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This Auto-Parts Retailer Is Getting a Tuneup

Patient investors will be rewarded as Advance Auto Parts recovers from integration-related sales declines and implements efficiency measures.

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Zain Akbari: We believe the largest participants in the auto-parts retail industry stand to benefit from industry consolidation that should build on competitive advantages that already have given the companies on our coverage list narrow economic moats. Advance Auto Parts, AutoZone, Genuine Parts, and O'Reilly stand to benefit at the expense of subscale retailers as do-it-yourself customers, as well as professional repair shops, increasingly focus on larger chains' higher service levels versus smaller competitors. For do-it-yourself and professional customers alike, high levels of part availability are increasingly critical as motorists look to quickly repair their vehicles, and repair shop owners concentrate on quickly turning over service bays to maximize profits. This dynamic has been enhanced by the continued aging of the U.S. vehicle fleet and rising miles driven, factors which increase the need for aftermarket components. Larger retailers are able to replenish store inventory faster than smaller industry participants, and are able to leverage inventories of infrequently purchased parts held at distribution centers across a vast store network, increasing turnover. Furthermore, leading retailers' scale leads to attractive supplier payment terms that effectively finance the firms' inventory investments, a significant additional working capital advantage that subscale peers cannot replicate.

Of our coverage list, we believe investors should take a close look at Advance Auto Parts, which we see as undervalued relative to its peers. Advance has suffered in the aftermath of its acquisition of General Parts, which the company purchased in 2014 and has struggled to integrate. While a recent senior leadership change increases uncertainty, we believe patient investors will be rewarded as the company recovers from integration-related sales declines and implements efficiency measures to close persistent margin and payable ratio gaps with its large-scale peers, all the while improving part availability as the postacquisition distribution network integrates.

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