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Advance Auto Parts: Getting Squeezed by the Executors

Thomas Paulson
Sep 2, 2022
Advance Auto Parts: Getting Squeezed by the Executors

Key Advanced Auto Parts Metrics

Advance Auto Parts reported softer sales and reduced its guidance for sales and earnings for the year due to weaker than expected results in its DIY business. CEO Tom Greco stated, "After a late spring contributed to stronger sales at the start of the quarter, comparable sales softened and turned negative with final results below our expectations, primarily driven by DIY. In terms of category growth, fluids and chemicals, including motor oil, as well as batteries and brakes were the top performers in 2Q22. Our regional sales performance was led by the Mid-Atlantic and West regions." Placer.ai data confirms softening visitation trends as the quarter progressed, with improvement thus far in August.

  • Comparable-store sales slipped 0.6%. As a reminder, DIY customers represent about 45% of Advanced Auto Parts business. This is lower than O’Reilly Auto Parts (DIY makes up 59% of its sales) and AutoZone (74%). Given that Pro is up substantially for the industry and DIY is down substantially, it seems paradoxical that Advance had the softest comps. However, the differences in when fiscal 2Q22 ended also explains a part of the paradox between the three.
  • Average unit retail (AUR) was up about 9%, so units and transactions were down.
  • Trailing-twelve-month (TTM) sales per square foot slipped slightly QoQ to $231 and is likely to remain even over the next year. As shown in the comparable-store comparisons table below, Advance is not narrowing its sales productivity compared to O’Reilly and AutoZone.

  • Advance’s challenge is that these two competitors are execution machines, and both have their sights set on moving their Pro businesses meaningfully higher given their under-penetration of the segment, the larger addressable market of the Pro market, and its higher fragmentation. (Pro is 41% of sales for O’Reilly and 26% for AutoZone). Last week, O’Reilly held an investor day, where management spoke strongly to the opportunity and strategy for making hay of Pro (see below for the auto parts retail industry landscape that O'Reilly's management team presented). This presentation came on top of their previously shared plans to increase the value of their Pro parts at the expense of their own gross margin rate. AutoZone is doing the same. Thus, Advance is trying to maneuver its value to defend against an increasingly price-aggressive O’Reilly and AutoZone.

  • Advance’s profitability improved modestly. Advance is re-mixing towards private brands to increase margin, while at the same time it is slowing the pass through of part cost price increases onto its customers as a means of driving market share. Over the past year, Advance has invested in pricing tools which enables them to better differentiate pricing by category, region, store and customer.
  • Trailing-twelve-month (TTM) EBITDA and free cash flow of $1.1B and $273M, respectively, slipped slightly QoQ and compares to $975M and $616M in 2Q19. Both metrics will likely only modestly increase over the next year given the macro pressures on its DIY business, competitive pricing on the Pro side (i.e., O’Reilly), the cost of growing in the Los Angeles market, and higher-than-initially-planned labor rates and fuel costs (for delivering parts to shops).
  • On Los Angeles, a new market for Advance, Greco shared, "We're pretty excited about the performance out there. We're focused on hitting the 125-150 guide in total...We're going to get as many of them open this year as we can...Overall, very pleased with the performance there...We've got a partnership with the Dodgers that has really resonated with the Hispanic community. We can see our market share gains out there. We're making a lot of progress… and we're going to stay focused on that market. It's a very important market, as you know. It's one where we have very little penetration. We've got nice overall professional business with Worldpac. That's where we're going to leverage our enterprise assets to bring that whole package together. The DIY business that we're getting from the converted stores but also a very, very large professional opportunity in Southern California...so [we're] on track to get these stores open soon."
  • As shown in Placer.ai's platform, while the sample is small, the Advance stores in LA are maturing favorably relative to the competing brands. That’s impressive as the competition is tuff. At the above referenced O’Reilly investor day, COO Brand Beckham shared, "This isn't a business that somebody can just walk into...It's really you have to have a good understanding of what make those shops tick, what really happens on the counter every day. Our business is a consulted visit. When you see our stores, we have several thousand SKUs that are out on the front floor. But the far majority of the parts are in the back room, so to speak, behind that counter...we have 13 divisions in the United States, and every one of those division vice presidents ran an O'Reilly store. They started out in the stores every single one of them. They ran a successful store. They ran a successful district. They ran a successful region. And now they're leading groups of 500, 600, 700 stores for the company. And we're just extremely proud of our promote from within philosophy that we've been able to hold on to. And we feel like that's somewhat intangible but something that we really want to remind you, such an important part of what we do here at O'Reilly."

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Thomas Paulson

Director of Research and Business Development, Placer.ai

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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