Analysis: AutoZone Looking to Combat Amazon

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KEYWORDS Amazon AutoZone

September 20, 2018—Although traditional auto parts stores took a hit when Amazon decided to sell auto parts online, sentiments on brick-and-mortar auto retailers are now up amongst investors. And AutoZone’s earnings show that brick-and-mortar companies are still looking to combat the e-commerce threat, reports Barron's.

Shares of AutoZone fell after reporting fiscal-fourth-quarter earnings on Tuesday, although the shares are on the rebound. The auto parts retailer earned $18.54 a share on revenue of $3.56 billion. Same-store sales rose 2.2 percent in the quarter. The company also announced a next-day delivery program with up to 100,000 parts and accessories available to some 80% of the U.S. population.

AutoZone’s earnings are noteworthy for a couple of reasons. First, the shares are up just 5.3 percent this year, compared with O’Reilly Automotive’s 42.6 percent gain and Advance Auto Parts 69.5 percent gain, so the report could have been a good catalyst to make up some ground. Second, the entire auto parts retailing industry has been under close scrutiny in recent years, with investors concerned that and other online players would muscle in on the territory. The announcement of next-day delivery was clearly aimed at the e-commerce threat.

Raymond James’s Dan Wewer writes that the new option could help “rejuvenate” its lagging performance in the do-it-yourself sales; Wells Fargo’s Zachary Fadem reiterated an "outperform" rating writing that the move will give AutoZone an opportunity “to leverage its supply chain to improve customer-fulfillment options (and potentially grow share of a rapidly expanding online auto-parts market).”

Not everyone is convinced, however. Guggenheim’s Ali Faghri warns that the announcement adds fuel to bear argument of online encroachment: Yes, it’s a longer-term necessity to fight back, but it will likely weigh on margins too. “Importantly, investor sentiment in auto-parts retail has been highly tethered to the prospect of online encroachment, and we believe this announcement adds support to the belief that a growing portion of industry sales will migrate online over time, likely leading to more competition from e-commerce retailers like Amazon.”

In the end, offering more delivery options, emphasizing speed or convenience, seems a necessary step, as nearly all of retail has discovered, given changing consumer tastes. While only time will tell how quickly it gains traction, all three major auto-parts stores have seen their shares rebound from the depths of 2017 thanks to increased investor optimism that brick-and-mortar retail isn’t dead.

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