Advance Auto Parts, Inc. (NYSE: $AAP) is a leading provider of aftermarket parts for professional and DIY customers. It has stores and branches in the US, Puerto Rico, US Virgin Islands, and Canada.
On Thursday, April 4, 2024, Advance Auto Parts shares sank over 5% after performing better than industry peers following the release of its Q4 and fiscal 2023 results a month ago.
Advance Auto Parts Underperforms on Thursday
AAP shares sank 5.82% on Thursday, reversing an upward trend that started on February 28, 2024, after the release of its Q4 and fiscal 2023 results that saw the stock climb 29.98%. Thursday proved to be a rough trading session for the stock market, with the S&P 500 dropping 1.23%, while the Dow Jones fell 1.35%.
The stock closed at $79.26, which was $50.64 short of the 52-week high of $129 achieved on April 21, 2023. When compared to its peers, the stock underperformed. For instance, AutoZone Inc. (AZO) fell 1.96%, while O’Reilly Automotive Inc. (ORLY) fell 2.94%. On Friday morning, the stock improved slightly, gaining 0.29% to $79.49 as of 9:37 AM in New York.
However, it is still above its 50-day and 200-day moving averages of $72.22 and $64.13, respectively. The day’s trading volume of 2.03 million was also above its 50-day trading volume of 2 million and 10-day volume of 1.79 million.
Looking at the short interest in the stock, it is in line with the rest of the industry. As of March 15, 2024, investors are short on 10.08% of the floating shares and 8.71% on the shares outstanding.
Advance Auto Parts Q4 Performance
In Q4 fiscal 2023, Advance Auto Parts reported net sales of $2.5 billion, a 0.4% decline from the previous year, while comparable store sales in the quarter fell 1.4%.
For the full year, the company reported net sales of $11.3 billion, a 1.2% increase from fiscal 2022, while comparable store sales declined 0.3%.
The gross margin declined to 38.6% in Q423 compared to 43.6% last year, while the fiscal 2023 gross margin fell 414 basis points to 40.1%.
In Q4, it reported an operating loss of $8.6 million or a -2% operating income margin, compared to an operating profit of $119.3 million, or a 4.8% operating margin.
The full-year operating income was $114.4 million, for an operating income margin of 1%, compared to $670.3 million, or 6%, in fiscal 2022.
Fiscal 2024 Guidance
In fiscal 2024, Advance Auto Parts forecasts $11.3-$11.4 billion in net sales, an operating income margin of 3.2%- 3.5%, and a diluted EPS of $3.75-$4.25. It also forecasts a fiscal 2024 free cash flow of at least $250 million, compared to a free cash flow of $43.65 million at the end of fiscal 2023.
Advance Auto Parts Leadership Changes
On March 11, 2024, Advance Auto Parts announced the appointment of three new directors: A. Brent Windom, Gregory L. Smith, and Thomas W. Seboldt joined the board as independent directors.
The appointments were part of a settlement with activist investors Third Point and Saddle Point, which had accumulated a significant stake in the company in the preceding months.
Previously, the company reached a similar settlement with Starboard Value, which was pushing for change in 2015 after taking a sizable stake in the company. Following the appointment, AAP shares rose 3.7% on March 11.
Analysts’ Outlook on AAP
According to 16 Wall Street analysts, AAP shares have an overall hold rating. They have a broad target for the stock, with a high of $83 and a low of $38. Their average forecast of $66.14 is a 16.55% downside based on the last closing price.
Is AAP Stock A Buy?
Advance Auto Parts reported a dilute loss per share of $0.59 in its most recent quarterly results, which was a disappointment to investors. However, it has been taking several steps to right the ship.
The addition of activist investors to the board in March could help turn things around. There are several areas that are ripe for improvement. For instance, the company’s cash conversion cycle is 72 days, compared to the negative figure for peers O’Reilly and AutoZone.
It simply means that the two competitors require vendors to pay for merchandise before they sell it. The figure signals that Advance Auto Parts could improve its inventory management, which is achievable with the right changes.
Looking at the multiples, AAP shares are quite cheap compared to rivals O’Reilly and AutoZone, which have a price-to-sales ratio of 4.24 and 3.18, respectively, while AAP has 0.42. However, that is a classic value trap, as the fundamentals are not as lucrative.
Advance Auto Parts has a lot of ground to cover before it can convince investors and analysts. Consequently, the current hold rating is an accurate representation of the stock’s medium-term performance.
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