Over the past two years, we have written about Advance Auto Parts being "squeezed by the executors" with the executors being AutoZone and O’Reilly Automotive. We chose to characterize them as "executors" given their consistently strong execution and large gains in commercial (do-it-for-me, or DIFM) at the expense of Advance and other regional auto parts retailers. While the executors were investing in greater service levels, more competitive pricing, and shop management tools for their commercial customers (the repair shops), Advance struggled with inventory management, leaned more heavily on its private-label selection, cut expenses, and expanded its margins. (Recall that Advance also announced that they were seeking a new CEO.)
Those different approaches came to a head during Q1 2023, and Advance reported results that fell short of its sales plan (indicating that they lost share again) and experienced a meaningful decline in margins as they reversed tact and cut prices to stem the commercial share losses. Advances 1Q 2023 release quotes outgoing CEO Tom Greco: “We expect the competitive dynamics we faced in the first quarter to continue, resulting in a shortfall to our 2023 expectations. We have reduced our full-year guidance and our board of directors made the difficult decision to reduce our quarterly dividend. In addition, in connection with my pending retirement, our board’s independent chair (and former Darden CEO), Gene Lee, has assumed an expanded role as interim executive chair. Gene will be providing additional operational oversight and support to our management team to enable a seamless CEO transition.” Unfortunately for Advance, this news will embolden the executors to redouble their efforts to take market share in commercial from Advance. In support of that view, AutoZone’s forecast for a decline in average ticket during Q2 2023. Moreover, the spread between O’Reilly’s commercial comps (over 20%) and Advance’s (negative low- to mid-single digits) continues to gap wider.
Advance’s sales mix is 60% commercial and 40% do-it-yourself (DIY), and we estimate that commercial sales per location are just over $1M. By contrast, AutoZone’s sales mix is 31% commercial and 69% DIY, with commercial sales per location around $830K, meaning that they have a lot more headroom to claim. As we shared recently, the industry’s multi-year outsized growth stems from the shortages of both new- and used-vehicle sales inventory. Those shortages, plus the resulting high prices for vehicles, pushes up the average age of vehicles on the road. More older cars driving more miles leads to increased wear & tear. The shortages aren’t just last year’s or this year’s issue. It will take years to remedy. When we look at the data measuring supply & demand for commercial auto parts, we see no attenuation in demand.
Source: Bureau of Transportation Statistics
While AutoZone’s +1.9% April-end quarter domestic comparable-store increase wasn’t impressive on the surface, weather was a meaningful headwind and suppressed comps to -1% in March. For April and early May, comps were +4%. AutoZone's commercial comp for the quarter was +6.3%. Lower tax refunds were also an issue for AutoZone, a common headwind shared by many retailers. On its Q1 2023 update call, CEO Bill Rhodes said, “After the most significant product cost inflation we have seen in decades, we are seeing those trends moderate and are negotiating some cost reductions from our vendors, as both product cost and freight inflation are slowing or have subsided…While we've had to manage through external forces, our focus continues to be on driving profitable market share growth, particularly in units and transactions. Our growth initiatives did just that this past quarter and included new store unit growth, improved satellite store availability, Hub and Mega-Hub openings, improvements in coverage, leveraging the strength of the Duralast brand, enhanced technology to make us easier to do business with and more efficient, reducing delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being priced right for the value proposition we deliver. While our sales moderated this past quarter, we remain focused on growing our share over time and becoming the industry leader in both DIY and commercial.”
AutoZone’s commercial program has now been extended to 88% of the domestic store base, or 5,526 locations in total. Rhodes noted, “Execution in our culture of always putting the customer first are what define us…We continue to be bullish on our industry and, in particular, on our own opportunities for the remainder of the year…We are doubling down on execution and are focused on driving share gains.” As it relates to gains in commercial, President Jamare Jackson noted “Duralast offerings, expanding our assortments with Mega-Hub, improving our delivery times, leveraging technology, the competitive pricing that we've done, all of those things still have a lot of legs associated with them.” AutoZone expects its commercial business to be a double-digit growth segment for years to come given that it only has a 5% share of a large $100B market.
