Automotive chains ride out unstable economy - Discount Industry Annual Report

Discount Store News, July 22, 1991

Automotive Chains Ride Out Unstable Economy

The automotives aftermarket got at least three votes of confidence in recent months: the launch of a new warehouse chain called Auto Source, Indianapolis, and the successful initial public offerings of AutoZone, Memphis, Tenn., and Hi/LO, Houston.

But those positive signs flew in the face of numerous indications that competitive and recessionary stresses are getting to the automotives aftermarket:

* Northern Automotive, Phoenix, Ariz., recently scrapped the remnants of its Crown Auto chain that operated 57 stores when Northern bought it in 1988 for $8 million. Coupled with other closings, the failure of Crown Auto trimmed store count for the group to 760 from 850; * Sales of Grand Auto, Oakland, Calif., slumped 5% in the fourth quarter of 1990. In an attempt to cut costs, it asked all vendors in April to cut prices by 5%. It closed all seven stores in the Los Angeles market in February and is down to 90 units from the 107 it had in 1989, when PACCAR acquired the chain; * Trak Auto lost a net of $4.2 million last year on sales of $293 million from 331 stores, compared to net profits of $2.6 million on sales of $276 million from 308 stores. Moreover, Trak lost a net of $3.4 million more in the first quarter of 1991, although sales rose 11.5% to $75.7 million from a year ago. The chain blamed the loss on "lower margins due to market pressures;" * Western Auto, owned by Sears, had to delay the opening of its first Auto America franchise store when its first franchisee partners had trouble securing financing. It had expected to open the first of six 1991 units in May but now looks to an August opening in Marion, Ind.; * Action Auto, Flint, Mich., declared Chapter 11 bankruptcy in June 1990, slashing store count to 50 from 68; * Cash woes have stalled the expansion of Auto Giant, Long Beach, Calif., at three warehouse units and prompted the chain to seek a merger with its sister warehouse chain, Auto Depot. A start-up company then without any stores of its own, Auto Depot rescued Auto Giant this spring by acquiring a California unit that Auto Giant built but was unable to open; * Even though its operating profits overall rose 12% on an 11% sales gain in 1990, Pep Boys--Manny, Moe & Jack, Philadelphia, ran into "an abrupt decline in sales and profits" starting in September. It blamed the slump on the recession, lack of consumer confidence and the Gulf War. Pep Boys continued to feel the affects of the recession during the first quarter of 1991 when operating profits declined on record sales.

In the face of these danger signals, Canadian Tire, Toronto, has tightened the competitive screws a notch by launching a U.S. chain of automotive warehouse units called Auto Source.

Auto Source opened the first 47,000-square-foot unit July 12 in Indianapolis and will open the second warehouse there next month. A third store should open its doors in October, with 10 to 12 more units opening next year.

Canadian Tire took the plunge, even though it lost $200 million on its ill-fated acquisition of White Auto Stores during the mid-'80s, because it has saturated its Canadian market.

The initial public offering of AutoZone, Memphis, Tenn., in April, provided a look at a chain that is prospering, despite the recession.

Sales for AutoZone rose 25% in the fiscal year ended Aug. 25, 1990, to $672 million from $536 million the previous year. Operating profits almost doubled to $49.3 million from $24.9 million in 1989.

For the six months ended Feb. 9, 1991, AutoZone saw its operating profits increase 80% on a 15% sales gain from 553 stores.

AutoZone was able to sell 3.5 million shares for $23 a share, against an expected range of $17 to $19 for 3.25 million shares. It raised $84.8 million to pay down debt.

Hi/LO, which currently operates 108 stores, went public last month, selling a one-third stake, or 3.2 million shares, at $12 per share. The chain will use the $38 million to pay off its LBO debt.

The only acquisition over the past 18 months was the long-delayed $115 million leveraged buyout of Whitlock Auto. Merrill Lynch Capital Partners acquired Whitlock, composed of Whitlock, R&S Strauss and Rose Auto chains, last July and renamed it the WSR Group.

Although Auto Giant struggles, the Auto Parts Club, San Diego, is driving ahead with expansion. Since its 1989 launch, Auto Parts Club has opened seven clubs in California and an eighth in Phoenix.

In addition, it is opening two more automotives warehouse clubs in the San Francisco Bay area and is building two in San Antonio, Texas, for a total of 12.

In another test of warehouse units, 150-store Discount Auto Parts, located in Lakeland, Fla., opened a 36,000-square-foot unit called Disco Depot Auto Parts, in Hialeah, Fla.