As Americans slowly emerge from their pandemic automobile driving slumber, the automotive parts sectors is well poised to benefit once Americans start to hit the road in increasing numbers.
Driving didn't disappear during the pandemic, but in terms of total miles driven, was down substantially. Americans drove approximately 14% fewer miles during the past 12-month period through January 2021 than the previous 12 months. For the auto parts business, less driving translates into fewer parts that need replacing.
The big three auto parts retailers are Advance Auto Parts Inc. (AAP, Financial), AutoZone Inc. (AZO, Financial) and O'Reilly Automotive Inc. (ORLY, Financial). During the past year, the stock of O'Reilly, the largest of the three, gained 46.3%, below the S&P 500 Index's 48.2% return and its two main rivals.
O'Reilly's first-quarter results are in, and the numbers far surpassed analysts' and even the company's own expectations by wide margins in several metrics. Comparable store sales increased by 24%; operating income jumped 63%. The icing on the cake to complement strong comparable sales growth and operating income was the 526 basis point boost in operating margin to 22.4%.
Sales increased $614 million to $3.09 billion, a 25% increase from $2.48 billon in the same period last year. Gross profit also showed an increase of 27% to $1.64 billion from $1.30 billion, 52.3% of sales to 53.1 % of sales respectively. Net income grew from $201 million to $502 million — a whopping 67% increase.
On top of the enviable same-store revenue and operating income, the company logged diluted first-quarter earnings per share of $7.06, versus $3.97 for the same period last year — a 73% increase
It should be noted that O'Reilly's surge in comparable sales growth was the strongest comparable sales growth in the company's history.
The first-quarter results are an indication that O'Reilly's business strategy, implemented during the pandemic economic downturn, has paid off handsomely.
One of the reasons for the strong comparable stores revenue is that O'Reilly has been aggressive about opening new stores — 167 in 2020. Additionally, the company is establishing an international footprint with its acquisition of Mexico-based auto parts retailer Mayasa in November 2019. Ira Rothberg, a portfolio manager at Hennessy Funds, believes O'Reilly is looking to be more than just a predominant retailer in the U.S. Rothberg thinks the company can ultimately expand from its current 5,600 stores in the U.S. to 7,000 store fronts, which would rival competitor AutoZone's 600-store presence in Mexico.
The company has borrowed a strategy that Target (TGT, Financial) and Walmart (WMT, Financial) have utilized deftly to fend off the reach of online giant Amazon (AMZN, Financial). An expanded retail store footprint facilitates getting parts to its customers as soon as possible. Amazon may be able to deliver, but its competitive advantage is diluted significantly for hard-to-find parts that are not well stocked. As the number of its stores grows, O'Reilly can deliver to its customers' garages in 30 minutes or less.
As evidenced by the company's stellar first-quarter results, implementation of its long-term business plans has positioned it to ride the coming tailwinds of the anticipated recovery. And the view of many economists lately has been increasingly sanguine, not only about the rate of growth for this year, but for 2022 as well.
Although forecasts for the economic rebound vary, all economists agree that the U.S. economy is poised to grow at its fastest clip in decades, fueled by the pent-up demand generated during the pandemic as well as the trillions of dollars of support injected into the economy provided by the Federal Reserve and congressional stimulus funds.
IHS Markit estimates, based on its survey of economists, that on average, inflation-adjusted gross domestic product will be 6.7% higher in the fourth quarter of 2021 than the previous year. That would represent the strongest year of growth since 1983, when the economy was coming out of a deep recession.
On top of the projected growth rates for 2021, forecasts for the following year bode well for O'Reilly's retail store sales. Forecasts for 2022 are for the economy to grow an additional 3.3%.
Thus, even low-end projections for the anticipated post-pandemic economic surge would likely lift the price of the stock even higher.
The stock currently trades at $541.46, 14.3% above its close yesterday. That represents an almost seven-point increase over its price of $534 one week ago. The stock is trading slightly below its 52-week high of $544 per share; its 52-week low is $373.13.
Disclosure: I have no position in any of the securities referenced in this article.
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