Why My Subscribers Shorted Advance Auto Parts At $131

Summary

• To complete the trifecta, I am sharing my research on Advance Auto Parts.
• AAP is my least favorite aftermarket auto parts stock of the group.
• Some of my Market Adventures subscribers took my advice and bought September AAP puts, when AAP was trading around $130-$131.

Note: This article first appeared on my premium site, Market Adventures, on June 16, 2017, at 6:13 a.m. ET.

For the benefit of my subscribers, I finally wrote an article on the third largest publicly traded aftermarket auto parts name, Advance Auto Parts (NYSE:AAP). Let me be clear: At least in my view, AAP ranks a distant third place out of the group. Perhaps the only positive is that AAP has underperformed O'Reilly Automotive (NASDAQ: ORLY) and AutoZone (NYSE: AZO) for so long that perhaps expectations are lower.

Let's look at management's guidance for FY 2017. As you can see, management guided full year comps at flat to up 2%.

Yet, FY 2017 Q1 comps were down 2.7%. Even more disconcerting was that operating income was only 6.2%, down from 9.1% YoY.

On the conference call, CEO Tom Greco tried to explain away the results saying that investors need to combined Q4 FY 2016 and Q1 FY 2017. Gee, that's funny -- you gave full-year guidance for comps at flat to up 2%.

Incidentally, Tom is a former potato chip and snack foods executive from PepsiCo/Frito-Lay North America. I'm not sure what selling high-fat and caloric junk foods has to do with selling aftermarket auto parts.

Let's look at recent consensus estimates for FY 2017 for AAP. This company, which has much worse historical financial performance than AZO and ORLY, is still selling for 19x FY 2017 earnings. That's way too expensive for an underperformer and the laggard of the group.

Here are full-year historical results for AAP's income statements:

Earnings per share data:

Cash flow metrics:

Next, let's turn to AAP's Q1 FY 2017 conference call. There's a lot of ground to cover here.

First there's the classic "we love our people and our team" platitudes.

Phase 1 turnaround objectives:

Phase 2: $750 million in gross (not net) productivity savings over four years. Will Greco even be the CEO in four years?

Second part of Phase 2:

Third part of Phase 2:

Here's a discussion of why operating margins were down 349 basis points:

Then there's the Q&A section. Customer service is suddenly really important, so that's why operating margins were lower.

The new executive team:

I highlighted the CEO's biography earlier. Here is some info on the CFO, Tom Okray, and Executive Vice President Bob Cushing.

AAP wants to improve productivity, but needs to move faster.

Questions regarding the operating margins:

Gross vs. net:

Labor expenses:

Okray's response:

And a question about vehicle aging - my favorite driver of results:

Questions on promotions:

Part 1

Part 2

Here is snapshot of the 20% off when I visited AAP's website.

For context, AAP bought General Parts International in January 2014 for $2 billion.

Source: Amanda Hoyle's Triangle Business Journal Article (Jan. 3, 2014)

Takeaway

I think AAP is still a good short at $131. It is the clear laggard of the group and 19x earnings isn't cheap. The company's conference call was unimpressive and at times incoherent and disjointed. I have no idea what a former chip and snack foods company executive is doing selling customer service and aftermarket auto parts. The snack foods business is about marketing and distribution. As I argued in two ORLY pieces and recent AZO piece, I expect the industry headwinds to remain stiff, making it difficult for these companies to hit guidance for both full-year earnings and same-store sales.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.