In the world of retail, success can be a fickle companion. The automotive aftermarket industry is no exception, as evidenced by the tumultuous journey of Advance Auto Parts (NYSE: AAP) over the past decade. In this article, we’ll delve into the company’s recent performance and explore the factors contributing to its struggles.
Historical Performance
When comparing Advance Auto Parts to its competitors O’Reilly (ORLY) and AutoZone (AZO), it becomes evident that the company has had a challenging decade. Both O’Reilly and AutoZone have enjoyed extraordinary performance during the same period, outperforming Advance Auto Parts significantly.
A Pivotal Moment in 2014
The decline in Advance Auto Parts’ performance may be traced back to a significant acquisition made in 2014. The company decided to expand rapidly through the acquisition of General Parts International, the owner of Carquest and Worldpac brands. This acquisition added a substantial 1,300 stores to its portfolio. In contrast, O’Reilly and AutoZone pursued a strategy of gradual, steady, and sustainable growth.
Financial Implications
This significant acquisition altered Advance Auto Parts’ financial position, especially its Net Debt/EBITDA ratio, which shifted from a better position than its competitors to a challenging 1.35x. The company had to prioritize debt reduction and focus on integrating the acquired stores and distribution centers.
The Inflection Point
Before the 2014 acquisition, Advance Auto Parts had higher revenue per store and better returns on invested capital. However, after this pivotal acquisition, the company’s return on invested capital followed a different trajectory compared to O’Reilly.
The Challenge of Debt
While O’Reilly and AutoZone used debt for strategic and profitable growth, Advance Auto Parts was forced to allocate fewer resources due to its increased debt burden. This situation affected the company’s payment terms with suppliers and resulted in worse working capital and lower free cash flow margins.
A Struggling Reputation
In addition to its financial challenges, Advance Auto Parts has faced issues with customer perception. Its Net Promoter Score, a metric measuring whether customers would recommend the company, is significantly lower than that of O’Reilly and AutoZone.
Valuation Scenarios
Looking ahead, there are two potential scenarios for Advance Auto Parts. In an optimistic scenario where the company successfully addresses its issues and sees improvement in growth, margins, and market multiples, it could become an attractive investment with potential annual returns of up to 30%.
However, there’s also a less favorable scenario where persistent price competition leads to continual margin reduction and stagnant revenues. In this case, the potential return would be only 7% annually for the next five years, despite the company’s seemingly low valuation.
Final Thoughts
Advance Auto Parts is at a crossroads, and the path it chooses will determine its future. While it may appear undervalued, the company’s recent trajectory raises concerns. In light of these considerations, the author’s recommendation is to ‘sell’ and observe this story from the outside. However, it’s worth noting that the company recently announced a change in CEO, and this could potentially lead to a fundamental shift in the business.
In conclusion, Advance Auto Parts has faced significant challenges over the past decade, and its future remains uncertain. Only time will tell whether the company can turn the tide and regain its competitive edge in the automotive aftermarket industry.
- by Brown girl
- October 31, 2023