In the face of tough winter weather and sagging consumer spending, finally, there's some good news coming out of the retail sector. In an earnings season awash with complaints over the weather and the effect it had on earnings, it's encouraging to see that some sectors of retail are doing just fine.
Auto parts retailers had an exceptional quarter, posting solid increases in sales and profits. Let's take a look at what's driving the results from major players AutoZone (AZO +2.79%), Advance Auto Parts (AAP +8.23%) and O'Reilly Automotive (ORLY +1.98%).Let's take a look at these three parts retailers and see if they represent an opportunity to make some Foolish investments.
Solid demand
Several factors have been contributing to the increased demand for auto parts. As the economic recovery in the U.S. matures, the initial surge in new auto sales has slowed down. As people buy fewer new cars, there is a greater need to fix and maintain their current vehicles. Furthermore, consumers are keeping their cars longer. Last year, the average age of the U.S. auto fleet hit a record 11.4 years.
The second major factor was the weather. While most retailers suffered due to the harsh winter, it was beneficial to auto parts makers as the cold increased wear and tear on cars, especially the batteries and starters.
While consumers were loath to brave the winter chill for discretionary items such as electronics and fashion items, car repairs are essential to such a degree that they are almost non-negotiable. Salt on the roads and potholes also contributed toward increased demand for repair parts, creating a variety of problems that will need fixing in the spring and summer.
Under the hood
All this has led to a bounce in sales for auto parts retailers. AutoZone's revenue increased by 6.2% for the third quarter, while comp-store sales were up a healthy 4%. Net income rose by 7.4%, while earnings per share were up 16.4% for what is apparently the 31st consecutive quarter of double-digit EPS growth. That's no small feat. Deferrable maintenance categories are expected to continue delivering strong sales going into the summer.
O'Reilly's most recent earnings report was even stronger. EPS increased by 18.4% on a net income increase of 13%. Meanwhile, overall revenue was up 9% and comp-store-sales rose 6.3%. As was to be expected, the company saw cold-weather related categories such as batteries, electrical parts, heating and wiper blades perform particularly well. Also, the harsh winter is expected to lead to a greater demand for parts in the coming months.
Finally, the best performer was Advance Auto Parts, reporting a 36% surge in EPS. Meanwhile, revenue exploded 48% to $2.97 billion, largely due to the acquisition of Genuine Parts, which provided a huge boost to the top line. Before that, the company usually delivered mid-single-digit revenue growth. Comp-store-sales increased 2.4%, reversing a 3.2% decline last year. The company also raised its outlook, now expecting full-year EPS to come in between $7.30 and $7.50 versus a previous projection of $7.20 to $7.40.
The bottom line
While the brutal winter put a drag on results across the retail sector, some industries managed to benefit from it. Auto parts retailers had a great quarter, not only due to the weather, but also as a result of an aging U.S. car fleet and a slowdown in new-car sales. All of the companies mentioned managed to come up with double-digit EPS growth, and expect this strong performance to continue into the summer.
