AutoZone

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. Auto Zone. Auto Zone'stock skyrocketed near $1,200 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. And recently, investors say Auto Zone has been growing a new business that could lead to several more years of solid growth. So Auto Zone 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 for across the entire retail industry. But threats and challenges do remain. Auto Zone 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 Auto Zone first opened in Forest City, Arkansas on July 4, 1979. Then it was called Auto Shack and was a division of a larger company called Malone & Hyde. Early growth came quickly. The company opened its 100th store in Willasco, Texas in 1983, just four years later. It was spun off from Malone & Hyde in 1986. That same year, it debuted the first products of its in-house Durilast brand, under w The following year, Auto Shack changed its name to Auto Zone. In 1991, 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 Auto Zone and its peers to fend off competition from e-commerce companies are service and parts availability. Stores 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 winds So you don't have time for next day delivery, right? You just want to get them replaced immediately, and if you pull into an Auto Zone, they'll actually go, the employee will go out there and do it for you. The emphasis on in-store service has been especially important for Auto Zone. About 80% 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. W 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 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 n Wit The exact n Once cars So auto parts retailers tend to see the most business when there is the highest n 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 8 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 Those began to re-accelerate in the early 2010s and really just in 2019 and 2020, the n And so that cohort of 8 to 12 is beginning to grow again and should support industry growth growing forward. But a relatively protected industry with a good, stable customer base doesn't really answer the $1,200 question. If all auto parts retailers can offer service, why are AutoZone shares priced so What is setting it apart? As of January 3rd, 2020, shares had risen just over 40% 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 For one t Forward PE 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 PE ratio are things But what we're seeing today is that 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 re-accelerating. They're not mature. They're getting it's commercial. And so I'm willing to pay more for a dollar of earnings at AutoZone than I would It's actually a growth company again. 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. DIFM basically means professional mechanics and body shops. These clients want to be able to order a part needed for a customer and receive it wit 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 vol 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 n In recent years, AutoZone has been ramping up the n 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 set it plans to grow its n It is also invested in training its staff to improve relations But for a long time, these investments bore no fruit, until that is relatively recently. It'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 the 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 addressed concerns that investors have had longer term as the business and the industry s And they've proven that they're a vital competitor that 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 15% of its business in the do it for me category. Their peers have more of a mix of 50% of their sales. And so we see tremendous growth opportunity to AutoZone over the next, honestly decade. There are some reasons to t E-commerce 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 book selling over the years became known as the everyt 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 in other businesses. AutoZone's competitors are liable to not give up commercial auto parts retail market share without a fight either. AutoZone declined to be interviewed for t Electric cars are known to be mechanically simpler than internal combustion counterparts. The potential impact of t Despite the relative simplicity of an electric powertrain, automakers may continue to add other safety, security and comfort features that might continue making cars ever more complex For now, investors are betting that cons