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Robert Stephens, CFA
Robert Stephens, CFA
Articles (370) 

Why Advance Auto Parts Has Investment Appeal

The company’s strategy could boost its stock price

September 24, 2019 | About:

Having fallen 7% in the last year, Advance Auto Parts (NYSE:AAP) could offer good value for money.

The auto parts, advice and accessories company’s financial forecasts suggest that its focus on boosting customer loyalty, offering a wider range of its products and improving its digital performance could catalyze its stock price.

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Customer loyalty

The company launched its updated loyalty program across its store estate in the second quarter. This followed its extensive pilot across two of its markets over a 20-week timeframe. The results of its test showed that it increased average dollar spend per loyalty program member when compared to its control group stores.

The updated loyalty program also increased the rate of customer sign-ups. This provides the business with supplemental data on a larger proportion of its customer base. The updated loyalty program’s national rollout should catalyze the company’s customer engagement rate and its sales growth.

Improved product offering

Advance Auto Parts launched the first part of its partnership with Walmart (NYSE:WMT) in its second quarter. It now has a branded Advance Auto Parts store on Walmart.com that sells a small assortment of its parts. The company anticipates that it will gradually sell a larger range of its parts through Walmart.com, according to its second-quarter update. This should provide it with a larger total addressable market that leads to a rise in its sales over the long run.

Advance Auto Parts has made changes to the range of professional products that it sells. It now sells more products that are in stock more often. This should lead to an increase in its customer conversion rates.

Digital prospects

The company’s ongoing investment in its digital segment could strengthen its competitive advantage. In the second quarter, it improved its customer notification capabilities on order tracking. In addition, it upgraded the functionality and speed of its website, which produced an improvement in its online traffic growth rate, as well as a rise in its customer conversion rate.

The company is also investing in its "buy online, pickup in store" process. For instance, it plans to provide a dedicated and convenient collection point for its online customers in each of its stores. This should make the collection process easier for its customers, as well as provide the company with cross-selling opportunities.

Possible threats

The company’s performance in its second quarter was disappointing. For example, its comparable store sales were flat when compared to the same quarter of the previous year. Additionally, its second quarter operating income margin declined 40 basis points to 8.4%. Since consumer sentiment is weak and an increasing proportion of consumers are currently concerned about the possible affect of tariffs, the company’s near-term financial outlook could be challenging.

In response, Advance Auto Parts is making changes to its supply chain. For example, it plans to close its distribution center in New York by the end of fiscal 2019. It is also focusing on optimizing its material costs and increasing its higher-margin private-label products as a percentage of mix. Alongside this, the business plans to use new analytical tools to implement its strategic pricing actions. These changes could support higher margins for the company, and reduce the impact of its potentially difficult operating conditions in the short run.

Outlook

The stock is forecast to record a rise in its earnings per share of 32% in the 2019 fiscal year, followed by further growth of 14% in fiscal 2020, according to consensus analyst forecasts. Its price-earnings ratio of 27 suggests that the stock offers good value for money.

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

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