AutoZone Deep Dive

Welcome to the 87th Pari Passu Newsletter.

Last week, we learned about the amazing story of Eddie Lampert, his fund ESL Investments, the engineered takeover of Kmart, and the merger with Sears. Since everyone knew Lampert for the Kmart / Sears saga, many of you were surprised to learn that the best investment of Eddie’s career is actually AutoZone, the topic of today’s edition.

Founded in Forrest City, Arkansas in 1979, AutoZone is the largest retailer of aftermarket auto parts and accessories in the United States. Since its founding, the company has expanded to 6,300 stores in the US and 840 across Mexico and Brazil. AutoZone offers a wide range of products for a number of vehicles including sedans, SUVs, vans, and light trucks. 

With a market cap of over $49bn, AutoZone is one of the largest consumer stocks in the US and has seen sustained success and rapid growth since its IPO in 1991. Since 2010, the company’s stock price has jumped 1,670%, outpacing the S&P by over 1,100 points. AutoZone’s strategy of consistent capital expenditures and new store openings has resulted in 85% of the US population living within 10 miles of an AutoZone store. [1]

Let’s explore how AutoZone has separated itself from other competitors in the auto parts industry by impressively utilizing capital and perfecting its business model. 

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Section 1: History & Company Overview 

Founding & IPO 

AutoZone’s story starts in Forrest City, Arkansas in 1979. Entrepreneur J.R. “Pitt” Hyde III noticed there was a gap in the automotive parts industry. There weren’t any stores particularly focused on the do-it-yourself market. His vision was a one-stop shop allowing customers to find, purchase, and install auto parts themselves. More importantly, Hyde realized a shop of this nature could cater to both the individual consumer and repair shops. [2] 

• AutoZone originally started as a division of Malone & Hyde, a wholesale grocer, and was just one of the many divisions operating under the Malone & Hyde brand.  

• AutoZone was known as AutoShack until 1987. The name change occurred due to a lawsuit filed by RadioShack regarding infringement of RadioShack’s trademark. 

• In 1981, AutoZone unveiled its first piece of innovation: Express Parts. Express Parts, also known as VDP, was introduced to provide customers with hard to find parts through wholesalers. 

The 1980s were a time of massive growth, innovation, and change for AutoZone. By 1984, AutoZone was the first auto parts retailer to have a quality control program. Even more impressive, AutoZone had expanded to 194 stores in 13 states compared to 73 stores in 7 states just 3 years earlier. 1985 saw the coinage of AutoZone’s signature phrase wittdtjr – what it takes to do the job right. [7] 

• Hyde sold a majority of AutoZone's parent company, Malone & Hyde, to KKR in 1984 for $500mm, which also marked KKR’s first purchase of a public company. This came to be a pivotal move in the history of AutoZone as it provided access to capital and superior management for rapid expansion. 

• By 1987, AutoZone had become so profitable that Hyde and KKR, in order to focus on growing AutoZone, sold off the other divisions of Malone & Hyde to Fleming companies for $600mm. [8] 

• The total number of stores by the end of 1987 was 459 across 16 states in the southern United States, a 137% increase from just three years prior.  

One of the defining moments in AutoZone’s history came with the creation of the Duralast brand in 1988. Duralast, which started as a line of starters and alternators, is AutoZone’s brand of auto parts offered at an affordable price. This proved to be a massive success for AutoZone, with $500mm in sales by the end of 1989. 

In April of 1991, AutoZone was listed publicly on the New York Stock Exchange as AZO, trading at an opening price of $27.50 per share. KKR held on to 68% of shares, AutoZone managers received 16%, former managers received 6%, and the final 10% was left for other investors. [11] 

Post-IPO Expansion 

By 1995 AutoZone had hit the 1,000 store mark and was looking for as many ways to expand as possible. The mid to late 90s saw a number of innovations and advancements that solidified AutoZone as a national player in the auto parts market.  

• In 1995 AutoZone released the Duralast and Duralast Gold battery series that same year, which would go on to become the highest selling battery automotive battery in the US.  

• In 1996 AutoZone acquired Alldata Corp., a developer of software that offers diagnosis and repair information regarding various automotive problems for $56.8mm.  

• The 1998 acquisition of two automotive parts chains, Auto Palace and Chief Auto Parts Inc., was coupled with the purchase of 100 stores from Pep-Boys to introduce a total of 800 new AutoZone stores.  

• AutoZone implemented its share buyback program in 1998, an effort that has seen AutoZone's total share count fall by around 89%.  

• AutoZone closed out the 90s by opening its first international store in Mexico and appearing on the Fortune 500. [12] 

The early 2000s were a time of significant change for AutoZone’s focus. The rapid expansion in 1998 led to a debt burden that damaged AutoZone’s profit. This, in tandem with the closure of 35 stores in 2001 due to underperformance, led CEO Steve Odland to raise the performance standards for the remaining 3000 stores, looking to secure investors a 15% annual return. [13] 

• These initiatives also introduced AutoZone’s most famous slogan – Get in the Zone: AutoZone.  

• Another part of this newfound focus on efficiency was the creation of a network of hub, feeder, and satellite stores that reduced inventory investment and increased the amount of product carried or supplied by individual AutoZone stores. 

By 2008, AutoZone had opened up its 4,000th store, and had expanded to its 5,000th store in 49 states just 4 years later in 2012. AutoZone closed 2012 by purchasing AutoAnything.com, an e-commerce leader in aftermarket auto parts to strengthen AutoZone’s internet presence. Thanks to the nature of the auto parts industry, the Covid-19 pandemic didn’t cause too much of a hit to AutoZone’s business, allowing for significant revenue and profit growth across 2020 and 2021. With the promotion of Philip Daniele to CEO in January of 2024, the biggest question facing AutoZone is how it can further solidify its position as the largest retailer of aftermarket auto parts. [14] 

Section 2: Overview  

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