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Advance Auto Stays Neutral

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On Apr 18, we maintained our Neutral recommendation on Advance Auto Parts Inc. (AAP - Free Report) based on its continuous focus on enhancing supply chain by pursuing aggressive store expansion strategy and share repurchase policy, which is expected to boost earnings. However, we are concerned about the sluggish economy, volatile gasoline prices and pricing pressures.

Why Maintained?

On Feb 7, Advance Auto posted a 2.2% decrease in earnings per share to 88 cents in the fourth quarter of 2012 from 90 cents in the year-ago quarter. However, reported EPS surpassed the Zacks Consensus Estimate by 13 cents.

Revenues remained flat year over year at $1.3 billion, in line with the Zacks Consensus Estimate. Flat revenues reflect a 1.9% decrease in comparable store sales versus a 2.9% rise during the fourth quarter of 2011, partially offset by the positive impact of net addition of 132 stores over the past 12 months.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 went down 1.1% to $5.52 per share. The Zacks Consensus Estimate for 2014 also declined 1.1% to $6.07 per share. Currently, Advance Auto maintains a Zacks Rank #3 (Hold).

Advance Auto will benefit from its focus on different operational initiatives, which will improve sales and productivity and enhance market share of the company. These initiatives include development of merchandising programs, better store remodeling programs, nationwide advertising aimed at establishing the AAP brand.

Advance Auto will be favorably impacted by the aggressive store expansion strategy and share repurchase policy. During the fourth quarter of 2012, Advance Auto Parts opened 67 stores, including 8 Autopart International stores. With this, the company has opened 137 stores, including 21 Autopart International stores, in 2012.

In 2012, Advance Auto Parts repurchased shares worth $27.1 million. As of Dec 29, 2012, the company had nearly $492 million shares remaining under its $500 million share repurchase program, which was authorized by the board on May 14, 2012.

However, sluggish economy and volatile gasoline prices are some of the challenges facing the company. In addition, rising competition from national and regional automotive retailers including AutoZone Inc. (AZO - Free Report) is a matter of concern for the company.

Other Stocks to Look For

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

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