Advance Auto Parts Drives Sales Via Buyouts, Old Cars

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Advance Auto Parts keeps upshifting, even after its zippy stock-market acceleration after announcing a $2 billion buyout in October to become North America's largest aftermarket car parts retailer.

Roanoke, Va.-basedAdvance Auto Parts ( AAP ) acquired 1,233 Carquest stores and 103 Worldpac branches when it bought out privately held General Parts International for $2.08 billion in an all-cash deal that closed Jan. 2.

The company expects to "achieve synergies of $190 million over three years," it said in a statement June 18, and spend $39 million to $51 million over two years on restructuring, atop a $55 million-to-$65 million one-time charge related to the deal.

Despite the added expense, the General Parts International takeover will fuel earnings and sales growth for the foreseeable future, analysts say.

"The company only achieved a small amount of synergies in the first quarter, so the earnings growth should accelerate as the savings increase in the back half of the year," UBS analyst Michael Lasser wrote in a client note May 29. "Top-line synergies have not been factored into the company and should be a key source of upside to the consensus forecasts."

Higher Horsepower

As a larger firm, Advance Auto Parts will be able to negotiate lower prices from suppliers, offer more selection and boost its supply-chain efficiency, Nick Mitchell and Seth Woolf, analysts at Northcoast Research Partners, wrote May 19.

Advance Auto Parts is the fourth-largest firm by market cap in IBD's Retail/Wholesale-Auto Parts industry group, afterAutoZone ( AZO ),O'Reilly Automotive ( ORLY ) andGenuine Parts Co. ( GPC ) The group ranks No. 81 in performance of 197 IBD tracks, and Advance Auto Parts holds the top IBD Composite Rating in the group -- 95 out of a possible 99. O'Reilly holds a 93.

Advance Auto Parts said June 18 that it is relocating some top managers to General Parts International headquarters in Raleigh, N.C., and will hire 600 employees at a corporate support center through 2017. North Carolina is set to give Advance Auto Parts more than $17 million in tax breaks over 12 years if it meets hiring and investing targets.

First-quarter sales grew 47% year over year to $2.97 billion, thanks to the General Parts International acquisition and the addition of 80 net new stores and two new branches. Same-store sales ticked up 2.4% vs. the consensus expectations for a 1.6% uptick.

First-quarter adjusted earnings jumped 36% from the year-ago period to $2.25 a share, the company reported May 15. Analysts polled by Thomson Reuters had expected $2.16 on average.

Extreme weather-related store closures paled in comparison with a double-digit sales rush in batteries, antifreeze and wipers.

Advance Auto Parts raised its full-year earnings outlook to $7.30 to $7.50 a share, 10 cents higher than its prior forecast. Analysts in the Thomson Reuters poll on average expect full-year earnings to grow 42% to $7.58 a share for 2014 followed by 12% growth next year.

Pricing Power

Investors have bid up Advance Auto Parts stock by 17% for the year to date and by 61% in the past 12 months, vs. the S&P 500 index gains of 6% and 23%, respectively, over those periods.

Advance Auto Parts' prices run 20% to 25% higher than its online rivals, said Michael Dash, president of New York -based CarPartKings.com, a supplier to Advance Auto Parts. Customers "will pay a premium to use a trusted name and they can talk to someone in person rather than order online."

Serving both auto shops and do-it-yourself customers, Advance Auto Parts often sources parts from suppliers such as CarPartKings.com and ships directly to customers or its own stores, saving itself the cost of stocking many products, he says.

With a workforce of 74,000 referred to as "team members," Advance Auto Parts operates 5,276 stores throughout the U.S. and Puerto Rico. That's after opening 20 new stores while closing nine in the first quarter. During that period, it also added 31 hub stores, revving the total hub-store count to 57 and two Worldpac branches for 105 total.

The company plans to add 120 to 140 new stores this fiscal year, George Sherman, president of Advanced Auto Parts, told analysts on a conference call discussing first-quarter results. Advance Auto Parts declined to speak with IBD for this story.

During the first-quarter conference call, CEO Darren Jackson said the company is introducing new training programs for its do-it-yourself (DIY) and commercial customers. The Carquest Technical Institute provides sales, technical and management training program for Carquest Auto Parts customers and Advance Auto Parts professionals.

Older Cars, More Business?

Auto parts typically account for a third of an auto shop's repair bill, according to JPMorgan research. Auto parts retailers enjoy consistent demand from auto shops, which can pass on costs to their customers. Demand for auto repairs is expected to increase as both average age and the number of cars on the road rise. Analytics firm IHS forecasts the average age of U.S. autos to rise nearly 3% over the next five years from 11.4 years in 2014 to 11.7 years by 2019.

The total number of vehicles in operation rose 1.5% last year to more than 252.7 million, as of Jan. 1, according to IHS. About 11.5 million vehicles were scrapped in 2013, representing an 18% decline from 2012, when a record 14 million were junked.

"We see the total VIO (vehicles in operation) growing by 6.5% between now and 2019," said Mark Seng, director of aftermarket solutions at IHS Automotive, based in Southfield, Mich. "As the number of vehicles on the road increases and the average age increases -- people are hanging onto their vehicles longer -- that is all good news for the aftermarket repair business."

On average Americans are financing auto purchases longer and keeping their vehicle about 22 months longer compared with 10 years ago, Seng added.

Thanks to improved quality and extended ownership periods, the number of cars 12 years and older will rise 15% by 2019, IHS estimates. Meanwhile the number of cars less than five years old will jump nearly a third. But the number of autos between six and 11 years old will drop by roughly a fifth given that new car registrations crashed 40% between 2008 and 2010 because of the recession.

Growth in new car sales is expected to pick up just 2.6% in 2014 vs. 7.6% and 13.4% in the prior two years, according to JPMorgan.

Investment Risks

Cars tend to need the most repairs when they're six to 10 years old -- known as the industry sweet spot -- after manufacturer warranties have expired and before people dump their cars.

U.S. vehicle sales dropped from 16 million to 17 million annually before the recession to a record low of 10.4 million in 2009, which means this year slightly more cars will exit the sweet spot than enter it, Christopher Horvers and colleagues at JPMorgan, said in a research note April 9 headlined "Autoparts Bull vs. Bear."

"This represents a sharp reversal from a much larger beneficial trend over the past decade and it gets worse in 2015 when 3 million cars exit on a net basis," they wrote. "We've also hit a cliff given that the peak repair age starts at six years."

What's more, the typical do-it-yourself customers -- single males ages 50 to 59 with annual household income between $30,000 and $49,999 -- are struggling more than most, according to JPMorgan. "This customer is not getting better and they will continue to drag on an already weak DIY segment," Horvers and colleagues wrote.

Horvers also sees potential risks in Advance Auto Parts' ability to integrate the newly acquired General Parts International stores, which could drive customers to competitors. If the economy weakens, consumer spending would drop off, especially in the DIY business.

Advance Auto Parts announced June 18 that it will hold an investor and analyst conference in Boston on Wednesday, to be webcast live from its website.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAP , AZO , ORLY , GPC

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