AutoZone (AZO +1%) saw a positive uptick today despite a slow start following consecutive earnings misses in Q1. The aftermarket auto parts retailer faced similar challenges as the previous quarter, particularly in its domestic DIY segment, which struggled with weak discretionary merchandise sales such as accessories, tools, and appearance chemicals.
This trend was anticipated after management's September warning about ongoing pressure in discretionary categories until economic relief is seen. AutoZone's competitor, O'Reilly Automotive (ORLY, Financial), also experienced similar issues in the same period. However, discretionary merchandise only accounts for 17% of AutoZone's total sales, making its impact notable but not overwhelming. The company is seeing gradual improvements in certain areas and expects to increase market share in its domestic DIY and commercial sectors over time.
- Despite macroeconomic challenges, AutoZone showed sequential improvements in Q1, with total comp growth of +1.8% in constant currency, up from +1.3% last quarter. Including FX impacts, comps slightly decreased from Q4, at +0.4% compared to +0.7%.
- DIY comps grew by just +0.3%, an improvement from last quarter's -0.4%. The average DIY ticket rose by 1.3% in Q1, with the trend expected to continue into Q2. DIY transaction count fell by 1.8%, better than the 2.0% drop in Q4. Management expects DIY sales to stay pressured until economic relief occurs.
- Most DIY weakness was in the Northeast, Mid-Atlantic, and Rust Belt regions, with comps down -1.8%, compared to a -0.1% drop elsewhere. This was likely due to milder weather, as auto repairs increase during colder and wetter conditions.
- Commercial comp growth remained strong, rising by +3.2%, though this was a decline from the +4.5% increase last quarter. The first four weeks of the quarter were weak, largely due to hurricanes impacting the commercial side.
- International demand was a standout, with comp growth up +14% in Q1 after accounting for FX fluctuations, which posed a 1,300 bp headwind. AutoZone is optimistic about its international stores in Mexico and Brazil, having opened 11 new stores in Q1, totaling 932. The company plans to open 100 more international stores by FY25.
After initial hesitation, investors focused on AutoZone's improving trends and sustained international growth, despite mild domestic DIY performance due to weak discretionary demand. With an aging vehicle fleet, AutoZone expects long-term demand to remain robust as auto repairs become unavoidable.
