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Jul 5, 2017

O’Reilly Auto Sales Miss Turns Into a Sector Wide Fender Bender

The Automotive Retail sector has been driving in reverse for most of 2017 - first there was Amazon.com Inc. (AMZN US) targeting the sector as an online sales growth opportunity, then Carl Icahn decided he would create a vertically integrated automotive parts and service conglomerate, and now Mother Nature and the IRS teamed up to weaken 2nd quarter consumer demand. O’Reilly Automotive (ORLY US) stated that same store sales rose 1.7% in the 2nd quarter, far below earlier guidance of 3%-5% sales growth.

The auto parts retailer explained that another mild winter reduced the overall demand for car replacement parts and delayed income tax refunds gave car enthusiasts less disposable income to spend on their cars. As a result, ORLY was down 18.9% by the end of the day and with the big three auto retailers all driving in the same lane, AutoZone Inc. (AZO US) was down 9.6% and Advance Auto Parts (AAP US) was down 11.5%.
Short interest in the three auto parts retailers peaked in November 2016 with over $4.8 billion in total short interest as the stock price for all three securities were at or near recent highs, but had dropped 24% by April 2017 as stock prices dropped and shorts did not rush to double down their bets. Short sellers were reinvigorated with the idea that Bezos and Icahn had the sector in their crosshairs and short interest increased by over $1 billion, or 29%, by mid-June 2017. Total short interest in the three retailers hit a year to date high of $4.8 billion on June 14th. Short interest was down to $4.2 billon on July 3rd and will fall to approximately $3.7 billion after today’s stock price drop.

Today’s stock price drop added $591 million to the shorts’ P/L. Short sellers in these three stocks are up $1.83 billion this year, for a 45% return on their average yearly short positions. We’ve seen additional shorting in all three stocks today as short sellers continue to build their positions in anticipation of further weakness in the sector.  

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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