Aging cars drive profits for auto part retailers

Susan Kelly of Reuters submitted this story: Americans are holding on to their aging cars and trucks longer, fattening the bottom line at service centers and auto parts stores nationwide.

While sales of new vehicles continue at a torrid pace, many families are keeping their older cars, too, and now a third car in the driveway often belongs to the teenager in the house.

Stable prices for better-built vehicles that can run longer with fewer repairs, plus a wealthier U.S. population, add up to more cars on the road logging more miles than ever before, analysts said.

"What we have is people buying more and more cars per family," said Diane Swonk, chief economist at Bank One Corp.

Reaping the benefits are chains that sell car and truck replacement parts, such as AutoZone Inc., Advance Auto Parts Inc.and CSK Auto Corp. Shares of several parts retailers are trading near multi-year highs, offering a haven for investors in a gloomy stock market.

Analysts said the long-term demographics are favorable for the replacement parts industry, as new cars sold during the record years of 1999 through 2001 grow older, suggesting steady sales and solid earnings growth over the long term.

"There is a huge number of cars coming into the high-maintentance portion of their life cycles," said Bret Jordan, an analyst with Advest Inc.

The average age of passenger cars in the United States has risen steadily over the past decade and now stands at 9.3 years, up from 8.1 years a decade ago, according to the Automotive Aftermarket Industry Association.

Americans are also putting more miles on their cars and trucks, averaging about 12,000 miles (19,200 km) a year.

Light truck and SUV sales outpaced passenger cars last year to account for more than half of total vehicle sales, another factor favoring parts sellers because the bigger, 4-wheel-drive vehicles are more complex and expensive to repair.

Many SUVs and light trucks are now coming off warranty, with the average age at 5.5 years, said John Lawrence, retail analyst with Morgan Keegan & Co. "All of the retailers are doing well because of these industry dynamics," he said.

The two largest U.S. auto parts retailers, AutoZone and Advance Auto Parts, last week reported strong profit growth, citing the nation's aging vehicle fleet as a key factor.

AutoZone Inc., the largest U.S. auto parts chain and the No. 1 performing company in the Standard and Poor's index last year, saw net income jump 61 percent in the latest quarter.

The Memphis, Tennessee-based retailer sells automotive parts to consumers and professional mechanics through more than 3,000 stores in the United States and Mexico.

As cars and trucks reach 7 years of age, their maintenance needs increase, said AutoZone Chairman and CEO Steve Odland.

'PEOPLE HAVE TO GET THEIR CARS FIXED'

Odland said he has found the auto parts business fares well in both good and bad economic times.

"Auto-parts maintenance tends to be one of the areas that you call recession-proof because people always have to get their cars fixed," Swonk said.

AutoZone tries to convince car owners, via radio ads, to complete regularly scheduled maintenance. It estimates that $60 billion worth of upkeep goes undone each year.

Other parts and service companies have seen profits swell.

Industry consolidation has improved the purchasing power of the large chains, boosting operating margins, while price wars that had undercut profits in the past erupt less frequently now because competing stores have stopped popping up across the street from one another, the analysts said.

AutoZone rival Advance Auto Parts, of Roanoke, Virginia, with 2,400 stores, saw its quarterly earnings more than double excluding acquisitions. Advance Auto last year bought Discount Auto Parts to become the nation's second-largest parts chain.

CSK Auto on Thursday said operating profit rose 13 percent in the latest quarter as the Phoenix-based retailer shuttered several underperforming stores.

The Pep Boys - Manny, Moe & Jack, a retailer and service center operator, posted a 49 percent quarterly profit gain this month. The Philadelphia company cited an encouraging upturn in tire sales in April after manufacturer recalls, the recession and a mild winter saw consumers postpone purchases.

Rochester, New York-based Monro Muffler Brake Inc. said store traffic rose 10 percent in the recent quarter as it performed more oil changes and other routine maintenance.