Here Comes The Sun: Advance Auto Parts Analysts Bullish After Stormy Q2

Advance Auto Parts, Inc. (NYSE:AAP) turned in a disappointing second quarter Tuesday as car repair DIY-ers put off fixes due to bad weather. But sell-side analysts said the sun is coming back out for both the auto parts chain and its customers. 

Same-store sales growth was flat, below estimates, for the Raleigh, N.C.-based auto parts chain, but several analysts continue to recommend buying the stock on belief that the second quarter was a temporary weather-marred setback in a medium-term improvement story.

The Analysts

Bank of America analyst Elizabeth Suzuki reiterated a Buy rating and $200 price target.

UBS Securities analyst Michael Lasser maintained a Buy rating on the stock and raised the price target from $170 to $205.

Morgan Stanley’s Simeon Gutman maintained an Overweight rating and lowered the price target from $205 to $185.

The Takeaways 

Weather killed comps in the do-it-yourself market, Morgan Stanley’s Gutman said in a Wednesday note.

“One quarter does not make a trend, but four bad weeks can ruin a quarter,” the analyst said, referring to the last two weeks of April and the beginning of May, which were cool and wet across much of the country.

But that's changed. 

"The return of ‘extreme heat’ has helped DIY comps bounce back in Q3 to date, with some of the strongest performances in markets that lagged in Q2," the analyst said. 

Bank of America's Suzuki said Advanced Auto Parts remains a good buy due to a favorable industry outlook.

“We continue to believe the auto parts retail group, and particularly those with more exposure to the do-it-for-me (DIFM) channel, such as AAP, have the strongest industry fundamentals in all of hardline retail,” the analyst said in a Tuesday note.

“Although AAP’s first half results were pressured by weather, we expect improvement in the remainder of the year and through 2020, especially as growth in the population of vehicles age 6-10 years old accelerates.”

UBS’ Lasser said most of the soft performance in comp sales can be attributed to DIY-ers putting off repairs.

“The mix shift away from this higher margin business drove a gross margin decline,” the analyst said in a Wednesday note.

“That said, its commercial segment performed well. Plus, its expenses were well managed despite the top-line softness.”

The chain is making an effort to boost DIY sales through a recently-launched loyalty program, and a new buy online, in-store pickup program, Lasser said.

The analyst also noted the pick-up in business as the quarter ended.

“The most draconian view coming out of AAP’s 2Q is the quarter provided evidence margins can’t reach the mid-teens long-term potential previously outlined,” he said. “We think this is an overreaction.”

Price Action

Investors continued to have a cloudy view of Advanced Auto Parts stock, which was down 4.53% to $135.79 at the time of publication Wednesday. 

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Photo credit: WhisperToMe, via Wikimedia Commons