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Morningstar | AutoZone’s Burgeoning Commercial Unit Should Augment Its Leading DIY Offering

Narrow-moat AutoZone is pushing to develop its commercial sales effort, building on its leading do-it-yourself aftermarket automotive parts franchise. The company’s endeavors come at a generally favorable time for the industry, as increased miles driven and an aging vehicle fleet have bolstered sales growth, with recent fleet composition headwinds subsiding. AutoZone has a history of operational success, with adjusted returns on invested capital averaging 29% over the past five years and high-teens operating margins.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 the firm’s scope of distribution and leading DIY market share, the company stands to benefit from an industrywide consolidation behind national chains that can efficiently provide reliable part availability. As vehicles become more complex and durable, AutoZone has an opportunity to deepen its engagement with DIY consumers seeking advice as they make repairs and commercial clients as part failures drop in frequency but increase in cost. 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 company in a strong position to weather change.AutoZone benefits from a customer base that values service level more than price-based appeals, which insulates the firm’s returns and acts as a bulwark against competition. We expect the firm’s profitability metrics to hold steady as it scales and takes share from independent and regional competitors, with adjusted operating margins remaining near fiscal 2018's 19% mark even as wage pressures mount. While its domestic operations still have room to grow, AutoZone has an expanding presence in Mexico and Brazil. We believe its measured approach to international expansion should poise the firm for continuing growth in the years ahead, even after its core market consolidates and stabilizes.