Consumer

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Almost a year after highly regarded activist investor Starboard Value added Advance Auto Parts to its collection, the $12 billion retailer reported its biggest drop in same-store sales and worst earnings miss. The rest of the year doesn't look great either, with Advance Auto's new CEO Tom Greco forecasting "some strain" on margins during Tuesday's earnings call.

Wrong Way
Advance Auto, the car-parts retailer under pressure from activist Starboard Value, hasn't improved yet.
Source: Bloomberg

Starboard is run by Jeff Smith, a roll-up-your-sleeves type of activist who led the turnaround of Olive Garden parent Darden Restaurants beginning in 2014 (he actually waited tables at one point during the process) and is now also tinkering with money-losing chipmaker Marvell Technology. He became Advance Auto's chairman in May, one month after Greco, the former head of PepsiCo's North American Frito-Lay snacks business, was named CEO.

Smith and the Advance Auto management team have a lot of work to do. But communicating with shareholders is often half the battle and Tuesday's call at least showed that the company is acutely aware of the issues and is implementing solutions. For one, Greco said that "customer service metrics" and product availability were a problem during the second quarter -- troubling because those things are at the heart of any retail business. However, they have a team dedicated to improving inventory.

As for margins, Advance Auto has started to do zero-based budgeting, an approach that helps companies remain lean by starting from scratch each period and then having to justify every single cost that's added. But they can't do much about the fact that more Americans are buying new vehicles instead of spending to repair old ones. 

Earnings Detour
Advance Auto's profit during the latest quarter came in well below analysts' estimates. Same-store sales weren't quite as bad as expected, but were still pretty bad.
Source: Bloomberg
Macro Challenges
A recovery in vehicle sales generally doesn't bode well for parts retailers like Advance Auto.
Source: Bloomberg

Advance Auto's stock was down by about 3 percent Tuesday after the call concluded -- not too bad, considering. The horrendous results may be drudging up old speculation of a merger with O'Reilly Automotive, one of Advance Auto's larger competitors. Not to mention, the Pep Boys chain was acquired earlier this year by activist investor Carl Icahn. Gadfly's Gillian Tan wrote back in December that there's a case to be made for O'Reilly buying Advance Auto next, and the $27 billion company certainly has the financial flexibility to do so -- O'Reilly's generating more Ebitda than it has in net debt. 

With Smith there to grease the wheels, Advance Auto's shares at least have some support while the team makes the necessary repairs.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net