Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

What Strategies Are Auto Parts Retailers Executing in 2014?

By Louie Grint - Mar 13, 2014 at 7:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What's the outlook for AutoZone, Advance Auto Parts, and O'Reilly Automotive?

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 ( AZO -1.18% ), Advance Auto Parts ( AAP -2.88% ), and O'Reilly Automotive ( ORLY -0.93% ). 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( AAP -2.88% ), 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.

Bottom line
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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AutoZone, Inc. Stock Quote
AutoZone, Inc.
$1,817.07 (-1.18%) $-21.62
O'Reilly Automotive, Inc. Stock Quote
O'Reilly Automotive, Inc.
$638.16 (-0.93%) $-5.99
Advance Auto Parts, Inc. Stock Quote
Advance Auto Parts, Inc.
$220.72 (-2.88%) $-6.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.