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Advance Auto Parts Idea Proposal (AAP)

Mar 30 2017 Automotive, Idea Proposals
Advance Auto Parts Idea Proposal (AAP)
 

Is Advance Auto Parts succeeding with its operational improvements in the commercial market to drive its turnaround and fend off rising online competition?

Report Available: April 26, 2017

 

Blueshift’s initial research shows AAP focused on its five-year plan to turn itself around, seeing some fruits of that effort in the fourth quarter of 2016 with year-to-year sales growth. But it still faces numerous obstacles in the commercial market, including the growth on online auto parts purchasing marked by Amazon’s entry.

 

Observations

  1. AAP’s Q4 earnings came in below expectations, though its revenue was 2.4% ahead of last year and beat consensus. Same-store sales in the quarter grew 3.1% from a year ago, but were down 1.4% for the year. Operating income and margin in Q4 trailed the year-ago quarter. The company expects same-store sales to rise as much as 2% in 2017.
  2. AAP has embarked on a five-year plan to deliver mid-single-digit same-store sales and at least 500 basis points of margin expansion by 2021. The effort includes streamlining the supply chain to improve availability, delivery consistency, and speed; succeed in both the do-it-yourself and do-it-for-me markets; reduce costs; and improve company culture by developing talent and reducing employee turnover. To that end, AAP is integrating all of its assets like Worldpac and Carquest in one place for its professional customers, creating a joint inventory system and a unified catalog. AAP expects to open as many as 85 new stores and a distribution center in 2017, hiring 15,000 employees, while also converting 200 Carquest stores.
  3. One potential obstacle to this speed and delivery consistency initiative is the consideration of 515 workers in one of AAP’s distribution centers to form a union, which would be a significant development since less than 1% of AAP workers were represented by unions.
  4. AMZN is expanding into the auto parts market, partnering with several auto parts suppliers to capitalize on the growing demand for purchasing parts online. AMZN offers same-day delivery on auto parts and is price competitive as well, which Barron’s claims is 22% lower than the chains. This is attractive to the DIY community, but could also catch the attention of repair shops in the commercial market. A Hedges & Company report projects online auto parts sales to reach $8.9 billion in 2017, 16% higher year to year.
  5. Blueshift’s Nov. 2, 2016, report showed that AAP’s efforts in the commercial market had not resulted in any marked improvement since our April 14, 2016, report, and were not leading to any sales increases or company turnaround. Five repair shop owners who were also repeat sources from April had not noticed any changes for AAP in those six months. Repair shop owners, industry consultants, and parts supply competitors said AAP lacks the knowledgeable staff, experience, and relationships to supplant current solutions and gain share. Parts availability and quality, delivery speed, and relationships with repair shops were cited as priorities in the commercial auto parts industry. Only one source named AAP as a primary supplier.

 

How important is 2-hour parts delivery to auto repair shops? What percentage of their purchases need to be within two hours? How much of their purchases are replenishment in nature and stocked onsite that can be ordered online instead of through a traditional aftermarket parts retailer? What percent of their total product spending is through pure-play online retailers? What do they expect it to be in three years? What are auto repair shops seeing from AAP in terms of improvements in service quality, store associate knowledge, associate turnover? How much of a difference will this make in auto repair shops’ decision to use AAP vs. competitors? How is the integration of AAP’s supply chain, unified catalog, and POS system progressing? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Auto repair shops, Manufacturers and supply chain, AAP competitors, and Industry specialists.

 

Companies: Advance Auto Parts (AAP), Amazon.com (AMZN), Auto Zone (AZO), eBay (EBAY), Genuine Parts Co. (GPC), Icahn Enterprises (IEP), O’Reilly (ORLY)

 

Research Begins: April 10, 2017