AutoZone Can Get Your Portfolio in the Zone

By Michael Carter - July 16, 2012 | Tickers: AAP, AMZN, AZO, ORLY, PBY | 0 Comments

• Email
• Print

What company’s share price has delivered 370%+ gains over the past 10 years, 160%+ gains the past five years, and 20%+ gains over the past year?  What company has opened up over 180 new stores in the past fiscal year?  What company’s stock performance shows no evidence of a national recession in 2008-2009?  Finally, what company has continued to beat earnings expectations every quarter for the past several quarters?  Get in the Zone!  AutoZone (NYSE: AZO).

There are other competitors in the automotive retail sector like Advance Auto Parts (NYSE: AAP), Pep Boys (NYSE: PBY), O’Reilly Automotive (NASDAQ: ORLY), and other smaller chains, but I am going to stick with AutoZone as the company to watch.  The other companies are all solid, and you could even argue that O’Reilly is stronger due to its past stock performance (510%+ over the past 10 years).  However, I like AutoZone’s overall growth throughout not only the United States (4,500+ stores), but also in Mexico with 270+ openings. O’Reilly on the other hand has just 3,700+ stores in 39 states.  I have moved around quite a bit in the eastern portion of the United States, and where I live now a new AutoZone is being built to compete against Advance Auto Parts and Pep Boys across the street.

National Presence

Not only is AutoZone succeeding in growing its presence across the United States through its sheer number of store openings, but it also caters to commercial sales in almost 3,000 of its stores.  These commercial sales consist of providing parts to local garages, regional and national repair garages, dealers, service stations and other accounts.  What does this mean?  It means that AutoZone has pretty much every possible customer covered!  If it isn’t selling parts to the do-it-yourself (DIY) mechanic that would rather save money on labor from the local shop, it is also selling parts to the local shop itself. 

And, if it is not selling parts in person at one of its 4,800+ stores, it is selling them online.  The website is not only for regular retail customers either.  Just as AutoZone caters to both DIY’s and professionals at their brick-and-mortar locations, it does the same online.  There is an entirely separate website for commercial sales. 

Growth

There is no denying that the stock's performance has correlated nicely with the company's performance overall.  Since going public over 20 years ago in 1991, the stock has increased over 5,000% and has done so with nearly no major price dips.  The chart is a steady but constant slope up to its current price.  Net sales were up 6.7% last quarter with growth from both retail and commercial customers.  AutoZone comes with very few surprises, and it meets a necessary need in the lives of anyone that owns or drives an automobile.

Advantages

A moat is a deep, broad ditch, either dry or filled with water that surrounds a castle.  The term is usually used to describe companies with competitive advantages over other companies in the same industry.  Due to the large presence AutoZone has both in-person and online, this means they have huge accounts in order to purchase products cheaper and sell them cheaper versus the competition.  Their relationship with commercial customers also puts them way ahead of the game.  Being able to have structured relationships with places like Jiffy Lube really prevents new entrants in the sector.  AutoZone’s brand is also known through their advertising and marketing.  Who hasn’t heard that famous line at the end of their commercials – Get in the Zone! AutoZone!?  A better question would be to ask someone to state the company slogan or motto of a competitor.

Company Culture

Glassdoor.com is a website that gives an inside look at jobs and companies from current or ex-employees.  AutoZone, in a 2009 survey, was ranked as the 4^th worst workplace in America.  Today the company has a 2.6 rating on Glassdoor.com (out of 5) and many employees complain that their pay is based on sales.  Basically, if you work there and you aren’t selling, you aren’t going to get as many hours as someone else that performs better.  AutoZone appears to follow a pay-for-performance business model among its employees.  Now, perhaps it isn’t the best place to work at for most people, but this is the type of culture that produces results and real share price returns.

On the executive summary in the last quarter’s SEC filings report it is noted that AutoZone’s “primary response to fluctuations in the demand for the products we sell are to adjust our inventory levels, store staffing, and advertising messages.”  What is there not to like?  Many companies believe in not changing until it is too late.  AutoZone is changing even while they are still beating estimates, out-performing the market, and growing as a company! 

Marketplace Changes and Other Factors

Amazon.com (NASDAQ: AMZN) is often cited as the cause in recent years for many traditional retail stores closing down or going bankrupt.  However, Amazon doesn’t seem to affect AutoZone in the same way.  It does sell many auto parts, and their selection has grown exponentially in recent months; you can even buy parts on other automotive websites.  However, AutoZone seems to carry an advantage based on a few simple facts.

First, most liquid items that go into or on cars can’t be shipped through traditional mail due to their hazardous nature.  Other items are usually too heavy, and it is far more convenient, cheaper, and faster to go to the actual AutoZone store to buy the part you need.  Automotive parts are also usually bought on an as-needed basis.  Unlike other products like electronics or clothes, where there is no immediate need, things like engine and car parts are usually critical to doing anything else during the day that involves traveling by car.

Second, gas prices seem to have helped AutoZone’s bottom line, because if people are going to have to spend more on gas, they are going to find ways to save money on things they normally would have paid a premium in labor for like air filters, wiper blades, oil, brake pads, and other parts they can install themselves.

Speaking of DIYs, that number has grown exponentially thanks to the internet.  Anyone that has any ability to fix things can easily get the help or video guide they need online and will often find that things most mechanics would charge handsomely for they can do themselves.  For those that would rather spend the time browsing options at their own pace, they can use AutoZone’s website to find the exact parts they need that fit their car.  This is unlike the pre-internet past, when customers would succumb to whatever advice salesmen gave them and would buy whatever they were told they needed.

Bottom Line

AutoZone appears to have everything you would want out of a solid and consistently performing stock.  Unfortunately it does not pay a dividend (yet), which may repel income investors that live and die by the dividend.  However, if you pay attention to today’s economy, where people are trying to save money any way they can, you will see that AutoZone has a lot more room to grow in the future.  Companies that go from 1,000 stores in 1995 to over 4,800 stores in 2012 are clearly in the zone. 

• Email
• Print
• Feedback