Earnings Scorecard: Advance Auto Parts (AAP)

Advance Auto Parts Inc. (AAP) reported its second quarter results on August 11, beating the Zacks Consensus Estimate by 14 cents per share. The market reacted favorably, with share prices rising subsequent to the earnings release.

Analysts were highly optimistic given the company’s improved results revised their estimates upward. Below, we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both short-term and the long-term outlook for the stock.

Second Quarter Review

Advance Auto Parts reported an increase in profit to $100.9 million or $1.16 per share in the quarter from $80.3 million or 83 cents in the year-ago quarter. This was attributable to the company’s aggressive store expansion strategy, enabling better availability of parts and fueling higher comparable store sales gain.

Sales in the quarter grew 7.2% to $1.42 billion, driven by a net addition of 90 stores during the past 12 months. Sales per store improved to $1,638 from $1,600 a year ago. Comparable store sales gain increased to 5.8% from 4.8% in the prior year quarter, driven by an increase in average age of vehicles, dealer closings and more consumers willing to repair their own vehicles.

Gross margin was 50.4% compared with 49.3% last year. This translated into an improvement of 111 basis points, caused by enhanced merchandising and pricing capabilities, increased inventory levels, supply chain efficiencies and improved availability of parts.

Following the improved results, the company has raised its earnings per share guidance to $3.70–$3.80 per share from the previous guidance of $3.20–$3.40 per share.

(Read our full coverage on this earnings report: Advance Auto Parts Outpaces Estimates)

Earnings Estimate Revisions: Overview

Estimates have improved over the last 7 days, reflecting analysts’ optimism about the stock, driven by the company’s improved results and an efficient growth strategy. The share price movement was favorable as well, suggesting Advance Auto Parts is a good stock to own. Let us delve into the earnings estimate details.

Agreement of Estimate Revisions

The table below shows a strong agreement among the analysts regarding the outlook of the company’s earnings. Most of them covering the stock have revised upward the estimate for 2010 and 2011, with no downward revisions. They are also optimistic about the company’s continued investments in most of its stores with commercial programs as well as in parts availability to serve both its DIY and Commercial business.

Out of 13 analysts covering the stock, 11 have revised upward the estimate for 2010 while none has revised it downward since the earnings results were released.

For 2011, out of 22 analysts covering the stock, 14 analysts have revised the estimate upward while none moved in a downward direction. This commendable trend in estimate revisions predicts a consistent stream of earnings.

Magnitude of Estimate Revisions

Earnings estimates for 2010 have been raised by 17 cents from $3.58 to $3.75 since the earnings announcement. Analysts are even more confident about 2011. They have raised the estimates by 20 cents from $4.01 to $4.21 for the year.

Advance Auto Parts in Neutral Lane

Advance Auto Parts remains focused on numerous operational initiatives designed to improve sales and productivity within its existing business, while enhancing an already well-established market share by concentrating on both new and existing stores.

To face the difficult industry metrics, Advance Auto reviewed its business strategies to drive sales, lower costs and increase return on invested capital (ROIC). The company’s ROIC was 16.5% during the second quarter, a 160 basis points improvement over the last year.

These factors, along with the raised earnings per share guidance, have helped the company to retain its Zacks #1 Rank (Strong Buy) recommendation on its shares in the short term (1–3 months).

However, sluggish economy, volatile gasoline prices and pricing are some of the challenges facing the company. Therefore, we have recommended the shares of the company as Neutral in the long term (6+ months).

ADVANCE AUTO PT (AAP): Free Stock Analysis Report

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