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August 16, 2016 02:00 AM

OTHER VOICES: Advance Auto turnaround a slow ride

Tara Lachapelle, Bloomberg News
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    (Bloomberg News photo)

    NEW YORK (Aug. 16, 2016) —  Almost a year after highly regarded activist investor Starboard Value added Advance Auto Parts Inc. to its collection, the $12 billion automotive parts retailer reported its biggest drop in same-store sales and worst earnings miss.

    The rest of the year doesn't look great either, with Advance Auto's new CEO Tom Greco forecasting “some strain” on margins during the company's earnings call on Aug. 16.

    Starboard is run by Jeff Smith, a roll-up-your-sleeves-type of activist who led the turnaround of Olive Garden parent Darden Restaurants beginning in 2014 (he actually waited tables at one point during the process) and is now also tinkering with money-losing chipmaker Marvell Technology. He became Advance Auto's chairman in May, one month after Mr. Greco, the former head of PepsiCo's North American Frito-Lay snacks business, was named CEO.

    Advance Auto's President George Sherman stepped down from that role on Aug. 13, although the Roanoke, Va.-based firm said he would remain with the company through year-end to assist with an orderly transition. Advance said Mr. Sherman's leadership team would now report to Mr. Greco but did not provide a reason why he was leaving the company.

    Mr. Smith and the Advance Auto management team have a lot of work to do. But communicating with shareholders is often half the battle and the earnings call at least showed that the company is acutely aware of the issues and is implementing solutions.

    For one, Mr. Greco said that “customer service metrics” and product availability were a problem during the second quarter — troubling because those things are at the heart of any retail business. However, they have a team dedicated to improving inventory.

    As for margins, Advance Auto has started to do zero-based budgeting, an approach that helps companies remain lean by starting from scratch each period and then having to justify every single cost that's added. But they can't do much about the fact that more Americans are buying new vehicles instead of spending to repair old ones.

    Advance Auto's stock was down by about 3 percent Aug. 16 after the earnings call concluded — not too bad, considering. The horrendous results may be drudging up old speculation of a merger with O'Reilly Automotive Inc., one of Advance Auto's larger competitors. Not to mention, the Pep Boys – Manny, Moe & Jack chain that was acquired earlier this year by activist investor Carl Icahn.

    Gadfly's Gillian Tan wrote back in December that there's a case to be made for O'Reilly buying Advance Auto next, and the $27 billion company certainly has the financial flexibility to do so — O'Reilly's generating more EBITDA than it has in net debt.

    With Mr. Smith there to grease the wheels, Advance Auto's shares at least have some support while the team makes the necessary repairs.

    As of April, Advance Auto, a unit of Advance Stores Co. Inc., operated 5,086 stores and 125 WORLDPAC branches serving approximately 1,300 independently owned Carquest-branded stores in the U.S., Puerto Rico, the U.S. Virgin Islands and Canada.

    _________________________________________

    This piece appears as the so-dubbed “Bloomberg Gadfly” column, and does not necessarily reflect the opinion of Bloomberg L.P. and its owners, according to Bloomberg News.

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