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Bear of the Day: Advance Auto Parts (AAP)

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Advance Auto Parts (AAP - Free Report) is a Zacks #5 Rank (Strong Sell) whose shares may be in for a fall as they just hit an eight-month resistance ceiling at $165 and earnings estimates continue to come down.

In the last 60 days, full year 2016 EPS estimates have dropped from $8.81 to $7.80. And 2017 profit projections fell from $9.78 to $8.67.

Here's the background on why analysts took EPS estimates down over 10% for the next two years...

On May 19, Advance Auto Parts reported a 5% increase in adjusted earnings to $2.51 per share in the first quarter of fiscal 2016 (ended Apr 23, 2016) from $2.39 in the prior-year quarter. However, the figure missed the Zacks Consensus Estimate of $2.61. Adjusted net earnings improved 5.5% to $186.1 million from $176.5 million in the first quarter of fiscal 2015.

Revenues dropped 1.9% year over year to $2.98 billion and fell short of the Zacks Consensus Estimate of $3.01 billion. The decline resulted from a fall in comparable store sales. Comparable store sales slipped 1.9% in the reported quarter as against 0.7% growth recorded a year ago. The drop in comparable store sales was due to service shortfall and lower demand resulting from unfavorable weather.

Guidance Lowered

Advance Auto Parts expects comparable store sales to be in the range of negative 3% to negative 5%, lower than the previous forecast of low-single digits growth. The revised outlook is based on the company’s performance in the reported quarter. The company no longer expects to achieve its adjusted operating margin target of 12% and free cash flow of $500 million.

Additionally, it expects to incur capital expenditures in the band of $260–$280 million in fiscal 2016. Income tax rate will likely be in the range of 37.5%–38%.

Advance Auto Parts enhances profits through its relentless focus on store expansion. In 2016, the company plans to open 65–75 new stores, including Worldpac branches. As of Apr 23, 2016, the company’s total store count was 5,211, including 125 Worldpac branches. Advance Auto Parts served roughly 768 independently owned Carquest stores as of that date.

While the consumer auto market remains robust, AAP may be experiencing its own growing pains. Until this earnings momentum turns around, it's probably best to stay on the sidelines here. The Zacks Rank will let you know.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research.

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