Shares in auto parts retailer Advance Auto Parts(NYSE: AAP) slumped by 28.5% in August, according to data provided by S&P Global Market Intelligence. The move comes after a disappointing second-quarter earnings report and a slew of analyst downgrades.
Advance Auto Parts' problems continue
Nine years ago, renowned activist investor Starboard Value laid out the value case for Advance Auto Parts. It was made based on classic value investor principles. Find a company that's notably underperforming its peers, in this case, O'Reilly Automotive and AutoZone, and look to replicate what its peers do so its metrics can improve to their levels, and the stock should rise significantly.
However, despite Starboard's extensive involvement and Tom Greco's tenure as CEO from 2016 to 2023, it can hardly be considered a success.
Unfortunately, the same issues appear to be dogging Advance Auto Parts today, and they came to the fore with a second-quarter earnings report that saw the company, now led by former HD Supply CEO Shane O'Kelly, cut its full-year sales guidance and slash the midpoint of its full-year earnings outlook to $2.25 from $4.
Another turnaround at Advance Auto Parts
It's hard to know what to make of the latest disappointment and not feel sympathy for O'Kelly. He was left to outline that "Turnarounds take time, but our team is solid and putting in the work." He noted that he would continue a strategic and operational review of the company while selling Worldpac to improve the balance sheet, cut costs, make organizational changes, and consolidate its supply chain.
Image source: Getty Images.
As part of the changes, the company is expanding its so-called "market hubs" whereby "an average of 80,000 SKUs" will be made "available to a supported radius of stores on a same-day basis." Making readily available parts or stock-keeping units (SKUs) is a big thing in the auto parts retail business. Customers, particularly professionals, typically need the part quickly to make repairs.
A decade of turnarounds
The problem is Advance Auto Parts has been in turnaround mode for a decade, and it's still not close to lowering the number of days it holds inventory before selling it compared to its rivals.
AAP Days Inventory Outstanding (Annual) data by YCharts
As such, the stock is worth avoiding until the company shows meaningful progress on its margins, inventory management, and ability to deliver SKUs in a timely fashion to customers in a productive way. The lack of tangible progress on that front hurt the company in August, and it will do so again until Advance Auto Parts improves its execution.
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Lee Samaha 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.
