Earnings Scorecard: Advance Auto Parts – Analyst Blog

Advance Auto Parts Inc. (AAP) reported second-quarter results on August 11, beating the Zacks Consensus Estimate by 14 cents per share. The market reacted favorably, with its share price rising after the release.

 

Analysts were highly optimistic given the company’s improved results and revised their estimates upward. Below, we will cover the results of the earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term.

 

 

Advance Auto Parts reported an increase in profit to $100.9 million or $1.16 per share in the quarter from $80.3 million or 83 cents in the year-ago quarter. This was due to the company’s aggressive store expansion strategy, enabling better availability of parts and fueling a higher comparable store sales gain.

 

Sales in the quarter grew 7.2% to $1.42 billion, driven by a net addition of 90 stores during the past 12 months. Sales per store improved to $1,638 from $1,600 a year ago. Comparable store sales increased to 5.8% from 4.8% in the prior year quarter, driven by an increase in average age of vehicles, dealer closings and more consumers willing to repair their own vehicles.

 

Gross margin was 50.4% compared with 49.3% last year. This translated into an improvement of 111 basis points, thanks to enhanced merchandising and pricing capabilities, increased inventory levels, supply chain efficiencies and improved availability of parts. 

 

Following the improved results, the company raised its earnings per share guidance to $3.70–$3.80 per share from the previous guidance of $3.20–$3.40 per share.

 

(Read our full coverage on this earnings report: Advance Auto Parts Outpaces Estimates)

 

 

Estimates have improved over the last 7 days, reflecting analysts’ optimism about the stock, driven by the company’s improved results and an efficient growth strategy. The share price movement was favorable as well, suggesting Advance Auto Parts is a good stock to own. Let us delve into the earnings estimate details.

 

 

The table below shows a strong agreement among analysts regarding the outlook of the company’s earnings. Most analysts covering the stock revised estimates for 2010 and 2011 upward, with no downward revisions. They are also optimistic about the company’s continued investments in most of its stores with commercial programs as well as in parts availability to serve both its DIY and Commercial business.

 

Out of 13 analysts covering the stock, eleven have moved higher for 2010 while none have moved lower since the earnings results were released.

 

For 2011, out of 22 analysts covering the stock, fourteen analysts have revised the estimate upward while none moved in a downward direction. This commendable trend in estimate revisions predicts a consistent stream of earnings.

 

 

 

Earnings estimates for 2010 have been raised by 17 cents from $3.58 to $3.75 since the earnings announcement. Analysts are even more confident about 2011. They have raised the estimates by 20 cents from $4.01 to $4.21 for the year.

 

 

 

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.

 

To face the difficult industry metrics, Advance Auto reviewed its business strategies to drive sales, lower costs and increase return on invested capital (ROIC). The company’s ROIC was 16.5% during the second quarter, a 160 basis points improvement over the last year.

 

These factors, along with the raised earnings per share guidance, have helped the company to retain its Zacks #1 Rank (‘Strong Buy’) in the short term (1–3 months).

 

However, the sluggish economy, volatile gasoline prices and pricing are some of the challenges facing the company. Therefore, we have recommended the shares of the company as Neutral in the long term (6+ months).