Auto Parts Retailers: Rev Up Your Portfolio

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 |  Includes: AAP, AZO, ORLY
by: Brad Thomas

The Auto Parts segment is comprised of retail do-it-yourself (“DIY”) and commercial do-it-for-me (“DIFM”) auto parts and accessories retailers. Due to the challenging economic conditions, vehicle owners are more willing to maintain and repair their rides. Subsequently, the increase in the average age of vehicles drove demand for automotive replacement parts.

According to data provided in O'Reilly Automotive 2009 Annual Report, the top three Auto Parts chains enjoy 30% market share, leaving 70% to a highly fragmented competition. Clearly, there will be continued market consolidation with these top retailers:

Retailer

Symbol

Market Share

AutoZone

AZO

12%

Advance Auto

AAP

9%

O'Reilly

ORLY

9%

Click to enlarge

Let’s peek under the hood to check what makes these chains “Best in Class”:

The Beginning – All three (3) retailers started with deep roots in the south. Advance Auto Parts success began in 1929 in Roanoke, VA when the Taubman family opened its first hardware store that later evolved into a regional auto parts chain. O’Reilly, also a family owned retailer (still named for the founding family), was launched in Springfield, MO in 1957. AutoZone was formed in 1979 and is headquartered in Memphis, TN. With 165 years of combined experience, all three (3) of these chains have a long established history and well qualified as Classics if not Antiques.

Store Count – With a combined 11,613 store count, our top three retailers represent considerable horsepower. AutoZone is the store count leader with over 4,627 stores compared with 3,450 Advance Autos and 3,536 O’Reillys. In addition, AutoZone has the biggest geographic footprint with presence in 48 States, Puerto Rico, and Mexico. Advance Auto and O’Reilly have stores in 39 and 38 States, respectively. (AAP also has stores in Puerto Rico and The Virgin Islands).

Expansion – Again, AutoZone appears to be the “leader of the pack” in terms of growth in 2010. Based on AutoZone’s most recent 2010 Annual Report, the retailer grew by 213 units in its latest fiscal year (up 23 units compared to 2009). The company has historically grown by 5% annually over the last few years. According to Advance Auto’s recent 10Q (11-17-10), the company will add 110 stores in 2010 and O’Reilly appears to be on track for its 150 “new” stores in 2010. However, in its most recent 10Q, O’Reilly stated that it opened 121 stores and completed 580 CSK conversions in 2010 so far. Clearly, the CSK acquisition boosted O’Reilly to the #2 “store count” position with this strategic and successful acquisition.

Sales – The sales barometer makes it obvious that all three (3) engines are working extremely well. All retailers are reporting record sales. AutoZone posted 2010 Annual Sales of $ 7.362 B vs. its 2009 Annual Sales of $ 6.816 B - 7.4% increase. Advance Auto reported Annual Sales of $5.413 B in 2009 and O’Reilly posted Annual Sales of $ 4.847 B in 2009. By the end of this year there should be in excess of $ 18 B reported from all three chains. Impressive horsepower for 30% combined market share!

Cash – Now let’s check the cash gauge, perhaps the one of the best indicators of power! As of August 28, 2010, AutoZone was sitting on approximately $ 98.28 M in cash. Advance Auto is hoarding $ 194.50 M vs. $ 43.1 M O’Reilly’s cash balance (as of 9-30-10). From analyzing their growth strategies, it is apparent that AutoZone is funding its 5% growth with cash. Advance Auto are leasing 79% of its stores and planning a more conservative growth. Over the previous nine (9) months, Advance Auto grew its cash balance from approximately $ 100 M to $ 194.5 M. Advance Auto’s healthy cash balances are enviable and the company’s strength should prove to be an important fuel for acquisition, growth, and consolidation in the months ahead.

Long Term Debt

Retailer

Symbol

Long Term Debt (*)

AutoZone

AZO

2.908

Advance Auto

AAP

.301

O’Reilly

ORLY

.104

* In Billions

Click to enlarge

AutoZone has a large amount of long term debt and higher than average Long-Term-Debt to Sales ratio as compared to other national publicly traded retailers:

Retailer

Sales (*)

Long Term Debt (*)

Debt / Sales

AutoZone

7,362,618

2,908,486

39.50%

Advance Auto

5,413,000

301,043

5.56%

Walgreen's

63,000,000

2,336,000

3.71%

CVS

98,700,000

8,756,000

8.87%

Dollar General

11,796,380

3,399,715

28.82%

Wal-Mart

408,214,000

36,401,000

8.92%

Kroger

76,733,000

7,420,000

9.67%

Goodyear

16,301,000

4,182,000

25.65%

Staples

24,275,451

2,500,329

10.30%

Kohl's

17,178,000

2,052,000

11.95%

(*) In thousands

Click to enlarge

Recently Advance Auto was upgraded from BB+ to BBB- and is now an Investment Grade Credit. AutoZone is rated BBB and O’Reilly is not (credit) rated. With a much more conservative balance sheet and due to its upgraded credit rating, Advance Auto appears to have the healthiest debt engine in the auto parts sector.

The final two (2) measurements are arguably the most important:

Cash Flow From Operations and ROIC – In reviewing AutoZone’s most recent 2010 Annual Report, it has posted historically significant data. In 2010, AutoZone increased its cash flow from operations from $ 924 M to $ 1.196 M. This graph provides the company’s five (5) year cash flow history:

Click to enlarge

AutoZone

2010

2009

2008

2007

2006

2005

Cash Flow From Operations (*)

1,196

924

921

845

823

648

Increase

22.74%

0.32%

8.25%

2.60%

21.26%

Click to enlarge

(*) Thousands

Comparatively, Advance Auto grew its cash flow from operations from $ 479 M in 2008 to $ 699.7 M in 2009, a 31.5% increase. Both companies enjoyed historical results in previous years.

I consider ROIC (Return On Invested Capital) to be the absolute best metric for retailer’s success.

ROIC =

Net Income After Tax

Invested Capital

Click to enlarge

ROIC is defined as net operating profit after taxes (excluding rent charges) divided by average invested capital (which includes a factor to capitalize operating leases). Over the previous five (5) year period, AutoZone has achieved 20%+ ROIC performance as follows:

AutoZone

2010

2009

2008

2007

2006

2005

ROIC

27.60%

24.40%

24.00%

22.70%

22.20%

23.90%

Increase

11.59%

1.64%

5.42%

2.20%

-7.66%

Click to enlarge

Compared to Advance Auto’s ROIC performance of 15.1% (2009) and 14.0% (2008) and O’Reilly’s lower double digit results.

Best in Class - In summary, all three (3) Classic cars deserve applause; however, AutoZone takes the Overall prize. It is also important to note that AutoZone owns 2,246 sites and leases 2,171 sites. There is considerable capital value in the real estate portfolio as the company has deployed its stated 5% annual growth target and also achieved its sustainable cash flow operations and ROIC metrics.

In closing, this is the AutoZone Pledge as read from the company’s 2009 Annual Report:

“ AutoZoners always put customers first!

We know our parts and products.

Our stores look great!

We’ve got the best merchandise at the right price.

Gentlemen, start your engines!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.