Goldman Sachs Downgrades AutoZone Due to Struggling Low-Income Consumers

AutoZone Faces Challenges Due to Economic Environment

Goldman Sachs analysts have expressed concerns about the financial pressures faced by low-income consumers. This led them to downgrade auto parts retailer AutoZone from "Buy" to "Sell". The decision was primarily based on the challenging macroeconomic environment for consumers.

Goldman's Analysis of AutoZone's Future

Kate McShane from Goldman Sachs led a team of analysts who predict that AutoZone will likely experience muted growth over the next few quarters. They noted that the auto parts retailer's customer base is highly exposed to working-poor consumers. The analysts believe that elevated inflation and high interest rates could reduce spending from this group and impact sales through winter into early 2025. The analysts have lowered their FY25 estimate to $150.76 (from $152.21), largely reflecting their outlook for muted growth in the next few quarters. They have also lowered their FY26 EPS estimate to $161.38 (from $165.39) and their FY27 EPS estimate to $173.64 (from $179.93) due to a lower base from their lower estimates in FY25.

Rationale for Downgrading AutoZone

McShane provided several reasons for downgrading AutoZone to "Sell" from "Buy": - The lower income consumer, to which AutoZone has significant exposure, will likely remain under pressure into 2025. - As cars become more affordable, there is an increased risk of a lower amount of repairs. - According to HundredX, AutoZone's NPS and NPI scores have been on the decline, with AutoZone's NPI score approaching a 3-year low. - There is an increased risk for higher interest expense and/or reduced share repurchases with 2025 notes coming due.

AutoZone's Exposure to Working-Poor Consumers

McShane highlighted AutoZone's significant exposure to working-poor consumers. She pointed out that while Goldman Sachs's Discretionary Cash Flow model indicates growth for the lower income consumer in FY25, recent sentiment for the lowest income consumer continues to be under pressure. This is particularly relevant for AutoZone, whose core customer base consists of these consumers.

AutoZone's Future Outlook

McShane's outlook on the company is a 'muted' one. She noted that AutoZone's growth has been muted over the last several quarters. She also stated that improving auto affordability could "temper repairs" and will only translate into less demand for AutoZone's products. Given this, McShane believes that AutoZone's valuation "remains above historical absolute levels despite slower growth and the increased risk to the bottom line." Her new price target for the stock is $2,917, with a -7 % downside.

Bottom Line

The major takeaway from this analysis is that the financial stress on low-income consumers is expected to worsen into the latter parts of the year and likely into early 2025. This could have significant implications for companies like AutoZone, which have a large customer base in this income bracket. What are your thoughts on this analysis? Do you agree with the downgrade of AutoZone? Share this article with your friends and let us know your thoughts. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.