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AutoZone zooms

What slowdown? More Americans are repairing their own vehicles, and that's driving growth at national car-parts purveyor AutoZone.

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By Telis Demos, writer-reporter
Last Updated: April 2, 2009: 2:56 PM ET

(Fortune Magazine) -- The first lunch-hour customers at the AutoZone store in Kenosha, Wis., are the type you'd expect: a group of buddies in starter jackets and DeWalt hats. They come in the store joking and chatting, and head straight back to the rows of neatly stacked gray boxes filled with things mysterious to the uninitiated (a DGC785 brake pad with nitrile rubber shim, for example).

Soon, though, a different type of customer comes around. A Jaguar pulls up in the parking lot - "Check that out," says Jeff Teel, an AutoZone regional manager who's visiting for the day. "You don't see that too often" - and the driver walks into the store to ask how to buy spark plugs. A few minutes later, a young yuppie-ish couple in Abercrombie & Fitch sweatpants park their Volkswagen Jetta in the lot and ask an AutoZoner to help them pop the hood and find the battery.

Welcome to the do-it-yourself economy, where customers of every demographic stripe are putting off the purchase of new cars and handling many auto repairs themselves. U.S. car sales are projected to be 9.3 million this year, according to Standard & Poor's Equity Research - nearly 7 million fewer than the natural replacement cycle. A study in March by auto consumer trends researcher R.L. Polk & Co. found that two-thirds of consumers said they were likely to keep their car longer than they would have otherwise.

One of the big beneficiaries of this new American car culture is AutoZone (AZO, Fortune 500), the 4,300-location chain that last year sold some $6.5 billion worth of brake pads, spark plugs, and other car parts. The company (along with Wal-Mart (WMT, Fortune 500) and McDonald's (MCD, Fortune 500)) is one of the country's few retailers with unambiguously positive results in gloomy times. AutoZone in 2008 cranked out a 5.7% gain in sales and a 7.7% rise in net income. Same-store sales, the key metric for retailers, surprised even the company when they rose 6% in the quarter that ended Feb. 14. The stock hit its 52-week high in mid-March, while the broader market was some 40% off its own peak.

Count AutoZone among the believers that Americans' spendthrift habits are finally a thing of the past. "I think there's been a mindset change," says CEO Bill Rhodes. "Clearly people are challenged and trying to find ways to save." Rhodes, reached by phone at company headquarters in Memphis, is hardly a Depression baby. At 44, he's one of the Fortune 500's youngest chiefs. "We're having new customers introduced to us," he says. "They may be people we're seeing who are tackling more complicated jobs, or people who've never gone into an AutoZone before." The company's own market research shows what it calls a "noticeable" rise in customers earning over $100,000 a year, though its bread and butter is still in the $50,000-a-year demographic.

The shift to a richer consumer for car parts has, in AutoZone's eyes, been a long time coming. It scrapped the old model of grungy hobbyist-oriented stores (the kind of place where guys in DeWalt hats might hang out) favored by its competitors. AutoZone stores today feel like places that would welcome suburban moms on a busy school day: They're colorful, brightly lit, and filled with superfriendly salespeople, known internally as AutoZoners, who use computers to print repair directions in simple language.

Even as AutoZone is winning new customers, it has managed to hold on to one of its longtime loyalists, value investor Eddie Lampert, who began amassing a large share of the company in 1998 and owns 40% today, a stake valued at about $3.7 billion. Lampert, who recently has had less success with his investments in Sears, Kmart and AutoNation, stuck with AutoZone during some lean years; same-store sales were essentially flat from 2002 to 2007. Why? Competitors like Advance Auto Parts upgraded service, adding their own computerized repair guides and other fare. Freely available credit meant buying a new car was just as easy as fixing an old one. But during those tough times AutoZone made some smart operational moves: It began asking suppliers to its private-label brand, Duralast, for deeper volume discounts. Management worked to keep inventory carrying costs low; as a result, AutoZone will throw off $650 million in cash this year, according to Morgan Stanley estimates.

CEO Rhodes points out that AutoZone's inventory doesn't go out of fashion, and most products don't have an expiration date. Still, the company tries to avoid overstocking. Most AutoZone stores carry only one of many less used parts and rely on larger "hub" stores to hold extra inventory, which they can ship to nearby AutoZones in a pinch. The company has recently begun to expand its hubs to carry more inventory and better serve commercial customers. As a result, gross margins took a small hit in the past quarter, but at 49.7% they are still the highest in the auto-parts retailing sector. Advance Auto Parts' margins are 46.2%.

AutoZone's gain is Detroit's loss, and the retailer could end up losing out as politicians scramble to save U.S. carmakers. One particularly ominous threat is a German import called "scrappage" - a new law that gives out cash in exchange for scrapping older cars. U.S. lawmakers are mulling a similar move to spark new car purchases.

AutoZone sees it as a disincentive to buy parts and, in the long run, more expensive for consumers. To combat such "cash for clunkers" bills, which have been introduced in the House and Senate this month, AutoZone is pushing so-called right-of-repair laws in state legislatures. The laws would ensure that carmakers continue to provide repair stores with computerized information to help decode a car's precise problem when the words check engine light up on its dashboard.

CEO Rhodes worries that as things for Detroit get worse and worse, carmakers will be less willing to pass off repair work to third parties. "Clearly, with the support given to original-equipment manufacturers," he says, "Congress should want to give the consumer something in return for that support." In today's DIY economy, that sounds like a concept both AutoZone regulars and Jaguar drivers could agree on. To top of page

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