The Simple Lesson From Advance Auto Parts Disastrous Earnings Report

Advance Auto Parts (US:AAP) delivered an earnings report that was a disaster by almost every measure, pulling down the entire auto parts sector as a result. That may be a buy-the-dip opportunity, but not likely for AAP stock. That’s because the results from Advanced Auto Parts is reinforcing a time-honored truth for investing in volatile markets: Buy the best and forget the rest.

As of Thursday’s pre-market activity, AAP stock is down a further 2.5%, as it extends a more than 60% decline over the last 12 months.

The auto parts sector has had tailwinds for the last three years. First, a global pandemic and supply chain disruptions effectively suspended new car sales and lifted the prices of used cars. This made keeping existing cars in top working order a priority. The perfect storm continued as consumers were lush with stimulus money and had a lot of time on their hands.

This trend has stayed in place even as the economy reopened due to the stickiness of inflation that was weighing on consumer budgets. But as the economy is starting to weaken, slices of the auto parts pie are getting smaller. And that means this is a time for investors to look for the sector leaders. Advanced Auto Parts doesn’t fit that description.

Disastrous Earnings Report by Any Measure

Let’s start with what was, perhaps, the least bad news. The auto parts retailer had only a slight miss on the top line. Revenue came in at $3.42 billion which was below the $3.43 billion expected by analysts. In fairness, it was a 1.3% year-over-year gain from the $3.37 billion reported in the same quarter in 2022.

That slight miss, however, was the highlight of the report. Earnings per share (EPS) came in at 72 cents. However, analysts were expecting EPS of $2.57. That could be excused, but the company also reduced its guidance for the full year on both the top and bottom lines.

There was more bad news when it came to comparable store sales and margins, both of which were lower than expected. The company even took a pre-emptive step in cutting its dividend by over 80%. The move was made “to provide enhanced financial flexibility” for the remainder of the year.

A Laggard Not a Leader

That’s plenty for investors to digest. But the report should be looked at in context of where Advanced Auto Parts stands within the sector.

On May 23, 2023, AutoZone (US:AZO) beat on both the top and bottom lines and the company raised its earnings outlook for the remainder of the year.  A similar story emerged for O’Reilly Automotive (US:ORLY). While its report was more mixed than that of AutoZone, it still reflects a company that is one of the leaders in the sector. Both stocks are clawing back this morning from Wednesday’s sector decline.

Advanced Auto Parts, by contrast, has always been a laggard in terms of revenue and earnings. Even before the pandemic, the company was lagging behind its competitors. In a weakening economy, that change is becoming more pronounced.

The lesson for investors is that this is a time to buy the best. And when it comes to auto parts manufacturers, there are better options. Advanced Auto Parts has looked like an undervalued stock. Data from Fintel gives it a Value score of 81.21. The dividend was most likely the key reason for positive investor sentiment. But with that dividend being cut, one of the main reasons to own AAP stock goes away.

This article originally appeared on Fintel

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