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Two Auto-Parts Retailers Gain Moats From Growing Cost Advantages, Industry Consolidation

O'Reilly and Advance have expanded their store bases through acquisitions and organic growth, enhancing their cost advantages.

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 O'Reilly Automotive (ORLY) and  Advance Auto Parts (AAP) have both rapidly and profitably expanded their store bases through a mix of acquisitions and organic growth, enhancing their cost advantages in the process. These developments have led us to upgrade the economic moat ratings of O’Reilly and Advance to narrow from none. From our view, industry dynamics have become increasingly favorable for the largest auto-parts retailers; including  AutoZone (AZO) and NAPA (operated by  Genuine Parts (GPC)), we now think there are four auto-parts retail businesses that have achieved the scale to obtain narrow moats.

Macro conditions have become more favorable for the auto-parts retail market in recent years, but the industry's gains have been highly concentrated on just a few companies. In fact, while each of the narrow-moat retailers has expanded rapidly, the total number of auto-parts retail outlets has remained static over the past decade. Moreover, public disclosures of (formerly) private competitors (General Parts, for example) and other smaller publicly traded companies suggest that competitors are generating much lower profitability levels.

Liang Feng does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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