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Advance Auto (AAP) Falls 20% Post Weak Q2 Results: What's Next?
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Shares of Advance Auto Parts (AAP - Free Report) tumbled 20.6% in the last two trading sessions after it delivered dismal second-quarter results on Aug 22, before the opening bell. The stock closed at $49.15 on Friday, just 3% above its 52-week low of $47.73. At this juncture, investors must be wondering if it’s the right time to buy the stock given the dip.
Now, this auto retail parts company has been suffering from quite some time. It missed earnings estimates in each of the trailing four quarters, with the average negative surprise being 132.3%.
The stock is trading below both its 50-day and 200-day moving averages, signaling a bearish trend.
AAP Below 50 & 200-Day SMA
Image Source: Zacks Investment Research
AAP Grapples With Challenges
The company is navigating a difficult economic climate characterized by inflationary pressure, supply chain disruptions and intense competition in the automotive parts and retail industries.
In the last reported quarter, Advance Auto’s EPS of 75 cents fell short of Zacks Consensus Estimate of 97 cents and also declined 47.5% on a year-over-year basis. Weak results in the first two quarters of 2024 and expectations of an uncertain macro environment and reduced discretionary spending have forced AAP to slash its full-year view.
The company now anticipates full-year sales between $11.15 billion and $11.25 billion, down from the earlier projection of $11.30 billion to $11.40 billion. Comparable store sales are expected to range from a decline of 1% to flat, compared to the previous guidance of flat to up 1%. EPS is projected between $2 and $2.50, a reduction from the earlier forecast of $3.75 to $4.25.
The firm’s cost-cutting measures are not yielding desired results. Despite the top line remaining almost flat year over year in the last reported quarter, profit margins deteriorated. The gross margin declined by 100 basis points year over year to 41.5%, primarily due to pricing challenges to maintain competitiveness. Higher cost of sales also hurt gross margins. The operating margin also dropped by 200 basis points year over year due to gross margin pressure and high SG&A expenses.
The company’s trailing twelve months EBITDA margin compares way too unfavorably with its close peers like O’Reilly Automotive (ORLY - Free Report) and AutoZone (AZO - Free Report) .
EBITDA Margin TTM Comparison
Image Source: Zacks Investment Research
Profitability issues are expected to persist in the near term. The operating margin for 2024 is now expected to be between 2.1% and 2.5% (down from the previous guidance of 3.2% to 3.5%) due to lower gross margins and SG&A deleverage. Additionally, management has revised its free cash flow forecast to approximately $100 million, down from the previous estimate of $250 million.
Ongoing demand challenges, especially within the DIY segment, are expected to persist in the second half of the year. The CEO mentioned in the recent earnings call that the third quarter has started weaker than expected, with continued headwinds likely to impact sales and profitability. While management has observed some positive trends in specific categories and improving unit velocity, the pace of recovery has been slower than anticipated. As a result, consistent growth over the next few quarters will be needed before considering more significant market share gains.
Will Worldpac Sale Help in AAP’s Turnaround?
Along with its quarterly results, AAP announced the sale of its Worldpac business to Carlyle Group for $1.5 billion in cash, aiming to close the deal by year-end. After taxes and fees, AAP expects net proceeds of approximately $1.2 billion. This strategic divestiture is a pivotal move to streamline AAP's operations and refocus on its core "blended box" model, which serves both DIY customers and professional installers.
The sale offers several advantages. It generates substantial cash that AAP plans to use to reduce debt and reinvest in its core operations, potentially bolstering its balance sheet. By exiting a non-core business, AAP can allocate more resources to enhancing profitability in its main business areas. This financial flexibility and increased focus could be vital for AAP as it navigates a challenging market.
However, while the sale is a positive step, it's not yet a clear reason to invest in AAP. The success of this strategy hinges on AAP's ability to execute cost optimization and operational improvements, as well as its effectiveness in gaining market share in the competitive automotive aftermarket industry. Investors will need to monitor AAP's progress closely in the coming quarters.
AAP’s Price Performance & Valuation
Shares of Advance Auto have dropped around 20% year to date, significantly underperforming the industry and its peers ORLY and AZO.
YTD Price Performance
Image Source: Zacks Investment Research
AAP does look attractive from a valuation standpoint, with its current P/E ratio trading below the industry and its own 5-year average. Having said that, it is still not dirt cheap given the multiple headwinds surrounding the stock.
Image Source: Zacks Investment Research
Why AAP Isn't Worth Buying on the Dip
AAP’s second-quarter results were disappointing, and we remain pessimistic for the remainder of the year as well. Although the company is taking steps to improve, such as cost optimization, operational enhancements, and targeted growth investments, it's too early to count on a successful turnaround.
The company’s performance lags behind its key peers in terms of both revenues and earnings. While some investors might be tempted by AAP's large store base, well-known brand, and seemingly attractive valuation, we advise you to avoid investing in this stock now.
As it is, AAP is witnessing a downtrend in its earnings estimate revisions for the current and next year.
Image Source: Zacks Investment Research
Declining earnings estimates, along with an unfavorable Zacks Rank #5 (Strong Sell), reinforce our bearish outlook on AAP stock.
Image: Bigstock
Advance Auto (AAP) Falls 20% Post Weak Q2 Results: What's Next?
Shares of Advance Auto Parts (AAP - Free Report) tumbled 20.6% in the last two trading sessions after it delivered dismal second-quarter results on Aug 22, before the opening bell. The stock closed at $49.15 on Friday, just 3% above its 52-week low of $47.73. At this juncture, investors must be wondering if it’s the right time to buy the stock given the dip.
Now, this auto retail parts company has been suffering from quite some time. It missed earnings estimates in each of the trailing four quarters, with the average negative surprise being 132.3%.
Advance Auto Parts, Inc. Price and EPS Surprise
Advance Auto Parts, Inc. price-eps-surprise | Advance Auto Parts, Inc. Quote
The stock is trading below both its 50-day and 200-day moving averages, signaling a bearish trend.
AAP Below 50 & 200-Day SMA
Image Source: Zacks Investment Research
AAP Grapples With Challenges
The company is navigating a difficult economic climate characterized by inflationary pressure, supply chain disruptions and intense competition in the automotive parts and retail industries.
In the last reported quarter, Advance Auto’s EPS of 75 cents fell short of Zacks Consensus Estimate of 97 cents and also declined 47.5% on a year-over-year basis. Weak results in the first two quarters of 2024 and expectations of an uncertain macro environment and reduced discretionary spending have forced AAP to slash its full-year view.
The company now anticipates full-year sales between $11.15 billion and $11.25 billion, down from the earlier projection of $11.30 billion to $11.40 billion. Comparable store sales are expected to range from a decline of 1% to flat, compared to the previous guidance of flat to up 1%. EPS is projected between $2 and $2.50, a reduction from the earlier forecast of $3.75 to $4.25.
The firm’s cost-cutting measures are not yielding desired results. Despite the top line remaining almost flat year over year in the last reported quarter, profit margins deteriorated. The gross margin declined by 100 basis points year over year to 41.5%, primarily due to pricing challenges to maintain competitiveness. Higher cost of sales also hurt gross margins. The operating margin also dropped by 200 basis points year over year due to gross margin pressure and high SG&A expenses.
The company’s trailing twelve months EBITDA margin compares way too unfavorably with its close peers like O’Reilly Automotive (ORLY - Free Report) and AutoZone (AZO - Free Report) .
EBITDA Margin TTM Comparison
Image Source: Zacks Investment Research
Profitability issues are expected to persist in the near term. The operating margin for 2024 is now expected to be between 2.1% and 2.5% (down from the previous guidance of 3.2% to 3.5%) due to lower gross margins and SG&A deleverage. Additionally, management has revised its free cash flow forecast to approximately $100 million, down from the previous estimate of $250 million.
Ongoing demand challenges, especially within the DIY segment, are expected to persist in the second half of the year. The CEO mentioned in the recent earnings call that the third quarter has started weaker than expected, with continued headwinds likely to impact sales and profitability. While management has observed some positive trends in specific categories and improving unit velocity, the pace of recovery has been slower than anticipated. As a result, consistent growth over the next few quarters will be needed before considering more significant market share gains.
Will Worldpac Sale Help in AAP’s Turnaround?
Along with its quarterly results, AAP announced the sale of its Worldpac business to Carlyle Group for $1.5 billion in cash, aiming to close the deal by year-end. After taxes and fees, AAP expects net proceeds of approximately $1.2 billion. This strategic divestiture is a pivotal move to streamline AAP's operations and refocus on its core "blended box" model, which serves both DIY customers and professional installers.
The sale offers several advantages. It generates substantial cash that AAP plans to use to reduce debt and reinvest in its core operations, potentially bolstering its balance sheet. By exiting a non-core business, AAP can allocate more resources to enhancing profitability in its main business areas. This financial flexibility and increased focus could be vital for AAP as it navigates a challenging market.
However, while the sale is a positive step, it's not yet a clear reason to invest in AAP. The success of this strategy hinges on AAP's ability to execute cost optimization and operational improvements, as well as its effectiveness in gaining market share in the competitive automotive aftermarket industry. Investors will need to monitor AAP's progress closely in the coming quarters.
AAP’s Price Performance & Valuation
Shares of Advance Auto have dropped around 20% year to date, significantly underperforming the industry and its peers ORLY and AZO.
YTD Price Performance
Image Source: Zacks Investment Research
AAP does look attractive from a valuation standpoint, with its current P/E ratio trading below the industry and its own 5-year average. Having said that, it is still not dirt cheap given the multiple headwinds surrounding the stock.
Image Source: Zacks Investment Research
Why AAP Isn't Worth Buying on the Dip
AAP’s second-quarter results were disappointing, and we remain pessimistic for the remainder of the year as well. Although the company is taking steps to improve, such as cost optimization, operational enhancements, and targeted growth investments, it's too early to count on a successful turnaround.
The company’s performance lags behind its key peers in terms of both revenues and earnings. While some investors might be tempted by AAP's large store base, well-known brand, and seemingly attractive valuation, we advise you to avoid investing in this stock now.
As it is, AAP is witnessing a downtrend in its earnings estimate revisions for the current and next year.
Image Source: Zacks Investment Research
Declining earnings estimates, along with an unfavorable Zacks Rank #5 (Strong Sell), reinforce our bearish outlook on AAP stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.