Earnings from auto parts distributors such as
Advance Auto Parts
just might be the canary in the coal mine. There is a limit to what people can pay to buy and maintain their vehicles.
Advance (ticker:
AAP
) reported earnings per share of $1.43 and operating income of $134 million from sales of $2.7 billion Wednesday. Wall Street was looking for $1.69, $156 million, and $2.7 billion respectively.
Comparable store sales decreased 0.6% year over year.
For the full year, Advance now sees sales coming in at about $11.3 billion, up a little from prior guidance of $11.25 billion. Comparable store sales are expected to be flat year over year, versus prior guidance of down 0.5%. Operating profit margins, however, are expected to be about 4.2%, versus prior guidance of 5.2%. Bottom-line earnings per share are now expected to be about $4.80. Prior guidance was $6.25. Wall Street is currently projecting $5.73 a share.
The guidance cuts reflect “additional headwinds anticipated in the back half of the year driven by our ongoing commitment to maintain competitive price targets, impacts from a shift in channel mix, and investments in our team to help retain top talent,” said the company in a news release.
It’s a miss and a guidance cut. Shares are up 1.7% in premarket trading anyway, while
S&P 500
and
Dow Jones Industrial Average
futures are both up 0.2%.
One reason shares are rising on a miss might be the starting point. Coming into Wednesday trading, Advance stock was down about 42% over the past three months and down more than 54% year to date.
Another reason is the company is shaking up the management ranks. Shane O’Kelly is the new CEO and Tony Iskander is the new interim CFO. O’Kelly comes from outside the company and once ran
Home Depot’s
(HD) pro-customer distribution business, HD Supply. He replaces Tom Greco, who has led the company since April 2016. Greco announced his retirement in February 2023.
Iskander succeeds Jeff Shepherd, who left Advance this month.
Advance peer
O’Reilly Automotive
(ORLY) reported second-quarter numbers in late July. It raised full-year guidance for comparable store sales and earnings while maintaining operating profit margin guidance. O’Reilly’s margins are expected to be roughly 20%, about four to five times the level of Advance.
AutoZone
(AZO) reports later, its fiscal year ends in August.
O’Reilly stock dropped 4.8% after reporting earnings. Comparable store sales growth is expected to decelerate in the second half of the year. Parts are more expensive, driving sales growth, but do-it-yourselfers are starting to feel the pressure. What’s more, it’s getting tougher to pay and retain employees.
Advance is seeing similar trends and that has investors nervous.
The deceleration is one sign that consumers can’t pay ever-higher prices for cars, car parts, and insurance. The price of new and used cars is up, very roughly, $10,000 from pre-pandemic levels. More expensive cars mean more expensive parts. And insurance prices are rising at almost 20% year over year. Higher interest rates are also squeezing consumers, making it more expensive to finance vehicles.
Investors should expect pressure on car prices. While good for consumers, it’s a headwind for businesses such as auto parts distribution and for the automakers including
Ford Motor
(F),
General Motors
(GM), and
Stellantis
(STLA). The offset to lower prices can be higher volumes. U.S. consumers are buying new cars at roughly a 15 million annual rate. That number was about 17 million before Covid-19.
Starting points also matter for the car maker stocks. Ford, GM, and Stellantis trade for 6.2, 4.9, and 3.2 times estimated 2024 earnings.
Advance hosts an earnings conference call at 8 a.m. Eastern time to discuss results. Investors will be interested to hear more about the health of the U.S. consumer.
Write to Al Root at [email protected]
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