Auto-parts retailers, dollar stores and drugstore chains serve
different consumer needs. But both share defensive traits that
have powered them ahead of other retail segments and bolstered
the stocks even as the general market has skidded.
As a group, drugstores are up 13% year to date, compared with
only a 1% gain for the S&P 500 Index and a 5.11% decline in
the S&P Retail Index.
What's the draw? Potential benefits from the Affordable Care
Act, an aging U.S. population and the opportunity to boost
margins amid a new wave of generic drugs coming to market have
helped spark investor enthusiasm over the group, which includes
chains such asCVS Caremark (
) andRite Aid (
All three chains are trading at all-time highs. Rite Aid's
share price has rocketed to its highest level in 13 years.
"The backdrop for all three (drugstore chains) is a rising
tide lifts all boats," said Jefferies analyst Mark Wiltamuth.
"Health care reform could add 3% to the industry's prescription
volumes over time once the new insurance coverage is digested by
There's also a "nice macro trend with the aging of the baby
boomers," who will require more medication when they reach
Medicare age at 65.
Wiltamuth notes that consumers ages 65 and over spend an
average of $1,300 a year on prescription drugs vs. $150 for those
18 to 44.
Another plus: There's likely a new wave of generic drugs
coming to market in late 2014 into 2015. "Generic drugs carry
more profit dollars for a pharmacy even though they go for a
cheaper price," Wiltamuth said.
He adds that pharmacies generally make 50% or more per
prescription selling a generic drug vs. a branded drug.
Cold Hearts, Spare Parts
The auto-parts retail and distributors group includesO'Reilly
) andAdvance Auto Parts (AAP). O'Reilly and AutoZone have been on
a long-running winning streak with double-digit earnings
As a group, the industry's shares are up 8% year to date.
What's revving up their performance? While a long, tough
winter has dragged on many retail segments, it has increased wear
and tear on cars and trucks, driving up demand for auto
The economic recovery's initial surge in new car sales has
slowed, and the overall age of the U.S. auto fleet continues to
"The primary driver in the near term has been weather," said
Wedbush analyst Seth Basham.
The extremely cold winter and early spring weather in several
parts of America have led to a lot of stress on car parts,
particularly batteries, starters and alternators, Basham
That stress results in stalling and breakage. That means more
business for the auto-parts retailers from the do-it-yourself
customers and the commercial garages that fix the cars.
Batteries and starters need to be fixed immediately, says
Basham. And the do-it-yourself customer, typically a lower-end
consumer, needs to fix the car so he or she can get to work.
"That's led to a nice pop in sales (for the do-it-yourself
auto sector) in the fourth quarter and into the first," he said.
"Our expectation is we'll continue to see strong sales in the
second and third quarters."
The cold and snowy winter also means more potholes and salt on
the roads. They cause stress on under-car parts, Basham says,
creating many problems that will be addressed in the spring and
into the summer.
A hot summer would compound those issues and lead to
additional part failure.
Another driver: New car sales continue to rise but at a slower
pace. The seasonally adjusted annual rate of car sales in units
rose 2% in the first quarter. It's a drop from an 8% rise in the
first quarter of 2013 and even higher levels in 2012, wrote
Basham: "We view this as an incremental positive for DIY auto
sales, as not as many consumers purchase or consider purchasing
new cars and instead repair and maintain existing vehicles."
Another trend that helps the auto parts retailers: People are
holding onto their cars longer.
Last year, the average age of light vehicles was a record 11.4
years, according to auto research firm Polk.
Fistful Of Dollars
Another defensive retail segment is the variety discounters
such asDollar Tree (DLTR),Family Dollar Stores (FDO) andDollar
As a group, they're down 5% year to date. But that is among
the best performances among retail industry groups.
And variety discounters continue to outrun the broader
industry in same-store sales growth, according to Ken Perkins,
president of Retail Metrics.
"The dollar stores have great value and convenience," said MKM
Partners analyst Patrick McKeever. And "overall they're doing
better than other retail sectors."
However, growth is slowing from two years ago, when the group
was generating mid-single-digit same-store sales growth, to low
single digits now, he says.
He adds that Family Dollar Stores is the weak link in the
group now. Family Dollar's earnings slipped 30% in its second
quarter ended March 1, and its same-store sales fell 3.8%.
It's going through a restructuring, which includes closing
around 370 stores and job cuts.
Overall, dollar stores continue to strike a chord with
consumers by offering ultralow prices on everything from food to
But their core low-income consumer is feeling pressure on a
number of fronts.
"Some of it is macro," McKeever said. "The weak recovery in
some instances has left the core dollar-store customer
Added Piper Jaffray analyst Peter Keith: "We've seen
bifurcated recovery, with asset appreciation in home prices and
stock market gains largely benefiting mid- and upper-income
consumers. The lower-half income demographic is not participating
in the wealth effect, because this demographic has much lower
ownership rates in home and equities."
A headwind: what McKeever calls a pullback in government
assistance to the dollar stores' core customers, including cuts
in extended unemployment benefits and a reduction in food-stamp
assistance effective Nov. 1.
Drugs On The Rise
The climate for the drugstore chains continues to be
"Retail pharmacies make more profit per generic drug dispensed
than branded drugs," said UBS analyst Steven Valiquette. "From
2011 to 2015, there is the biggest generic opportunity in the
history of the industry to capitalize on."
He estimates that $115 billion worth of branded drugs will
have gone generic in that period, compared to an estimated $79
billion from 2006 to 2010.
"A big part of why these stocks are doing well has to do with
their ability to capitalize on this current generic drug wave,"
he said. "Our view is that most investors believe the generic
opportunity will slow down dramatically from 2016 to 2020.
However, our $82 billion view for this time period still creates
an excellent opportunity for retail pharmacies."
Added Wiltamuth: "These health care themes, including the new
generic drug wave, the aging baby boomers and the Affordable Care
Act, all help the sector against a more sluggish economic
Auto retailers are likely to continue seeing a boost from the
John R. Lawrence at the financial-services firm Stephens says
he likes the stocks and the group. The question, he said, is "how
long will the harsh weather continue to favorably affect the
purchase of auto parts as far as creating demand? There could be
a long tailwind."
The variety discounters could continue to face challenges.
"2014 is going to continue to be a challenging year following
a tough 2013, given the pressure on the lower income demographic,
which is their core customer," said Wedbush analyst Joan
"There's going to continue to be a negative mix shift toward
lower-margin consumables because that demographic is buying what
they need when they need it, and they're not buying discretionary
products like apparel."
The shift toward lower-margin consumables "has the potential
to put pressure" on same-store sales, she added.