Down Under's not just geography: underhood and undercar are underperforming.
As we write this piece in late July, oil prices hover at $75 per barrel, the average national gas price is $3.06 and Genuine Parts Company has posted somewhat disappointing second quarter results in terms of revenue relative to expectation. While we certainly were encouraged heading into 2007, our cautious optimism proved prudent. As we prepare for the second quarter 2007 earnings season, our expectations are quite low.Channel checks indicated that after a tough April and very good May, June trends seemed to decelerate later in the month. Certain markets remain challenging, particularly the state of Florida, where distributors, retailers and professional technicians indicate it's the weakest region. Florida has been hampered with a slowdown in construction, a downturn in housing, a collapsing sub prime market and lingering hurricane and insurance issues. Companies with significant exposure to Florida (such as Advance Auto Parts) might continue to face downward sales pressures in the coming quarters until some kind of recovery takes place.
Advance's exposure to Florida is very high, as roughly 15 to 16 percent of its store base resides in the state. While flooding in Texas is likely to impact business for only a few weeks, Florida might not be on the path to recovery until sometime in 2008.
Geography isn't the only thing impacting sales trends. From a mix standpoint, categories such as batteries and oil filtration appear strong, while under car and under hood products have under performed. Looking at the industry as a whole, the robust acceleration in trends some anticipated this summer has been absent, and gas prices continue to place downward pressure on the consumer.
To be clear, we don't believe the market is in a worse situation this year, but we think consumers' mind-sets have been conditioned to one of "deferral," and that might continue to plague the industry for some time. While we think deferrals have played a role in softer than expected demand, we also think parts longevity is extending the useful cycle, allowing consumers to defer automotive services.
Stability in gas prices should provide consumers with more flexibility in allocating dollars toward automotive needs, as well as boost miles driven. Even with less than robust trends in the first half of 2007, our expectations remain optimistic for the back half of the year. Sales comparisons are favorable (see Figure 1), and we still think the significant number of maintenance deferrals in 2006 should begin to translate into demand for parts and services as the months progress.Disclosures: BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc. and Genuine Parts Company in the next three months. Advance Auto Parts, Inc. is, or during the past 12 months was, a client of BB&T Capital Markets, which provided non-investment banking, securities-related services to, and received compensation from, Advance Auto Parts for such services. An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc. for products or services other than investment banking services during the past 12 months.
BB&T Capital Markets is a full-service investment banking firm focused on specific industries, including the automotive aftermarket.
