For years now, investors have known that someday Amazon and other online sellers would be a threat to auto-parts retailers, but they have largely dismissed the risk.
Years ago, Saturday Night Live ran a spoof trailer for a disaster flick called Glacier, which featured a serious voice intoning, if memory serves, “You had plenty of warning. But now it’s here.” That sums up the predicament faced by auto-part retailers like AutoZone (AZO), Advance Auto Parts (AAP), and O’Reilly Automotive (ORLY).
What do I mean? For years now, investors have known that someday Amazon.com (AMZN) and other online sellers would be a threat to auto-parts retailers, but they have largely dismissed the risk—in many cases rightfully so, as the stocks would sell off and then bounce back. So when the New York Post reported last Monday that Amazon had started to target the U.S. auto-parts retailers, the stocks reacted: Shares of AutoZone fell 4%, Advance Auto Parts dropped 2.2%, and O’Reilly Automotive tumbled 3.3%. And analysts, who are predominantly bullish on auto-parts retailers, rushed to defend the stocks.
One analyst at a major U.S. investment bank called Amazon “a long-term threat,” but one that doesn’t have the ability to do much damage yet. Another noted that online is “becoming more important” for auto parts—prices at Amazon are 22% lower, according to his research—even as he dismissed the threat by saying there’s a “heavy service component and same-day requirements” that make going online impractical.
This time, however, might be different. Yes, we know those are famous last words, but last week we once again learned that there would be no same-old same-old under Trump. Last Thursday, Press Secretary Sean Spicer suggested a 20% tariff on products from Mexico could pay for a border wall—and that could be the catalyst for those lower prices offered at Amazon and elsewhere to finally matter.
In a report released on Wednesday, Wolfe Research analyst Chris Bottiglieri called a potential tariff war between the U.S. and Mexico or China a “potential catalyst for increased online encroachment,” though one he considered a “black swan,” a financial term for an unpredictable event. Why would tariffs be bad for traditional auto-parts retailers like AutoZone, Advance Auto Parts, and O’Reilly? Bottiglieri writes that higher prices as a result of tariffs could cause shoppers to put off purchases as long as possible, and focus more on what they’re paying.
At the time of the report, Bottiglieri was “hesitant to turn more negative” on the stocks—he rates AutoZone and Advance Auto Parts Peer Perform, while O’Reilly is rated Outperform—but we have no such qualms. Remember, all three have been top performers—they gained between 22% and 33% annually during the five years ending on Dec. 31, 2016, more than double the S&P 500’s 14% return during the same period—and only now are they starting to weaken.
Sure, AutoZone has dropped 7.6% so far this year, while Advance is off 2.8% and O’Reilly has fallen 5.3%, so some of these concerns are already in the stocks. But for investors who have capitalized on their long runs of outperformance, it’s time to get out of the way of the glacier.