For the first time in over five years, AutoZone (AZO, Financial) missed quarterly EPS expectations due to ongoing weakness in its domestic DIY business, particularly in discretionary merchandise categories. The company's Q4 results also showed a modest top-line miss, adding to a series of disappointing earnings reports from the auto parts retail sector. This trend indicates that many consumers are prioritizing essential vehicle repairs and maintenance over discretionary spending.
On August 22, Advance Auto (AAP, Financial) missed Q2 EPS and revenue estimates and slashed its FY24 guidance. This followed a Q2 top and bottom-line miss from O'Reilly Auto (ORLY, Financial) on July 24.
- Echoing ORLY CEO Brad Beckham's comments about softness in discretionary appearance and accessory categories, AZO noted that its business is impacted by weakness in discretionary merchandise and deferrals of non-critical repairs. This is evident in AZO's same-store sales growth slowing to +0.7%, down from +1.9% last quarter.
- Operating expenses as a percentage of sales increased to 31.6% from 31.2%, mainly due to higher store payroll. Gross margin dipped by 21 bps year-over-year to 52.5%, ending AZO's long streak of beating analysts' EPS estimates.
- While DIY demand remains sluggish, the domestic commercial business posted strong comps of +10.9%. AZO's commercial initiatives, such as offering a wider assortment of parts and improving delivery times, are proving successful. The commercial program is now available in over 90% of its domestic stores.
- AZO's international business also performed well. Despite lapping a remarkable +31.2% comp from the previous year, international comps still came in at +4.9% in Q4 2024. The company aims to grow its footprint in Mexico and Brazil, opening 31 new stores in Mexico and 18 in Brazil during Q4.
The stock's 4.5% drop since the end of August suggested that a bumpy earnings report was expected, so AZO's downside results were not a major surprise. The good news for AZO and its competitors is that the deferral headwind will eventually reverse, turning into a tailwind as consumers can no longer delay essential maintenance and repairs. AZO also believes it is gaining market share in both retail and commercial businesses, which bodes well for future spending trends.
