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Weak Consumer Spending Doesn’t Hold Back This Auto Stock
Posted by: Elliot Gue (IP Logged)
Date: July 20, 2012 10:16AM

The economic recovery is more than two years old, but U.S. gross do­mestic product (GDP) continues to limp along at a lackluster 2 per­cent annualized pace, unemployment remains at an elevated 8.2 percent and the housing market is at best scraping bottom.

Even worse, unemployment soars to nearly 15 percent if you factor in the millions of underemployed workers and those discouraged workers who gave up looking for a job. By most metrics, the recovery since mid-2009 is one of the weakest expansions in post-war economic history and tepid growth is likely to continue for the rest of the year.

Not surprisingly, U.S. consumers, along with their counterparts in Eu­rope and other developed markets, are saving more and spending less — bad news for most retailers. Howev­er, some consumer-focused compa­nies are actually benefiting from the new age of austerity.

The weak housing market has severely hit investment in new home construction. The sil­ver lining is that many consumers are instead remodeling and main­taining existing properties.

Foreclosed homes are typically in bad shape when they’re acquired at auction from banks; new owners must upgrade and repair these prop­erties to make them suitable for resale. Improvements and remodeling now account for more than 42 percent of all investment in retail hous­ing, up from about 21 percent at the height of the housing boom.

The same principle is at work with automobiles. The U.S. new car mar­ket currently stands at 13.7 million annualized vehicles, down from an average of about 18 million before the Great Recession of 2007 to 2009. Instead of splurging on a new car every few years, consumers are keep­ing their existing vehicles longer, pushing up the average age of U.S. cars. The need to repair and maintain older vehicles is powering demand for retailers of automobile parts and tools.

One stock that stands to gain from cost-conscious consum­er spending is AutoZone (AZO).

AutoZone is the largest automobile parts and accesso­ries retailer in the U.S., with more than 4,600 domestic store locations and 300 in Mexico.

The company sells products in three main categories: failure, maintenance and discretionary. Failure items include major mechanical parts in auto­mobiles and trucks that wear out over time such as air conditioning compres­sors, fuel pumps, fuses and lights.

Maintenance items include non-discretionary products that must be replaced over time such as oil, wind­screen washing fluid and transmission fluid, while discretionary items include waxes, floor mats and air fresheners.

The first two categories of prod­ucts are direct beneficiaries of the current tendency of consumers to keep their cars longer. Cars that are older than seven years typically have more than 85,000 miles on the odometer and are no longer covered by warranty require more frequent and ex­pensive repairs.

The number of cars in this age group has exploded since 2007, as sales of new cars have fallen sharply and the average age of U.S. cars reaches record levels (for more on the U.S. car market, see Perfect Storm for Palladium Could Bode Well for Stillwater).

AutoZone has traditionally served a primarily DIY customer base. Sales to that group continue to perform well, but the do-it-for-me (DIFM) market that consists of professional mechanics has stronger growth prospects.

Over the past 12 months, sales to DIFM customers totaled $1.2 billion, around 15 percent of the company’s total revenue base, and they’re grow­ing at a more than 21 percent pace year over year, compared to a total revenue growth rate of only 8 percent.

One driver of that growth is Au­toZone’s roll-out of its commercial sales program across its retail loca­tions, allowing professional customers to buy parts on credit, with expanded online ordering and delivery.

Management believes that AutoZone only has 2 percent market share in auto parts sales to professional buyers, suggesting there is plenty of upside.

AutoZone shares were hit in late June after competitor O’Reilly Auto Parts (ORLY) lowered its quarterly comparable store sales guid­ance, citing sales below expectations in June.

However, this softening in sales partly stems from the extraordinarily warm winter of 2011 to 2012, which prompted customers to buy parts ear­lier in the year. For more on AutoZone, see 2 Auto Repair Stocks Set to Race Ahead.


Stocks Discussed: AZO, ORLY,
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