This Automotive Retailer Can Still Spark the Plug

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I took my car for a routine service and replaced some spare parts in the process. I preferred parts manufactured by AutoZone, which made me think that the company preferred by consumers must be rewarding to its investors. AutoZone (NYSE: AZO) is the largest retailer and distributor of automotive parts and accessories by number of stores in the US. The company operates through a wide network of over 5,000 stores in the United States, Mexico, and Puerto Rico. 

A See-Saw Ride 

AutoZone has come out with its recent fiscal quarter earnings, reporting a rise of 6.4% in net income to $203.5 million ($5.41 per share) and a 3.5% rise in revenue to $1.9 billion compared to the same quarter last year.

The increased earnings, however, do not reflect the complete picture, as outstanding shares were decreased to the tune of 8% due to share buybacks. Better pricing from vendors and lesser price inflation have also contributed towards the marginal improvements.

Replacement of many auto parts in the severe winters of 2010 and 2011 has been another influencing factor.   The current weather conditions being more comfortable are less likely to cause wear and tear, and thus demands for both repairs and replacements are expected to be low. Rises in revenues have been attributable to new stores, as same store sales growth was almost negligible.

The Hidden Potential

Apart from the core sales and distribution, the company is also exploring e-commerce through business activities like ALLDATA, which deals in the production, sales, and maintenance of diagnostic repair information software used in the Automobile industry.

Auto Zone is also said to be gearing up to gather stakes in, which is another player in the online retail automotive products market. The move is supposed to boost both its consumer base and revenues.

The company also has a commercial sales program that provides commercial credit and speedy sales delivery and services to service stations, repair garages, and the like. The company’s Loan-A-Tool program provides customers with an opportunity to borrow specialty tools- a very convenient option for Do-It-Yourself (DIY) consumers.

Rivals in Friction

Advance Auto Parts (NYSE: AAP) declared a 4.2% drop in EPS to $1.21 per share last month. It’s interesting to note that even AAP has been dependent on increasing its number of stores to boost sales. It well reflects the sluggish demand of the DIY sector. It is however the market leader in the DFIM (Do It For Me) segment and is reflecting double digit same store sales growth in the same.

O'Reilly Automotive (NASDAQ: ORLY) is a smart competitor. Its success in building its business is largely due to its ability to establish itself by adopting a dual DIY/DIFM strategy. It has efficiently penetrated the market and built its customer base with it, and has also established itself well in unattractive anthropologic regions. Its ability to shell out satisfactory sales in low population areas makes its approach commendable.

The Larger Picture

Manufacturers’ of automotive parts are considering coming together via mergers and consolidations of late. This shall result in a concentrated vendor base, reducing the number of suppliers for purchasing inventory. This provides greater pricing power in the hands of suppliers and pressurizes margins of manufacturers.

The ever-increasing number, age, and mileage of vehicles, including transit vehicles like trucks that need more maintenance, spells a steady and moderately growing industry. However, rising oil prices are giving way to purchase of more fuel efficient vehicles and reduction in driving mileage. This strains sales and service demand for the industry. While extraordinary profits are not expected, the companies need to evolve and adapt to changing technology and demands in order to keep pace.

Race to the Finish

AutoZone seems to be in good stead compared to its competitors and has given comparatively better results too. It must, however, keep a close watch as its competitors are catching up and the industry calls for innovative measures for growth. AutoZone seems to be the most promising buy in this segment.

adityaladha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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