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O'Reilly Looks Like a Solid Pick in Aftermarket Retail
Posted by: kcpl (IP Logged)
Date: June 19, 2014 11:20AM

As the tremors of the recession continue, consumers are scared to spend their hard earned money or take a new credit line. According to a survey done by Polk, the average age of vehicles on the U.S. roads is at a record high of 11.4 years, as people are not ready to buy new cars.

Also, a NDP report highlighted that 75% of the surveyed population would still use their old cars, which will further increase the average age of used cars in 2014. And this creates a good opportunity after market retailers such as O'Reilly Automotive (ORLY), Advance Auto Parts (AAP) and AutoZone (AZO).

A look at O'Reilly

O’Reilly has put in a solid performance over the past five years, which is better than its peers. In the fourth quarter, it had the leading comparable store sales growth in the industry at 5.4%, which was even more than last year’s growth of 4.2%. On the contrary, its rivals Advance Auto and AutoZone reported a marginal increase of 0.1% and 0.9% in comps, respectively, in their previous quarters.

O’Reilly reported an annual growth in its revenue of 7.1% on an year-over-year basis, which was supported by a strong comps growth of 4.3%. It had also opened 190 new stores during the fiscal year. As a result of robust comps and top-line growth, its adjusted earnings per share for the full year increased 27%.

Strategies to push growth

The company has adopted a dual market strategy, in which it would serve both wholesale and retail automotive parts businesses. This has proved to be a great success for O’Reilly, which is clearly evident from its results.

This is one of the few businesses which has benefited from the extreme cold weather and along with an increase in average ticket, boosted its comps growth in the fourth quarter. In addition, the miles driven by vehicles during October and November increased, which will further increase the wear and tear in parts. It is expected that the miles driven will continue to increase at the same pace in the future as well. This would be one of the main growth drivers for the company as consumers are holding on to their vehicles longer than before.

Going forward, the company plans to open 200 new stores in this year. In addition to this, there are specific stores that are built out of the professional business in the western parts of the country.

Competition

Although O’Reilly has been doing well, it's not alone in the race. Advance Auto also performed well in the fourth quarter, as compared to its earlier guidance of a single digit decline. It sales increased 6% on a year-over-year basis. The growth was mainly led by the acquisition of BWP and new store openings during the fiscal year.

In addition, Advance Auto has acquired General Parts, which will make it the largest player in the automotive industry with a coast-to-coast coverage of about 5,300 company -operated stores. This deal was well received by the market and enabled its shares to rise. But still, over a period of five years, the return is very less as compared to O’Reilly.

But O’Reilly will have to be on guard for its largest rival AutoZone and track its performance. AutoZone has been gaining market share that it had lost earlier. Moreover, the acquisition of AutoAnything will further lead the company on the growth track.

AutoZone’s commercial parts business is growing at a fast pace, and gained 14% last year. The commercial business has immense growth opportunities as only 3,600 stores out of 5,200 run the commercial business, according to the Memphis Business Journal. AutoZone’s expansion of the commercial business could be a major headache for competitors as it has a large number of stores.

Conclusion

Aftermarket retailers have performed extremely well in the past and if we consider the industry trend, they might continue to do well. Out of the three, O’Reilly seems to be a better option as it has posted the highest revenue growth rates of the three, despite its small size. Since the company can still grow its network, it can sustain its momentum in the future as it has got sound strategies to power its growth.



Stocks Discussed: ORLY, AAP, AZO,
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