Auto-parts retailer has strong outlook

Unless Americans begin walking to every destination, there is a good chance that Advance Auto Parts will be around for a while.

The Roanoke-based parts retailer has emerged as one of the more stable companies on the market, and efforts to upgrade and refurbish its 2,800 stores have boosted the company’s financial outlook.

A glowing analyst’s report from Merrill Lynch last week backed up management’s assertions that Advance is gaining market share on its main competition, AutoZone, and recent earnings reports show that sales are at their highest levels.

Advance shares rose $1.18 yesterday to close at $41.13 on the New York Stock Exchange.

“Advance Auto is a market-share gainer at the expense of AutoZone,” Merrill Lynch analyst Danielle E. Fox wrote. “[The company] is an appealing investment in a market that demands selectivity.”

Ms. Fox rates the company a “buy” but does not own shares.

Advance reported record net income of $31.3 million (41 cents per share) for the fourth quarter of 2003, compared with $11.9 million (12 cents per share) for the similar quarter of 2002. Sales during the period rose from $689.2 million to $821.3 million. If new stores aren’t included, sales rose 7 percent.

The company opened 46 new stores during the quarter and said it plans to open between 125 and 135 stores this year. By the end of 2004, Advance plans to have remodeled about 1,000 stores to the company’s new design.

Debt-rating agencies have responded to Advance’s good results. On Friday, Advance’s top competitor, AutoZone, reported that net income for its second fiscal quarter increased to $91.7 million from $79.8 million in the comparable quarter of 2002. Sales grew 3.4 percent to $1.16 billion, but fell short of Wall Street estimates. And same-store sales were essentially flat.

Merrill Lynch said Advance has cut into AutoZone’s market share by investing heavily in upgrading its stores. And even the company’s oldest, unrenovated stores are showing good results because of a recent national advertising campaign.

“By contrast, our store visits reveal that [AutoZone] has made more modest investments in its older store base, and that its in-store technology is outdated,” Ms. Fox wrote. “It has also already realized the benefits of stepped-up advertising.”

Analysts said Advance should reach its earnings goal of 62 cents to 65 cents per share by the end of June, and $2.50 to $2.55 per share for all of 2004. Free cash flow should reach at least $180 million, according to several analysts, who said Advance is a good buy because the auto parts business is relatively immune to the ups and downs of the economy.

“The business is pretty stable, mainly because most of what we sell is nondiscretionary,” said Jeff Gray, the chief financial officer of Advance. “We like to think we’re sort of anticyclical. Our business does well in good economic times and bad economic times.”

Mr. Gray conceded that the company’s business is seasonal and that sales usually pick up during the spring and summer. But that means strong sales for the company in the next six months.

“People aren’t inclined to lay up under their car in the dead of winter,” he said.