EUR 850.00 For Business Accounts Only

Morningstar | Profitability, sales improving at Advance as its turnaround effort gains momentum.

Although narrow-moat Advance Auto Parts has long lagged its peers in profitability, with long-standing operational inefficiencies exacerbated by its troubled 2014 purchase of General Parts, we believe the company’s ongoing turnaround effort can unlock improved performance as it capitalizes on its balanced professional-DIY segment exposure. As Advance refocuses on closing performance gaps with large-scale peers, we contend it is poised to gradually rebuild share in a market that should see consolidation behind large, national retailers that can leverage a broad distribution network to efficiently provide a high standard of service. Early signs of progress in its turnaround have coincided with recovering industry conditions; fundamental indicators, including miles driven and average vehicle age, are conducive to long-term growth.While Advance’s adjusted returns on invested capital and operating margins (6.1% and 7.3% in 2017, respectively) have lagged peers, we believe the firm has ample runway for profitability growth over the years ahead. The expanded store network should help Advance lift private-label penetration (currently about 40%) while spreading distribution costs over a larger base. Increased reliance on commercial sales requires expensive investments in inventory management to provide services like rapid store inventory replenishment and high availability levels that are increasingly de rigueur in the industry. However, we believe that such moves offer national players like Advance an opportunity to differentiate themselves from local and regional competition in a relatively price-inelastic industry. Advance's size should also help its acquisition costs and lead its accounts payable to inventory ratio to converge toward industry leaders over time, improving efficiency as the firm optimizes its inventory and supply chain and gains cachet with vendors.We believe the cost advantage associated with the firm's scope, together with the strength of Advance's brand intangible assets, provides a durable competitive advantage that should shine through as the turnaround begins to deliver results and Advance's performance gradually moves toward that of its peers.