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Each week, we try to cover one or two companies we have discussed in previous podcasts and/or own for clients (including personally). Let’s review Advance Auto Parts Inc. (AAP), which recently delivered $2.01 billion in revenues during the quarter, landing at the high end of prior guidance and beating consensus by about $33 million, says Tom Hayes, editor of HedgeFundTips.

Most importantly, this was driven by positive comp sales of +0.1%, an improvement from (0.6%) in Q1 and also at the high end of guidance. Adjusted earnings per share came in well ahead of expectations at $0.69 versus the Street’s $0.54.
 

Management continued to deliver on the profitability front, returning the business to overall profitability in the quarter with adjusted gross margins rising to 43.8%, up 16 basis points year-over-year. The most important metric in the turnaround, adjusted operating margins, expanded to 3%, up 19 bps year-over-year.

The Pro business, which is the biggest overall driver of the company's underlying performance, continued to show strength. It had positive comp growth in the low single digits during the quarter – and mid-single-digit growth on a two-year basis. Pro customers have been showing increased confidence in Advance Auto Parts, as evidenced by sustained sales growth from both Main Street Pro accounts and large national customers.

Management also continued to work on tariff mitigation strategies, while prioritizing profit dollar expansion, with about 40% of cost of goods sold exposed to tariffs at a blended rate of around 30%. Most importantly, more than 90% of Advance Auto Parts' business has remained nondiscretionary, keeping the company well-positioned to navigate a higher-product-cost environment.

About the Author

Thomas J. Hayes is the founder, chairman, and managing member of Great Hill Capital, LLC (a long/short equity manager based in New York City). Before starting his own firm, Mr. Hayes worked with Cornwall Capital, LP (one of the firms featured in The Big Short book and movie).

On a weekly basis, he publishes his timely stock market commentary, Hedge Fund Tips with Tom Hayes videocast and podcast. He has a wide following in the investment management, hedge fund, and media community.

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