The retail march continues

A spotty retail environment has left some aftermarket companies reporting a mediocre first quarter, while other major players are touting more favorable results.

Unlike the recent consolidation experienced on the distribution side, the retail end of the equation has likely consolidated as much as it’s going to, say analysts, but retail continues to be an important component to the aftermarket. Its particular role, however, is bound to change shape.

“I think there is good long-term growth, but the DIY segment is not growing the same way it has been,” says David Solomon, managing director and partner of Goldsmith Agio Helms.

The U.S. aftermarket has averaged more than 4 percent yearly growth from 1999 to 2004, and Solomon projects the retail segment to only grow in the high 2’s or 3’s going forward.

“The top 20 retailers have about 40 percent of market share, which is a pretty good level of consolidation,” he says, comparing the statistic to the DIFM segment, in which the top 20 players have only 11 percent of the market.

The commercial business is growing faster than its retail brethren, but the small numbers will still drive DIY business — especially as the age of vehicles reach that “sweet spot” of surpassing their warranties.

“I think where we’re at now is 9.6 years for cars,” Solomon adds. “That, combined with the increased number of cars, bodes well for the aftermarket.”

Right now, Advance Auto and O’Reilly appear to be the market leaders as far as growth is concerned, but it’s still too early to tell, remarks Solomon.

AutoZone has posted negative growth so far, while CSK has broken even. Wal-Mart, whose numbers encompass more than automotive aftermarket retail sales, remains solid, as well as companies like Genuine Parts. Pep Boys, on the other hand, is still struggling after investing in numerous store renovations.

It’s obvious that retailers are wary amid the current economic climate, as companies contacted for this story either declined comment (like Advance Auto) or did not return repeated phone calls by press time.

A lot of the problems retailers face with manufacturers are caused by the retailers themselves, says Dan Smith, president of Capstone Financial Group. “They’ve had such onerous terms with manufacturers over the last couple of years; a lot of (manufacturers) are avoiding retailers like the plague.”

In fact, Smith says he’s encountered a number of industry buyers who say they won’t buy a company that sells to specific retailers. As a result, some suppliers will bypass retailers altogether and sell goods straight to the consumer through the Internet, mail order or other nontraditional channels.

Reaching a wider demographic

Although the proliferation of SKUs is cited as a detriment to the aftermarket, broadening product offerings to include a wider demographic reach will likely boost these companies amid this lagging retail environment, says Smith.

Pep Boys, which underwent a high-profile retail facelift and expanded its product lineup to cover powersports items and apparel, is still struggling with its retail business.

CSK announced plans to open four stores this year in the Phoenix market that will sell tools, hardware and household goods under the Pay N Save banner. Pay N Save sells an eclectic mix of items such as windmills, fishing gear, water fountains and bar stools.

“Retailers are looking at new avenues,” says Smith. “I don’t think they’re going to slow down.”

The growing sophistication of vehicles is also contributing to a trend away from the DIYer. All in all, the top retailers will weather the current climate and persevere, suggests Smith.

“From everything we see, the economic factors are not going to change; as long as the supply lines stay open and no manufacturers bite the dust, I think it will be about the same.”

Here’s a look at some first-quarter reports from several major retail players:

Advance Auto Parts Inc. saw a 12-percent growth in net sales, with 9 percent comparable store growth, leading to about $1.3 billion in total net sales. Average net sales per store is $1.5 million. Advance expects to open 150 to 175 new stores this year.

AutoZone reported a 1.6-percent, or $21.6 million, decrease in net sales from last year’s $1.36 billion in reported sales. The company attributes this to a 5-percent decrease in comparable store sales, a 2-percent decrease in DIY sales and a 5-percent decrease in commercial sales. Gross profit for this period was $673.1 million, or 51 percent of net sales, compared with $676.2 million, or 50 percent of net sales, for this period last year. New CEO Bill Rhodes has his work cut out for him, especially as it pertains to the company’s commercial ventures.

CSK Auto Corp. held steady with no reported losses or gains for the first-quarter, news that’s a little more positive than its end-of-year 2004 results, which saw a slight decrease in net sales, same store sales and gross profit. CSK, which operates under brand names Checker Auto Parts, Schuck’s Auto Supply and Kragen Auto Parts, reported a slight increase in net sales, while same store sales decreased 1.2 percent over last year. The company attributes a difficult sales environment, like a decline in customer count, for its performance. The company says its business is seasonal in nature, with the highest sales occurring June through October. CSK also changed its inventory method from “last-in, first-out” (LIFO) to “first-in, first-out” (FIFO) starting the fourth quarter of 2004, which initially increased the cost of sales and decreased gross profits.

Genuine Parts Co. has had a favorable year so far. The company reported a consolidated net income of $107 million, up from $100 million for this period last year. First-quarter sales were $2.3 billion, a 7-percent increase over last year; cost of goods sold was $1.61 billion, compared to $1.51 billion last year. Operating profit as a percentage of sales, however, was 8.2 percent, compared to 8.5 percent for this period last year. In order to increase sales and earnings, the company says it has focused on introducing new product lines and sales to new markets.

O’Reilly Automotive Inc. had 15.6 percent revenue growth in the first quarter of 2005, as sales grew $63 million to $466 million. The company, which boasts a 50/50 mix of retail and commercial, reported a 16-percent, or $27 million, increase in gross profits.

Pep Boys continues its uphill climb with a reported net loss of $2.77 million for the first quarter, as well as a .3 percent decrease in sales, compared to an 11-percent sales increase this time last year. Merchandise sales were negatively affected by internal changes due to the company’s store refurbishment program and organizational changes, according to Pep Boys’ quarterly report.