Advance Auto Parts's stock suffers record plunge after big profit miss, dividend slashed by more than 80%

By Tomi Kilgore

Auto parts seller cuts full-year outlook for EPS, sales and margins, and stock sinks to 10-year low

Shares of Advance Auto Parts Inc. suffered a record one-day selloff to close at a 10-year low Wednesday, after the auto parts seller reported fiscal first-quarter earnings that missed by a wide margin, slashed its dividend to enhance "financial flexibility" and chopped its full-year outlook.

Operating margins for the quarter also took a hit as the company faced a competitive pricing environment.

The stock (AAP) plunged 35.0% in active trading to $72.89, the lowest closing price since Feb. 4, 2013. Trading volume swelled to 21.8 million shares, compared with the full-day average of about 1.0 million shares.

The stock, which was the biggest decliner listed on the New York Stock Exchange (NYSE), surpassed the previous record one-day selloff of 20.3% on Aug. 15, 2017.

"We remain focused on improving inventory availability while sustaining competitive price targets to improve topline sales," said outgoing Chief Executive Officer Tom Greco. "We expected the competitive dynamics we faced in the first quarter to continue, resulting in a shortfall to our 2023 expectations."

Net income for the quarter to April 22 dropped to $42.7 million, or 72 cents a share, from $139.8 million, or $2.26 a share, in the same period a year ago. The FactSet consensus for earnings per share was a rise to $2.56.

Greco said the operating margin rate of 2.6%, down from 6.0% a year ago, was "well below expectations due to higher than planned investments to narrow competitive price gaps in the professional sales channel as well as unfavorable product mix."

Sales grew 1.3% to $3.42 billion, but came up just shy of the FactSet consensus of $3.43 billion.

Same-store sales, or sales from locations open for 13 complete accounting periods, dropped 0.4%, while the FactSet consensus called for a rise of 0.5%.

The net cash outflow increased to $378.9 from $54.9 million a year ago, due to lower net income and an increase in cash used in working capital, primarily in accounts payable.

"Given the shortfall experienced this quarter, along with our revised outlook for the balance of the year, we are reducing our full-year 2023 guidance," said Chief Financial Officer Jeff Shepherd. "In addition, our board of directors made the decision to reduce our quarterly cash dividend to provide enhanced financial flexibility."

For fiscal 2023, the company cut its guidance ranges for EPS to $6.00 to $6.50 from $10.20 to $11.20; for sales to $11.20 billion to $11.30 billion from $11.40 billion to $11.60 billion; and for operating margin to 5.0% to 5.3% from 7.8% to 8.2%.

D.A. Davidson analyst Michael Baker said the company's results and outlook were "as big a miss and cut as we can remember." He reiterated his neutral rating on the stock.

Wells Fargo's Zachary Fadem said he "can't sugarcoat this one," saying the magnitude of the earnings shortfall is "concerning," and that he can't help but question the achievability of the outlook, even after it's been lowered.

"All in, we smell a value trap, and we're steering clear," Fadem wrote.

He reiterated his equal weight rating on the stock, but dropped his stock price target to $80 from $125.

Separately, the company cut its quarterly dividend by 83.3%, to 25 cents a share from $1.50 a share. Shareholders of record on July 14 will be paid the new dividend on July 28.

Based on current stock prices, the new annual dividend rate implies a dividend yield of 1.37%, which compares with the yield for the Consumer Discretionary Select Sector SPDR exchange-traded fund (XLY) of 0.95% and the implied yield for the S&P 500 index of 1.64%. The company's previous dividend yield, based on Tuesday's closing price, was 5.35%.

Greco, who in February announced plans to retire at the end of the year after about seven years in the role, said the independent chair of the company's board of directors, Gene Lee, as assumed an expanded role as interim CEO. "Gene will be providing additional operational oversight and support to our management team to enable a seamless CEO transition," Greco said.

The stock has tumbled 50.4% year to date, while the consumer discretionary ETF has climbed 17.4% and the S&P 500 has gained 8.9%.

-Tomi Kilgore

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06-01-23 0736ET

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