Growing Vehicle Age And More Miles Will Sustain Aftermarket Demand

Key Takeaways

• Enhanced automation, supply chain optimization, and distribution center consolidation are expected to drive margin expansion, efficiency, and sustained profitability improvements.
  
• Strategic store expansion, strengthened Pro channel capabilities, and private label investments will position the company to capture market share and benefit from durable industry tailwinds.
  
• Heavy reliance on traditional auto parts, digital underinvestment, supply chain issues, and rising competition threaten long-term growth and profitability in a shifting automotive market.

Catalysts

Engages in the provision of automotive aftermarket parts in the United States and internationally.

• Analysts broadly agree that the accelerated rollout of the new assortment framework and market-specific SKU rebalancing can lift sales, but with automation and tech-enabled optimization, comp growth and market share gains could outperform expectations, driving top-line growth and expanded net margins faster than anticipated.
  
• Analyst consensus is that distribution center consolidation will enhance gross margin and supply chain efficiency, but the rapid transition to 12 mega-DCs and a single warehouse system could unlock multi-year cost takeouts and labor productivity improvements, potentially pushing operating margins above guidance as volume leverage increases.
  
• Advance's aggressive new store expansion, now focused in regions where it holds the #1 or #2 density position, sets it up to capture outsized share of a $150 billion addressable market, with compounding revenue growth potential and a structurally advantaged local cost base.
  
• Persistent growth in the average vehicle age and miles driven, combined with Advance's strengthened Pro channel capabilities and improved service delivery, position it to benefit disproportionately from the rising, non-discretionary demand for replacement parts, supporting durable revenue streams and improved earnings resilience.
  
• Investments in private label brands and exclusive offerings, combined with the ability to dynamically mitigate import tariffs through alternative sourcing, could structurally expand gross margins while diversifying supply risk and enhancing long-term profitability.

Advance Auto Parts Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Advance Auto Parts compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Advance Auto Parts's revenue will grow by 1.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -6.5% today to 6.2% in 3 years time.
• The bullish analysts expect earnings to reach $567.4 million (and earnings per share of $9.25) by about July 2028, up from $-580.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from -6.5x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.55%, as per the Simply Wall St company report.

Advance Auto Parts Future Earnings Per Share Growth

Risks

• The accelerated adoption of electric vehicles, which require fewer traditional auto parts, poses a long-term risk to Advance Auto Parts' core revenue streams as the company remains heavily centered on the internal combustion engine market.
  
• The company is still experiencing ongoing supply chain and inventory management challenges, as evidenced by significant consolidation efforts and costly asset optimization activities, which could continue to pressure net margins and drive higher working capital needs over time.
  
• Competitive threats from e-commerce leaders and direct-to-consumer channels, coupled with Advance Auto Parts' historical underinvestment in digital and online capabilities, are likely to result in lost market share and subdued revenue growth, especially as more customers shift away from brick-and-mortar purchases.
  
• Persistent weakness in the DIY segment, highlighted by management's acknowledgment that this channel remains "challenged" and is expected to be "slightly pressured," raises concerns that a declining consumer reliance on vehicle ownership and tightening household budgets may further restrict topline revenue and earnings growth.
  
• The potential for heightened industry pricing pressure due to consolidation among large automotive aftermarket retailers and growth in OEMs' proprietary service channels threatens to compress margins and restrict earnings improvement, particularly as Advance Auto Parts' store closures and flat same-store sales growth indicate weak competitive positioning in the long term.

Valuation

• The assumed bullish price target for Advance Auto Parts is $61.41, which represents two standard deviations above the consensus price target of $47.44. This valuation is based on what can be assumed as the expectations of Advance Auto Parts's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 $30.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $9.2 billion, earnings will come to $567.4 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of $62.56, the bullish analyst price target of $61.41 is 1.9% 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.