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    Advance Auto Parts $AAP is a generational turnaround

    Advance Auto Parts shares collapsed during 2022-23 falling from $240 to a low of $50 per share. Currently trading at $69. My target price is 140$. 

    What happened?

    Basically due to bad CEO decisions operating margin decreased from 7,5% to around 1,5%. This was caused by a mess in the company supply chain, an increase in the SG&A costs and store comparable sales metric stopped growing. 

    What are the good news?

    The necessary steps to fix this situation have been taken:

    1. Former CEO was fired,  and in Q3 2023 Shane O’Kelly was appointed as new CEO. Prior to that, O’Kelly worked as CEO of Home Depot Supply, a subsidiary of Home Depot. This is the kind of CEO we need to fix the supply chain issues. Also he has brought with him a new CFO and some other management leaders. 
    2. Operating margins are going to increase. Not to the prior 7,5%, but management is guiding at least 3,2% in 2024. New CEO laid off 400 people in his first week and is cutting $200M in SG&A annually.  The AAP Canada business is on sale and he is also selling another part of the business called WorldPac. Proceeds from these sales are going to retire all debt and save additional 90$ in interest expenses annually. Also concentrating business in the US will boost margins. 
    3. An activist investor, (Dan Loeb) has taken a stake in the company and has appointed 3 board members with experience in the auto parts industry ( prior board members lacked this experience). Also legendary Michael Burry also took a position in the company. 

    https://www.cnbc.com/2024/04/13/how-third-point-and-saddle-point-may-help-boost-margins-at-advance-auto-parts.htmlFrom

    A macro perspective shows the stock fundamentals are solid as the US consumer is hurt and new vehicles sales are being impacted leading to a higher maintenance cost from older vehicles. 

    Also US elections are going to take place in November and it is safe to assume that the worst case scenario is that the stock market won’t crash. A FED rate cut in September can also help.

    Upcoming catalysts? 

    It reports earnings on 29th May and if it reaffirms the guidance they gave in February and some of the steps management is taking materializes, then stock can fly to more than 100$ per share. 

    What I have done?

    Although I think the stock will rise on next week earnings release, I think it is better to buy long dated call options. I bought 100 calls of the longest dated option which is January 2026. Strike 90$ at 11.25$ for a total cost of $100k dollars. Leverage 9 to 1. 

    TLDR: I'm long $100k on long dated out of the money $AAP calls.

    https://preview.redd.it/q2k1duxeel2d1.png?width=1603&format=png&auto=webp&s=819efb879c8c33c43cc9405d046873c515752881

    Advance Auto Parts $AAP is a generational turnaround
    byu/llompalles inwallstreetbets



    Posted by llompalles

    View 26 Comments

    26 Comments

    1. VisualMod on

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    2. VisualMod on

      The rabble, foolish with money as with most other things, is hardly worth one’s time.

    5. whatsallthisanyway on

      🎶 oh oh oh o’reillyyyys, auto parts yow 🎶

      now what does aap have as far as that goes? 

    7. frizzolicious on

      Umm look at HD Supply that was a shit show. Sold from HD to private equity for 10billion. Private equity sold it back at a loss. Now HD is shedding market value because it was so badly ran that in 4 years they still can’t fix it. CEO with shit track record usually isn’t a savior

    8. surfaceVisuals on

      food and auto are victims of their own price gouging strategies. come back when it’s at $2.00.

    9. aihes on

      Quite interesting and convincing DD. Thanks. My biggest concern would be that your strategy claims to outsmart hegies (very unlikely) and depends on squeezing which relies on finding 2000 regards (though, but possible) to go in with $100k (impossible). How does your play look if you’re on your own?

    10. aihes on

      Quite interesting and convincing DD. Thanks. My biggest concern would be that your strategy claims to outsmart hegies (very unlikely) and depends on squeezing which relies on finding 2000 regards (though, but possible) to go in with $100k (impossible). How does your play look if you’re on your own?

    11. DogFund on

      Sometimes I see DDs for companies I really don’t like as a consumer. Then I start thinking, what about this other competitor company that I really do like…and they’re always private companies![img](emote|t5_2th52|31225)

    12. ridenourt on

      I own some AAP and I have never seen so much inept management. Even though new management is installed they still don’t have a handle on their numbers. They have missed the last 5 quarters and guided lower. Honestly I would wait until they can report solid numbers, because right now it seems like they still don’t know, and horrible about guiding. Whenever you see management constantly missing like this you wait until they correct the ship and then buy even though you miss on some gains at the start. The stock should be in the 90’s, however they miss again and hello 50’s.

      9/30/23 quarter expected 1.45 and came in -.82 and guided lower

      12/31/23 quarter expected .22 cents and came in -.59 and guided lower

    14. Spins13 on

      Dan Loeb has very poor returns on the past 3 years and Michael Burry has probably already sold the stock because he rarely holds anything more than 2 months. I’m in

    15. MoreRatzThanFatz on

      Sorry but I’m more of an O’reilly’s or Autozone guy, puts it is

    17. w0ke_brrr_4444 on

      Huge short interest and institutional ownership on this too. Solid squeeze candidate

    18. itskellyd on

      Not convinced that the company can turn it around any time soon but I do want to say this was a great DD. It’s nice to read a DD on here that doesn’t start with something like “Alright regards buckle upbecause I’m about to take you guys to the MOON!!!!11” and then proceeds to ramble with emojis and trigger phrases from the gamestore squeeze era to try and entice people to jump onboard.

    19. sourpickle69 on

      Idk, I usually go to NAPA for anything, AutoZone in a jiffy, O’Reilly’s if AutoZone doesn’t have it and AAP is basically circling back to if AZ and OR don’t have it, this disorganized POS store won’t either.

      Puts it is![img](emote|t5_2th52|12787)![img](emote|t5_2th52|12787)

    23. czar_king on

      This is an interesting DD. I have been long on GPC for years (shares) due to their consistent earnings growth. I wouldn’t say this play has paid off but my underlaying thesis is still happening so I haven’t changed my position.

      If you believe their guidance then AAP has a forward PE of 18 while GPC has 14. It seems like a long strategy here would prefer GPC however I do understand your thesis which is at a much higher and shorter term risk level. I certainly would not recommend a short term strategy on GPC.

    24. Godschariot14 on

      They’re gonna sell worldpac which has taken over massive amounts of market share in Canada form Napa. Sounds like a dumb ceo puts it is

    25. blockciphers on

      Per the annual report: Their biggest sales happen in the spring and summer, winter being the slowest although cold weather helps by breaking car parts helping them sell more. Additionally, their interest payments are due in March and September, which would negatively impact those earnings reports, especially at an almost 6% interest. They said they got 150 million dollars in cost savings and used 50 million to invest in the business with raises for front line workers, but I also see a lot of insiders buying on 04/30. Was that insiders buying on their own or are those stocks bonuses given to them by the company? If they are company bonuses, they really cannot afford that. They have 50 distribution centers and really need to invest in their supply chain and IT infrastructure before becoming efficient and profitable, so I think they will be investing a lot back into the business which will take a few years, thereby lowering profits.

      I also checked out their career board. It seems that the most important thing per their own annual report they should be hiring for is good engineers. They are looking for around 20 IT type jobs and around 20 finance type jobs. Almost all the IT jobs are in India, so looks like they are trying to save labor costs that way. We’ll see how it turns out. Store lead positions where someone manages 5 people in a (in my opinion) HCOL pay between $19 to $21. I don’t see them attracting the talent that could really make this place more efficient and result in better customer satisfaction. It does look like they are trying to hire a few industrial engineers throughout the country to improve efficiency. However, all of them seem to be extremely junior roles with high requirements, including traveling 75% of the time, at a salary of 65k.

      It doesn’t seem like the executives are willing to bleed a bit to make this place successful and doesn’t seem like they are truly willing to invest in highly skilled and talented people to turn this place around.

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