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On Sep 30, we maintained our Neutral recommendation on Advance Auto Parts Inc. (AAP - Analyst Report) based on its continuous focus on enhancing the supply chain by pursuing an aggressive store expansion strategy along with its share repurchase policy, which is expected to boost earnings. However, we are concerned about the uncertain economic environment, volatile gasoline prices and pricing pressures.

Why the Reiteration?

On Aug 8, 2013, Advance Auto reported an 18.7% rise in earnings to $1.59 per share in the second quarter of fiscal 2013 (ended Jul 13, 2013) from $1.34 per share in the year-ago quarter. It also beat the Zacks Consensus Estimate of $1.48. Earnings benefited from higher gross margin and efficient cost control measures.

Revenues went up 6.1% to $1.55 billion, missing the Zacks Consensus Estimate of $1.59 billion. The increase was driven by the acquisition of BWP Distributors and the net addition of 175 new stores in the last 12 months.

Following the release of the second quarter results, the Zacks Consensus Estimate for 2013 went up 0.5% to $5.51 per share. However, the Zacks Consensus Estimate for 2014 remained constant at $6.08 per share. Currently, Advance Auto carries a Zacks Rank #3 (Hold).

Advance Auto will benefit from its focus on different operational initiatives, which will improve sales and productivity within its existing business. These initiatives include improvement of the commercial business through better delivery speed and reliability, increase of customer retention, improving in-store execution by increasing labor productivity, and improving local market availability through new store openings and by upgrading the existing stores.

Advance Auto will be favorably impacted by the aggressive store expansion strategy and share repurchase policy. During the second quarter, the company opened 26 stores, including 5 Autopart International stores, and closed 5 stores. In August, Advance Auto celebrated the opening of its 4,000th store.

Share buyback helps in boosting earnings per share and increases shareholders’ confidence in the company. In the first half of 2013, the company repurchased about 1 million shares at an aggregate cost of $74.5 million. As of Jul 13, 2013, the company had roughly $418 million available on its $500 million share repurchase program, authorized by its board of directors on May 14, 2012.

However, uncertain economic environment with higher payroll taxes, high unemployment and financial stress on the core customers are some challenges faced by Advance Auto. In addition, rising competition from national and regional automotive retailers including AutoZone Inc. (AZO - Analyst Report) is a matter of concern for the company.

Other Stocks to Look For

Currently, CarMax Inc. (KMX - Analyst Report) and O’Reilly Automotive Inc. (ORLY - Analyst Report), both with a Zacks Rank #2 (Buy), are performing well in the industry where Advance Auto operates.

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