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Tickers in this Article: AZO, AAP, PBY, ORLY, AN
For some time now, the working thesis among analysts coving the auto parts companies has been that the sector would benefit from the fact that cash-strapped U.S. drivers would be spending more on replacement parts to keep their old clunkers on the road longer.

Eight Ways To Survive A Market Downturn

AutoZone Shares Plunge
Unfortunately, recent data points coming from the industry do not seem to be in sync with that view, prompting something of a sell-off in the sector. Earlier this week, leading auto parts retailer AutoZone (NYSE: AZO) saw its shares tumble more than 7% following the release of its fiscal fourth-quarter results.

While the profit numbers themselves were just a hair under analysts' expectations, management's disclosure that its sales mix had now shifted to more lower margin products came as a clear warning to expect materially lower profits in future.

Back To Basics For U.S. Car Owners
U.S. car owners now appear to be confining their maintenance work on their older cars to just the basics, with things like oil, filters and brake pads making up the bulk of purchases. More expensive and therefore higher margin items only made up about 20% of AutoZone's sales in the recent quarter.

That news appeared to echo earlier disclosures coming from the management of auto service and parts supplier Pep Boys (NYSE:PBY) who earlier this month described their sales of higher margin items as "challenging."

Auto Parts Sector Skidded In August
An early warning about the pending slump in the fortunes of the auto parts retailers was evident in survey data compiled by broker Wedbush Morgan. Channel checks compiled by the firm's research department revealed a dramatic decline in business sentiment for the group from July to August with the sharpest drop being experienced by O'Reilly Automotive (Nasdaq:ORLY).

Not surprisingly, shares of O'Reilly and rival Advanced Auto Parts (NYSE:AAP) have been in a steady downtrend since peaking in late July. AutoZone's recent one-day plunge appears be a continuation of a downtrend that has been in place since last April.

But Some New Car Dealers Are Optimistic
Tough times in the "clunker" market don't appear to be dampening the optimism of some of the players in the new car market. Recently, top U.S. auto dealer AutoNation (NYSE:AN) announced aggressive expansion plans based on their view that the auto market had troughed.

The Bottom Line
One unintended consequence of the U.S. government's recent "Cash For Clunkers" program may well be the perception in the minds of many consumers that older cars are essentially scrap. If that is the case, then it will be a while before we see a recovery in the fortunes of the auto parts retailers. After all, who would want to continue putting money into a piece of scrap? (For more, see Analyzing Auto Stocks.)

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