MW Advance Auto Parts to exit Western U.S. as it closes more than 700 locations

By Tomi Kilgore

Auto-parts retailer will focus on its strongest markets in the eastern part of the country

Shares of Advance Auto Parts Inc. pulled a sharp early U-turn to trade higher Thursday, after the company laid out its plan to return to sales growth and to boost margins, including by closing more than 700 store locations.

The North Carolina-based company $(AAP.AU)$ said the targeted store closures are part of an asset-optimization program that comes after an operational productivity review of the business was completed.

The plan includes closing 523 corporate stores, ending its relationship with 204 independent locations and closing four distribution centers. That represents a 10% reduction of the overall corporate store count and a 20% cut in independent locations. The closures are expected to be completed by mid-2025.

"This reduction consists of complete market exits in certain Western states, coupled with the optimization of our footprint in other markets, including eastern states where we have higher density," Chief Executive Shane O'Kelly said on the post-earnings call with analysts, according to a FactSet transcript.

The distribution centers that will be closed are located in the Western U.S.

Here's what the company's revised U.S. store footprint will look like:

The company estimates total costs of $350 million to $750 million from the closures, including severance and employee benefit costs and lease terminations.

O'Kelly said the store closures will reduce annual net sales by about $700 million but will increase sales per store by about 4%. The 700 locations outlined for closure are reducing annual operating income by $60 million to $80 million, which is expected to be recovered after the closures, he said.

"Making the decision to close such a meaningful percentage of our store base was not an easy one, as it affects a significant number of our team members," O'Kelly said. "However, we believe this action is prudent to support the long-term health of the company."

He added that the company has now charted "a clear path forward" and introduced a new three-year financial plan, with a focus on improving productivity and creating shareholder value.

The stock initially dropped after the store-closure plan was released along with third-quarter results, with the stock tumbling as much as 13% in premarket trading. It quickly reversed course and opened the regular session with a 6.2% rally before paring gains to be up 3.9% in midday trading.

The stock has now run up 19.9% so far in November through Wednesday, after closing on Oct. 31 at the lowest price since Feb. 18, 2009.

Regarding third-quarter results, the company said that, given the closing of the $1.5 billion deal to sell automotive-parts distributor Worldpac to Carlyle Group $(CG)$ earlier in November, the results were reported on a continuing-operations basis.

Net losses for the quarter to Oct. 5 narrowed to $6 million, or 10 cents a share, from $62 million, or $1.04 a share, in the same period a year ago.

Excluding nonrecurring items, the adjusted per-share loss was 4 cents, compared with the FactSet consensus for a profit of 49 cents a share, to extend the company's streak of bottom-line misses to seven quarters.

Net sales fell 3.2% to $2.15 billion. The FactSet sales consensus was for $2.62 billion, but that included discontinued operations.

Meanwhile, comparable-store sales, or sales of stores open at least a year, were down 2.3% to miss expectations of a 1.7% decline.

Cost of sales fell by much more than sales, down 11.5% to $1.24 billion, to push gross margin up to 42.3% from 36.9%.

Looking ahead, the company now expects full-year 2024 guidance for earnings per share to be a loss of 60 cents to breakeven, compared with previous guidance for a per-share profit of $2.00 to $2.50. Comparable-store sales growth guidance was lowered to be down approximately 1% from down 1% to flat.

Looking to 2025, the company is targeting net sales of $8.4 billion to $8.6 billion. Comparable-store sales are expected to rise 0.5% to 1.5%, while the current FactSet consensus is for a 0.8% increase.

The company said it has also identified opportunities to expand operating margins by more than 5 percentage points through fiscal 2027.

The stock has tumbled 30.3% year to date, while the S&P 500 index has rallied 25.4%.

-Tomi Kilgore

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November 14, 2024 11:56 ET (16:56 GMT)

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