What happened
Shares of Advance Auto Parts (AAP 2.18%) gained 19.9% last month, according to data provided by S&P Global Market Intelligence. Many stocks fell in August as investors worried about the potential impact from the escalated trade tensions between the U.S. and China. Advance Auto Parts got caught up in the broader sell-off, but saw its share price rebound strongly in September as investors realized that things may not be that bad after all.
In September, the stock was upgraded by Citigroup with a buy rating, which might have helped investor confidence as well.
Image source: Getty Images.
So what
The auto parts supplier reported a somewhat disappointing quarter in August but maintained full-year guidance. Comp sales were flat after posting much better growth to start the year. Management blamed sub-optimal weather for the flattening comps results. But the company expects a strong finish to the year, as management continues to improve the supply chain and make strides in e-commerce.
Now what
Advance has been making significant improvements to the supply chain and inventory optimization to improve margins. The analyst with Citigroup expects these investments to pay off despite the recent headwinds of channel and product mix, which caused gross margin to decrease by 0.42 percentage points in the second quarter.
Management sees better margin results in the second half of 2019. Analysts don't expect the supply chain initiatives to significantly improve margins until next year, based on current earnings estimates. They expect earnings to increase by 11% in 2019 and 14.4% in 2020. Sales are expected to grow by just 1.5% this year and pick up slightly to 2.4% next year.
The long-term picture looks good, as Advance Auto Parts should benefit from growing demand for pre-owned vehicles. More car buyers are choosing to fix up older vehicles instead of buying more expensive new cars, which favors long-term sales growth for the auto parts industry.
