Solid results from the likes of O’Reilly Automotive Inc (NASDAQ:ORLY), a retailer, as well as several wholesale auto parts suppliers, jumpstarted the stocks of previously floundering do-it-yourself stores. O’Reilly’s earnings per share rose to $1.38 from $1.14 in the prior-year period. Share repurchases supported the upturn. Same-store sales climbed only 0.6% year over year, though the outlook for mid-single-digit sales growth in the June quarter and for 2013 were greeted positively.
This forecast was likely the fuel that ignited strength in several industry compatriots. Typically tending toward countercyclicality, with parts sales increasing along with slowing auto sales, the sector might well now be poised to benefit from other catalysts. For one, new car sales in the U.S. were up substantially in early 2013.
These factors might well provide a boost to O’Reilly’s competitors/peers as well, and we will find out more when they report earnings within the next month or so.
Do-it-yourself auto parts concept leader AutoZone, Inc. (NYSE:AZO) struggled in its February period, posting a nearly 2% same-store sales decline. Similar to O’Reilly Automotive Inc (NASDAQ:ORLY), it is generating profit gains from new store openings, the buildout of its commercial program, and share repurchases.
As far as the economy and vehicle demand go, AutoZone has historically seen demand climb when the number of aged cars on the road is higher. A chart would show that AutoZone, Inc. (NYSE:AZO)’s same-store sales increases over the years have mirrored increases in unemployment and vice versa. The company’s best performances using this metric in recent years were achieved in 2010 and 2011.
The guidance given by O’Reilly Automotive Inc (NASDAQ:ORLY) may signal that a bounce back is in store for AutoZone. Regardless, AutoZone is positioned to see further upside from a better matching of its inventories to demand. AutoZone, Inc. (NYSE:AZO) remains a good stock to own for the long road ahead. For a more complete look at the company, see my blog published on Dec. 5, 2012.
Next, delving into Advance Auto Parts, Inc. (NYSE:AAP), several of the same issues are at work in terms of soft comps and a growing store base. Notably, Advance’s professional-related business comprises the largest proportion of sales among these retailers. It offers the service at 91% of locations, contributing about 35% of sales. Given the market potential for the business, Advance’s sales should stay aloft. However, the margins on that operation are narrow, restraining bottom-line gains.
Advance Auto Parts watched its per-store results recede in 2012. It experienced lower sales transactions and initiated promotional activity. After a likely tough first quarter, things may be looking up this year, in light of better market conditions on the way. Some of these profit gains are already priced into Advance Auto Parts, Inc. (NYSE:AAP)’s stock, but it remains a good holding for long-term investors.
Finally, shares of The Pep Boys – Manny, Moe & Jack (NYSE:PBY) rebounded about 10% in a week on the O’Reilly Automotive Inc (NASDAQ:ORLY) news. The sales outlook offered some encouragement, despite unfavorable operating characteristics at the company.
Not only did Pep Boys’ comps fall significantly in the fourth quarter, but its profitability is under pressure, as heightened labor costs and weak margins at new Service & Tire Centers are weighing on the bottom line. The company has plans to continue to add new such locations.
Based on the less profitable operating structure and the fact that The Pep Boys – Manny, Moe & Jack (NYSE:PBY) is likely losing market share, it is more of a risk than its competitors. Then again, management’s new customer-focused strategy, combined with lower interest costs thanks to debt restructuring, might well allow for a sizable earnings turnaround this year. In all, the shares lack appeal at this time. Over the long run, the company is aiming to gain steam through a value-priced, differentiated set of product offerings, and a customer centric service offering. Thus, there could be long-term upside, given a conducive industry environment.
The scoop
Sales for these auto parts retailers are apt to bounce back this year. Higher discretionary spending and stable gas prices would help. Should same-store sales continue to fall short of expectations, the sector might reduce its rate of expansion or enhance its commercial operations to an even greater extent. For now, though, expansion ought to remain key to performance. Stocks in the group are largely worth keeping for their potential. The first three (O’Reilly Automotive Inc (NASDAQ:ORLY), AutoZone, Inc. (NYSE:AZO), and Advance Auto Parts, Inc. (NYSE:AAP)) are also buoyed by share buybacks.
The article Auto Parts Retailers Are Revving it Up originally appeared on Fool.com and is written by Damon Churchwell.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
