Autozone shifts back into rally-mode, new highs are in sight

The market for Autozone (NYSE: AZO) stock pulled back from a fresh all-time high ahead of the FQ4 earnings release because there was cause for concern.

Not only was the stock trading at an above-average P/E for the S&P 500 (NYSEARCA: SPY) and well above its peer Advance Auto Parts (NYSE: AAP) but the fundamental set-up favored Advanced Auto Parts because of the channel mix.

Advance Auto Parts has less exposure to DIY sales and the DIY channel was and is projected to be weaker in the near term, spurring the analyst to act, but their negativity appears to be misplaced.

With these factors in play, Advance Auto Parts is still a more-attractive play for income investors but that doesn’t make Autozone an unattractive investment, far from it.

Autozone’s Q4 results prove not only the company’s resiliency but the strength of the underlying market and its ability to generate healthy cash flow and fuel a robust capital return program. Autozone returned more than $4.4 billion to shareholders during F22 for a total of 2.2 million shares or about 10% of the share count at the start of the period. 

The company has a little more than $1.05 billion left under the current authorization which is worth another 2.4% of the market and a new authorization is likely to come at the end of the current period.

The balance sheet shows some changes versus last year but not for the worse. While cash is down it is because of inventory build-ups that have the company in a position to continue operating at the level it has been.

Autozone advances on strong results and outlook 

Autozone reported $5.35 billion in net revenue for the Q4 period which is not only up 9% versus last year but an acceleration from last year’s 8.1% gain and 370 basis points better than the Marketbeat.com consensus estimate.

The gains were driven by a 6.2% gain in comp stores which was more than double the expectation and commercial business which grew by 22%. Revenue growth was also aided by new stores as well with the total count rising by 178 across the company’s operating territory. 

The good news did not end with the top line, either. Autozone posted a slim 73 basis point contraction in gross margin that is due more to its efforts to enhance operations than anything else.

The contraction was offset by a decrease in operating expenses that left the operating profit up 5.7% and the GAAP EPS up 13% versus last year. The $40.51 in GAAP earnings is also $2.04 or 530 basis points better than expected which should lead to some upward revisions from the analysts. 

The company did not give any formal guidance but CEO Bill Rhodes made some favorable comments in regard to the coming year. From his perspective, “the investments we have made in both inventory availability and technology are enhancing our competitive positioning.  We are optimistic about our growth prospects heading into our new fiscal year.”

The technical outlook: Autozone confirms its uptrend

The price action in Autozone fell from a peak but has already bottomed and is now confirming support at the long-term 150-day EMA. Assuming the market follows through on this trend-following signal, the stock should drift higher over the next few weeks and move up to set a new high fairly soon.

In this scenario, investors should buy on pullbacks or price weakness but there is still a risk. The market conditions are not bullish in general and that may cap gains or even lead to a deeper correction in this stock.