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Here is a chat I had earlier with the infamous Blackhat in our private Certified User chatroom about the company O'Reilly Auto Parts (competitors to Autozone). Conversation below:

BlackHat: ORLY
WallStreetOasis.com: what is orly's downside?
WallStreetOasis.com: what happens in a recession?
BlackHat: recessions are good
BlackHat: expansions are good
BlackHat: what you dont wanna see is a new car purchase cycle start up again
WallStreetOasis.com: auto parts...similar to autozone?
BlackHat: direct competitor ya
WallStreetOasis.com: but then
BlackHat: more focus on commercial side though which makes them have a better growth profile
WallStreetOasis.com: if economy starts to recoverisnt new auto cycle about to reset
WallStreetOasis.com: since people have been holding off for a while?
BlackHat: right
BlackHat: but you should still see people maintaining their cars
WallStreetOasis.com: ok, true
WallStreetOasis.com: so what is it correlated with?
BlackHat: last thing you wanna see with the aftermarket auto parts sector is the avg life of a car declining
WallStreetOasis.com: how many used cars are on road?
WallStreetOasis.com: like over 5 yrs oold?
BlackHat: avg life of a car, miles driven
BlackHat: avg life is like 9.5 years now its ridiculous
WallStreetOasis.com: ok...
BlackHat: and keeps increasing
WallStreetOasis.com: i like that trend

WallStreetOasis.com: what's it trading at?
WallStreetOasis.com: and historically?
BlackHat: 88 high/89 low
WallStreetOasis.com: i mean multiples
BlackHat: should be like 21-22x in my eyes
BlackHat: gets up to 25-26
BlackHat: trading at around 18 now
WallStreetOasis.com: what was low?
BlackHat: prolly mid 70s, lemme look
BlackHat: so like 16x
WallStreetOasis.com: cool
BlackHat: great value buy / long term play if ur into that sorta thing
WallStreetOasis.com: they arent crooks?
BlackHat: i like it to 110
BlackHat: nope theyre one of the best mgmt teams ive everk nown
BlackHat: ever known*
WallStreetOasis.com: no acct fraud
WallStreetOasis.com: etc
WallStreetOasis.com: ?
WallStreetOasis.com: lol
BlackHat: well by extension, no
BlackHat: honest bunch
WallStreetOasis.com: ok, I'm in
BlackHat: lol

BlackHat: ur a quick sell!
WallStreetOasis.com: yup
WallStreetOasis.com: looking for long term play
WallStreetOasis.com: in my retirement account
WallStreetOasis.com: have cash to put to work
BlackHat: haha nice
WallStreetOasis.com: but why has it seen
WallStreetOasis.com: such a runup in 2011
WallStreetOasis.com: and 2012?
BlackHat: even when growth is slow they have such great vendor captivity that they negotiate payments like 1 year in advance
WallStreetOasis.com: opening new locations?
BlackHat: so they get mad negative working capital and buy back like 8-9% of their stock each year
BlackHat: they just turn the borrowed inventory and pay it back that way
WallStreetOasis.com: great, but why the runup so big mid 2011?
BlackHat: yeah opening new locations
BlackHat: big acquisition
WallStreetOasis.com: so they were on an expansion track
BlackHat: of a west coast auto parts guy
WallStreetOasis.com: and that has slowed?
BlackHat: a bit, as the acquired company has matured
WallStreetOasis.com: expansion plans?
BlackHat: but they just bought another one in the northeast which theyve never penetrated
BlackHat: usually the NE is just advance vs autozone

BlackHat: but theyre coming in
BlackHat: since advance is phasing out
WallStreetOasis.com: cool
WallStreetOasis.com: why is advance phasing out?
WallStreetOasis.com: orly 101
BlackHat: brand awareness isnt as strong. not as good at having the inventory in stock at all times. just overall weakness
WallStreetOasis.com: isnt as strong as autozone?
BlackHat: right
WallStreetOasis.com: but wont orly have that issue in NE?
BlackHat: and orly is eating their lunch in the mid atlantic
BlackHat: orly has strong brand and distribution so they compete very well with autozone
WallStreetOasis.com: who was in mid atl first?
WallStreetOasis.com: advance or orly?
BlackHat: about the same time
WallStreetOasis.com: and orly won
BlackHat: orly probably more though, just by presence
BlackHat: yeah
WallStreetOasis.com: any regions
WallStreetOasis.com: they in with autozone
BlackHat: orly will always beat autozone straight up
WallStreetOasis.com: that they are winning?
BlackHat: yup
WallStreetOasis.com: and how do you define winning?
WallStreetOasis.com: mkt share gains?

BlackHat: mkt share gains on both sides, commercial and retail
WallStreetOasis.com: and how do they know autozone's mkt share?
BlackHat: its more or less an oligopoly, just 3 players in the market. not hard to see what everyone else is doing
BlackHat: wow fb 29.77
WallStreetOasis.com: DOWN SHE GOES
BlackHat: ^
WallStreetOasis.com: still holdiong my puts
BlackHat: same
WallStreetOasis.com: from yesterday
WallStreetOasis.com: and the jan 14s
WallStreetOasis.com: ok, will put $10k into Orly
BlackHat: but ya - for orly main growth generator coming up especially in the northeast, greg (CEO) says they are moving in to increase commercial awareness
BlackHat: ive got about 150k in it myself
WallStreetOasis.com: but
WallStreetOasis.com: is the
WallStreetOasis.com: penetration done on west coast and mid atl?
WallStreetOasis.com: what is runway
WallStreetOasis.com: to keep growth in double dig?
BlackHat: probably in mid atlantic its done, but not quite on west coast
WallStreetOasis.com: 2yrs
WallStreetOasis.com: ?
WallStreetOasis.com: or depends on NE?
WallStreetOasis.com: any international?

WallStreetOasis.com: or harder?
WallStreetOasis.com: apple bounced back today
WallStreetOasis.com: got more in at 490
BlackHat: im expecting revenue growth of about 8% next couple years with EPS growth 18-20%
BlackHat: thats worth at least 22x to me
WallStreetOasis.com: ok
BlackHat: so i pay it
BlackHat: the rest of the growth wont come from expansion but organic
BlackHat: on the top line
WallStreetOasis.com: so shoudl i put in 10k now
WallStreetOasis.com: or 5k and 5k?
BlackHat: hmm
WallStreetOasis.com: or wait
BlackHat: 88.80 is pretty good
WallStreetOasis.com: weak #s for auto sales
WallStreetOasis.com: in europe
BlackHat: not really correlated with auto sales
BlackHat: ahhaha those are a guarantee
WallStreetOasis.com: i thought weak new sales
WallStreetOasis.com: good
BlackHat: orly wont respond on that
WallStreetOasis.com: = older fleet
BlackHat: you could hold on and see if it drops a bit in the next week or two
WallStreetOasis.com: = more breakdowns

WallStreetOasis.com: ok, will hold
BlackHat: really no catalysts until earnings
WallStreetOasis.com: been waining
BlackHat: which are early feb
WallStreetOasis.com: and overall mkt
WallStreetOasis.com: is too high
BlackHat: yup
WallStreetOasis.com: think I could get it at ~$80

BlackHat: if advance gets bought by private equity you'll see ORLY get a really nice boost tho
WallStreetOasis.com: will put it on watch list
BlackHat: ehhh i dont think you'll get it at 80
WallStreetOasis.com: yup, true
WallStreetOasis.com: ok, 82
BlackHat: maybe 85
WallStreetOasis.com: lol
BlackHat: it had been floating in the 90-94 range for a little while last month

BlackHat: im expecting it back up there
BlackHat: then good earnings
BlackHat: targeting 110
BlackHat: orly has been a longtime favorite of mine
WallStreetOasis.com: sounds like it
WallStreetOasis.com: i like the buyback
BlackHat: yeah i always love management that cares BlackHat: theyre so consistent with it too
BlackHat: best stat you can throw at people about orly tho
BlackHat: 13 straight years of top and bottom line growth
WallStreetOasis.com: yeah, that's nice
WallStreetOasis.com: and also

WallStreetOasis.com: looks like it has come off major highs
BlackHat: yup
WallStreetOasis.com: so gives me a bit of comfort
BlackHat: they pre announced a few quarters ago and got whacked
BlackHat: i loaded up at 79-80
BlackHat: said their comp store growth was gonna be like 75bps less
WallStreetOasis.com: but were worse

BlackHat: couple other things
WallStreetOasis.com: than expected
BlackHat: was due to a soft winter
BlackHat: yeah
WallStreetOasis.com: ah, heavy winter = more repairs
BlackHat: soft winter means less wear and tear on cars
BlackHat: yup
WallStreetOasis.com: cool
WallStreetOasis.com: global warming aginst you

BlackHat: so this is a huge anti-al-gore play
BlackHat: hahah exactly
BlackHat: everyone knows i love me some o reilly
BlackHat: ive been pitching that stock for 6 years haha
BlackHat: was the first stock i ever covered in my career

1

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Comments (52)

  • theassetpro's picture

    maybe i am wrong here....but aren't car sales going up due to the beginning of a new purchasing cycle and not necessarily improved economic conditions? My understanding is that due to the recession, many people have delayed purchasing new cars and instead have driven their old cars to the ground (as a result, this has increased the car purchasing cycle way above historical average).

    If this is holds true and people are finally replacing their old junkers for newer cars, sales at autopart stores should take a hit.

    Seems like the trade should have been at the beginning of the recession.

    Thoughts?

    "The way to make money is to buy when blood is running in the streets."
    John D. Rockefeller.-

  • In reply to theassetpro
    BlackHat's picture

    theassetpro:
    maybe i am wrong here....but aren't car sales going up due to the beginning of a new purchasing cycle and not necessarily improved economic conditions? My understanding is that due to the recession, many people have delayed purchasing new cars and instead have driven their old cars to the ground (as a result, this has increased the car purchasing cycle way above historical average).

    If this is holds true and people are finally replacing their old junkers for newer cars, sales at autopart stores should take a hit.

    Seems like the trade should have been at the beginning of the recession.

    Thoughts?

    That's kind of the single fear with the auto parts players. A new purchasing cycle would definitely slow them down. The idea though is that even in a new car cycle you'll have a decent amount of people driving older cars and still keeping the business up, and the habit remains for new car owners who just traded in their old cars to keep servicing them. That and the thought that the cycles are becoming more muddied and not *everyone* is buying a new car at the same time. You're definitely right though, that is where the cyclical aspect would be.

    I hate victims who respect their executioners

  • In reply to theassetpro
    yeahright's picture

    theassetpro:
    maybe i am wrong here....but aren't car sales going up due to the beginning of a new purchasing cycle and not necessarily improved economic conditions? My understanding is that due to the recession, many people have delayed purchasing new cars and instead have driven their old cars to the ground (as a result, this has increased the car purchasing cycle way above historical average).

    If this is holds true and people are finally replacing their old junkers for newer cars, sales at autopart stores should take a hit.

    Seems like the trade should have been at the beginning of the recession.

    Thoughts?

    Off the lot car purchases increased approx. 16% in 2012. In my opinion, I would say this is more so due to the deals on purchasing new cars right now, which if a new purchasing cycle is indeed in effect, will disappear. This could create a balancing effect.

    And still, I think a lot of people are going from their run down cars to newer (used) cars. Rather than a brand new model.

    Frank Sinatra - "Alcohol may be man's worst enemy, but the bible says love your enemy."

  • theassetpro's picture

    Also, something to consider long term is that many car manufacturers are making their car parts more technologically advanced (i.e. some parts are programmed with computers, etc), requiring car owners to be more reliant on car dealerships that tend to have better trained mechanics, tools, etc.; rather than your average mechanic shop which tends to use autozone, ORLY, and others.

    My understanding is that car manufacturers make a big chunk of money of the dealers auto repair department and thus have a vested interest in keeping customers using their dealerships as much as they can.

    "The way to make money is to buy when blood is running in the streets."
    John D. Rockefeller.-

  • barbariansatthegates's picture

    BlackHat whats your take on the purchase of new cars in the NE. Due to sandy, will the average age of cars decrease in that area and thus dampen the NE expansion?

    PE is the new black.

  • In reply to barbariansatthegates
    BlackHat's picture

    barbariansatthegates:
    BlackHat whats your take on the purchase of new cars in the NE. Due to sandy, will the average age of cars decrease in that area and thus dampen the NE expansion?

    Definitely could, but being the boring value guy that I am, a one time event like that would only make me want to buy on weakness. The expansion is really just acquiring an already mature group of stores and a distribution center in Maine, so they don't need to build awareness and don't need an initial surge of customers or anything like that, but I never really thought of that as something that could permanently impair their move into the NE market.

    I hate victims who respect their executioners

  • In reply to AndyLouis
    BlackHat's picture

    AndyLouis:
    now i have their song stuck in my head...

    Totally forgot to mention that the biggest reason to be long is the jingle...

    I hate victims who respect their executioners

  • BTbanker's picture

    Stock down 1.18% following BH's in-depth analysis.

  • animalz's picture

    nice, im gonna visit this thread again next year and see what changed

  • BanditPandit's picture

    O RLY?
    YA RLY!

    ^.^

  • FutureBanker09's picture

    Any thoughts about Ford? Sales for them continue to impress. Looking at the other side of the coin from AZO and ORLY.

  • barbariansatthegates's picture

    Thanks, BH. I had looked at AutoZone sometime in November for a little research but didn't dig deep enough into ORLY.

    PE is the new black.

  • In reply to FutureBanker09
    BlackHat's picture

    FutureBanker09:
    Any thoughts about Ford? Sales for them continue to impress. Looking at the other side of the coin from AZO and ORLY.

    Love Ford. But don't look at the businesses as opposites, where one gaining ground means the other has to lose it. In fact, more sales for F and its peers would mean more sales (albeit down the line) for ORLY and its peers. I'm personally long both in my PA actually.

    I hate victims who respect their executioners

  • ladubs111's picture

    Thought average car life span in the US is around 10.8 years including heavy vehicles and US auto sales are going up still. GM presented 5% 2013 growth expectations and i believe Ford from dec 2012 sales call expects 15-16 mil SAAR ifrom 14.8 million in 2012.

  • kyleyboy's picture

    O o o o reiiiillllly's Auto parts. Meow

    Great post, cool to see how you think Bhat

  • orangejulius's picture

    my thoughts on autos: OEs negative, suppliers neutral, aftermarkets/retailers positive.

  • In reply to BlackHat
    orangejulius's picture

    BlackHat:
    theassetpro:
    maybe i am wrong here....but aren't car sales going up due to the beginning of a new purchasing cycle and not necessarily improved economic conditions? My understanding is that due to the recession, many people have delayed purchasing new cars and instead have driven their old cars to the ground (as a result, this has increased the car purchasing cycle way above historical average).

    If this is holds true and people are finally replacing their old junkers for newer cars, sales at autopart stores should take a hit.

    Seems like the trade should have been at the beginning of the recession.

    Thoughts?

    That's kind of the single fear with the auto parts players. A new purchasing cycle would definitely slow them down. The idea though is that even in a new car cycle you'll have a decent amount of people driving older cars and still keeping the business up, and the habit remains for new car owners who just traded in their old cars to keep servicing them. That and the thought that the cycles are becoming more muddied and not *everyone* is buying a new car at the same time. You're definitely right though, that is where the cyclical aspect would be.

    i would challenge this as aftermarkets are widely known to be less cyclical in nature given parts maintenance/replacement is non-discretionary regardless of vehicle age, although the record fleet age is certainly beneficial. new vehicle purchases = more vehicles on the road which expand and support the aftermarket retailer customer base. the one major risk aside from qualitative factors that i would focus on with auto retailers would be factoring arrangements which they rely very heavily on to support wc, fcf. given overwhelming production cuts at the oe's there is a growing pricing war throughout the supply chain and i would focus on liquidity as a premier risk.

    -ex auto analyst

  • HarvardOrBust's picture
  • johnwayne7's picture

    Have you factored in the upcoming, wide-scale implementation of E15 gasoline by the EPA? More than a dozen automakers are drawing the line there and are voiding warranties for any vehicles that use it as it destroys gas lines, pumps, etc.

  • prospie's picture

    This is a great thread, but when I saw the title, I assumed it was Blastoise. So glad that guy stopped posting as much.

  • Value Sleuth's picture

    Why will they "always beat Autozone"? I haven't done any work on this name...

  • In reply to Value Sleuth
    BlackHat's picture

    Value Sleuth:
    Why will they "always beat Autozone"? I haven't done any work on this name...

    I meant to say "always beat Advance" there, should have corrected myself earlier. ORLY just has an overall stronger product offering, brand name, distribution network, etc. than AAP and that's kind of shown itself over the past few quarters. Even AAP management admits they've slipped, but they still have a much stronger presence in the Northeast so it'll be interesting to see if ORLY's strategy is to go head to head with them there and try to branch out more in those high-density areas. Traditionally ORLY kills it in the Midwest and now the West and South, but big pushes into the Northeast and potentially the Southeast could bode well for them if they can scoop up share from AAP and at least battle to a draw with AZO on the retail side. Commercial is the big differentiatior for ORLY and one of the reasons I like the growth profile for them better than, say, AZO, who generally has a stronger grip on Retail than its competitors.

    I hate victims who respect their executioners

  • Value Sleuth's picture

    Ah, okay, thanks, BH. I know ESL loves Autozone, so I was interested in hearing why you like ORLY better. Thanks. You're the man.

  • In reply to Value Sleuth
    BlackHat's picture

    Value Sleuth:
    Ah, okay, thanks, BH. I know ESL loves Autozone, so I was interested in hearing why you like ORLY better. Thanks. You're the man.

    Yah Eddie's a big AZO guy and there's definitely nothing wrong with them. If I had my way I would be long both ORLY and AZO. The industry has great economics and both have top notch positioning and management that delivers for shareholders. AAP has solid management as well but just not at the same level as the others, and definitely has slipped in terms of competitive position. If I wanted to hedge it out I guess long those two and shorting AAP wouldn't be the worst idea in the world. The correlations aren't what you'd expect though so it carries some risk I would rather leave off the table.

    I hate victims who respect their executioners

  • bear396's picture

    I've always liked the auto aftermarket retailing industry. There are strong secular trends on the DIFM side of the business (which is a large part of ORLY's business) as cars get more complicated and the population ages and I think one thing that hasn't been mentioned is why the auto aftermarket retailers have strong protection against online competition - the pure number of SKUs required to be kept in stock along with the importance of service and support from an actually physical storefront are both difficult to replicate through online retailers. Coupled with the strong FCF conversion from negative working capital and favourable industry structure, it's definitely a great place to put money to work.

    There are a number of issues that worry me though:
    (1) The North American auto fleet can only remain so old before it becomes too expensive to maintain. Given that it's at historic highs right now, I tend to be concerned that this trend is more likely to revert to the mean / slow down rather than continue to work so strongly in ORLY's favor
    (2) I was under the impression that some of the gross margin expansion was from inflationary pressures in 2009 - 2011 and that this was starting to slow
    (3) The synergies from converting CSK stores and integrating procurement / distribution should have started to slow by now. While they're continuing to expand, it's not at the same scale of CSK (which almost doubled their store base). That acquisition was a significant wind behind their sails for the last few years.

    All these point towards slowing growth and if sales start to turn because of near-term cyclical trends, you'll see multiple compression (and negative working capital will start working against you from a cash flow perspective).

    I will admit that compared to AZO, there's room for improvement especially on the leverage and working capital side and generally people believe they are up there with AZO as the best operators in the business. But I find it very difficult to underwrite 20% eps growth for another few years (and by extension the 19x earnings purchase price) when that's what the company has achieved over the last two years under significantly more promising circumstances (both operationally and in the macro environment).

  • In reply to bear396
    orangejulius's picture

    bear396:
    I've always liked the auto aftermarket retailing industry. There are strong secular trends on the DIFM side of the business (which is a large part of ORLY's business) as cars get more complicated and the population ages and I think one thing that hasn't been mentioned is why the auto aftermarket retailers have strong protection against online competition - the pure number of SKUs required to be kept in stock along with the importance of service and support from an actually physical storefront are both difficult to replicate through online retailers. Coupled with the strong FCF conversion from negative working capital and favourable industry structure, it's definitely a great place to put money to work.

    There are a number of issues that worry me though:
    (1) The North American auto fleet can only remain so old before it becomes too expensive to maintain. Given that it's at historic highs right now, I tend to be concerned that this trend is more likely to revert to the mean / slow down rather than continue to work so strongly in ORLY's favor
    (2) I was under the impression that some of the gross margin expansion was from inflationary pressures in 2009 - 2011 and that this was starting to slow
    (3) The synergies from converting CSK stores and integrating procurement / distribution should have started to slow by now. While they're continuing to expand, it's not at the same scale of CSK (which almost doubled their store base). That acquisition was a significant wind behind their sails for the last few years.

    All these point towards slowing growth and if sales start to turn because of near-term cyclical trends, you'll see multiple compression (and negative working capital will start working against you from a cash flow perspective).

    I will admit that compared to AZO, there's room for improvement especially on the leverage and working capital side and generally people believe they are up there with AZO as the best operators in the business. But I find it very difficult to underwrite 20% eps growth for another few years (and by extension the 19x earnings purchase price) when that's what the company has achieved over the last two years under significantly more promising circumstances (both operationally and in the macro environment).

    you are right that maintenance is getting too expensive which is why you see more demand shifting to no-name brand items. for example prestone antifreeze sales have been declining significantly vs. private labels (same chemicals but one is more expensive given brand value). hence the declining margins on the supplier side and increasing price concessions among the suppliers and retailers. this is why you're seeing slight earnings volatility but will ultimately get pushed to the customers. keep in mind that you aftermarket is non-discretionary. a broke vehicle won't drive. so demand will always be there more so with the supporting macro factors stated above. additionally, keep in mind most suppliers and retailers are north america concentrated which is still very robust with respect to light vehicles (orly's core demographic). i would definitely agree aftermarket retailers is a good place to put your money.

  • In reply to bear396
    BlackHat's picture

    bear396:
    I've always liked the auto aftermarket retailing industry. There are strong secular trends on the DIFM side of the business (which is a large part of ORLY's business) as cars get more complicated and the population ages and I think one thing that hasn't been mentioned is why the auto aftermarket retailers have strong protection against online competition - the pure number of SKUs required to be kept in stock along with the importance of service and support from an actually physical storefront are both difficult to replicate through online retailers. Coupled with the strong FCF conversion from negative working capital and favourable industry structure, it's definitely a great place to put money to work.

    There are a number of issues that worry me though:
    (1) The North American auto fleet can only remain so old before it becomes too expensive to maintain. Given that it's at historic highs right now, I tend to be concerned that this trend is more likely to revert to the mean / slow down rather than continue to work so strongly in ORLY's favor
    (2) I was under the impression that some of the gross margin expansion was from inflationary pressures in 2009 - 2011 and that this was starting to slow
    (3) The synergies from converting CSK stores and integrating procurement / distribution should have started to slow by now. While they're continuing to expand, it's not at the same scale of CSK (which almost doubled their store base). That acquisition was a significant wind behind their sails for the last few years.

    All these point towards slowing growth and if sales start to turn because of near-term cyclical trends, you'll see multiple compression (and negative working capital will start working against you from a cash flow perspective).

    I will admit that compared to AZO, there's room for improvement especially on the leverage and working capital side and generally people believe they are up there with AZO as the best operators in the business. But I find it very difficult to underwrite 20% eps growth for another few years (and by extension the 19x earnings purchase price) when that's what the company has achieved over the last two years under significantly more promising circumstances (both operationally and in the macro environment).

    great analysis here. definitely something to think about that orly has a bit of an ace in the hole with the option to jack up their working capital leverage and push that AP/Inventory closer to the industry average. Not sure where they're at now but I last I checked they were around 70-75% while AAP does like 85% and AZO is actually something a step higher than that even. ORLY continues to open new locations and hopefully can see some margin padding thanks to the move towards more private label products and less demand for the Federal Mogul type parts that carry a much smaller gross margin. I feel confident they can continue to deliver mid-high teens eps growth over the near term, but the issues you brought up are certainly legitimate. That said, this is a business I plan on holding until I die, and we'll see a few more of this fleet cycles before then (hopefully), so I see it as one of the better long-term plays available for me right now, and there's certainly worse places one could put their money.

    I hate victims who respect their executioners

  • In reply to BlackHat
    Value Sleuth's picture

    BlackHat:
    Value Sleuth:
    Ah, okay, thanks, BH. I know ESL loves Autozone, so I was interested in hearing why you like ORLY better. Thanks. You're the man.

    Yah Eddie's a big AZO guy and there's definitely nothing wrong with them. If I had my way I would be long both ORLY and AZO. The industry has great economics and both have top notch positioning and management that delivers for shareholders. AAP has solid management as well but just not at the same level as the others, and definitely has slipped in terms of competitive position. If I wanted to hedge it out I guess long those two and shorting AAP wouldn't be the worst idea in the world. The correlations aren't what you'd expect though so it carries some risk I would rather leave off the table.

    Thanks for the response - I agree, hedging doesn't make sense here, IMO.

  • KarateBoy's picture

    Fan of ORLY- my brother used to work there so I know it well from an operational perspective. In addition, I'm a car buy who built a 240sx from SCRATCH. AAP is not in the same league. It just feels 2nd class.

    But, I disagree that online competition is curtailed by SKU count. In fact, I would argue its a reason why online retailer will succeed. Stocking SKUs in store is harder/more expensive than in a centrally located distribution center. If I was a bear, this would be central to a long-term short thesis, but in the near-term all the other drivers of this business are too powerful.

    I think the biggest hurdle for online retailers is:

    1) Same-day service (most important)
    2) Relationships with the store (important but there is fair amount of turnover)
    3) Old generations (doesn't want to use internet but this is eroding)

    Within the same auto parts space, I love LKQ. Very powerful moat.

    The role of relationship when providing a service is one of the reason I'm bullish on GME.

    Follow me on Twitter: https://twitter.com/_KarateBoy_

  • In reply to KarateBoy
    BlackHat's picture

    KarateBoy:
    Fan of ORLY- my brother used to work there so I know it well from an operational perspective. In addition, I'm a car buy who built a 240sx from SCRATCH. AAP is not in the same league. It just feels 2nd class.

    But, I disagree that online competition is curtailed by SKU count. In fact, I would argue its a reason why online retailer will succeed. Stocking SKUs in store is harder/more expensive than in a centrally located distribution center. If I was a bear, this would be central to a long-term bear thesis, but in the near-term all the other drivers of this business are too powerful.

    I think the biggest hurdle for online retailers is:

    1) Same-day service (most important)
    2) Relationships with the store (important but there is fair amount of turnover)
    3) Old generations (doesn't want to use internet but this is eroding)

    Within the same auto parts space, I love LKQ. Very powerful moat.

    The role of relationship when providing a service is one of the reason I'm bullish on GME.

    Bullish on GME? That's a bold statement. Industry really seems to be turning obsolete, and relies on another slowly dying industry in game consoles. Not sure how big the service component is there but you may know better than me in that regard.

    I hate victims who respect their executioners

  • In reply to BlackHat
    KarateBoy's picture

    BlackHat:
    KarateBoy:
    Fan of ORLY- my brother used to work there so I know it well from an operational perspective. In addition, I'm a car buy who built a 240sx from SCRATCH. AAP is not in the same league. It just feels 2nd class.

    But, I disagree that online competition is curtailed by SKU count. In fact, I would argue its a reason why online retailer will succeed. Stocking SKUs in store is harder/more expensive than in a centrally located distribution center. If I was a bear, this would be central to a long-term bear thesis, but in the near-term all the other drivers of this business are too powerful.

    I think the biggest hurdle for online retailers is:

    1) Same-day service (most important)
    2) Relationships with the store (important but there is fair amount of turnover)
    3) Old generations (doesn't want to use internet but this is eroding)

    Within the same auto parts space, I love LKQ. Very powerful moat.

    The role of relationship when providing a service is one of the reason I'm bullish on GME.

    Bullish on GME? That's a bold statement. Industry really seems to be turning obsolete, and relies on another slowly dying industry in game consoles. Not sure how big the service component is there but you may know better than me in that regard.

    I don't want to derail this good thread but my high-level thoughts on GME:

    1) Secular decline is over-rated due to age of current gaming cycle
    2) GME has one of the BEST customer loyalty programs in all of retail
    3) Company's ability to grow organic sales in the great recession is a testament to the power of the model
    4) Management is super shareholder-friendly
    5) Company is generating ~20% FCF and using it all for dividend/share buybacks
    6) Management's is innovative (will do smart things to unlock shareholder value) and Street is underestimating the company's own mobile/digital investment
    7) GME is the sales force for SNE/MSFT/NTDOY and they need each other. They will work to keep each other happy/profitable.

    I also wanted to add that people should look at GWW as proof of the economics that are created by stocking SKUs in a central location. These guys are moving inventory from the stores to a warehouse and managing 100K SKU is a breeze. They are top-notch in the supply chain world. In fact, they can sell GE light bulbs to GE cheaper than the company can ship it themselves! This is a legitimate threat.

    Follow me on Twitter: https://twitter.com/_KarateBoy_

  • In reply to KarateBoy
    BlackHat's picture

    KarateBoy:
    BlackHat:
    KarateBoy:
    Fan of ORLY- my brother used to work there so I know it well from an operational perspective. In addition, I'm a car buy who built a 240sx from SCRATCH. AAP is not in the same league. It just feels 2nd class.

    But, I disagree that online competition is curtailed by SKU count. In fact, I would argue its a reason why online retailer will succeed. Stocking SKUs in store is harder/more expensive than in a centrally located distribution center. If I was a bear, this would be central to a long-term bear thesis, but in the near-term all the other drivers of this business are too powerful.

    I think the biggest hurdle for online retailers is:

    1) Same-day service (most important)
    2) Relationships with the store (important but there is fair amount of turnover)
    3) Old generations (doesn't want to use internet but this is eroding)

    Within the same auto parts space, I love LKQ. Very powerful moat.

    The role of relationship when providing a service is one of the reason I'm bullish on GME.

    Bullish on GME? That's a bold statement. Industry really seems to be turning obsolete, and relies on another slowly dying industry in game consoles. Not sure how big the service component is there but you may know better than me in that regard.

    I don't want to derail this good thread but my high-level thoughts on GME:

    1) Secular decline is over-rated due to age of current gaming cycle
    2) GME has one of the BEST customer loyalty programs in all of retail
    3) Company's ability to grow organic sales in the great recession is a testament to the power of the model
    4) Management is super shareholder-friendly
    5) Company is generating ~20% FCF and using it all for dividend/share buybacks
    6) Management's is innovative (will do smart things to unlock shareholder value) and Street is underestimating the company's own mobile/digital investment
    7) GME is the sales force for SNE/MSFT/NTDOY and they need each other. They will work to keep each other happy/profitable.

    I also wanted to add that people should look at GWW as proof of the economics that are created by stocking SKUs in a central location. These guys are moving inventory from the stores to a warehouse and managing 100K SKU is a breeze. They are top-notch in the supply chain world. In fact, they can sell GE light bulbs to GE cheaper than the company can ship it themselves! This is a legitimate threat.

    Back to ORLY - one of the beauties of O'Reilly is that they are the best I've seen in distribution. I've been to ORLY, AZO, and AAP distribution centers and from what I've gathered ORLY was clearly best prepared and has a great distribution team in place and a proprietary inventory management system. They do same-day and overnight restocking to all their stores from about 25 large distribution centers, and often do multiple shipments per day to their stores. Everyone in the aftermarket game knows if you don't have the part on hand, you're dead. So being in stock is everything, and that's where ORLY beats out AAP pretty significantly. They don't have everything in one central location like GWW or AMZN or anything like that, but they have a similar model if broken out regionally the way they handle their distribution.

    I hate victims who respect their executioners

  • In reply to BlackHat
    KarateBoy's picture

    BlackHat:

    Back to ORLY - one of the beauties of O'Reilly is that they are the best I've seen in distribution. I've been to ORLY, AZO, and AAP distribution centers and from what I've gathered ORLY was clearly best prepared and has a great distribution team in place and a proprietary inventory management system. They do same-day and overnight restocking to all their stores from about 25 large distribution centers, and often do multiple shipments per day to their stores. Everyone in the aftermarket game knows if you don't have the part on hand, you're dead. So being in stock is everything, and that's where ORLY beats out AAP pretty significantly. They don't have everything in one central location like GWW or AMZN or anything like that, but they have a similar model if broken out regionally the way they handle their distribution.

    Did you ever look at LKQ?

    Follow me on Twitter: https://twitter.com/_KarateBoy_

  • In reply to KarateBoy
    BlackHat's picture

    KarateBoy:
    BlackHat:

    Back to ORLY - one of the beauties of O'Reilly is that they are the best I've seen in distribution. I've been to ORLY, AZO, and AAP distribution centers and from what I've gathered ORLY was clearly best prepared and has a great distribution team in place and a proprietary inventory management system. They do same-day and overnight restocking to all their stores from about 25 large distribution centers, and often do multiple shipments per day to their stores. Everyone in the aftermarket game knows if you don't have the part on hand, you're dead. So being in stock is everything, and that's where ORLY beats out AAP pretty significantly. They don't have everything in one central location like GWW or AMZN or anything like that, but they have a similar model if broken out regionally the way they handle their distribution.

    Did you ever look at LKQ?

    No not really, it's not exactly the same business as the automotive aftermarket guys. It's more the repair products and lower end recycled parts, or correct me if I'm wrong on that... and that business is going to probably be even more dependent on the commercial side of what the aftermarket guys would do, and much more correlated to the age of the auto fleet and an increased average lifespan of cars. The consumer aspect is much less prominent I imagine. But I'd assume it's a very good business right now / has been over the past half decade or so.

    I hate victims who respect their executioners

  • In reply to BlackHat
    KarateBoy's picture

    BlackHat:
    KarateBoy:
    BlackHat:

    Back to ORLY - one of the beauties of O'Reilly is that they are the best I've seen in distribution. I've been to ORLY, AZO, and AAP distribution centers and from what I've gathered ORLY was clearly best prepared and has a great distribution team in place and a proprietary inventory management system. They do same-day and overnight restocking to all their stores from about 25 large distribution centers, and often do multiple shipments per day to their stores. Everyone in the aftermarket game knows if you don't have the part on hand, you're dead. So being in stock is everything, and that's where ORLY beats out AAP pretty significantly. They don't have everything in one central location like GWW or AMZN or anything like that, but they have a similar model if broken out regionally the way they handle their distribution.

    Did you ever look at LKQ?

    No not really, it's not exactly the same business as the automotive aftermarket guys. It's more the repair products and lower end recycled parts, or correct me if I'm wrong on that... and that business is going to probably be even more dependent on the commercial side of what the aftermarket guys would do, and much more correlated to the age of the auto fleet and an increased average lifespan of cars. The consumer aspect is much less prominent I imagine. But I'd assume it's a very good business right now / has been over the past half decade or so.

    Something like that. One of their core competencies is they buy salvaged cars and cut-off the undamaged pieces for resale to both consumers and shops. A lot of the demand is being driven by insurance companies wanting to lower the repair costs since recycled parts are much cheaper than OEM.

    What makes this company so unique is the scale and the people that work there. You gotta be a car-guy to work at LKQ so its not easy to replicate. Also, the company has an awesome historic sales growth record (even if its partially driven by acquisitions).

    P.S. GME has been on quite a run these last few days :)

    Follow me on Twitter: https://twitter.com/_KarateBoy_

  • WhiteHat's picture

    You must be very proud of yourself....

  • stvr2013's picture

    Glad I trusted an anonymous poster on an internet forum! But actually, great thread.

  • duffmt6's picture

    The legend of Blackhat grows. ORLY up big this morning on earnings (although I do realize BH has a long time horizon).

    "For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."

  • In reply to WhiteHat
    KarateBoy's picture

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  • In reply to stvr2013
    BlackHat's picture

    I hate victims who respect their executioners

  • In reply to WallStreetOasis.com
    BlackHat's picture

    I hate victims who respect their executioners

  • BlackHat's picture

    I hate victims who respect their executioners

  • In reply to cheese86
    BlackHat's picture

    I hate victims who respect their executioners

  • BlackHat's picture

    I hate victims who respect their executioners

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