Turnaround Progressing at Advance Auto Parts

We plan a low- to mid-single-digit percentage uptick for our $157 per share valuation for narrow-moat

First-half sales rose 1%, with 49 basis points of adjusted operating margin expansion (to 8.3%). Management lifted 2018 guidance, calling for $9.3 billion-$9.5 billion in sales and a 7.5%-7.8% adjusted operating margin (versus earlier $9.1 billion-$9.4 billion and 7.3%-7.8% marks), with our pre-earnings estimates within the new ranges ($9.3 billion, 7.5%). Leadership indicated it plans to repurchase up to $200 million of shares in 2018; we are skeptical of such a use of capital as the stock trades near its fair value estimate.

Management cited its cross-banner availability and digital efforts as performance drivers, along with favorable weather. We see the availability work as the first step to distribution efficiency improvement, enabling footprint rationalization as Advance finally streamlines operations after its 2014 General Parts purchase (a view bolstered by its plans to close two distribution centers). We are also encouraged by early results for Advance Pro, a new online portal for professional clients (higher conversion rate, dollars per transaction), and Advance's new DIY website (visits up 90% in June with flat conversion rates). We argue that Advance and its peers will withstand pressure from online-only retailers but expect omnichannel offerings to generate sales, leveraging distribution networks and trained store personnel.

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