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AutoZone: Going the Extra Mile and Lapping the Competition

Thomas Paulson
Sep 23, 2022
AutoZone: Going the Extra Mile and Lapping the Competition

Key AutoZone Metrics

In our bizarre world where car manufacturers still can’t ramp production fast enough, high prices for new and used cars have left dealership lots barren, and mobility continues to increase as folks need to be "back in the office," it's a wonderful world to be an auto part retailer. This is especially true when you are an execution machine like AutoZone. The retailer put up an impeccable August-end quarter. And to level set, AutoZone’s "mature" DIY business is now 17% larger than it was pre-pandemic on a per location basis. Its "growing" commercial (DIFM) business has grown +$1.7B (+70%) compared to pre-COVID levels.

  • AutoZone's domestic comparable-store sales increased +6.2% which was led by commercial business (+19%). As a reminder, AutoZone, O’Reilly, and Napa are squeezing Advance Auto’s commercial business. In addition to enhancements in delivery time and part availability, AutoZone and O’Reilly are "investing" in price to take market share. Consequently, gross margin rate is down and inventory is up for these two brands. Those dynamics depress free cash flow.
  • Commercial sales per location per week were $17K for the quarter. For comparison, Advance’s commercial sales (excluding WorldPac) are $25K. As such, AutoZone still has lots of track in front of it to grow commercial (DIFM). According to CEO Bill Rhodes, these results are being driven by, "Improved satellite store inventory, massive improvements in Hub and Mega-Hub coverage, the strength of the Duralast brand, better technology to make us easier to do business with, improve delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being "priced right" for the value proposition we deliver."
  • Impressively given difficult compares, DIY comps increased +1.1% for the quarter due to part price inflation; the overall ticket was +8%. Compared to 2019, sales on a monthly basis during the quarter were pretty consistently strong. data shows really spectacular traffic gains vs. 2019 throughout the quarter (below).

  • Rhodes shared, "More recently, as gas prices have abated, we are encouraged to see the discretionary categories bounce back a bit. In general, the categories that are driven by failure due to heat performed well, and we were encouraged to see our battery category successfully lapped very strong performance last year and exceed our expectations. We believe our hard parts business will continue to do well this fall as we expect miles driven to improve while our growth initiatives are delivering solid results."
  • Importantly, Rhodes also shared, "as rising raw material pricing, labor and transportation costs are all impacting us and our suppliers, inflation has been prevalent in the aftermarket space. We believe inflation is stabilizing. We are seeing transportation costs begin to moderate after reaching historic levels, but we are not seeing product cost deflation yet nor are we seeing any signs that labor wage growth is slowing." (This being a both yes/no characterization of inflation.)
  • Trailing-twelve-month (TTM) sales per square foot was $349 compared to $325 last year. This metric is highly likely to increase by a mid-single-digit rate over the next year to over $366, which would be an industry-leading figure.
  • Profitability was modestly down as a result of the price investments in commercial.
  • TTM EBITDA and free cash flow were $3.7B and $2.6B, respectively, versus $2.6B and $1.6B in FY19. It is highly likely that both will be $200M higher over the next year.
  • Over the past twelve months, AutoZone opened 118 new locations. We would expect a similar amount over the next year. As of August, the company has 6,168 stores in the U.S. 5,342 of these, or 87%, has a commercial program.
  • The biggest risk to AutoZone, and its competitors, is the long-term transition from internal combustion engine (ICE) to battery electric vehicle (BEV) given the absence of fluids, more durable parts, and safer driving cars.

  • Relative to new car sales, August was still incredibly soft at a 13M units on a seasonally adjusted annual rate (SAAR), which was down 14% YoY and only 5% MoM. As a reminder, auto manufacturers were expected to significantly ramp production in 2H22 as supply chain hurdles were cleared. While the U.S. makers are ramping, Honda and Toyota are still declining. Given those two manufacturers’ large size, it’s a significant drag on the total. Interestingly, it is only the U.S. markets that are down for the brands.
  • Additionally, this week Ford announced that additional supply chain costs and "above plan inflation" would inhibit 3Q22 profitability by $1B. Moreover, they are expected to end 3Q22 with around $2B worth of "vehicles on wheels" awaiting missing parts. Thus, to an outsider, it looks like the automotive industry has yet to get onto its feet to run faster.
  • Regarding our Mid-Central Electric Valley theme, Honda announced that it would build a battery plant for its U.S. BEVs with a $4.4B investment (along with LG Energy) for a plant that will begin construction planned in early 2023 (the location has yet to be disclosed).  This is rolls off the Inflation Reduction Act which allows for tax credits of up to $7,500 for BEVs sold in the US if they are made in the US, along with stipulations for the battery materials and assembly to also largely be of US origin.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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