AutoZone Cruises As Consumers Stick With Older Cars

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Auto parts retailers might not pop the champagne when the economy hits the skids and folks delay buying big-ticket items like cars and trucks.

But they probably don't mind it a great deal, either. When people put off buying new cars, it means they put their money into maintaining and repairing old ones.

This works in the favor of companies likeAutoZone ( AZO ). It's the nation's largest auto parts retail chain with nearly 4,800 stores in 49 states, the District of Columbia and Puerto Rico. It also has 341 stores in Mexico and one in Brazil.

AutoZone sells auto parts and accessories to consumers in the Do-It-Yourself (DIY) market and repair shops in the Do-It-For-Me (DIFM) market.

Old Cars, New Parts

Like other auto parts companies, includingO'Reilly Automotive ( ORLY ),Genuine Parts ( GPC ) andAdvance Auto Parts ( AAP ), AutoZone tends to flourish when the nation's fleet of cars on the road grows older.

That's been happening for several years now as recession-weary consumers decided to stick with their old vehicles rather than trade them in for something newer.

Not coincidentally, AutoZone has delivered a years-long run of double-digit earnings gains and steady revenue growth.

"Because people are keeping their cars longer, they're doing more maintenance on them. Cars are also lasting longer because they're much more durable," said Aaron Lowe, vice president of government affairs at the Automotive Aftermarket Industry Association, or AAIA. "This has all been good for the parts industry."

The average age of cars and trucks on the road is at a record high of 11.3 years, says Ron Rossi, the AAIA's director of market intelligence.

He points out that over the last five years, the number of vehicles 11 years and older has grown at a 3.95% compounded annual rate.

Meanwhile, the number of vehicles less than five years old has declined 6.5% over the same period, and the number six to 10 years old has dropped 1.3%.

The reason is simple: Younger cars are getting older, and older cars are staying on the road.

"The 11-year-and-older category is the aftermarket sweet spot," Rossi said. "It plays well into the DIFM and the DIY markets, both of which AutoZone is very interested in."

Even so, there are signs that consumers are changing their buying habits. U.S. auto sales in May rose 8% to an annualized 15.3 million vehicles, according to Autodata, above expectations.

It is unclear how these trends will affect the auto parts industry.

New cars typically come with warranties that let consumers get repairs at dealerships for a certain number of years rather than having to take them to independent repair shops or fix the cars themselves. Those trends work against auto parts retailers.

But even with rising sales of new cars, some watchers say there is still plenty of business left over for the aftermarket parts industry.

"In the interim, there are enough older vehicles on the road that the aftermarket should continue to see steady business in the years ahead," Rossi said.

The aftermarket parts industry is expected to grow at a rate of 3.4% a year through 2016, according to a report recently released by the AAIA and Automotive Aftermarket Suppliers Association.

Still, there are signs auto parts retailers are facing more head winds than they did a couple of years ago.

Decelerating Growth

AutoZone's quarterly earnings growth has decelerated or been flat in eight of the last nine quarters. Sales growth has decelerated or been flat nine quarters in a row.

Analysts polled by Thomson Reuters expect annual earnings this fiscal year to climb 18%, down from 21% growth in fiscal 2012 and 30% in 2011. Yearly earnings are seen rising 13% in both 2014 and '15.

"Certainly, the industry is growing slower than it did in 2010-11," noted Christopher Horvers, an analyst at JPMorgan. "But we believe results from AutoZone, Genuine Parts and O'Reilly show that 2013 is positioned to benefit from easier comparisons and a more normalized winter."

There are certainly far worse problems than dropping from 20%-or-better EPS growth to growth in the low to midteens. AutoZone has managed to deliver consistent gains because of its operational prowess, analysts say.

"AutoZone has used the cyclical boom in the category to fund commercial investments and as a means to buffer any potential slowdown in sales," Horvers noted. "Strong growth runway in DIFM, coupled with best-in-class execution in the DIY business, places AutoZone in a favorable position."

Meanwhile, the company continues to deliver solid financial results. It reported earnings of $6.27 a share for its fiscal third quarter, which ended May 5. That was up 16% from the prior year and 2 cents above analyst views.

Overall sales climbed 4.5% to $2.2 billion -- above estimates for $2.13 billion -- though same-store sales declined 0.1%.

AutoZone shares rose 6% to a record high of 435.35 on the day the company reported results. The stock currently trades near 416.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAP , AZO , GPC , ORLY

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