Advance Auto Parts is a well-known automotive aftermarket parts provider, catering to both professional installers and do-it-yourself customers. With an extensive network of stores and branches across the United States, Canada, Puerto Rico, and the U.S. Virgin Islands, the company offers a wide selection of brand names, original equipment manufacturers, and brand-owned automotive replacement parts, accessories, batteries, and maintenance items for various vehicles.
Third Point, a multi-strategy hedge fund founded by Dan Loeb, has made significant waves in the realm of shareholder activism. Loeb, a true pioneer in the field, has been instrumental in shaping modern-day shareholder activism. Transitioning from the use of poison-pen letters to leveraging the power of compelling arguments, Loeb has established Third Point as a formidable force in the industry. The hedge fund, known for selectively taking activist positions, has recently partnered with Saddle Point to form a group with a collective economic ownership of 8.04% of Advance Auto Parts stock.
Having weathered previous activist campaigns, including one by Starboard Value, Advance Auto Parts faced a significant downturn in its stock price following a Q1 2023 earnings miss. The stock plummeted to $72.89 on May 31, 2023, presenting a compelling entry point for astute investors. With the stock trading below its peak value, the company's two distinct businesses, its core retail auto parts business, and Worldpac, its wholesale auto parts distribution business, came under scrutiny.
One key opportunity to enhance shareholder value at Advance Auto Parts lies in divesting its Worldpac business. Considered by many as the company's crown jewel, Worldpac is estimated to have a value of approximately $1.5 billion. By selling Worldpac at a conservative 10x multiple, management could reduce debt, stabilize the company's balance sheet, and refocus on strengthening the core retail business. This strategic move would not only align Advance Auto Parts' valuation with industry peers but also pave the way for improved sales and margins.
Despite its potential, Advance Auto Parts faces challenges in maintaining adequate stocking levels to meet customer demand. With lower sales per store compared to competitors like O'Reilly and AutoZone, the company's supply chain and stocking issues have hindered revenue growth and profitability. Addressing these operational challenges is crucial for advancing the company's performance and closing the valuation gap with industry peers.
The Path Forward with New Leadership
With the appointment of Shane O'Kelly as CEO in September 2023, Advance Auto Parts welcomed a seasoned retail executive with strong leadership skills. O'Kelly's background and experience position him well to drive operational improvements and steer the company towards sustainable growth. The recent settlement with activist investors Third Point and Saddle Point, resulting in the appointment of industry veterans to the board, signifies a collaborative effort to support O'Kelly's strategic vision and enhance shareholder value.
Advance Auto Parts stands at a critical juncture, poised for transformation and value creation. By addressing operational inefficiencies, leveraging strategic divestments, and fostering strong leadership, the company can chart a course towards sustainable growth and enhanced shareholder returns. The proactive involvement of activist investors like Third Point underscores the importance of governance and strategic oversight in driving positive outcomes for stakeholders in the automotive aftermarket industry.