Our latest checks across the auto parts space are showing continued signs of sales recovery, although indications of moderate supply constraints have surfaced across some categories. This coincides with accelerating demand trends in the commercial or DIFM segment of the business, which we pointed out last week as part of our broader consumer checks.
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We’re continuing to see signs of recovery (we had begun seeing an improvement on May 15) across our leisure and hardlines coverage. Powersports retail demand remains a standout—sales of off-road vehicles, boats and RVs picked up significantly in May and momentum has continued into June—although inventory replenishment is an increasing focus. Cruise trends improved modestly over the past few weeks. Home improvement is seeing continued strength although DIY trends are likely moderating off peakish May levels; however, pro biz improved in June. The recovery in auto parts retail is further taking shape with commercial sales picking up of late. Finally, small biz activity has been accelerating over the last several weeks as states re-open, according to Office Depot.
We conducted a consumer survey to better assess driving plans for this summer amid COVID-19 related fallout, and the implications for auto parts retailers. This follows our latest industry checks (through June 1st) which indicated a further step up in sales activity in recent weeks. Overall, we expect emerging, favorable dynamics within the broader auto parts sector to help propel a continued, gradual sales recovery from here absent any other major shocks to the system (i.e. second coronavirus wave or further tariff escalation).
Our latest checks across the auto parts retail space suggest a further step up in sales activity over the past two weeks as more favorable weather and some pent-up demand has furthered the positive momentum spurred on by stimulus payments. We indicated sequential sales improvement through mid-May in our previous checks.
Following recent earnings reports across leisure, food retailers, and hardlines retailers, we are publishing updated estimates and price targets for each of the following: Norwegian Cruise Lines (NCLH), Royal Caribbean Cruises (RCL), Walmart (WMT), Sprouts Farmers Markets (SFM), Advance Auto Parts (AAP), AutoZone (AZO), Home Depot (HD), Lowe’s (LOW), Wayfair (W).
AutoZone (AZO) reported Q3 results (period ending May 9th) with sales well above Street expectations, weighed on by incremental COVID-related costs. Comps tracked in the positive mid-single digits from mid-February through mid-March before turning materially lower. Over the final four weeks of the quarter, and consistent with our latest checks, the flow of stimulus checks to consumers significantly impacted sales results with AZO noting improvement to “meaningfully positive.”
Top-line trends for the broader sector likely picked up throughout April and into May, getting better each week and approaching normalized levels. The flow of stimulus checks to consumers likely helped drive at least some of the nearer-term lift.
We’ve seen improved demand across several segments of the consumer landscape. Most discretionary categories appear to have bottomed-out in late March / early April and have subsequently improved week-to-week, with less discretionary categories like home improvement enjoying healthy demand over the last 2-months. Changes in vacation spend and summer plans (fewer camps, sports, etc.), are likely helping, but the big unknown over the next few quarters is whether the demand we’re seeing is sustainable in light of higher unemployment and lingering economic impacts from coronavirus.
Our most recent checks in the auto parts retail space indicate continued pressure from lack of driving combined with pressure on consumer wallets. However, there are some tailwinds that could benefit 2H2020.
Our latest conversations across the consumer sector suggest somewhat mixed results. Food retail, home improvement and toys / games have benefitted from COVID-19 disruptions, but the more discretionary segments like leisure vehicles (RVs, boats, etc.) have seen weak trends. While we’ve seen some signs of stabilization / modest improvement over the past week or two (trends are still negative), it has been largely driven by government stimulus for consumers & small businesses combined with people getting stir crazy staying in their homes (e.g. picking up a Whopper via drive thru at Burger King versus cooking another pasta meal at home).
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