Many factors are behind the growth of the retail auto parts industry. The average vehicle age in the United States remains near its all-time high, and there are also very good demand levels for do-it-yourself (DIY) repairs and car accessories. Very recently, the extreme winter weather on the U.S. East Coast also proved a great sales boost, impacting the last quarter's results and getting investor's attention.
When it comes to this business, there are three big players in the U.S.: AutoZone (NYSE:AZO), Advance Auto Parts (NYSE:AAP), and O'Reilly Automotive (NASDAQ:ORLY). Each one is executing its own strategy looking for success in 2014. Let's see what they are up to.
Growing and expanding
First of all, let's look at the nation's biggest auto parts retailer: the well-known AutoZone.
The company reported solid second-quarter results, with same-store sales growth increasing a sharp 4.3% from 0.9% a quarter before. The harsh winter weather helped, along with good demand for maintenance and failure hard parts. AutoZone has grown earnings in the double digits for the past 30 consecutive quarters. Its stock price performance has been fantastic as well, growing more than 40% year over year.
The company continues to expand its store count in the U.S. and Mexico. Today, it holds 5,237 locations and added 167 in the past year. The Mexico business in particular is less saturated and leaves extra room for expansion, so we might see more action across the border soon. In addition, AutoZone is venturing in Brazil, where it holds a handful of stores with good success levels.
Profiting from DIFM
The second biggest player in this industry, Advance Auto Parts(NYSE:AAP), has the same store count as AutoZone and is close to reaching similar sales figures as well.
After acquiring General Parts for $2.04 billion late last year, Advance Auto Parts repositioned itself in a growing and crucial trend in the industry: the "do-it-for-me" (DIFM) auto repair. This is a big difference with AutoZone, which is increasingly focusing on commercial sales channels for selling parts to garages and similar car repair businesses. Now, for Advance Auto Parts, DIFM sales account for 55% of total sales.
Although full integration is not over yet, this dual-market approach is starting to boost overall productivity as Advance Auto Parts can leverage its existing retail infrastructure in the DIFM market. In fact, the company aims at exploiting a new commercial-centric concept store that targets a 70/30 DIFM-DIY sales mix.
This is also an important strategy for O'Reilly, a strong competitor that operates 3,976 stores in 42 states.
O'Reilly was an early adopter of this dual-market approach, and had historically a 50/50 sales mix with good performance levels. The key has been building a solid distribution infrastructure, and this is still its major advantage for the company. In the end of 2012, O'Reilly operated 24 distribution centers and 240 hub stores. These add a great deal to the quality of service by offering a wider range of products and faster delivery.
This expertise in the commercial market, scale, and an infrastructure lead grown over the years have given the company a significant cost advantage over many of its rivals.
Despite the growth levels and good performance of these companies, the domestic retail auto parts business is reaching mature levels and faces a strengthened competitive landscape. As such, the companies will have to rely on international expansion and/or better strategy execution in relation to their peers.
Strategy-wise, these companies are taking slightly different paths. Advance Auto Parts' focus is on mechanic repairs, which is a compelling strategy. AutoZone's tactic, meanwhile, is to position itself as the leading parts supplier; this is also working quite well. Despite their differences, the stock performance correlation of the two companies is outstanding. Just take a look at this graph.
O'Reilly's 50/50 strategy, meanwhile, presents unique challenges and is overall more capital-intensive. However, the company as an early adopter developed a valuable know-how that works when it comes to keep costs contained.
For now, Advance Auto Parts remains less productive than the other two companies in the DIY and DIFM markets. A successful implementation of its new acquisition will very likely strengthen scale, however, and should increase asset productivity by leveraging its infrastructure.
Beyond strategy execution, this industry's performance has a high correlation with total vehicle miles driven indicators. This metric, which used to grow consistently in the past, has stayed flat and even declined in recent years. So, with the improvements in vehicle quality and the sustained increase in gasoline prices, there is a long-term risk that demand for auto parts might decline.