AutoZone's Store Expansion Will Drive Market Share Gains, Morgan Stanley Analyst Predicts

Morgan Stanley analyst Simeon Gutman reiterated an Overweight rating on the shares of AutoZone Inc AZO and lowered the price target from $2,835 to $2,750.

The analyst said Q4 FY23 represented AutoZone's lowest comparable sales of the post-COVID era.

The analyst added that the ~1.7% domestic comp (a miss versus the street at ~2.3%) should improve going forward, driven by both easy compares and DIFM initiatives.

The cadence of the Q4 comp (flattish in the first half and 3.4% in the last eight weeks of the quarter) should translate to a solid bounce-back in Q1 FY24, in the analyst's view.

The analyst estimates that DIFM comps should climb at least into the mid- to high-single-digit range by mid-F24, possibly even reaching the low double-digits by year-end.

The analyst said that DIFM weakness throughout F23 largely resulted from trade down/lower car counts, ticket disinflation and unfavorable weather.

However, the last four weeks of the quarter meaningfully improved, driven by better weather, and the analyst thinks this re-acceleration should continue in F24 as a result of AZO's initiatives. 

The analyst models ~175/~20 basis points of gross margin expansion in Q1/Q2 FY24 compared to ~245/~70 basis points of contraction in Q1/Q2 FY23. 

In addition to a faster growth algorithm, AZO's accelerated store opening cadence should result in substantial share gains, both domestically and internationally, opined the analyst.

In FY24, the analyst forecasts +3.1% comps, ~30 basis points of gross margin expansion and ~$145.50 in EPS.

In FY25, the analyst models a ~3% comp, ~10 basis points of gross margin contraction and ~$160.60 in EPS.

Price Action: AZO shares are trading higher by 4.20% at $2,579 on the last check Wednesday.