In the dead of winter, hitting your knuckles on an engine block when the wrench slips can be an expletive-inducing event. It also explains why the auto-parts retail market is seasonal. The do-it-yourself (DIY) mechanic is far more fickle than the professional and will usually wait for the warmer weather to work on a car.
That also probably helps to explain why O'Reilly Automotive (NASDAQ:ORLY) can consistently keep sales up, regardless of the season, while competitors like industry leader AutoZone (NYSE:AZO) experience wintertime weakness. Where AutoZone relies primarily on DIY customers for its sales, 48% of O'Reilly's customers are professional installers. It's not immune from weather factors -- second- and third-quarter sales are typically higher than first- and fourth-quarter sales -- but the professional needs to keep buying, regardless of the weather.
That undoubtedly helped O'Reilly boost sales by 8%, as profits rose a more modest 2% in the fourth quarter. For the year, sales were up nearly 12%, and profits rose more than 10%, excluding a one-time tax benefit form the 2005 results.
O'Reilly also differs from competitors like PepBoys (NYSE:PBY) in that it doesn't offer automotive repairs or installations, and it doesn't sell tires. It's a straight retail operation, more along the lines of AutoZone, Advance Auto Parts (NYSE:AAP), and CSK Auto (NYSE:CAO).
Another unique aspect of O'Reilly is that it actually sells to what is nominally its competition. Independently owned auto parts stores can buy their parts from O'Reilly through a subsidiary, Ozark Automotive Distributors. They're only nominally considered competition, because they operate in areas not currently served by O'Reilly stores. The jobber business model lets O'Reilly garner additional sales.
When it comes down to it, though, retailers live and die by their comps -- the difference in sales at stores open for at least a year. Where AutoZone, for example, has seen flat or declining numbers for several years now, O'Reilly has seen its comps growing steadily. In 2005, they were up 7.5%, atop 6.8% growth the year before. Establishing relationships with customers, whether they're DIY or professional mechanics, is key to keeping them coming back. As of the end of 2006, O'Reilly had added 170 stores, for a total of more than 1,600 locations. It plans to open nearly 200 more in 2007. Adding stores and generating repeat customers is a good recipe for growth.
While garage tinkerers like me will wait for the spring and summer to minimize the damage we do to our hands, we know in a pinch that our mechanics will be there when we need them. The same could be said for O'Reilly's customers.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
