What happened
Shares of Advance Auto Parts (AAP 3.41%) were trading down 17% as of 11:46 a.m. ET on Wednesday after the company delivered disappointing earnings results for the third quarter. The company's earnings per share came in at $2.84, well below the consensus estimate of $3.32.
Year to date, Advance Auto stock has fallen 36%, consistent with the broader market sell-off over concerns about the direction of the economy in a high inflationary environment. Management warned that profits may not meet the company's previous three-year target, which contributed to the stock sell-off today.
So what
Overall, it wasn't a terrible quarter. While comp sales declined by 0.7%, it was in line with management's expectations. Adjusted gross margin improved by slightly less than one point due to higher selling prices and sales of company-owned brands.
However, higher operating expenses offset the improvement in gross profit margin and cut into the bottom line. This increases doubt that the company can meet its operating margin target of between 10.5% and 12.5% by the end of 2023. Management says reaching that target will be "very challenging," partly due to the lower sales growth trends in 2022 that have trailed the industry.
Now what
With Target's warning, the market has lost patience with retail stocks. It doesn't help the bulls' case after management said if the economy worsens next year, it will further challenge its ability to meet its profit goals.
Management isn't sitting still. The company is looking to increase inventory availability for certain categories that can drive demand and help the business gain market share. Management believes these efforts can reaccelerate sales growth in 2023.
If Advance Auto Parts can improve sales, it could lift the stock next year, especially with the valuation sitting toward the end of the 10-year trading range on a price-to-sales basis.
