AutoZone ( AZO) is shifting out of overdrive. With its old growth engine sputtering, the nation's largest auto-parts retailer is looking for a new way to soup up its performance. The company, which zoomed to prominence by catering to retail customers, is now steering its focus toward the commercial market. AutoZone hopes to grow at an "accelerating pace" by rolling past smaller players and snatching up more of the $47 billion commercial market that, so far, it has barely tapped. Right now, AutoZone still relies on retail customers for roughly 90% of its business. But the company has become increasingly dependent on commercial sales -- which rocketed 30% in the latest quarter -- to fuel much of its growth. "There's tremendous opportunity to gain market share" in the commercial sector, AutoZone CEO Steve Odland told investors in a conference call on Wednesday. "We're really confident in our model." But some investors clearly prefer the model in the rearview mirror. They took one look at AutoZone's same-store sales for the third quarter -- flat at the retail level and up just 2.8% overall -- and sped away. The stock, trading near historic highs ahead of Tuesday night's earnings release, tumbled 3.3% to $84.50 Wednesday. Even a fresh buy recommendation from Legg Mason, which declared the quarter a strong one overall, couldn't stop the slide. AutoZone CFO Mike Archbold insisted Wednesday that the company "hit it out of the park this quarter" and declined to speculate on the market's reaction. "People can choose to buy or sell," he said. "But we did beat expectations. ... I think it was, overall, just a great quarter."
This time last year, AutoZone delighted investors with a 23% upside surprise. But back then, AutoZone was boasting an 8.5% core growth rate that was nearly double the industry average. In more recent quarters, the company's performance has stalled. It reported overall sales growth of just 5.2% in the latest period, all of it from new stores and the expansion in commercial sales. Meanwhile, the company's ongoing retail sales -- once a highlight -- languished at last year's levels. Still, Archfold defended even retail sales as strong. He said that last year's exceptional numbers have made for tough comparisons. And he applauded the company for holding on to customers nabbed during last year's boom. "This is not an easy accomplishment," Odland agreed. "It's extremely encouraging." But the company, which reported "record" numbers in virtually every category, has more than its share of doubters. AutoZone critics, betting heavily against the company's stock, have shorted a whopping 80% of the float. They know, already, that an accounting change will hurt next quarter's earnings. But they clearly believe that AutoZone faces fundamental challenges as well. Even AutoZone's own CFO admitted the company must overachieve just to match its past performance. But he expressed confidence that the company will do just that. "Are we always pushing for more?" he asked. "You bet. We're relentless."