North America Equity Research Auto Parts Retailing: The Roadmap June 2025 Barath Rao (1-212) 622-6547 barath.rao@jpmorgan.com J.P. Morgan Securities LLC Jolie Wasserman (1-212) 622-1961 jolie.wasserman@jpmchase.com J.P. Morgan Securities LLC See end pages for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the object ...

Jami Dimon is one of the most respected minds on Wall Street.The JPMorgan Chase (JPM -0.48%) CEO not only leads the biggest bank in the country by assets but also famously led his bank though the 2008 financial crisis and did not need to be rescued by the government, though it did participate in the Troubled Asset Relief Program (TARP).Given his experience and his position, investors tend to pay attention to what Dimon has to say, so it was notable when he warned of the bond market "cracking."At the Reagan ...

A month has gone by since the last earnings report for AutoZone (AZO) . Shares have lost about 6.8% in that time frame, underperforming the S&P 500.Will the recent negative trend continue leading up to its next earnings release, or is AutoZone due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.How Have Estimates Been Moving Since Then?It turns out, es ...

Financial Performance - Net sales increased to $4.5 billion, a 5.4% increase over the comparable prior year quarter, driven by a 5.4% increase in same store sales on a constant currency basis[76][80] - Operating profit decreased 3.8% to $866.2 million, and net income decreased 6.6% to $608.4 million for the quarter, impacted by unfavorable foreign currency exchange rates[76][86] - Domestic commercial sales increased by $123.2 million to $1.3 billion, or 10.7% over the comparable prior year[80] - Net income for the fiscal year ended August 26, 2023, was $2,528,426, an increase from $1,663,585 for the thirty-six weeks ended May 6, 2023[116] - EBITDAR for the fiscal year ended August 26, 2023, was $4,471,048, compared to $2,934,533 for the thirty-six weeks ended May 6, 2023, reflecting a significant growth[116] Profitability Metrics - Gross profit for the quarter was $2.4 billion, with a gross profit margin of 52.7%, down from 53.5% in the prior year due to higher inventory shrink and new distribution center startup costs[82] - Gross profit for the thirty-six weeks was $6.7 billion, with a gross profit margin of 53.2%, slightly down from 53.4% in the prior year[89] - Adjusted after-tax return on invested capital (ROIC) for the trailing four quarters ended May 10, 2025, was 43.5%, down from 51.4% in the prior year[104] - The effective tax rate over the trailing four quarters was 20.6%[117] - The effective income tax rate increased to 20.4% for the thirty-six weeks ended May 10, 2025, compared to 19.8% in the prior year[92] Operating Expenses and Cash Flow - Operating expenses increased to $1.5 billion, representing 33.3% of sales, up from 32.2% in the prior year, primarily due to increased self-insurance expenses[83] - Net cash flows from operating activities for the thirty-six weeks ended May 10, 2025, were $2.2 billion, an increase from $1.9 billion in the prior year[97] - Capital expenditures for the thirty-six weeks ended May 10, 2025, were $885.6 million, up from $725.9 million in the prior year, driven by growth initiatives including the opening of 163 new stores[98] - Net cash flows used in financing activities for the thirty-six weeks ended May 10, 2025, were $1.3 billion compared to $1.0 billion in the prior year, with stock repurchases totaling $1.1 billion[99] Debt and Financing - Net interest expense rose to $111.3 million, with average borrowings of $9.2 billion and a weighted average borrowing rate of 4.48%[84] - Adjusted debt to EBITDAR ratio was 2.5:1 as of May 10, 2025, consistent with the prior year[105] - The company issued $500 million in 5.125% Senior Notes due June 2030, while repaying $400 million in 3.250% Senior Notes due April 2025[121] - The fair value of the company's debt was estimated at $8.8 billion as of May 10, 2025, reflecting a decrease of $57.9 million from its carrying value[122] - A one percentage point increase in interest rates would negatively impact pre-tax earnings and cash flows by $8.1 million for fiscal 2025 due to variable rate debt[122] - The company had $805.5 million of variable rate debt outstanding as of May 10, 2025[122] - Fixed rate debt was $8.0 billion as of May 10, 2025, with a potential fair value reduction of $340.3 million from a one percentage point increase in interest rates[122] Strategic Initiatives - The company plans to increase investments in growth initiatives, including new stores and hub expansions, compared to fiscal 2024[100] - The accounts payable to inventory ratio was 115.6% at May 10, 2025, down from 119.7% at May 4, 2024[101] - The company anticipates relying on internally generated funds and available borrowing capacity for capital expenditures and stock repurchases[102] - The Revolving Credit Agreement was amended to extend the termination date to November 15, 2028[106] - As of May 10, 2025, the company was in compliance with all covenants under its borrowing arrangements[107] - Total lease cost per ASC 842 for the trailing four quarters ended May 10, 2025, was $625,740, up from $558,627 for the trailing four quarters ended May 4, 2024[117]

Core Insights - The article reflects on the author's past experiences with AutoZone, Inc. (NYSE: AZO) and emphasizes a focus on dividend investing in quality blue-chip stocks, BDCs, and REITs [1]. Group 1 - The author expresses a long-term investment strategy aimed at supplementing retirement income through dividends over the next 5-7 years [1]. - There is a commitment to helping lower and middle-class workers build investment portfolios of high-quality, dividend-paying companies [1]. - The article aims to provide a new perspective for investors seeking financial independence [1].

Core Viewpoint - The quarterly reports from Costco and AutoZone have initiated the Q2 earnings season, with Costco showing strong performance against consensus estimates, while broader expectations for the S&P 500 indicate a slowdown in earnings growth compared to Q1 [2][3][6]. Costco Performance - Costco reported earnings, revenues, and same-store sales that exceeded consensus estimates, with same-store sales increasing by +8% for the quarter, excluding gasoline and foreign exchange impacts, following a +9.1% growth in the previous period [3]. - The high single-digit growth in Costco's non-food merchandise suggests a competitive advantage over other retailers like Walmart and Target, likely due to its affluent customer base and potential market share gains [4]. - Despite tariff challenges, Costco's management noted that most merchandise is sourced domestically, with only about 25% of U.S. sales reliant on imports [5]. Broader Market Expectations - For Q2, S&P 500 earnings are expected to rise by +5.4% year-over-year, with revenues increasing by +3.7%, marking a significant deceleration from the +12% earnings growth and +4.7% revenue growth seen in Q1 [6]. - Since April, Q2 earnings estimates have been cut for 15 of the 16 Zacks sectors, with the most significant reductions in Transportation, Autos, Energy, Basic Materials, and Construction sectors [7]. - The Tech and Finance sectors, which contribute over 50% of S&P 500 earnings, have also seen downward revisions, although the Tech sector's revisions have stabilized recently due to easing tariff uncertainties [8][10][11].

Company Overview - AutoZone, founded in 1979, has grown from a single store to 6,500 locations in the U.S. and expanding in Mexico and Brazil [4] - The company is recognized for its strong brand and customer service, catering to both automotive repair technicians and DIY customers [3] Financial Performance - For fiscal 2024, AutoZone reported net sales of $18.5 billion, a year-over-year increase of nearly 6%, and earnings per share (EPS) rose 13% to $149.55 [5] - In the third quarter of fiscal 2025, net sales increased by 5.4% to $4.5 billion, with domestic same-store sales up 5% [5] - EPS in the latest quarter decreased by 3.6% compared to the previous year, attributed to aggressive investments in growth rather than weak demand [6] Growth Strategy - AutoZone is focusing on expanding its market share in the commercial sector by enhancing delivery capabilities, increasing sales staff, and opening "mega-hub" stores [7] - The company is committed to long-term growth despite short-term margin pressures due to these investments [7] Market Position - The automotive aftermarket, valued at over $2.3 trillion globally, is characterized by inelastic demand, making AutoZone's core business resilient even during economic downturns [9][10] - The average age of vehicles on U.S. roads has reached a record 12.8 years, indicating a growing need for maintenance and parts, which benefits AutoZone [13] Share Buyback Program - AutoZone has repurchased over $38 billion of its own shares since 1998, significantly reducing its shares outstanding [14][15] - The company has $1.1 billion remaining in its current buyback authorization, indicating a strong commitment to returning value to shareholders [15] Valuation and Future Outlook - AutoZone's forward price-to-earnings ratio is around 25, which is lower than competitor O'Reilly Auto Parts at 31, suggesting reasonable valuation [17] - The U.S. automotive aftermarket is projected to reach $617 billion by 2027, providing substantial growth opportunities for AutoZone [17]

Core Viewpoint - AutoZone shares are in a long-term uptrend, with expectations to surpass $4,400 this year due to strong business fundamentals and market activity [1][2]. Group 1: Stock Performance and Forecast - The stock is displaying a bullish flag within a solid uptrend, with a low-ball estimate suggesting a potential move to $4,400, reflecting a $600 increase similar to the 2025 rally [2]. - Analysts have revised price targets, with a new high-end target of $4,800, indicating a potential 33% upside from late May trading levels [8]. - The 12-month stock price forecast averages $4,054.52, representing an 8.24% upside, with a high forecast of $4,850.00 and a low of $3,585.00 [9]. Group 2: Financial Health and Capital Return - AutoZone's cash flow supports regular quarterly buybacks, with FQ3 buybacks exceeding $250 million, contributing to a 3% year-over-year reduction in share count [5]. - The company maintains a low leverage ratio of less than 0.5x equity, allowing continued investment in growth while sustaining capital returns [7]. - Despite a shareholder deficit due to share repurchases, this strategy enhances shareholder leverage and supports share price uptrend [6]. Group 3: Revenue and Market Position - AutoZone reported $4.62 billion in revenue for Q3, a 5.2% year-over-year increase driven by positive comparable store sales and store count growth [10]. - Institutional investors hold significant interest in AutoZone, accounting for approximately 90% of the stock, providing a solid support base for upward price pressure [11].

Investment Rating - The report assigns a Neutral rating to AutoZone Inc. (AZO) with a 12-month price target of $3,811, indicating a downside potential of 0.4% from the current price of $3,826.46 [9][11]. Core Insights - AutoZone reported a 3Q25 EPS of $35.36, which was below the Goldman Sachs estimate of $35.91 and consensus of $37.11. The total company same-store sales increased by 5.4%, exceeding the GS/consensus estimates of 3.1%/3.2% [1][8]. - Domestic same-store sales rose by 5.0% year-over-year, while international same-store sales (excluding foreign exchange) increased by 8.1%. The report estimates that DIFM same-store sales grew by 9.8% year-over-year, while DIY sales increased by 3.0% [1][4]. - The EBIT margin decreased by 185 basis points year-over-year to 19.4%, which was below the GS estimate of 20.8% and consensus of 20.5%. This decline was attributed to a gross margin decrease of 77 basis points to 52.7% and an increase in SG&A as a percentage of sales to 33.3% [1][4][8]. Summary by Relevant Sections Financial Performance - AutoZone's total sales for 3Q25 were reported at $4,464 million, reflecting a sales growth of 5.4% compared to the previous year. The gross profit was $2,354 million, with a gross margin of 52.7%, which was below expectations [8]. - SG&A expenses increased by 8.9% year-over-year to $1,487 million, with the SG&A ratio at 33.3%, slightly above the GS estimate of 32.4% [4][8]. Inventory and Debt - The company ended the quarter with $6,823 million in inventory, representing a 10.8% year-over-year increase. The accounts payable to inventory ratio was 115.6%, down from 119.7% in the prior year [4][7]. - AutoZone's adjusted debt to EBITDAR ratio remained stable at 2.5x, consistent with the previous year and quarter [7]. Market Expectations - The report anticipates a negative market reaction to the earnings miss, particularly due to the lower-than-expected gross margin. Key areas of focus for future commentary include gross margin expectations for 4Q, inventory availability, and the health of the DIY consumer [6].

Financial Performance - Q3 FY2025 - Net sales increased by 5.4% to $4464 million[9] - Same Store Sales (SSS) increased by 5.4% overall, with domestic SSS up by 5.0% and international SSS up by 8.1% (constant currency)[11] - Diluted EPS decreased by 3.6% to $35.36[9] - The company repurchased $250 million in AutoZone stock[11] Financial Performance - YTD FY2025 - Net sales increased by 3.3% to $12696 million[13] - Diluted EPS decreased by 2.0% to $96.17[13] - The company repurchased $1.1 billion in AutoZone stock[16] - Total Company SSS increased 3.4%, with Domestic SSS increasing 2.4% and International SSS increasing 10.4% (Constant Currency)[16] Store Expansion - The company accelerated new domestic store openings by 69% and international store openings by 131% compared to Q3 FY24[20] - Total company stores opened, net, were 84 for the 12 weeks ended May 10, 2025[20] Commercial Business - Domestic commercial sales increased by 10.7% for the 12 weeks ended May 10, 2025[21] - The company has a commercial program in 92% of domestic stores[22]