CFRA Talks AZO Mixed Earnings, International Strength & Demand Trends

SPEAKER_1 (0:00)

Welcome back to Next Gen Investing. It's now time to welcome in our next guest. That's Garrett Nelsom. He's a Vice President and Senior Equity Analyst at CFRA Research, and he's here to discuss AutoZone, which is on the move higher here today. First off, Garrett, I just want to leave it open-ended, I guess. What was your general thoughts around this report, which I guess at best is mixed?

Garrett Nelson (0:25)

That's right. The headline was a pretty comfortable beat, but when you looked at it a little bit closer, the gross margins, which is where they'd be, were boosted by tariff refunds, and one-time non-recurring LIFO inventory impacts.

The actual numbers weren't as good as the headline suggested. But that said, this stock has really been beaten down over the past year, and so I think what you're seeing is a relief rally in AutoZone as well as a couple of its auto aftermarket peers today. And so I think investors are sort of looking at this stock as a name that's much less cyclical than other names in the consumer space. The headline earnings growth was 15% year over year, and they're continuing to do a pretty solid job executing. And so I think you're seeing a relief rally today.

SPEAKER_1 (1:26)

Garrett, given that they missed at least some of the estimates I had, I guess, I don't know if they missed your personal estimates on revenue and comp sales, both domestically and internationally.

Is there anything durable about this report for the investors maybe looking at this as a potential investment and thinking, hey, nice 6% move basically off year to date lows is this anything more than just better than feared relief pop? Was there something here that gives you confidence going forward as you've already kind of pointed out a lot of the good is one time impact?

Garrett Nelson (2:07)

Yeah, a couple of positives. Domestically, their same store sales were disappointing.

Those same store sales domestically rose only 1.6 percent, but internationally, they grew close to 11 percent, and their commercial business continues to grow high single digits. Really, the commercial and international business is really what's driving the results.

Also, they've been very aggressive in terms of new store openings. They opened 374 new stores in fiscal 2026, the fiscal year that just ended. That's a pretty big increase from their pace of new store openings compared to the last few years. But they're doing a pretty respectable job executing, buying back a lot of stock. So they bought back $2 billion in fiscal 2026 Had a nice chunk of that in the quarter that just ended. So, sort of staying the course as far as their growth strategy. And I think over time, that's a winning strategy. And we continue to like the secular growth story of fundamentals of the auto aftermarket, because the average vehicle age in the US is almost 13 years old, which is a record high. And so that creates a lot of demand for auto parts and repairs and maintenance activity, which is benefiting AutoZone.

SPEAKER_1 (3:42)

Garrett, speaking of maintaining and kind of holding the course, you guys maintain a whole opinion on the shares. You have a 12 month price target, I believe I saw of $3,200 per share. You mind kind of walking us through how you guys come to that conclusion and some of the math behind it?

Garrett Nelson (4:02)

Sure. So that assumes a multiple of 17 times our fiscal 2028 estimate, which is how we get to $3,200 a share. So it does imply some upside from where the stock is currently, is below $3,000, but not enough to justify a buy. Historically, if you look back over the last 10 years, this is a stock that's traded at a forward PE multiple of just above 18 times. So we're being a little bit conservative with our target multiple.

And so that's how we get to 3,200. Our big concern in the near term is just the sluggish domestic same store sales growth. And we have a lot of concerns about the US consumer, particularly in the near term, looking out three to six months and having just posted a 1.6 percent domestic same store sales growth number. As I mentioned, that's over 85 percent of their stores are in the US. That's really the bread and butter. So we're really looking for some signs of improvement domestically to get more bullish on the story.

SPEAKER_1 (5:10)

Garrett, when you look at this kind of industry group or its peers within this auto parts space, is there a lot that separates these companies? Is there a pretty strong correlation both fundamentally and kind of how they operate, whether it's O'Reilly, whether it's advanced auto parts? Some of them were, I guess, commonly known, I guess, peers within the industry.