Advance Auto stays resilient as DIY gains outweigh eCommerce threat

While the change in customer behavior during the pandemic was favorable to the broad retail industry, some segments thrived on the shift of discretionary spending from services to goods. Advance Auto Parts, Inc. (NYSE: AAP) has remained largely unaffected by the ongoing market turmoil, mainly due to the shelter-in-place orders that prompted people to take up do-it-yourself [DIY] auto repair works.

Last year, annual sales of the North Carolina-based provider of aftermarket automotive parts crossed the $10-billion mark for the first time. The management’s efforts to enhance the omnichannel capabilities complement the shift in customer behavior.

“DIY omnichannel led the way, as it has since Q2. It’s well documented that consumers are spending more of their time at home, likely contributing to the shift in discretionary spending from services to goods. Given economic uncertainty and elevated unemployment, many consumers are choosing lower-cost options for vehicle repairs and maintenance, benefiting our DIY omnichannel business. Our professional business continued to recover with positive comp sales in both Q3 and Q4,” said Tom Greco, chief executive officer of Advance Auto, during his interaction with analysts this week.

Bullish View

There is every reason to believe that demand conditions would improve in the coming months, aided by the widespread vaccine rollout and withdrawal of pandemic-related curbs. Market watchers are optimistic about the company’s ability to create shareholder value going forward and predict double-digit growth in value this year. Prospective investors wouldn’t want to miss the buying opportunity, while those who already hold the stock can look forward to adding value to their investment.

At Advance Auto, efforts are on to strengthen the business through initiatives like debt-reduction, cash preservation, and restructuring of the management system at key distribution facilities. The focus of the present business strategy is to tackle growing competition from the e-commerce space, though the unique services give the company an edge over its online counterparts.

Strong Comps

Supported by a 5% growth in comparable sales, fourth-quarter net sales moved up 12% annually to $2.4 billion. Earnings, excluding one-off items, grew in double-digits to $1.87 per share, despite an increase in selling, general and administrative expenses due to an additional reporting week and pandemic-related costs.

 

The continued same-store sales growth, both in the DIY omnichannel and the professional segment, reflects the steady uptick in market share amid competitive pricing and owned-brand expansion. While earnings topped expectations in two of the last four quarters, they missed in the latest quarter sending the stock lower soon after the announcement.

Peer Performance

When rival auto parts dealer Autozone Inc. (AZO) reports its latest quarterly numbers early next month, the market will be looking for a 2% annual growth in earnings on revenues of $2.7 billion, which represents a 9% increase. The company’s quarterly earnings have beaten the Street view consistently for more than a year.

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Read management/analysts’ comments on Advance Auto’s Q4 results

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After rebounding from last year’s multi-year lows, at a slow but steady pace, Advance Auto’s stock is currently trading close to the pre-crisis levels. It traded sharply higher during the early hours of Wednesday’s regular session and continued to outperform the market.