Auto-parts retailer Advance Auto Parts, Inc. (NYSE:AAP) hasn’t been the best performer in its industry this year. Its gain of just under 12% is dwarfed by peer O’Reilly Automotive Inc (NASDAQ:ORLY) 42% appreciation. However, the more conservative investor should give Advance Auto Parts, Inc. (NYSE:AAP) a thought because it’s valued cheaply and has been gradually turning its business around.
At 15 times earnings, Advance Auto Parts, Inc. (NYSE:AAP) is considerably cheaper than O’Reilly Automotive Inc (NASDAQ:ORLY), which has a trailing P/E of 23. Also, Advance Auto Parts, Inc. (NYSE:AAP)’s same-store sale growth has been improving. In the second quarter, same-store sales declined 0.30%, which is a marked improvement over the year-ago quarter’s decline of 2.70%. However, Advance Auto Parts, Inc. (NYSE:AAP) management expects comps to be “slightly down” this fiscal year.
Tailwinds to consider
But given the trends in the auto industry and Advance Auto Parts, Inc. (NYSE:AAP)’s expansion plans, the company’s performance over the long run might improve further. With the average age of vehicles on American roads now at an all-time high of 11.4 years and 70% of those being over seven years old, Advance Auto believes that there is opportunity going forward.
Management stated that Advance Auto’s weak same-store performance was partly due to higher payroll taxes and high unemployment, as these factors hurt its sales in the do-it-yourself segment. However, these are the factors that might lead vehicle owners to stretch their dollars and keep their older vehicles running.
Opportunity in commercial
So, there might be some reprieve for Advance Auto in the do-it-yourself segment going forward as deferred maintenance of vehicles remains at elevated levels. In addition, the company is focused on strengthening its commercial segment. Advance Auto believes that the commercial market is worth $40 billion at present and is growing at twice the rate of the do-it-yourself segment.
As such, Advance Auto is strengthening its capabilities to serve commercial customers. It has been improving the availability of parts and bolstering its sales force to tap this market. To complement its moves in the commercial market, Advance Auto had acquired 124 stores of BWP Distributors earlier this year. This acquisition has helped Advance strengthen its presence in the Northeast.
Advance Auto is also following an aggressive store expansion program and added 21 new stores in the previous quarter. The company remains on track to open 170 to 190 new stores this fiscal year. Importantly, the stores opened in fiscal 2012 and 2013 have exceeded management’s expectations as the commercial business has been ramping up.