Advance Auto Parts (NYSE:AAP) is the second largest US retailer of automotive parts and accessories to do-it-yourself as well as a leader of the do-it-for-me automotive customer segment. Founded in 1929, the company operates 3,420 stores, the vast majority of which are in the United States and which have commercial delivery programs catered toward the independent garages and other commercial customers whose end-user do it for me (DIFM) customers seek maintenance from them. Like most companies in the do it yourself (DIY) segment, AAP targets demographic regions in which they estimate there to exist a large number of old vehicles, given these cars’ propensity for repairs and maintenance.
Operating in a mature and fragmented marketplace, AAP achieved growth in two ways: for its bread-and-butter DIY segment, AAP has opened new stores to fuel growth while the smaller DIFM segment, same store sales grew by double digits. In addition, AAP has been facing pressure in a consolidating auto parts manufacturer industry (related to the woes of the Big Three automakers), which in turn decreases the company's pricing power it enjoys as one of the largest auto parts retailers in the U.S. Finally, in the longer term, the company may see decreased demand in auto parts due to continually rising oil prices, which could decrease the mileage driven by American and thus decrease the demand for car repairs and maintenance.
In 2009, AAP earned a total of $5.41 billion in total revenues, compared to its 2008 total revenues of $5.14 billion. 2009 was AAP's ninth straight year in which revenues have increased. As a result of the increase in revenues, AAP's net income increased as well. Between 2008 and 2009, AAP's net income increased from $238 million in 2008 to $290 million in 2009.
In the US, increases in the number and age of vehicles, number of miles driven annually, licensed drivers, and total number of light trucks (which generally require greater upkeep) provide for a relatively steady and growing automotive parts market. The market, however, is mature and unlikely to experience significantly higher rates of growth. Also, increases in the quality of cars may offset the need for secondary purchases of repair equipment and parts.
The company operates in a domestically mature and fragmented auto parts market, and growth has been respectable, though modest recently and driven almost entirely by new store openings in the DIY category, which accounts for nearly three-fourths of revenue, as opposed to the increase in same store sales driving the DIFM category (one-fourth of revenue).
Auto part manufacturers, which operate in a generally troubled industry, have been consolidating via mergers or considering consolidation of late. A more concentrated vendor base for auto part retailers, then, limits the number of companies that the firm can purchase inventory from, and may provide suppliers with greater pricing power, putting pressure on AAP’s margins. No supplier, however, represents more than 6% of AAP’s inventory purchases.
As oil prices continue to increase, drivers may begin to purchase newer, more fuel efficient vehicles--including [[hybrid and fuel cell vehicles]--and/or limit their driving mileage. Greater numbers of new car purchases and fewer drivers accumulating heavy mileage mean that consumer demand for repairs and new parts may be hampered, thus diminishing AAP's sales.
The auto-part aftermarket retailer industry is a highly competitive and generally fragmented $118 billion/year market, with an estimated $35 billion represented by the DIY (do-it-yourself) category, $75 billion by the DIFM (do-it-for-me) category, and the rest represented elsewhere. Companies compete on a mix of customer service, product selection, price, and location.
In the DIY segment, AAP competes with other major do-it-yourself retailers, like Advance Auto Parts (AAP) , O'Reilly Automotive (ORLY) , CSK Auto (CAO), Pep Boys-Manny, Moe & Jack (PBY), and AutoZone (AZO). In the DIFM segment, it competes with a highly fragmented base of small, single store mom-and-pop shops, repair destinations, full-service mechanics and other independent automotive destinations that sell parts or repair vehicles.