Advance Auto Gains After Starboard Discloses 3.7% Stake

  • Hedge fund says retailer has potential to widen profit margins
  • Shares climb the most in more than 19 months on the news

Advance Auto Parts Inc. rose the most in more than 19 months after activist hedge fund Starboard Value disclosed a stake in the retailer and said it will discuss ways to improve the business with management.

Advance Auto Parts is undervalued and has opportunities to expand its profit margins, the New York-based fund said Wednesday in a statement. Starboard said it has a 3.7 percent stake in the retailer, which would make it the company’s sixth-largest investor, according to data compiled by Bloomberg.

Starboard’s ideas for Advance Auto Parts include reducing its overhead costs and improving product sourcing, getting more value out of its Worldpac distribution business, returning capital to shareholders, and pursuing more acquisitions of smaller, regional auto-parts chains. Starboard Chief Executive Officer Jeff Smith presented the plans at the 2015 C4K Sohn Canada Investment Conference on Wednesday, saying the company could boost its share price by improving profit margins that are “well below” such peers as AutoZone Inc. and O’Reilly Automotive Inc.

“We have an open and engaged dialogue with our shareholders and welcome their input on ways to create value,” Laurie Stacy, an Advance Auto Parts spokeswoman, said in an e-mailed statement. “We are highly focused on our base business and integration milestones, and remain committed to our stated plan to reach 12 percent comparable operating margins by 2016.”

Trailing Peers

Advance Auto Parts shares climbed 11 percent to $189.53 in New York trading, the biggest gain since February 2014. While the retailer had risen 7.1 percent this year through Tuesday, that trails the 26 percent gain for O’Reilly and the 17 percent advance for AutoZone.

In addition to margin improvements, Smith said, “we want to rethink the distribution and supply chain strategy, we want to dramatically improve permanent capital to get it closer to best in class and we want to look at some of their assets that are maybe non-core that can be pulled back.” He said the shares could be worth more than $350, compared with an average 12-month price target of $201.53 among 15 analysts surveyed by Bloomberg.

Starboard has a history of targeting small- and mid-cap public companies it considers undervalued. Last year, the firm persuaded investors to replace the board of Darden Restaurants Inc. and attempted to split off the company’s real estate, a proposal bondholders resisted. In July, Smith revealed a new active stake in Macy’s Inc., proposing it capitalize more on its real estate.

Before it's here, it's on the Bloomberg Terminal.