Economics
Advance Auto Parts Crushed After Weak Earnings, Has Something Changed in the Auto Parts Business?
Before the market opened on May 31, Advance Auto Parts, Inc. (NYSE: AAP) reported disappointing results for the sixteen weeks ended April
The post Advance…
Before the market opened on May 31, Advance Auto Parts, Inc. (NYSE: AAP) reported disappointing results for the sixteen weeks ended April 22, 2023, provided equally disappointing guidance for the full-year 2023, and slashed its quarterly dividend to US$0.25 per share from US$1.50. Not surprisingly, the stock of the aftermarket auto parts provider was savaged, declining 35% to US$72.89.
AAP, which is generally considered not to be as well managed as rivals AutoZone, Inc. (NYSE: AZO) and O’Reilly Automotive, Inc. (NASDAQ: ORLY), reported an operating margin (operating income as a percentage of revenue) of just 2.6% for the period ended April 22, 2023, down from 6.0% in the year-ago period and 6.4% in the full year 2022.
AAP cited various excuses for the shortfall, including “inflationary product costs,” “unfavorable product mix and supply chain headwinds,” and “inflation in labor and benefit-related expenses.” These factors caused AAP’s diluted EPS for the 16 weeks ended April 22, 2023 to sink to US$0.72 from US$2.26 in the year-ago period.
ADVANCE AUTO PARTS INC.
| (in thousands of US dollars, except for shares outstanding) | Calendar 2023E | 16 Weeks Ended 4-22-23 | 16 Weeks Ended 4-23-22 | Full-Year 2022 | Full-Year 2021 |
| Revenue | $11,200,000 to $11,300,000 | $3,417,594 | $3,374,210 | $11,154,722 | $10,997,989 |
| Year-Over-Year % Change | 0.9% | 1.3% | 1.4% | ||
| Gross Profit | $1,470,663 | $1,506,520 | $4,962,100 | $4,928,748 | |
| Gross Margin | 43.0% | 44.6% | 44.5% | 44.8% | |
| Operating Income (A) | $579,375 | $89,999 | $203,270 | $714,151 | $838,717 |
| Operating Margin | 5.0% to 5.3% | 2.6% | 6.0% | 6.4% | 7.6% |
| Diluted EPS | $6.00 to $6.50 | $0.72 | $2.26 | $8.27 | $9.55 |
| Operating Cash Flow (B) | $450,000 to $600,000 | ($378,865) | ($54,940) | $722,222 | $1,112,262 |
| Capital Expenditures | $250,000 to $300,000 | ($89,996) | ($114,854) | ($424,061) | ($289,639) |
| Free Cash Flow (Operating Cash Flow minus Capex) | $200,000 to $300,000 | ($468,861) | ($169,794) | $298,161 | $822,623 |
| Cash – Period End | $226,499 | $269,282 | $601,428 | ||
| Debt – Period End | $4,169,876 | $3,651,601 | $3,371,971 | ||
| Weighted Average Shares Outstanding (Millions) | 59.5 | 61.7 | 60.7 | 64.5 |
(B) Operating cash flow guidance is derived from the midpoints of AAP’s free cash flow and capital expenditures guidance ranges.
In turn, AAP slashed its EPS forecast for the full year 2023 to US$6.00-US$6.50 from the US$10.20-US$11.20 guidance it had issued just three months ago. The magnitude of such a reduction for a mature, predictable business is quite remarkable.
Of course, the question which springs from AAP’s results is: has there been a material change in the used auto parts business? Investors seem to be saying no, at least so far. The stocks of AZO and ORLY each declined about 3% on the AAP news on May 31, minor adjustments given the thrashing that AAP shares received.
Interestingly, neither AZO’s nor ORLY’s most recent quarterly results showed evidence of the significant inflationary cost pressures that AAP experienced. AZO’s and ORLY’s 1Q 2023 operating margins were about 21% and 19%, respectively, little changed from each company’s full-year 2022 margins of around 20%.
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Inflation in auto parts (and in used car prices) was rampant in 2022. This tailwind played no small role in the robust 2022 operating margins enjoyed by AZO and ORLY. Given the similar business operations of AZO, ORLY and AAP, it is difficult to understand how AAP’s 2022 operating margins were only about one-third of its main rivals.
After its stock price plunge, AAP trades at about 11.7x estimated 2023 earnings (at the midpoint of its guidance range). AZO and ORLY shares trade at much higher multiples, about 18x and 24x, respectively.
Advance Auto Parts, Inc. last traded on the NYSE at US$72.89.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
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