What: Shares of Advance Auto Parts (AAP 3.41%) were down 15.2% as of 2:45 p.m. Thursday after the company released disappointing third-quarter 2015 results, the retirement of its CEO, and an agreement with investor group Starboard Value.
So what: Quarterly revenue rose slightly year over year to $2.295 billion, helped by a 0.5% increase in comparable-store sales. Comparable cash earnings per diluted share -- which excludes roughly $0.32 per share in costs and expenses related to its acquisition of General Parts last year -- rose 3.2% year over year to $1.95.
Analysts, on average, were anticipating higher earnings of $2.09 per share on revenue of $2.33 billion.
Advance Auto Parts CEO Darren Jackson elaborated, "These results were unfavorably affected by the continuing demands of the General Parts integration as well as some headwinds due to foreign exchange. We remain focused on structurally improving our business and progressing through our integration milestones to position the company for long term growth."
That said, in a separate press release Advance Auto announced Jackson will retire as CEO. Jackson will also step down from the company's board on January 2, 2016. The following day, Advance Auto Parts President George Sherman will assume the role of interim CEO. Going forward, the company will consider both Sherman and external candidates for the role of permanent CEO. In addition, current board Chairman John C. Brouillard will become Executive Chairman to work in an advisory capacity with Sherman as the company continues to implement its long-term strategy, and board member John Ferraro will take the role of Lead Independent Director.
Relatedly, Advance Auto announced an agreement with activist investor Starboard Value (which owns a roughly 3.7% stake in Advance Auto Parts) "regarding the membership and composition of the Advance Auto Parts Board of Directors."
Now what: Specifically per the terms of the agreement, Starboard CEO Jeffrey Smith has been appointed to Advanced Auto Parts' board effective immediately, and the size of the board has been expanded from 12 to 13 members. Smith will serve as chair of the Nominating and Corporate Governance Committee and a member of the Compensation and Finance Committees, and Starboard will identify two independent directors to be added to the board "as soon as practical." Advance Auto will also designate two additional independent directors for election at its 2016 annual meeting.
Smith added, "Advance Auto Parts is a terrific company which is well positioned to be even more successful with best in class execution. I look forward to working constructively with my fellow Board members and the management team to help take advantage of the tremendous opportunity to continue growing shareholder value."
In the meantime, however, given its earnings shortfall in Q3, continued integration headwinds, and a soft start to the fourth quarter, Advance Auto Parts also reduced its full-year comparable cash earnings per share guidance to a range of $7.75 to $7.90, down from the previous range of $8.10 to $8.30. In addition, Advance Auto Parts has identified another 30 stores for closure (in addition to the 50 stores it identified last quarter) by the end of 2015. These latest closures will result in incremental one-time expenses of $10 million to $15 million, effectively increasing Advanced Auto Parts' estimates for one-time integration and restructuring expenses this year to a range of $101 million to $120 million.
To be fair, it's arguably preferable to see Advance Auto Parts bite this bullet today in order to set themselves up for a stronger 2016, especially with the added accountability of having Starboard representatives working to create value for shareholders. For now, however, I prefer watching Advance Auto's progress for at least another quarter before determining whether it's worthy as a long-term investment.
