These Auto-Parts Retailers Are Running at Full Throttle

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the U.S. economic recovery continuing, auto-parts retailers have seen strong demand from their customers. These companies have had a good run over the past several years and are trading near their 52-week highs. The uptrend looks set to continue as auto-parts retailers grow market share and improve their businesses.

A family business

O'Reilly Automotive (NASDAQ: ORLY) has been in business since 1957 when the O'Reilly family opened its first store in Springfield, Mo. Today the company has over 4,000 stories in 42 states. O'Reilly is one of the largest specialty automotive retailers of aftermarket parts, tools, supplies, equipment and accessories. The company serves professional service providers as well as do-it-yourself customers.

O'Reilly Automotive just posted impressive second-quarter numbers. Earnings increased 37% to $1.58 per share. This marked the 18th consecutive quarter of 15% or more in earnings-per-share growth. Comparable-store sales increased 6.5% in the second quarter. Overall, the operating margin increased 170 basis points to 17.3%. Sales increased 10% to $1.7 billion. During the quarter, the company repurchased $274 million in shares.

Going forward, O'Reilly Automotive is getting set to roll out its card-loyalty program to do-it-yourself customers. This will allow the company to accumulate a customer's purchase history and target them with promotions based on their past purchases. The complete roll-out is expected by year-end.

Furthermore, the company is integrating its acquisition of VIP Auto Parts in Maine, New Hampshire and Massachusetts. The acquisition gave O'Reilly 56 stores in the critical Northeast market and sets the company up for further expansion in this lucrative market. The stores won't have an impact on results for this year, but will starting in 2014.

Outside of the Northeast, O'Reilly is focused on expanding in California, Chicago and Florida. To do so, it has added distribution centers to fuel growth in these markets. The company is on track to open 190 net new locations this year.

Eddie Lampert's favorite auto retailer

AutoZone (NYSE: AZO) has been a major holding for billionaire Eddie Lampert for several years. AutoZone is the largest auto-parts retailer with more than 5,000 stores in the U.S., Puerto Rico and Mexico. Each store carries a full line of parts for cars, SUVs, vans and light trucks. The company's first store was opened in 1979 in Forrest City, Ark.

In its most recent quarter, net sales increased 4.5% to $2.2 billion from the prior year. Earnings increased 15.8% to $7.27 per share. This quarter marked the 27th consecutive quarter of double-digit earnings growth. Same-store sales decreased 0.1% in the quarter. The gross margin for the quarter was 51.8%. During the quarter, AutoZone repurchased $325 million in shares. The company opened 33 new stores in the quarter, relocated three stores, closed one store in the U.S. and opened seven new stores in Mexico.

Going forward, AutoZone just increased its share-repurchase program by an additional $750 million. This continues its trend of being a shareholder-friendly organization. Since 1998, AutoZone has authorized $13.4 billion in share repurchases.

AutoZone is focusing on is its e-commerce business, an attractive area for growth. It just purchased AutoAnything in the second quarter of this fiscal year. AutoAnything's e-commerce site helped boost e-commerce sales 79.9% in the most recent quarter compared to last year. Overall, e-commerce sales account for only 3.5% of total sales. AutoZone sees its e-commerce business as a complement to its walk-in stores where customers can research purchases prior to coming to the store or have the products delivered directly to their doorstep. AutoZone sees plenty of room for growth in its e-commerce initiatives.

We all know these three guys

The Pep Boys – Manny, Moe & Jack (NYSE: PBY) was founded in 1921 and today has over 750 locations in the U.S. and Puerto Rico. Its locations sell and install tires, parts, electronics and other vehicle-maintenance products. The focus at Pep Boys is on service and installation.

In the first quarter, sales increased 2.2% to $536.2 million compared to last year. Comparable sales increased 1%. Earnings rose from $0.02 per share last year to $0.07 this year.

Going forward, Pep Boys is testing a more customer-centered strategy in the Tampa, Fla. market. The company started with one location and the positive results are leading it to test the strategy in the entire market. The new changes touch every aspect of the business model and start with the company's employees.

The plan is to build lasting relationships with its customers whether it's for service or retail needs and handle all of their automotive care. The test store in Tampa, Fla. was completely remodeled with new waiting areas and a more inviting retail environment to appeal to all customers, including women. According to CEO Michael Odell on the company's recent earnings call,

The cost of the physical changes for the rest of the Supercenters in the [Tampa, Fla.] market is about $525,000 per store. It requires a 13% comparable-store sales lift in year one to produce a 15% after-tax internal rate of return. The results to date are a lift in comparable-store sales that is significantly higher than that.

Foolish assessment

There's still room for growth with these auto-parts retailers. The average vehicle age in the US is over 11 years old and repairs are needed. Even though the U.S. economy has recovered and new auto sales are up, many people are still choosing to keep their cars longer. This trend will benefit the auto-parts retailers.

Of the three companies, my favorite is Pep Boys because it's the smallest and has the most room for growth. A successful implementation of its new store concept in Tampa, Fla. will help the company going forward as it expands the concept into its other stores, boosting comparable sales.

AutoZone and O'Reilly are both in a position to consolidate the fragmented auto- parts business and expand their respective footprints. Look for further gains from all three companies over the long term.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool owns shares of O'Reilly Automotive. 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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