Automotive parts retailer Advance Auto Parts' (AAP 2.69%) CEO Shane O'Kelly has his work cut out for him. The stock's 17.8% decline in the week to Friday morning is the latest disappointment for a stock down 62% over the last decade compared to a 490% rise at AutoZone and a 625% increase at O'Reilly Automotive over the same period.
Advance Auto Parts's second-quarter earnings
As previously noted, second-quarter earnings saw a severe contraction in profit margins due to the increased costs of implementing its strategic plans (which now include selling its Worldpac business for $1.5 billion to shore up the balance sheet) and higher product costs.
Image source: Getty Images.
However, that's not the only negative because things aren't getting better anytime soon. The company also slashed its full-year guidance across the board:
- The midpoint of full-year sales guidance of $11.2 billion, compared to $11.35 billion previously
- The midpoint of full-year operating margin guidance of 2.3%, compared to 3.35% previously
- The midpoint of diluted earnings-per-share (EPS) guidance of $2.25, compared to $4 previously
After attracting criticism last year for trying to hold pricing to maintain margin, the company is now investing in pricing changes to "improve our price perception in the industry," according to CFO Ryan Grimsland.
It's part of O'Kelly's turnaround. Still, the company has a long way to go before achieving the operational metrics its peers enjoy (shown below), including working capital management.
AAP Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
The stock has a value case, but that's been the case for the last decade. It's also a year since the board chair, Gene Lee, told investors he expected "improvement pretty quickly." Given a track record of disappointments, waiting until there's some tangible improvement before buying it makes sense.
