Advance Auto Parts, Inc. AAP, a leading automotive parts provider in North America, is expected to gain from Worldpac sales, cost reduction efforts and its three-year strategic plan amid weak DIY business.
Let’s see why you should retain this Zacks Rank #3 (Hold) stock in your portfolio.
The sale of Worldpac for $1.5 billion to the Carlyle Group, completed in November 2024, has improved the company’s liquidity. It would allow the company to concentrate more effectively on its core business, specifically the advanced blended box business. This sharper focus can lead to more decisive actions in turning around key operations. These proceeds from the sale can support AAP’s ongoing strategic and operational reviews, providing the necessary capital to invest in initiatives that could enhance efficiency, drive growth or improve profitability.
Efforts to consolidate its supply chain into a single unified network bode well. This strategic move will involve implementing a warehouse management system across all major distribution centers (DCs) and converting smaller legacy DCs into market hubs. Since late 2023, the company has closed 10 DCs and expects to close another 12 in 2025, including four DCs on the West Coast, to end the year with 16 DCs. By 2026-end, the company plans to expand its network with 12 large DCs. It is targeting to open 60 market hubs by mid-2027.
AAP plans to achieve operating cost reductions of $60-$80 million from store closures. During 2025, the company expects to recover about half of these savings and the full run rate of operating cost savings is expected in the second half of 2026. Additional efficiencies will come from merchandising initiatives, such as product cost negotiations and modest SG&A leverage driven by labor productivity and indirect cost reductions. These actions will gradually expand margins through 2025, with further improvements expected by 2027, supported by a more efficient cost structure and enhanced gross margins in the mid-40% range.
AAP’s gloomy outlook for first-quarter and full-year 2025 raises concern. Revenues for 2025 are expected to be in the range of $8.4 billion to $8.6 billion, suggesting a decline of 5-8% year over year. First-quarter net sales are expected to reach approximately $2.5 billion, with a comparable sales decline of around 2%. The company’s sales performance has been volatile and is currently tracking below expectations. Gross margin is anticipated to decline due to liquidation sales at closing stores and comparisons to last year’s price investments. SG&A expenses are expected to be slightly lower year over year due to the impact of closure costs. Also, the company's DIY segment is facing pressure due to financial strain on consumers, leading to fewer discretionary purchases. While the automotive industry remains resilient because essential maintenance is unavoidable, the short-term challenges are reflected in weaker DIY sales trends.
Some better-ranked stocks in the auto space are China Yuchai International Limited CYD, Dana Incorporated DAN and Strattec Security Corporation STRT, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for CYD’s 2025 sales and earnings indicates year-over-year growth of 9.17% and 36.84%, respectively. EPS estimates for fiscal 2025 and 2026 have improved 25 cents in the past 30 days.
The Zacks Consensus Estimate for DAN’s 2025 earnings implies year-over-year growth of 70.21%. EPS estimates for 2025 and 2026 have improved 10 cents each in the past 30 days.
The Zacks Consensus Estimate for STRT’s 2025 sales indicates year-over-year growth of 2.61%. EPS estimates for 2025 and 2026 have improved 91 cents and $1.06, respectively, in the past 30 days.
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Advance Auto Parts, Inc. (AAP) : Free Stock Analysis Report
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