AutoZone Talks Execution Stumbles, Rising Expenses, and the Online Sales Challenge

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AutoZone (NYSE: AZO) is taking positive -- but tiny -- steps toward the improved operating results that its management has targeted. That was the key takeaway from fiscal fourth-quarter results this week, which showed faster sales and improved profitability that nevertheless translated into flat or declining market share for the auto parts giant.

In a conference call with Wall Street analysts, CEO Bill Rhodes and his team discussed the key factors behind that competitive stumble while seeking to assure investors that these issues shouldn't impact results going forward.

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Below are a few highlights from that presentation.

Execution challenges

AutoZone's sales growth rate sped up to 2.2% at existing locations from 0.6% in the prior quarter. Yet while that spike powered a healthy acceleration in fiscal 2018 compared to 2017, it still translated into a worsening market share performance relative to earlier in the year. Rival Advance Auto Parts, for example, grew comparable-store sales by 2.8% over the summer months. "While our overall sales improved for the quarter," Rhodes said, "they should have been more robust."

AutoZone executives listed several challenges that hurt results, including inventory issues tied to vendor transitions, mismatched pricing in the online sales channel, and stumbles around the major changes being made to the supply chain. The good news is management believes it has a firm grasp on these problems and so they shouldn't be significant headwinds heading into fiscal 2019.

Bright spots

AutoZone's inventory expansion initiative involves adding more distribution centers so that local stores can always be stocked with the most relevant, in-demand merchandise. That strategy is working well enough, according to executives, that they now plan to launch more of these retailing hubs in the next year. These should help the company stand out against local competitors while closing the inventory offering gap with online-focused rivals.

Investing more in the business

With help from a sharply declining tax rate, AutoZone is directing an unusually high proportion of cash flow right back into the business today. These investment priorities include building out the online sales channel and bringing inventory closer to the consumer for delivery and stocking purposes.

The spending category that will most directly impact results in fiscal 2019 is wages, which are scheduled to rise beginning in the first quarter. Shareholders can expect these expenses to take a bite out of profitability, especially in the seasonally slow second quarter. But AutoZone executives say the spending will improve operating performance over the long term.

Looking ahead to 2019

AutoZone didn't issue specific sales guidance for the new fiscal year, but management said they're optimistic about the industry and the robust spending trends they're seeing today. Other positive indicators include relatively low gas prices and an aging stock of automobiles. As for new tariffs, executives said they are likely to impact prices across the industry and so they won't disadvantage any particular retailer.

Assuming the company can fix the sales hiccups that pinched results this quarter, it should return to modest market share gains in fiscal 2019. That would make it relatively easy for AutoZone to absorb higher expenses while achieving its second straight year of moderately accelerating sales growth.

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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.