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Advance Auto Parts Inc. (NYSE:AAP) announced that it would release its results for the third quarter of 2011 after the market closes on November 09, 2011. Roanoke, Virginia-based Advance Auto realized earnings per share of $1.46 in the second quarter, higher than the Zacks Consensus Estimate of $1.39 per share.

In the upcoming quarter, the Zacks Consensus Estimate for Advance Auto is pegged at a profit of $1.19 per share, reflecting an annualized growth of 15.47%. The downside potential of the estimate, essentially a proxy for future earnings surprises, is 1.68%.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 4.44%. The company outdid the Zacks Consensus Estimate in three of the concerned quarters while the remaining one failed to beat the Estimate.

Second Quarter Recap

Sales in the quarter increased 4.4% to $1.48 billion, driven by a net addition of 130 stores during the past 12 months. Sales per store increased to $1,700 from $1,638 a year ago. Comparable store sales gain declined significantly to 2.5% from 5.8% in the second quarter of fiscal 2011.

Gross profit climbed 2.9% year over year to $735.8 million but gross margin reduced to 49.7% from 50.4% in the prior-year quarter. The shrinkage in gross margin is attributable to higher expense, supply chain expense, increased fuel and product acquisition costs, partially offset by continued improvements in merchandising and pricing capabilities.

The company’s selling, general and administrative (SG&A) expense was 37.0% of sales compared with 38.3% a year ago, excluding the impact of store divestitures. The decrease was driven by lower incentive compensations, benefits from the new labor model and significant decrease in support costs, partially offset by the company’s increased strategic investments.

Operating income rose 10.1% to $188.9 million (12.8% of sales) from $171.6 million (12.1%) in the year-ago period. Operating income per store increased to $170 from $153 in the corresponding quarter of fiscal 2010.

During the quarter, Advance Auto Parts opened 28 new stores and closed 1. As of July 16, 2011, the company’s total store count was 3,627, including 203 Autopart International stores.

Estimate Revisions Trend

Earnings estimate for the third quarter of 2011 is currently pegged at a profit of $1.19 per share. The analysts are confident that the company will be able to improve sales and productivity with its current operational initiatives.

Agreement of Estimate Revisions

Out of the 16 analysts covering the stock, only one has upgraded the stock in the past 30 days. However, none of the analysts has downgraded it in the given period.

Magnitude of Estimate Revisions

Following the second quarter earnings release in August, third quarter earnings per share were projected at $1.18. However, in the past 60 days the estimate rose by a penny to $1.19 and has been maintained there since.

Our Take

Advance Auto has taken various initiatives to improve sales and productivity within its existing business. These initiatives include the ongoing development of merchandising programs driven by category management, enhanced store remodeling programs, nationwide advertising to build the AAP brand and the expansion of the commercial customer base.

Advance Auto has reviewed its business strategies to drive sales, lower costs and increase return on invested capital (ROIC). The company aims to improve its supply chain and vendor terms. Furthermore, it plans to open better-located stores and divest unprofitable stores. The company has achieved increased DIY and DIFM sales by improving availability of parts at its stores.

Meanwhile, Advance Auto has implemented an aggressive program to reduce the inventory of other less-profitable products, which in turn will free up cash to increase parts availability.

Thus, considering all these factors, the shares of Advance Auto maintain a Zacks #2 Rank, which translates into a short- term Buy rating (1 to 3 months).

ADVANCE AUTO PT (AAP): Free Stock Analysis Report

Source: Earnings Preview: Advance Auto Parts Reports After The Bell Wednesday