Earnings of Auto Parts Distributors Signal Potential Challenges Ahead

Auto parts distributors, like Advance Auto Parts, are serving as indicators of potential challenges in the industry. With a limit on how much people can afford to spend on buying and maintaining their vehicles, these companies are facing obstacles in their financial performance.

Advance Auto Parts (ticker: AAP) recently released its financial results, reporting earnings per share of $1.43 and operating income of $134 million from sales reaching $2.7 billion on Wednesday. However, these numbers fell short of Wall Street's expectations of $1.69, $156 million, and $2.7 billion, respectively.

Comparable store sales also saw a decline of 0.6% year over year.

Looking at the full year ahead, Advance Auto Parts now forecasts sales to be approximately $11.3 billion, a slight increase from its earlier guidance of $11.25 billion. However, the company expects comparable store sales to remain flat year over year, as opposed to a previously projected decrease of 0.5%. Operating profit margins are also anticipated to be 4.2%, lower than the previously guided 5.2%. Finally, the bottom-line earnings per share are expected to be around $4.80, a significant drop from the previous guidance of $6.25. Currently, analysts project a per-share earnings figure of $5.73.

These revised expectations are largely due to various factors mentioned by the company in a news release. The challenges include additional headwinds expected in the second half of the year, resulting from the company's commitment to maintaining competitive prices, changes in channel mix, and investments in securing top talent.

Despite the disappointing results and guidance cuts, shares of Advance Auto Parts have seen an increase of 1.7% in premarket trading. In contrast, futures for the S&P 500 and Dow Jones Industrial Average have risen by only 0.2%.

One possible explanation for the stock's rise despite the miss could be that the starting point was relatively low. Prior to Wednesday's trading, Advance Auto Parts' stock had already experienced a decline of approximately 42% over the past three months and over 54% year to date.

Another contributing factor to the market's reaction is the recent management changes within the company. Shane O'Kelly has been appointed as the new CEO, while Tony Iskander takes on the role of interim CFO. O'Kelly brings external expertise to the company, having previously managed Home Depot's pro-customer distribution business, HD Supply. This leadership transition follows the retirement announcement of former CEO Tom Greco, effective in February 2023. Additionally, Jeff Shepherd has recently parted ways with Advance Auto Parts, making way for Iskander's appointment as interim CFO.

While facing significant challenges, Advance Auto Parts is taking steps to navigate these hurdles and improve its performance in an evolving market landscape.

O'Reilly Automotive Continues to Grow, but Faces Challenges

O'Reilly Automotive (ORLY) recently released its second-quarter earnings report, showing strong growth in comparable store sales and earnings. The company raised its full-year guidance, maintaining a solid operating profit margin. With margins expected to be around 20%, O'Reilly's profitability is four to five times higher than that of its competitor, Advance.

On the other hand, Advance is experiencing similar trends, which has made investors somewhat nervous. The deceleration in sales growth is one indication that consumers may be struggling to afford the increasing prices of cars, car parts, and insurance. Since the pandemic, the price of new and used cars has risen by approximately $10,000. As a result, car parts have also become more expensive. Additionally, insurance prices have seen a significant year-over-year increase of almost 20%. The combination of higher prices and rising interest rates is putting financial strain on consumers.

This situation is likely to put pressure on car prices going forward. While this can benefit consumers, it presents a challenge for businesses involved in auto parts distribution, as well as automakers like Ford Motor (F), General Motors (GM), and Stellantis (STLA). However, one potential offset to lower prices is higher sales volumes. Currently, U.S. consumers are purchasing new cars at an annual rate of approximately 15 million, which is lower than the pre-pandemic level of around 17 million.

When considering investing in car maker stocks, it is important to consider their starting points. Currently, Ford, GM, and Stellantis have price-to-earnings ratios of 6.2, 4.9, and 3.2 respectively, based on estimated earnings for 2024.

Moving forward, investors are eagerly awaiting further insights into the health of the U.S. consumer. Advance will be hosting an earnings conference call at 8 a.m. Eastern time to discuss its latest results.