For Advance Auto Parts, Is This The 'New New Turnaround'?

With business performing below expectations, Advance Auto Parts, Inc. AAP has projected a comps decline of 3-5 percent for 2016. Morgan Stanley’s Simeon Gutman maintained an Overweight rating for the company, while reducing the price target from $195 to $180. The analyst commented that the company is a “multi- year earnings improvement story.”

Analyst Simeon Gutman mentioned that Advance Auto Parts’ guidance appears conservative and process improvements should help the company narrow EBIT margin gap versus peers. The company has an “addressable margin opportunity versus its peers,” and new management is likely to unlock the business’ potential.

Turnaround Likely

Gutman believes that the Q1 release represents “an important first step in this turnaround.” Although 1Q EPS and 2016 guidance are disappointing, new CEO Tom Greco has reset expectations “appropriately low,” in order to “pave the way” for an improvement.

Moreover, the CEO seems to be taking “the right approach to fixing the business based on commentary on the earnings call and from our conversation with him,” the analyst stated.

The segment that Advance Auto Parts operates in supports the turnaround. Gutman cited the following as positives of the auto parts retail segment:

1. Highly fragmented, with meaningful share in the hands of independents
2. Relatively protected from ecommerce
3. Stable pricing