AutoZone Takes a Step Back Toward Robust Sales Growth

AutoZone (NYSE: AZO) this week announced earnings results highlighted by a rebounding sales growth pace, just as the management team had predicted back in late May. And, like rivals in the industry have done recently, the auto parts giant expressed optimism that trends will continue picking up in the quarters to come. Yet AutoZone appears to have its work cut out for it, as its growth rate is currently trailing peers like Advance Auto Parts.

Here's how the big-picture results stacked up against the prior-year period:

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What happened with AutoZone this quarter?

Sales picked up during the summer months as warmer weather lifted demand for car maintenance. AutoZone also managed healthy profitability despite rising costs. Its rebound was a bit less robust than what peers have seen lately, though.

Highlights of the quarter included:

  • Comparable-store sales grew 2.2% to mark an acceleration over the prior quarter's 0.6% uptick. The increase allowed management to hit its broader annual goal, with comps rising 1.8% for the full year compared to 1% in fiscal 2017. Investors were still hoping for slightly stronger results, given that Advance Auto Parts had recently posted a 2.8% comp sales gain.
  • Gross profit margin held steady at 53% of sales as higher pricing offset increased supply chain costs.
  • AutoZone took a significant charge related to its pension plan liabilities, and that expense led to lower reported earnings. Yet on an adjusted basis, profit grew 14% as gross and operating margins held steady while tax expenses plunged.
  • Management spent $665 million buying back its shares, which allowed adjusted earnings to rise 21% on a per-share basis.
  • Inventory grew at a slightly faster pace than revenue, rising 1.6%.
  • AutoZone added 78 stores to push its global base just past 6,200 locations.

What management had to say

Executives celebrated the faster sales gains while noting that the growth could have been stronger. "We were pleased to deliver positive same store sales for both our retail and commercial businesses," CEO Bill Rhodes said in a press release. "We expected our sales, particularly in the Rust Belt, to increase this summer and, for the most part, that materialized," Rhodes continued. "While these were positive developments, we believe we have further opportunities to improve our operations and results."

Management also reiterated its broad investment priorities, which include spending on the business to maximize long-term profits. "As we are investing to grow," Rhodes explained, "we will remain committed to our disciplined approach to increasing operating earnings and utilizing our capital effectively."

Looking forward

AutoZone executives implied that they're aiming for a second straight year of accelerating sales growth in fiscal 2019. Their long-term plans involve laying the groundwork for more robust volume on the digital side of the business, which today represents just a tiny fraction of overall revenue.

The retailer's more immediate challenge is to return to market share gains by lifting its comps metrics back up to match or exceed its industry peers. It took a small step in that direction over the summer months, but AutoZone still hasn't erased that gap.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.