Is Advance Auto Parts Inc. (AAP) Overstating Net Income?

Advance Auto Parts, Inc. (NYSE:AAP) discussed its Q2 2013 results on August 8th. A day later the company also opened its 4,000th store. According to Motley Fool, AAP “carries the highest level of inventory available per store ($600,000 / store) in the industry.” Several hedge funds like Ricky Sandler’s Eminence Capital have positions in AAP.

Will AAP maintain its relatively high rates of return? Find out with this Free report!

Download

Based on the preliminary financial results for the quarter ended 2013-07-31, we analyze Advance Auto Parts, Inc. (NYSE:AAP) relative to other players in the industry. (Scroll to the end of the post for the peer set).   The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2013-07-31 2013-04-30 2012-12-31 2012-09-30 2012-07-31
Revenues 1,549.6 2,015.3 1,329.2 1,457.5 1,461.0
Revenue Growth % (23.1) 51.6 (8.8) (0.2) (25.4)
Net Income 116.9 121.5 65.1 89.3 99.4
Net Income Growth % (3.8) 86.8 (27.2) (10.1) (25.6)
Net Margin % 7.5 6.0 4.9 6.1 6.8
ROE % (Annualized) 35.4 39.2 22.1 32.4 39.0
ROA % (Annualized) 9.7 10.4 5.8 8.4 9.7

A long-term strategic bet?

While Advance Auto Parts, Inc. (NYSE:AAP)’s revenues growth has been below the peer median in the last few years (4.7% vs. 6.4% respectively for the past three years), the market still gives the stock an about peer median PE ratio of 15.6. The market seems to see the company as a long-term strategic bet.

AAP’s annualized rate of change in capital of 6.8% over the past three years is higher than its peer median of 2.4%. This investment has generated an above peer median return on capital of 26.4% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.

Possible overstatement of its reported net income?

The company’s reported net income margin for the last twelve months is around the peer median (6.2% vs. peer median of 5.2%). However, the company has also recorded a relatively low level of accruals (2.6% vs. peer median of 3.4%) which suggests possible overstatement of its reported net income.

Advance Auto Parts, Inc. (NYSE:AAP)’s accruals over the last twelve months are positive suggesting a buildup of reserves. But this level of accruals is less than the peer median — which suggests that while the company is building reserves, it is doing so in a relatively modest manner compared to its peers.

Trend Charts

Quarterly Revenues Trend for Advance Auto Parts Inc. (NYSE:AAP)Annual Revenues Trend for Advance Auto Parts Inc. (NYSE:AAP)Quarterly Accruals Trend for Advance Auto Parts Inc. (NYSE:AAP)Annual Accruals Trend for Advance Auto Parts Inc. (NYSE:AAP)

Peer Set for Advance Auto Parts, Inc. (NYSE:AAP)

AutoZone, Inc. (NYSE:AZO), O’Reilly Automotive Inc (NASDAQ:ORLY), Canadian Tire Corp. Ltd. Cl A (CTC), Valeo S.A. (FR), Autobacs Seven Co. Ltd. (9832-JP), Halfords Group PLC (HFD) and The Pep Boys – Manny, Moe & Jack (NYSE:PBY).

Company Profile

Advance Auto Parts, Inc. is a retailer of automotive aftermarket parts, accessories, batteries, and maintenance items. Its stores carry an extensive product line for cars, vans; sport utility vehicles and, light trucks. The company operates through two segments: Advance Auto Parts and Autopart International. The Advance Auto Parts segment is comprised of its store operations within the Northeastern, Mid-Atlantic, Southeastern and Midwestern regions of the United States, Puerto Rico, and the Virgin Islands, which operate under the trade names Advance Auto Parts, Advance Discount Auto Parts and Western Auto. The Autopart International segment serves the commercial market for imported cars from its store locations in the Northeastern and Mid-Atlantic regions of the U.S. and Florida. The company was founded by Arthur Taubman in 1932 and is headquartered in Roanoke, VA.

Are AAP’s relatively high operating returns sustainable? Find out with this Free report!

Download

This article was first published on the CapitalCube Blog, full disclaimer.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!