Each month, Northcoast Research publishes the Northcoast Research Mechanic Index, based on the results of a survey of approximately 50 independent repair shops operating in the top 10 states (based on the light vehicle fleet population), plus Advance Auto Parts’, AutoZone’s and O’Reilly’s aggregate store count.
According to the results of Northcoast Research’s April survey, sluggish sales trends returned to the industry in April after a brief respite in March, as the Current Sales Index fell 21.8 percent in April to close at 41.8, which was the second-lowest reading that the firm has recorded since the inception of its survey.
Furthermore, Northcoast added that with last month’s reading coming in below 50.0, the index has now been in contraction territory for three of the past four months. "In our view, this strongly suggests that the DIFM channel is experiencing demand pressure relative to recent quarters," Northcoast Research stated in its report.
"Moreover, we believe that the weakness is also reflected in a more promotional pricing environment over the past month as many aftermarket parts resellers are attempting to take market share with sharper pricing, especially on fast-turning parts like break pads.
"According to our research, the sales pressure can be attributed to a sequential drop off in year-over-year traffic trends at the garages, which more than offset the benefit of solid ticket trends that continued to benefit from a mix shift to failure work (higher average ticket than maintenance jobs), as well as rising product costs, which are being passed through to consumers.
"According to our contacts, consumers’ deferral of preventative maintenance was a major contributor to the soft traffic trends during April, which clearly depressed demand. In fact, with the exception of February, this is the worst level for our deferred maintenance indicator that we have seen since 2010."
The Three Month Outlook Index fell 14.1 percent to close the month at 61.4. This decline reflects the fact that a smaller proportion of respondents anticipate year-over-year sales gains during the next three months (May, June and July).
"While we continue to appreciate the opportunity that the national automotive parts retailers have to gain market share in the DIFM channel, current valuations are not attractive enough for us to dip our toes back into the water, especially given the decelerating sales trends and signs that the consumer remains under pressure," the Cleveland-based firm stated. "Furthermore, we have growing concerns over what a changing mix of automobiles in the nation’s light vehicle fleet could mean for demand trends over the next four to five years. (See our note entitled ORLY: Change in Light Vehicle Mix Likely to be a Headwind in Coming Years for more details.) As a result, we are maintaining our NEUTRAL ratings on Advance Auto Parts, AutoZone and O’Reilly Automotive."
To read the full report on Northcoast Research’s April 2012 Independent Garage Survey, click here.
ABOUT NORTHCOAST RESEARCH
Northcoast Research is an independent, full-service institutional equity research and trading firm headquartered in Cleveland, Ohio. Founded in 2009, the company’s mission is to add value in each phase of the investment process by aligning the company’s goals with those of its clients. Northcoast aims to provide unbiased, proprietary and actionable fundamental research on select industry verticals and companies, underpinned by comprehensive channel checks across a broad array of industry contacts. The company’s core research verticals are Consumer, Health Care, Industrial and Business Services.
