It has been a good year for auto parts retailers—other than
Advance Auto Parts.
Another “kitchen sink” quarter for the company has dragged its shares lower yet again.
That makes it hard to know if this is the point where the shares finally pull a U-turn—or hit a dead end.
Advance Auto’s (ticker: AAP) third-quarter report, delivered Wednesday, was filled to the brim. It delivered a surprise loss, and the company slashed its full-year earnings guidance by roughly two-thirds, well below analysts’ estimates—partly due to nonrecurring charges in the quarter. It also introduced a cost-savings strategy, named a new chief financial officer, and said it’s hoping to sell its wholesale distributor Worldpac and its Canadian businesses.
The stock slid 7% in recent Thursday trading to $51.77, piling on top of Wednesday’s 4.6% decline. If the post-earnings decline seems to be a relatively tame reaction, it’s likely because Advance Auto stock had already fallen more than 60% this year heading into the results.
The company’s turnaround, which has been under way since before the pandemic, has seen roadblocks. In May, Advance Auto stock tumbled some 30%—its largest one-day percentage decline on record—after its first-quarter results and full-year guidance missed expectations, and the company cut its dividend.
Investors hoping Advance Auto’s big guidance reductions were in the rearview mirror were disappointed again this week. The company’s woes are also thrown into a harsher light by the relatively benign macroeconomic backdrop for the industry in recent years: High vehicle costs and an aged American fleet have led to more people repairing their cars. Shares of peers
AutoZone
(AZO) and
O’Reilly Automotive
(ORLY) are up roughly 10% and 16% this year, respectively.
Little wonder then that Advance Auto was hit with another downgrade after the results. BofA Securities analyst Elizabeth Suzuki cut her rating on the stock to Underperform from Neutral, and lowered her price target to $43 from $60.
There’s “a lot of wood to chop before [the] stock looks attractive,” she wrote in a note dated Wednesday.
Advance Auto’s “transformation is going to be messy and free cash flow will likely remain under pressure for at least the next twelve months,” she added.
Only one out of the 27 analysts tracked by FactSet is bullish on Advance Auto, while the average target price has fallen by more than half since May, to less than $60.
Of course, it’s always darkest before the dawn, and, after such a massive decline, the shares trade at just over 13 times forward earnings, naturally attracting bargain hunters.
But those investors will want to kick the tires for sure. Truist Securities analyst Scot Ciccarelli notes that the company’s issues—including its declining profitability and financial strain—are “way too much for our taste,” particularly as retail turnarounds tend to be “notoriously difficult.”
Still, the stock’s relatively mild reaction Wednesday could be an encouraging sign that the biggest declines are behind it.
After all, the Worldpac acquisition, announced in 2013, never really jelled with the company in a way that investors hoped, so it likely won’t be missed much . In addition, the lowered profit outlook does include one-time items. And a new management team—Chief Executive Shane O’Kelly is a
Home Depot
(HD) alum who just joined this summer—needs to make moves quickly, so the new CFO and strategic changes are likely welcome, too.
“Advance Auto is quickly making bold pivots and refocusing its strategy,” writes TD Cowen analyst Max Rakhlenko. Likewise, Raymond James’s Bobby Griffin says the company is “laying the groundwork for [the] road to recovery.”
Tellingly, however, both analysts remain sidelined on the stock.
Ultimately, Advance Auto needs to make big changes and reinvigorate its turnaround, so strategic shifts are welcome—as long as profit forecasts don’t continue to shrink dramatically. The question of whether or not this is the stock’s low-water mark remains an open one, however.
At some point it may be clearer that the worst is truly over. For now, that timeless car-buying advice seems relevant: Caveat emptor.
Write to Teresa Rivas at teresa.rivas@barrons.com
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