The economic recovery is more than two years old, but U.S.
gross do�mestic product (
GDP
) continues to limp along at a lackluster 2 per�cent
annualized pace, unemployment remains at an elevated 8.2 percent
and the housing market is at best scraping bottom.
Even worse, unemployment soars to nearly 15 percent if you factor
in the millions of underemployed workers and those discouraged
workers who gave up looking for a job. By most metrics, the
recovery since mid-2009 is one of the weakest expansions in
post-war economic history and tepid growth is likely to continue
for the rest of the year.
Not surprisingly, U.S. consumers, along with their counterparts
in Eu�rope and other developed markets, are saving
more and spending less - bad news for most retailers.
Howev�er, some consumer-focused compa�nies
are actually benefiting from the new age of austerity.
The weak housing market has severely hit investment in new home
construction. The sil�ver lining is that many
consumers are instead remodeling and main�taining
existing properties.
Foreclosed homes are typically in bad shape when they're acquired
at auction from banks; new owners must upgrade and repair these
prop�erties to make them suitable for resale.
Improvements and remodeling now account for more than 42 percent
of all investment in retail hous�ing, up from about 21
percent at the height of the housing boom.
The same principle is at work with automobiles. The U.S. new car
mar�ket currently stands at 13.7 million annualized
vehicles, down from an average of about 18 million before the
Great Recession of 2007 to 2009. Instead of splurging on a new
car every few years, consumers are keep�ing their
existing vehicles longer, pushing up the average age of U.S.
cars. The need to repair and maintain older vehicles is powering
demand for retailers of automobile parts and tools.
One stock that stands to gain from cost-conscious
consum�er spending is
AutoZone
(
AZO
).
AutoZone is
the largest automobile parts and accesso�ries retailer
in the U.S., with more than 4,600 domestic store locations and
300 in Mexico.
The company sells products in three main categories: failure,
maintenance and discretionary. Failure items include major
mechanical parts in auto�mobiles and trucks that wear
out over time such as air conditioning compres�sors,
fuel pumps, fuses and lights.
Maintenance items include non-discretionary products that must be
replaced over time such as oil, wind�screen washing
fluid and transmission fluid, while discretionary items include
waxes, floor mats and air fresheners.
The first two categories of prod�ucts are direct
beneficiaries of the current tendency of consumers to keep their
cars longer. Cars that are older than seven years typically have
more than 85,000 miles on the odometer and are no longer covered
by warranty require more frequent and ex�pensive
repairs.
The number of cars in this age group has exploded since 2007, as
sales of new cars have fallen sharply and the average age of U.S.
cars reaches record levels (for more on the U.S. car market, see
Perfect Storm for Palladium Could Bode Well for Stillwater).
AutoZone has traditionally served a primarily DIY customer base.
Sales to that group continue to perform well, but the
do-it-for-me (DIFM) market that consists of professional
mechanics has stronger growth prospects.
Over the past 12 months, sales to DIFM customers totaled $1.2
billion, around 15 percent of the company's total revenue base,
and they're grow�ing at a more than 21 percent pace
year over year, compared to a total revenue growth rate of only 8
percent.
One driver of that growth is Au�toZone's roll-out of
its commercial sales program across its retail
loca�tions, allowing professional customers to buy
parts on credit, with expanded online ordering and delivery.
Management believes that AutoZone only has 2 percent market share
in auto parts sales to professional buyers, suggesting there is
plenty of upside.
AutoZone shares were hit in late June after competitor O'Reilly
Auto Parts (
ORLY
) lowered its quarterly comparable store sales
guid�ance, citing sales below expectations in June.
However, this softening in sales partly stems from the
extraordinarily warm winter of 2011 to 2012, which prompted
customers to buy parts ear�lier in the year. For more
on AutoZone, see
2 Auto Repair Stocks Set to Race Ahead
.
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