Company Reports

Despite serving as a leading auto parts retailer across North America, we do not think Advance Auto Parts benefits from a durable competitive edge and thus lacks confidence in its ability to outearn its cost of capital over the following decade. After suffering from operational mismanagement and poor supply chain integration, the retailer is set to embark on its third turnaround attempt in 15 years with Shane O’Kelly at the helm. While we look favorably upon management’s plans to cut unnecessary corporate costs and improve distribution speed, we find it increasingly difficult for the auto parts retailer to close the wide operational gap that exists between it and its most prodigious competitors, such as wide-moat firms AutoZone and O’Reilly, and narrow-moat Genuine Parts (Napa).

For the better part of the past 15 years, Advance Auto Parts has grappled with bloated expenses and supply chain inefficiencies that continue to plague its cost structure and product availability. The company’s first two attempts at a strategic turnaround failed to materialize under past CEO Darren Jackson (2008-2015) and Tom Greco (2016-2023), and the firm has recently called upon Shane O’Kelly to lead another turnaround.

We are dropping coverage of Advance Auto Parts. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Our $191 fair value estimate for narrow-moat Advance Auto Parts should fall by a high-single-digit percentage in the wake of disappointing first-quarter results and a per-share dividend cut to $0.25 per quarter from $1.50. However, we do not believe the results are as much of a disaster as the shares’ 30%-plus postearnings plunge might suggest. We see the challenges Advance faced in the period (most notably, larger-than-expected price cuts in the professional segment) as idiosyncratic, with the sector’s favorable traits intact. While it will take time to right the ship, we believe our long-term forecast for Advance (mid-single-digit top-line growth and low-double-digit operating margins over the next decade) is sufficiently conservative.

Although narrow-moat Advance Auto Parts has long trailed its scaled peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its optimization efforts can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Its turnaround should benefit from strong industry conditions, which should remain favorable long term.

We don’t plan any material change to our $201 per share fair value estimate for narrow-moat Advance Auto Parts after digesting fourth-quarter results. Even after a mid-single-digit lift, we view shares as attractive, trading at over a 25% discount, and think the shift to GAAP reporting signals the intention of management to focus on extracting efficiencies and improving product availability from the existing business, rather than the pursuit of significant acquisitions ahead. As such, the initial forecast for 7.8%-8.2% GAAP operating margin implies the expected capture of roughly 160 basis points in operating margin expansion in fiscal 2023, as Advance, like its peers, tends to benefit from a less elastic demand profile that isn’t as affected by inflationary pressures.

Although narrow-moat Advance Auto Parts has long trailed its scaled peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Signs of progress in its turnaround have coincided with strong industry conditions, which should remain favorable long term.

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.

Although narrow-moat Advance Auto Parts has long trailed its peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Signs of progress in its turnaround have coincided with strong industry conditions, which should remain favorable long term.

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.

Although narrow-moat Advance Auto Parts has long trailed its peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Signs of progress in its turnaround have coincided with strong industry conditions, which should remain favorable long term.

Our $233 per share valuation of narrow-moat Advance is unlikely to change much after it posted first-quarter earnings that leave it poised to meet our 2022 targets. With indications that its second quarter is off to a solid start, the firm is demonstrating our view that it and its scaled peers possess considerable competitive advantages that insulate them from economic turbulence. We believe Advance is on track to reach our long-term targets (mid-single-digit percentage top-line growth, low-double-digit operating margins over the next decade) and believe prevailing sentiment does not adequately credit long-term profitability improvement opportunities from the firm’s work to streamline its supply chain and optimize its footprint, resulting in a buying opportunity.

Although narrow-moat Advance Auto Parts has long trailed its peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Signs of progress in its turnaround have coincided with strong industry conditions, which should remain favorable long term.

Our $220 per share valuation of narrow-moat Advance should rise by a mid-single-digit percentage after it posted fourth-quarter earnings, although the increase is mostly on account of the rescission of our past expectations of a 2022 U.S. corporate tax rate hike. We believe the firm is on track to reach our long-term targets (mid-single-digit percentage top-line growth against low-double-digit operating margins over the next decade), although we suggest prospective investors await a more attractive entry point.

Although narrow-moat Advance Auto Parts has long trailed its peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Signs of progress in its turnaround have coincided with strong industry conditions, which should remain favorable long term.

In light of third-quarter results, our $215 fair value estimate for narrow-moat Advance Auto Parts should rise by a mid-single-digit percentage. Advance maintained its strength as the professional segment continued its momentum, with 3% comparable growth overall leading to 13% two-year stacked expansion that was in line with the second-quarter mark. This near-term performance suggests the firm is slightly ahead of our 2021 expectations, but we plan to maintain our long-term targets of mid-single-digit top-line growth against low-double-digit operating margins over the next decade.

Although narrow-moat Advance Auto Parts has long trailed its peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Signs of progress in its turnaround have coincided with strong industry conditions, which should remain favorable long term.

Our $207 fair value estimate for narrow-moat Advance Auto Parts should rise by a mid-single-digit percentage to reflect solid second-quarter results. As expected, Advance saw rebounding professional segment sales (double-digit growth) as American life started to normalize, but we are encouraged that its do-it-yourself operation held fairly steady. The quarterly results do not alter our long-term perspective (3%-4% top-line growth, low-double-digit operating margin over the next decade), and while we have long held a favorable view of Advance’s ongoing turnaround, we suggest investors await a more attractive entry point.

Although narrow-moat Advance Auto Parts has long trailed its peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe its turnaround can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps, we view it as poised to build share in a market that should gradually consolidate behind large retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Signs of progress in its turnaround have coincided with strong industry conditions, which should remain favorable long term.

Our $198 per share valuation of narrow-moat Advance is unlikely to change materially even though it announced a brisk start to 2021 with 25% first-quarter comparable growth. The strong growth was attributable to lapping the sector’s swoon in the corresponding period of 2020 as the pandemic began (comparisons were against a 9% comparable sales slide in that year’s opening frame) and transitory factors like economic stimulus and weather conditions. Thus, our long-term forecast still calls for 3%-4% top-line growth against low-double-digit operating margins.