What happened
Shares of automotive parts retail chain Advance Auto Parts (AAP 0.58%) dropped 52.2% in the first half of 2023, according to data provided by S&P Global Market Intelligence. The drop was particularly painful for shareholders considering the S&P 500 rose 15.9% during this time -- a sensational first-half performance.
Advance Auto Parts started off 2023 respectably; it was roughly keeping pace with the S&P 500 after it reported financial results for 2022 in February. But in March, Wall Street started turning more tepid toward the company's prospects. At that point, the stock started slipping.
However, Advance Auto Parts stock experienced a massive drop after reporting financial results for its fiscal first quarter of 2023. The company's revenue came up short of expectations, profitability plunged, and management lowered its guidance as well as substantially reduced its dividend. And all of this caused investors to completely abandon Advance Auto Parts stock in the first half of 2023.
So what
The low investor confidence in Advance Auto Parts stock is exacerbated because it has two main publicly traded competitors: Autozone and O'Reilly Automotive. And these stocks are two of the best performers over the past decade, rising 479% and 710%, respectively, whereas Advance Auto Parts stock is actually down 16% in the last ten years.
So why invest in a struggling Advance Auto Parts when there are proven winners in the space? At least that's the logic behind why investor confidence in Advance Auto Parts is particularly low right now.
Moreover, Advance Auto Parts clearly needs a turnaround, but the company is awaiting new leadership. In February, CEO Tom Greco announced he was retiring this year, and the company has yet to name his replacement.
Perhaps Advance Auto Parts could inspire investors by presenting a turnaround plan. But that won't likely happen until a new CEO is hired.
Now what
To be sure, after being cut in half, Advance Auto Parts is a cheap stock. It trades at less than 0.4 times trailing sales, whereas Autozone stock trades at 2.8 times sales, and O'Reilly trades at over four times sales.
However, Advance Auto Parts may also be a value trap considering its competitors are better businesses. This can be seen by comparing the gross-profit margins and operating margins of these three companies.
AZO Gross Profit Margin data by YCharts.
In 2014, profit margins for Advance Auto Parts took a hit after it acquired General Parts International, a company that has a large, professional mechanic customer base. Margins have never recovered to previous levels, and the path to margin improvement is complicated from here.
One of the specific challenges Advance is facing right now is in its pro business. Its expenses are up in 2023, but management is worried that its prices can't go up further without losing pro sales to competitors.
In the second half of 2023, Advance will likely name its new CEO. When that happens, I would listen carefully to the plan this person lays out for stimulating sales growth and improving profit margins. These are details that investors need before investing in the company.
