Auto parts providers can reap benefits from auto inflation
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Auto retail stocks have reflected a large degree of market turmoil in recent days, driving rather erratically as both broad market and sector-specific headwinds hit the industry. 
However, even adverse impacts in shifting consumer appetites, supply chain problems, and inflation may offer opportunity. Namely, these impacts are likely to motivate consumers to drive a car for longer. As many Americans return to pre-pandemic commuting and travel trends, these problems could prove positive for auto retailers offering auto repair services and, of course, auto parts providers. 
Reviewing Retail
Auto retailers, online or otherwise, have not enjoyed a smooth ride during Aprilâs earnings season. 
While companies like AutoNation (NYSE:AN) and Lithia Motors (LAD) have helped encourage some optimism on auto retailersâ resilience, Carvanaâs (CVNA) bearish quarterly report coupled with cautious commentary on consumer strength and supply chain problems has held back bullishness on the sector.
While Carvana (CVNA) has a host of problems that are specific to its own story, the broad, macroeconomic headwinds that it blamed for disappointing earnings results do appear to be impacting stocks across the sector, perhaps disproportionately to their respective performance.
First and foremost, inflation issues that threaten to slow down demand are cited frequently in analyst assessments of the sector. For example, even after a solid earnings report that beat on top and bottom lines, AutoNation (AN) slid due to margin pressures that Wells Fargo analyst Colin Langan pinpointed. 
Those squeezed margins will remain difficult to maintain as inflation in used autos remains extremely elevated and is stinging consumer demand.

That is not to mention persistent supply chain issues, especially in semiconductors, that also add margin pressure and have exacerbated adverse share reactions among many of the auto retail sectorâs most prominent names.
âAll of these headwinds, in general, will make it harder to afford a new car whether itâs lower supply, higher payments from rising interest rates, or a tighter wallet due to inflation,â Carparts.com (PRTS) CFO Ryan Lockwood told SeekingAlpha. âThere will likely still be spending on autos; however, there will be a lot of shifting both horizontally and vertically.â
Inflation and Auto Parts
Adding to this substitution effect, Lockwood indicated that the industry his firm operates within should stand to benefit.
He suggested that consumers are not only likely to substitute higher-end autos for lower priced options, but hang onto their cars for a longer period of time. As a result, parts and service providers could be in prime position. 
âObviously, there are plenty of used cars being sold outside of dealerships and we think this is a great tailwind for the auto parts industry where people want to make sure the used car they just bought is in good working condition,â Lockwood concluded.
Peering into results from dealership groups like Lithia (LAD) and AutoNation (AN), these trends in used auto sales and repairs are actually well reflected already. AutoNation (AN) was able to increase revenue from used autos by 47%, for example, while also noting a nearly $300 million rise in parts and service revenue. Lithia likewise saw a 14% jump in parts and service profits after used auto sales soared 30% from the year prior. 
Adding bullishness to the auto parts subsectorâs prospects as consumer behavior shifts is the matter of pricing power. Per Goldman Sachs, O'Reilly Automotive (ORLY) and Advance Auto Parts (AAP) are among the firms most insulated from inflationary pressure by virtue of strong pricing power. 
"We believe that inflation is a primary concern for most investors in the space. We expect investors to lean into companies with higher levels of pricing power, such as auto parts and home improvement," Truist wrote in a note anticipating a need for defensive positioning amid inflation pressure.
At present, that forecast appears to be coming to fruition as shares of auto parts retailers populate the sparse spots of green in the consumer discretionary space.
To be sure, optimism on the sector is not universal, nor is it applicable to all names. For example, Autozone (AZO), in stark contrast to Advance Auto Parts and OâReillyâs bullish reviews from analysts, has been targeted as a short candidate.
Read more on why Bank of America is very negative on Autozoneâs road ahead.