Retailers of all kinds are in the dumpster this year. The hardest hit seem to be the big mall retailers like Sears, JCPenny, and Macy’s — their stock prices are down more than 48% in the last year. Yikes!
I first wrote about the alleged demise of retail back in May when I asked the question “Is Retail Dead?”
While I was fairly convinced that physical retail was going to be a lot smaller in the near future, I’m not one of those people that believes physical retail will completely die. There’s still life left in brick and mortar stores, but most investors are negative about the sector right now.
Ultimately, I think a few special retailers are going to survive because of the unique niches they inhabit. Investing in these companies is tricky, because it’s not yet obvious who’s going to survive and who’s going to… err… shit the bed?
Back in May, I singled out Home Depot as a potential survivor of the retail war. Subsequent Home Depot earnings reports have since added further evidence to my survivor theory. The Good Ship Orange is sailing along just fine, thankyou!
But where are the other physical retailers that will survive? Mall-based retailers are generally doing terrible, but what about stand-alone stores? Could investors be throwing out other “retail babies” with the bathwater?
I’ve had my eyes scanning for possible survivors the last few months, and I may have found a possibility…
It’s A Car Nation
The United States is a country powered by automobiles. Oh sure, a few large cities might have a subway, or light rail system, but largely Americans are transported by automobiles. Cars, trucks, buses, and motorcycles.
We absolutely NEED our cars to get to work, to travel long distances, and to engage in our favorite personal hobbies. Mr. Money Mustache still has A LOT of face punching to do before that changes.
It doesn’t matter if those cars are powered by internal combustion engines or three phase induction motors, cars are going to be with us for a very long time. Well into the future.
We’re also a nation in a hurry, so when something finally breaks on our beloved cars, we absolutely need parts IMMEDIATELY to keep our lives moving forward.
The idea of waiting around days for a package to be delivered doesn’t fly when you need your car to get to work tomorrow. You’ll willingly pay extra to get those parts today.
DIY auto part retailers fill this unique local niche… A niche I believe Amazon hasn’t completely conquered yet.
Yes, I’m talking about auto part retailers like O’Reilly’s (symbol: ORLY), AutoZone (symbol: AZO), Napa Auto Parts (a subsidiary of Genuine Parts Co. (symbol: GPC)), and Advance Auto Parts (symbol: AAP).
Besides supplying parts, these retailers provide knowledgeable employees to answer questions, tool loan programs, online ordering and in-store pickup, used oil and battery recycling, and other services valuable to car enthusiasts and DIY mechanics. (Not everyone takes their car to the dealership for repairs!)
Besides the parts, Amazon offers none of those services today. It has me thinking that some of the retailers in the DIY auto parts space might have a future.
Don’t get me wrong, auto parts retailers have been punished in 2017. Stock prices have tanked along with the rest of the retail space.
Despite terrible stock performance, every single one of these retailers is still showing signs of sales growth in recent quarters (albeit rather slow sales growth).
Typically sales growth in retail stores takes two forms: Increasing sales at existing stores (Same Store Sales growth), or growth from the opening of new stores. In the case of U.S. auto parts retailers, most growth appears to be coming from the opening of new retail stores.
Here in lies the problem (and the reason why these stocks are tanking) — A certain segment of customers doesn’t need parts immediately. This customer can wait a couple days as long as the price is right.
This is where Amazon is making inroads — Prices. Based upon my own survey of part prices, Amazon offers significantly cheaper parts than my local retailers.
According to a NYPost report, Amazon may even be paying parts suppliers up to 30% more, despite having prices that are 10-20% cheaper than the usual parts retailers.
How can Amazon afford to do this? They’re a giant that can willingly afford to take losses for years without any consequences…effectively pushing smaller retailers out of business.
Furthermore, as Amazon expands same day delivery (now in 40 major U.S. cities), the unique value niche of local auto parts stores is being eroded.
(Check to see if your zip code is covered by Amazon’s same day delivery.)
How many U.S. cities will Amazon ultimately reach with same day shipping? Do auto parts retailers stand a chance against this unrelenting online onslaught?
There’s a lot of good questions to answer before investing your hard earned dollars.
In recent years, business has been almost too good for the likes of AutoZone and Oreilly’s — they both sporting net margins over 11%. Margins like that are almost unheard of in the retail space.
I think there’s significantly more pain ahead as these business come back down to earth.
Could the likes of Oreilly’s and Autozone survive on operating profit margins a mere tenth of what they are today? Probably, but it would be a very close call.
Who Would I Buy?
If I was forced to pick a winner today, I’d probably pick Genuine Parts Co. (GPC)…aka Napa Auto Parts. They’re the most diversified of the companies mentioned, have the lowest debt levels, and source their own Napa branded parts. Yet they still maintain prices that are pretty competitive with Amazon. (Did I also mention that 3.26% dividend yield?)
That said, on a Price-to-Earnings basis, GPC is one of the most expensive of the stocks mentioned. It’s not a fantastic value just yet.
At this point in time, I’m not jumping to buying shares… but I am watching the sector closely. There is the possibility for one or two survivors to inhabit unique value niches, much like Home Depot does.
For now, I think these retailers will continue to lose customers to Amazon. It’s possible a few companies will start closing underperforming stores, much like mall based retailers have in recent months. Ultimately this should mean lower stock prices in the future.
In other words: the battle has only just begun in the auto parts space! No point rushing out to buy shares today… but keep your eye on it. There could be good opportunities for careful investing ahead.
Now, if only I could get Amazon to change my oil for less…