Stock Spotlight: AutoZone

Mick Dillon (00:14): We're investing in a company called AutoZone based in the US. And AutoZone sells spare parts for cars. About 92% of households in America own a car. For AutoZone, about two-thirds of the business is selling to DIY customers or retail customers, and it's a bit like Halfords in the UK, where you can go and buy your windscreen wipers or whatever you need. And one-third is just pure professional supply of parts into professional garages. (00:41): They have six and a half thousand stores, but they have 400 hubs, mega hubs, distribution centres all around the country and they can have over 110,000 stock units within those hubs. Because of the scale of their distribution network, they've got the parts in market and they can get them within day or next day into the stores. (01:05): AutoZone's the biggest supplier in the market. They have about 10% of the market, and it's a market that's growing low-single to mid-single digits per year. (01:13): Most jobs on cars require specialist tools. And normally, people make you buy the tool and the part. They don't do that. They let you borrow the tool to fix your car, so long as you bring it back in good shape. And so, in other words, you get a free tool to help you fix the car with a good quality part that's got a warranty. The customer outcome for both the garages and for retail is exceptional. (01:37): The return on capital is over 25%. We want to see this result in numbers that are meaningful. That's a really productive business, that one in $4 that come in in revenue goes to the shareholder. And by the way, the customers are getting a great outcome here as well. (01:53): If we look back over the last 10 years, they have reinvested enormously into their business to build out the infrastructure. But in the meantime, they've bought back 50, 5-0%, half of their share base has disappeared in the last 10 years as in, they've bought back shares, which means the free cash flow per share is going up because your share base is going down. So, for every time they do that, we see that more and more cash accrue to the ongoing shareholders, which is what we really want on a five and a 10-year view. (02:22): Today, the forward P/E on AutoZone is in about the 22, 23 range. It's very durable and predictable over long periods of time, with an advantage business model at a valuation that we felt drove double-digit five-year IRRs for our investors. So, it's a company that has really passed all of our tests and it's one that we're really happy to hold.