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AutoZone on Cruise Control, Whereas Advanced Auto in the Body Shop

Thomas Paulson
Dec 9, 2022
AutoZone on Cruise Control, Whereas Advanced Auto in the Body Shop

Key AutoZone Metrics

  • AutoZone produced another strong and consistent quarter despite the industrywide headwind of slower discretionary sales and inflationary cost pressures. Trailing-twelve-month (TTM) sales per square foot increased $10 QoQ to $357 and it will likely increase to $375 by this time next year.
  • Commercial programs rose to 87% of AutoZone's 6,978 domestic stores and those programs average $820K per year compared to $545K in 2019. That market share has come from smaller regionals and Advance Auto. Advance Auto’s commercial revenue per location (excluding WorldPac) have declined by over 20%. The comparable-store sales table below shows how revenue (DIY and commercial) are just grinding higher for AutoZone and O’Reilly Auto Parts over Advance’s lower rate of growth. AutoZone’s sales per commercial program are up 50% from pre-pandemic levels and from that basis the business has been consistent. AutoZone continues to invest in improved parts availability vis-a-vis Hub and DC expansion. Hub locations result in significantly higher commercial sales and market share capture. Long-term, Zone plans for 200 Mega-Hubs and 300 regular-Hubs vs. the current 80 and 194.

  • AutoZone’s TTM EBITDA and free cash flow increased to $3.7B and $2.4B, respectively, and will likely be around $4.0B and $2.7B at this point next year.

Key Advanced Auto Metrics

  • As we have written about all year, Advance Auto Parts (and its other brand Carquest) is in the unenviable position of facing off against two very strong executors (AutoZone and O’Reilly Auto Parts). Both of these competitors have more competitive supply chains and both are investing in price and value to gain share in commercial. For its quarter ended Oct. 8, Advance Auto comparable-store sales declined, even with double-digit part price inflation. Trailing-twelve-month (TTM) sales per square foot for its retail locations (excluding WorldPac) were around $219, down $3 QoQ and -6% YoY. It would seem likely that they decline by a similar amount over the next year.
  • Advance Auto Parts CEO Tom Greco stated with respect the chain's sales: "We've done a deep dive on the competitive environment and the actions necessary to accelerate growth. From our analysis, two opportunities came to the forefront, particularly in the professional sales channel. First, we have opportunities on availability in certain categories, which require inventory investment to enable us to get more SKUs closer to the customer. Secondarily, while our research has consistently indicated that price is not the most important driver of choice for professional customers, we've tested and will make surgical pricing actions in certain categories to enable us to better address changes in competitive pricing dynamics." That will adversely impact EBITDA and FCF, and management expects Advance Auto's margin rate to fall next year. Matching the parts availability and service levels of AutoZone and O’Reilly demands substantial financial and organizational resources, moreover, the two are always "raising the height of the basketball hoop."
  • On the positive side, Advance Auto’s Pep Boys banner in Los Angeles is successfully improving traffic (below), which represents more the DIY and Pep Boys garage side of the business compared to servicing other independent repair shops.  (The reason why AutoZone’s traffic is so much higher than O’Reilly’s is its much higher DIY sales mix; AutoZone’s DIY sales per location is $1.64K on average at a national level vs. $1.34K at O’Reilly, or 22% more.)

  • Given the sales decline TTM EBITDA and free cash flow also fell to $1.0B and $238M and the figures should decline into next year given the above strategic change.

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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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