ORLY management did not sound bullish on business on today's earnings call. It was quite the opposite, actually.
The quarter was ok, weak comps in Jan and Feb blaming weather, improved in early March to more typical business trends and then Covid19 hit. From mid-March to mid-April comps were down 13%. The company saw a bit better results in just the last week as stimulus checks hit consumers bank accounts. The company noted investors should expect outsized negative earnings flow through on the negative sales trend given its ‘high fixed model’.
The most concerning aspect of the call was management was continually reiterated miles driven being down and the impact that miles driven has on the business. The team also seemed to be signaling it expects comps to be pressured from miles driven longer than just 2Q. If you think about it, miles driven are unlikely to be positive YY until March next year, and there is a bit of lag to auto parts demand and miles driven with the maintenance cadence. The demand is mostly shifted out, not pent up. We have seen miles driven reported to be down in late March to early April by a range of 40-75%. With comps only down 13%, the miles driven relationship suggests some future sales downside. That’s a risk when you see street expectations indicating a reversion to positive comps in 3Q. The stock is just barely off its recent peak multiple at 21x PE and we think earnings expectations are high.
This doesn’t seem like the time and price to be buying auto parts retail. We have debated with investors whether NTM earnings will matter if the ultimate tail earnings power will recover to a level known to be higher. We think NTM earnings will absolutely matter to the market when the numbers become more clear, and we think most of retail still has consensus numbers that are too high.
ORLY is moving from our long bias list to the short bias list, and AZO and AAP are joining it.
