During the same period, SSS for our professional installer index fluctuated between –1.3 percent and +3.2 percent, with an average value of +0.9 percent.
Note that indexed SSS for the parts retailers moved almost lockstep with the professional techs from the first quarter of 2003 to the first quarter of 2005, although SSS for the parts retailers exceeded those of professional installers by roughly a 200 basis point spread. We think this can be explained by aggressive store growth and shift to commercial mix for retailers, while many technicians were seeing low square footage growth as well as structural changes in business mix.However, as gas prices moved closer to the $3 mark in 2006 and beyond, not only has the relative differential been largely erased, but both segments are generating SSS in the flat to +2 percent range. The takeaway here is that although the sudden deceleration in fourth quarter results caught investors (as well as many management teams) off-guard, the environment is tough and the historical data certainly speaks to the impact that gasoline prices have on driving store traffic.
When sales drop so suddenly, it simply becomes too late for companies to cut back on fixed expenses. This was very much the case for the majority of our automotive aftermarket coverage group.
Monro Muffler kicked things off in late January by reporting earnings in line with expectations driven by a SSS increase of 1.9 percent. By category, SSS of tires increased 9 percent and maintenance increased 4 percent, while the brake category remains pressured with SSS down by roughly 3 percent. Traffic fell 3.5 percent, but was more than offset by a 10 percent increase in the average ticket.
With respect to outlook, CEO Rob Gross notes, "We are cautious given the challenging economy and weak consumer spending patterns," and the company forecast SSS growth of 1 percent to 3 percent for its March quarter.
The other publicly traded installer, Midas, reported franchise SSS declined 4 percent. The company is guiding for a SSS increase of 2 percent for 2008.
Advance Auto Parts sales came under pressure as the holidays approached, with continued weakness in the Florida and Gulf Coast markets. Do-it-yourself (DIY) SSS declined 3.1 percent, while do-it-for-me (DIFM) SSS increased an impressive 8.2 percent. The company is guiding for flat SSS in 2008.
The results of NAPA were further confirmation of the widespread moderation in automotive demand that was present throughout much of 2007. Total automotive sales were up 2 percent, with core NAPA up 3 percent.
Trends did rebound in January and remained steady through mid-February.
Macro issues pressured O'Reilly (SSS increase of 2.1 percent), which noted that motorists continue to trade down to more value-oriented product lines from premium aftermarket lines. Management gave guidance for its first quarter 2008 SSS of 1 percent to 3 percent, and full year SSS guidance of 3 percent to 5 percent.
AutoZone reported comparable SSS decreased 0.3 percent, while we estimate that its commercial SSS were positive during the quarter. Its investment in the commercial program appears to be working. However, we caution investors not to factor in too much benefit too quickly.
Looking into the first three months of 2008, we are modestly encouraged to hear that business appears to have improved slightly from the run rate of late December.
However, cautious optimism seems to be the approach of most companies at this point. With oil prices hovering at $100 per barrel and the national gas price average at $3.05 in January (versus $2.27 last year), there is reason to be cautious heading into 2008.
For the first time in 27 years, annual miles driven declined in 2007 by 0.4 percent. Consumers are changing their driving habits, but should gas prices reach $4 per gallon, we would not be surprised to see another wave of "shock" that once again could disrupt spending patterns on automotive service and repair.
Some investors are optimistic that the second half of 2008 will be better, particularly as benefits from the economic stimulus package take hold. Our concern is that rebate checks will be used to pay down credit card bills or outstanding mortgage payments rather than be used to fuel economic growth.
The macro headwinds are quite persistent, and in our opinion, if the automotive aftermarket can produce results in 2008 that are similar to 2007, we will take it and look forward to 2009.
BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, Inc., NYSE/SIPC. Scott & Stringfellow is a registered broker/dealer subsidiary of BB&T Corporation, the nation's 14th-largest financial holding company with $130.8 billion in assets.
Disclosures: BB&T Capital Markets makes a market in the securities of Copart, Inc.; Monro Muffler Brake, Inc.; and O'Reilly Automotive Inc. BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc.; AutoZone Inc.; Cooper Tire & Rubber Company; Copart, Inc.; Genuine Parts Company; Monro Muffler Brake, Inc.; O'Reilly Automotive Inc.; Standard Motor Products, Inc.; and The Pep Boys—Manny, Moe & Jack in the next three months. Advance Auto Parts, Inc.; Midas, Inc.; and Monro Muffler Brake, Inc. are, or during the past 12 months were, clients of BB&T Capital Markets, which provided non investment banking, securities-related services to, and received compensation from, the aforementioned companies for such services. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report knows the foregoing facts. An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc.; AutoZone, Inc.; Copart, Inc.; Genuine Parts Company; Midas, Inc.; Monro Muffler Brake, Inc.; and O'Reilly Automotive Inc. for products or services other than investment banking services during the past 12 months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts.
