Prepared by Chris, CEO of Quad 7 Capital, and Team Leader at BAD BEAT Investing
AutoZone (AZO) is a name that we continue to cover regularly. In March we highlighted it as an excellent buy under $800, and the stock had rallied hard with the market and on the back of its own performance, but has sold off a bit since late summer. In this column, we continue our regular coverage of the name following its recently reported earnings, and believe that if the name dips below $1,100 again, it’s time to reenter the stock. With the COVID-19 market crisis, AutoZone’s operations have been impacted, but has held up very well all things considered. It remains our opinion that this company will thrive moving forward, but the stock also is a little ahead of itself.
The present fiscal Q1 is going to get a bit of a boost we think as economies are reopening, cars are getting back on the road, and, to be clear, there are recession impacts from people out of work and many businesses closed, which leads to people keeping their cars on the road longer. There are concerns that COVID-19 is resurging, but shutdowns are unlikely, at least to the extent we saw in the spring. That remains to be seen, but we see it as likely that many will try and extend the life of their cars. Under these assumptions, AutoZone as a company should reap rewards, so we think as the stock pulls back again, it should be considered. We think the future is bright, and that while the near term is questionable the longer-term picture looks solid. Let us discuss.
What we thought of fiscal Q4 performance
In our opinion, things were strong in Q4. The company once again delivered well past expectations. We were impressed, but the performance of the company did not seem to be reflected in share prices, which have largely faced selling pressure in recent weeks. We are relatively neutral to short-term bearish, but bullish in the long term. The company is crushing sales expectations and still exceeding our bullish same-store sales expectations. In Q4, AutoZone registered sales of $4.55 billion, which was just a 14% year-over-year increase, and was a decent beat vs. consensus analyst estimates of $400 million, and well above our expectations for $4.25 billion.
Now, as sales continue to be strong, we need to, of course, understand what’s driving these sales. The measure you should care about is comparable sales, which have been on the mend since bottoming out in 2017.
Comparable sales are a critical metric, and we expected increases in the quarter given the COVID-19 crisis and push to keep cars on the road. We expected a strong increase in the mid teens, but comps were even better than this. Comparable store sales were up 21%
Management gave us some really solid color on what happened here:
We set many modern era records during our fourth quarter including record same store sales of 21.8%, record commercial sales per program per week of $12,200, record adjusted earnings before interest and taxes growth of 40.4% and record quarterly operating cash flow of $1.4 billion. During the quarter, our same store sales growth was very consistent, generally increasing twenty-one to twenty-seven percent per week. During the last four weeks of the quarter, following the expiration of the enhanced unemployment benefits provided by the Federal Government, our same store sales increased 16.5%.
So we see comps dipped to end the quarter, though this dip brought comps in line with our expected range.
As shareholders in the long term of AutoZone, our firm is looking to see the company continue to focus on increasing sales while controlling expenses, particularly those impacting gross margins. We expect margins to remain strong and not fluctuate greatly, and in the heart of the COVID-19 crisis, the company delivered gross margins that were flat from a year ago. They were 53.1%, which is strong on its own, but dipped from a year ago. So we saw big sales growth, decent sales margins, and operating margin remains solid.
The stellar buyback program is now on pause, but when that resumes it will provide a nice floor of buying under the stock. Even without that EPS was strong. Net income for the quarter increased $175.2 million, or 31.0% over last year’s quarter to $740.5 million, while EPS increased 36.9% to $30.93 per share from $22.59, surpassing our expectations by $5.00 per share. Overall the quarter was much stronger than expected.
Looking ahead to 2021
After these results and despite the uncertainty ahead this winter with COVID-19, we are projecting for the entire year 2021 ahead comparable sales of 8%-15%. We think that’s largely priced in. We are excited about 2021 and beyond. The bottom line people need to keep cars going, despite the pick up in work from home. That’s the thesis here.
It’s worth noting that further boosting the top line is the fact that AutoZone also continues to strategically open new shops to fuel future growth. The company opened 49 net new stores in the U.S. and added another 16 internationally. With these new store openings, and those opened in the last three quarters, sales should see continued low-single digit growth.
Thus, we think EPS for fiscal 2021 will ramp up. If sales grow in the low double digits on the back of strong comps, excluding any future buybacks, we anticipate fiscal 2021 EPS of $75-$81. The historical trading range is 18-19X forward EPS. At the low end of our estimates, and shares at $1,125, we are at 15x forward EPS. We think shares are attractively valued, and would be a great buy on a further dip.
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Disclosure: I am/we are long AZO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.