Daily Stock Watch: Advance Auto Parts Splutters on Q3 Earnings

By Duncan Ferris


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Advance Auto Parts (NYSE: AAP) shares have dipped by more than 15% as the business continues to be overshadowed by its competition. But is AAP stock a good investment?

Photo by Aaron Huber on Unsplash

Advance Auto Parts (NYSE: AAP) has seen its share price take a tumble after its third quarter earnings failed to live up to expectations.

But how bad is the update, and is APP stock a good investment?

What is Advance Auto Parts?

Advance Auto Parts provides automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy-duty trucks. 

The company sells its products through its website. It serves professional installers and do-it-yourself customers.

The company operates stores under the Advance Auto Parts, Autopart International and Carquest brands, as well as branches under the Worldpac name.

As of April 23, 2022, it operated 4,687 stores and 311 branches in the United States, Puerto Rico, the US Virgin Islands and Canada, as well as serving 1,318 independently owned Carquest branded stores in Mexico, Grand Cayman, the Bahamas, Turks and Caicos and the British Virgin Islands.

The company was founded in 1929 and is based in Raleigh, North Carolina.

AAP Stock Financials

The company’s most recent earnings showed that net sales were largely unchanged, rising by just 1% to $2.6bn during the third quarter period. Gross profit margin decreased by 44 basis points to 44.7% of net sales, though adjusted gross profit margin increased 98 basis points to 47.2%.

Even so, the business’ quarterly reduction in cash and cash equivalents widened from $230.3m to $410.2m amid changes in inventory value and a significant increase in the amount of money being used for the purchase of property or equipment. 

This loss left the business with cash and cash equivalents of $191.2m at the end of the third quarter, compared with $604.6m at the same point 12 months prior.  

Furthermore, the business slashed full-year adjusted earnings guidance from a range of $12.75 to $13.25 per share to a range of $12.60 to $12.80 per share.

The year to date has seen AAP stock decline in price by around 22%, while the stock price has hit a high of $244.55 and a low of $154.46 across the last 12 months.

It is worth noting that the business offers shareholders dividend payouts, with these amounting to $6 per share over the last 12 months. The dividend yield for Advance Auto Parts as of 11 November is 3.42%.

AAP Investment Risks

The company has significant competition from the likes of O'Reilly Auto Parts (NASDAQ: ORLY), LKQ Corporation (NASDAQ: LKQ), AutoZone (NYSE: AZO) and TravelCenters of America (NASDAQ: TA).

AAP is significantly smaller than the likes of ORLY and AZO and each of the previously named competitors has outperformed the company’s share price since the start of 2022. ORLY and AZO have both risen by more than 20%, while the declines seen by LKQ and TA have been significantly smaller than those suffered by AAP.

This poor share price performance in comparison to those around it comes after the company’s second quarter earnings also elicited disappointment from investors.

Analysts have speculated that the company’s lacklustre growth over recent quarters may be due to a rising number of potential customers putting off vehicle repairs as other costs take precedent in the current high inflation environment.

While this is speculation, this could mean that we see customers flocking to the business and revenues returning to solid growth when economic conditions become more favourable.

However, further disappointing results and cuts to guidance could lead to much more damage for AAP’s share price in the short term.

Is AAP Stock a Good Investment?

On the positive side, the business has significant room for growth and a sizeable platform from which to build. Additionally, investors can enjoy significant dividend returns and the possibility of significant share price growth if a significant uptick in revenue is delivered.

The company’s share price has sunk more than that of its closest competitors, which could mean AAP is a chance to pick up an auto parts stock at a relatively cheap price. 

On the downside, it appears that the company needs to make changes to catch up with industry competitors. In the company’s third quarter earnings President and CEO Tom Greco said the leadership team was “not satisfied with our relative topline performance versus the industry this year and are taking measured, deliberate actions to accelerate growth”.

The company says it is placing major emphasis on margin growth and returning excess cash to shareholders in what is the final step in a three-year plan the company outlined in 2021. As such, though it is lagging behind industry growth standards at present, success could be very attractive for shareholders.

Enjoyed this analysis? Why not check out our recent examinations of Toughbuilt and AST SpaceMobile?


In this article:

Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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