What happened
Shares of auto parts retail chain Advance Auto Parts (AAP 0.58%) got absolutely smashed on Wednesday after the company's latest quarterly financial results underwhelmed expectations and led to a massive cut to its quarterly dividend. As of 10:15 a.m. ET, Advance stock is down 32%, and the stock now has negative returns over the past decade.
So what
Things didn't look so bad for Advance on the top line. In its fiscal first quarter of 2023, which ended April 22, the company had net sales of $3.4 billion, up 1.3%. While this was meager growth, management hadn't guided for much growth in the first place. So this number was fine.
The problem for Advance is profitability. Management had guided for operating margin improvements in 2023. But in Q1, the company's operating margin shrank to 2.6%, whereas it had had an operating margin of 6% in the prior-year period.
Management blamed its shortcomings on its attempts to "narrow competitive price gaps." In other words, Advance lowered prices to steal sales away from competitors. The end result was meager growth and lower profits. And the market really doesn't like this commentary.
Now what
The problems for Advance are ongoing, as evidence by the reduction in guidance from management. It's slightly lowering its net-sales guidance, but the bigger reduction is regarding its earnings per share (EPS). Previously management expected full-year EPS of $10.20 to $11.20. But with slumping sales and a lower operating margin, management now anticipates EPS of $6.00 to $6.50.
Stock prices tend to follow earnings. Considering Advance just lowered EPS guidance by 36% to 46%, the drop in the stock price today appears warranted.
Moreover, Advance was likely an attractive dividend stock to some. But with profits falling, management decided to cut its dividend from $1.50 quarterly to $0.25 quarterly.
In light of long-term returns for rivals AutoZone and O'Reilly, it's clear this space has potential for investors, and it's tempting to view Advance as an attractive value investment here. But Advance would need to turn things around after years of underperforming its peers. And it's unclear what the catalyst for that could be.
