Market watchers, aftermarket respondents note these tendencies still are not robust.
To determine if business trends strengthened in May and early June from what appeared to be a soft April, we polled a sample of 128 automotive parts retailers across the United States. Based on the results, we think aftermarket trends have improved sequentially since April, but investors should keep modest expectations for the June quarter.
Nationwide, demand for maintenance items and hard parts appears to be strengthening. Deferred maintenance levels still indicate a degree of budgetary constraint on consumers, but the environment appears to have improved from last summer. The survey indicates June is the best month in the second quarter so far. In May, business seems to have been stronger in the Northeast and Midwest, followed by the South and West. In June, all regions, save for the Northeast, appear to have witnessed trend accelerations from May. Trend improvement still has not been as pronounced as we hoped given easier year-over-year comparisons.Nationally, weather appears to have exerted a slightly positive impact on business in May and June, with greater benefit to the Northeast and West. Weather of late has been seasonal and if it continues, should help drive higher ticket item sales and lead to more parts failure.
Same store sales (SSS) at Advance Auto Parts were somewhat soft in the first quarter. Even if comps fall a bit light (we expect 2 to 3 percent), logistics and procurement initiatives could result in partial offset from gross margin improvement.
The survey indicates the West had some of the strongest sales acceleration in June and the strongest performance in hard parts. With AutoZone's dominant presence there and a very strong fiscal fourth quarter from a cash flow perspective, we anticipate sequential trend improvement and further share repurchase to contribute meaningfully to earnings growth.
In the first quarter, O'Reilly Automotive Inc. posted a 6.8 percent comp against what might have been the toughest comparisons of the year. Given the higher level of DIFM exposure, we think O'Reilly again might post comps at the high end of or slightly exceeding guidance. The improvement in May and June should allow NAPA (given its DIFM exposure) to post improved results from the first quarter, especially as year-over-year comparisons ease.Respondents show they are optimistic about business prospects. We expect positive sales comps from all aftermarket participants, especially those exposed to the DIFM segment.
Tony Cristello Senior VP, BB&T Capital Markets Equity Research
BB&T Capital Markets is a full-service investment banking firm focused on specific industries, including the automotive aftermarket.
Disclosures: BB&T Capital Markets makes a market in the securities of O'Reilly Automotive Inc.
BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc.; AutoZone Inc.; Genuine Parts Company; and O'Reilly Automotive Inc. in the next three months.
Advance Auto Parts, Inc. is, or during the past 12 months was, a client of BB&T Capital Markets, which provided non investment banking, securities-related services to, and received compensation from, Advance Auto Parts, Inc. for such services.
An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc.; AutoZone, Inc.; and O'Reilly Automotive Inc. for products or services other than investment banking services during the past 12 months.
