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Advance Auto Parts (AAP) Rides on Expansion, High Costs Hurt

Zacks Equity Research

On Aug 19, we issued an updated research report on Advance Auto Parts, Inc. AAP.

The leading automotive parts provider in North America engages in selling replacement parts, accessories, batteries and maintenance items for domestic as well as imported vehicles.

The company is undertaking numerous initiatives to meet the changing needs of customers. To achieve this, the company is strengthening its supply chain, positioning its inventory and transforming its stores. These initiatives are expected to aid the company to expand its margin in the long term.

Further, Advance Auto Parts is undertaking expansion by opening new stores, widening online presence and making strategic collaborations. In the reported quarter, the company closed and consolidated 21 stores that totals to 59 stores this year. Also, it continues to capitalize on strategic growth opportunities. In the second quarter, the company launched four new Worldpac branches that brought the total to seven new branches this year.

During the second quarter, the company also enhanced customer notification capabilities and upgraded several websites to improve function and usage for customers. This led to a substantial year-over-year increase in online traffic, improved conversion rates and resulted in double-digit growth for sales as well as online transactions.

However, the huge capital expenditure that is required for acquisitions, store openings and development of supply chain is a concern for Advance Auto Parts. For the current year, capital expenditure is expected in the range of $250-$300 million. Moreover, competition with national and regional industry peers such as AutoZone, O’Reilly Automotive, Pep Boys and CSK Auto Corporation is a threat to the company.

The improved quality of new vehicles is lowering the need for maintenance and repair of parts. Consequently, there is a hindrance in demand for automotive maintenance market. In fact, customers prefer new vehicle purchases instead of maintaining old ones. This is likely to affect demand. Dependence on seasonality and weather conditions for sales is another headwind for the company.

In the past six months, Advance Auto Parts has underperformed the industry it belongs to. During the same time frame, the company’s shares plunged 17.9% against the industry’s growth of 7.5%.

Zacks Rank & Stocks to Consider

Currently, Advance Auto Parts carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the auto space are Fox Factory Holding Corp FOXF, CarMax, Inc. KMX and Gentex Corporation GNTX, each presently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fox Factory has an expected long-term growth rate of 16.7%. In the past six months, shares of the company have rallied 23.2%.

CarMax has an expected long-term growth rate of 12.6%. In the past six months, shares of the company have moved up 37.8%.

Gentex has an expected long-term growth rate of 5%. In the past six months, shares of the company have returned 30.2%.

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