Has Advance Auto Parts Inc. Turned the Corner?
Advance Auto Parts Inc. (NYSE:AAP) has certainly found the integration of Carquest stores to be a much-harder job than it originally expected, but the fresh management team has embarked off by providing investors what they want. Is this a sign that the company has eventually turned the corner? And is it now ready to catch up with its sector peers AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive (NASDAQ:ORLY) ?
Pic source: WhisperToMe via commons.wikimedia.com
The investment pitch
Followers of the company will be familiar with the investment pitch. Simply put, the hope is that Advance Auto Parts can “pull an O’Reilly Automotive” and succeed with the Carquest integration, thereby establishing itself as a leading dual-store (DIY and do-it-for-me, or DIFM) retailer.
Moreover, there is a big chance for the company to generate operational improvements and get to the kind of operational metrics loved by O’Reilly Automotive and AutoZone. Operating margin, cash flow generation, sales per employee, inventory management, etc. — you name a metric and Advance Auto Parts most likely lags in it.
In other words, the company has a lot of earnings growth potential merely from catching up to its peers.
Not getting better, but not getting worse
Unluckily, it’s not been plain sailing, and same-store sales growth has lagged that of its peers, while operating margin is seemingly in a downward trend. So what exactly was it about the latest third-quarter results that got the market so excited?
I think there were two key takeaways that prompted the market’s reaction:
- For the very first time in a long while, same-store sales growth came in better than expected.
- Management fleshed out a long-term outlook, which, if achieved, is bullish for the stock.
Let’s tackle each point in turn. As you can see below, the same-store sales decline of only 1% was the best result in three quarters. CEO Tom Greco claimed that “to date, our investments have driven sales spectacle at a swifter rate than expected” — some good news at last.
AUTOZONE FIGURES ARE DOMESTIC SAME-STORE SALES AND ARE TO THE MOST Latest COMPARABLE QUARTER. O’REILLY FIGURES ARE COMPARABLE SAME-STORE SALES. DATA SOURCE: COMPANY PRESENTATIONS. CHART BY AUTHOR.
Management’s outlook
The key points from the company’s earnings report included:
- Positive comparable-sales growth in two thousand seventeen and “modest increase in operating margin”
- Mid-single-digit comparable-sales growth by 2021
- Improvement of five hundred basis points in operating margin by 2021
- $500 million in gross productivity over the next five years
To put these figures into context, analysts are forecasting $9.63 billion in sales for two thousand seventeen and assuming linear growth to a rate of 4% per annum in 2021, meaning revenue could be around $Ten.9 billion in 2021. Using the adjusted operating income margin of 9.7% in the third quarter as a base suggests that operating income margin could be 14.7% in 2021.
In other words, operating income could be $1.6 billion in 2021. In contrast, the average ratio of market cap to operating income for O’Reilly Automotive and AutoZone presently stands at 13.Two, and using this figure means Advance Auto’s market cap would be $21.1 billion in 2021, indicating a 72% increase from today’s $12.25 billion.
Three reasons to be optimistic
Of course, all of this sounds wonderful, but the previous management clearly thought it had a treat on the integration process as well. What makes things different this time?
There are three key signs that the current management might make a better knuckle of it.
Very first, albeit he was light on the details (for competitive reasons), Greco signaled that management now has a coherent and clear strategy in place, rather than reacting to difficulties created by the integration as the previous management appeared to be doing.
2nd, as you can see in the chart below, the tempo of consolidations (Carquest stores are consolidated with nearby Advance Auto Parts stores) has slowed. Greco’s words suggested details: “We dramatically diminished them by about a third, based on what we originally planned at the time of the deal itself.” Meantime, conversions (Carquest stores are turned into Advance Auto Parts stores) have been “much more successful overall,” according to Greco.
It’s possible the disruptions caused by the tempo of previous consolidations caused the faltering sales growth, and now the rate of consolidations is being slowed, Advance Auto Parts might get back to same store sales growth.
DATA SOURCE: ADVANCE AUTO PARTS INC. PRESENTATIONS. CHART BY AUTHOR.
Third, it emerges that management previously overemphasized daily replenishment to stores in the Northeast. According to Greco, “We had more stores than we should have assigned to them, at a delivery frequency that was very difficult for them to execute flawlessly.”
Shifting the distribution centers toward delivery three times a week has led to “much better pack rates, like significantly better, much better accuracy, and the general managers are much more satisfied, and they’re selling more,” Greco added.
OLD CARS REQUIRE MORE MAINTENANCE — GOOD NEWS FOR ADVANCE AUTO PARTS INC. Photo SOURCE: GETTY Pictures.
Time to buy Advance Auto Parts stock?
All told, there is evidence to support the belief that eliminating previous mistakes with the integration will help matters significantly. Meantime, the long-term value chance remains in place. Clearly, the company has a long way to go before reaching the kind of spectacle achieved by O’Reilly Automotive and AutoZone, but this quarter’s results and outlook act as a tentative marker for better days ahead.
Has Advance Auto Parts Inc
Has Advance Auto Parts Inc. Turned the Corner?
Advance Auto Parts Inc. (NYSE:AAP) has certainly found the integration of Carquest stores to be a much-harder job than it originally expected, but the fresh management team has began off by providing investors what they want. Is this a sign that the company has eventually turned the corner? And is it now ready to catch up with its sector peers AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive (NASDAQ:ORLY) ?
Pic source: WhisperToMe via commons.wikimedia.com
The investment pitch
Followers of the company will be familiar with the investment pitch. Simply put, the hope is that Advance Auto Parts can “pull an O’Reilly Automotive” and succeed with the Carquest integration, thereby establishing itself as a leading dual-store (DIY and do-it-for-me, or DIFM) retailer.
Moreover, there is a fat chance for the company to generate operational improvements and get to the kind of operational metrics liked by O’Reilly Automotive and AutoZone. Operating margin, cash flow generation, sales per employee, inventory management, etc. — you name a metric and Advance Auto Parts most likely lags in it.
In other words, the company has a lot of earnings growth potential merely from catching up to its peers.
Not getting better, but not getting worse
Unluckily, it’s not been plain sailing, and same-store sales growth has lagged that of its peers, while operating margin is seemingly in a downward trend. So what exactly was it about the latest third-quarter results that got the market so excited?
I think there were two key takeaways that prompted the market’s reaction:
- For the very first time in a long while, same-store sales growth came in better than expected.
- Management fleshed out a long-term outlook, which, if achieved, is bullish for the stock.
Let’s tackle each point in turn. As you can see below, the same-store sales decline of only 1% was the best result in three quarters. CEO Tom Greco claimed that “to date, our investments have driven sales spectacle at a swifter rate than expected” — some good news at last.
AUTOZONE FIGURES ARE DOMESTIC SAME-STORE SALES AND ARE TO THE MOST Latest COMPARABLE QUARTER. O’REILLY FIGURES ARE COMPARABLE SAME-STORE SALES. DATA SOURCE: COMPANY PRESENTATIONS. CHART BY AUTHOR.
Management’s outlook
The key points from the company’s earnings report included:
- Positive comparable-sales growth in two thousand seventeen and “modest increase in operating margin”
- Mid-single-digit comparable-sales growth by 2021
- Improvement of five hundred basis points in operating margin by 2021
- $500 million in gross productivity over the next five years
To put these figures into context, analysts are forecasting $9.63 billion in sales for two thousand seventeen and assuming linear growth to a rate of 4% per annum in 2021, meaning revenue could be around $Ten.9 billion in 2021. Using the adjusted operating income margin of 9.7% in the third quarter as a base suggests that operating income margin could be 14.7% in 2021.
In other words, operating income could be $1.6 billion in 2021. In contrast, the average ratio of market cap to operating income for O’Reilly Automotive and AutoZone presently stands at 13.Two, and using this figure means Advance Auto’s market cap would be $21.1 billion in 2021, indicating a 72% increase from today’s $12.25 billion.
Three reasons to be optimistic
Of course, all of this sounds wonderful, but the previous management clearly thought it had a treat on the integration process as well. What makes things different this time?
There are three key signs that the current management might make a better knuckle of it.
Very first, albeit he was light on the details (for competitive reasons), Greco signaled that management now has a coherent and clear strategy in place, rather than reacting to difficulties created by the integration as the previous management appeared to be doing.
2nd, as you can see in the chart below, the tempo of consolidations (Carquest stores are consolidated with nearby Advance Auto Parts stores) has slowed. Greco’s words suggested details: “We dramatically diminished them by about a third, based on what we originally planned at the time of the deal itself.” Meantime, conversions (Carquest stores are turned into Advance Auto Parts stores) have been “much more successful overall,” according to Greco.
It’s possible the disruptions caused by the rhythm of previous consolidations caused the faltering sales growth, and now the rate of consolidations is being slowed, Advance Auto Parts might get back to same store sales growth.
DATA SOURCE: ADVANCE AUTO PARTS INC. PRESENTATIONS. CHART BY AUTHOR.
Third, it shows up that management previously overemphasized daily replenishment to stores in the Northeast. According to Greco, “We had more stores than we should have assigned to them, at a delivery frequency that was very difficult for them to execute flawlessly.”
Shifting the distribution centers toward delivery three times a week has led to “much better pack rates, like significantly better, much better accuracy, and the general managers are much more satisfied, and they’re selling more,” Greco added.
OLD CARS REQUIRE MORE MAINTENANCE — GOOD NEWS FOR ADVANCE AUTO PARTS INC. Photo SOURCE: GETTY Pictures.
Time to buy Advance Auto Parts stock?
All told, there is evidence to support the belief that eliminating previous mistakes with the integration will help matters significantly. Meantime, the long-term value chance remains in place. Clearly, the company has a long way to go before reaching the kind of spectacle achieved by O’Reilly Automotive and AutoZone, but this quarter’s results and outlook act as a tentative marker for better days ahead.