Are Auto Parts Retailers Headed for a Stall?

by Jim Woods | December 4, 2012 1:28 pm

November new car sales are in, and they were very good.

In fact, sales during November revved up to a five-year high for that month, thanks to a rebound of sorts after Superstorm Sandy hit October sales.

However, while Fiat/Chrysler (PINK:FIATY[1]), Ford (NYSE:F[2]), Honda (NYSE:HMC[3]), Hyundai and Toyota (NYSE:TM[4]) are all cheering their outstanding sales gains in November, a couple other auto-related stocks — namely, DIY parts retailers AutoZone (NYSE:AZO[5]) and Pep Boys (NYSE:PBY[6]) — are crying. But why?

Well, because it wasn’t just a post-storm rebound that has helped automakers’ sales recover. The more important reason is the need to replace aging vehicles.

Now, these days, cars and light trucks are built to last … but once a vehicle starts to get over 10 years old, Father Time steps in and requires an owner to either continually fix the vehicle, or to just buy a new model. According to research firm Polk, the average age of cars and light trucks currently in operation in the U.S. has increased to 10.8 years[7].

For the past several years — and particularly during the immediate aftermath of the Great Recession — car owners shunned replacing their tired old vehicles and opted to keep them on the road for as long as possible. That was good news for companies that sold auto parts, so it was no surprise that we saw great earnings — as well as strong stock performance — for the premier do-it-yourself retail auto parts sellers.

Companies such as AutoZone and Advanced Auto Parts (NYSE:AAP[8]) — and to a lesser extent, Pep Boys — have enjoyed strong earnings and big upside in their respective share price over the past five years. AAP and AZO have a five-year stock gain of 85% and 191%, respectively. PBY actually is in the red by about 8% over that time, some of that coming on a big slide of nearly 14% in Tuesday’s trade.

One reason for that big slide: Pep Boys’ release of fiscal third-quarter earnings. PBY said weak sales and rising costs teamed up to cause a loss of $6.8 million, or 13 cents per share, in the quarter. The quarter did include an $11.2 million expense for debt refinancing and $8.8 million impairment charge. Still, the numbers were not good, as total revenue fell 2.4% to $509.6 million. In terms of the all-important same-store sales data, that metric fell 2.7%.

Wall Street reacted to the numbers, which fell well short of expectations, with the aforementioned double-digit percentage haircut.

As for AutoZone, it too reported disappointing earnings, with revenues missing analysts’ expectations for the third consecutive quarter. During the company’s fiscal first quarter, the largest U.S. auto parts retailer said revenue rose 3.5% to $1.9 billion. The Street was expecting revenue of $2.02 billion. As for same-store sales, that metric rose a slight 0.2%, but that was well below expectations for a gain of 2%.

AZO shares fell nearly 4% by midday Tuesday.

For investors, the takeaway here is actually pretty simple: More and more consumers are opting to buy new cars, as evidenced by the strong November new-car sales figures. That change in preference is no doubt having a negative impact on revenue and sales at auto parts retailers.

If this trend continues, you’ll want to shift your investment preferences toward the big automakers and away from the companies dedicated to keeping older models on the road.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

  1. FIATY:
  2. F:
  3. HMC:
  4. TM:
  5. AZO:
  6. PBY:
  7. has increased to 10.8 years:
  8. AAP:

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