8. Autozone Inc. (NYSE:AZO)
Share Price as of January 19: $3,228.40
Surge in Share Price in 5 Years: 179.62%
Stock Split Confirmed: No
Number of Hedge Fund Holders: 47
Autozone Inc. (NYSE:AZO) retails and distributes automotive replacement parts and accessories. It operates a network of stores and serves both professional mechanics and do-it-yourself customers. Some of its products include engine parts, brakes, and batteries, among other automotive components.
One of its key growth drivers is the domestic commercial (DIFM) business. It involves selling auto parts to professional repair shops and service providers who install them for customers. In FY24, domestic commercial sales increased 6.2% for the full year. This segment now represents 31% of domestic auto parts sales and 27% of total company sales.
This was fueled by the expansion of hub and mega-hub locations. Hub locations are central distribution points, whereas mega-hub locations are high-capacity centers that handle more inventory and logistics operations. The company added 8 hubs and 11 mega-hubs in FY24, bringing the total to 109 mega-hubs. These locations stock over 100,000 SKUs, which accelerate fulfillment speed and drive higher sales. Mega-hubs outperform standard stores and lift both commercial and DIY sales. Autozone Inc. (NYSE:AZO) aims to surpass 200 mega-hubs in the coming years.
As of January, the company has a consensus price target of $3322.71 based on the ratings of 26 analysts. Appalaches Capital highlighted in its Q3 2024 investor letter that Autozone Inc.’s (NYSE:AZO) strong market position is reinforced by its extensive inventory, supplier reliance, and favorable credit terms. Here’s what the firm said:
“Passing on cost structure benefits, sometimes called “Shared Economies of Scale,” is not the only form of these positive feedback loops. AutoZone, Inc.’s (NYSE:AZO) moat also deepens as it grows. While most would think of the company as a very good retailer, I would say that the business model is more nuanced than that. The automotive aftermarket is a highly fragmented and specialized industry. There are hundreds of companies producing automotive components, most of which are specific to one of thousands of vehicle models. In 2022, there were over 280 million registered vehicles in the U.S., further adding to the fragmented nature of the value chain.8 Outside of large metropolitan areas with public transportation, people rely heavily on their vehicles in all facets of their daily lives. Not having a working car poses significant problems. Whether it’s getting to work or shopping for groceries, if something breaks on your vehicle, you need it fixed immediately.
The combination of all of these factors leads AutoZone to maintain a large and diverse inventory that is ready on a moment’s notice. Manufacturers and vendors cannot sell directly to consumers because it would take too long for the product to arrive, and it would not be economical to build out their own distribution network given the low turnover of the inventory. AutoZone is heavily relied upon by their suppliers, and as a result, their suppliers give them very favorable payment terms allowing them to stock more inventory while tying up less working capital. The creditors of these suppliers additionally acknowledge the prowess of AutoZone, providing more flexible credit to suppliers if their inventory is sent to AutoZone. With more inventory, they can better meet the needs of their customers, resulting in higher sales and a more efficient network of stores, which in turn leads to a more effective service for suppliers. This is a very effective flywheel. AutoZone is not new to the portfolio, but I do enjoy writing about it.”
