Advance Auto Parts May Stall As Fundamentals Remain Weak

BTIG has cut its earnings estimate for Advance Auto Parts, Inc. AAP on weak fundamentals and continued loss of share to competitors. The brokerage maintains its Sell rating and $120 target price on the shares.

Analyst's Take

Lead analyst Alan Rifkin cut his 2017 and 2018 EPS estimates to $7.80 and $8.25 from $7.90 and $8.30, respectively. The revised EPS estimates are $0.33 and $1.08 below the Street for 2017 and 2018, respectively.

“While we have a favorable impression of AAP’s recently appointed CEO and look forward to meeting incoming CFO Thomas Okray, we believe AAP will continue to lose share and estimates remain optimistic,” Rifkin wrote in a note.

Related Link: Argus Says Advance Auto Parts' New CEO Is "The Right Executive For The Job"

The analyst noted that the 840 bp delta in the second-quarter comps between Advance Auto Parts and O'Reilly Automotive Inc ORLY is “among the greatest differences in concurrent comparisons ever between the two.”

Further, Rifkin expects EBIT margins to decline by 80 bp overall for Advance Auto Parts over the three-year period versus a nearly +600 bp increase at O’Reilly.

Restructuring And Turnaround

Rifkin, who wants the company to restructure more aggressively, expects the company may close up to 10–12 of its 50 DCs and believes the company should consider closing 300–400 stores, or 6–8 percent of the store base.

“While some of these stores may be cash flow positive, we believe most are not earning their cost of capital,” Rifkin highlighted.

Despite the company is in a turnaround phase, the analyst said it will take more time as daily delivery and stores consolidations have not met expectations.

At last check, Advance Auto Parts was down 2.08 percent at $140.02.

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