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Why This Aftermarket Retailer Should Continue To Beat the Market

August 11, 2014 | About:
Suravi Thacker

Suravi Thacker

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U.S. auto sales improved 1.2% for the month of June, which was much better than the analysts’ expectation of a decline of 3%. According to Autodata Corp., the annualized selling rate surged to 16.98 million, the highest since 2006. This means that the automobile industry is on a surge and people are willing to spend on cars, reflecting growth in the economy. However, this has not hampered aftermarket sales of auto parts and accessories. The demand for auto parts is still rising.

This is evident from the recently reported second quarter results of O’Reilly Automotive (ORLY), an aftermarket retailer of auto parts. The numbers were ahead of Street’s estimates, pushing its share price higher. Let us take a look.

By the numbers

Driven by higher demand for automobile parts, revenue climbed 8% to $1.85 billion, over last year. The top line was higher than the estimate of $1.83 billion. Also, same store sales for the period rose 5.1%. One of the primary reasons why the retailer did well was the fact that harsh winters resulted in more wear and tear of vehicles. Therefore, more cars needed to be repaired, resulting in higher sales.

O’Reilly’s strategy of focusing on both the DIFM and DIY segment has been quite helpful in its growth. This dual market strategy is one of the key drivers of the company’s growth. Also, it provides excellent customer service. In fact, it has also done well in managing its expense efficiently. Hence, its gross margin and bottom line surged.

Gross margin expanded to 51.7% from 50.9% in the previous year. Similarly, earnings jumped 21% to $1.91 per share, higher than the expectation of $1.85 per share.

Well stacked against the peers

When compared to its peers such as AutoZone (AZO) and The Pep Boys (PBY), O’Reilly proves to be a clear winner. The stock price performance of all the three players reflects the same. O’Reilly’s stock price has appreciated the most (28.8%), as against AutoZone (17.9%) and The Pep Boys (-11.4%).

This shows the strength of O’Reilly’s dual market business model. Also, it is engaged in continuous expansion of its business. For instance, it opened 91 new stores during the first half of 2014, and has a target of 200 new stores during this year. Also, it has expanded its distribution facilities in order to strengthen the distribution network.

On the other hand, Pep Boys has been a poor performer, which is reflected in its declining revenue. However, this retailer is undertaking a number of measures to win back lost customers. It is expanding its store network, rebranding itself and ramping up its marketing strategies. Also, its focus on service has been one of its key strengths. It makes more than 50% of its revenue from servicing, which provide higher margins also.

AutoZone, too, is expanding through acquisitions, with a special focus on online retail and commercial segment. Its buyout of AutoAnything, an online retailer of auto parts, was an effort in this direction.

Key thoughts

Nonetheless, O’Reilly still enjoys leadership over the other two. Its performance has been much better than its peers, and its steps to expand its business should further be helpful. Moreover, it has revised its earnings guidance for the year and reaffirmed its revenue outlook. Also, it has repurchased many shares, leading to investor delight. Thus, O’Reilly looks like an interesting bet.


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