Genuine Parts Company (GPC) reported soft fiscal Q3 2024 results and lowered their outlook for the year, reflective of a more difficult macro environment in their view; the slower pace of sales has adversely impacted profitability and cash generation. NAPA comparable sales were down -1.5%, which implies a volume decrease of -4% to -6%, with mix being around +3% to 5% and price down -0.5%. Given that NAPA is around 80% commercial and only 20% DIY, that implies a lot less “fix it for me” as households defer non-essential repairs (DIY was down more). GPC CEO Will Stengel said, “Major accounts underperformed the group, driven by continued cautious end-consumer as we're seeing elevated levels of deferrals from customers on certain repairs. For sales into our independent store owners, we saw another quarter of more normalized buying behavior, which is a trend we believe will continue throughout the balance of the year.” Major accounts are the franchise dealers, Monro, Firestone, etc. Below we show that traffic to the large aftermarket repair shops is generally stable; as such, it must be the franchise dealers which are soft; we’ll learn more with the results from Lithia, Sonic, AutoNation, and Group 1. Group 1 shared that its repair & maintenance business was also impacted by the CDK outage; we’d expect that to be an industry dynamic that hurts all franchise dealership groups and auto part retailers.
Stengel also shared that consumers are trading down in the category, both in the DIY business and the end-consumer of the commercial customers. Positive mix has been a 4-point boost to growth in recent years; driving the other way hurts. Management also shared that business in July was impacted by Hurricane Beryl and the CrowdStrike Outage. They likely were not alone.
Recall that Stengel is a new CEO and looking to make essential repairs to NAPA’s business and its proposition (Stengel is a five-year veteran of the company and came from Home Depot.) On this, he said, “During the second quarter, we saw further improvements in inventory fill rates and stocking levels for specific categories where we had opportunity. Additionally, the team continues to elevate the execution in our stores and DCs, which is driving better customer service metrics. We're pleased with these results, but we're intensely focused on continuous sequential improvement. And finally, we're making good progress on our initiative to evolve our operating model at U.S. Automotive to own more stores in selected priority markets…During the second quarter, we acquired 242 NAPA stores from our independent owners as well as competitive stores in key markets. We're leveraging our disciplined integration playbook as we integrate these stores into our own store base. We'll continue to make methodical progress with our strategy of owning more stores in the second half of the year as the pipeline remains active.”
Solidifying the view that the macro has become more difficult for auto parts retail, “executor” O’Reilly Automotive also reported below-plan results and lowered their full-year outlook. Befitting the “executor” title, despite a more challenging macro, O’Reilly still was able to produce a +2.3% comp-store increase and grow profits and generate more cash (than last year). Like NAPA, the commercial business led with comps of 5.2% and DIY was down (-1.8%). In describing the shape of the quarter which aligns with Placer traffic, O'Reilly CEO Brad Beckham said, "Our quarter started off with sluggish results in April as we faced headwinds from cool wet weather during the spring selling season. The softness in our business persisted into May, which we believe reflected broad-based pressure throughout the industry. As we entered June, we saw improved trends driven by strong performance in hot weather-related categories. On a week-to-week basis relative to our original guidance expectations, June represented the strongest performance for our quarter. So far in July, sales trends have remained solid with weather benefit we saw in June, moderating somewhat as we compare to similar favorable hot weather in July of last year.” In other words, trends were chopping. Beckham also said, “The sales softness we experienced in the quarter was more pronounced in the discretionary appearance and accessory categories.” This adverse sales mix (discretionary has higher merchandise margin) is similar to what the dollar stores have experienced, which reflects an incremental pull back in spending by lower income consumers.
One of the keys to O’Reilly’s success in gaining share has been its consistent vision of their customer proposition, its consistent organizational structure, and its ability to retain and reward its store managers and labor, all of which results in its ability to have parts in stock and delivered more quickly than the competition. O'Reilly President Brent Kirby said, “One of the greatest resources as an organization is the professionalism and experience of our store team leaders. An excellent example of the strength of our leadership bench is the quality and tenure of our group of over 600 district managers who each have responsibility for an average of 10 stores (i.e., a number that is manageable and which can be driven for excellence). Our district manager group averages more than 14 years of service with Team O'Reilly. And each of these leaders is actively engaged on a daily basis to identify and capitalize on opportunities to enhance the service we provide to our customers while also optimizing the productivity of the dollars we spend in each of our stores. Our ability to execute our business model at a high level and over 6,000 stores is the direct result of the broad-based experience and industry knowledge across the company. We believe that our consistency in delivering excellent customer service in all market conditions, driven by this experienced leadership team has been critical to our long-term success. Ultimately, our customers require and deserve a high level of service regardless of the broader market conditions. Our commitment to work that much harder to earn their business in a challenging environment simply represents another opportunity for us to develop strong long-term relationships and grow our share of the business over time”
These industry dynamics are going to make it very difficult for others in the industry to generate the kind of return on capital that’s requisite for a healthy business; as such, we’d expect to see another wave of industry consolidation, led by O’Reilly and AutoZone. O’Reilly and AutoZone are driving traffic gains far in excess of Advance Auto. Advance Auto is in the midst of a significant business turnaround; the macro is going to make that turnaround exceedingly difficult.
Beckham observed, “When I think back...to the toughest years we've had from a macro perspective in my 28-year career with O'Reilly, some of our toughest years are the biggest opportunities we had to kind of build our own catalyst going into 2025. There are times that when things get tough, there are certain competitors, not always our public competitors that overreact to on the expense front, and they don't do as good a job of staffing their stores, staffing their delivery vehicles. They can overreact on inventory levels and things like that. I actually believe the biggest catalyst we have is just being our own worst critic internally, looking ourselves in the mirror in terms of our execution and our team is fully committed to putting the things in place that it's going to take to drive continued share gains.
