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Will Advance Auto Parts (AAP) Disappoint in Q2 Earnings?

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Advance Auto Parts Inc. (AAP - Free Report) is expected to report second-quarter fiscal 2017 results before the market opens on Aug 15.

Last quarter, the company delivered a negative earnings surprise of 24.5%. In fact, in three of the trailing four quarters, the company recorded earnings miss and on one occasion, it beat the estimate. The average surprise in the trailing 12 months came in at negative 10.8%.

Advance Auto Parts has underperformed the industry it belongs to in the last six months. The company’s shares have lost 34.7% over this period compared with 23.9% decline recorded by the industry.

Let’s see how things are shaping up prior to the impending announcement.

Factors to Consider

Advance Auto Parts is challenged by declining cash flows. During the 16-week period ended Apr 22, 2017, operating cash flow was $35.1 million, down from $88.4 million in the year-ago period. Free cash flow in the period amounted to negative $30.2 million, significantly wider than negative $0.7 million in the prior-year period.

Price competition remains a concern for Advance Auto Parts, as it competes with national and regional automotive retailers such as AutoZone, O’Reilly Automotive, Pep Boys and CSK Auto Corporation.

Also, the improvement in the quality of new vehicles leads to reduced need for maintenance and repair of parts. This in turn, impedes demand in the automotive maintenance market. In addition, the fact that consumers are opting for new vehicle purchases instead of maintaining old ones, can affect the company products’ demand.

Prior to its second-quarter earnings release, Zacks Consensus Estimate is showing a declining trend in the last one month.

Earnings Whispers

Our proven model does not conclusively show that Advance Auto Parts is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP:  Earnings ESP represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate. Advance Auto Parts’ Earnings ESP is -0.61%. This is because the Most Accurate estimate is $1.64 whereas the Zacks Consensus Estimate stands at $1.65.
 
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Advance Auto Parts carries a Zacks Rank #5 (Strong Sell).

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

CACI International Inc (CACI - Free Report) is expected to release fiscal fourth-quarter and fiscal 2017 results on Aug 16, 2017. The company carries a Zacks Rank #2 and has an Earnings ESP of +1.83%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Coach, Inc. is expected to release fourth-quarter and fiscal 2017 results on Aug 15. The company carries a Zacks Rank #3 and has an Earnings ESP of +2.04%.

The Gap, Inc. (GPS - Free Report) , a Zacks Rank #2 stock, has an Earnings ESP of +3.85%. The company is expected to report second-quarter financial numbers on Aug 17.

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