"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."
The above is a famous quote from Warren Buffett, who has both literally and figuratively written the book on finding and investing in companies with sustainable competitive advantages and wide economic moats to protect their profit margins. That means long-term track records and proven durability in posting returns on invested capital that exceed the costs of capital.
I'm not arguing that AutoZone
I'm just not convinced AutoZone will be able to continue posting market- and industry-leading returns. For starters, its track record prior to 2000 is sketchy, with frequent negative free cash flow due in part to uneven operating cash flow generation. Management's brilliance since then is undeniable, but retailing is a narrow-moat business, and I surmise that auto-parts retailing is one of the tougher spaces in the industry.
I mean, parts is parts, right? At least, that's what a past commercial speculated about the auto-parts industry. With so many choices, from the myriad of do-it-yourself retailers to the thousands of do-it-for-me auto mechanics, how does a firm differentiate itself and ensure above-average profitability? I don't think it does, at least not for very long.
Dave details that AutoZone focuses on improving its stores and operations instead of aggressively opening new ones. That has led to industry-leading sales per square foot, but competitors are always on its trail, opening new stores at a rapid clip and copying AutoZone's sales and store strategies. It's not a hard thing to do in retailing.
So what will the competitive landscape look like five, or even 10 years down the road? Will too many stores exist as at least four major players look to grow their way to market domination? Will AutoZone be able to grow profitability at existing stores even though top-line and same-store sales are minuscule?
I'd be willing to wager that the unappealing economics of the auto-parts industry will eventually get the best of AutoZone, even with a brilliant management team. Southwest Airlines
Closer to home, for proof that anything having to do with autos is inherently low-margin and ultra-competitive, check out how the Big Three automakers -- Ford
AutoZone is an Inside Value pick.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.