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AutoZone Inc
July 15, 2024
FOLLOW-UP
September 26, 2024 | Total Return: +9.18%
ORIGINAL ARTICLE
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AutoZone Inc
Ticker: AZO.NYSE
Addition to:
✅ SENSU Watchlist
Addition Date: July 15, 2024
Price per Share: 2920.83 USD
TABLE OF CONTENTS
THE COMPANY
AutoZone, the largest retailer of aftermarket automotive parts and accessories in the United States, had its modest beginnings in 1979. Founded by J.R. "Pitt" Hyde III, the company opened its first store in Forrest City, Arkansas. Hyde's vision was to create a retail chain that offered not only quality automotive parts but also exceptional customer service.
The company quickly expanded, and by 1991, AutoZone had gone public, trading on the New York Stock Exchange under the ticker symbol "AZO." This move provided the capital necessary for further growth and innovation. By the mid-1990s, AutoZone had already established itself as a major player in the automotive aftermarket industry, with over 1,000 stores across the United States.
AutoZone has always been at the forefront of technological advancements in the retail sector. In 1994, the company became the first auto parts retailer to register customer warranties in a computer database, a revolutionary step that enhanced customer convenience and loyalty. The following year, AutoZone began using satellites to facilitate communication between stores and the corporate office, ensuring seamless operations and inventory management.
The late 1990s saw further innovations, including the launch of AutoZone's website in 1996, which marked the company's entry into the digital age. This period also witnessed significant acquisitions, such as the purchase of ALLDATA, a software company providing automotive diagnostic and repair information, and several regional auto parts chains, which expanded AutoZone's footprint and market share.
The Business Model: A Blend of Retail and Commercial Sales
AutoZone's business model is a blend of retail and commercial sales, catering to both do-it-yourself (DIY) customers and professional service providers. This dual approach has been instrumental in the company's sustained growth and profitability.
Retail Sales
AutoZone's retail segment targets DIY customers who prefer to perform their vehicle maintenance and repairs. The stores offer a wide range of products, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products. The company has also developed a strong private label portfolio, with brands like Duralast and Valucraft, which account for over 50% of total sales. These private label products offer higher margins and help differentiate AutoZone from its competitors.
Commercial Sales
AutoZone's retail segment targets DIY customers who prefer to perform their vehicle maintenance and repairs. The stores offer a wide range of products, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products. The company has also developed a strong private label portfolio, with brands like Duralast and Valucraft, which account for over 50% of total sales. These private label products offer higher margins and help differentiate AutoZone from its competitors.
Strategic Expansion and Digital Transformation
AutoZone's growth strategy has always included expanding its store network and enhancing its digital capabilities. The company now operates over 7,140 stores across the United States, Mexico, Puerto Rico, Brazil, and the US Virgin Islands. This geographical diversification has helped AutoZone tap into new markets and reduce dependence on any single region.
In recent years, AutoZone has invested heavily in digital transformation to improve customer engagement and streamline operations. The company's e-commerce platform, AutoZone.com, allows customers to order parts online and pick them up in-store or have them delivered. Additionally, AutoZonePro.com caters to commercial customers, offering a seamless online ordering experience. The acquisition of AutoAnything.com, an e-commerce leader in aftermarket automotive parts, further strengthened AutoZone's online presence.
Customer-Centric Approach
At the heart of AutoZone's success is its unwavering commitment to customer service. The company's motto, "AutoZoners always put customers first," reflects this philosophy. AutoZone invests in training its employees, known as AutoZoners, to ensure they provide knowledgeable and friendly service. This customer-centric approach has earned AutoZone a loyal customer base and a strong reputation in the industry.
STOCK PRICE
The dynamic background color reflects overall market valuation, allowing you to quickly assess both stock-specific trends and market conditions at a glance.
Why logarithmic? It displays percentage changes uniformly, making price movements easily comparable across different ranges. A 100% increase appears the same whether from $10 to $20 or $100 to $200.
MANAGEMENT ANALYSIS
Philip Daniele recently took the helm as CEO of AutoZone, bringing over 30 years of experience with the company to the role. Starting as a part-time employee at an auto parts store in Florida, Daniele worked his way up through various positions at AutoZone, gaining deep knowledge of the business from the ground up. His journey included roles in store operations, merchandising, and supply chain management, providing him with a comprehensive understanding of AutoZone's operations.
Daniele is known for his customer-first approach and focus on operational excellence. Under his leadership in previous roles, AutoZone saw improvements in inventory management and customer service metrics. His hands-on leadership style emphasizes employee development and fostering a strong company culture.
While it's still early in his tenure as CEO, Daniele's long history with AutoZone and track record of driving results in previous leadership positions make him well-positioned to guide the company's future growth.
Employee Sentiment
The Positives
Employees generally appreciate the opportunity to learn about automotive parts and gain knowledge in the field. Many mention that AutoZone provides good training programs and systems that are easy to use. The company culture is often described as team-oriented, with several reviews highlighting positive relationships with coworkers. Some employees value the flexible scheduling options, especially for part-time workers. The employee discount on auto parts is frequently cited as a benefit. There are opportunities for advancement within the company, with many managers having been promoted from within. Some employees, particularly those in corporate roles, mention competitive pay and benefits.
The Negatives
The most prevalent complaint across reviews is low pay, especially for store-level employees. Many feel the compensation does not match the workload and responsibilities. There is widespread criticism of upper management, with employees feeling disconnected from leadership above the store level. Many reviews mention understaffing issues, leading to overwork and stress. Work-life balance is often described as poor, with long hours and expectations to work beyond scheduled shifts. The company's focus on sales metrics and KPIs is a common source of frustration, with employees feeling pressured to push products on customers. There are numerous mentions of high turnover rates, particularly at the store level. Some employees report experiencing or witnessing favoritism in promotions and treatment. The company's technology and systems are described as outdated by some. Several reviews mention a lack of proper training, especially for new hires.
"Majority is underpaid except VPs and above. Management throws you under the bus. The benefits are terrible. Thriving depends on your corporate politics skill set which is fine if you enjoy that but exhausting otherwise. Communication is terrible. Personal boundaries are constantly crossed with excessive communication after hours. Promotions are picked based on personal relationships with no real consideration given to others who may qualify."
"The whole building needs a cultural reset, lots of humility required, especially with upper management. You can't assume that strong financials (outward) imply the working environment (inward) is just as strong. The system as it stands today fosters ingenuine employees and 'leaders'. Strong optics are incentivized over actual work substance—looking good in front of the right VP can carry you if they have enough pull, even if there are more skilled, more qualified candidates in the field."
FINANCIAL ANALYSIS
⭐⭐⭐⭐ Quality Score | ⭐⭐⭐ Value Score | ⭐⭐⭐⭐ Growth Score |
AutoZone has shown consistent financial performance from 2014 to 2023, with earnings yields ranging from 5% to 8.5%. In 2023, the earnings yield was 5.57%, slightly down from 5.59% in 2022. The peak was 8.52% in 2017, indicating strong profitability. Despite fluctuations, AutoZone has maintained a stable earnings yield, balancing profitability and market valuation.
Earnings Yield
AutoZone has demonstrated impressive ROIC, fluctuating between 37-50% from 2014 to 2019, dipping to 25.4% in 2020 due to the pandemic, but rebounding to 42.1% in 2023. The TTM ROIC of 66.1% is particularly striking, indicating strong potential for future returns. This consistently high ROIC, well above the cost of capital, underscores AutoZone's competitive advantage and efficient operations, reflecting its resilience and effective capital management in challenging times.
ROIC
Price-to-Book Ratio
AutoZone's price-to-book (PTB) ratio has shown an unusual trend over the past decade, consistently maintaining negative values due to the company's negative book value. This stems from aggressive share repurchases and substantial debt. Despite this, AutoZone's market value has grown faster than its negative book value has declined, with the trailing twelve-month ratio at -11.03. This trend suggests strong market confidence in AutoZone's business model and future prospects, despite its unconventional balance sheet position
Price-to-Book Ratio
MOST SIGNIFICANT MOATS
AutoZone's extensive distribution network is its most significant economic moat. The company operates 14 distribution centers across the U.S., Mexico, and Brazil, which ensures efficient and timely delivery of products to its stores and commercial customers. This network allows AutoZone to maintain high product availability and quick turnaround times, which is crucial in the automotive parts industry where customers often need parts immediately to complete repairs.
AutoZone has built a strong brand and customer loyalty over the years. The company is well-known for its customer-centric approach, encapsulated in its pledge to always put customers first. This commitment to customer service has fostered a loyal customer base, both among individual consumers and commercial clients like repair garages and fleet owners. The trust and reliability associated with the AutoZone brand make it a preferred choice for many customers.
As one of the largest players in the automotive parts retail industry, AutoZone benefits significantly from economies of scale. The company's large scale of operations allows it to negotiate better terms with suppliers, reduce per-unit costs, and invest in technology and infrastructure that smaller competitors cannot afford. These cost advantages help AutoZone maintain competitive pricing while still achieving healthy profit margins.
MOST SIGNIFICANT RISKS
Risk: Increasing popularity of electric vehicles could reduce demand for traditional auto parts.
Impact: Potentially lower sales and profits as EVs require fewer replacement parts.
Mitigating Factor: AutoZone is expanding its product offerings to include EV-specific parts and tools.
Risk: Recessions may lead consumers to delay vehicle maintenance and repairs.
Impact: Reduced consumer spending could hurt AutoZone's sales and profitability.
Mitigating Factor: AutoZone's focus on lower-cost replacement parts may actually benefit during tough times as people keep older cars longer.
Risk: Growth of online retailers and other auto parts chains intensifying competition.
Impact: Price pressure and loss of market share could negatively affect margins.
Mitigating Factor: AutoZone's extensive store network and strong brand provide competitive advantages.
CATALYSTS FOR GROWTH
AutoZone has been rapidly expanding its commercial business, which caters to professional mechanics and repair shops. With only about 5% market share currently, there's significant room for growth. The company plans to open more commercial programs and improve parts availability, which could drive sales and market share gains in this high-potential segment.
AutoZone is seeing strong growth in its international markets, particularly Mexico and Brazil. The company plans to accelerate new store openings in these countries, aiming for up to 200 international store openings annually within 5 years. Success in these growing markets could meaningfully boost AutoZone's overall growth rate.
As the EV market grows, AutoZone is expanding its product offerings to include EV-specific parts and tools. While the shift to EVs poses some risks, it also presents new revenue opportunities. AutoZone's ability to successfully adapt its business to serve the EV market could position it for long-term growth as the automotive landscape evolves.
Disclaimer: The information provided in this newsletter is for educational and informational purposes only and does not constitute financial, investment, or legal advice. The content is solely the opinion of the author, who is not a qualified financial advisor, investment professional, or legal expert. All investments involve risk, and past performance does not guarantee future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author of this newsletter is not liable for any losses or damages arising from the use of the information provided. This newsletter is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would be contrary to local law or regulation.
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