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Robert Stephens, CFA
Robert Stephens, CFA
Articles (413) 

Why Advance Auto Parts Can Recover

The company's growth plans could catalyze its profitability

March 24, 2020 | About:

Advance Auto Parts, Inc. (NYSE:AAP) has investment potential, in my view, after its 53% stock price decline in the past year.

The automotive aftermarket parts provider is investing in its stores, aiming to become more efficient and improving its loyalty program.


Loyalty program

The business relaunched its loyalty program, Speed Perks, in fiscal 2019. This contributed to a one million rise in its number of members in the fiscal 2019 fourth quarter. It now has 12 million members from whom Advance Auto Parts can obtain valuable data on the types of products that its customers are purchasing. This will help the business to offer increasingly personalized recommendations on which products to buy to its customers, which may boost its sales performance.

The company plans to launch a new mobile app in fiscal 2020. Advance Auto Parts expects its new app to make it easier for its customers to sign up to its loyalty program. This could further boost its loyalty program membership numbers.

Store investment

Advance Auto Parts plans to increase its number of stores in fiscal 2020 after it opened 17 new locations in 2019. It expects to open new stores in geographic regions where it does not currently have exposure. This could increase the size of its potential customer base. It also expects to close its unprofitable stores to improve its bottom line.

In addition, the business will continue to improve the appearance and layout of its stores. For example, it will increase the amount of floor space dedicated to its most popular products. This could make its stores more appealing to its customers.

Its investment in upgrading its stores contributed to an increase in the company’s average sales per store from $1.5 million in 2017 to $1.6 million in 2019. Its continued investment in store refurbishment could continue to have a positive impact on its financial performance in upcoming years.

Growth strategy

The company launched several new own-brand products in the second half of 2019. They help to differentiate the business from rivals, and also offer potentially higher margins than third-party products. Advance Auto Parts expects to release further own-brand products in 2020, which could improve its market position.

Additionally, the business is increasing the amount of training that it provides for its staff. This will focus on increasing the speed of its “buy online, pickup in store” service. This contributed to a rise in its customer satisfaction ratings in 2019, and may boost its levels of customer loyalty in upcoming quarters.

Potential difficulties

Advance Auto Parts faces an uncertain near-term future due to the impact of the novel coronavirus on the economy. In addition, quarantine and the prospect of a recession may mean lower vehicle usage and reduced demand for parts.

In response, the company is seeking to improve its efficiency through cutting its costs. For example, it implemented a new labor scheduling system in the third quarter. This could reduce its staff costs and improve its productivity. In addition, Advance Auto Parts plans to reduce its number of distribution centers from its current figure of 50. It also expects to merge the distribution channels of its various brands to remove duplicate costs.

Future prospects

Market analysts forecast that the company will report a 28% rise in its earnings per share in fiscal 2020, followed by further growth of 11% in 2021. Its price-earnings ratio of 12 suggests that the stock is currently undervalued.

Disclosure: The author has no position in any stocks mentioned.

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