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Advance Auto Cut to Underperform

Zacks Equity Research

We have downgraded our long-term recommendation on Advance Auto Parts Inc. (AAP) to Underperform.  The leading automotive parts and accessories retailer is facing challenges from the sluggish economy and volatile gasoline pricing.

Advance Auto Parts, in the second quarter of 2012, registered an 8.2% decline in earnings per share to $1.34 from $1.46 in the corresponding quarter a year ago. The results missed the Zacks Consensus Estimate by 6 cents. Profit decreased 12% to $99.6 million from $113.1 million in the corresponding quarter last year.

Total revenues went down 1.3% year over year to $1.46 billion in the quarter, missing the Zacks Consensus Estimate of $1.48 billion. The decline was attributable to a 2.7% drop in store sales offsetting the favorable impact of the addition of 65 new stores during the past 12 months.

The softness in the economy coupled with volatile gasoline prices are putting pressure on the company’s performance. Weak economy and uncertainty in the market are leading to a decline in consumer spending on replacement parts. In addition, fluctuating gasoline prices are adversely affecting the miles driven, thus reducing vehicle parts sales.

Advance Auto Parts faces tough competition from other national and regional automotive retailers including AutoZone Inc. (AZO), O’Reilly Automotive Inc. (ORLY), Pep Boys and CSK Auto Corporation. Moreover, complexity of vehicles makes it difficult for customers to perform DIY maintenance activities. This will adversely affect the DIY industry expansion, thus hindering the company’s expansion.

Meanwhile, the company has adopted numerous operational strategies which will improve sales and productivity of its existing business. The initiatives include development of merchandising programs, store remodeling programs and nationwide advertising, which will establish its brand value along with a focus on the commercial customer base.

The company has also undertaken an aggressive store expansion strategy. It has projected the launch of 120–140 stores during 2012 including 110–120 Advance Auto Parts stores and 10–20 Autopart International stores.

Our recommendation on the stock is backed by a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.

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