Will This Aftermarket Retailer Help Your Portfolio Grow?

Does AutoZone's blockbuster quarter provide reason enough for an investment?

Apr 11, 2014 at 11:14AM

Auto-parts retailers are in vogue, especially because the average age of cars in the U.S. has increased to a new high of 11.4 years. This has mainly occurred because people do not want to spend on new cars, as indicated by the fact that auto sales declined in January. Therefore, people need to get their cars repaired more often, and this leads to higher auto-parts sales for such retailers.

Leading auto-parts retailer AutoZone (NYSE:AZO)  has been growing well over the last few years thanks to the growing demand for its products. It recently reported its second-quarter results, and the numbers came in ahead of the estimates.

Winter-driven numbers
Severe weather conditions such as a colder winter and more storms resulted in more wear and tear on vehicle parts, such as engine oil thickening. This resulted in a jump of 7.3% in revenue for AutoZone as the total revenue clocked in at $2 billion. Other factors that drove revenue higher were the addition of 28 new stores and same-store sales growth of 4.3%. 

Despite an increase in costs due to advertising expenses, AutoZone's earnings surged 17.8% to $5.63 per share. Also, gross margin expanded to 52.1% from 51.9% last year. The increase in gross margin mainly stemmed from higher merchandise margins.

AutoZone also strengthened its web presence by acquiring the online auto parts retailer AutoAnything at the end of 2012. Hence, the auto parts retailer rode the trend of growing e-commerce business.

Tough competition
In addition to AutoZone, other industry players such as Advance Auto Parts (NYSE:AAP) and O'Reilly Automotive (NASDAQ:ORLY) have also performed well. Each player's share price movement over the last year appears in the chart below:

AZO Chart

AZO data. Source: YCharts.

Clearly, AutoZone has been unable to perform as well as its peers have, as it provided the lowest share price return of 32.5%. In fact, AutoZone's biggest threat is the growing stature of rival Advance Auto Parts. Advance Auto acquired General Parts International in January this year, which helped the company's sales rise to more than $9.3 billion. General Parts International supplies replacement parts and other equipment. The acquisition helped Advance Auto strengthen its footprint in North America. Also, it led to the expansion of Advance Auto's product line. Advance Auto is focusing on the mechanical repair segment since people have become dependent on such services because of technological advancements.

AutoZone has also tried to strengthen its commercial segment by adding more commercial programs. In fact, this segment grew a staggering 12.2% over last year's quarter, as sales clocked in at $325.2 million. The retailer has improved the availability of hard parts, and this has led to higher customer traffic. Since the commercial segment mainly offers hard parts, it has benefited from this demand. Moreover, AutoZone opened 49 new commercial programs during the quarter, which should help its revenue grow further . It will be interesting to watch this segment grow since both players have made efforts to expand it.

On the other hand, O'Reilly is expanding its distribution centers. After it opened its 25th distribution center in 2013, the company plans to open another one in 2014. O'Reilly is focused on expanding its network and providing same-day delivery of auto parts. It has also introduced a loyalty card program which sends out offers based on customers' past purchase records. O'Reilly also performed well in its latest quarter wherein it reported same-store sales growth of 5.4%, much higher than the rates posted by both of its peers. Also, its earnings surged 23% to $1.40 per share. Hence, O'Reilly's efforts and its great numbers enabled its stock price to grow by 40.7%.

Goals to be focused on
Although AutoZone has failed to outperform its peers, it has some goals which should help it grow. It has been taking measures to optimize its inventory level and put new assortments in place. The auto-parts retailer has also been remodeling its hub stores and a total of 115 locations have been remodeled. Remodeling includes the addition of inventory as well as expanded store capacity and size. Also, the company opened three new hub stores during the quarter.

Moreover, AutoZone has been expanding its commercial business by adding more programs to it. The retailer's e-commerce business has also been growing, especially because of the acquisition of AutoAnything. These efforts should help the company grow.

AutoZone had been heading in the right direction until Advance Auto acquired General Parts, which made Advance Auto the biggest industry player. AutoZone faces stiff competition from its peers and they have performed better. Hence, it is difficult to say how things will shape up for AutoZone in the months to come. It is therefore prudent to invest in its peers if aftermarket retail is what you are looking for.

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Pratik Thacker 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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