Quality company: Autozone Inc.
Outperforming the S&P 500 isn't limited to new technology; it can also come from companies that excel at simple ideas. Autozone Inc (AZO) has seen a 263% increase in share price over the past five years, compared to the S&P 500's 112% growth during the same period. This translates to a compound annual growth rate (CAGR) of 29% versus 16.2%.
Established 46 years ago in Forrest City, Arkansas, Autozone has expanded from one store to over 7,400 locations in the US, Mexico, and Brazil. AutoZone is the leading retailer and distributor of automotive replacement parts and accessories in the Americas. Each store carries an extensive product line for cars, sport utility vehicles, vans and light duty trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.
The average age of automotive vehicles is increasing as advancements in technology and maintenance practices extend MV lifespans resulting in delayed purchases of new vehicles. This combined with AZO’s expanding footprint of up to 250 new stores each year, the ongoing share buybacks, supports strong earnings per share (EPS) growth.
A strong culture of delighting customers for the 126,000 Autozoners promotes repeat business and creates a motivated work force being named to Forbes World's Best Employers list for 2021, 2022 and 2023. Combined with a best in class compensation plan for top management that directly aligns with shareholders interest, makes for a winning long term combination.
Key strengths include: Growing number of stores, increasing sales per square foot and ongoing share buybacks, demonstrated in the following graphs.
Total store locations
Net sales per average square foot
Weighted average shares outstanding - compounded reduction of 6.27% p.a. over 10 years
Share performance: AZO vs S&P 500 - 5 years
Reasons why we find Autozone an attractive investment opportunity:
Demonstrated ability to deliver superior performance in a competitive market.
Outstanding culture with continued focus on delighting customers with their service and offering.
Superb capital allocation with ROIC averaging 50%, linked to annual management targets,
Continuous expansion of new stores annually, between 200 to 250 annually.
Their focussed program to annually reduce the total share count through buy back of shares.
The structure of the annual share incentive scheme for senior management that limits annual grants to 0.9% of the issued number of shares. This creates a pool of shares to be allocated, irrespective of monetary value that ensures the the share count decreases annually after buy backs.
The payout matrix for annual bonuses that combines achieved EBIT margin with the actual return on invested capital (ROIC) achieved for the year. The following table is from AZO’s 2024 proxy statement.
Source: Autozone proxy statement 2024
6. Stated focus on expanding contract customers – best repeat business, sticky clients if well executed.
7. Continuous enhancements to online strategy with same day delivery..
8. Supply chain ensuring same day delivery utilizing distribution centres, mega hub (109) and regional hub stores, the following extract from their 10-K:
9. Extensive use of its proprietary software - Z-net for parts and ALL-DATA for vehicle diagnostics increasing their competitive edge..
10. The inelastic demand for AZO products and services - if a motor vehicle is broken or requires routine maintenance, there is no delay in the buying decision.
AZO One pager
Valuation thoughts
At the current share price of USD 3,663.73, our valuation of Autozone Inc, at a discount rate of 10% and terminal growth rate of 3%, indicates an implied growth rate in Free Cash Flow of 12.04% over the next 10 years. EPS has grown at 16.29% CAGR over the past 10 years. Management has proven that they have the ability to manage the business effectively and are appropriately incentivised to maintain margins and effectively allocate capital. At its current price, we estimate that AZO is trading at a premium of 12% to 18% of its intrinsic value. This is a sound share to own in turbulent times.
Conclusion
We believe AZO Inc to be a wonderful quality company. The industry in which they operate is encountering changes with the increase in the number of electric vehicles with fewer replacement parts. We anticipate that this change will be slower than initially anticipated and continue to monitor developments closely.
Disclaimer: The information provided on this page is for informational purposes only and should not be interpreted as investment advice or as a recommendation to buy or sell any stocks. It merely reflects our views on the companies we have analysed and in certain instances in which we have invested or whose shares we have divested. Please note that the past performance is not indicative of future outcomes and should not be relied upon as such.