Unimpressive Third Quarter at Advance Auto, but Long-Term Outlook Is Favorable; Shares Attractive

Narrow-moat Advance Auto Parts saw sluggish third-quarter comparable sales (down 0.7%), and we expect to reduce our $219 per share valuation by a high-single-digit percentage in response. We ascribe the underperformance relative to scaled peers this year to its ongoing turnaround, with work remaining to improve part availability and bolster service levels. Our long-term forecast contemplates mid-single-digit percentage top-line growth and low-double-digit operating margins over the next decade. We see the shares as attractive for long-term investors willing to wait out the volatility associated with the optimization, with the shares’ midteens swoon in response to earnings striking us as a nearsighted reaction given Advance’s progress in improving its supply chain and distribution capabilities.