Wells Fargo (NYSE:WFC) has revised its outlook on Advance Auto Parts (NYSE: NYSE:AAP), reducing the price target to $50 from $60 while retaining an Equal Weight rating on the stock.
The adjustment follows the company's announcement of a lowered fiscal year 2024 guidance, which includes anticipated comparable store sales ranging from a 1% decline to flat. This represents a roughly 100 basis points decrease from the previous guidance.
The updated forecast for net sales is now set between $11.15 billion and $11.25 billion, a slight decrease from the prior estimate of $11.3 billion to $11.4 billion. EBIT margins are also expected to be lower than initially projected, now ranging from 2.1% to 2.5% compared to the previous 3.2% to 3.5%. This suggests a reduction in EBIT of approximately $120 million to $125 million, against a $150 million decrease in sales outlook at the midpoint.
Advance Auto Parts' earnings per share (EPS) projection has also been adjusted, now expected to be between $2.00 and $2.50, down from the earlier estimate of $3.75 to $4.25. However, capital expenditures are anticipated to remain unchanged at $200 million to $250 million. Free cash flow (FCF) expectations have been revised downward, now exceeding $100 million compared to the previous forecast of over $250 million.
Reviewing the company's second-quarter performance, net sales showed a marginal year-over-year decrease of 0.1%, with comparable store sales slightly better than expected at 0.4% growth compared to the forecasted 0.8% decline.
Gross margin contracted by 93 basis points to 41.5%, affected by pricing investments and increased product costs. Selling, general, and administrative expenses (SG&A) increased by 109 basis points, with higher wages and professional fees only partially offset by reduced marketing expenses.
This resulted in EBIT margins dropping by 202 basis points to 2.7%, and an EPS of 75 cents, which was higher than the anticipated 72 cents but below the consensus estimate of 93 cents.
In light of these figures, Wells Fargo has also lowered its EPS estimates for fiscal years 2024 and 2025 by $1 and $1.10 to $2 and $2.60, respectively. The new price target of $50 is based on approximately 19 times the estimated fiscal year 2025 EPS.
In other recent news, Advance Auto's Q2 earnings per share (EPS) of $0.75 fell notably short of the anticipated $0.91 consensus, a discrepancy attributed to an unexpectedly high tax rate of 27.5% compared to the consensus estimate of 23.4%. Despite the earnings miss, the company reported a slight increase in comparable store sales of 0.4% and a marginal revenue beat with $2.68 billion against the consensus of $2.67 billion.
CFRA revised its 12-month price target for Advance Auto Parts from $70 to $55, maintaining a Hold rating on the stock. Similarly, Citi maintained a Neutral rating with a consistent price target of $64.00. These ratings followed the company's downward revision of its net sales and EPS guidance for 2024 to a range of $11.15 billion to $11.25 billion and $2.00 to $2.50, respectively.
In addition to earnings updates, Advance Auto Parts announced the sale of its Worldpac auto parts distribution business to Carlyle for $1.5 billion, a transaction expected to fortify the company's balance sheet. The business segment involved in the sale has generated trailing twelve months revenue of $2.1 billion and EBITDA of $100 million.
InvestingPro Insights
The recent revision of Advance Auto Parts' fiscal year 2024 guidance has prompted analysis from various quarters, including Wells Fargo's revised price target. To provide additional context, InvestingPro insights reveal several key metrics and tips that could further inform investors' perspectives on the company's performance and valuation.
InvestingPro Data indicates a current market cap of $3.03 billion and a P/E ratio of 141.27 based on the last twelve months as of Q1 2024. Despite the company's stock experiencing a significant drop over the past week, with a 1-week price total return of -17.83%, Advance Auto Parts has maintained dividend payments for 19 consecutive years, showcasing a commitment to shareholder returns, even as the dividend growth has seen a sharp decline of -83.33%.
Two InvestingPro Tips of note include the expectation that net income is expected to grow this year, and the company is trading near its 52-week low, which could signal a potential value opportunity for investors considering the long-term profitability forecast. Moreover, with analysts predicting the company will be profitable this year and the stock trading at a high earnings multiple, there's a nuanced picture of risk and opportunity.
For those seeking a deeper dive, InvestingPro offers additional tips on Advance Auto Parts, which can be found at https://www.investing.com/pro/AAP. These insights can help investors weigh the company's prospects against current market performance and analyst expectations.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.