Auto Parts & Accessories Retailers
COVID-19 Industry Brief
EFFECTS OF THE CORONAVIRUS ON THE Auto Parts & Accessories INDUSTRY Updated August 26, 2020
- Market Dynamics: The aftermarket automotive industry is generally counter-cyclical and will do well in a recessionary environment, as car owners defer purchases of new vehicles and continue to drive and repair existing vehicles for longer periods. During the pandemic, reduced levels of driving have had a negative impact on the space, as demand for mileage-driven maintenance is down. Going forward, commuting in a private vehicle is perceived to be a safer alternative than public transportation, which should have a positive impact on vehicle ownership and usage and maintenance trends.
- COVID-19 Impacts: The automotive repair sector was considered an essential service allowing repair shops, retailers, and distributors to remain open even in the face of stay-at-home and nonessential business closure orders. This has mitigated some of the worst impacts of the pandemic on the industry, as it has been able to maintain its business and workforce throughout the crisis.
- Retailer Performance – Advance Auto: Advance Auto reported its second quarter results on August 18, 2020. Sales were up on a sequential basis and on a year-over-year basis with comparable same store sales increasing by 7.5 percent. Management noted that the company “benefited from a surge in industry demand in the quarter fueled by the government stimulus, unemployment benefits, and the impact COVID-19 had on consumer behavior in terms of how they repaired and maintained their vehicles.”
- Production and Sale of Aftermarket Parts Not Curtailed: Ford Motor Company closed all of its vehicle production plants in North America from April through mid-May but kept its MOPAR aftermarket parts arm open. Likewise, Pep Boys, AutoZone, and Advance Auto Parts have remained open ostensibly to service the need of first responders, but also to keep repair shops and individuals supplied.
- Supply Chain Issues: Although there were some supply chain issues in February and March 2020 related to the impact of the COVID-19 pandemic on China, most of these issues have since been resolved and have resulted in very few stock-outs.
- Industry Fallout: APC Automotive Technologies, an automotive parts manufacturer and distributor specializing in exhaust products, brakes, and chassis parts, filed for Chapter 11 Bankruptcy protection in early June, citing impacts on demand from the pandemic, as well as supply difficulties in its catalytic converter segment related to palladium and rising prices.
- Valuation Outlook: Gordon Brothers believes that this segment will see little overall impact from the COVID-19 pandemic and that appraisal values should be stable in this space. In addition, for the balance of 2020, given the recessionary economic conditions that will likely persist for at least a portion of this period, it is anticipated that there will be a demand pickup in the space.
Date February 2020
- U.S. retail sales for motor vehicle and parts dealers were up 3.9 percent for the 11 months ended November 2019 over the same period in 2018, indicating a positive market
- Year-over-year through November 2019, the number of vehicle miles driven increased 0.9%, continuing the steady increase seen for the past several years and driving increasing demand for replacement parts and accessories
- As of late February 2020, auto manufacturing facilities were beginning to restart production in China following extended holiday shutdowns due to the coronavirus outbreak
Approximate net recovery on cost
Retail overview: Americans are driving more and their cars are older on average in 2019 than they have ever been. Average vehicle miles traveled in the United States increased 0.9 percent for the 11-month period ended November 2019 over the same period in 2018. According to data released in June 2019 by research firm IHS Markit (IHS), the average age of vehicles on the road in the United States was 11.8 years, an all-time high and the eighth consecutive year the average age of vehicles was over 11 years. The average vehicle age has increased an average of 4 percent over the last five years, according to the research firm. The total number of light vehicles on the road also increased in 2019. Based on a report from IHS issued in June 2019, there are approximately 278 million cars, SUVs and light trucks on the road in the United States, which is up by almost six million vehicles over 2018. Additionally, IHS has projected that the number of vehicles that are at least 16 years old will increase 22 percent by 2023. All of these metrics have the potential to benefit the aftermarket auto parts industry as consumers look to maintain their older cars.
Positive sales performance by major retail players supports this positive momentum. For each of the companies’ most recent eight quarters, comparable store sales averages for three major auto parts retailers were up over last year, with Advance Auto Parts up 1.8 percent through December 28, 2019, AutoZone up 2.6 percent through November 23, 2019, and O’Reilly Automotive up 3.5 percent through September 30, 2019. Recent sector analysis from Creditntell notes “Amazon competes aggressively on price, but we expect parts retailers will be able to defend their DIY market position due to their ability to offer needed components on-demand coupled with store staff that is trained to help customers avoid mistakes, a combination that is difficult for online competitors to match.”
Automotive industry impacted by coronavirus: Multiple automotive plants in China and other parts of the world extended holiday shutdowns into 2020 due to the threat posed by the coronavirus. Plant operational statuses remain fluid as changes occur; however, as of mid-February 2020, Toyota, General Motors, and Fiat Chrysler had reopened factories and were beginning to restart production in China following extended holiday shutdowns due to the coronavirus outbreak. Spokesperson Jim Cain from GM, reported that the company “began the process of restarting production” on February 15 as part of a two-week process to reopen its 15 assembly plants in the country.” Toyota, according to company representative Eric Booth, said three of its four plants in China are beginning to operate single shifts for the week of February 17. Similarly, Michael Palese, a representative for Fiat Chrysler, said the company’s plant in Guangzhou had resumed production the week of February 17, adding that the company’s second assembly plant in China was “expected to resume operations soon.” While some manufacturers, like those noted above, are working towards re-opening operations, it is difficult to predict how long it will take those plants to get back up to full production. The domestic communist party in China has been making a concerted efforts to facilitate getting these plants back up and running, however many are currently short of workers due to the virus. So while it is positive news that operations are starting up again, they may be limited in their capacity given the associated labor shortage.
In terms of the impact these closures will have on the supply chain, Michael Palese, a representative for Fiat Chrysler, said Fiat Chrysler “continues to monitor its global supply chain in relation to the coronavirus outbreak in China.” However, factories such as Hyundai in South Korea have closed all their plants due to the shortage of the components provided from China that are needed to make their products. Additionally, Fiat Chrysler stated that one of its European plants may be the first of that region to have to slow or halt production due to supply chain issues. The impact of these closures extends beyond auto manufacturing as China and South Korea are a major source of automotive aftermarket parts.
The trickle-down effect in automotive will continue to be felt throughout the world forcing manufacturers and wholesalers to source components from areas outside China and South East Asia if possible. Going forward it is difficult to forecast how long the slowdown will continue and what impact it will have on the economy in general. Already economists are revising the expected economic annual growth of the Chinese economy down by at least 1 to 2 percent from the 6 percent that had been expected. As the second-largest economy, this kind of weakening coupled with a protracted period of component shortages will exacerbate the stress put on companies in the United States and elsewhere that rely on Chinese components and aftermarket parts. While reports indicate that the virus could be contained in the coming weeks, some damage will already have been done to many companies’ supply chains causing product launch delays and lost revenue.
Multi-faceted liquidation strategies yield highest recovery values: In order to maximize gross recovery values, the liquidation strategy for an auto parts retailer/service center would include a portion of the inventory being sold through the retail stores/service centers, with a bulk sale through wholesale channels to liquidate the balance of the application-specific “hard parts” inventory remaining at the end of the retail sale. Over-the-counter non-application parts such as chemicals, waxes, tires, tools, wiper blades, batteries, etc. would be sold during the retail sale. The higher the percentage of total inventory sold through retail stores, the better the gross recovery on a blended basis.
The highest recovering inventory categories on a blended basis would typically include chemicals/fluids, batteries, oil, wiper blades, tires, and tools. The lowest recovering categories would include brakes, cooling and fuel system parts, ignition parts, hoses and belts, and steering and suspension parts. Additionally, Gordon Brothers’ recovery assumption would not include “core” values associated with re-manufactured parts.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
Reference sources: FRED, U.S. CENSUS BUREAU, FINANCIAL TIMES, NBC NEWS, THE VERGE, JUST AUTO,
IBISWORLD, STATISTA, ROAD SHOW, USA TODAY, U.S. ENERGY INFORMATION ADMINISTRATION, IHS MARKIT