Advance Auto Parts, Inc. (AAP) Margin Expectations Are Overshot: BTIG

Advance Auto Parts, Inc. (NYSE:AAP) investors are flying the coop after second-quarter earnings have proven that this auto-parts retailer is far from attaining comeback status after a sharply disappointing earnings miss. In the wake of the print, shares have been dropping 20% today.

BTIG analyst Alan Rifkin continues to sound the alarm on the retailer, leading him to cut back his expectations for this year and next year once more, reiterating a Sell rating on AAP with a $90 price target, which represents a 2% increase from current levels. (To watch Rifkin’s track record, click here)

For the second quarter, AAP posted $1.58 in operating EPS on a 0% comp against the analyst’s expectations of $1.67 on a 0% comp. EBITDA margin fell even worse than the analyst had already projected, with the AAP team meaningfully taking down its 2017 guide, just as the analyst had believed would transpire. Comps in the past guide had called for a dip between 0 to 2%, but now have been taken lower to (1 to 3)%. Moreover, Rifkin takes the outlook to signify comps in the back half of the year will fall negative to (5)%. Another “alarming” weakness of the print points to AAP’s EBIT margin, expected to take an even more substantial dip. In other words, implied EPS now looks to fall from a former guide of $7.40 to $7.55 all the way down to $4.80 to $5.60- quite the slash considering Rifkin had already found himself “skeptical” with the prior guide. For perspective, the Street’s forecast of $6.27 was already quite “low,” and now, guidance is massively underwhelming.

Any comp improvement has been barely “minimal,” as the analyst notes, “While mgnt believes the comp gap vs. peers is narrowing, compares have been very easy and AAP continues to lose share, even if the rate of loss is modestly decelerating.”

Additionally, with “Earnings pressure to continue,” Rifkin finds himself even more pessimistic on AAP’s prospects, elaborating, “Based on guidance for a (75) bp impact in 2017 and ~(40) bp YTD, we estimate guidance implies ~(120) bp of margin pressure from inventory actions in 2H17. Much of AAP’s expected productivity savings do not hit until 4Q or year-end. 4Q SG&A is expected to be at least $25MM lower than 2Q.” A key point of the analyst’s bearish thesis rests on margin expectations, which he deems “overly optimistic.”

“We believe this quarter has borne out our longstanding concern that any turnaround will be a long and challenging process given AAP’s weak competitive position. We continue to view 5-year goals for +MSD comp growth and 500 bp of EBIT margin expansion as lofty with little detail on how mgnt will achieve these targets and no interim benchmarks,” contends Rifkin.

TipRanks analytics exhibit AAP as a Buy. Based on 11 analysts polled by TipRanks in the last 3 months, 6 rate a Buy on Advance Auto Parts, 2 maintain a Hold, while 3 issue a Sell. The 12-month average price target stands at $137.13, marking a 59% upside from where the stock is currently trading.

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