needs more than a tune-up.
Despite plenty of tinkering, the auto parts dealer is still looking for a way to repair its top-line growth. The company warned late Tuesday that sales -- particularly to its core do-it-yourself market -- had stalled during the first seven weeks of its current quarter. Specifically, the company said that same-store sales fell 1% and retail DIY sales dropped an even more dramatic 3%. It gave no reason for the decline, offering just a one-sentence announcement instead, but some on Wall Street were quick to pull out their tools in an attempt to diagnose the problem on their own.
They blamed cool, rainy weather in part. But they also suggested company-specific issues -- such as poor merchandising in the chain's aging store base -- as well. One essentially portrayed the company as an older-model investment vehicle that will probably never hit top speed again.
"While the company's new initiatives should help to drive small incremental sales gains, we have come to the realization that sales growth will likely come at a much slower pace than we initially thought," wrote Citigroup Smith Barney analyst Bill Sims. "Given that we are now thinking of AutoZone as less of a high-growth company, we are comfortable with this."
But investors sped out the door. Shares of AutoZone tumbled $6.57, or 7.5%, to $81.65 around midday Wednesday.
Piper Jaffray analyst Michael Cox promptly lowered his forecast for the company. He now expects AutoZone to post a fourth-quarter profit of $2.56 a share -- a dime shy of the current consensus estimate -- when the company officially releases results in September.
Cox, who maintained his market perform rating on the company, also dropped his 2005 forecast from $7.73 a share to $7.62 due to expected lower sales growth. Cox's forecast still remains above the consensus estimate of $7.56, however.
Sims also lowered his profit expectations but kept intact his $98 target price -- and his buy recommendation -- on AutoZone's stock. He explained that investors simply need to view AutoZone as a mature retailer instead of the growth story it used to be. Based on that assumption, he said, AutoZone still remains an attractive investment.
Sims acknowledges that AutoZone is growing far more slowly than its competitors, such as
Advance Auto Parts
, and fetches a lower multiple as a result. He also admits that AutoZone "has achieved most of its earnings growth from share buybacks" instead of actual increases in net income. But he nevertheless considers the stock undervalued even based on conservative assumptions.
"We continue to believe that management has tacitly admitted a new reality to us: that is, their store base has begun to mature and retail sales no longer represent the primary source of earnings growth," Sims conceded. But "significant value still exists from margin and stock buyback opportunities, and ... ongoing sales weakness is already reflected in the stock's valuation."
However, Sims did list a number of risks that, if realized, could threaten the company's stock price. He said that director Eddie Lampert's ownership of a huge block of AutoZone shares already creates an overhang on the stock. Looking ahead, he says that AutoZone could suffer if commercial sales -- now a source of growth -- fail to hit company targets. He says that a sudden drop in the age of automobiles or a decrease in leased cars that often need repairs could also hurt the company. Finally, he says that "AutoZone's somewhat aggressive and non-traditional management style combined with less transparent reporting/guidance relative to their competitors" remains a potential threat as well.
In the meantime, Sims' competitor at Piper Jaffrey cautioned investors to expect no overhaul anytime soon.
"We maintain our view that a sustained comp recovery (back to peer group levels) will take several quarters considering AZO's older store base and measured store refresh efforts," Cox wrote on Wednesday. "Earnings growth remains strong -- but comps are the key for the stock."