Like an old car that breaks down often, Advance Auto Parts(NYSE: AAP) stock has been a giant headache for investors. The automotive parts retailer and distributor has struggled amid an industry slowdown and weaker-than-expected earnings. Shares have declined by 83% from their all-time high in early 2022, with the sell-off continuing this year.
The numbers are discouraging, but this type of volatility can sometimes present a compelling opportunity for investors, assuming the company can make the necessary repairs. Is Advance Auto Parts stock a buy now? Here's what you need to know.
An ongoing restructuring effort
Several factors have contributed to the collapse of Advance Auto Parts stock over the past two years. Beyond a shift in the macroeconomic backdrop with a post-pandemic consumer spending slowdown, the company was hard hit by supply chain disruptions to the aftermarket auto parts industry and inflationary cost pressures.
The impact was evident in 2023 as weak growth and sharply lower profit margins led to full-year earnings per share (EPS) of just $0.50, marking a deep contraction from $7.65 in 2022. Advance Auto Parts announced a major effort to improve its cost structure, including large corporate layoffs to return to profitable growth.
Thus far, the results have left a lot to be desired. In the fiscal 2024 second quarter (ended July 13), EPS of $0.75 came in below the consensus estimate, with management citing the costs associated with implementing its strategic plan in what remains a "challenging demand environment."
Q2 net sales growth was flat year over year while comparable store sales climbed by 0.4% compared to Q2 2023. For 2024, Advance Auto Parts expects comparable sales between -1% and 0% compared to last year. The company's EPS target of $2.00-$2.50 with a minimum of $100 million in free cash flow favorably represents a rebound from 2023.
Image source: Getty Images.
The long road ahead
Advance Auto Parts has a lot of work ahead to help rebuild investor confidence. That being said, there are some pieces of good news suggesting the worst of the situation is now in the rearview mirror.
The latest Q2 results offered some evidence operating and financial conditions are at least stabilizing. Advance Auto Parts has its challenges, but investors should also recognize the company is profitable and benefits from its network of 4,776 stores across its namesake and CarQuest brands with a loyal customer following.
An important recent development was the announced sale of its WorldPac automotive parts wholesale distribution business for $1.5 billion. The transaction expected to close by the end of the year will generate a significant cash infusion to shore up the balance sheet with further room to support Advance Auto Parts's strategic goals. The ability to pay down debt and continue distributing the company's regular quarterly dividend of $0.25 per share adds to a measure of underlying fundamental strength.
Another consideration for investors is valuation. Advance Auto Parts stock is trading at 18 times its consensus 2024 EPS as a forward price-to-earnings (P/E) ratio. The forward earnings multiple narrows to 13 into 2025 when the market expects earnings to ramp up further.
Advance Auto Parts trades at a discount to the P/E ratio of industry competitors like AutoZone and O'Reilly Automotive, suggesting the stock could be a bargain if the turnaround is successful.
AAP PE Ratio (Forward) data by YCharts
Decision time for AAP stock
I believe it's just too early to confirm that the company is back on track for long-term growth. The market will want to see several quarters of improving results to support a sustained rally going forward.
It's likely also too late for longtime shareholders to sell the stock, as many of the negatives facing the company may have already been priced in. Investors on the sidelines may be better off taking a wait-and-see approach or exploring better opportunities elsewhere in the market.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
