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By Zain Akbari, CFA | 04-17-2017 02:00 PM

Auto Parts Will Be a Tough Race for Amazon

Investor concern about the prospect of Amazon disrupting the automotive parts retail sector have created opportunities in Advance Auto Parts and AutoZone, both of which are now trading at attractive discounts to our valuations.

Zain Akbari: We believe recent investor concern about the prospect of Amazon disrupting the automotive parts retail sector will create opportunities for investors to take a position in Advance Auto Parts and AutoZone, both of which are now trading at attractive discounts to our valuations. While Amazon has obviously been a game-changing competitor across many categories, we believe automotive parts pose unique challenges that will prove difficult to crack. 

Among DIY customers, vehicle owners' dependence on retailers' trained sales personnel for basic diagnostics and advice on finding and installing the right component is a significant part of the value proposition, one which we believe will be difficult for digital participants to replicate given the unfamiliarity of most vehicle repairs to motorists.  Furthermore, customers need parts quickly to return their vehicles to working order, making next-day delivery less attractive. 

Professional repair shops have an even greater need for rapid parts availability, often demanding delivery in minutes. Since motorists bringing their vehicle into a shop are largely price-insensitive, mechanics focus on turning service bays as quickly as possible, putting a premium on long-standing relationships with retailers to ensure the right part is delivered fast. Mechanics also depend on retailers to quickly pick up excess parts and old components eligible for refurbishment, a reverse logistics infrastructure that is difficult to copy.

Of our coverage list, we believe Advance Auto Parts and, to a lesser extent, AutoZone are particularly attractive. While Advance is in the midst of a turnaround, we believe the new management team should be able to improve profitability amid favorable industry-wide conditions that favor large-scale retailers. AutoZone relies on the DIY segment more than its peers and so has been more susceptible to the Amazon worries, but again we do not see the digital threat as especially significant beyond what is already contemplated in our forecasts.

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