It is commonly thought to be a
terrible time for many brick and
mortar retailers, but one segment seems
to be bucking the trend —
auto parts.
And one chain in particular seems
to be doing especially well —
AutoZone. AutoZone's stock skyrocketed near $1200
a share at the end
of 2019.
Investors see the company as a
leader in a segment of retail
relatively well-protected from the
e-commerce incursions that have
brought down so many other
once seemingly invincible stores.
Like its closest rivals, O'Reilly, Advanced
Auto Parts and Napa Auto
Parts, AutoZone sells just about everything
a person would need to
fix, maintain or improve
a car or truck.
And recently, investors say AutoZone has
been growing a new business
that could lead to several
more years of solid growth.
So AutoZone is a best in
breed retailer, specifically in the auto
part retail industry.
But I would say that their supply
chain is probably best in breed or
one of the best in breed
supply chains across the entire retail
industry. But threats and
challenges do remain.
AutoZone has some pretty capable rivals
and there are massive changes
taking place in transportation that
threaten the entire automotive
industry. The store that
would later become AutoZone
first opened in Forest City,
Arkansas, on July 4th, 1979.
Then it was called Auto Shack and
was a division of a larger company
called Malone and Hide.
Early growth came quickly.
The company opened its 100th store
in Weslaco, Texas, in 1983, just
four years later. It was spun off
from Malone and Hyde in 1986.
That same year it debuted the
first products of its in-house Duralast
brand, under which it markets an
array of items, including starters,
alternators, batteries and
hand tools.
The following year, Auto Shack
changed its name to AutoZone.
In 1999, the company listed on
the New York Stock Exchange.
And from there it continued to grow
to 1,000 stores by 1995 and 6,000
by 2017.
Two key advantages that enable AutoZone
and its peers to fend off
competition from e-commerce companies
are service and parts
availability. Stores like AutoZone and
O'Reilly invest money in
training their staff to help customers
with often detailed and highly
specific questions about cars.
That is service that e-commerce giants such
as Amazon are not yet in
the business of providing.
These advantages have also allowed auto
parts retailers to face and
fend off threats from much bigger
brick and mortar retailers who have
had the ability to
undercut them on price.
You don't really know you need
windshield wiper blades until it's
raining and then at that point you
need them now so you don't have
time for next day delivery.
You just want to
get them replaced immediately.
And if you pull into an AutoZone,
they'll actually go, t he employee,
will go out there and do it
for you. The emphasis on in-store service
has been especially
important for AutoZone.
About 80 percent of its revenues come
from Do It Yourselfers — home
mechanics. A lot of these customers
can be gearheads and auto
enthusiasts, but many of them are
simply customers who would rather
work a bit on their own cars to
save the expense of a trip to the
mechanic. While a lot of these
customers might be knowledgeable about
cars, they typically don't have the
same level of expertise as a
professional mechanic.
These stores also enjoy
somewhat stable demand.
Car parts are not
luxury or recreational items.
Drivers need their
cars for transportation.
So auto parts retailers can often rely
on at least some kind of
customer base whether the economy
is good or bad.
Some of the reasons auto parts
retailers have been especially strong
in this retail environment is
partly due to timing.
The economic recovery that followed the
financial crisis of 2008 has
recently begun to boost the auto
parts retailers in some interesting
ways, say analysts.
As the economy has improved and
gas prices have come under pressure,
people have felt free
to drive more.
More driving eventually leads
to more parts failures.
The other factor is that a historically
high number of the right kind
of car for auto parts retailers
is on the road right now.
Within the industry, there is something
known as the sweet spot for
auto maintenance. The exact number of
years can vary, but it is
generally thought to include cars that
are between eight years and 10
or 12 years old.
Once cars hit about seven to
eight years of service, warranties often
start to run out. But owners tend
to keep their cars on average for
another two to four
years after that.
So auto parts retailers tend to see
the most business when there is
the highest number of cars between eight
and 12 years old on the
road. The financial crisis and the
ensuing recession crippled new car
sales. What that meant was there
were relatively fewer cars in that
maintenance sweet spot roughly eight years
later, around 2016 or so.
But that sweet spot population began
to improve in 2018 and is
expected to improve for another
12 to 18 months.
The highest correlation to industry growth
has been eight to 12.
And why that's improving is after
really, the recession of 2008, new
vehicle sales slowed through 2010.
Those began to re-accelerate in the
early 2010s and really just in
2019 and 2020 the number of
eight-year-old vehicles is beginning to
increase again after three
years of declining.
And so that cohort of eight to
12 is beginning to grow again and
should support industry growth going
forward. But a relatively
protected industry with a good,
stable customer base doesn't really
answer the $1200 question.
If all auto parts retailers can
offer service, why are AutoZone
shares priced so high, even far
higher than its already good
competitors. What is
setting it apart?
As of January 3rd, 2020 shares had
risen just over 40 percent in the
last year. There are a
few reasons for the climb.
Some analysts point to the fact
that AutoZone management has been
buying back shares of the stock
starting in the late 1990s.
Around that time, AutoZone had
about 150 million shares outstanding.
In late 2019, the company had
about 25 million shares outstanding.
Share buybacks alone have a tendency
to inflate share prices, say
some analysts. The high share
price does not deter bulls.
For one thing, AutoZone's forward price
to earnings ratio is smaller
than those of rivals.
Forward P/E is a ratio commonly
used by investors that compares the
price of a stock with
a company's expected earnings.
It allows investors to compare the
value of companies of different
sizes and different share prices.
The lower that ratio, the more earnings
an investor may expect to get
for every dollar spent on a share.
The main things that often drive a
higher or lower forward P/E ratio
are things like the rate at which
a company is growing, its ability
to deliver earnings consistently and the
quality of the assets it
owns. But what what we're seeing
today is AutoZone has the lowest
ratio in the industry.
And its growth opportunities
are actually accelerating.
And what we've seen in the last
couple of years is AutoZone has made
a lot of investments. Their
growth is now reaccelerating.
They're not mature. They're
getting into commercial.
And so I'm willing to pay more
for a dollar of earnings at AutoZone
than I would historically, because it's
no longer considered a mature
company. It's actually
a growth company.
And a big part of what has
been fueling the enthusiasm over AutoZone
has been its recent push into
commercial parts retailing often called
Do It for me or DIFM.
As opposed to its traditional business
in Do It Yourself or DIY.
DIF M basically means professional
mechanics and body shops.
These clients want to be able to
order a part needed for a customer
and receive it within hours or even
minutes in many cases in about as
little time as one
would expect a pizza.
AutoZone has been investing heavily in
building up the supply chain
needed to compete in
commercial parts supply.
For example, the company has three
types of store divided by size.
The smallest stores are
often called satellite stores.
Then there are hubs and mega hubs
which are larger stores that carry
a much larger variety
and volume of parts.
A typical AutoZone store carries about
23,000 unique parts on its
shelves, often called SKUs, in reference
to the unique barcodes on
each type of product. A hub carries
about twice that number, while a
mega hub can carry twice as many as
a hub — up to about 100,000
different products. In recent years, AutoZone
has been ramping up the
number of hubs, especially mega hubs it
has to improve its chances of
having a certain kind of part in
an area at any given time.
That kind of selection is especially
important when you're trying to
serve a mechanic who needs
a part right away.
In 2016, AutoZone had 182 hub
stores, including 11 mega hubs.
By the end of 2019, the company
had 205 total hub stores, including
35 mega hubs.
In 2019, AutoZone said it plans to
grow its number of mega hubs to
about 70 to 90 stores
in the next few years.
It is also invested in training
its staff to improve relationships
with mechanics. But for a long
time, these investments bore no fruit.
Until that is relatively recently,
there's really been an
acceleration in the commercial business
as they've made a few
investments both in their supply chain
and in their people to really
refocus on that part of their
business, although it's the minority of
sales it's been a majority of
the organic growth driver and really
it's address concerns that investors have
had longer term as the
business and the industry shifts secularly
towards to Do It For Me.
And they've proven that they're a
viable competitor t hat can take
market share over there. Now, analysts
expect the company has several
years of profitable growth in
its commercial business left.
AutoZone only has to 15 percent of its
business in the Do It For Me
category. Their peers have more of a
mix of 50 percent of their
sales. And so we see tremendous
growth opportunity at AutoZone over
the next honestly decade.
This is helped by the
ever increasing mechanical and technological
complexity of vehicles.
There are some reasons to think the
stock does not have much more
upside. Investors also do see a
few other potential threats to auto
parts retailers. E-commerce businesses such
as Amazon remain a
threat. The company that began mostly
with bookselling over the years
became known as the Everything Store
and has begun moving into
traditional retail businesses, both
through its acquisition of
grocery retailer Whole Foods and
other experiments in brick and
mortar selling. E-commerce also poses
an oblique or indirect threat.
Even if Amazon decides it doesn't want
to move into auto parts, auto
parts sellers could suffer competition
from other retailers seeking
refuge from e-commerce rivals
and other businesses.
Auto Zone's competitors are liable to
not give up commercial auto
parts retail market share
without a fight either.
AutoZone declined to be
interviewed for this story.
Electric cars are known to
be mechanically simpler than internal
combustion counterparts.
The potential impact of
this is unknown.
Despite the relative simplicity of
an electric power train,
automakers may continue to add
other safety, security and comfort
features that might continue making
cars ever more complex
anyway. For now, investors are betting
that consumers will still need
a wide array of auto parts rapidly
and will still need help actually
fitting them in place.
