The automotive aftermarket parts sector has been on fire over the past several months because of favorable trends that have been displayed in recent earnings blowouts from O'Reilly Auto Parts (Nasdaq: ORLY ) and Standard Motor Products (NYSE: SMP ) . The bar had been set pretty high for Advance Auto Parts' (NYSE: AAP ) quarterly report on Tuesday, and the parts retailing giant exceeded expectations. The company reported earnings that rose 41%, to $1.03 a share, on revenue of $1.4 billion. Analysts were expecting the company to earn $0.93 a share on sales of $1.36 billion.
While Advance's earnings release and conference call were similar to its peers in noting the favorable industry and weather trends that helped boost earnings, the company also made a point to discuss the impressive growth in its commercial business. Advance Auto Parts CEO Darren Jackson delved into the company's quarter at the beginning of the call, saying, "The past 11 quarters we've been squarely focused on becoming more competitive. We have embarked upon a journey to accelerate our commercial business, which has realized 11 consecutive quarters of double-digit gains in comparable store sales."
Advance now generates 34% of its revenue from the commercial, do-it-for-me (DIFM) business. Advance built its brand in the do-it yourself retail business, but today's opportunities for growth are shifting to the DIFM space. Vehicles are much more complex, and fixing up the family car isn't the American hobby that it used to be. This means that more work is done in independent repair shops, instead of driveways. Over the past few years, the closing of several thousands of dealerships has also shifted a tremendous amount of vehicle service to the independent shops that Advance serves.
As a result, Advance began to roll out a program to focus on a commercial sales program for many of its stores about three years ago. At the time, Advance only had a 3% share of the market. Today, that number is 4.5%, which is still small, and shows the tremendous opportunity for growth in this market.
Advance has traditionally sat between its largest competitors O'Reilly Auto Parts, which gets about 50% of its revenue from DIFM, and AutoZone (NYSE: AZO ) , which is the leader in the retail space and only sees about 11% of its revenue come from DIFM. If the results of the past few quarters are any indication, it looks like Advance is moving more toward the O'Reilly model. I believe that the economic and industry trends likely to continue into the future make this the right choice.
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