Core Portfolio Insight: AutoZone (AZO)

Core Portfolio Insight: AutoZone (AZO)

September 29, 2021
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AutoZone is a leading retailer and distributor of automotive replacement parts and accessories with over 6,700 store locations in the US, Mexico, and Brazil. Locations are made up of typical satellite retail stores, hubs, and mega-hubs. AutoZone prides itself on putting the customer first, knowing its parts & products, having great looking stores, and having the best merchandise at the right price. Despite constant uncertainty in the world, AutoZone delivers steady, growing cash flow and earnings each year, while returning excess cash to shareholders through share repurchases. AutoZone has multiple growth opportunities ahead in its Commercial business, Mega-hub strategy, and international expansion.

To see how steady AutoZone's results are, I have a 25-year chart from Zacks Research showing AZO's stock price (blue line) and earnings per share (yellow line). The dot-com crash, '08-09 financial crisis, and COVID-19 pandemic did not stop AutoZone from delivering strong earnings. Not only is AutoZone resilient during market turmoil, AutoZone's strongest performance has been coming out of recessionary periods when consumer behavior changes. In addition, none of these strong periods were followed by equivalent declines in performance. 

AutoZone's management returns cash to shareholders through share repurchases. Over the last 15 years, the share count was reduced to about 20M shares compared to about 70M at the beginning of the time period. These share repurchases greatly increase our ownership of the company and our share of future earnings. As Warren Buffett said in his latest letter, "The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses."

AutoZone has many growth opportunities ahead, most notably from its Commercial business. AutoZone currently has a 4% share in the highly-fragmented Commercial market, estimated to be worth about $75B. Customers with AutoZone Pro accounts get referrals from AutoZone's retail stores when customers require help from a professional shop. In addition, AutoZone offers many programs for commercial customers, like stocking, loan-a-tool, credit, technician training, and ALLDATA automotive repair software. Another opportunity is the Hubs & Mega-hubs strategy. Typical satellite stores carry around 25,000 SKUs, while Mega-hubs have close to 100,000 SKUs. Mega-hubs deliver to hubs and satellite stores anywhere from 1 to 3 times per day, allowing for more inventory available in the marketplace. On the Q4 FY21 earnings call, CFO Jamere Jackson said, "We now have 58 Mega-Hub locations, and we expect to open approximately 20 more over the next 12 months. As a reminder, our Mega-Hubs typically carry roughly 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as a fulfillment source for other stores."

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