Advanced autoparts
Recent Price: 38
Expected Price: 80
Expected Horizon: 2 years
Nov 15, 2024
Business Overview:
Advance Auto Parts, Inc. is a leading automotive aftermarket parts provider in North America. The company offers a wide range of replacement parts, accessories, batteries, and maintenance items for cars, vans, SUVs, and trucks. Operating through a network of corporate-owned stores, independently owned branches, and an online platform, it serves both professional repair shops and do-it-yourself (DIY) customers.
Business Strategy
Advance Auto Parts focuses on a dual-market approach, catering to both professional repair channels and retail consumers. Its strategy emphasizes improving customer convenience through an extensive store network, efficient supply chain management, and leveraging e-commerce solutions. The company aims to enhance profitability by optimizing inventory, expanding private-label offerings, and strengthening relationships with professional installers. Additionally, it invests in technology and customer service to ensure a seamless, omnichannel shopping experience.
Why is the stock down?
Advance Auto Parts has faced several management missteps that have hampered its performance. The company lagged in adopting modern inventory and supply chain technologies, leading to inefficiencies and slower order fulfillment. Frequent leadership changes created instability and inconsistent strategic direction, while weak execution in the professional market left it trailing competitors like AutoZone and O'Reilly. Poor inventory management resulted in stockouts and overstocking, and inconsistent implementation of strategic initiatives, such as store remodels and omnichannel integration, further eroded its competitive edge. Additionally, prioritizing shareholder returns through buybacks and dividends over operational reinvestments and delays in e-commerce integration have left the company struggling to keep pace in a rapidly evolving market. These issues collectively have limited its ability to capture market share and sustain growth.
What´s the turnaround strategy?
Advance Auto Parts is focusing on a comprehensive turnaround strategy to address its challenges and enhance performance. The company is modernizing its inventory and supply chain systems to improve product availability and delivery speed while strengthening relationships with professional repair shops by expanding product offerings and enhancing service reliability. It is investing in omnichannel improvements, integrating online and in-store operations to create a seamless shopping experience, and upgrading stores and technology to enhance customer service. Under new leadership, the company is emphasizing consistent execution of strategic initiatives, implementing cost-saving measures to improve margins, and reinvesting in growth areas. Additionally, Advance Auto Parts is working to rebuild brand loyalty through targeted marketing and improved customer engagement, aiming to regain market share, boost profitability, and reestablish its competitive edge.
Our Take
We believe that if AAP successfully implements some of its key initiatives, the company could be repriced in line with its peers, AutoZone and O'Reilly. The automotive aftermarket industry is experiencing steady growth, driven by factors such as an aging vehicle fleet, increasing vehicle complexity, and a growing demand for both DIY and professional repair services. As vehicles age, the need for replacement parts and maintenance rises. Additionally, the growing complexity of modern vehicles requires more specialized aftermarket parts. The rise of e-commerce also presents new opportunities for online retailing of auto parts.
Post-pandemic, delayed vehicle repairs are adding to the demand. In this context, with the three key players in the industry controlling a combined 60% of the market, we like AAP’s prospects in this competitive but growing market.
Expected Price
We believe that if AAP can return to its historical net margin of 5%, based on its current last twelve months (LTM) revenue, the company could earn $560 million. At a conservative multiple of 8 (compared to AutoZone's and O'Reilly's multiples of 20), its market capitalization could double from its current $2.2 billion. In an optimistic scenario, if the turnaround allows AAP to achieve the same margins as its peers (14%), without any revenue growth, the stock could become a 10-bagger.
Position Strategy
Why would we sell?
-If management’s initiatives fail to materialize in improving operating margins within a 12-month timeframe.
Why would we hold?
-We would hold the stock beyond 12 months only if operating margins improve from the current 1% to at least 4%.
Why would we add more?
-If market pessimism grows despite improvements in margins.
-If margins and growth show consistent improvement, but the market fails to reflect this in its valuation.
This report is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The information contained herein is based on sources believed to be reliable, but its accuracy and completeness cannot be guaranteed.
Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. For more information regarding Taler Capital Management investment approach and investment products visit www.talercapital.com