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.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
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 World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!