Company Reports

Amid a highly fragmented aftermarket auto parts industry, wide-moat AutoZone differentiates its retail operations by offering robust customer service to its do-it-yourself (70% of U.S. sales) and commercial customers (30% of U.S. sales) while maintaining ample parts availability across a wide range of vehicle makes and models. Given about 85% of AutoZone’s sales are composed of failure and maintenance related products that tend to be time sensitive and vital to the functioning of a vehicle (such as alternators, batteries, and spark plugs), AutoZone’s customer base typically values service quality and convenience over a lower price. As such, the retailer’s staff often assists customers with the diagnosis of a vehicle, ordering the necessary part for a specific vehicle’s make and model, and in some instances, even replacing and testing the functionality of parts. While online channels (such as Amazon and Carparts.com) and diversified retailers (such as Walmart) may offer ostensibly lower prices, we think AutoZone’s consistent comparable store sales growth and healthy gross margins (north of 50%) suggests its focus on customer service and the convenience provided by its more than 6,300 domestic brick-and-mortar stores is a winning formula in the category.

Wide-moat AutoZone delivered solid fiscal second-quarter results as stronger-than-anticipated gross margin expansion outweighed lackluster domestic sales growth that underperformed our expectations. We plan to raise our $2,430 fair value estimate by a low-single-digit percentage after making a positive adjustment to our gross margin forecast, though we still view shares as overvalued.

Despite operating amid a fragmented landscape, we now award AutoZone a wide moat rating, as we have more confidence in the firm’s ability to outearn its cost of capital over a 20-year time horizon. In conjunction, we raised our fair value estimate on AutoZone by 15% to $2,430, from $2,120, due to its moat upgrade and an increase in our top-line forecast that stems from our more optimistic outlook concerning store expansion. We now estimate average annual new store growth of around 2.5% over our 10-year forecast, up from about 1.5%, as we believe the company is well-positioned to consolidate the auto parts retail industry further. We also estimate the firm to post around 3.0% domestic comparable sales growth as AutoZone’s established distribution network should enable it to maintain its lead in the do-it-yourself industry (about 70% of U.S. sales) while expanding its share in the faster-growing commercial aftermarket (30% of U.S. sales). Still, we view shares as modestly overvalued.

Amid a highly fragmented aftermarket auto parts industry, wide-moat AutoZone differentiates its retail operations by offering robust customer service to its do-it-yourself (70% of U.S. sales) and commercial customers (30% of U.S. sales) while maintaining ample parts availability across a wide range of vehicle makes and models. Given about 85% of AutoZone’s sales are composed of failure and maintenance related products that tend to be time sensitive and vital to the functioning of a vehicle (such as alternators, batteries, and spark plugs), AutoZone’s customer base typically values service quality and convenience over a lower price. As such, the retailer’s staff often assists customers with the diagnosis of a vehicle, ordering the necessary part for a specific vehicle’s make and model, and in some instances, even replacing and testing the functionality of parts. While online channels (such as Amazon and Carparts.com) and diversified retailers (such as Walmart) may offer ostensibly lower prices, we think AutoZone’s consistent comparable store sales growth and healthy gross margins (north of 50%) suggests its focus on customer service and the convenience provided by its more than 6,300 domestic brick-and-mortar stores is a winning formula in the category.

We’re raising narrow-moat AutoZone’s fair value estimate to $2,120 per share from $2,070, mostly due to the time value of money. We saw few surprises in its first-quarter fiscal 2024, so most of our long-term forecast remains intact. We see limited risk-adjusted upside at current levels. The current price implies even better performance than the 11% average annual top-line growth or 21% midcycle operating margin we forecast.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.

We anticipate raising our $2,070 fair value estimate for narrow-moat AutoZone by a low- to mid-single-digit percentage, mostly due to the time value of money. But with the shares trading in 2-star territory, we think the current price is predicated on loftier expectations that might prove difficult to achieve.

We are maintaining our fair value estimate of $2,070 per share, narrow moat rating, and exemplary capital allocation rating after AutoZone announced that long-time CEO, president, and chairman William Rhodes will transition to executive chairman in January 2024. Philip Daniele, currently serving as executive vice president of merchandising, marketing, and supply chain, will succeed as CEO and join the board.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.

Our $2,050 per share valuation of narrow-moat AutoZone should not change much after the firm posted lackluster third-quarter results (1.9% same-store sales growth in the period ended May 6). Our reaction would have mirrored the trading price’s mid-single-digit percentage swoon after the news were it not for a time value of money adjustment that should offset much of the impact. However, we attribute much of the underperformance to transitory factors including wet March weather and difficult comparisons rather than a material change in the firm’s trajectory, so our long-term forecast still assumes mid-single-digit top-line annual growth rates and roughly 20% operating margins. We suggest investors await a more attractive entry point, as we believe the current trading price leaves little room for error.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.

We don’t expect to materially alter our $1,950 per share fair value estimate for narrow-moat AutoZone after the firm posted solid second-quarter results. We’re encouraged investments behind its commercial expansion initiatives persist, despite industrywide cost pressures, particularly in labor and freight. Even after a low-single-digit downdraft, shares trade at a premium; we recommend investors seek a more attractive entry point.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.

We do not plan to alter our $1,870 per share valuation of narrow-moat AutoZone significantly after the firm posted solid first-quarter results (period ended Nov. 19), spurred by continued expansion of its commercial unit. Our long-term forecast still assumes mid-single-digit top-line annual growth rates and roughly 20% operating margins, and we suggest investors await a more attractive entry point as we believe the current trading price leaves little room for error.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.

Our $1,770 per share valuation of narrow-moat AutoZone should not change much after the firm announced solid fourth-quarter (ended Aug. 27) earnings, which included a 6.2% domestic same-store sales increase. With AutoZone performing well in its DIY and commercial segments, we see little reason to alter our long-term expectations (mid-single-digit top-line annual growth rates and roughly 20% operating margins). Despite our favorable view of AutoZone and the industry, we suggest investors await a more attractive entry point.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.

Our $1,690 per share valuation of narrow-moat AutoZone should rise by a mid-single-digit percentage, in line with the shares’ trading uptick after the firm announced strong third-quarter (ended May 7) earnings. The planned uptick stems from strong quarterly sales (up 6%). We still expect mid-single-digit top-line annual growth rates and roughly 20% operating margins in the long term. We view AutoZone favorably, but we suggest investors await a more attractive entry point.

Narrow-moat AutoZone benefits from strong brand intangible assets borne of its nationwide presence, effective customer engagement driven by its high standard of service, and the success of its proprietary-label products. Coupled with a cost advantage generated by its scope of distribution and leading DIY market share, the firm stands to benefit from consolidation behind national chains that can efficiently provide reliable part availability. While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change.