After a gap of almost nine months, I decided to take a look at a stock about which I used to be quite bullish. Unsurprisingly, the stock has gained a tad over 13% since then, and has also managed to turn analyst sentiment from negative to positive. The last time I looked, Advance Auto Parts, Inc. (NYSE:AAP) was coming off a woeful quarter and it wasn’t expecting a bright future either.
But the company has managed to stage a comeback over the past few months and its recently reported fourth quarter sent the stock soaring. Analysts lauded Advance Auto’s solid cost management and earnings performance, even though it didn’t record an improvement in revenue. Thus, even though same-store sales fell 1.9% from the prior-year period, gross margin improved 90 basis points while operating income was slightly better.
As a result, the company delivered a positive surprise of almost 16% on the bottom line and expects to keep the momentum intact this year as well. Management knows that they might face a tough environment as people are either buying or looking to buy new cars. But, they know that this will turn into an opportunity in the long term, even though it would hurt business in the short run.
However, it should also be kept in mind that average age of vehicles in the U.S. still exceeds 10 years, with around 52 million vehicles more than 16 years of age. This should help Advance Auto keep its revenue stream intact and help it in improving same-store sales.
In addition, Advance Auto also expects an increase in the number of vehicles more than seven years old, apart from a cold weather, to provide further thrust to the top line. Moreover, an expected decline in gas prices would be another tailwind for Advance Auto.
Some catching up to be done
But the company is taking some other steps as well in order to bring its same-store sales into green territory, and plug the gaps in its business. Advance Auto lags behind its peers AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) in terms of store presence with around 3,800 stores.
O’Reilly’s 4,000 stores in 42 states helped it record a 4.2% same-store sale growth in its recently reported fourth quarter. The company expects further growth this year, and its earnings guidance comfortably surpassed consensus forecasts, which shows us what a superior store count can do.
Similarly, AutoZone, with around 5,000 stores in the U.S. and Mexico, managed to improve its same-store sales slightly in its previous quarter. AutoZone is now looking at e-commerce for further growth and had entered into an agreement to acquire online retailer AutoAnything in the previous quarter.
The right moves
To catch up with these heavyweights, Advance Auto stepped on the gas in the previous quarter and opened 137 new stores in fiscal 2012, its best ever new store count in the last five years. It acquired 21 stores of the erstwhile Strauss Auto Parts to improve its presence in New York. Advance Auto calls these new stores its best performing new stores opened in the past 10 years, and expects them to improve sales by 3% going forward.
In addition, Advance Auto is also focused on improving its presence in the commercial space. It acquired BWP, which is well-positioned in the Northeast commercial market. This acquisition is expected to aid Advance Auto’s commercial initiatives by adding $170 million to $180 million in revenue this fiscal year. The company’s results in the previous quarter were driven by its initiatives in the commercial business and it is intent on improving it further through its B2B e-commerce website.
Advance Auto is gradually looking to improve its business and it is making the correct moves. While improvement in sales of new cars might create a short-term pressure, it goes without saying that vehicle owners will ultimately turn to aftermarket retailers such as Advance Auto for maintenance. The company’s new stores should start contributing positively to same-store sales in the future and its advances in the commercial space are noteworthy.
Also, the stock seems fairly valued at a trailing P/E of 15.1 times and a forward P/E multiple of 12.9 times suggests that earnings growth is on the way. Moreover, a small dividend yield of 0.30% is another perk that potential investors would enjoy if they decide to buy this stable and steadily improving stock.
The article 1 Improving Stock You Should Consider Buying Right Now originally appeared on Fool.com and is written by Harsh Chauhan.
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