There are many competitive markets in retail, but you would be hard-pressed to find one as crowded as the auto aftermarket parts industry. I may do my own landscaping and have painted just about every room in my house, but when it comes to opening the hood of a car I'm as clueless as Jeff Spicoli from the movie Fast Times at Ridgemont High.
Retailers such as Wal-Mart (NYSE: WMT), Target, Sears, Costco (Nasdaq: COST), and BJ's Wholesale Club have extended the roster of companies participating in the auto parts industry. Specialty retailers such as AutoZone (NYSE: AZO), Advance Auto Parts (NYSE: AAP), Pep Boys (NYSE: PBY), Genuine Parts (NYSE: GPC), and CSK Auto (NYSE: CAO) are thrown into a mix of companies that would seem less chaotic if they were swirling in a blender.
One of these, CSK Auto, said it was "disappointed" with its second-quarter sales results, including a 2.5% decrease in same-store sales, which highlights the suffocating level of competition within the industry. When a company starts blaming its "slower than anticipated sales" on "higher gas prices and milder summer temperatures," my eyebrows go up. There is such a small margin for error in this industry that even the slightest hiccup can produce a ripple.
Although the company remains "positive about the strength and growth potential of the retail automotive aftermarket industry," it expects its same-store sales to decline 2% to 3.5% in the third quarter and come in flat-to-negative 2% in the fourth quarter. Management also expects earnings for 2004 to be in the range of $1.13 to $1.22 per share, which is below the current analysts' consensus estimate of $1.32 per share.
The company's CEO said that management does not want to "overreact to what we believe are short-term sales fluctuations." The question is: Is a multiquarter, same-store sales decline a short-term fluctuation or a disturbing trend? The company remains optimistic in its words, but the numbers don't lie; the truth is that consolidation is probably inevitable in this crowded subway car of an industry.
Even though CSK shares are trading at 10 times its 2004 earnings forecast of $1.17 per share, which is a discount to its mid-teens growth rate, I would avoid the shares until sales stability is restored. Sometimes stocks look like a bargain but are relatively inexpensive for a reason.
Change your oil, check your filter and fluids, and then check out a few of these other views:
Fool contributor Phil Wohl spent more than 12 years on Wall Street. He has no stake in any firm mentioned above.
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