Advance Auto
This article was originally published on Market Adventures, on December 7th, at 10 AM. Again, as I have all month, I have been sharing some recent in-depth articles for free site readers to show I write about more than just a few stocks.
Please correct the errors below: Username Password Forgot Your Password?
Advance Auto Parts 40% Off Entire Order
This past Tuesday, December 5th, during another lively 'livechat' session, a few readers asked me for short ideas. I reiterated my AAP short thesis and said Advance Auto Parts (NYSE:AAP) is definitely a short, as it was then trading at $102-ish. Since a few readers shorted it (either directly or via puts), I write to provide an update to my original Marketplace piece (see below) that was published on June 16, 2017, at 6 AM.
At the outset, let me be clear, I am not a fan of AAP's CEO, Tom Greco. I have no idea how his tenure at Frito-Lay North America is helpful.
On April 4, 2016, Frito-Lay North America President, Tom Greco, become the new CEO of Advance Auto Parts.
Source: AAP IR
AAP's stock price is down 40% since April 1, 2016. Notwithstanding the questionable recent bounce from the 52-week low of $79 to as high as $107 earlier in the week, AAP hasn't performed under Mr. Greco's leadership.
Source: Google Finance
Before we get into the weeds of AAP's Q2 and Q3 2017 conference calls, enclosed below, please find some important data on comparable store growth relative to peers, inventory turnover, and accounts payable to inventory ratio.
As you can see, terrible comps for a multiple year period. Yet, industry fundamentals and backdrop have been outstanding.
Per Tom's opening remarks made during the Q2 2017 conference call:
In any given year from 2000 to 2016, the industry experienced variability in growth rates year-to-year; yet overall, the market has grown with a CAGR of 3.5% over that 16 year period; based on our analysis, car park has the highest correlation with auto parts sales of any variable we've studied; given current estimates for car park over the next five years, we see the current 2017 headwinds for the industry as temporary.
Then, why hasn't AAP comped (annually) more than 2% over the past 5 years?
Looking at the peer analysis, it is clear how much stronger comps at have been at both O'Reilly (ORLY) and AutoZone (AZO). Also, note the lower inventory turns and less favorable accounts payable to inventory ratio.
Here is a more detailed looked at key metrics. Now, let's take a spin in our time machines and dive into the conference calls.
May 24, 2017 - Q1 2017 Conference call
Opening remarks: the customer, making investments, supply chain execution.
Phase 1 and Phase 2
Targeting Productivity savings from $500 million to $750 million
3 Parts to the savings: Zero based budgeting, supply chain optimization, and reduce material input costs.
Q2 2017 Conference Call (August 12, 2017)
Revised comp guidance lower
You saw our fiscal 2017 guidance revision in our press release today. Our revised full-year guidance ranges from down three sales comp on the low-end to down one comp on the high-end.
Three excuses for weak performance: (economic uncertainty, higher gas prices, and weather)!!! This guy gets paid $20 million plus and can't even tap dance that well.
First, economic uncertainty for low income consumers; the most measurable dimension here is the year-over-year increase in gas prices, which has led to a lower increase in miles driven in 2017 versus prior year relative to the increases we saw in both 2015 and 2016. Second, a temporary trough in vehicles in the age and maintenance suit-spot resulting from a substantial decline in new car sales in the 2008-2009 recession; eventually, this reverse as new car sales accelerated double digits for three straight years starting in 2010 and experience strong mid single digit growth for the succeeding years after that. As a result, we expect meaningful improvement for industry growth in the future.
Finally, it pains me to say this, but weather played a role in the first half of the year, as two consecutive mild winters, combined with the spring and summer that was cooler than last year, impacted certain categories like shocks and struts under car, as well as air conditioning. Growth rates for these categories were down low single-digits in Q2, and given that summer is almost over, we don't expect categories like AC to recover lost sales balance of year.
Availability Transformation, B2B Platform 'Advance Pro'
New Enterprise Apacs catalog, Worldquest (integrates Advanced, Carquest, and Worldpac) on the professional side
Embrace frugality (but Tom's compensation isn't affected), Restructuring, and Shrink from 32 to 12 regions.
On ZBB, we're embracing frugality as a fundamental cultural shift that will remove unnecessary costs from our P&L. As an example, we announced the field and corporate restructuring in late June. This changes how work gets done throughout the Company. As part of this initiative, we used customer insights and market analytics to restructure our field organization from 34 to 12 regions. We streamlined our professional sales team and aligned them with store operations. We optimize multiple and disparate call centers to become more efficient. We're deploying new technology to drive efficiency.
Inventory reductions
With respect to inventory, in Q1 and Q2, we delivered two consecutive quarters of reduction on a year-over-year basis. This is the first time the Company achieved this since 2009. Further, the inventory reduction in Q2 of roughly $120 million was the largest quarterly inventory reduction that we've had since at least 2005. It is important to note that we achieved the Q2 inventory reduction while growing sales. Our intent is to continue to reduce inventory going forward to set the Company up for strong free cash flow in the future. While absolutely the right thing to do, these actions will continue to be a non-cash P&L headwind.
Free cash flow guidance reduced by $100 million
Finally, on free cash flow. We now we to deliver a minimum of $300 million in free cash flow in fiscal year 2017. The change versus our prior $400 million free cash flow forecast is primarily driven by the change in our net income expectations, partially offset by the benefits from our increased inventory reduction effort. While below our initial guidance, the $300 million in free cash flow is a significant improvement from prior year performance.
Sold the corporate jet
$750 million productivity savings
Maintain Investment Grade Rating?
Context on the 34 to 12 Region (Florida 4 to 1)
Q3 2017 Conference call (November 14, 2017)
Excuses for lousy comps
Disruptive restructuring and more inventory reductions
Cross-banner visibility
Supply chain and ZBB are good for the customer
Disruption?
More Q&A for Disruption
More tap dancing
Advance Auto
Inventory reductions
EBIT Margins
SG&A Guidance
Good question, Seth!
Inventory reduction hurting sales?
Workday Advance Auto Parts
Disruption and Employee Morale
3 Part Plan
Good question, Dan!
Takeaway
Per this lengthy post, I love AAP as a short in the high $90s to mid $100s. I have no faith in Tom Greco's leadership and would argue that his drastic changes aren't the recipe to revive comparable sales growth. In fact, perhaps, AAP may have cut too much inventory and personnel costs. Yet, how will this help the customer experience? The structural headwinds that I highlighted in my original work relating to the average age of cumulative vehicle fleet getting to the point where it makes more sense to scrap than fix are a major headwind. AAP is a distant third compared to ORLY and AZO on nearly every operating metric.
Disclosure:I/we have no positions in any stocks mentioned, but may initiate a short position in AAP over the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: A few of my subscribers are outright short AAP and/or own AAP puts.