Investments In Supply Chain And Merchandising Will Strengthen Future Performance

Key Takeaways

• Advance Auto Parts aims to boost long-term net margins through merchandising, supply chain, and operational efficiency enhancements, targeting improved earnings.
  
• Liquidity gains from asset sales support strategic investments in supply chain networks and new stores, potentially driving future revenue growth.
  
• The company faces declining sales, operational closures, and significant execution risks amidst macroeconomic uncertainties and consumer spending challenges, especially in the DIY segment.

Catalysts

Provides automotive replacement parts, accessories, batteries, and maintenance items for domestic and imported cars, vans, sport utility vehicles, and light and heavy duty trucks.

• Advance Auto Parts is targeting an adjusted operating margin of approximately 7% by the end of 2027, focusing on merchandising excellence, internal supply chain transformation, and store efficiency. This is aimed at improving net margins and earnings over time.
  
• The comprehensive review of asset productivity has identified opportunities to improve the adjusted operating income margin through store footprint optimization and other cost management strategies, expected to enhance net margins in the long run.
  
• Following the sale of Worldpac, Advance Auto Parts has improved its liquidity position significantly, enabling the company to invest in high-return projects such as building a multi-echelon network and accelerating new store openings, which could drive future revenue growth.
  
• Advances in supply chain optimization, including the consolidation of distribution centers and creation of market hubs, are projected to increase productivity and reduce costs, contributing to improved gross margins and profitability.
  
• The turnaround plan involves refined merchandising strategies, including negotiating better product costs with suppliers and optimizing pricing and promotions, which are expected to widen gross margins and support earnings improvement.

Advance Auto Parts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Advance Auto Parts's revenue will decrease by -8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 2.6% in 3 years time.
• Analysts expect earnings to reach $225.1 million (and earnings per share of $4.2) by about January 2028, up from $47.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $45 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 59.6x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 3.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.11%, as per the Simply Wall St company report.

Advance Auto Parts Future Earnings Per Share Growth

Risks

• The company is experiencing a decline in net sales, with a 3% decrease in the third quarter and a comparable store sales decline of 2.3%, suggesting ongoing revenue challenges.
  
• The planned closure of over 500 corporate stores and more than 200 independent locations to address unprofitable operations will result in a reduction of approximately $700 million in net sales, impacting overall revenue.
  
• The company's adjusted operating income from continuing operations is currently low, and even though there are plans for improvement, the path to a targeted 7% margin by 2027 involves substantial execution risk and unproven strategic initiatives which may not materialize, affecting net margins.
  
• Major disruptions such as the CrowdStrike outage and hurricanes, combined with macroeconomic uncertainty and consumer spending softness, point to risks that can continue to adversely impact earnings.
  
• Despite improvements in Pro sales, the DIY segment is facing challenges due to consumer financial pressure, indicating a risk of continued sales and revenue weakness in a key customer segment.

Valuation

• The analysts have a consensus price target of $44.1 for Advance Auto Parts based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.6 billion, earnings will come to $225.1 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $47.37, the analyst's price target of $44.1 is 7.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.