Mizuho Securities has adjusted its outlook on Advance Auto Parts (NYSE: NYSE:AAP), reducing the stock's price target to $45 from the previous $64, while retaining a Neutral rating.
The decision follows a significant sell-off in the company's shares, which dropped by over 17%, a steeper decline than the S&P 500's 0.9% dip. This sell-off was attributed to the disappointing net proceeds of $1.2 billion from the divestiture of Worldpac, coupled with a substantial downward revision of the fiscal year 2024 earnings guidance by more than 40% at the midpoint.
Notably, this projection still accounts for the second half revenues and earnings from the Worldpac business.
In a follow-up discussion with Advance Auto Parts CEO Shane O'Kelly and CFO Ryan Grimsland, several key points emerged. Firstly, management is confident in its ability to gain market share from smaller competitors while striving to close the gap with rivals AutoZone (NYSE:AZO) and O'Reilly (NASDAQ:ORLY) Automotive.
Secondly, to achieve operating margin expansion, the company likely needs to sustain low single-digit comparable sales growth. Lastly, the pressure from low-income consumers has intensified, particularly affecting the do-it-yourself (DIY) segment.
In other recent news, Advance Auto Parts reported a slight increase in second-quarter comparable sales of 0.4% and earnings per share (EPS) of $0.75, as noted by Jefferies.
The company's earnings before interest and taxes (EBIT) margin declined to 2.7% due to increased labor spending and price investments. Jefferies and TD Cowen have revised their stock targets for Advance Auto Parts while maintaining their respective Buy and Hold ratings.
The recent sale of Worldpac for $1.5 billion is a significant development, providing a substantial cash influx for Advance Auto Parts. Both Jefferies and TD Cowen anticipate that this sale will allow the company to reinvest in its supply chain and improve its Direct-to-Installer (DIFM) comparable sales.
Despite facing a challenging macroeconomic environment, Advance Auto Parts is confident in its ability to navigate towards stronger earnings growth. The company plans to open 100 new stores per year, funded by the Worldpac sale and potential growth from turnaround activities. Full-year sales are projected to be between $11.15 billion and $11.25 billion, and the diluted EPS for the full year is anticipated to range from $2 to $2.50.
InvestingPro Insights
In light of recent developments for Advance Auto Parts, real-time data and insights from InvestingPro may provide additional context for investors. Despite the challenges outlined in the article, the company's net income is expected to grow this year, according to an InvestingPro Tip, which could indicate a potential turnaround in performance. Additionally, with the stock trading near its 52-week low and the RSI suggesting it is in oversold territory, some investors might see this as a buying opportunity.
Key InvestingPro Data metrics reflect the current state of the company, with a market capitalization of $2.91 billion and a P/E ratio standing at -98.15, signifying high investor expectations for future earnings growth. The revenue for the last twelve months as of Q2 2024 is reported at $11.27 billion, with a modest growth rate of 0.49%. Furthermore, the dividend yield is currently at 2.03%, showcasing the company's commitment to maintaining dividend payments for 19 consecutive years, an aspect that may appeal to income-focused investors.
For those seeking more comprehensive analysis, InvestingPro offers additional tips on Advance Auto Parts, which can be found at https://www.investing.com/pro/AAP.
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