Entering This Auto Zone Will Make You Rich!

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The impending economic crisis, growing unemployment and prevailing uncertainty is resulting in a great loss for retailers. This is mainly because of restrained spending by customers who are trying to save each penny. For instance, one who used to go out shopping for new clothes once every month might cut down on its unnecessary wants and shop twice in a year. This hit the apparel retailers’ sales. But this is not the case for all. There are discount retailers who benefit from this because of their lower prices which give reasons to shoppers to loosen up their wallets.

Similarly, one who buys a new car every five years might stretch the period longer and maintain the existing one in order to avoid splurging on a new one. Although this is tough for the car manufacturers, it is a great opportunity for the ones who sell replacement parts and accessories that keep old cars going. An apt example here is AutoZone (NYSE: AZO), a leading player in the automotive parts and accessories industry which has been performing well for quite some time now. It has been beating analysts’ estimates from the last few quarters with its recent fourth quarter results not being an exception.

And The Growth Continues…

New store expansion and customers’ demand for replacement parts and services drove revenue 4.6% north, clocking $2.76 billion for the quarter. AutoZone’s stores have been the favorite for customers mainly because of its competitive pricing, increased promotions and a well-trained and friendly sales personnel. These factors have played an important role in the company’s performance. Moreover, its cost cutting efforts and share buybacks led to a whopping jump of 18% in its earnings which stood at $8.46 per share.

The company’s increased focus on the professional mechanics through Do-It-For-Me (DIFM) segment proved to be fruitful. The segment comprises 15% of its revenue and has great growth potential going forward. AutoZone has been strategizing to strengthen the segment by announcing more and more commercial sales programs in order to attract increased number of professional customers. This segment looks to be potential one going forward since only 65% of its domestic stores have the Commercial program implemented.

The auto parts retailer has also been laying stress on its e-commerce business. It has expanded its distribution facilities which make its online presence stronger. The segment registered a growth of more than 6% for the quarter. Also, its increased promotional efforts drive customers to its stores.

Well Stacked Against Its Peers

Let us take a look at the 5 year stock performance of AutoZone as against its peers such as O’Reilly Automotive (NASDAQ: ORLY), Advance Auto Parts (NYSE: AAP) and The Pep Boys – Manny, Moe & Jack (NYSE: PBY) as depicted by the chart below:

<img src="http://media.ycharts.com/charts/01ac8605c533a786edc43eff314812cd.png" />

AZO data by YCharts

Clearly, AutoZone has been the leader in providing value to investors. Its return of 224.7% is much higher than its peers. Moreover, it has been continuously involved in share repurchases benefitting the shareholders even more.

Though most of them have been doing well because of the general trend of customers getting their cars repaired rather than buying a new one, some of them have been outperforming others.

O’ Reilly had posted great results in its recent quarter with a 20% jump in the bottom line owing to the growing market for DIFM business. Pep Boys’ recent quarter was also ahead analysts’ expectations with a more than double growth in the bottom line driven by higher customer count. However, Advance Auto Parts was a laggard with lackluster results. Nevertheless, it has been adopting various strategies like increasing marketing efforts and improving productivity to combat competition.

In fact, if we consider the PEG ratios (a metric which shows how fast a company grows and should ideally be lower) of the players we find that AutoZone is expected to grow faster than its peers even in the future. AutoZone’s ratio stands at 0.92 which is the lowest as compared to O’Reilly Automotive, Advance Auto Parts and The Pep Boys which have PEG ratio at 1.05, 1.06 and 1.55 respectively.

The Bottom Line

What more can an investor ask for. A company which performs well, beats estimates, repurchases shares, and provides great returns to investors should never be ignored. With slow economic recovery this retailer can make the most of it. It has already opened 72 new stores during the quarter and intends to expand further. Its increased focus on the growing Commercial segment and expanding margins can prove to be fruitful going forward. I believe investors should definitely consider this one for their portfolio.


justhimanshu has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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