What’s next for ... Advance Auto Parts?

Higher gas prices and a rebound in new car sales don’t seem to worry auto-parts retailer

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Print this page by Tim Loughran

Roanoke-based Advance Auto Parts Inc. did well during the slumping economy. During the downturn, many consumers kept and repaired their cars rather than buying new vehicles. The auto-parts retailer is now positioning itself to take advantage of a long-awaited recovery in consumer spending.

During 2010, Fortune 500 the company saw sales rise for the fifth consecutive year to $5.9 billion, while operating income jumped to almost $585 million and net income rose to $346 million — two metrics that have increased three times in the last four years.

In recent conversations with investors, company CEO Darren Jackson said prospects for continued growth in the next few years are strong. He plans to increase investment in the rapid delivery of parts to commercial clients, provide more intense customer-friendly service training for all sales associates and drive managers to raise the company’s average annual store sales from $1.6 million a year to $2 million.

Skeptics say rising gasoline prices and the recent rebound in new car sales could slow Advance Auto’s growth. Jackson, however, argues that the impact from either factor will be minimal. Higher gasoline prices may slow traffic to stores (since motorists will drive less and need fewer replacement parts), but they really won’t become a serious threat to revenue until crude oil returns to 2008 levels of about $150 a barrel, he says.

“We’ve learned to adapt and adjust in spite of any major change in the economy,” says James Wade, Advance Auto’s president. “Consumers will continue to be challenged by high unemployment and having less to spend. . .we can help them work their way through those issues.”

Morningstar analyst Zoe Tan agrees, writing earlier this year, “Although we expect demand for automotive parts to moderate as new car sales improve from record lows over the next few years, we remain optimistic about the long-term outlook … Despite cyclical swings in the industry, the aftermarket parts industry has proven to be relatively stable over the long haul.”

According to Jackson, U.S. motorists buy about $60 billion a year in auto parts, with $40 billion sold through professional mechanics and the rest purchased by do-it-yourselfers who work on their own cars either as a hobby or to save money. Right now, 66 percent of Advance Auto’s sales are to do-it-yourself customers, with commercial customers making up the other 34 percent. Jackson eventually wants to achieve a 50-50 balance.

He’s been able to raise Advance Auto’s share of commercial sales nationwide to about 4 percent of the market. That was the result of double-digit sales gains in each quarter since 2008 as the company added commercial sales and delivery capabilities to about 90 percent of the company’s more than 3,600 stores.

Advance Auto, which by its own admission had no viable Internet presence until 2009, now hopes an improved website and online ordering by commercial customers will help the company cut into the 10-year head start in e-commerce held by rival chains, including NAPA, O’Reilly, AutoZone and Pep Boys. Jackson sees commercial sales as a growth engine. “We’re going into 2011 with a set of capabilities that we have not had historically,” he said in March. Adds Wade, “If we don’t have a part in a particular store, we’ll can get it for you in 30 minutes.”

While giving an increased focus to commercial customers, the company has unveiled a new national marketing campaign, titled “Service is the Best Part,” to protect the 20 percent share it says it holds of the do-it-yourself market. The campaign is designed to leverage the company’s service offerings for those motorists who can’t, or won’t, perform the simplest of auto repairs.
For many years, AutoZone has offered free replacement of batteries and wiper blades at their stores. Currently, about 100 Advance Auto stores are experimenting with something extra: delivering a variety of replacement parts to homes and performing some installation services on-site. “We are seeing customers respond very positively to this experience.” says Wade. “It comes down to serving the customer.”

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