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Practice English Speaking&Listening with: How AutoZone Is Holding Off Amazon... For Now

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It is commonly thought to be a terrible time for many brick and

mortar retailers, but one segment seems to be bucking the trend

auto parts.

And one chain in particular seems to be doing especially well

AutoZone. AutoZone's stock skyrocketed near $1200 a share at the end

of 2019.

Investors see the company as a leader in a segment of retail

relatively well-protected from the e-commerce incursions that have

brought down so many other once seemingly invincible stores.

Like its closest rivals, O'Reilly, Advanced Auto Parts and Napa Auto

Parts, AutoZone sells just about everything a person would need to

fix, maintain or improve a car or truck.

And recently, investors say AutoZone has been growing a new business

that could lead to several more years of solid growth.

So AutoZone is a best in breed retailer, specifically in the auto

part retail industry.

But I would say that their supply chain is probably best in breed or

one of the best in breed supply chains across the entire retail

industry. But threats and challenges do remain.

AutoZone has some pretty capable rivals and there are massive changes

taking place in transportation that threaten the entire automotive

industry. The store that would later become AutoZone

first opened in Forest City, Arkansas, on July 4th, 1979.

Then it was called Auto Shack and was a division of a larger company

called Malone and Hide.

Early growth came quickly.

The company opened its 100th store in Weslaco, Texas, in 1983, just

four years later. It was spun off from Malone and Hyde in 1986.

That same year it debuted the first products of its in-house Duralast

brand, under which it markets an array of items, including starters,

alternators, batteries and hand tools.

The following year, Auto Shack changed its name to AutoZone.

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

And from there it continued to grow to 1,000 stores by 1995 and 6,000

by 2017.

Two key advantages that enable AutoZone and its peers to fend off

competition from e-commerce companies are service and parts

availability. Stores like AutoZone and O'Reilly invest money in

training their staff to help customers with often detailed and highly

specific questions about cars.

That is service that e-commerce giants such as Amazon are not yet in

the business of providing.

These advantages have also allowed auto parts retailers to face and

fend off threats from much bigger brick and mortar retailers who have

had the ability to undercut them on price.

You don't really know you need windshield wiper blades until it's

raining and then at that point you need them now so you don't have

time for next day delivery.

You just want to get them replaced immediately.

And if you pull into an AutoZone, they'll actually go, t he employee,

will go out there and do it for you. The emphasis on in-store service

has been especially important for AutoZone.

About 80 percent of its revenues come from Do It Yourselfershome

mechanics. A lot of these customers can be gearheads and auto

enthusiasts, but many of them are simply customers who would rather

work a bit on their own cars to save the expense of a trip to the

mechanic. While a lot of these customers might be knowledgeable about

cars, they typically don't have the same level of expertise as a

professional mechanic.

These stores also enjoy somewhat stable demand.

Car parts are not luxury or recreational items.

Drivers need their cars for transportation.

So auto parts retailers can often rely on at least some kind of

customer base whether the economy is good or bad.

Some of the reasons auto parts retailers have been especially strong

in this retail environment is partly due to timing.

The economic recovery that followed the financial crisis of 2008 has

recently begun to boost the auto parts retailers in some interesting

ways, say analysts.

As the economy has improved and gas prices have come under pressure,

people have felt free to drive more.

More driving eventually leads to more parts failures.

The other factor is that a historically high number of the right kind

of car for auto parts retailers is on the road right now.

Within the industry, there is something known as the sweet spot for

auto maintenance. The exact number of years can vary, but it is

generally thought to include cars that are between eight years and 10

or 12 years old.

Once cars hit about seven to eight years of service, warranties often

start to run out. But owners tend to keep their cars on average for

another two to four years after that.

So auto parts retailers tend to see the most business when there is

the highest number of cars between eight and 12 years old on the

road. The financial crisis and the ensuing recession crippled new car

sales. What that meant was there were relatively fewer cars in that

maintenance sweet spot roughly eight years later, around 2016 or so.

But that sweet spot population began to improve in 2018 and is

expected to improve for another 12 to 18 months.

The highest correlation to industry growth has been eight to 12.

And why that's improving is after really, the recession of 2008, new

vehicle sales slowed through 2010.

Those began to re-accelerate in the early 2010s and really just in

2019 and 2020 the number of eight-year-old vehicles is beginning to

increase again after three years of declining.

And so that cohort of eight to 12 is beginning to grow again and

should support industry growth going forward. But a relatively

protected industry with a good, stable customer base doesn't really

answer the $1200 question.

If all auto parts retailers can offer service, why are AutoZone

shares priced so high, even far higher than its already good

competitors. What is setting it apart?

As of January 3rd, 2020 shares had risen just over 40 percent in the

last year. There are a few reasons for the climb.

Some analysts point to the fact that AutoZone management has been

buying back shares of the stock starting in the late 1990s.

Around that time, AutoZone had about 150 million shares outstanding.

In late 2019, the company had about 25 million shares outstanding.

Share buybacks alone have a tendency to inflate share prices, say

some analysts. The high share price does not deter bulls.

For one thing, AutoZone's forward price to earnings ratio is smaller

than those of rivals.

Forward P/E is a ratio commonly used by investors that compares the

price of a stock with a company's expected earnings.

It allows investors to compare the value of companies of different

sizes and different share prices.

The lower that ratio, the more earnings an investor may expect to get

for every dollar spent on a share.

The main things that often drive a higher or lower forward P/E ratio

are things like the rate at which a company is growing, its ability

to deliver earnings consistently and the quality of the assets it

owns. But what what we're seeing today is AutoZone has the lowest

ratio in the industry.

And its growth opportunities are actually accelerating.

And what we've seen in the last couple of years is AutoZone has made

a lot of investments. Their growth is now reaccelerating.

They're not mature. They're getting into commercial.

And so I'm willing to pay more for a dollar of earnings at AutoZone

than I would historically, because it's no longer considered a mature

company. It's actually a growth company.

And a big part of what has been fueling the enthusiasm over AutoZone

has been its recent push into commercial parts retailing often called

Do It for me or DIFM.

As opposed to its traditional business in Do It Yourself or DIY.

DIF M basically means professional mechanics and body shops.

These clients want to be able to order a part needed for a customer

and receive it within hours or even minutes in many cases in about as

little time as one would expect a pizza.

AutoZone has been investing heavily in building up the supply chain

needed to compete in commercial parts supply.

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

The smallest stores are often called satellite stores.

Then there are hubs and mega hubs which are larger stores that carry

a much larger variety and volume of parts.

A typical AutoZone store carries about 23,000 unique parts on its

shelves, often called SKUs, in reference to the unique barcodes on

each type of product. A hub carries about twice that number, while a

mega hub can carry twice as many as a hubup to about 100,000

different products. In recent years, AutoZone has been ramping up the

number of hubs, especially mega hubs it has to improve its chances of

having a certain kind of part in an area at any given time.

That kind of selection is especially important when you're trying to

serve a mechanic who needs a part right away.

In 2016, AutoZone had 182 hub stores, including 11 mega hubs.

By the end of 2019, the company had 205 total hub stores, including

35 mega hubs.

In 2019, AutoZone said it plans to grow its number of mega hubs to

about 70 to 90 stores in the next few years.

It is also invested in training its staff to improve relationships

with mechanics. But for a long time, these investments bore no fruit.

Until that is relatively recently, there's really been an

acceleration in the commercial business as they've made a few

investments both in their supply chain and in their people to really

refocus on that part of their business, although it's the minority of

sales it's been a majority of the organic growth driver and really

it's address concerns that investors have had longer term as the

business and the industry shifts secularly towards to Do It For Me.

And they've proven that they're a viable competitor t hat can take

market share over there. Now, analysts expect the company has several

years of profitable growth in its commercial business left.

AutoZone only has to 15 percent of its business in the Do It For Me

category. Their peers have more of a mix of 50 percent of their

sales. And so we see tremendous growth opportunity at AutoZone over

the next honestly decade.

This is helped by the ever increasing mechanical and technological

complexity of vehicles.

There are some reasons to think the stock does not have much more

upside. Investors also do see a few other potential threats to auto

parts retailers. E-commerce businesses such as Amazon remain a

threat. The company that began mostly with bookselling over the years

became known as the Everything Store and has begun moving into

traditional retail businesses, both through its acquisition of

grocery retailer Whole Foods and other experiments in brick and

mortar selling. E-commerce also poses an oblique or indirect threat.

Even if Amazon decides it doesn't want to move into auto parts, auto

parts sellers could suffer competition from other retailers seeking

refuge from e-commerce rivals and other businesses.

Auto Zone's competitors are liable to not give up commercial auto

parts retail market share without a fight either.

AutoZone declined to be interviewed for this story.

Electric cars are known to be mechanically simpler than internal

combustion counterparts.

The potential impact of this is unknown.

Despite the relative simplicity of an electric power train,

automakers may continue to add other safety, security and comfort

features that might continue making cars ever more complex

anyway. For now, investors are betting that consumers will still need

a wide array of auto parts rapidly and will still need help actually

fitting them in place.

The Description of How AutoZone Is Holding Off Amazon... For Now