Auto parts retailers have been posting great results as chilled weather led to greater wear and tear of automobile parts. Therefore, with the spring season setting in every customer is trying to get their vehicles repaired. Moreover, people now keep their automobiles for a long time, delaying their purchase of a new vehicle. According to Polk, average life of a vehicle has increased to 11.4 years in the U.S. This fills auto part retailers’ coffers as demand for such services increase.
AutoZone (NYSE:AZO) is one of the leading auto parts retailers which posted its third quarter results recently. The numbers beat analysts’ expectations, making its share price surge. Let us dig deeper.
The ugly truth
Net sales surged 6% over last year, clocking in at $2.34 billion, driven by higher demand for repairs of vehicles. The company’s same store sales, a key metric to measure a retailer’s health, rose by 4%. Another important reason for revenue increase was the addition of new stores. It added 30 new stores in the U.S. and 7 new stores in Mexico during the quarter.
The company announced that failure-related category witnessed increase in sales during the period. It focuses more on Do-It-Yourself category. Also, commercial segment sales have been a point of focus for most of the aftermarket retailers. The domestic commercial segment sales inched up by 14% to $406 million.
Gross margin also expanded 20 basis points to 52%. This was mainly because of lower expenses and higher merchandise margins. Moreover, earnings climbed to $8.46 per share from $7.27 per share over the prior year period. Hence, the company is doing well on both the top line as well as the bottom line.
Peers racing ahead
AutoZone’s peers such as Advance Auto Parts (NYSE:AAP) and O’Reilly Automotive (NASDAQ:ORLY) are doing much better as evident from its revenue and stock price appreciation over the last one year. One year revenue (on a trailing twelve month basis) grew 2.6% for AutoZone. On the other hand, Advance Auto and O’Reilly’s revenue grew 4.2% and 16.1%, respectively, during the same period. Hence, AutoZone registered the lowest revenue growth.
This is clearly reflected in the stock price movement of the company. Share price appreciation is 56.3% for Advance Auto and 40.2% for O’Reilly in the last one year. However, AutoZone registered the lowest appreciation of 32.7% during the same period. Also, its peers registered a better quarter last month when compared to AutoZone’s performance. Advance Auto has indeed become the largest player after the acquisition of General Parts International a few months back.
Some key points to note
Although AutoZone has not been able to outpace competition, it has been enhancing its presence. It has been expanding its footprint in Brazil, the fourth largest car market in the world. Though it has just 4 stores in the region, it will be reaching out to have a larger presence. This should lead to higher sales.
Also, the auto parts retailer is strengthening its online operations to make it convenient for its customers to place orders on its website. Nonetheless, the company’s inventory is a problem since it has been rising from the last few quarters.
Although the aftermarket retailer has been a remarkable performer, its growth is generally driven by the advantages of the industry it operates in. It fails to outperform its peers. Moreover, it is not being able to manage its inventory well. Hence, aftermarket retail has better options to invest in rather than AutoZone.