Earnings Scorecard: Advance Auto - Analyst Blog

Advance Auto Parts Inc. (AAP) reported its third quarter results ended October 9, 2010 on November 10, 2010, surpassing the Zacks Consensus Estimate by 11 cents per share. However, the market failed to react positively, with share prices falling in the subsequent days.

Despite the depressive market reaction, the overall response from the analysts was positive, as most of them covering the stock have revised the estimates upward. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short-term along with the long-term outlook for the stock.

Earnings Report Review

Advance Auto Parts's profit rose to $87.6 million or $1.03 per share in the quarter from $61.98 million or 65 cents per share in the third quarter of 2009. The increase in profit was attributable to the company's aggressive store expansion strategy, enabling better availability of parts to its customers and leading to higher comparable store sales.

Sales in the quarter rose 11.4% to $1.41 billion, driven by a net addition of 122 stores during the past 12 months. Meanwhile, comparable store sales gain was 9.9%, which was more than double in terms of percentage point when compared with 4.7% in the third quarter of 2009.

Gross margin improved 110 basis points to 50.3% from 49.2% in the third quarter of 2009. The improvement was attributable to enhanced merchandising and pricing capabilities, supply chain efficiencies and better availability of parts.

Advance Auto Parts repurchased 381,000 shares during the third quarter at an aggregate cost of $20.7 million, reflecting an average price of $54.18 per share. In August this year, the company's board of directors authorized a $300 million share repurchase program, replacing the previous authorization of $500 million share repurchase program.

Advance Auto Parts anticipates earnings in the range of $3.80 to $3.90 per share, up from the previous guidance of $3.70–$3.80 per share.

(Read our full coverage on this earnings report:  Advance Auto Beats, Opens 43 Stores )

Earnings Estimate Revisions – Overview

Estimates have improved since the earnings were released, implying analysts' optimism about the stock. Analyst upgrades were based on the company's higher earnings, improved guidance, share repurchases and, most importantly, aggressive store expansion strategy that could fuel its growth in the future.

However, the market discounted the above factors with the company's deteriorated liquidity position and higher debt. In the 40-week period ended October 9, 2010, the company's operating cash flow declined to $596.49 million from $628.45 million in the year-ago period.

The fall in cash flow was primarily attributable to lower provision for deferred income taxes and increases in trade receivables and inventories. The lower cash flow could hinder the company's store expansion strategy and share repurchases in the future.

Consequently, cash and cash equivalents decreased to $194.5 million as of October 9, 2010 from $216.22 million in the comparable quarter-end a year ago. Meanwhile, long-term debt amounted to $302.22 million as of the above date. The long-term debt-to-capitalization ratio stood at 21%, up from 18% a year ago.

Agreement of Estimate Revisions

There is strong agreement among the analysts regarding the outlook of Advance Auto's earnings. Out of 20 analysts covering the stock, 19 analysts have revised upward the estimate for 2010 while none revised it downward over the last 30 days. The trend is a bit down for 2011. As many as 18 analysts have revised estimates upward while one moved in a downward direction.

Over the last 7 days, there were 3 upward revisions and 2 downward revisions of estimate for 2010. For 2011, the trend has become strong. There were 8 upward revisions and no downward revision of estimates for the year. This impressive trend in estimate revisions promises a favorable trend in earnings.

Magnitude of Estimate Revisions

The earnings estimate for 2010 has been revised upward by 15 cents from $3.79 to $3.94 over the last 30 days. Over the last 7 days, the estimate has been raised only by a penny.

For 2011, the estimate has been raised significantly by 25 cents from $4.35 to $4.60 over the last 30 days. Over the last 7 days, the estimate went up by 8 cents from $4.52 for the year. The estimate revisions look promising as analysts continue to value the stock at an increasing premium.

Advance Auto in Neutral Lane

Advance Auto remains focused on enhancing its already established market share by concentrating on both new and existing stores. These initiatives include the ongoing development of merchandising programs driven by category management, enhanced store remodeling programs, nationwide advertising to build the AAP brand and a focus on the commercial customer base.

Further, in order to face the difficult industry metrics, the company has reviewed its business strategies to drive sales, lower costs and increase return on invested capital. The company aims to improve its supply chain and vendor terms. It also plans to open better-located stores and divest unprofitable stores. The company has achieved increased DIY and DIFM sales by improving the availability of parts at its stores.

However, a sluggish economy and volatile gasoline prices are some of the factors that negatively affect the company. The slow economy and uncertainty in the market are forcing consumers to refrain from raising expenditures, such as purchases of replacement parts. The volatility in gasoline prices is negatively influencing the number of miles driven and may slow the sale of vehicle parts.

Further, pricing remains an issue as Advance Auto Parts competes with other national and regional automotive retailers such as AutoZone (AZO), O'Reilly Automotive (ORLY), Pep Boys and CSK Auto Corporation

Therefore, despite the improved results and better outlook, the company retains Zacks #3 Rank on its stock, which translates to a short-term (1-3 months) Hold recommendation.

In line with this, we also reiterate our Neutral recommendation on the stock for the long-term (more than 6 months).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings athttp://www.zacks.com/education/

 
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