3 Reasons Why This Auto-Parts Retailer Could Be a Solid Investment

This aftermarket retailer is an intriguing option which could benefit from growing demand for vehicle repairs, colder weather, and a growing professional market.

Feb 13, 2014 at 10:48AM

Auto-parts retailers couldn't have asked for a better start to the year. The likes of O'Reilly Automotive (NASDAQ:ORLY), Advance Auto Parts (NYSE:AAP), and AutoZone (NYSE:AZO) have already raced ahead of the S&P 500. O'Reilly has led the pack with a gain of almost 16%, with the company's recently reported fourth-quarter results setting the stage for a strong performance in fiscal 2014.

Investors cheered O'Reilly's quarterly performance and forecast, which came on a day when competitor Advance Auto Parts also released robust results and its shares gained close to 13%. Given O'Reilly's presence in both the commercial and do-it-yourself, or DIY, markets, the company provides a balanced alternative to Advance Auto's aggressive focus on commercial. Here is why O'Reilly could prove to be a solid pick in aftermarket retail.

A balanced approach
AutoZone and Advance Auto are focusing on the professional market. O'Reilly is doing this as well but it is not neglecting the do-it-yourself segment either. For example, O'Reilly rolled out a loyalty program in the second quarter of last year, and it had completed rolling out the program to all of its stores by the beginning of the fourth quarter.

More importantly, O'Reilly has already signed up over 4 million customers under this program and looks to increase customer engagement further through targeted promotions based on customer preferences and purchase histories.  

This focus on the DIY market has already helped O'Reilly. For example, as a result of the severe weather seen in the U.S. last month, the company expects a boost in demand. According to management, extremely cold weather leads to higher parts failure rates in certain categories, and this helped the DIY segment grow faster than the professional segment in the last quarter. Also, David Schick of Stifel Nicolaus is of the opinion that the next six months will see good demand for auto parts as a result of the cold weather, which is good news for O'Reilly. 

O'Reilly's focus on the DIY market is commendable, but the company is certainly not leaving out any opportunities in the professional market. The professional, or do-it-for-me, segment is growing at a fast clip as cars today become more complex, over-engineered, and technologically advanced. In fact, according to Advance Auto, the professional market is growing twice as fast as the do-it-yourself segment. 

So, O'Reilly is making a concerted push into the professional segment where it has already recorded market share gains, according to management. The company is improving its professional business in under-covered markets, which has led to increases in average ticket sales. Going forward, O'Reilly will continue to build its professional business in the Western U.S., improve its presence in the Northeast, and enhance its service offerings by opening two more distribution centers.  

Improving its network
It is very important for O'Reilly to keep expanding its network in the wake of moves being made by its peers. Both AutoZone and Advance Auto are aggressively expanding their chains in order to establish their supremacy in aftermarket retail.

Late last year, Advance Auto announced the acquisition of General Parts International, on the completion of which it would become the largest auto-parts supplier in North America. With this move, Advance Auto will become a bigger player in the professional market as well. Also, Advance Auto has continued to strengthen its position in the Northeast by integrating the stores of BWP Distributors that it had acquired last year. 

AutoZone has also stepped up its game in the professional segment. AutoZone aims to improve the accessibility of commercial parts at its hub locations, and it is also adding related inventory at its distribution centers to serve the professional market. 

Keeping these developments in mind, O'Reilly plans to open 200 new stores this fiscal year, slightly more than the 190 stores it opened last year. 

Other significant things
O'Reilly doesn't pay a dividend, but the company surely has an impressive share repurchase plan in place. It has bought back more than $3.35 billion worth of its shares in the last three years, and once again raised its repurchase authorization by $500 million in the previous quarter. Also, O'Reilly boasts superior same-store sales growth over the other two.

O'Reilly expects to grow same-store sales in the 3%-5% range in 2014. In comparison, AutoZone's same-store sales growth in the previous quarter was 0.9% and Advance Auto's was 0.1%.  So, both AutoZone and Advance Auto are not even close to the rate O'Reilly expects to hit during the current year, which makes O'Reilly the pick of the lot.

In addition, O'Reilly's focus on the DIY segment through the loyalty program and colder weather should continue to drive its business going forward, while the professional segment is no doubt an important catalyst.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of O'Reilly Automotive. 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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