Following weaker results from Genuine Parts Company (NAPA’s parent company), AutoZone and Advance Auto Parts both turned in softer results for Q4 and both pointed to subdued industry growth for 2024 after a difficult 2023, as we had previewed. (See our previous write-ups on AutoZone and Advance.) With less top-line growth, and potential deflation, there is risk of fall out and consolidation within the category, a topic that we will remain close to.
As it relates to 2024 and beyond, we expect to see AutoZone getting back to in-gear; we have not seen any improvement at Advance Auto Parts. If AutoZone improves--especially with its commercial program--that would become another headwind for Advance. As a reminder, Advance’s business is 65% commercial, and AutoZone and O’Reilly are gunning for that business. As one measure of the situation, Advance is to spend $50K per store in capital expenditures during 2024; AutoZone and O’Reilly are planning to spend three times that level.
AutoZone reported a very soft +0.3% comparable-store sales increase; both weather and the calendar were headwinds. The commercial business was up +2.7%, but that was largely driven by new programs, as existing programs were down (20 new programs were added to reach 92% of the domestic stores and 30% of the domestic business). Management shared that delivery times, in-stock levels, and parts availability all have room to improve (i.e., they are not where they would like them to be). DIY comparable-store sales fell -0.3%, despite a +1.7% increase in average ticket. Incoming AutoZone CEO Phil Daniele said, “Fiscal 2024's top priority is enhanced execution. Additionally, we have many strategic projects in various stages of completion. We will continue opening new Mega-Hubs and Hubs, completing construction on the new distribution centers, and optimizing our new direct import facility. We are also in the early stages of ramping up our domestic and international store growth.” (See our write up here on that acceleration.)
Advance Auto Parts reported comp-store sales of -1.4%, which was better than feared. The earnings release quotes incoming CEO Shane O'Kelly saying, “As we closed out 2023, we continued to act with a sense of urgency to stabilize the business and position the company to return to profitable growth. Our full year results are well below our expectations, and we are focused on instilling greater discipline and accountability both in the fundamental business and in how the organization executes across the board. In addition to the operational improvements we are implementing, we are strengthening internal controls and enhancing the quality of our accounting information to help better inform how we drive the business forward. We continue to advance our ongoing operational and strategic review of the business, including the separate sales processes for WorldPac and our Canadian CARQUEST business. We have streamlined and reorganized the company’s leadership structure and have made several important new hires...” For the quarter, gross profits were down 8% and the business is posting operating losses. Cash generation is also meaningful down with it being just over $40M versus over $800M two years ago. The asset sales would ease concerns about Advance’s ability to sustain its vendor financing program--something that supports parts availability (the linchpin in this industry).
In pursuit of stabilizing the business, Advance is also re-investing in wages, bonus programs, and as well enhancing its training programs to the tune of $50M. However, with 4,500+ Advance Auto stores and around 45K store employees, that $50M is spread pretty thinly at $1K per employee, or $21 per employee per week. O'Kelly noted, “Going forward, in every operational decision we make, if it isn't core to the business to help our frontline team members and service our customers, it's off the table.” Said differently, Advance’s new management has a very difficult problem to solve, especially given the pressing financials. WorldPac and CARQUEST are going to have to bring in big amounts of cash. Additionally, Advance will pivot the commercial sales teams’ focus to independents and small regionals from national accounts (like Firestone, Big-O, CarMax). That’s going to be a man-to-man fight with O’Reilly and AutoZone--both well-trained fighters in the analogy.
One initiative to boost profitability by the prior management was to sell more of its private label parts which have higher margins. While it did yield higher gross margins, many felt that it also led to unhappy commercial customers and market share loss. O'Kelly is reversing that initiative saying, “[The] merchandising side of the house is reaching out to our vendors, both to ensure that from a cost position and a product availability and a prioritization for innovation that we're where we need to be. But I think important for everybody to know, as we talk to the vendors, that feedback is also overwhelmingly positive around supporting Advance. There is a strong desire to see Advance thrive, and you can say, hey, that's the vendors should have that perspective. But that works for us. The idea that we've got this collective coalition between the vendors, between our engaged frontline, between customers who want to buy from us, we just need to have our fundamentals right in terms of that product, that price, and the delivery all working together.”
In terms of rightsizing, they will no longer be expanding CARQUEST locations in the U.S. and are now terminating independently owned stores. Management also noted reliability issues with its point-of-sale (POS) and IT systems. Advance is also consolidating its distribution center networks and facilities. While that should improve costs and service in the long term, in the near term it holds significant risk, especially given the uncertain supporting IT infrastructure. Moreover, incoming CFO Ryan Grimsland said, “The turnover of accounting personnel over the past 12 months has increased the challenge to operate as an effective finance organization. We have taken aggressive action to bring in resources around our internal controls, both hiring accounting professionals and in-sourcing contractors at varying levels to provide leadership and oversight. With these actions, we are making significant progress on remediating our material weakness related to people identified in early 2023.”
