International Expansion And Technology Investments Will Strengthen Future Operations

Key Takeaways

• Expansion of Mega-Hub locations and international stores is expected to drive revenue growth and improve sales margins by enhancing inventory availability.
  
• Investments in advanced technology for distribution centers aim to improve supply chain efficiencies and net margins, while share buybacks enhance earnings per share.
  
• The company faces margin pressures from foreign exchange headwinds, inflation, tariffs, and rising expenses, impacting revenue and earnings unless offset by strong sales growth.

Catalysts

AutoZone, Inc. retails and distributes automotive replacement parts and accessories in the United States, Mexico, and Brazil.

• AutoZone's focus on improving availability and speed of delivery in the Domestic Commercial business is expected to drive further sales growth, contributing significantly to revenue growth.
  
• The expansion of Mega-Hub locations, with an aim to open at least 19 more in the next two quarters, will enhance inventory availability and support both retail and Commercial growth, potentially improving sales and operating margins.
  
• International expansion, particularly in Mexico and Brazil, with a target of opening 100 new international stores in the fiscal year, is poised to increase revenue and profitability by tapping into underpenetrated markets.
  
• Investments in new distribution centers featuring advanced technology and automation in California and Virginia are expected to create supply chain efficiencies, which should help to improve net margins.
  
• AutoZone's consistent share buyback program, supported by strong free cash flow generation, is set to continue enhancing earnings per share (EPS) over time.

AutoZone Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AutoZone's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.0% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $3.0 billion (and earnings per share of $196.45) by about March 2028, up from $2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, up from 23.2x today. This future PE is greater than the current PE for the US Specialty Retail industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 3.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

AutoZone Future Earnings Per Share Growth

Risks

• The impact of foreign exchange rates resulted in significant headwinds, reducing sales by $91 million and EBIT by $30 million, which could continue to negatively impact reported revenue and earnings.
  
• The variations in performance across different regions, particularly the Northeast and Rust Belt, due to severe weather conditions, show volatility in sales, which might affect consistent revenue streams.
  
• Persistent inflationary pressures expected to increase ticket prices by approximately 3% and result in lower transaction counts, indicating consumer caution about spending, potentially impacting overall revenue.
  
• 20% tariffs on SKUs from China could pose additional cost pressures; historically, maintaining margin post-tariffs has been challenging, leading to potential impacts on net margins if not offset efficiently.
  
• Continued investment in aggressive expansion and technology are leading to higher SG&A expenses, causing margin pressures and limiting earnings growth unless sales growth compensates for these costs.

Valuation

• The analysts have a consensus price target of $3682.431 for AutoZone based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4064.0, and the most bearish reporting a price target of just $2752.91.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.0 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $3614.97, the analyst price target of $3682.43 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.