Advance Auto Elements: Robust DIFM Presence (NYSE:AAP)


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Funding abstract

With the Covid pandemic receding, persons are more and more changing into extra snug in going out of their automobiles. So, miles pushed are recovering in most components of the U.S. This may assist auto components demand within the close to future. Additional, used automobile gross sales have elevated considerably post-pandemic and ageing automobiles on roads may even be a optimistic for the demand for Superior Auto Elements (NYSE:AAP). Additional, the corporate’s above-average publicity in the direction of Do-It-For-Me (DIFM) finish market and a number of initiatives for margin enchancment additionally bode nicely for its fundamentals. The inventory appears to be like good buying and selling at a reduction to its historic valuation.

This autumn incomes evaluation

Advance Auto Elements lately reported This autumn outcomes and the corporate posted higher than anticipated outcomes. The corporate’s income elevated ~1.3% YoY to ~$2.4B towards the consensus estimate of ~$2.37B. Fourth-quarter adjusted working earnings margin was ~7.4%, nearly flat versus This autumn 2020 adjusted working margin of seven.3% because the influence of inflationary headwinds (particularly inside labour) and elevated incentive compensation offset a number of the margin enchancment initiatives the corporate is implementing. We consider it’s only a momentary hiccup and the long-term margin outlook appears to be like good with the corporate persevering with to work on value discount initiatives. Regardless of a contraction in margins, the adjusted EPS elevated to $2.07 (vs. $1.96 consensus) in comparison with $1.53 within the prior yr of This autumn.

I consider there are a number of macroeconomic and company-specific elements that make AAP a beautiful funding for each brief and long-term buyers.

Ageing automobiles and restoration in miles pushed

Through the Covid Pandemic, there was a major improve in demand for automobiles, however new automobile manufacturing was impacted attributable to provide chain points and different lockdown associated manufacturing disruptions. This led to a surge in used automobile gross sales. New automobile manufacturing continues to be going through disruption because of the influence of chip shortages. This bodes nicely for auto components retailers as older automobiles require extra upkeep and the possibilities of them needing a alternative for an auto half is far larger. The extra such automobiles transfer across the cities the higher it’s for the corporate.

As well as, auto half retailers additionally profit as miles pushed improve. Through the pandemic, folks had been touring much less and nesting of their houses for more often than not. However as Covid circumstances are ebbing and restrictions are being lifted, they’re venturing out of their automobiles. This has led to a restoration in miles pushed and AAP is more likely to profit from it. In response to administration, the miles pushed within the northeast market, the place the corporate has a major presence, continues to be beneath 2019 ranges. This means that the corporate will proceed to see profit from a restoration in miles pushed within the close to future.

The Northeast continues to be nearly 10% beneath the place it was two years in the past in case you look by means of the tail finish of final yr on the miles pushed. Now it is arising, however it’s nonetheless beneath. So I feel you’ll proceed to see that miles pushed enhance. The knowledge we now have says it is down nonetheless versus ’19. We count on that to proceed to enhance.”

– Tom Greco, CEO Advance Auto Elements, This autumn 2021 Earnings Name

Robust place within the DIFM market

Among the many three main Auto Elements retailers – Advance Auto Elements, O’Reilly (ORLY), and AutoZone (AZO) – Advance Auto Elements has the most important publicity in the direction of the DIFM market.

DIFM vs. DIY sales of Advance Auto Parts, O

DIFM vs. DIY gross sales of Advance Auto Elements, O’Reilly and AutoZone (Firm Information, GS Analytics Analysis)

Through the pandemic, folks had been spending extra time at dwelling and there was a surge in DIY actions. Nevertheless, with the economic system opening up and restrictions getting lifted, it’s anticipated that DIFM actions will see a surge and a number of the pent-up demand will get unleashed. With ~60% gross sales coming from this finish market Advance Auto Elements is positioned nicely to profit from this surge.

Margin enchancment potential

One parameter on which Advance Auto Elements lags its friends O’Reilly and Auto Zone is margins.

Margin Comparison for Advance Auto Parts, O

Margin Comparability (GAAP) for Advance Auto Elements, O’Reilly, and AutoZone (Firm Information, GS Analytics Analysis)

Administration realises this and is enterprise varied initiatives to enhance the corporate’s margins. The next are a number of the initiatives administration is taking to cut back prices:

  • Integration of Advance model and Carquest model to a single provide chain

  • Rolling out of cross banner replenishment that directs a retailer to extra logical freight distribution to cut back the miles pushed throughout their distribution centres and shops

  • Launching its personal manufacturers to drive gross margin growth. The corporate launched Diehard energy instruments in This autumn 2021 and is seeking to launch Diehard hand instruments within the first half of 2022.

  • Transitioning your entire Distribution centre underneath a single Warehouse administration system to effectively deal with your entire main and minor warehouse job to avoid wasting value. The corporate has transitioned ~44% of its distribution centres to the brand new warehouse administration system and is already saving some value however the full advantage of the Warehouse administration system is to be solely realized by finish of 2023. The corporate can be incorporating Labour Administration System to extend productiveness and save a number of the expenditure on labour.

  • Bettering strategic pricing capabilities to get rid of unproductive reductions and react rapidly to inflation-related value will increase utilizing a brand new know-how platform which the corporate rolled out in 2020.

  • Integrating the assortments, provide chain, know-how platforms inside Worldpac and Autopart Worldwide to accommodate the skilled enterprise underneath the identical roof to additional enhance gross margin and make incremental gross sales.

The corporate’s adjusted working margins elevated to 9.6% in FY2021 from 8.3% in FY2020. For FY2022, administration has guided for adjusted working margins between 10.1% and 10.2%. I consider this enchancment will proceed for the following a number of years as the corporate implements its margin enchancment initiatives and tries to shut the hole with its friends.

Valuation

AAP is buying and selling at ~15.33x FY2022 EPS estimates which is a major low cost to its 5-year common P/E of ~19.14x. In response to consensus expectations, the corporate’s EPS is anticipated to extend by ~12.21% this yr and ~15.15% subsequent yr. I consider the corporate will proceed seeing good EPS progress sooner or later helped by each macro (restoration in miles pushed, ageing automobiles) in addition to company-specific elements (excessive proportion of DIFM gross sales in comparison with friends, margin growth potential). Therefore, I consider the inventory is an efficient purchase on the present ranges.



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