Is Autozone a Good Bet

Autozone (AZO) keeps people moving by selling parts to repair and maintain cars and trucks. Operating through a network of over 4,800 stores in the continental US, Puerto Rico and Mexico, this Memphis, TN-based company is the largest retailer of automotive aftermarket products in the US. These are service items like filters, lightbulbs, brake pads and windshield wipers, hard parts like suspension linkages, oil pumps, fuel pumps, and engine components, and accessories such as license plate frames and stereo systems.

Autozone customers are a mixture of those who carry out their own repairs, what’s called the DIY market, and commercial auto repair businesses – the Do It For Me (DIFM) market. Unlike some other auto parts retailers, Pep Boys (PBY), or Sears (SHLD) for example, Autozone has no installation or servicing business. And while they are leveraging the internet as a means of reaching both consumers and repair shops, (,) sales volumes through these channels remain small.

On the commercial side Autozone has a growing business in software for engine diagnostics – ALLDATA. Currently some 80,000 repair facilities – around 50% of the US market – use the ALLDATA subscription service. ALLDATA also sells shop management software, aimed at helping commercial auto repair businesses operate more efficiently.

Autozone recognizes the role of inventory management in its ongoing success – if a part isn’t on the shelf a customer can’t buy it – and has invested heavily in distribution. In addition to eight distribution centers, Autozone operates a Hub network of 144 stores carrying more than double the SKU’s of the regular retail operations. These Hubs will deliver to the smaller stores up to three times a day, minimizing inventory of slower moving items while still getting a part into the customer’s hands within hours.

Autozone prides itself on clean, well-managed stores coupled with knowledgeable counter staff. (The preferred name for these employees is “Autozoners”.) These people are helped in their sales effort by “Z-net” – the electronic parts catalog on the counter. This allows the Autozoners to recommend additional items to the customer to help with the project he’s undertaking. (The conversation might go something like, “While you’re at it, have you thought about …”)

Autozone has a strong history of growth. For the year ending 8/27/11 (read the annual report here,) revenue was $8.1bn with income before taxes of $1.3bn. This represents a 10 year CAGR of 5.3%, and over the last three years performance has been an even more impressive 7.3%.

In addition, for FY2011 Autozone reported EBITDAR of $1.9bn, up from $1.7bn in 2010, and growth in EPS, (aided by a share repurchase program,) of over 20%. The company continues to be strong cash generator, generating $1.3bn, thanks to a strong emphasis on inventory management.

In 2011 the ‘Sales per square foot’ metric grew from $246 in ’10 to $258 in FY2011. However, in answers to questions following a presentation given at the 35th Gabelli & Co. Automotive Aftermarket Symposium, November 1st, 2011, (webcast available here,) CFO Bill Giles noted that much of the increased revenue is from pricing rather than volume growth.

At the same presentation, Giles was upbeat about future prospects. Autozone is the market share leader in the $44bn DIY industry, currently growing at around 4%. As this is a highly fragmented business there seems room for growth. In 2011 the company opened 147 stores and sees more openings ahead, particularly in Mexico which, with a large population of aging cars, has good potential: in 2012 Autozone anticipates growing beyond the 279 stores already in operation there.

In the commercial DIFM market, worth around $57bn and currently growing at about 2.6%, Autozone is a relatively small player with revenues of $1.1bn. This again implies considerable room for growth.

US opportunities for ALLDATA are seen to be more limited, so for 2012 a move into Europe is planned. Other plans include continued investment in the stores, ensuring they look clean and bright, and ongoing training of store personnel: Autozone recognizes the importance of having knowledgeable staff at the counter.

As Giles noted, the company will also maintain its relentless focus on controlling costs.

In addition to Pep Boys (PBY) and Sears (SHLD) mentioned previously, Autozone competes with NAPA, O’Reilly Auto Parts (ORLY) and Advance Auto Parts (AAP) plus many smaller businesses. Internet retailing of auto parts also appears to be growing, as evidenced by Amazon’s (AMZN) presence in this market.

The leader in a growing marketplace, Autozone is focused on inventory management and customer service. The results seem to demonstrate the value of this strategy.