We are maintaining our long-term Neutral recommendation on Advance Auto Parts Inc. (AAP). Headquartered in Roanoke, Virginia, Advance Auto operates in the U.S. automotive aftermarket industry and primarily engages in selling replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks.
The company is the second largest retailer for the DIY and DIFM (or Commercial) customers.
The company released its third quarter 2011 earnings on November 09, 2011. Advance Auto Parts’ profit in the quarter amounted to $105.6 million or $1.41 per share, up 21% year over year from $87.6 million or $1.03 per share in the year-ago quarter.
The increase in profit was attributable to the company’s aggressive store expansion strategy. The company has opened 105 stores in the last 12 months.
Revenues in the quarter climbed 4.2% to $1.46 billion. Sales per store increased to $1,702 from $1,667 a year ago. Comparable store sales gain was 2.2% versus 9.9% during the third quarter of 2010.
Advance Auto Parts remains focused on numerous operational initiatives designed to improve sales and productivity within its existing business, while enhancing an already well-established market share by concentrating on both new and existing stores.
These initiatives include the ongoing development of merchandising programs, driven by category management, enhanced store remodeling programs, nationwide advertising to build the AAP brand and a focus on the commercial customer base. Around 82% of the company’s stores have commercial delivery programs in place.
Moreover, the company pursues an aggressive share repurchase policy. In the first nine months of 2011, the company has repurchased 9.9 million shares of its common stock for $609.7 million, implying an average price of $61.51. As of October 8, 2011, the company had $200 million remaining under its $300.0 million share repurchase authorization approved by the company’s board of directors in August 2011.
However, a sluggish economy and volatile gasoline prices are some of the factors that raise our concern regarding Advance Auto Parts’ performance in the near term. The volatility in gasoline prices is negatively influencing the number of miles driven and may slow the sale of vehicle parts.
In addition, the increasing complexity of vehicles may pose some difficulties for customers to perform DIY maintenance activities in the future. This will harm the DIY industry expansion, thereby eroding Advance Auto’s growth rate.
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