Advance Auto Parts: Weak Q2, Price Competition Pose Concerns

On Aug 17, we issued an updated research report on Advance Auto Parts Inc. (NYSE:AAP) .

Price competition and poor performance delivered by the company in the second quarter of fiscal 2016 remain concerns. However, it will gain from management’s relentless focus on store expansion.

Advance Auto Parts reported a 16.3% decrease in adjusted earnings to $1.90 per share in the second quarter (ended Jul 16, 2016) of fiscal 2016 from $2.27 earned in the prior-year quarter. The figure also missed the Zacks Consensus Estimate of $2.13.

Revenues dropped 4.8% year over year to $2.26 billion but surpassed the Zacks Consensus Estimate of $2.24 billion. The year-over-year decline in the top line was due to a fall in comparable store sales, store closures in 2015 and the effect of Carquest consolidations.

Moreover, Advance Auto Parts is expected to deliver a poor performance in fiscal 2016. For fiscal 2016, the company expects comparable store sales growth to be in the range of negative 3% to negative 5%, weaker than flat comparable store sales in fiscal 2015. Moreover, it no longer expects to achieve its adjusted operating margin target of 12% and free cash flow of $500 million.

Additionally, price competition poses a concern for Advance Auto Parts, as it competes with national and regional automotive retailers such as AutoZone, Inc. (NYSE:AZO) , O'Reilly Automotive Inc. (NASDAQ:ORLY) and U.S. Auto Parts Network, Inc. (NASDAQ:PRTS) .

However, Advance Auto Parts’ consistent focus on store expansion helps it enhance profits. In the 28-week period ended Jul 16, 2016, the company opened 34 stores. As of Jul 16, 2016, its total store count was 5,192, including 126 Worldpac branches. In fiscal 2016, it plans to open 65–75 new stores, including Worldpac branches.

The rise in store count ensures higher availability of parts to customers, thereby leading to an increase in sales volume. Advance Auto Parts is also poised to benefit as the industry continues to show stability with the increasing average age of vehicles, along with a rise in the number of miles driven.

Advance Auto Parts currently carries a Zacks Rank #4 (Sell).

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