Following the report yesterday that O’Reilly Automotive’s management was updating its guidance for the second quarter of 2012, BB&T Capital Markets has issued an analyst report on the auto parts retailer.
O’Reilly lowered its second quarter comparable store sales guidance to 2 percent to 2.5 percent from its previous estimate of 3 percent 5 percent. Coupling this with projected soft April growth due to mild winter-related first quarter demand pull-through, O’Reilly’s management announced
that second quarter 2012 EPS will likely come in at the low end of the previously announced $1.13-$1.17 guided range.
In an analyst’s note from BB&T’s Bret Jordan, the firm questioned whether recent weakness is a reflection of macro instability.
"Despite weather-related softness in April, we believe the comp improvement in May signaled the end of demand pull-through to first quarter. Accordingly, the surprising comp miss in June likely reflects recent soft industry demand as the broader macro environment remains unstable. We anticipate competitors Advance Auto Parts (AAP – $62.43 – Hold) and AutoZone (AZO – $356.19 –Hold) will likely experience similar comp weakness as consumers remain ‘hesitant’ in light of rising unemployment," Jordan wrote.
However, Jordan noted that near-term trends remain favorable.
"Despite current soft demand, we continue to believe industry tailwinds will drive third quarter growth. With likely accelerating miles driven for the July 4th holiday weekend (AAA forecasts a decade high 35.5 million drivers) and continued price declines at the pump (average fuel prices fell 4.3 percent in May to $3.73), we believe consumers are poised to ‘hit the road’ in July and August. Coupling this with current National Weather Service forecasts for warmer-than-average summer weather in all but six states, we anticipate demand for vehicle maintenance will bounce back from current depressed levels," the analyst’s note stated.
Long-term, BB&T says, the fundamentals for O’Reilly "appear robust."
"With an aging vehicle population (average age of roughly 10.8 years) and likely West Coast market share expansion through the CSK store base (management continues to ramp commercial mix to roughly 50 percent of regional sales), we continue to believe O’Reilly remains an attractive option given recent weakness in the shares. Coupling this with likely continued aggressive share repurchases (authorized for $2 billion as of June 1) and improving working capital management (1Q’12 AP/Inventory of 73.3 percent remains below peer range of 80 percent to 100 percent), we believe O’Reilly will again post EPS growth rates in excess of 20 percent."
