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With inflation making headlines throughout 2022, consumers looked for areas in their budgets where savings could be realized. One such area was auto repairs, which saw an explosion in DIY during the pandemic and sustained this momentum throughout the past year. We see similar themes taking hold during 2023, making aftermarket auto parts retailer AutoZone (AZO), which has more exposure to the DIY market than its competitors O'Reilly Automotive (ORLY) and Advance Auto Parts (AAP), a solid Investment Idea for 2023.

• New and used auto prices are trending down from the elevated levels seen over the past year as supply chains normalize. However, new car prices are still setting records. According to Kelly Blue Book, the average new car sold during November reached nearly $49K. Meanwhile, in the used market, prices remain well above pre-pandemic levels. Used car retailer CarMax (KMX) reported average selling prices for used vehicles of over $28K in NovQ, a 1.9% jump yr/yr and a 37.8% leap compared to 2019.
• A physical presence is vital for an auto parts retailer, given the urgency surrounding vehicle breakdowns. A physical footprint also gives AZO a competitive advantage over e-commerce competitors like Amazon (AMZN) and eBay (EBAY), as it allows the company to offer hands-on services, such as help identifying correct parts.
  • AZO has commented that its growth over the past two years resulted from capturing share from the broader market instead of its close competitors, underscoring the demand for physical locations. On that note, AZO boasts the most extensive physical presence, boasting over 6,100 domestic locations, dwarfing ORLY's 5,700 and AAP's 4,300.
• AZO also noted in early December that it is growing its market share, likely at the expense of AAP, which continues to experience difficulties with its private label portfolio. Also, AZO's aggressive pricing investments from 2021 allowed it to remain highly competitive in a marketplace where price and convenience trump differentiating services.
• Although AZO tends to cater more to DIY clients, with just around 29% of its FY22 (Aug) revs stemming from commercial sales, it is seeing healthy progress regarding its commercial acceleration strategy. Part of AZO's success branches from its focus on carrying more products closer to its customers, an approach AAP has started emphasizing more. This success is expected to continue for at least the near term, with AZO expecting its commercial business to drive Q2 (Feb) sales growth.

Risks are still present for AZO this year. The stock already climbed around 20% in 2022, paving the way for increased profit-taking activity on minor weak points in each quarter. Vehicles are also becoming more complex, making it more challenging for individuals to conduct repairs themselves. Consumers may also opt to delay certain repairs that are not vital to whether their car runs as prices remain elevated.

However, although shares may have become overextended, the stock has shown excellent support around its 200-day moving average, so waiting for a pullback toward those levels would reduce risk. Also, AZO and its peers have repeatedly mentioned how the current fleet of vehicles on the road continues to age, leading to increased breakdowns. Therefore, even though cars are becoming more complex, this concern may not be a meaningful challenge for some time. Meanwhile, consumers can delay certain repairs, but as ORLY has noted, little demand in the aftermarket auto parts industry is genuinely discretionary as repairs eventually need attention.

Lastly, AZO trades at an attractive forward P/E of ~18x, a discount relative to ORLY at ~23x. As always, with these longer-term ideas, we recommend utilizing a 20-25% stop loss.