Is Advance Auto Parts going out of business?

Is Advance Auto Parts going out of business

Whether Advance Auto Parts will go out of business is still being determined. The company will still operate with net sales of $11 billion in 2022.

A leading supplier of automotive aftermarket items, Advance Auto Parts, Inc. offers both professional installations and DIY clients. By April 22, 2023, Advance had 3,182 Worldpac branches and 4,778 stores, mainly in the US and Canada, Puerto Rico, and the US Virgin Islands.

Besides these areas, the business also provided services to 1,315 independently owned Carquest-branded stores in Mexico and many Caribbean islands. Let us view the company in detail in this article.

Overview of the company

An American supplier of automotive aftermarket parts is named Advance Auto Parts, Inc. The business sells a range of replacement brand names, original equipment manufacturers (OEM), and private-label auto parts, accessories, batteries, and maintenance supplies. It offers these to domestic and imported cars, vans, sport utility vehicles, light-duty trucks, and vans. Institutional investors hold the majority of Advance Auto Parts’ shares. It includes The Vanguard Group, BlackRock, State Street Corporation, and others.

According to the most recent study from S&P Global Mobility, almost 284 million vehicles are currently operating in the United States. This is with the average age of automobiles and light trucks climbing to a new record of 12.5 years. It is up by more than three months over the same period in 2022.

Due to the continued growth of pickup trucks and SUVs, fewer than 100 million passenger cars will be on the road for the first time since 1978. This is encouraging for companies that provide aftermarket auto parts, such as Advance Auto Parts Inc. Established in 1932, the business is valued at $3.80 billion.

Financial analysis

The company released poor financial results on May 31. It led to a 35% drop in the stock price in a single day. Sales in the first quarter rose 1.30% to $3.40 billion due to new store openings, while same-store sales fell by 0.40%.

Gross profit dropped by 2.40% to $1.50 billion, representing a gross margin of 43%, down from 44.60% in the same period the previous year. The business needed help boost prices far enough to compensate for rising product expenses.

Selling, general, and administrative costs totalled $1.4 billion, or 40.40% of revenues, up from 38.60% in the corresponding quarter last year. This rise was caused mainly by rising benefit-related expenditures and labour inflation. This is in addition to the usual opening-day expenses for new stores. The company’s anticipated growth in California resulted in lower launch costs, which helped offset some of the SG&A.

Operating revenue totalled $90 million, with an operating margin of 2.60%. It is a startling turnabout from the 6% recorded in the first quarter of 2022. Operating margins are still limited by labour inflation.

These disappointing results hurt operating cash flow as well as free cash flow. In the first quarter, $378.90 million in net cash was used for operating activities, as opposed to $54.90 million in the same period last year. A decrease in net income and a rise in working capital, particularly in accounts payable, were the leading causes of the increased use of cash.

In the first quarter of 2023, free cash flow decreased by $468.90 million compared to last year’s period, when it decreased by $169.80 million. The business has $226.50 million in cash and equivalents as of April 22 and $1.80 billion in total long-term debt. Work in progress totalled $1.2 billion.

CEO Thomas Greco stated in a statement:

“We remain committed to enhancing inventory availability while maintaining competitive price targets to increase topline sales. We predict that the competitive dynamics we experienced in the first quarter will persist and cause a shortfall in our 2023 forecasts.”

The downturn at Advance Auto Parts may provide activist investors with access

The gap between Advance Auto Parts of Raleigh and its rivals has expanded due to prolonged supply chain issues. The company is looking for solutions to close it.

The most recent earnings report for the Fortune 500 business shows the company’s continued decline. Due to the disappointing results, the company’s outlook and dividend were slashed, making it one of its worst trading days ever.

The trading price for Advance Auto Parts shares was about $68; on May 30, the day before the most recent earnings report, the price was $112.24. Stock in the business is down 60% from a year ago.

At the end of 2023, Tom Greco, the company’s CEO, will step down. As a result of the challenges, activist investors may decide to target Advance Auto. The industry’s somewhat inelastic demand may be a good sign for businesses confident in their capacity to reroute ineffective companies.

Bret Jordan is a managing director and research analyst at Jefferies. He suggested that a company could want to enter to resolve Advance Auto’s issue.

That was the situation in late 2015 when Starboard Value, a renowned activist hedge fund, took over the auto parts retailer. Starboard’s plan called for raising margins, changing the supply chain strategy, and hiring new management to narrow the gap between Advance Auto and its rivals.

The fund helped Greco and other young leaders. On other fronts, though, not much has changed. Advance Auto’s operating margin for the quarter ended October 2015 was 8.9%. The margin decreased to 2.6% in the most recent quarter.

Each percentage for rivals AutoZone and O’Reilly Auto Parts exceeded 19%.

The Triangle Business Journal inquired about possibilities for an activist deal with Advance Auto spokeswoman Darryl Carr.

“We manage investor relationships pro-actively. We speak often with both present and potential stockholders and maintain the privacy of these discussions”, according to Carr. “We are committed to enhancing our operational performance. Also,we expect that the steps we are taking will have a positive impact in 2023.” 

Jordan claimed that when Starboard first entered the market in 2015, it needed to be clarified how complicated Advance Auto’s issues were. Once he was inside the business, it was clear that Advance Auto’s supply chain “is established on a pile of sand,” he claimed.

In May 2021, Starboard ultimately left Advance Auto Parts. When asked if Starboard and the retailer were still in contact, Carr responded, “We cannot comment on talks with current, former, or potential investors.”

A complete turnaround will be challenging, given the business’s operating figures. Due to the gap in physical store footprints, selling the company to a rival like AutoZone or O’Reilly Auto Parts is unlikely, according to Jordan. Furthermore, he claimed it was doubtful that Advance Auto would go out of business. The business is still in operation. It had net revenues of $11 billion in 2022.

At the end of the first quarter, Advance Auto Parts’ total current liabilities were under $5 billion.

Conclusion

Carr claimed that the business is working on fixing its supply chain problems.

We reduced the number of the business’s supply-chain systems from four to two over the past few years. We also finished cross-banner replenishment, allowing the business’s distribution. 

Centres to re-supply stores in a freight-logical manner, based partly on different parts across various regional stores. We set up technology that allows us to stock the right products in the right markets based on customer needs. We do think there will be more chances to improve the efficiency of our supply chain in the future, so we’ll keep concentrating on it,” Carr added.

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