AutoZone Pricing Spineometer: 4 of 5 Vertebrae

AutoZone, a multinational auto parts retailer, had a positive Q4 2023. Revenue rose 6.4% to $5.7 billion and earnings before interest and taxes rose 11% to $1.2 billion over the same period last year.

A review of AutoZone’s September 19^th earnings call and financial report provided insight regarding the importance of pricing on performance.

Phillip Daniele, CEO-Elect, clearly set price management expectations for investors in this industry and during this macroeconomic environment.  He stated, “Historically, as costs have increased, the industry has increased pricing commensurately to maintain margins. It is also notable that following periods of higher inflation, our industry historically has not reduced pricing to reflect lower cost and we believe we have entered one of those periods.”

This is aligned with the approach that standard industry best practices would suggest.

Phillip Daniele noted that inflation in his industry has fallen and is currently near the Federal Bank’s target rate, stating, “This quarter, we saw low-single-digit inflation, and as a result, our ticket average was up roughly 2%.”  Around this time last year, he reported price inflation in this industry as near 8%.

While the CEO-Elect has a good understanding of price management in general, and both he and Bill Rhodes, Chairman and CEO-retiring, stress the importance of execution, is AutoZone well situated to execute on the price management vision?

1. Based on revenue, industry standard metrics would suggest AutoZone to have 35 to 175 pricing professionals on staff.
2. Given operations in the United States, Mexico, and Brazil, we would expect to have various teams located in those countries to account for price variations across borders.
3. Given the retail data challenges in Mexico and Brazil compared to the data commercially available in the States, we might even expect the pricing teams in Mexico and Brazil to be disproportionately large.
4. Given their retail operations, we would not be surprised to find pricing professionals focused on price promotions.
5. Given the inordinately large number of SKUs (up to 110,000 per megahub), we would expect a somewhat robust pricing team focused on product pricing and routine price updates.
6. Given the focus on both consumers and commercial operations (DIY vs. DIFM), and the growth expectations in the business-to-business sales to commercial operators, we would again expect a pricing team focused on transactional pricing, including discount and rebate management.
7. Given the changing industry environment (increased focus on data and increased focus on commercial business), weather (impacting sales of needed undercarriage parts dependent on snowfall), and macroeconomic environment (changes in inflation and exchange rates), we would expect a pricing team to include business strategy.

Research into the investment by AutoZone in pricing yielded somewhat encouraging results.  The number of professionals identified as being focused on pricing was near the lower end of expectations. Their titles ranged from analyst and manager to director, but no clear vice president could be identified. Customer foci varied between the DIY segment with promotions and merchandising to the DIFM segment with commercial pricing.  Locales varied across the United States, Mexico, and Sao Paulo.

AutoZone may suffer some challenges in price management, however, with merchandising professionals having such a large role in pricing management. The two knowledge domains must work together, but it raises concerns.  (Compare this situation to the review of their industry cohort, Genuine Parts Company. Strategic Movements March 2023 | The Wiglaf Journal)

Given the importance and capability of pricing at AutoZone as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of October 2023.

AutoZone Pricing Spineometer: 4 out of 5 Vertebrae.

AZO (AutoZone Inc.) was relatively unchanged from 2,522 the day prior to their earnings call to 2553 one week later. FY 2023 revenue of $17.4 billion with a 20% operating margin and P/E ratio near 18.

For FY 2023, a 1% improvement in price would yield 5.0% improvement in operating profits holding all else constant at AutoZone.