Advance Auto Stays Neutral

We continue to recommend the shares of Advance Auto Parts ( AAP - Analyst Report ) as “Neutral” for the long-term (more than 6 months). We appreciate the company’s efforts to improve supply chain and vendor terms by pursuing an aggressive store expansion strategy. However, we believe sluggish economy and unfavorable pricing due to tough competition will mar the company’s results.

Advance Auto is primarily engaged in selling replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks. It is the second leading retailer catering to the Do-it-Yourself (DIY) and Do-it-for-Me (DIFM) customers. As of December 31, 2011, the company’s total store count was 3,662.

The company remains focused on numerous operational initiatives designed to improve sales and productivity within its existing business, while enhancing an already well-established market share by concentrating on both new and existing stores. Its profit has advanced through an aggressive store expansion strategy, enabling better availability of parts to its customers. In 2011, the company opened 104 stores. Further, it has projected to open 120–140 stores during 2012.

However, sluggish economy and volatile gasoline prices are some of the factors raising our concern about Advance Auto Parts’ performance in the near term. The slow economy and uncertainty in the market are forcing consumers to refrain from expenditures, such as purchases of replacement parts. Pricing remains an issue as Advance Auto Parts competes with other national and regional automotive retailers such as AutoZone ( AZO - Analyst Report ) , O’Reilly Automotive ( ORLY - Analyst Report ) and Pep Boys ( PBY - Snapshot Report ) .

Advance Auto Parts Inc. reported a 58% rise in profit to 90 cents per share in the fourth quarter fiscal 2011 ended December 31, 2011 from 57 cents in the comparable quarter ended January 1, 2011. The profit exceeded the Zacks Consensus Estimate by a considerable margin of 16 cents per share.

Sales in the quarter grew 4.5% to $1.33 billion from $1.27 billion in the fourth quarter of fiscal 2010. The increase in sales reflects the net addition of 99 new stores during the past 12 months and a comparable store sales gain of 2.9% compared with 8.9% during the fourth quarter of fiscal 2010.

However, the company’s gross margin deteriorated 39 basis points to 49% from 49.4% in the fourth quarter of fiscal 2010. The decline was attributable to higher supply chain expenses due to investments in hub stores and increased shrink expenses.

Advance Auto Parts anticipates earnings in the range of $5.55 to $5.75 per share for 2012 compared with $5.12 per share in 2011. The company also expects comparable store sales gain of low to mid single digits.

Due to the commendable results and higher earnings guidance, the company retains a Zacks #2 Rank, which translates to a “Buy” rating for the short-term (1 to 3 months).