Advance Auto Parts’ business
Advanced Auto Parts (AAP) sells auto parts and accessories primarily in the United States, Puerto Rico, Canada, and the US Virgin Islands. It provides auto parts to DIY (do-it-yourself) customers and offers professional installation services.
In the last three years, US automakers (FXD) Ford (F) and General Motors (GM) have benefited from higher US truck sales. However, the average age of vehicles on US roads has gone up in the last few years. That has boosted the growth potential for US auto parts sellers, including AAP, O’Reilly Automotive (ORLY), and AutoZone (AZO).
Weakness in sales
In the first quarter, AAP reported revenues of $2.87 billion, a 0.6% decline YoY (year-over-year). It missed Wall Street analysts’ consensus revenue estimate of $2.91 billion, which hurt investor sentiment. It was the third consecutive quarter that sales have declined YoY. In Q4 2017 and Q3 2017, sales fell 2.2% and 3% YoY, respectively.
AAP’s same-store sales fell 0.8% in the first quarter. Its comp store sales decline was much steeper at 2.7% in Q1 2017 and 2.8% in Q4 2017.
During Advance Auto Parts’ first-quarter conference call, management said the company’s comp store sales began the quarter on a strong note but dropped significantly in the final five weeks of the quarter. The delayed spring in the North Central and Northeastern markets was a key reason for lower sales in the quarter.
In 2017, sales declined 2% year-over-year to $9.4 billion, while same-store sales fell 2% compared to a 1.4% decline in 2016.
Improved free cash flow
In the last few quarters, Advance Auto Parts has been focusing on optimizing inventory and working capital to improve its free cash flow. Due to these efforts, its free cash flow in the first quarter rose $119.5 million from a negative free cash flow of $30.2 million a year ago. Although it’s working to reduce inventory, it’s still trying to improve auto parts availability at its stores and provide better customer service to increase sales.
In the next part of this series, we’ll look at Advance Auto Parts’ profit margins in the first quarter.