Advance Auto Parts Faces Profitability Pressure Despite Turnaround Efforts, Says JP Morgan Analyst

JP Morgan analyst Christopher Horvers reiterated the Neutral rating on Advance Auto Parts Inc. AAP, lowering the price forecast to $43 from $55.

Yesterday, the company faced a scorching sell-off, as a disappointing second-quarter earnings miss, a slashed FY24 outlook, and the announcement of its $1.5 billion Worldpac sale shook investor confidence.

Comparable sales accelerated in the quarter but have weakened quarter-to-date as weather-related boosts wane and low-income consumers remain under pressure, Horvers writes.

The analyst considers the Worldpac sale, the new management team’s initial medium-term margin target for the core business, and early turnaround efforts—such as completed management changes, the beginning of a supply chain strategy, and wage investments—as key milestones for future progress.

Also Read: Advance Auto Parts Q2 Earnings: EPS Miss, Annual Outlook Cut, Sells Worldpac Business

Despite progress, the core business’ profitability remains under pressure and may take several years to fully improve, with store productivity being the major opportunity for boosting mid-single-digit operating margins, Horvers adds.

The analyst notes that since the CEO change last year, revitalizing a business amid a downturn has been challenging, as the industry declined further in the quarter despite easier comparisons.

The analyst’s Neutral rating is mainly due to auto parts retailers offering the best strategy in the current environment.

However, the company is losing market share, adjusting pricing to regain it, and forecasting an operating margin below 4% for 2024, compared to its previous long-term target of 11-13%.

Price Action: AAP shares are trading lower by 4.62% to $48.74 at last check Friday.

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