Advance Auto Parts on the move

Jan. 1, 2020
We recently upgraded shares of Advance Auto Parts from hold to buy. It?s always tough to gauge the sentiment of the street as investors rely on visibility ? confidence on execution ? and time horizons for some are not always as longterm in nature as

We recently upgraded shares of Advance Auto Parts from hold to buy. It’s always tough to gauge the sentiment of the street as investors rely on visibility — confidence on execution — and time horizons for some are not always as longterm in nature as management teams would hope. That said, we continue to see significant opportunity for Advance Auto over the longer term.

We have spoken at length about Advance Auto’s goals to increase its commercial parts distribution business to the point where its overall mix of business is closer to 50 percent DIY and 50 percent DIFM. At the end of last quarter, Advance’s wholesale distribution business represented approximately 32 percent of total revenue, and our opinion is that the company’s efforts will result in Advance continuing to grow market share while developing greater relationships with its installer clients. In addition to company-specific initiatives to drive improved performance in wholesale parts distribution (parts availability, target of consistent delivery within 30 minutes, building knowledgeable sales force, etc), the commercial segment of the auto aftermarket remains larger, more fragmented, and faster growing (due to underlying fundamentals of increased vehicle complexity and diagnostic requirements) than the retail business.

If Advance continues to focus on its supply chain and provide ample depth and breadth of hard parts, we believe it should meet with success. The key will be to convince its garage customers that AAP not only has the breadth of quality parts that they are looking for, supported by knowledgeable commercial clerks, but that they can depend on Advance as a partner to consistently deliver those parts quickly. We believe this is possible in time, although it will likely take somewhere in the range of 7-plus years assuming low-single-digit growth in total retail sales and low- to mid-double-digit growth in total commercial revenue.

Our downgrade of Advance Auto to a hold following Q4 earnings was predicated on our concern that still elevated levels of selling, general and administrative expense growth, coupled with a sluggish start to Q1 (against a very challenging 8 percent same store sales comparison from last year), would lead to disappointing quarterly results. That said, in just six weeks our opinion quickly changed, as conversations with numerous industry insiders have revealed that sales trends accelerated in March and into April, with many companies noting meaningful yr/yr revenue increases. While we anticipated some pick-up in the aftermath of disruptive winter weather in February, the extent of the rebound has surpassed our expectations. Also interesting to us is that many of our contacts have noted a robust uptick in part sales for older vehicles, suggesting that this surge of business is not coming solely as a result of dealership closings. With this positive commentary emanating from suppliers, distributors, and installers alike, we believe that Q1 results for Advance and the Aftermarket in general will exceed expectations driven by stronger than anticipated sales volumes.

In our opinion, we think the uptick in sales volumes is likely to continue. While many may point to the benefits of dealership closings and miles driven, we think the aging of the fleet and elevated unemployment levels are also likely to keep demand for aftermarket parts relatively high. Also, the impact of such a severe winter should not be overlooked. Though disruptive to the first part of the quarter (particularly February), we think the warm start to spring on top of what were such harsh winter conditions likely provides a tailwind in terms of parts failure heading into the seasonally stronger quarters.

BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, LLC NYSE/SIPC. Scott & Stringfellow is a registered broker/dealer subsidiary of BB&T Corporation, one of the nation’s largest financial holding companies with $165 billion in assets.

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