Why Advance Auto (AAP) Stock Is Not a Buy Despite Bargain Price
Shares of Advance Auto Parts AAP have plummeted around 56% over the past six months. In the third quarter of 2023, the auto parts retailer incurred a loss of 82 cents, sharply lagging the Zacks Consensus Estimate. Also, it trimmed the full-year 2023 guidance. But on a somewhat positive note, the company’s new CEO, Shane O’Kelly, has laid out a plan of action to help it return to profitability.
With management seemingly pivoting in the right direction, should you consider investing in the stock now? Well, AAP’s share price is currently hovering around $51, trading at some 68% off its 52-year high. While one may be tempted to buy the stock at this low price point, especially when the company has outlined plans that offer hope of a rebound, we feel it's still too early to invest in its potential turnaround, given the shrinking margins, cash flow and muted near-term outlook.
AAP’s Action Plan
On its latest earnings call, Advance Auto's CEO announced a strategic plan to restore profitability, encompassing the divestment of Worldpac and CarQuest Canadian business, substantial cost reductions, strategic reinvestment in core operations and the appointment of a new CFO. These actions aim to streamline operations, optimize the portfolio and fortify leadership, signaling a commitment to long-term financial resilience and growth.
To enhance focus on its blended box business in the United States, AAP has initiated distinct sale processes for the potential divestiture of Worldpac and its Canadian operations. Centerview Partners has been engaged to facilitate these sales. AAP emphasized that both entities operate largely independently of the core business, ensuring minimal disruption or distraction for its U.S. business. The company clarified that there is no immediate urgency or specific requirements for the sale of Worldpac or Canada, as they are recognized as sound businesses within AAP's portfolio.
Apart from these planned divestitures, Kelly announced that the company has launched a comprehensive cost-reduction program anticipated to yield minimum annualized savings of $150 million. This initiative will primarily focus on streamlining the organizational structure, eliminating duplicative efforts and divesting non-core investments. While the benefits are expected to manifest in 2024, with continued growth throughout the year, AAP plans to reinvest $50 million of the savings back into the business, encompassing wage and training enhancements. Initial changes to frontline compensation have already demonstrated reduced turnover in targeted roles.
Wait on the Sidelines for the Time Being
While the plans hold promise, it's prudent for investors to exercise patience and await more tangible progress before jumping to buy shares at the discounted price. As it is, the company is grappling with various near-term headwinds.
Despite initial strength in both Professional (Pro) and Do-It-Yourself omnichannel segments during the first eight weeks of the third quarter, there was a notable softening in the last four weeks. Also, lower average selling prices in the Pro segment are limiting revenues and margins. Discouragingly, the trend is expected to persist in the near term as AAP focuses on regaining market share.
Margins are under pressure due to elevated product costs. AAP witnessed $80 million in higher product costs in the last reported quarter. Wage inflation and increased volume, contributing to heightened supply chain expenses, add to the woes. The company grapples with ongoing inflationary costs, particularly in labor, within its new distribution centers in California and Toronto. AAP expects several one-time costs to adversely impact margins in the latter half of the year, including costs associated with organizational restructuring in the fourth quarter.
AAP has lowered 2023 sales and profit projections, dimming investors’ confidence. It now estimates 2023 net sales in the band of $11.25-$11.30 billion compared with the previous guided range of $11.25-$11.35 billion. Comparable store sales are projected within a range of negative 0.5% to 0%. Operating income margin is envisioned in the range of 1.8-2%, down from 4-4.3% guided earlier. The company now projects free cash flow in the band of $50-$100 million, down from the prior guidance of $150-$250 million. Earnings are forecast between $1.40 per share and $1.80 per share, down from the previous estimate of $4.50-$5.10 per share.
Rising debt levels also play a spoilsport. AAP’s long-term debt was $1,785.7 million as of Oct 7, 2023, up from $1,188.3 million on Dec 31, 2022.
Although Advance Auto is currently trading near 52-week lows with a plan of action in place, it might not be a buying opportunity just yet. AAP needs to demonstrate progress in employee retention, market share gains, higher gross and operational margins and improved cash flow and balance sheet strength to get into investors’ good books again.
Zacks Rank & Key Picks
AAP currently carries a Zacks Rank #4 (Sell).
A few better-ranked players in the auto space include Toyota TM, PACCAR PCAR and Canoo GOEV, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for TM’s fiscal 2024 sales and EPS implies year-over-year growth of 10.5% and 30.5%, respectively. The earnings estimate for fiscal 2024 and 2025 has been revised upward by 11 cents and 19 cents, respectively, in the past seven days.
The Zacks Consensus Estimate for PCAR’s 2023 sales and EPS implies year-over-year growth of 20% and 56%, respectively. The earnings estimate for 2023 and 2024 has been revised upward by 41 cents and 33 cents, respectively, in the past 30 days.
The Zacks Consensus Estimate for GOEV’s 2023 and 2024 EPS implies year-over-year growth of 69% and 53%, respectively. The company has surpassed the earnings estimates in the last four quarters, with an average surprise of 26.1%.
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Canoo Inc. (GOEV) : Free Stock Analysis Report
