Advanced Auto Kept in Neutral
In the second quarter, Advance Auto Parts, Inc. (AAP) reported diluted earnings per share were $0.79, compared to $0.64 in the prior-year period. Net sales increased to $1.24 billion from $1.17 billion in the same period last year. The revenue increase reflected a net addition of 138 new stores in the past 12 months. Comparable store sales saw an increase of 2.9% compared to 1.2% increase in the same quarter of the previous year.
Though it is generating topline growth by opening new stores, the company currently faces a challenging industry environment. To combat the difficult industry metrics, AAP has reviewed its business strategies to drive sales, lower costs and increase return on invested capital (ROIC).
AAP expects increased investments and fuel costs to constrain profit growth in 2008. Thus, we are maintaining a Hold recommendation until costs are contained and same store sales improve. We set a six-month target price of $47.00.
The company also wants to improve its supply chain and vendor terms, which are not believed to be market competitive. The company s investment in the supply chain and IT systems should reduce costs through improved efficiency. As a step towards increasing Do-It-Yourself (DIY) and Do-It-For-Me (DIFM) sales, the company is improving parts availability at its stores. Meanwhile, Advance Auto Parts Inc. has implemented an aggressive program to reduce inventory of other less profitable products, which in turn will free up cash to increase parts availability.
Pricing remains an issue, as the company competes with other national and regional automotive retailers like AutoZone Inc. (AZO), O'Reilly Automotive (ORLY), Pep Boys (PBY), and CSK Auto Corporation (CAO). All of these issues could contribute to weak same store sales comparisons in the future.
Comerica Target Lowered Further
Comerica Inc.'s (CMA) second quarter adjusted earnings from continuing operations of $0.58 per share were four cents short of our estimate. The miss mainly stemmed from a decline in net interest margin (down 31 bps sequentially to 2.91%) and a rise in the provision for loan losses.
Continued deterioration in the residential real estate development loan portfolio, mainly in California, resulted in the increase of nonperforming assets to 1.44% (up 37 bps sequentially) of total loans and foreclosed property. As we suspect that the credit related costs will remain high in the coming quarters and the company may also need to cut its dividend, we have further lowered our EPS estimates and our six-month target price.
