Looking Under the Hood of the Auto Parts Industry Crash

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This past week was absolutely catastrophic for the retail auto parts industry. It all kicked off when O’Reilly Automotive Inc. (NASDAQ: ORLY) provided an update ahead of its second-quarter financial results. But O’Reilly wasn’t the only one that suffered. Advance Auto Parts Inc. (NYSE: AAP) and AutoZone Inc. (NYSE: AZO) also saw their shares hit multiyear lows in the wake of this announcement. While the weaker numbers are said to be related to industry headwinds, some might believe that a new entrant to the market might be disrupting these sales.

As a result, analysts took this opportunity to slash their targets for this industry with perhaps one notable exception.

In terms of O’Reilly’s report, the company said that its same-store sales increased only 1.7%, below its previously issued guidance of 3% to 5%. This also fell below the 3.9% consensus estimate at FactSet.

CEO Greg Henslee commented that the company has faced a more challenging sales environment than it expected for the quarter due to continued headwinds. Henslee closed by saying:

We remain confident in the long-term health of our industry and our team’s ability to provide exceptional customer service and take market share in this challenging demand environment.

Analysts seemed to key off the idea of a challenging demand environment in the industry. Wedbush commented:

The company attributed the slowdown to weak consumer demand and knock-on effects from a second consecutive mild winter … but we also pointed to additional pressures including the slowdown in total miles driven growth, declines in miles driven for “sweet spot” 8+ year old vehicles, muted low-end and minority consumer confidence and rising competition from the online channel. We do not expect a sharp reversal in these factors near-term, leaving us neutral on the sector despite the stock price corrections.

On the other hand, this “challenging demand environment” could refer to its brick-and-mortar competition in Advance Auto and AutoZone, but it seems more appropriate to consider Amazon’s entrance into this industry as a big headwind for those involved.

Keep in mind that within the past year, Amazon has made deals with the largest auto parts makers in the United States. And at this point, most large auto parts suppliers are selling to Amazon.

Last September, a Jefferies report said that Amazon was offering same-day delivery for auto parts in 40 major U.S. cities. Not only this, but the firm also noted that the prices were on average 23% less than these major chains.

In terms of picking a winner in this industry, Wedbush saw a bright spot in Advance Auto Parts, despite rating the industry as a whole as Neutral. The firm has an Outperform rating for Advance Auto Parts with a $150 price target, which compares to a $105.21 prior closing price.

Jefferies also upgraded Advance Auto Parts to a Buy rating from Hold, although the firm lowered its price target to $130 from $150. Ultimately, the firm believes that this is an attractive entry point for investors after the huge drop on Wednesday. Jefferies also mentioned that significant margin expansion opportunities can be driven by improving operating efficiencies rather than growing sales, given a long history of “fat” overhead and inefficient supply chain.

Other analysts piled into these auto parts retailers, and price targets were falling all around:

  • Barclays cut its Advance Auto Parts price target to $93 from $120.
  • Morgan Stanley cut its Advance Auto Parts price target to $125 from $160.
  • RBC cut its Advance Auto Parts price target from $153 to $125.
  • Barclays cut AutoZone’s price target to $710 from $870.
  • Morgan Stanley downgraded AutoZone to Equal Weight from Overweight and cut its target to $540 from $680.
  • RBC cut AutoZone’s price target price to $577 from $653.
  • Wedbush reiterated a Neutral rating for AutoZone with a $650 price target.
  • Barclays cut O’Reilly’s price target from $300 to $234.
  • Credit Suisse downgraded O’Reilly to Neutral from Outperform and lowered its target to $195 from $262.
  • Goldman Sachs upgraded O’Reilly to a Neutral rating from Sell.
  • Morgan Stanley downgraded O’Reilly to Equal Weight from Overweight and cut its target from $290 to $200.
  • Wedbush has a Neutral rating and cut its price target to $195 from $260.

Shares of O’Reilly closed out the week at $172.85, with a consensus analyst price target of $248.50 and a 52-week range of $170.68 to $292.84. Over the course of the week, the stock dropped more than 20%.

Advance Auto Parts shares ended Friday at $101.93. The stock has a 52-week range of $99.13 to $177.83 and a consensus price target of $148.86. Over the course of the week, the stock dropped more than 12%.

AutoZone was last seen at $501.39, within a 52-week range of $498.50 to $819.54. The consensus price target is $717.05. Over the course of the week, the stock dropped over 10%.

Amazon closed at $978.76, with a 52-week range of $710.10 to $1,017.00. The consensus price target is $1,120.44.

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