Is Advance Auto Parts the Best Pick in Aftermarket Retail?

Huge size, e-commerce presence, and commercial focus make Advance Auto an interesting pick.

Jan 27, 2014 at 10:11AM

The average age of vehicles in the U.S. is rising. Currently, it is at an all time high of 11.4 years, compared to 11.2 years and 10.9 years in 2012 and 2011, respectively. Also, the number of vehicles on the road that are older than 12 years has increased by a whopping 20%.

The rising average age of vehicles on the roads is a tailwind for aftermarket retailers and service providers like Advance Auto Parts (NYSE:AAP), The Pep Boys-Manny, Moe & Jack (NYSE:PBY), and Monro Muffler Brake (NASDAQ:MNRO). Each of these companies operates with a different business model, as we will see subsequently, but all three are positioned to gain from aging vehicles. Let's see which business model is working well from an investor's perspective.

Advance Auto: the giant
Advance Auto Parts completed the acquisition of General Parts International this year. This acquisition offers a balanced platform for growth between do-it-yourself, or DIY, and commercial operations. Advance Auto is now the largest automotive-aftermarket provider of parts, accessories, batteries, and maintenance items along with the largest business-to-business e-commerce platform in North America, with coast-to-coast coverage of about 5,300 company-operated stores. During the third quarter, the B2B e-commerce business grew roughly 50%, and this acquisition should be a good growth driver for this segment going forward.

As a result of the General Parts acquisition, Advance Auto has also strengthened its position in the faster-growing do-it-for-me, or DIFM, market. During the third quarter, Advance Auto reported a 2% decline in same-store sales due to a decline in the DIY business, which was partly offset by an improvement in the commercial sales segment.

Focusing in the right area
Do it for me is a hot segment that is growing at around twice the rate of the DIY segment, according to Advanced Auto. The DIY scope is getting restricted as vehicles and parts get more complex. This is because customers are entrusting complex repairs to independent repair facilities. As a result, Advance Auto witnessed a sequential contraction of 400 basis points in its DIY business.

Advance Auto, however, has been on a roll. During the third quarter, total sales increased 4.3% and earnings per share increased 17.4% versus the year-ago quarter, despite a 2% decline in comps. The decline is comps was due to muted spending by consumers, as they only went for repairs necessary to keep vehicles running.

Going forward, Advanced Auto sees an opportunity worth $40 billion in the commercial segment. With the acquisition of General Parts International, it has already positioned itself to reap the benefits of the increase in consumer spending in this segment. The acquisition is a part of the company's strategy to align with the changing market dynamics, which is skewing more toward the DIFM segment.

Where do peers stand?
Monro Muffler Brake caters to the DIFM and services segment only and does not rely on the DIY business model. Just like Advance Auto, Monro has been making acquisitions to grow its business. It recently closed the deal to buy Curry's Auto Service's 10 stores, and is also negotiating with seven other takeover prospects.

Monro has been on a serial acquisition spree, and has acquired Ken Towery's Tire & Auto Service (27 stores); Enger Auto Service & Tires (11 stores); Tire King Complete Car Care (nine stores); Tire Barn Warehouse of Anderson (31 stores); and 17 Tuffy Muffler/Car-X locations in Wisconsin and South Carolina.

These acquisitions have enabled Monro to record impressive top- and bottom-line growth, apart from allowing the company to increase its geographical coverage. In the second quarter of fiscal 2014, it reported sales and net income growth of 16% and 18%, respectively.

The Pep Boys-Manny, Moe & Jack is a hybrid DIY/DIFM business model. It has been struggling due to a general weakening in consumer spending, as deferred maintenance remains at record levels. Pep Boys is also facing the heat due to a slowdown in the overall aftermarket growth between the second and the third quarters.

Much like its peers, Pep Boys' growth strategy is centered on DIFM for the long term. One bright spot for Pep Boys was a 100% jump in online sales across all lines of business, which grew to 3.6% of total sales.

Making a choice
But, in my opinion, Pep Boys looks like the least desirable investment of the three, as it is seeing weakness in its business. The company's focus on both DIY and DIFM for the time being doesn't make it as interesting as Monro or Advance Auto.

On the other hand, Monro didn't discuss online sales on its previous conference call, so it is possible that the company is missing out on opportunities in the e-commerce space due to its laxity. So, considering everything, Advance Auto could be the best pick of the three. Advance Auto is the biggest of the lot in terms of size, has an online presence, and is also highly focused on the DIFM market. Hence, investors looking to invest in aftermarket retail should consider Advance Auto for their portfolio.

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Amal Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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