Turnaround Progressing at Advance Auto Parts
We have long believed the narrow-moat firm's work to boost availability, improve efficiency, and optimize its supply chain and distribution network would boost performance.
We plan a low- to mid-single-digit percentage uptick for our $157 per share valuation for narrow-moat Advance (AAP), as its second-quarter earnings suggest its turnaround is progressing. Our reaction to the news is more muted than trading; we have long believed Advance's work to boost availability, improve efficiency, and optimize its supply chain and distribution network would boost performance. While the results indicate the turnaround may be ahead of schedule, our long-term forecast (mid-single-digit average top-line growth, adjusted operating margins rising into the low double digits from 7% in 2017 over the next decade) endures.
First-half sales rose 1%, with 49 basis points of adjusted operating margin expansion (to 8.3%). Management lifted 2018 guidance, calling for $9.3 billion-$9.5 billion in sales and a 7.5%-7.8% adjusted operating margin (versus earlier $9.1 billion-$9.4 billion and 7.3%-7.8% marks), with our pre-earnings estimates within the new ranges ($9.3 billion, 7.5%). Leadership indicated it plans to repurchase up to $200 million of shares in 2018; we are skeptical of such a use of capital as the stock trades near its fair value estimate.
Management cited its cross-banner availability and digital efforts as performance drivers, along with favorable weather. We see the availability work as the first step to distribution efficiency improvement, enabling footprint rationalization as Advance finally streamlines operations after its 2014 General Parts purchase (a view bolstered by its plans to close two distribution centers). We are also encouraged by early results for Advance Pro, a new online portal for professional clients (higher conversion rate, dollars per transaction), and Advance's new DIY website (visits up 90% in June with flat conversion rates). We argue that Advance and its peers will withstand pressure from online-only retailers but expect omnichannel offerings to generate sales, leveraging distribution networks and trained store personnel.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Zain Akbari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.