This Auto-Parts Retailer Will Keep Your Returns in High Gear

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

AutoZone (NYSE: AZO), the undisputed leader in the auto-parts retailing industry in terms of sales, is still expanding at a steady clip and remains a strong entity with solid prospects for several years hence. Its strategy of growing the store base about 4% annually, while holding new locations to a minimum return-on-invested-capital, is driving sales gains. Although improvements in new auto sales are likely limiting comparable-store sales comparisons, growing levels of sales to commercial mechanics should help to mitigate this effect and support long-term growth.

Optimizing the store base

Management sees opportunities to boost the store count at an ongoing 4% or so annual pace. The number of vehicles on the road is at an all-time peak and consumers are more often seeking out affordable repair alternatives. As part of its customer-acquisition and retention strategy, it has been consistently tailoring the mix of parts available at its units to better meet demand at its more than 5,000 stores.

For example, the company recently expanded five additional hub locations, and opened two more, for a total of 154 hubs. The initiative helps to ensure that the right parts are in stock when needed. On that note, AutoZone is beginning to place emphasis on e-commerce, from where only 3.5% of sales are currently derived. The Autozone.com and autoanything.com (acquired in December 2012) websites are geared toward providing service to a wider range of customers. Its existing ALLDATA online information service is inline with this goal, as well.

Looking forward, AutoZone will remain focused on improving its inventory selection and sticking to the per-store performance standards it places on new locations. I believe all of this will work toward management's other goal, consistency in earnings results.

The commercial program ramp

As of the end of the May quarter, 68% of AutoZone's U.S. locations offered delivery to commercial customers, having added the service to 302 units over the past year. Commercial-related sales rose 9.7% over that time frame, essentially inline with the program expansion. This caterer to the do-it-yourself mechanic has much room to grow share in the commercial market, where it remains well underrepresented.

An industry compatriot that has fared well in growing its commercial operations is Advance Auto Parts (NYSE: AAP). Advance's commercial sales climbed to a whopping 41% of its total in the most recent quarter. The recent acquisition of B.W.P. Distributors highlights Advance's intent to capitalize on a market that is under-penetrated by the major retail chains. It offers the service at about 87% of total stores. Of note, however, Advance's operating margin is significantly below that of AutoZone, due to higher SG&A costs. It plans to continue to boost the efficiency of this service for long-term profit gains.

I like Advance shares at their recent price. The company shares some features of AutoZone, such as consistent sales growth behind expansion, as well as share buybacks.

Another industry peer to look into

Pep Boys - Manny, Moe & Jack (NYSE: PBY) is on track for a resurgence of earnings this year. The "supercenter" operator is realizing higher sales from its service business, while retail sales have slumped a bit. Comparable-store sales, accordingly are on the rise. However, service margins are very narrow and net profit margins are weak.

In all, for the latest quarter ended May 4, share earnings were $0.07, up from $0.02 in the prior year. Trends are favorable for the commencement of a more-pronounced profit bounce-back that should be evident in the July earnings report. It is possible that share net will rebound to around $0.51 this fiscal year, versus $0.32 in 2012. As such, I like the shares as a near-term recovery candidate.

AutoZone leading the way

AutoZone is the best situated within the auto-parts DIY industry. It will likely persist in improving its supply-chain productivity, and R.O.I.C, thus maintaining strong profitability. At this moment, the only downside is a reduced amount of -- as AutoZone would say -- "OKVs" (our kind of vehicles) on the road that are seven years or older. This is a somewhat counter-cyclical phenomenon that impacts its results. I recommend holding the shares for the long term.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure