There are numerous reasons to appreciate AutoZone. It is an easy business to understand, a market leader, and has delivered exceptional returns to its shareholders. AutoZone operates in an industry with consistent demand, as people require auto parts for their vehicles, and the management has a clear and easily understandable growth strategy. Does all of this mean you should be investing in AutoZone? This is what I’m going to investigate in this post.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of AutoZone. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in AutoZone's competitors either. Thus, I have no personal stake in AutoZone. If you want to purchase shares or fractional shares of AutoZone, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
AutoZone, founded in 1979 as Auto Shack, is the leading retailer and distributor of automotive replacement parts and accessories in the Americas. The company operates 7.353 stores, including 6.432 in the United States, 794 in Mexico, and 127 in Brazil. Its stores offer a comprehensive range of products for cars, SUVs, vans, and light-duty trucks, including new and remanufactured automotive parts, maintenance items, accessories, and non-automotive products. AutoZone serves two primary customer groups: DIY customers, who repair and maintain their own vehicles, and DIFM (Do-It-For-Me) customers, which include repair shops, service centers, and other commercial partners. AutoZone emphasizes reliability and efficiency in its operations, ensuring products are consistently available in stores and that parts are delivered promptly, particularly to commercial customers. The company also sells its products online through platforms like AutoZone.com and AutoZonePro.com and provides software solutions under the ALLDATA brand for diagnostics and shop management. Unlike some competitors, AutoZone does not offer repair or installation services, focusing exclusively on parts and product sales. The United States is AutoZone’s largest market, contributing 88% of net sales, followed by Mexico with 11% and Brazil with 1%. The essential nature of vehicle maintenance makes AutoZone’s revenue stream relatively inelastic, as customers rely on their vehicles for mobility, and maintenance needs persist across economic cycles. AutoZone’s moat lies in its extensive store network, efficient logistics, and ability to deliver products quickly—critical for both DIY and DIFM customers. The company has built strong brand loyalty through its private-label products, such as the Duralast line, and its commitment to excellent customer service. Additionally, its commercial sales program, which offers credit and expedited delivery to repair garages and fleet owners, strengthens its market position. AutoZone’s culture, described by management as centered on “Great People, Great Service,” underscores the company’s emphasis on employee engagement and service excellence. This strong operational focus, combined with its scale and trusted reputation, has established a durable competitive advantage, positioning AutoZone as a leader in the automotive aftermarket industry.
Management
Phil Daniele, AutoZone’s CEO, has been with the company for over 30 years, taking on the role in January 2024 after starting as a Manager in Training in 1993. His journey through the organization exemplifies AutoZone's commitment to internal development, as he has advanced through various key roles, including Executive Vice President of Merchandising, Marketing, and Supply Chain. This extensive experience has provided him with deep insight into the company’s operations and strategic initiatives, positioning him uniquely to lead AutoZone into the future. Phil Daniele’s first year as CEO coincided with AutoZone's 45th anniversary, a milestone highlighting the company’s legacy of success. In his new role, Daniele has emphasized that AutoZone cannot rest on its laurels, recognizing challenges such as maintaining flawless execution across stores, meeting store opening goals, and continuing to deliver exceptional customer service. His leadership style reflects a disciplined and customer-centric approach, with a clear focus on optimizing shareholder value while ensuring AutoZone remains an “execution machine.” Phil Daniele has also underscored the strength of AutoZone’s leadership team, whose members average more than 18 years of experience with the company. He describes them as second to none in terms of expertise and dedication, viewing their collective experience as a cornerstone for driving AutoZone’s future growth plans. Former CEO William C. Rhodes, now serving as Executive Chairman, has praised Phil Daniele as a tremendous leader with unparalleled passion for the business and the skills, temperament, and courage needed to guide AutoZone’s continued success. Phil Daniele is committed to upholding AutoZone’s disciplined operational approach, ensuring the company remains focused on flawless execution and delivering “Wow!” customer service. With exciting plans for the future and a commitment to long-term growth, Daniele has reaffirmed AutoZone’s dedication to managing shareholder capital wisely, achieving strong returns, and continuing the company’s share repurchase program. Given his track record, leadership style, and strategic vision, I feel very confident in Phil Daniele’s ability to lead AutoZone successfully into the future.
The Numbers
The first metric to investigate is the return on invested capital (ROIC). I prefer to see a 10-year history of consistent growth, with ROIC exceeding 10% annually. AutoZone has far surpassed this benchmark, consistently delivering a high ROIC over the past decade, with returns never falling below 30% in any year. The performance over the past four years has been particularly impressive, with ROIC reaching exceptionally high levels. Very few companies manage to sustain such remarkable returns year after year. Although ROIC declined in fiscal year 2024 to its lowest level since 2020, it still remains well above 60%. This drop, while noticeable, is not concerning given AutoZone’s long history of exceptional performance. Management has reaffirmed their commitment to maintaining a relentless focus on ROIC and ensuring that all investments meet stringent hurdle rates. This disciplined approach continues to drive strong returns on invested capital, further reinforcing my confidence in AutoZone’s ability to deliver long-term value.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. AutoZone has reported negative equity for the past ten years, which, at first glance, may not seem impressive. However, there is a clear reason for this: AutoZone has strategically utilized debt to repurchase shares. This approach can be justified if the stock is significantly undervalued and the debt carries a low interest rate. Therefore, it isn’t necessarily a negative sign that AutoZone has reported negative equity every year over the past decade. Instead, it reflects the company’s disciplined capital allocation strategy aimed at enhancing shareholder value.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. AutoZone has consistently generated positive free cash flow every year over the past decade, underscoring the strength of its business model. However, in fiscal year 2024, free cash flow declined to its lowest level since 2019, with the levered free cash flow margin reaching its lowest point since 2017. This decline was primarily driven by a significant increase in capital expenditures, which rose to an all-time high in fiscal year 2024—approximately 35% higher than the previous fiscal year, which itself set a record for capital expenditures. These investments were focused on expanding AutoZone’s store network and enhancing its distribution capabilities, both of which management has identified as key drivers of long-term growth. Looking ahead, this elevated level of capital expenditures is expected to continue into fiscal year 2025, which will likely further impact free cash flow. Despite this, management remains confident in AutoZone’s ability to generate strong cash flows over the long term. They have emphasized that AutoZone is well-positioned for consistent, steady growth, with opportunities to expand margins and generate substantial free cash flow over time. Management has also reiterated their commitment to returning significant amounts of cash to shareholders, primarily through share buybacks. AutoZone has an established reputation for its buyback program, having reduced shares outstanding by approximately 45% between 2015 and 2024. As free cash flow grows, this trend is expected to continue, providing meaningful value to shareholders. While the current free cash flow yield is at its lowest point in a decade, suggesting that shares are trading at a premium valuation, this is a point we will revisit later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to assess whether a business has manageable debt that can be repaid within a three-year period. This is calculated by dividing the total long-term debt by earnings. After performing this calculation for AutoZone, I found that the company has 3,39 years of earnings in debt, which is slightly above the three-year threshold. One reason for this is that AutoZone has strategically used cheap debt to repurchase shares. It is worth noting that AutoZone has not exceeded four years of earnings in debt over the past 20 years. While the current level of debt is above the preferred three-year threshold, it is not a significant concern and will not deter me from investing in the company.
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Risks
Competition poses a significant risk for AutoZone due to the highly competitive nature of the automotive parts and accessories industry, which includes a wide variety of players. AutoZone faces competition not only from national and regional auto parts chains but also from independently owned stores, online marketplaces, wholesale distributors, repair shops, car dealerships, and even non-specialist retailers such as discount stores, hardware stores, and supermarkets. This broad array of competitors creates intense pressure on pricing, service quality, and customer retention. Many competitors have strengths that can challenge AutoZone’s market position. Larger competitors may have greater financial resources, enabling them to invest heavily in expanding operations, adopting advanced technologies, and running impactful marketing campaigns. Online and multi-channel retailers often operate with lower overhead costs and prioritize delivery services, offering faster shipping times and free or low-cost delivery options, which appeal to customers seeking convenience and value. AutoZone’s strategy emphasizes superior customer service, including knowledgeable staff, prompt delivery for commercial customers, and a strong in-stock inventory. However, this customer-focused approach contributes to a higher cost structure compared to some competitors. Price-sensitive customers may be drawn to competitors offering lower prices, particularly in an environment where cost savings are a top priority.
Macroeconomic factors pose a significant risk to AutoZone’s business because consumer behavior in the automotive parts industry is closely linked to economic conditions. During economic downturns, factors such as inflation, high interest rates, and elevated levels of consumer debt can lead to reduced discretionary spending. Consumers under financial pressure may delay vehicle maintenance and repairs, directly impacting AutoZone’s sales, particularly in the DIY segment. In fiscal year 2024, AutoZone’s domestic DIY sales were negatively affected by weak consumer confidence and economic headwinds. Discretionary sales, which account for approximately 15-18% of AutoZone’s revenue mix, experienced significant year-over-year declines. Inflationary pressures further weighed on discretionary spending, as consumers prioritized essential items over non-essential purchases. This trend has persisted for over a year and is unlikely to ease until economic conditions improve and consumer sentiment stabilizes. Even during economic expansions, AutoZone faces risks. In favorable conditions, DIY customers may choose to have professionals maintain their vehicles instead of performing the work themselves, or they may purchase new vehicles, reducing demand for aftermarket parts. This shift can dampen AutoZone’s core business in both DIY and commercial segments. These dynamics highlight the broader vulnerability of AutoZone’s business to external macroeconomic factors.
The transition to electric vehicles (EVs) represents a potential long-term risk for AutoZone due to the fundamental differences between EVs and traditional internal combustion engine (ICE) vehicles. EVs have fewer moving parts and require less ongoing maintenance, which could reduce demand for many of the automotive parts that constitute AutoZone's core business. For example, components like oil filters, spark plugs, and timing belts—essential for ICE vehicles—are not required for EVs. This shift could lead to decreased sales for AutoZone as the vehicle market evolves. While the adoption of EVs in the United States is occurring more gradually than in Europe, the trend is clear. EV sales have grown significantly, from 65,000 units in 2017 to over 1.4 million in 2023. Additionally, consumer interest in EVs is increasing, with 44% of Americans indicating they are somewhat or very likely to consider an EV for their next vehicle. As EV adoption accelerates, driven by consumer preferences or regulatory incentives, the prevalence of vehicles requiring less frequent maintenance could impact AutoZone's long-term business prospects. The uncertainty surrounding this transition adds to the risk. AutoZone must navigate the shift while continuing to serve the existing ICE vehicle market, which will likely dominate for years to come. Accurately predicting and adapting to the maintenance needs of EVs presents challenges. The company will need to invest in understanding and stocking new types of parts and tools specific to EVs, as well as retraining employees to address evolving customer needs.
Reasons to invest
International expansion is a compelling reason to consider investing in AutoZone, given its strong performance in foreign markets and significant growth potential. Currently, 13% of AutoZone's total store base is located outside the United States, with operations in Mexico and Brazil demonstrating consistent and robust growth. Management has outlined plans to accelerate the pace of international store openings, targeting approximately 200 new stores annually by 2028. With just over 900 stores internationally, the company sees substantial opportunities to expand its footprint, particularly in Mexico, where management now believes it can operate over 1.500 stores. AutoZone's international operations have delivered exceptional performance, with same-store sales increasing 9,9%, continuing a multi-year trend of strong growth. The business in Mexico has doubled in size over the past three years, and management is optimistic about replicating this success in Brazil as the market matures and scales. These international markets also offer attractive operating margins. Mexico is already delivering strong profitability, and Brazil is expected to follow a similar trajectory as it grows. AutoZone’s ability to apply its proven U.S. strategies - such as a strong focus on commercial capabilities - has been key to its success abroad. Customers in Mexico and Brazil have responded positively to AutoZone’s product and service offerings, further validating the company’s international expansion strategy.
Opening new stores in the United States, particularly hubs and mega-hubs, is a compelling reason to invest in AutoZone. These strategic expansions are driving growth and strengthening the company’s competitive position. AutoZone has committed to one of its largest domestic growth initiatives, targeting approximately 300 new store openings annually. This includes a significant focus on hubs and mega-hubs, with the company planning to operate over 10.000 stores in the U.S. and expand to approximately 285 mega-hubs and 300 hubs. Hubs and mega-hubs are particularly valuable because they carry an extensive inventory. These large facilities not only generate higher sales than regular stores but also serve as regional fulfillment centers, improving parts availability and delivery times for surrounding AutoZone locations. By placing inventory closer to customers, AutoZone is enhancing service levels, which boosts both DIY and commercial sales. The company has already opened 109 mega-hubs and has more than 70 additional locations in the pipeline, many of which are currently under construction. By continuing to invest in expanding its network and deploying inventory assets closer to customers, AutoZone is well-positioned to capture greater market share, improve operating efficiencies, and enhance profitability.
The growth potential of AutoZone's Commercial (DIFM) segment is a key reason to consider investing in the company. This segment, which caters to repair shops, service centers, and other professional customers, represents a significant and underpenetrated opportunity for AutoZone. With less than 5% of the estimated $100 billion U.S. commercial automotive market, AutoZone has substantial room for growth. In fiscal year 2024, commercial sales reached $4,9 billion, up 6,2% year-over-year despite a challenging macroeconomic environment. Management has identified aggressive growth in this segment as a top priority for fiscal year 2025. The company has been focused on several initiatives to drive commercial sales, including leveraging the strength of the Duralast brand, ensuring competitive pricing, and enhancing customer service. AutoZone’s ability to consistently win new business and grow its share of wallet with existing customers highlights the effectiveness of these strategies. The nationwide growth in commercial sales, with minimal regional variation, underscores the scalability of the company’s approach. Management remains optimistic about the future, citing significant opportunities for market share gains and a comprehensive plan to continue outpacing the industry’s growth.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 122,53, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 15%. (EPS has grown by a CAGR of 15,30% in the past decade). Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on AutoZone's historically higher price-to-earnings (P/E) ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $3.418,29 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy AutoZone at a price of $1.709,15 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.002, and capital expenditures were 1.092. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures designated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 764 in our calculations. The tax provision was 675. We have 16,926 outstanding shares. Hence, the calculation will be as follows: (3.002 – 764 + 675) / 16,926 x 10 = $1.721,02 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With AutoZone's free cash flow per share at $113,06 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $1.784,75.
Conclusion
I find AutoZone to be an intriguing company with excellent management. AutoZone has consistently achieved a high ROIC, and management has emphasized the importance of maintaining strong returns on invested capital, which I highly value. Free cash flow declined in 2024 due to elevated capital expenditures, which are expected to continue impacting free cash flow in 2025. However, these investments should benefit the company in the long term by supporting growth initiatives. Competition poses a risk for AutoZone, as the automotive parts industry is highly competitive, with rivals ranging from online retailers to large chains and local stores. Many competitors have advantages such as lower costs, faster delivery, or greater financial resources, which could pressure AutoZone’s market position. Macroeconomic factors also present risks, as economic downturns may lead consumers to defer vehicle maintenance and discretionary purchases, directly impacting sales, particularly in the DIY segment. Even during economic expansions, demand may shift as customers opt for professional services or purchase new vehicles, underscoring AutoZone’s vulnerability to changing economic conditions and consumer behavior. The transition to electric vehicles (EVs) is another risk for AutoZone. EVs require fewer parts and less maintenance than traditional internal combustion engine vehicles, potentially reducing demand for many of AutoZone’s core products as the vehicle market evolves. On the other hand, international expansion is a compelling reason to invest in AutoZone. The company has demonstrated strong growth in Mexico and Brazil, with same-store sales consistently increasing. Markets like Mexico have doubled in size over the past three years, showcasing the potential for further growth. Additionally, the opening of new U.S. stores, particularly hubs and mega-hubs, is a strong growth driver. These facilities enhance inventory availability, improve delivery speeds, and boost service levels, driving growth in both DIY and commercial sales. AutoZone's Commercial (DIFM) segment is another compelling reason to invest, as it represents a significant growth opportunity. With less than 5% market share in the $100 billion U.S. commercial automotive market, AutoZone has substantial room to expand. Consistent sales growth, effective strategies such as leveraging the Duralast brand, and management’s focus on increasing market share further strengthen this segment’s potential. All things considered, I like AutoZone, but I will need a margin of safety due to some uncertainty regarding the transition to electric vehicles. Therefore, I will only buy shares below $1.800, which will provide a significant discount to intrinsic value based on all three valuation calculations.
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