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by srakute
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It is commonly thought to be aterrible time for many brick and mortar retailers, but one segment seemsto be bucking the trend — auto parts.

And one chain in particular seemsto be doing especially well — AutoZone.

AutoZone’s stock skyrocketed near $1200a share at the end of 2019.

Investors see the company as aleader in a segment of retail relatively well-protected from thee-commerce incursions that have brought down so many otheronce seemingly invincible stores.

Like its closest rivals, O’Reilly, AdvancedAuto Parts and Napa Auto Parts, AutoZone sells just about everythinga person would need to fix, maintain or improvea car or truck.

And recently, investors say AutoZone hasbeen growing a new business that could lead to severalmore years of solid growth.

So AutoZone is a best inbreed retailer, specifically in the auto part retail industry.

But I would say that their supplychain is probably best in breed or one of the best in breedsupply chains across the entire retail industry.

But threats andchallenges do remain.

AutoZone has some pretty capable rivalsand there are massive changes taking place in transportation thatthreaten the entire automotive industry.

The store thatwould later become AutoZone first opened in Forest City, Arkansas, on July 4th, 1979.

Then it was called Auto Shack andwas a division of a larger company called Malone and Hide.

Early growth came quickly.

The company opened its 100th storein Weslaco, Texas, in 1983, just four years later.

It was spun offfrom Malone and Hyde in 1986.

That same year it debuted thefirst products of its in-house Duralast brand, under which it markets anarray of items, including starters, alternators, batteries andhand tools.

The following year, Auto Shackchanged its name to AutoZone.

In 1999, the company listed onthe New York Stock Exchange.

And from there it continued to growto 1, 000 stores by 1995 and 6, 000 by 2017.

Two key advantages that enable AutoZoneand its peers to fend off competition from e-commerce companiesare service and parts availability.

Stores like AutoZone andO’Reilly invest money in training their staff to help customerswith often detailed and highly specific questions about cars.

That is service that e-commerce giants suchas Amazon are not yet in the business of providing.

These advantages have also allowed autoparts retailers to face and fend off threats from much biggerbrick and mortar retailers who have had the ability toundercut them on price.

You don’t really know you needwindshield wiper blades until it’s raining and then at that point youneed them now so you don’t have time for next day delivery.

You just want toget them replaced immediately.

And if you pull into an AutoZone, they’ll actually go, t he employee, will go out there and do itfor you.

The emphasis on in-store service has been especiallyimportant for AutoZone.

About 80 percent of its revenues comefrom Do It Yourselfers — home mechanics.

A lot of these customerscan be gearheads and auto enthusiasts, but many of them aresimply customers who would rather work a bit on their own cars tosave the expense of a trip to the mechanic.

While a lot of thesecustomers might be knowledgeable about cars, they typically don’t have thesame level of expertise as a professional mechanic.

These stores also enjoysomewhat stable demand.

Car parts are notluxury or recreational items.

Drivers need theircars for transportation.

So auto parts retailers can often relyon at least some kind of customer base whether the economyis good or bad.

Some of the reasons auto partsretailers have been especially strong in this retail environment ispartly due to timing.

The economic recovery that followed thefinancial crisis of 2008 has recently begun to boost the autoparts retailers in some interesting ways, say analysts.

As the economy has improved andgas prices have come under pressure, people have felt freeto drive more.

More driving eventually leadsto more parts failures.

The other factor is that a historicallyhigh number of the right kind of car for auto parts retailersis on the road right now.

Within the industry, there is somethingknown as the sweet spot for auto maintenance.

The exact number ofyears can vary, but it is generally thought to include cars thatare between eight years and 10 or 12 years old.

Once cars hit about seven toeight years of service, warranties often start to run out.

But owners tendto keep their cars on average for another two to fouryears after that.

So auto parts retailers tend to seethe most business when there is the highest number of cars between eightand 12 years old on the road.

The financial crisis and theensuing recession crippled new car sales.

What that meant was therewere relatively fewer cars in that maintenance sweet spot roughly eight yearslater, around 2016 or so.

But that sweet spot population beganto improve in 2018 and is expected to improve for another12 to 18 months.

The highest correlation to industry growthhas been eight to 12.

And why that’s improving is afterreally, the recession of 2008, new vehicle sales slowed through 2010.

Those began to re-accelerate in theearly 2010s and really just in 2019 and 2020 the number ofeight-year-old vehicles is beginning to increase again after threeyears of declining.

And so that cohort of eight to12 is beginning to grow again and should support industry growth goingforward.

But a relatively protected industry with a good, stable customer base doesn’t really answer the $1200 question.

If all auto parts retailers canoffer service, why are AutoZone shares priced so high, even farhigher than its already good competitors.

What issetting it apart? As of January 3rd, 2020 shares hadrisen just over 40 percent in the last year.

There are afew reasons for the climb.

Some analysts point to the factthat AutoZone management has been buying back shares of the stockstarting in the late 1990s.

Around that time, AutoZone hadabout 150 million shares outstanding.

In late 2019, the company hadabout 25 million shares outstanding.

Share buybacks alone have a tendencyto inflate share prices, say some analysts.

The high shareprice does not deter bulls.

For one thing, AutoZone’s forward priceto earnings ratio is smaller than those of rivals.

Forward P/E is a ratio commonlyused by investors that compares the price of a stock witha company’s expected earnings.

It allows investors to compare thevalue of companies of different sizes and different share prices.

The lower that ratio, the more earningsan investor may expect to get for every dollar spent on a share.

The main things that often drive ahigher or lower forward P/E ratio are things like the rate at whicha company is growing, its ability to deliver earnings consistently and thequality of the assets it owns.

But what what we’re seeingtoday is AutoZone has the lowest ratio in the industry.

And its growth opportunitiesare actually accelerating.

And what we’ve seen in the lastcouple of years is AutoZone has made a lot of investments.

Theirgrowth is now reaccelerating.

They’re not mature.

They’regetting into commercial.

And so I’m willing to pay morefor a dollar of earnings at AutoZone than I would historically, because it’sno longer considered a mature company.

It’s actuallya growth company.

And a big part of what hasbeen fueling the enthusiasm over AutoZone has been its recent push intocommercial parts retailing often called Do It for me or DIFM.

As opposed to its traditional businessin Do It Yourself or DIY.

DIF M basically means professionalmechanics and body shops.

These clients want to be able toorder a part needed for a customer and receive it within hours or evenminutes in many cases in about as little time as onewould expect a pizza.

AutoZone has been investing heavily inbuilding up the supply chain needed to compete incommercial parts supply.

For example, the company has threetypes of store divided by size.

The smallest stores areoften called satellite stores.

Then there are hubs and mega hubswhich are larger stores that carry a much larger varietyand volume of parts.

A typical AutoZone store carries about23, 000 unique parts on its shelves, often called SKUs, in referenceto the unique barcodes on each type of product.

A hub carriesabout twice that number, while a mega hub can carry twice as many asa hub — up to about 100, 000 different products.

In recent years, AutoZonehas been ramping up the number of hubs, especially mega hubs ithas to improve its chances of having a certain kind of part inan area at any given time.

That kind of selection is especiallyimportant when you’re trying to serve a mechanic who needsa part right away.

In 2016, AutoZone had 182 hubstores, including 11 mega hubs.

By the end of 2019, the companyhad 205 total hub stores, including 35 mega hubs.

In 2019, AutoZone said it plans togrow its number of mega hubs to about 70 to 90 storesin the next few years.

It is also invested in trainingits staff to improve relationships with mechanics.

But for a longtime, these investments bore no fruit.

Until that is relatively recently, there’s really been an acceleration in the commercial businessas they’ve made a few investments both in their supply chainand in their people to really refocus on that part of theirbusiness, although it’s the minority of sales it’s been a majority ofthe organic growth driver and really it’s address concerns that investors havehad longer term as the business and the industry shifts secularlytowards to Do It For Me.

And they’ve proven that they’re aviable competitor t hat can take market share over there.

Now, analystsexpect the company has several years of profitable growth inits commercial business left.

AutoZone only has to 15 percent of itsbusiness in the Do It For Me category.

Their peers have more of amix of 50 percent of their sales.

And so we see tremendousgrowth opportunity at AutoZone over the next honestly decade.

This is helped by theever increasing mechanical and technological complexity of vehicles.

There are some reasons to think thestock does not have much more upside.

Investors also do see afew other potential threats to auto parts retailers.

E-commerce businesses suchas Amazon remain a threat.

The company that began mostlywith bookselling over the years became known as the Everything Storeand has begun moving into traditional retail businesses, boththrough its acquisition of grocery retailer Whole Foods andother experiments in brick and mortar selling.

E-commerce also posesan oblique or indirect threat.

Even if Amazon decides it doesn’t wantto move into auto parts, auto parts sellers could suffer competitionfrom other retailers seeking refuge from e-commerce rivalsand other businesses.

Auto Zone’s competitors are liable tonot give up commercial auto parts retail market sharewithout a fight either.

AutoZone declined to beinterviewed for this story.

Electric cars are known tobe mechanically simpler than internal combustion counterparts.

The potential impact ofthis is unknown.

Despite the relative simplicity ofan electric power train, automakers may continue to addother safety, security and comfort features that might continue makingcars ever more complex anyway.

For now, investors are bettingthat consumers will still need a wide array of auto parts rapidlyand will still need help actually fitting them in place.


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