Auto part stocks like Advance Auto Parts (AAP - Get Report) , AutoZone (AZO , O'Reilly Automotive (ORLY - Get Report) and others are getting smacked on Wednesday, down 6.5%, 7.1% and 4.2%, respectively.
The overall stock market is about flat on the day but these names are far from it. That's despite the strong performance this year, as names like Advance Auto and O'Reilly are up 58% and 38% so far in 2018, respectively. AutoZone, though, is about flat on the year. Wednesday's weakness follows the announcement that Walmart (WMT - Get Report) and Advance Auto are teaming up for a speciality online auto-parts store.
Specifically, the partnership will begin in 2019 and the online auto parts store will go up on Walmart.com. Walmart will also offer these services and products in its physical auto service centers.
"This comprehensive partnership will enhance almost every aspect of the automotive customer shopping experience - from the product offering online to fulfillment capabilities," said Phillip Oaks, vice president of retail merchandising at Walmart e-commerce.
So why the hit to the stock? The reason seems to be on worries about what this type of partnership will mean for profitability and for margins.
As the U.S. adds more drivers to the road each year and as the average age of U.S. vehicles continues to lengthen, more servicing is required. That's a big boon for companies like O'Reilly, AutoZone and Advance Auto. With AAP teaming up with Walmart, though, it's clear that the industry could take a hit with such a behemoth retailer getting involved.
Specifically, Walmart is known for driving down prices and crimping margins. It's what the company has to do to compete with companies like Amazon (AMZN - Get Report) , which have increased their exposure to the auto parts market in recent years as well. As big box retail gets into the auto business, more questions will continue to rise for these auto part suppliers. For instance, Costco Wholesale (COST - Get Report) also has a solid auto service product for its customers.
Given that Costco charges for a membership to its stores, this can help lower its cost and leverage price to work against companies like Advance Auto and others. Amazon has a similar situation thanks to its Prime membership.
The question now is, will this partnership help Advance Auto, or are these three major auto parts stores in for more downside? Will a partnership with Amazon or someone else come down the road? We'll see.
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