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Here's Why You Should Hold Advance Auto in Your Portfolio Now

Zacks Equity Research

Advance Auto Parts, Inc. AAP continues to undertake several initiatives, in a bid to strengthen and streamline the supply chain. However, declining comparable store sales as well as price competition among industry peers are concerning. The company’s shares have gained 2.8% year to date, underperforming its industry’s 32.5% rise.

Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.

What’s Aiding the Stock?

Advance Auto continues to expand and optimise its footprint by opening new stores, widening online presence and through strategic collaborations. The company is also capitalizing on its growth opportunities, which includes opening of new stores and forming alliance with other companies. Earlier this year, Advance Auto announced a partnership with Midwest Auto Care to provide automotive parts and training support to its member facilities. In addition to driving growth across professional business, the firm continues to make progress on its “Do-It-Yourself” (DIY) omnichannel e-commerce platform.

The company has also been undertaking measures to strengthen and streamline its supply chain, in order to meet customers’ evolving need. The cross-banner replenishment initiative will likely complete by mid-2021, and deliver significant cost savings and product availability. Apart from for supply-chain initiatives, it is looking into store transformation and inventory positioning. Further, the company is laser-focused on improving its retail traffic to accelerate growth. These initiatives are likely to help the company unlock its long-term margin expansion.

Advance Auto’s loyalty incentive programs bode well for its growth prospects. In the third quarter of 2019, the firm rolled out a Speed Perks 2.0 program that includes technology enhancements and provides employees with data insights. It is an important platform to help Advance Auto enhance its DIY business. This program led to 45% growth in the number of Speed Perks transactions, along with new member sign-ups surging around 80%.

The company’s strong balance sheet and investor-friendly moves are also major positives. The firm’s low leverage of 17.7% provides adequate financial flexibility to tap its growth opportunities. Further, the company’s solid buyback program boosts investors’ confidence. In the recently-reported quarter, the company authorized $700 million as an addition to the existing share-repurchase program.

What’s Pulling the Stock Down?

Comparable store sales of the company have been declining, with the trend likely to continue as reflected by the firm’s bleak guidance. The company has updated its 2019 comparable store sales guidance to 1-1.5%, down from the 2.3% recorded in 2018.

Price competition is a concern for Advance Auto, as it competes with national and regional automotive retailers such as AutoZone AZO, O’Reilly Automotive ORLY, Pep Boys and CSK Auto Corporation.

The improvement in the quality of new vehicles has been resulting in reduced need for maintenance and repair of parts. This, in turn, impacts demand in the automotive maintenance market. In addition, consumers increasingly opting for new vehicle purchases over maintenance of the old ones will affect the demand for Advance Auto’s products.

This apart, escalating U.S.-Sino trade tensions have been impacting the company’s performance. With the auto-parts makers already grappling with high costs of steel and aluminum, the trade war is likely to intensify the situation. Rising costs will dent margins if the company is unable to pass the price increases to customers. Moreover, the company has huge capital expenditure. Funding of its plans — including acquisition, store openings and investments to develop the supply chain — are flaring up expenses.

Key Pick

Investors can consider a better-ranked player in the same industry, CarMax KMX, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CarMax has an estimated earnings growth rate of 10.44% for 2019. The company’s shares have surged 59.4% in a year’s time.

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CarMax, Inc. (KMX) : Free Stock Analysis Report
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O'Reilly Automotive, Inc. (ORLY) : Free Stock Analysis Report
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