O’Reilly Automotive Inc (ORLY), Lumber Liquidators Holdings Inc (LL): Stocks to Buy On Evolving Business Models

Easy comps

O’Reilly Automotive Inc (NASDAQ:ORLY), which benefited from easy weather comparisons, also has revamped its retail offering and that is leading to much stronger results than others in its segment. It continues to be one of the favorite names in the do-it-yourself auto segment and Q2 results reminded us why. Nearly all metrics were better with stronger comps (+6.5%), gross margin and expense leverage. The result was a $0.09 earnings beat on the back of a record quarterly EBIT margin of 17.3%.

Gross margin seems to be an under-appreciated lever to the story as it rose a much better-than-expected 94 bps in Q2. That level of improvement is impressive following the multiple quarters of previous expansion. The growth in Q2 stemmed from product mix, lower acquisitions costs and price optimization, with the latter two likely persisting given a heightened focus in those areas.

Which names are changing their model?

As we look at this segment, two names stand out that are changing their model and offer the same potential upside should the changes resonate with consumers. Best Buy, one of the favorite names in this industry, is changing nearly every aspect of its business. That does not mean that it will be successful, but the Street likes the management, the overall plan, and the valuations.

The Street does not expect Best Buy to show the breakout quarter now, as it is knee deep in investments, the stores have not dramatically changed, and most importantly, consumers do not read research reports and it will take longer for them to recognize the changes than Wall Street.

The second name is Staples, which is destined to benefit from fewer competitors after recent consolidation in the industry. Those who are clueless of what I am talking about should be reminded of the recent merger of Office Max and Office Depot. It has led to a substantial reduction in competition for Staples, as the merger has led to the closure of numerable stores of both Office Max and Office Depot. Moreover, Staples’ internal changes and attractive valuations may also lead to more upside than projected.

Final word

Attractive marketing schemes and the redesigning of business models have worked well for GNC, Lumber Liquidators and O’Reilly Automotive Inc (NASDAQ:ORLY), which makes me bullish on them. However, when viewed across the industry, Best Buy and Staples also seem to be poised to benefit from similar restructurings. However, one should not expect either of these two to show the upside this quarter; but as investors contemplate where one may see out-sized returns, in my opinion, these two will lead the pack.

Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators and O’Reilly Automotive.
Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Three Stocks to Buy on Evolving Business Models originally appeared on Fool.com is written by Zain Abbas.

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