In Depth Review on Autozone Including 10 Recent Sale Comps

Overview

AutoZone is the nation’s leading retailer and a leading distributor of automotive replacement parts and accessories with more than 4,160 stores in the US, Mexico and Puerto Rico. Since opening its first store in Forrest City, Arkansas on July 4, 1979, the company has joined the New York Stock Exchange (NYSE: AZO) and earned a spot in the Fortune 500. The S&P Rating is BBB Stable.

AutoZone has grown quickly through a series of acquisitions over the past several years but now is focused on internal growth and development. Among the factors AutoZone considers when opening new stores — at a rate of 150 to 200 per year — is how many cars in an area are OKVs or “our kind of vehicle,” that is, cars older than seven years and no longer under their manufacturers’ warranty. AutoZone is also growing in Mexico, where cars are even older — and in need of more repairs — than in the US.

Other comments by Westwood:

• Auto Zone is the number one auto parts store in the nation. The company has been in existence since 1979.  These leases are backed by a strong corporate guarantee.
  
• Buildings backed by an Auto Zone lease are more easily funded because of their S&P BBB Stable rating.
  
• These stores are rectangular boxes on a main street with good traffic counts.  They can be found in all areas, but mostly Blue Collar neighborhoods. If the Auto Zone decides not to renew the lease, the buildings are easily converted to whatever the new tenant desires at less costs than a specialized building.
• The leases are typically 20 years and have 4 (5) year option periods.  There are rent increases in the options. The landlord has minimal responsibility.
• Auto Zones range in price from $1.2 to 2.5 million depending on the year built and time left on lease.
• The current market cap rate range is 6.50-7.25% on new buildings.
• The buildings are generally 7,000 sq. ft. with a lot size of ¾ of an acre.
• They pay rents between $15-$18 a sq. ft. This means that the price of the building is not over inflated and if they vacate the new tenant will pay close to what they are paying.

Recent Auto Zone Comps

#1- Close of Escrow: 12/11/2007

2933 Emanuel Church Road, Columbia, SC

6,800 SF Free Standing Auto Zone

Year Built: 2007

Sales Price: $1,335,000

Cap Rate: 7%

Price/SF: $196.32

#2- Close of Escrow: 6/6/2008

West Main Street and Kingsbury Boulevard, Fredericktown, MO

6,768 SF Free Standing Auto Zone

Year Built: 2008

Sales Price: $1,097,000

Cap Rate: 7%

Price/SF: $162.00

#3- Close of Escrow: 5/19/2008

1126 East Caro Road, Caro, MI

6,864 SF Free Standing Auto Zone

Year Built: 2008

Sales Price: $1,383,529

Cap Rate: 7%

Price/SF: $202.00

#4- Close of Escrow: 3/25/2008

14062 Northwest Boulevard, Corpus Christi, TX

7,370 SF Free Standing Auto Zone

Year Built: 2007

Sales Price: $1,663,615

Cap Rate: 6.5%

Price/SF: $226.00

#5- Close of Escrow: 3/25/2008

2149 Arline Road, Corpus Christi, TX

6,786 SF Free Standing Auto Zone

Year Built: 2007

Sales Price: $1,500,000

Cap Rate: 6.5%

Price/SF: $221.00

#6- Close of Escrow: In Escrow

602 Highway 50 East, Union, MO

7,370 SF Free Standing Auto Zone

Year Built: 2007

Sales Price: $1,375,000

Cap Rate: 6.5%

Price/SF: $187.00

#7- Close of Escrow: In Escrow

525 West Route 6, Minooka, IL

6,875 SF Free Standing Auto Zone

Year Built: 2007

Sales Price: $2,215,000

Cap Rate: 6.5%

Price/SF: $322.00

#8- Close of Escrow: Aug 2008

17248 W Grand Ave, Gurnee, Illinois

7,370 SF Free Standing Auto Zone

Year Built: 2007

Sales Price: $ 2,575,000

Cap Rate: 6.7%

Price/SF: $349.00

#9- Close of Escrow: March 2008
3702 Rte 9 S, Rio Grande, NJ

5,840 SF Free Standing Auto Zone

Year Built: 1951

Sales Price: $ 2,300,000

Cap Rate: N/A

Price/SF: $394.00

#10- Close of Escrow: January 2008
5702 S Dale Mabry Hwy

6,825 SF Free Standing Auto Zone

Year Built: 2006

Sales Price: $2,600,000

Cap Rate: 6.3%

Price/SF: $381.00

Average Cap Rate 6.66

History of AutoZone

Joseph “Pitt” Hyde took over the family grocery wholesale business, Malone & Hyde (established 1907) in 1968. He expanded into specialty retailing, opening drugstores, sporting goods stores, and supermarkets, but his fortunes began to race on Independence Day 1979, when he opened his first Auto Shack auto parts store in Forrest City, Arkansas.

Using retailing behemoth Wal-Mart as a model, Hyde concentrated on smaller markets in the South and Southeast, emphasizing everyday low prices and centralized distribution operations. He stressed customer service to provide his do-it-yourself customers with expert advice on choosing parts. While a number of retailers have tried to copy Wal-Mart’s successful model, Hyde had an inside track: Before starting Auto Shack he served on Wal-Mart’s board for seven years.

Auto Shack had expanded into seven states by 1980, and by 1983 it had 129 stores in 10 states. The next year Malone & Hyde’s senior management, with investment firm Kohlberg Kravis Roberts (KKR), took the company private in an LBO. Auto Shack continued to expand, reaching 192 stores in 1984.

A year later Auto Shack introduced its Express Parts Service, the first service in the industry to offer a toll-free number and overnight delivery of parts. The following year it introduced another first: a limited lifetime warranty on its merchandise. Also in 1986 Auto Shack introduced its own Duralast line of auto products.

The company was spun off to Malone & Hyde’s shareholders in 1987, and Malone & Hyde’s other operations were sold. Auto Shack brought its electronic parts catalog online that year. The company changed its name to AutoZone in 1987, in part to settle a lawsuit with RadioShack. By this time it had 390 stores in 15 states.

The company went public in 1991. By the end of that year, it had nearly 600 stores and five distribution centers. The company topped $1 billion in sales in 1992. The next year it opened new distribution centers in Illinois and Tennessee and closed its Memphis operation.

AutoZone began selling to commercial customers such as service stations and repair shops in 1996. It also acquired auto diagnostic software company ALLDATA. Hyde stepped down as CEO that year and as chairman in 1997 and was replaced by COO Johnston (John) Adams.

The company made several key purchases in 1998. It acquired Chief Auto Parts for $280 million, adding 560 stores (most in California) that were converted to AutoZones in 1999. It also purchased Adap and its 112 Auto Palace stores in the Northeast, heavy-duty truck parts distributor TruckPro, and (from Pep Boys) 100 Express stores. Also in 1998 AutoZone opened its first store in Mexico (Nuevo Laredo).

Hyde sold much of his stake by early 1999. Late that year AutoZone expanded its board of directors to 10 members, making room for increasingly active longtime shareholder Edward Lampert.

In January 2001 Steve Odland, formerly COO at supermarket retailer Ahold USA, succeeded Adams as chairman and CEO. In December 2001 AutoZone sold its TruckPro subsidiary to an investor group led by Paratus Capital Management of Boston and New York.

Odland resigned in 2005 to become CEO of Office Depot. He was replaced by Bill Rhodes, AutoZone’s former EVP of Store Operations and Commercial.

	2007	2006	2005
Revenue ($ mil.)	6,169.8	5,948.4	5,710.9
Gross Profit ($ mil.)	3,064.2	2,938.5	2,792.5
Operating Income ($ mil.)	1,055.3	1,009.9	975.7

	Advance Auto Parts	O’Reilly Automotive	Pep Boys
Annual Sales ($ mil.)	4,844.4	2,522.3	2,138.1
Employees	44,065	–	18,564
Market Cap ($ mil.)	3,969.1	3,335.1	485.2

Companies listed are Top Competitors.

Key Numbers	AutoZone	Advance Auto Parts	O’Reilly Automotive	Pep Boys	Industry Median	Market Median2
Annual Sales ($ mil.)	6,169.8	4,844.4	2,522.3	2,138.1
Employees	55,000	44,065	–	18,564
Market Cap ($ mil.)	8,653.8	3,969.1	3,335.1	485.2
Gross Profit Margin	50.00%	48.00%	44.60%	22.60%	16.70%	52.60%
Pre-Tax Profit Margin	15.30%	8.00%	11.90%	(2.80%)	0.10%	5.30%

Industry Overview

The wholesale and retail auto parts industry includes approximately 45,000 companies with combined annual revenue of $135 billion. Top companies include Genuine Parts, AutoZone, Advance Auto Parts, CSK Auto, and Pep Boys, all with annual sales over $1 billion. About 25 wholesalers and 40 retailers each have annual sales over $100 million. Many large firms operate both wholesale distribution centers and retail stores.

The industry is concentrated at the top: the 50 largest wholesalers hold over 50 percent of the wholesale segment. The retail segment is a bit less concentrated, with the top 50 companies holding about 40 percent of the segment. The used parts segment is highly fragmented.

Competitive Landscape

Demand for aftermarket parts is driven by the age and mileage of vehicles, generally increasing when fewer new cars are sold. The profitability of individual companies depends largely on inventory management and marketing. Small companies can compete effectively by carrying specialized parts or providing extra services such as machining or fast delivery. Average annual revenue per employee is about $700,000 for wholesalers, $100,000 for small retailers, and $175,000 for large retailers.

Products, Operations & Technology

The industry sells parts and other products used to maintain and repair cars and trucks in the so-called auto “aftermarket.” Products are sold both to consumers who work on their own cars, the “do-it-yourselfers” (DIY); and to commercial installers like auto repair shops, gas stations, fleet operators, and car dealer service departments (do-it-for-me, DIFM market). The DIY segment accounts for about 30 percent of the market, the DIFM segment 70 percent.

Products include “hard parts” like brakes, mufflers, batteries, starters, alternator, and pumps; maintenance items like oil, oil filters, lubricants, additives, spark plugs, fuel injectors, lights, wipers, paints, waxes, and hoses; tools like wrenches and diagnostic equipment; and accessories like trim, hub caps, and audio systems.

Most wholesalers and retailers operate a single location, but economies of scale in purchasing have encouraged the growth of large wholesale and retail networks. AutoZone, for example, operates 3,200 stores; Genuine Parts has 58 distribution centers and 900 retail stores. A typical distributor warehouse handles about $15 million in annual sales; a typical retail store $1 to $2 million.

In general, wholesalers sell to retail operators (stores and repair shops), who in turn serve car owners. But the similarity between wholesale and retail operations has drawn many wholesalers into the retail business and vice versa. Big retailers like AutoZone, Advance Auto Parts, Pep Boys, and O’Reilly Automotive operate their own distribution network. Some retailers sell both to consumers and local repair shops; some retailers operate their own repair department.

Sales & Marketing

Sales and marketing initiatives center on the type of customer a company is trying to serve. Wholesalers rely heavily on a sales force, advertising in trade magazines, and on trade shows. Retailers use typical retail advertising such as newspapers and Yellow Pages. Large retailers also advertise on TV and radio.

Some wholesalers and retailers belong to Program Distribution Organizations (“program groups”), similar to franchise networks, that buy in bulk and provide marketing services for members. Among the largest are the National Automotive Parts Association (NAPA); Automotive Distribution Network; and CARQUEST.