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AutoZone (AZO +1%) heats up after its cold start today following back-to-back earnings misses in Q1 (Nov). The aftermarket auto parts retailer ran into similar headwinds from last quarter, primarily regarding its domestic DIY business, which continued to endure relative weakness across discretionary merchandise categories (accessories, tools, appearance chemicals, etc.).

This trend was likely expected given the management's warning in September that discretionary categories would remain under pressure until the end consumer sees some economic relief. AZO's rival O'Reilly Automotive (ORLY) also endured a similar trend during SepQ. Meanwhile, discretionary merchandise comprises only 17% of AZO's total sales, making it material but not substantial. Furthermore, the company is witnessing gradual improvements across certain trends and expects to gain market share over time in its domestic DIY and commercial businesses.

• While the macroeconomic environment continued to hinder overall results, AZO delivered sequential improvements in Q1, including total comp growth of +1.8% in constant currency, an uptick from +1.3% last quarter. When incorporating FX impacts, comps did slip from Q4 (Aug), coming in at +0.4% versus +0.7%.
• DIY comps were the drag, expanding by just +0.3%. However, compared to last quarter's -0.4% comp, domestic DIY growth improved nicely in Q1. Average DIY ticket was up 1.3% in Q1, a minor uptick sequentially. AZO anticipates this trend to persist heading into Q2 (Feb). DIY transaction count did fall by 1.8%, but this was still better than the 2.0% drop experienced in Q4. Management maintained its view regarding DIY comps, noting that sales will remain pressured pending economic relief.
  • AZO saw most of the weakness in DIY across the Northeast, Mid-Atlantic, and Rust Belt regions of the U.S. Comps here slid by -1.8% compared to a -0.1% drop within the other domestic markets. This may not have been too surprising given the milder-than-normal weather in these areas. Auto repairs happen more often during cold and rainy weather.
• Commercial comp growth remained relatively healthy, jumping by +3.2%. However, this did represent a moderate drop from the +4.5% improvement posted last quarter. Unfortunately for AZO, the first four weeks of the quarter started off weak, primarily due to the hurricanes, whose impact was almost entirely on the commercial side of AZO's business.
• International demand remained a highlight, boasting a +14% pop in comp growth during Q1 when backing out FX fluctuations, which produced a 1,300 bp headwind. AZO remains thrilled over the future of its international stores, which are located across Mexico and Brazil. The company opened 11 stores in Q1, bringing its total to 932. AZO plans to open another 100 international stores in FY25 (Aug).

After an initial speed bump today, investors shrugged off another quarter of mild domestic DIY growth emanating from soft discretionary demand and instead focused on improving trends and sustained growth internationally. While domestic DIY demand could remain pressured over the near term due to the cumulative impacts of inflation, auto repairs can only be put off for so long. With a steadily aging fleet, AZO anticipates healthy demand over the long term.