• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

Let's Pop the Hood on AutoZone to See How Its Engine Is Running

The auto parts retailer's third-quarter results trounced expectations, but its large debt and inventory positions offer reasons to pause before buying its shares.
By STEPHEN GUILFOYLE
May 24, 2022 | 10:20 AM EDT
Stocks quotes in this article: AZO

AutoZone Inc. (AZO) crushed fiscal third-quarter earnings expectations with a GAAP earnings print of $29.03 a share. This beat the street by more than three bucks on revenue of $3.87 billion. That sales number also beat consensus and was good enough for year-over-year growth of 6%. Domestic same-store sales for stores open at least one year increased 2.6%.

Commenting on the results, AutoZone Chairman and CEO Bill Rhodes said, "We are very proud to report solid same-store sales growth on top of last year's remarkable 28.9%. Both our retail and commercial sales performance exceeded our expectations this quarter. While our commercial sales growth accelerated to 26%, our retail sales also remained healthy considering the tough comparison from a year ago."

While on the surface readers will see a stellar quarter, there are some less positive internals within this report that may temper your enthusiasm for the AZO shares, which initially traded higher after the open Tuesday morning but had given up their gains less than an hour into the session. Let's explore. 

Zoned Out

For the quarter, gross profit as a percentage of sales came to 51.9% (-54 basis points), while operating expenses as a percentage of sales printed at 31.58%, up from last year's 30.44%. Operating profit (EBIT) decreased 2.2% to $785.7 million. Net income for the 12-week period that ended May 7 decreased 0.6% to $592.6 million. However, AutoZone repurchased 449,000 shares of common stock for about $900 million (an average of $2,006 per share) during the quarter, leaving $2.058 billion remaining under the current buyback authorization. This allowed diluted earnings per share to increase 9.6% to the $29.03 mentioned above.

Inventories increased 13.9% over the same period, which is difficult to value in this environment. Net inventory (defined as merchandise less accounts payable) on a per-store basis dropped to -$216,000 from -$167,000 for the same period last year.

Still Growing

During the quarter, AutoZone opened 24 US locations, bringing the number of total domestic stores to 6,115. It also opened four locations in Mexico and three locations in Brazil, bringing the number of stores in those nations to 673 and 58, respectively. AutoZone's stores average 6,673 square feet globally, and sales for the quarter averaged $83 per square foot, up from $81 for fiscal third quarter of 2021.

Balance Sheet

AutoZone ended the quarter with a net cash position of $263 million and current assets of $6.25 billion. Remember that growth in inventories? Inventories make up $5.31 billion (85%) of that $6.25 billion in current assets. Current liabilities amount to $8.06 billion. That leaves AutoZone with a current ratio of 0.78, which is rather unacceptable. We usually don't do quick ratios for retailers as there is a necessity to maintain in many cases large inventories.

I think the value of inventoried auto parts in 2022 might be somewhat unpredictable. On the one hand, dollar values will fluctuate as the consumers' position weakens in a slowing economy. On the other hand, individuals may be hanging on to aging vehicles longer, which would support valuation. Therefore, I will not hold a microscopic quick ratio against AutoZone, but the current ratio has been damaging enough. Did I mention that AutoZone has total debt of $6.06 billion on the books, which is greater than cash and inventories combined?

My Thoughts

The company executed well this past quarter. The stock trades at 16x forward earnings. That balance sheet is gross, though. I don't think I can get past that -- too much nose holding to be done.

Readers will see that I think the shares going into earnings had been close to oversold after losing a more than one-year-long uptrend. AutoZone's performance provided some relief. I see that the stock managed to find some support at a rough 50% retracement of that entire uptrend last week after already losing its 200-day simple moving average ($1,876) a few days prior.

The shares need to retake that line in order to accomplish anything. It will be interesting to see if and where portfolio managers who sold the stock last week show interest today.

I think if I can get the "just after the opening" price of $1,840 or higher that I would rather be short this name than long going forward. I don't have the wherewithal to babysit a short position in a four-digit stock that might take weeks to play out, even if that four-digit stock comes with a beta of just 0.92. That said, a June 10 $1,840/$1,830 bear put spread can be had for a net debit of $4. Prices and levels may be different by the time you read this, but you get the idea.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Guilfoyle had no positions in the stocks mentioned.

TAGS: Earnings | Fundamental Analysis | Investing | Options | Stocks | Technical Analysis | Automobile Components | Retail | Real Money

More from Stocks

The Chasing Slows on Wall Street

James "Rev Shark" DePorre
Mar 24, 2023 4:34 PM EDT

After Deutsche Bank shakes up investors, market cools a bit, which might be a healthy development.

Stay Away From These Types of Stocks, They're Radioactive

Jim Collins
Mar 24, 2023 2:35 PM EDT

Here's what you're better off buying. I certainly have.

GE Looks Poised for a Pullback: How to Trade It Now

Bruce Kamich
Mar 24, 2023 1:45 PM EDT

The shares stopped short of my price targets.

It's Not Whether the Next Shoe Will Drop, But Where and When

Bret Jensen
Mar 24, 2023 11:30 AM EDT

A few months of anxiety likely lies ahead of us, and caution remains the watchword of the day.

The Good, Bad and Ugly: What's Happening and What Investors Need to Do

Stephen Guilfoyle
Mar 24, 2023 10:45 AM EDT

Right now I have more in cash, or equivalents, than in equities. Ever hear of a Wall Street guy saying that before?

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • 08:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How to Adjust Your Trading Style as Market Conditi...
  • 05:00 PM EDT CHRIS VERSACE

    AAP Podcast on the Fed Decision!

    Listen here!
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login