I feel like replacement auto parts retailers have to be some of the most misunderstood stocks in the market. Yesterday (10/16/2018) Advance Auto Parts (AAP) announced that it signed a partnership agreement with Walmart (NYSE:WMT) to open up an online store on Walmart.com. The press release also stated that the two companies were going to explore further integration including the possibility of allowing customers to pick up online parts orders at Walmart, offering home delivery, and potential using Walmart’s service centers to install some parts.
I think the market’s reaction is a bit overdone and the news really should be treated as a small, “show me” type win for Advance (more on that later) and a non-event for the other stocks.
First, let me talk about why I think the market is wrong. I think I’m probably fairly unique amongst market analysts in that not only am I a “car guy” and own multiple cars (that’s not the unique part) but I also enjoy working on them myself. My father worked in a garage briefly and growing up sometimes he’d fix his own vehicles or help me fix my car when I was a teen. I like learning more about how cars work, how to properly diagnose problems, and it is a fun change of pace to do some physical hands-on work rather than sitting at a desk. I’m also friends with a lot of other people who are into cars including several technicians and mechanics.
Much of what I read about auto parts stocks tends to treat them just like any other retailer. You can buy parts from Amazon, O’Reilly, Walmart, or whoever, and it’s all pretty much the same. I think it’s important to realize that the market is probably best thought of as having two segments. Customers that need a part right now (be they DIY or professional) and people that are willing to wait on parts. (Large shops that keep commonly used parts in stock could also be thought of as customers who are willing to wait since they are keeping their own inventory.)
Here’s a personal example. I owned a truck that was transfer case oil (technically ATF). I dropped it off at the garage. They put the truck up on the lift and saw the leak appeared to be originating at the rear prop shaft seal. To diagnose the problem definitively they removed the slip yoke and saw that the leak appeared to be coming from the outer part of the rear seal, likely because whoever worked on the truck previously did not replace the seal properly. The solution was to install a new rear seal, this time to spec. Is the shop going to want to put the truck back together again and let it sit out in the lot while they wait a week for a part from RockAuto or wait two days for free Amazon Prime shipping? Is the shop really going to want to leave my truck up on their lift for the whole day waiting for a part to show up from Walmart? Do you think they want to order the part from a local parts store (or dealer in this case since it was replaced with an OEM part) and have it there in an hour or less?
Time is money and professionals do not want vehicles clogging up their bays and don’t want to anger customers by making them wait longer than otherwise necessary to get their vehicle back.
It’s not too much different for the home mechanic in a lot of situations. Again, take something that happened to me. The power driver’s seat on my wife’s car stopped working. I took apart the lower portion of the seat to access to switch and motor. The motor worked fine and all of the wiring looked good. The switch was bad (not even electrical contact cleaner could get it working consistently). I would have loved to be able to go out and buy a new switch right then, but no one near me had a quality replacement or OEM part available (I’m not putting the cheap store brand Dorman or BWD parts in my vehicles) that day. Instead, I had to waste time by putting the seat back together and ordering one online.
From everything I’ve heard when discussing vehicle repairs with all of my “car guy” friends, you are usually in a situation where you either want the part right away or you aren’t under any time pressure and it’s fine to wait a week and order one from a discount retailer. Been restoring your classic Mustang for years? Go ahead and wait as long as you need for the parts you ordered. Working on your daily driver, you want is back on the road soon. I’ve never really encountered or heard of a situation where waiting a day or two was perfectly OK but waiting a week was impossible. I’m sure it’s happened, I’m just saying it’s very rare.
The segment of the market that needs parts right away isn’t really buying parts, they are buying distribution. Walmart has about 3,500 supercenters that cover the entire US. By contrast, the national auto parts retailers each have around 5,000 to 6,000 concentrated in certain geographic locations (e.g. O’Reilly has more stores in the south while Advance has a stronger presence in the Northeast). Between the four large national chains that comes out to around 22,000 stores. The result is that the parts retailers have a much better distribution network. Just take my local real for instance. The map below shows the two Walmart Supercenters in Lancaster, PA.
Now look at what a map of auto parts retailers looks like.
It’s highly unlikely that picking up a part at Walmart is going to be more convenient than picking it up in store. The home delivery option is also perplexing if taken as a game-changer. AutoZone already offers free next day home delivery on some parts. It’s highly unlikely that Advance’s deal with Walmart cannibalizes any significant number of parts sales for any of the retailers.
The segment of the market that can afford to wait days for parts has always been subject to intense competition. Discount online retailer RockAuto has been around since 1999. Adding Amazon and now Advance using Walmart.com as an additional sales channel doesn’t really change much.
I think the biggest piece of news in the press release is the possibility of Advance becoming a sort of preferred parts supplier for Walmart’s service centers. Nothing is certain now, which is why we referred to it as a “show me” type deal for investors. If something like that does happen it would legitimately be good news for Advance. Although, it’s important to remember that the auto repair market is extremely fragmented and one deal, even if it is with a large national chain isn’t going to change the company.
In conclusion, we don’t really see any reason the auto parts stocks should be reacting strongly one way or the other. It’s a nice deal with some potential for Advance and it looks like a non-event for everyone else. Remember, the auto parts market is also highly fragmented with the major players only accounting for anywhere from 2% up to almost 10% of the total auto parts market depending on how you define the market. Becoming the preferred supplier for one large chain isn’t going to move the needle a lot. It’s nice and it’s a great sign that the new management at Advance is turning things around, but it’s not worthy of a strong stock move up or down in our opinion.
Disclosure: I am/we are long AAP, ORLY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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