Advance Auto Parts: Building Momentum
Scaled parts retailers like Advance are relatively well insulated from digital threats.
After third-quarter earnings that leave it ahead of our 2018 revenue target, we anticipate raising our $165 per share valuation for narrow-moat Advance (AAP) by a high-single-digit percentage. The short-term forecast boost should leave our longer-term expectations (mid-single-digit average top-line growth, adjusted operating margin expansion to the low double digits by fiscal 2022) largely intact; we have long expected improving results as part availability and efficiency initiatives take hold.
Year-to-date sales rose 2% against 53 basis points of adjusted operating margin expansion (to 8.3%), fueled by improving industry conditions, better execution (partly enabled by cross-banner availability), and improved inventory efficiency. Management raised its 2018 guidance to $9.55 billion to $9.6 billion in sales (from $9.3 billion to $9.5 billion) and a 7.6% to 7.8% adjusted operating margin (from 7.5% to 7.8%), versus our $9.4 billion and 7.7% respective pre-earnings estimates.
Management believes 60% to 70% of its roughly 12-point 2017 adjusted operating margin gap versus its rivals is addressable long term, suggesting about 7-8 points of potential improvement into the low-teens. We are somewhat more conservative, assuming Advance exceeds 11% by the end of fiscal 2022. While we view the turnaround positively, we counsel some caution as the associated upheaval should leave Advance more vulnerable to industry conditions or execution missteps than its stabilized peers. Still, the differential suggests upside if tailwinds persist. Its recent agreement with Walmart to offer an assortment of parts on the retail juggernaut's website could help accelerate progress, with Advance capitalizing on its partner's prodigious online traffic using a targeted assortment. While we still believe scaled parts retailers like Advance are relatively well insulated from digital threats, we expect the initiative (which will see Advance retain pricing control over its items) to prove additive.
|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 (actual or beneficial) 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.