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Simple is Best
As the name implies, AAP is a retailer of auto parts, a simple yet incredibly strong business to be in. For the quarter, gross margins were 49.8%, up 1% from the prior quarter. Such margins are often found in more glamorous tech stocks, not boring auto parts. But auto parts, boring as they may be, are an excellent recurring business. And economies of scale are a big advantage in this business. The need for auto parts is very local in nature; you don't want to travel far to pick up a part for your vehicle when its not running. It's no wonder that AutoZone (NYSE:AZO), the largest auto parts retailer, has been one of the most successful companies over the last decade. Over the last decade, shares are up nearly five-fold.

Repairing the Shop
AAP looks likes its benefiting from operational improvements. The company, which has a market cap of $4.6 billion, trades for 86% of annual sales. That compares with 1.25 of sales for AutoZone, and 1.33 for O'Reilly Automotive (Nasdaq:ORLY).While AutoZone's net margins are nearly double that of AAP, that implies that AAP has room to improve it's bottom line margins. The company generated over $260 million in free cash flow for the quarter, an annualized number that would suggest a multiple of under 5 times free cash flow. Even Wal-Mart (NYSE:WMT), a retailer that attempts to offer it all, has not attracted enough do-it-yourself consumers to hurt the strongest auto retailers. (For more, see The Bottom Line On Margins)

Great Long-Term Business
Unless you see the automobile declining in use, the auto parts business has wonderful long-term economics. As populations increase so will need for more vehicles, new and old. And since a new car needs replacement parts months after it leaves the dealership, the growth possibility remains huge. Cars have hundreds of parts that need to be repaired or replaced, and the retailers with the bigger geographic footprint are in the best position to capitalize.

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