The function of AAP’s competitive advantage will eventually come down to distribution and item availability over time. It’s alrdy behind AZO and ORLY but it can def have room to improve.
The second shot on goal is the sizable impact of the sale for worldpac and carquest or associated Canadian businesses. These 2 are worth north of $2bn. Even at $1.5bn assuming impaired business, that’s 50% of market cap or 21% of enterprise value. That’s a hell of a lot of cash. For comparison, they paid something like $2bn for worldpac so good reason for me to believe they can sell it for that.
Using 3 separate sku sorting systems is a fucking headache. The normal thing to think is “if it’s so easily solvable, what the fuck was the previous CEO doing? Why did starboard value fail to get things turned around in 2015?”
I think the then CEO was a pos that prob just wanted to grow grow grow and the resulting -55% return since 2014 worldpac was purchased speaks volumes to the ex-CEO’s inability to get shit done. New CEO having publicly committed to getting the sale done and implementing a cancer strategy substantially derisks the probability of outcomes for value investors.
In essence, hard to lose on this unless the CEO pulls an UNO reverse card and buttfucks all the value investors who got hoodwinked into buying shares. I’m hoping that won’t happen with the combined third point saddle point board seats but shit has been worse. I haven’t dug into the incentives of the new ceo via proxy filing so that’s the only missing bit of data for me.
Wow, thank you for the in depth contribution! I find empire building and value destroying CEOs are a pretty common occurrence. So the leadership change with the signal of being willing to shrink the empire is a huge positive signal.
Yeah, I don't see AAP getting to the same multiples as ORLY and AZO due to their growth and continuing good operations, but I do think AAP can bounce hard off of this low. And the CEO seems to me to be doing the right things. I have no clue what modern inventory management systems should look like.
Thanks for sharing that, the author points to the inventory management systems and the Mega Hub warehousing system that AAP is implementing. Looks to be about as good as any turnaround can be.
"Almost inexplicably, Advance, CarQuest, and WORLDPAC operate on largely separate ERP systems with separate SKUs and partially overlapping processes. This means the exact same part from the customers perspective may have multiple different SKUs in Advance’s system depending on the store, creating a massive duplication of effort and hampered visibility into availability. The results can be lost sales, higher costs, and frustrated customers.
Additionally, until recently, the company has not pursued the focused mega-hub strategy that has worked wonders for AZO and ORLY."
Yeah, I do like AAP more now. The last earnings call they laid out a clear path forward, and the tone of the questions from the analysts made me think that they were not believing it. But learning that AZO and ORLY both use the hub and spoke inventory system that AAP is implementing is huge.
Thanks for the great write-up! It is great how you always make the comparison to peers and have the focus on the actual drivers of the investment thesis. Dan Shuart over at the Eagle Point Capital substack wrote about AAP two weeks ago detailing the situation with performance numbers and past efforts of turnarounds. He leaves off with the ominous:
"The problem is, the same opportunity exists today that existed in 2015, and it’s tough to shake that nagging feeling that if it was so easy, why haven’t any of the previous management teams been able to execute?"
Thanks for the feedback! I could be wrong about AAP's problems being purely inventory management and logistics, but that is the consensus I had heard. It is also consistent with Wal-Mart's initial market domination due to their inventory management system. I always try to size up management, mostly to prevent getting diluted or screwed, but that's one of the hardest things to analyze. I'm hoping my judgement gets better over time.
could you share a bit more about the car parts business? i dont understand if all 3 are distributors and essentially sell the same stuff, how are they able to have good margins and be profitable? or orly specialize in selling toyota parts and azo in mercedes? and for worldpac being sold, is there a confirmed buyer or AAP still asking around? thanks
AAP discussed on last earning call, they expect to be able to announce the closed deal for Worldpac on the next call for Q2, but a deal isn't a deal until a deal is a deal.
Regarding three or four companies with high margins all existing side by side, car parts are expensive, and nonperishable. Whenever I've needed windshield wiper blades or an intake manifold gasket, I go to whichever is closest as their prices are usually the same or close enough. To me the stores are interchangeable, and I polled about 100 college students when I was still a college professor, and everyone seems to think the stores are interchangeable as well. If anyone is a hardcore car enthusiast and has preferences for a brand, I would be willing to hear it. ORLY seems to have the nicest, newest built stores, but blue collar knuckle-draggers really don't care much about that.
2. how do you see risk of increased price competition between these chains, esp if, as you say, they are essentially co-located? if orly and azo and napa are all bigger than aap do they have an edge in getting better wholesale prices? are these other chains growing? is there any vertical integration in ownership of suppliers? if aap has worldpac, do the others have integrated wholesalers? and does divesting worldpac reduce aap's margins?
Good catch, thank you, NAPA trades under the ticker GPC, but they also have an industrial category while the other three don't. Multiples for GPC are in between the rest. I am planning on more writeups covering the Havana Syndrome thesis, AutoNation AN is also on the list, but it looks like GPC is worth a mention.
None of the four do any manufacturing, they are all distributors. Wholesale channels to auto repair shops are traditionally a part of the business, but I haven't found any segmented accounted for wholesale, just for international. I don't know if the margins are better or worse, if it is a profit center or a cost center. New CEO seems to think it's not essential, the outcome of that decision will be a good way to judge the CEO.
Typically in an agglomeration economy, all benefit from being close to each other. Nobody needs to advertise because everyone already knows where that part of the city is. I do agree, there is no definitive moat, but none of the others have a moat either. AAP did say on the last earnings call that there were products for which they were not price competitive, 3% of SKUs, and they stopped carrying them. If that trend continued, I would take that to mean there isn't room for four major auto parts shops. If that was a one-off from the new logistical efficiency focus, then game on.
I view this slightly differently.
The function of AAP’s competitive advantage will eventually come down to distribution and item availability over time. It’s alrdy behind AZO and ORLY but it can def have room to improve.
The second shot on goal is the sizable impact of the sale for worldpac and carquest or associated Canadian businesses. These 2 are worth north of $2bn. Even at $1.5bn assuming impaired business, that’s 50% of market cap or 21% of enterprise value. That’s a hell of a lot of cash. For comparison, they paid something like $2bn for worldpac so good reason for me to believe they can sell it for that.
Dissociating their shitty supply chain from worldpac and carquest also helps with their distribution problem. https://www.reddit.com/r/advanceautoparts/s/Tfjeg998Qy
Using 3 separate sku sorting systems is a fucking headache. The normal thing to think is “if it’s so easily solvable, what the fuck was the previous CEO doing? Why did starboard value fail to get things turned around in 2015?”
I think the then CEO was a pos that prob just wanted to grow grow grow and the resulting -55% return since 2014 worldpac was purchased speaks volumes to the ex-CEO’s inability to get shit done. New CEO having publicly committed to getting the sale done and implementing a cancer strategy substantially derisks the probability of outcomes for value investors.
In essence, hard to lose on this unless the CEO pulls an UNO reverse card and buttfucks all the value investors who got hoodwinked into buying shares. I’m hoping that won’t happen with the combined third point saddle point board seats but shit has been worse. I haven’t dug into the incentives of the new ceo via proxy filing so that’s the only missing bit of data for me.
Wow, thank you for the in depth contribution! I find empire building and value destroying CEOs are a pretty common occurrence. So the leadership change with the signal of being willing to shrink the empire is a huge positive signal.
Yeah, I don't see AAP getting to the same multiples as ORLY and AZO due to their growth and continuing good operations, but I do think AAP can bounce hard off of this low. And the CEO seems to me to be doing the right things. I have no clue what modern inventory management systems should look like.
https://eaglepointcapital.substack.com/p/advance-auto-parts-will-this-turnaround
Thanks for sharing that, the author points to the inventory management systems and the Mega Hub warehousing system that AAP is implementing. Looks to be about as good as any turnaround can be.
"Almost inexplicably, Advance, CarQuest, and WORLDPAC operate on largely separate ERP systems with separate SKUs and partially overlapping processes. This means the exact same part from the customers perspective may have multiple different SKUs in Advance’s system depending on the store, creating a massive duplication of effort and hampered visibility into availability. The results can be lost sales, higher costs, and frustrated customers.
Additionally, until recently, the company has not pursued the focused mega-hub strategy that has worked wonders for AZO and ORLY."
do you like this even more now given the even bigger discount over the past couple of weeks and today?
Yeah, I do like AAP more now. The last earnings call they laid out a clear path forward, and the tone of the questions from the analysts made me think that they were not believing it. But learning that AZO and ORLY both use the hub and spoke inventory system that AAP is implementing is huge.
Thanks for the great write-up! It is great how you always make the comparison to peers and have the focus on the actual drivers of the investment thesis. Dan Shuart over at the Eagle Point Capital substack wrote about AAP two weeks ago detailing the situation with performance numbers and past efforts of turnarounds. He leaves off with the ominous:
"The problem is, the same opportunity exists today that existed in 2015, and it’s tough to shake that nagging feeling that if it was so easy, why haven’t any of the previous management teams been able to execute?"
Thanks for the feedback! I could be wrong about AAP's problems being purely inventory management and logistics, but that is the consensus I had heard. It is also consistent with Wal-Mart's initial market domination due to their inventory management system. I always try to size up management, mostly to prevent getting diluted or screwed, but that's one of the hardest things to analyze. I'm hoping my judgement gets better over time.
could you share a bit more about the car parts business? i dont understand if all 3 are distributors and essentially sell the same stuff, how are they able to have good margins and be profitable? or orly specialize in selling toyota parts and azo in mercedes? and for worldpac being sold, is there a confirmed buyer or AAP still asking around? thanks
AAP discussed on last earning call, they expect to be able to announce the closed deal for Worldpac on the next call for Q2, but a deal isn't a deal until a deal is a deal.
Regarding three or four companies with high margins all existing side by side, car parts are expensive, and nonperishable. Whenever I've needed windshield wiper blades or an intake manifold gasket, I go to whichever is closest as their prices are usually the same or close enough. To me the stores are interchangeable, and I polled about 100 college students when I was still a college professor, and everyone seems to think the stores are interchangeable as well. If anyone is a hardcore car enthusiast and has preferences for a brand, I would be willing to hear it. ORLY seems to have the nicest, newest built stores, but blue collar knuckle-draggers really don't care much about that.
1. napa has 6000 outlets
2. how do you see risk of increased price competition between these chains, esp if, as you say, they are essentially co-located? if orly and azo and napa are all bigger than aap do they have an edge in getting better wholesale prices? are these other chains growing? is there any vertical integration in ownership of suppliers? if aap has worldpac, do the others have integrated wholesalers? and does divesting worldpac reduce aap's margins?
Good catch, thank you, NAPA trades under the ticker GPC, but they also have an industrial category while the other three don't. Multiples for GPC are in between the rest. I am planning on more writeups covering the Havana Syndrome thesis, AutoNation AN is also on the list, but it looks like GPC is worth a mention.
None of the four do any manufacturing, they are all distributors. Wholesale channels to auto repair shops are traditionally a part of the business, but I haven't found any segmented accounted for wholesale, just for international. I don't know if the margins are better or worse, if it is a profit center or a cost center. New CEO seems to think it's not essential, the outcome of that decision will be a good way to judge the CEO.
Typically in an agglomeration economy, all benefit from being close to each other. Nobody needs to advertise because everyone already knows where that part of the city is. I do agree, there is no definitive moat, but none of the others have a moat either. AAP did say on the last earnings call that there were products for which they were not price competitive, 3% of SKUs, and they stopped carrying them. If that trend continued, I would take that to mean there isn't room for four major auto parts shops. If that was a one-off from the new logistical efficiency focus, then game on.