Advance Auto Parts (NYSE:AAP) Faces Headwinds, But Turnaround Efforts Show Promise

Published on September 24, 2024 | Ticker: AAP

Advance Auto Parts, Inc. (NYSE:AAP) is a leading automotive aftermarket parts provider in North America, serving both professional installers and do-it-yourself customers. The company has faced some challenges in recent quarters, but its strategic initiatives aimed at simplifying the business and improving execution could pay off in the long run.

Financials

In the first quarter of 2024, Advance Auto Parts reported net sales of $3.41 billion, a slight decrease of 0.3% compared to the same period in the prior year. The company's comparable store sales declined 0.2% during the quarter. This performance was impacted by a combination of factors, including weather-related headwinds and a challenging consumer environment, with customers showing signs of financial distress and deferring some discretionary purchases.

Gross profit margin for the quarter was 42.0%, down 82 basis points year-over-year. This decline was primarily driven by increased costs that were not fully offset by pricing actions. However, the company's supply chain productivity efforts partially mitigated the margin pressure.

Selling, general, and administrative (SG&A) expenses for the first quarter were $1.34 billion, or 39.4% of net sales, an improvement of 48 basis points compared to the same period in 2023. This was driven by cost-saving initiatives, including reduced corporate expenditures and a gain on an asset sale, partially offset by increased field wages, training, and ongoing inflationary pressures.

Net income for the first quarter of 2024 was $40.0 million, or $0.67 per diluted share, compared to $48.3 million, or $0.81 per diluted share, in the prior-year period. The decrease in net income was primarily due to the lower operating margin, as well as a $0.05 impact related to a discrete tax item.

Outlook

For the full year 2024, Advance Auto Parts expects net sales in the range of $11.30 billion to $11.40 billion, with comparable store sales projected to be in the range of 0% to 1%. The company anticipates an operating income margin between 3.2% and 3.5%, and earnings per share between $3.75 and $4.25.

Recent Developments

The company's strategic initiatives, which it refers to as "decisive actions," are aimed at simplifying the business and improving execution. These actions include the potential sale of the Worldpac business, cost reduction efforts, organizational changes, improving asset productivity, and consolidating the supply chain.

Regarding the potential sale of Worldpac, the company is well underway with the process and expects to conclude it before reporting its second-quarter results. The company is also evaluating the potential sale of its Canadian business once the Worldpac transaction is complete.

On the cost reduction front, Advance Auto Parts delivered on the $150 million in annualized savings outlined in previous quarters, as evidenced by a $21 million reduction in year-over-year SG&A expenses in the first quarter. The company is also targeting an additional $50 million in annual indirect cost savings, with the bulk of the savings expected to be realized in 2025.

The company has also made organizational changes, including the appointment of Bruce Starnes as the new Executive Vice President and Chief Merchant. Starnes brings deep merchandising experience from his previous role at Target, and he will be partnering with the outgoing Chief Merchant, Ken Bush, to ensure a smooth transition.

Improving asset productivity, including both company-owned stores and independently owned Carquest locations, remains a top priority for Advance Auto Parts. In the first quarter, the company closed 17 underperforming stores and opened seven new ones. The company has also notified over 100 Carquest independent locations that it was removing them from its program, completing this action in the first quarter.

The company's supply chain consolidation efforts are also underway, with plans to operate a unified network of 14 large distribution centers and at least 60 market hubs by the end of 2026. This initiative is expected to enhance inventory availability and productivity, as well as improve the company's ability to serve its customers more efficiently.

Risks and Challenges

Advance Auto Parts faces some near-term headwinds, including continued pressure on its DIY business and margin challenges in the second quarter as it laps pricing actions taken in the prior year. However, the company's strategic initiatives, if executed successfully, could position it for improved performance in the back half of 2024 and beyond.

Conclusion

The automotive aftermarket industry remains attractive, with stable fundamentals, and Advance Auto Parts is well-positioned to capitalize on the opportunities within this space. While the company's turnaround efforts will take time, the management team's focus on simplifying the business and improving execution is a step in the right direction.

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