Advance Auto Falls Most Ever as CEO Sees Longer Sales Slump

Updated on
  • Retailer’s shares plunge 25% as AutoZone, O’Reilly also drop
  • Advance sees same-store sales falling up to 3% this year

Advance Auto Parts Inc. shares plunged the most on record after the company warned the weak demand that’s dragged on car components retailers this year will continue.

Annual same-store sales may decline as much as 3 percent, down from Advance Auto’s forecast in February for growth of up to 2 percent. The Roanoke, Virginia-based company also trailed analysts’ estimates for second-quarter sales and profit.

Auto-part retailers blamed weak demand early this year on delayed tax refunds and a mild winter that reduced the need for drivers to replace components. Competition from the likes of Amazon.com Inc. -- which has begun to mount an offensive on the industry -- also has weighed on shares of Advance Auto and peers including O’Reilly Automotive Inc. and AutoZone Inc.

Tom Greco

Photographer: Michael Nagle/Bloomberg

“It’s now prudent for us to plan for this softer industry backdrop to persist into the second half of 2017,” CEO Tom Greco said on a call with analysts Tuesday.

Greco blamed factors including economic uncertainty for low-income customers, higher gas prices and warmer weather easing the wear and tear on cars. Auto-parts stores aren’t alone in struggling: Retailers Coach Inc., Home Depot Inc. and Dick’s Sporting Goods Inc. all declined after reporting earnings Tuesday.

Advance Auto’s same-store sales were flat in the second quarter, compared with analysts’ average estimate for a 0.3 percent increase. Adjusted earnings fell from a year earlier to $1.58 per share, trailing projections for $1.65 a share.

Annual free cash flow will be at least $300 million, down from its projection in February for more than $400 million. The shares fell 20 percent to $87.08 at the close in New York, while AutoZone and O’Reilly also dropped.

Part of the profit miss was driven by Advance Auto speeding up plans to overhaul its supply-chain operations and reduce inventory to raise profit margins to a level more comparable with peers. Activist hedge fund Starboard Value LP purchased a stake in the company in 2015, arguing it could boost margins by reducing overhead costs and improving product sourcing.

Weaker industry sales may lengthen the time it takes for Advance Auto to see the fruits of those turnaround efforts, RBC Capital Markets analyst Scot Ciccarelli wrote in a note to clients.

“Today’s lowered guidance is likely designed to clear the deck of expectations,” Ciccarelli said. “If it is remotely accurate, then it would imply all of the productivity gains that we were expecting to start to manifest in the second half of 2017 will not come to fruition, or be pushed out further.”

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