Advance has made it apparent that a change in direction and strategy is needed. At a crossroads, we are beginning to see a heightened focus on cost savings and hard parts coverage. The one issue we have had with the retailers making the big push into commercial parts distribution (the exception being O'Reilly Automotive, Inc.) was their less than 100 percent commitment. Unless there is a complete commitment to the professional installer, success is likely limited. We expect to see changes in inventory commitment and IT upgrades at Advance, but it won't be an overnight fix.
Advance has a significant commercial business at more than $1 billion, and its Autopart International (AI) efforts have been well received. But to get its mix of business north of 35 percent will require a more intensified approach.
Advance appears to be making some directional changes to its long-term business plan. During its second quarter conference call, management quantified opportunities for cost savings and capital expenditure (CapEx) reductions. Through staffing reductions (175 field positions, mostly related to its remodel program) and other initiatives (discontinuing its TV network and refining advertising efforts), we estimate $20 million in cost savings in the second half of 2007 (worth $0.11 in earnings per share (EPS)) and another $30 million in incremental savings in fiscal year 2008 (for $0.17 in EPS).Slower store growth, an end to Advance's remodel program and refinement in logistics, IT and other infrastructure support will result in reduced CapEx spending by $20 million in 2007 and more than $30 million in 2008.
With Advance refocusing its core parts business, reducing operating expenses and cutting its CapEx growth, we expect a material improvement in free cash flow per share to $1.53 in 2007 and $1.90 in 2008. This will reflect free cash flow yields of 5 percent and 6.2 percent, respectively.
With Advance's renewed focus and commitment to higher levels of DIFM exposure, we think improved profit enhancement and return to shareholders will be meaningful.
BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, like the automotive aftermarket.