Advance Auto Parts (AAP, Financial), a specialty retailer of automotive replacement parts, accessories, batteries, and maintenance items, posted first-quarter fiscal 2015 results where it missed on earnings, but revenues were in line with what analysts had envisioned. The stockholders of this automotive aftermarket retailer are sitting on year-to-date loss of around 4%.
First-quarter numbers
Consolidated comparable-store sales, or comps, moved up 0.7% year-over year on top of 2.4% year-over-year in the year-ago quarter. As a result of comps growth and addition of new stores, consolidated revenue grew 2.4% year-over-year to $3.04 billion and came in line with expectations.
Gross profit increased 3% year-over-year as a result of merchandise cost synergies. Also SG&A expenses as a percentage of sales declined due to cost synergies and lower incentive compensation, which was partially offset by higher advertising expenses. Operating income and operating margin also expanded versus the year ago quarter.
As a result of sales growth and margin expansion, adjusted earnings per share grew 6.2% yea-over-year to $2.39 per share, missing expectations by $0.09.
Advance Auto exited the quarter with cash and cash equivalents of $123.8 million, long-term debt of $1.61 billion as against year-ago figures of $83.4 million and $2.07 billion, respectively.
Growth drivers
According to a research by HIS automotive, the average age of vehicles on the U.S. roads hit 11.4 years last year. The research firm forecasts that this will remain at same levels during 2015, rising to 11.5 during 2017 and then 11.7 by 2019. Older vehicles on the road mean more maintenance to keep the vehicle running, and this is one of the tailwinds for automotive aftermarket retailers like Advanced Auto.
The improving economy and declining oil prices are another tailwind for automotive aftermarket retailers as miles driven have increased. According to Fed data: "Travel on all roads and streets changed by 3.9% (9.8 billion vehicle miles) for March 2015 as compared with March 2014."
As miles driven rise, the need for replacement of parts and consumables also go up.
Advanced Auto has grown revenue due to relentless store expansions on top of acquisitions. For example, in 2014 it acquired General Parts International, a leading distributor and supplier of original equipment and aftermarket replacement products under the CARQUEST and WORLDPAC brands.
Advanced Auto is going through integration activities across the organization and this was one of the reasons cited for earnings miss. The aftermarket retailer is well positioned in the commercial business, DIY, import, domestic, independent and online channels with approximately 60% of its business being in the fastest-growing commercial segment.
During the quarter, the retailer opened 25 stores, closed 7 and consolidated 40 stores, taking the total store count to 5,350, including 115 Worldpac branches. The company sees the opportunity for over 6,000 stores, including doubling the capacity of Worldpac.
Wrapping up
Advanced Auto posted first quarter results, which did not impress analysts. However, the company is going through an integration phase across the organization and once this is complete, it will drive growth and profitability.
With average age of vehicles climbing up and miles driven increasing, the need for parts replacement will also go up, thus driving growth for automotive aftermarket retailers. The company sees opportunity to expand its stores to over 6000 mark, around 12% more than its current count.
Hence, given the growth opportunities, I would recommend this stock for buying on the dip.
