When it comes to exciting high-growth stocks that are innovative and interesting, AutoZone (NYSE:AZO) is typically left off the list. That's fair; an auto parts retailer selling spark plugs, batteries, and windshield wipers is about as unsexy as it gets in the stock market. However, AutoZone has trounced the S&P 500's return over the past decade.
Not only did AutoZone's gains dominate the S&P 500 over that time span, it also offered savvy investors a safe haven during the Great Recession. As new vehicle purchases were often delayed during the recession, more consumers relied on do-it-yourself projects to keep their older cars running, and AutoZone reaped the rewards.
That said, let's take a look at a couple of factors that could limit AutoZone's potential to continue trouncing the market's returns.
A few key trends
As an auto parts retailer, AutoZone thrives when older vehicles dominate the road, and when Americans are driving more miles than ever, increasing the need for its products. Historically, AutoZone's revenue has risen as the number of miles traveled on all roads in the U.S. has moved higher. As you can see in the graph below, that trend has hit a speed bump in recent years. That trend could limit AutoZone's ability to generate strong year-over-year revenue gains.
Here's a snippet from a study by the Frontier Group:
Americans drive fewer total miles today than we did nine years ago, and fewer per person than we did at the end of Bill Clinton's first term. The unique combination of conditions that fueled the Driving Boom -- from cheap gas prices to the rapid expansion of the workforce during the Baby Boom generation -- no longer exists. Meanwhile, a new generation -- the Millennials -- sees a new American Dream that is less dependent on driving.
To focus on that last point, millennials are driving a new trend of urbanization. More and more young people are living in large cities with cheap and easy access to public transportation. Also, many can work remotely with little need for daily driving -- myself included. A growing proportion of those who do commute are using bicycles rather than cars.
As the baby boomer generation continues to drive less in older age, and as millennials continue to flock to big cities, it will be important for AutoZone investors to watch the trend in total miles driven in the U.S. and see if that drop begins to hinder AutoZone's sales.
Another speed bump
As many investors know, new vehicle sales have been thriving in the U.S since the Great Recession, and that poses a couple of problems for AutoZone.
As newer vehicles continue to flood the roads, there are a few things for AutoZone investors to consider. One is pretty clear: newer vehicles need fewer auto parts for repairs, causing a potential slowdown in AutoZone's revenue.
Second, as sales of new vehicles continue to rise, older vehicles are scrapped at a higher rate. Because AutoZone sells more products to consumers with older vehicles, having the oldest of the bunch scrapped in favor of brand new vehicles isn't a positive trend for AutoZone's business.
Furthermore, as each new production vehicle rolls off the line, it's more complex than the vehicle before it. More and more vehicles are stuffed with high-end electronics, technology, and safety features. This makes repairs more difficult for the do-it-yourself consumer -- the consumer driving revenue and profit at AutoZone.
Don't panic yet
The recent trends of rising new vehicle sales and fewer miles being driven are important concerns for auto parts retailers and their investors. However, AutoZone still has a lot going for it. The company is the largest auto parts retailer in the U.S., so it can leverage its scale with its suppliers for a cost advantage over the competition.
Also, as cars continue to become more complex, it opens the door for AutoZone to expand more into commercial business, or do-it-for-me consumers, rather than mostly selling to do-it-yourself consumers.
Ultimately, AutoZone has set itself apart from the competition, and is a leader in the auto parts retail industry. That isn't going to change in the near-term, and AutoZone will still have a strong business going forward -- even if changing trends prevent the company from trouncing the S&P 500's gains.