Sales show resiliency

Jan. 1, 2020
To help determine business trends in May and June, seasonally stronger months, we polled a sample base of 151 automotive parts retailers across the United States, comprised of an almost equal split of stores in the Southeast, Northeast, Midwest and W
To help determine business trends in May and June, seasonally stronger months, we polled a sample base of 151 automotive parts retailers across the United States, comprised of an almost equal split of stores in the Southeast, Northeast, Midwest and West. Surprisingly, the results suggest that aftermarket sales trends held up fairly well from May into June. This survey tends to more accurately gauge direction than magnitude, but we think it indicates second quarter 2008 earnings per share (EPS) results will be in line or better for parts retailers. Overall, the survey results point to improved trends in general for all parts retailers, as well as the professional installers, from what were relatively weak results in the March quarter.

According to the survey, the April through June quarter progressed normally, with trends remaining positive into June. While we suspect May was the strongest month on a year-over-year basis, June was the best performing month in the quarter on a sequential basis (typical from a seasonal standpoint). Nationally, business in May appears to have improved from April and March. Nationwide, June sales maintained May's positive trends.

Overall, weather has had a modestly positive impact on aftermarket sales across the nation. Survey respondents indicate that maintenance items and hard parts are performing at an above-average pace with hard parts demand slightly higher for maintenance items. Across the nation, survey respondents indicate that the majority of customers are deferring automotive maintenance and repair as a result of gasoline prices and the economy, an ongoing trend since 2006. That said, it is interesting to see the Northeast region actually indicate a below-average deferral rate (relative to the other three regions).

What are the company-specific implications of this survey? While Advance's DIY business is likely to remain pressured, a renewed focus on hard parts and inventory availability should help, and we expect to see trends in the commercial segment remain robust. The strength seen in survey results for the Northeast could bode well for Advance, given its solid regional presence (nearly 25 percent of its business mix). Interestingly, the Northeast respondents were the only ones to note a below average customer deferral rate (a modest positive).

The results should bode well for AutoZone, but because its fiscal fourth quarter won't end until August, results in July and August will still have a meaningful impact. The company's focus on commercial continues to pay dividends, and its commitment to adding a greater mix of hard parts should keep its DIFM segment more insulated. Again, we think the consumer is likely to focus on value in this operating environment, and — with more private labels than its peers — it may give AutoZone's DIY business a bit of an edge.

With hard parts and maintenance item sales showing strength in recent weeks and our industry channel checks indicating the operating environment is at least stable, we believe that Genuine Parts Company (GPC), with its vast geographic footprint, is positioned to capitalize on improved aftermarket trends. For O'Reilly Automotive, survey results also appear favorable, given that respondents indicate the Midwest had improved performance in May and June (relative to April), even with some regional flooding. Given the strength seen in the Northeast, as well as the ongoing outperformance of parts retailers with more commercial exposure, we think that Monro Muffler Brake also is well positioned to deliver second quarter results exceeding street expectations.

While we expect gas prices (and softness in miles driven) will remain a headwind for the group and likely prevent robust trend acceleration, it does not appear that industry fundamentals have seen any meaningful deterioration. Softness in miles driven has created uncertainty (and volatility) in the aftermarket, although we suspect the year-over-year change in May and June miles driven will not be as severe a decline as seen in March (and likely more similar to April).

So why does it appear trends are holding up better than expected even as miles driven decline? First, we think the waning demand for new vehicles is a big win for the automotive aftermarket (at least near-term). Most consumers tend to hold off on repairs in anticipation of a new vehicle purchase. With new car sales unlikely to recover in the near term, we think demand for maintenance (as well as gas mileage enhancements such as filters and tire pressure gauges or even locking gas caps) should keep sales of automotive repair and services fairly stable.

Second, the average age of vehicles on the road is 9.2 years, which is important because the failure rates of critical parts such as alternators and starters doubles once a vehicle reaches eight years. Roughly 56 percent of vehicles on the road today are eight years or older, and sluggish new car sales should likely push that rate higher. Finally, the weather has been cooperative, with the exception of flooding in certain parts of the Midwest. Last summer was unseasonably cool and rainy, a bad combination for battery failure and the temperature control category, so sales comparisons should be favorable for the remainder of the year.

Disclosures: BB&T Capital Markets makes a market in the securities of Dorman Products, Inc.; Monro Muffler Brake, Inc.; Motorcar Parts of America, Inc.; and 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.; Dorman Products, Inc.; Genuine Parts Company; Midas, Inc.; Monro Muffler Brake, Inc.; Motorcar Parts of America, Inc.; O'Reilly Automotive Inc.; Standard Motor Products, Inc.; and The Pep Boys — Manny, Moe & Jack in the next three months.

Advance Auto Parts, Inc.; Midas, Inc.; and Monroe Muffler Brake, Inc. are, or during the past 12 months were, clients of BB&T Capital Markets, which provided non investment-banking, securities-related services to, and received compensation from, the aforementioned companies for such services. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report knows the foregoing facts.

An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc.; AutoZone, Inc.; Genuine Parts Company; Midas, Inc.; Monro Muffler Brake, Inc.; and O'Reilly Automotive Inc. for products or services other than investment banking services during the past 12 months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts.

BB&T Capital Markets is a full-service investment-banking firm that focuses on specific industries, including the Automotive Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, Inc., NYSE/SIPC. Scott & Stringfellow is a registered broker/dealer subsidiary of BB&T Corporation, one of the nation's largest financial holding companies with $136.4 billion in assets.