O’Reilly Automotive and Genuine Parts (NAPA Auto Parts) reported Q2 2023 results that confirmed two trends. One, demand for DIFM auto parts and repair services remains positive and growing despite the moderation in parts cost inflation as real demand is building. Two, the competitive pressure for commercial accounts and market share remains intense.
On the first trend, the consumer price index (CPI) for auto parts & equipment has been roughly unchanged since November (below).
Source: U.S. Bureau of Labor Statistics
As demand for motor vehicle repair & maintenance (as measured by personal consumption expenditures, or PCE) has built this year, it suggests that real demand has favorably increased in response. Since last December, real demand is up +5.6%, far outpacing overall PCE’s +1.5% increase.
Driving that demand has been: (1) the still high cost of new and used vehicles that haven’t appreciably come down this year, remaining 20% and 44% higher, respectively, than their pre-pandemic levels; (2) lower gas prices likely means more miles driven, which results in more auto repair occasions; (3) return-to-work and summertime kids activity also means more miles driven; and (4) the continued aging of the U.S. vehicles fleet.
On competitive pressures for commercial, readers will recall our prior stories on Advance’s struggles and recent slippages by AutoZone. (A couple weeks back AutoZone announced that long-time CEO Bill Rhodes would be retiring in January but will remain Executive Chairman. Rhodes has been CEO since 2005) This quarter, NAPA also moved into “slippage” in its commercial business, which is highly visible given that its 80% of sales. In contrast, O’Reilly "revved ahead" with double-digit commercial business comparable sales growth for its June-end quarter.
In addition to its outperformance, O’Reilly announced a CEO succession, with Greg Johnson handing the reins to Brad Beckham (currently Co-President). Beckham added some color on O'Reilly's quarterly update, “strong sales trends continued throughout the quarter, resulting in our outperformance versus our expectations in each month of the quarter. From a cadence perspective, our results were very steady in each month of the quarter both in absolute terms and as compared to our expectations. The ability of our team to drive high levels of sustained sales growth month after month is the product of consistent daily execution of our key business fundamentals…Our team delivered a mid-teens comparable store sales increase in our professional business in the quarter, with incredibly strong growth coming on top of double-digit professional comps in the second quarter of 2022. The compounded gains we are seeing on this side of our business reflect a sustained high level of customer service and execution that has allowed us to translate increased sales gains into future business opportunities. Every chance we have with a professional customer to prove our exceptional value gives us the ability to earn the next call and capture even more of that customer's business. As we have seen our business grow over the last few years, our store teams have made the most of these incremental opportunities, and we continue to see runway to leverage our proven business model and execution to gain market share.”
For auto part retail, one has to be careful in viewing foot traffic given the significance of commercial visits to the category. Commercial sales are done by running the brand’s part truck from a store to a commercial account’s shop. That part truck is driven by an employee and not a shopper. AutoZone’s sales mix is only 30% commercial, whereas Advance Auto Parts is 60%. And so, the table shows visits by loyal visitors (defined as more than 12 visits, including visitors and employees), which helps us better understand auto parts retailers' underlying commercial and DIY businesses. (Another powerful tool is “Favorite Places”, which gets at competitive encroachment into and expansion of a brand's commercial business from a peer.) The analysis in the table suggests that Advance outperformed NAPA and AutoZone in Q2 2023, which we will be able to confirm when they provide their next quarterly update in late August. Of note, comparable-store sales are stronger than traffic given the category’s +6% inflation for the quarter; moreover, we also don’t pick up changes in average ticket (which has been a large positive) and other variables. As such, we see this “loyal” indicator as a relative measure between the brands in the category.
AutoZone’s commercial comps for the March-May period were about +5%. As for Advance, earlier this year in an effort to stem its market share losses, it cut its dividend and reinvested margin into price. At the end of May, Advance’s CEO Tom Grecco said, “Our customer-focused investments in parts availability and price competitiveness resulted in improvements across key relevant performance indicators.” Our data suggests that the initiative is indeed bearing fruit. When Advance reports earnings in late August, we are expecting a notable improvement in commercial comps for the May-July period, something in the high-single-digit range (against a positive low-single-digit comp compare in commercial).