZN”
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