Advance Auto Parts Earnings Preview: Short or Long? - Advance Auto Parts (NYSE:AAP)

Advance Auto Parts

AAP

will report its second quarter (Q2) earnings August 9 before market open. Analysts expect the company to report earnings per share (EPS) of $1.40. Advance Auto Parts reported Q1 EPS of $1.79 and total sales of $1.96 billion on May 17, missing estimates of $1.81 and $2 billion. Shares dropped sharply on the news, closing the day's trading session down almost 17 percent.

The Company

Advance Auto Parts provides aftermarket and specialty parts for the automotive industry. The company began in 1929 when the Pep Boys'

PBY

founders created two Advance Stores stores in Virginia. Company founder and CEO Arthur Taubman purchased Advance Stores in 1932. Advance Auto Parts entered the public markets in December 2001 following an acquisition of 671 Discount Auto Parts stores. In the years following, the company acquires additional locations through a variety of regional and international outlets including Trak Auto Parts, Karparts Auto Stores, Autopart International and Lappen Auto Supply. Shares of Advance Auto Parts were down 2.3 percent year to date (YTD) going into Monday's market open. The company pays a dividend and with a beta of 0.53 is less likely to move with the volatility of the overall market.

Analyst Insight

Bank of America Merrill Lynch maintained its Neutral rating in a report published August 2, stating that although the ratings agency expects lower Q2 sales it is positive on long-term results:

"We believe the recent weather-related impacts are shorter-term in nature. Longer-term, metrics remain attractive, in our opinion, including average miles driven (+2.3% in May, the largest monthly Y/Y increase since Sept. 2009), increasing average age of vehicles (10.8 years in 2011 vs. 10.6 years in 2010) and moderated gas prices (-5.3% Y/Y and only +6.3% YTD). While AAP continues to make strides to improve its distribution and B2B capabilities, we believe this will take time."

In the report, Bank of America highlighted competitors AZO and ORLY as having "more advanced infrastructure," which may allow the two companies "to better capitalize on industry fundamentals." Bank of America has a $70 price target on Advance Auto Parts. J.P. Morgan

lowered its price target

on Advance Auto Parts in following the company's previous quarter, stating that its customer service aspect appeared "challenged":

"Clearly, AAP has made significant investments that have closed the execution gap with its competitors over the last several years. However, as investment spending waned and operating expenses cut, we believe this had an adverse impact on sales. Two of the most crucial aspects in auto parts retail are parts availability and customer service. AAP continues to improve its inventory availability with the expansion of another 23 hubs in the quarter. However, customer service appears to be challenged as the company aggressively reduced operating expenses, particularly on the DIY side."

Deutsche Bank upgraded Advance Auto Parts and increased its price target, leading to

favorable speculation

on the company. Of the analysts covering Advance Auto Parts, five have a Strong Buy rating and 11 carry a Hold rating.

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