Here’s why Advance Auto Parts collapsed in August

Actions at the auto parts dealer Advance Auto Parts (AAP -3.18%) fell 28.5% in August, according to data from S&P Global Market Intelligence. The move comes after a disappointing second-quarter earnings report and a series of analyst downgrades.

Advance Auto Parts’ problems continue

Nine years ago, renowned activist investor Starboard Value presented the value case for Advance Auto Parts. It was built on the classic principles of value investors. Find a company that is significantly underperforming its peers, in this case, O’Reilly Automotive and AutoZoneand is looking to replicate what its peers are doing so its values ​​can improve to their levels and the stock should rise significantly.

However, despite Starboard’s extensive involvement and Tom Greco’s tenure as CEO from 2016 to 2023, it can hardly be considered a success.

AAP data by YCharts

Unfortunately, the same issues seem to be besetting Advance Auto Parts today, and they came to the fore with a second quarter earnings report that saw the company, now led by former HD Supply CEO Shane O’Kelly, reduced its sales for the whole year. guidance and cut the midpoint of its full-year earnings outlook to $2.25 from $4.

Another return to Advance Auto Parts

It’s hard to know what to make of the latest debacle and not feel sympathy for O’Kelly. He was left to point out that “Returns take time, but our team is solid and working.” He noted that he will continue a strategic and operational review of the company while selling Worldpac to improve the balance sheet, reduce costs, make organizational changes and strengthen its supply chain.

Image source: Getty Images.

As part of the changes, the company is expanding its so-called “market hubs,” through which “an average of 80,000 SKUs” will be “available to a range of supported stores on the same day.” Making readily available parts or stock keeping units (SKUs) is important in the auto parts retail business. Customers, especially professionals, usually need the part quickly to make repairs.

A decade of returns

The problem is that Advance Auto Parts has been in recovery mode for a decade and still isn’t close to reducing the number of days it holds inventory before selling it compared to its rivals.

Outstanding (yearly) AAP Days inventory data by YCharts

As such, the stock is worth avoiding until the company shows significant progress in its margins, inventory management, and ability to deliver timely SKUs to customers in a productive manner. The lack of tangible progress on that front hurt the company in August and will do so again until Advance Auto Parts improves its execution.