Advance Auto Parts (NYSE: AAP) Shares fell 15.8% by 10:35 a.m. ET after the company beat revenue expectations but missed earnings forecast in its latest earnings release Thursday morning.
Ahead of its fiscal second-quarter results, analysts forecast the auto parts retailer would post earnings of $0.94 per share on revenue of nearly $2.7 billion for the period ended July 13. Advance Auto Parts met its revenue target but missed earnings, reporting just $0.75 per share.
Advance Auto Parts Q2 results
How could this happen? Well, if you look at the sales figures, things didn’t look too bad. Sales were down compared to the previous year, but only by a fraction of 1%.
However, even small single-digit increases in manufacturing costs and selling and administrative expenses were enough to turn these relatively stagnant sales into a dramatic 43% drop in operating profit. And despite large savings in taxes on this income, this decline trickled down to the bottom line, where net profit also fell by 43%.
What’s next for Advance Auto Parts?
So the second quarter wasn’t great. But the quarterly loss isn’t the only thing weighing on Advance Auto Parts’ stock today. As part of his plan to turn the business around, CEO Shane O’Kelly announced that the company would sell its wholesale business, Worldpac, for $1.5 billion “to strengthen our balance sheet and streamline our focus” on the retail business.
That sale was expected to close before the end of the year, and management has cut $150 million (about 1 percent) from its revenue forecast for the year, likely to offset Worldpac’s revenue loss. But earnings forecasts have been cut even more sharply – from $3.75 to $4.25 to about $2.25 per share, a 44 percent reduction. The problem is that Worldpac accounts for about $2.1 billion of Advance Auto Parts’ annual revenue, so the revenue and profit decline next year could be even more significant.
In short, the second quarter was bad, all of 2024 will be just as bad, and 2025, while still uncertain, probably won’t look as good either. No wonder investors are abandoning Advance Auto Parts stock today.
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Rich Smith does not own any stocks mentioned. The Motley Fool does not own any stocks mentioned. The Motley Fool has a disclosure policy.
Why Advance Auto Parts Stock Just Plunged 16% was originally published by The Motley Fool
