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AutoZone (AZO) Soars 30% Year to Date: More Room Ahead?

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The year 2019 has so far turned out to be favorable for AutoZone, Inc. AZO, with its share price surging around 30% year to date compared with the industry’s rally of 21%.

Headquartered in the United States, it is one of the nation’s leading specialty retailers, and distributors of automotive replacement parts and accessories. Continued sales growth in both retail DIY (Do it Yourself) and commercial DIFM (Do It For Me) businesses is boosting the firm’s performance. Notably, the company displays an impressive earnings surprise history, having surpassed estimates in each of the trailing four quarters, with an average of 8.74%.

The automotive aftermarket parts and accessories retailer — which is a bellwether of the industry — recently reported fourth-quarter fiscal 2019 results, wherein it delivered a comprehensive beat. The company’s domestic commercial sales rose 21.2% year over year in the last reported quarter, given expansion of stores and increase in commercial programs. Domestic same-store sales rose 3% year over year on improved performances of DIY and commercial businesses. In fiscal 2019, AutoZone generated record sales of $11.9 billion, with domestic commercial sales rising 13.4% from the prior year.

Let’s delve deeper into the factors boosting the stock’s performance.

Growth Drivers in Place

AutoZone’s net sales are positively impacted by the growing market presence of DIY retail and commercial businesses. In fiscal 2019, the company opened 209 new stores globally, with the current total being 6,411. Store expansion initiatives, fast delivery and high-quality products are improving the company’s market share as well as aiding in top-line growth.

Of late, it is focusing on expansion of the favorably located core business and development of the supply-chain network. This will enable it to offer products at the local level, wherein customer demand is immediate. Inventory assortment improvements, technological advancements, strong reputation of the Duralast brand across the professional customer base and greater engagement from store operating teams are enabling the company to come to fruition. In an effort to bolster inventory availability initiatives, the firm is working on increasing same-day service from hubs to stores for boosting the availability of parts to commercial customers.

The company’s omnichannel efforts to improve customer shopping experience are reaping profits. AutoZone’s initiatives to enhance in-store systems and website traffic bode well for sales growth. AutoZone’s efforts to expand to new markets and enhance digital capabilities will enable the firm to make deeper inroads and further grow its business. Ship-to-home next day, buy online, pickup in store and commercial customer ordering are picking pace, increasing traffic to the company’s online site.

Notably, the firm’s strong share buyback program is boosting investors’ confidence. For fiscal 2019, the company repurchased 2.2 million shares for $2.005 billion, at an average price of $919 per share. At the end of the last reported quarter, the company had shares worth $476.8 million remaining under the current repurchase authorization.

Is There Further Upside Left?

While AutoZone is benefitting from robust sales, high-quality products, supply-chain network and omnichannel presence, it is still exposed to certain headwinds. High capital and operating expenses are concerning for the company. It expects capital and operating expenses to rise over the next few years on opening of distribution centers, mega hubs and stores; technology investments; along with accelerated wage pressure.Further, the company’s technology investments to improve electronic catalogue involves capital expenditure. Markedly, U.S- Sino trade tensions are likely to negatively impact the company’s performance. Tariff impact on auto parts from the U.S.-China trade war, and looming tariff conflicts from Japan and European Union may eat into some of the profits of the firm.

Nevertheless, we expect AutoZone to tide over these limitations on the back of solid sales growth, impressive store expansion strategies and digital enhancements. As such, this Zacks Rank #3 (Hold) company has a Growth Score of A and seems well positioned to sustain the growth momentum in 2019.

Other Stocks to Consider

A few better-ranked stocks in the Auto-Tires-Trucks sector are Lithia Motors LAD, Douglas Dynamics, Inc. PLOW and SPX Corp. (SPXC - Free Report) . While Lithia Motors currently sports a Zacks Rank #1 (Strong Buy), SPX and Douglas Dynamics carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lithia Motors has an expected earnings growth rate of 12.8% for 2019. The company’s shares have gained 71.4% year to date.

SPX has an estimated earnings growth rate of 22.7% for the current year. Its shares have gained 42.8% year to date.

Douglas Dynamics has an expected earnings growth rate of 11.7% for 2019. The company’s shares have risen 23.3% year to date.

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