The aftermarket retail industry has grown over the last few years since people are less willing to spend on new cars and try to maintain the existing ones for a long time. This has resulted in an increase in the average life of vehicles. An obvious result of the same is higher demand for replacement parts and repairs of automobiles.
Specialty retailer of automotive parts Advance Auto Parts (AAP, Financial) is the largest player in the industry and has witnessed immense growth in the recent years. However, its recently reported fourth-quarter results were not up to the mark and were slightly below the Street’s expectations, sending its shares down.
Into the numbers
Revenue for the company surged 59% to $2.24 billion, over last year. This was slightly below the analysts’ estimate of $2.28 billion. Although the number was below the expectations, it was far more impressive than any of the industry peers. This was mainly because of the acquisition of General Parts International last year. Also, a growth of 1.1% in same store sales and the addition of 151 new stores in 2014, boosted the top line. Furthermore, the buyout of General Parts also added 1,336 Carquest stores and Worldpac branches to the existing network of stores.
The bottom line of the company was another win. Earnings surged 45.7% to $1.37 per share, as compared to the previous year. But the analysts’ estimate was at $1.48 per share. However, including an extra week this year the earnings came in at $1.54 per share, far ahead of expectations.
The gross margin of the company dropped to 44.9% from 49.8% in the previous year. This decline was mainly because of the acquisition of General Parts, which specializes in commercial sales having lower margins. Thus, an increase in commercial sales resulted in a much lower margin. On the other hand, acquisition synergies offset the decline to some extent.
Key points to note
Advance Auto Parts acquired B.W.P. Distributors and General Parts International last year. This has helped the company boost the geographic presence in North America as well as expand its portfolio of offerings.
These acquisitions have made the retailer stronger, enabling it to provide a bright outlook. The earnings guidance for 2015 is in the range of $8.35 per share to $8.55 per share. Also, it expects comp sales to be in the low single digits. Moreover, Advance Auto expects to open 100 to 120 new stores in 2015, which should further help the company grow its size.
However, a key matter of concern is that auto sales are expected to pick up the pace in the future and hit a high of 17 million, the highest since 2005. This should result in lower demand for aftermarket retail. According to Autodata Corp, total sales were up 6% in 2014, clocking in at 16.5 million vehicles. One of the primary reasons for higher auto sales is the decline in fuel prices.
My take
The specialty retailer of automotive parts caters to a wide variety of customers, including consumers who buy replacement parts and do it themselves, consumers who get it done by Advance Auto and the commercial customers who buy for their large inventory. Thus, this company has a wide range of customers. Also, it has declared a dividend of $0.06 per share for its investors and has a dividend yield of 0.16%. Therefore, this auto part retailer looks increasingly attractive. Investors should take note.
