Morgan Stanley made quite the confession by admitting it was wrong on DIY auto retail in 2017. Consequently, the firm downgraded two stocks in its coverage universe: O'Reilly Automotive Inc and AutoZone, Inc. . Weak Industry Revenue Trends Analyst Simeon Gutman indicated that the industry's top-line growth was weaker than expected in the first half. The analyst now estimates flattish same store sales growth for 2017 compared to his initial forecast for 2.2-percent growth. The analyst clarified that the slowdown does not reflect competitive threat by the online channel. Among the factors Morgan Stanley views as impacting the segment were unfavorable weather, fewer 5–12-year-old vehicles and choppy consumer demand. The firm attributed its downgrade of O'Reilly and AutoZone to slower industry growth persisting in the second half of 2017. Given the downgrade of its gross margin assumptions over the next two years, the firm expects about 2-percent downside to its previous EPS/EBIT estimates. The firm termed the 1.7-percent second-quarter comp reported by O'Reilly as not a terrible performance, relative to its coverage universe. The firm also noted that O'Reilly's pre-announcement was sketchy, not giving enough details on the magnitude of the second quarter earnings miss, gross margin performance and monthly comp cadence. "Applying a similar Q1 comp spread between ORLY and AZO/AAP to Q2 would imply the latter companies are comping negatively this quarter," the firm said. "We do not believe this is the case and forecast flattish SSS for AAP and AZO."Source