Lackluster Second Quarter at Advance Does Not Alter Our Favorable Long-Term View; Shares Attractive

Although disappointing second-quarter sales (comparable store sales fell 0.6%) should lead us to cut our near-term expectations for narrow-moat Advance Auto Parts, our long-term view remains favorable as we suspect recent strategic investments will deliver profitable growth. We still believe the company can post mid-single-digit percentage top-line growth and low-double-digit operating margins over the next decade. Despite our plans to reduce our $234 per share valuation by a high-single-digit percentage (similar to the trading price’s reaction), we see the shares as attractive and believe prevailing sentiment takes an overly pessimistic view of Advance’s long-term prospects. Advance’s performance should improve as it reaps the benefits of investments made in areas such as catalog and supply chain integration, footprint optimization, part availability, strategic pricing, and its owned brands. Patient investors willing to endure the near-term volatility associated with a mid-stage turnaround should be rewarded.