Wedbush downgrades Advance Auto Parts to Neutral, cuts price target to $145

As previously reported, Wedbush analyst Seth Basham downgraded Advance Auto Parts (AAP) to Neutral from Outperform with a price target of $145, down from $165. While shares have sharply underperformed peers in the past six months, the analyst sees mounting risks to consensus expectations as the company embarks on price and inventory investments to improve market share performance and faces enormous LIFO charges. In conjunction with its Q3 results, Advance Auto Parts indicated that it concluded from a strategic review that it needed to invest in price and increase inventory availability in its Pro segment to stop losing market share. On the surface, this strategy does not align with the fact that company has lower gross margins and more inventory per location than peers, Basham says. Even considering that the company’s Pro segment includes its Worldpac business that operates differently than peers, the analyst still notes that sales have grown in line with inventory since 2017 versus much stronger sales versus inventory growth performance for peers O’Reilly Auto (ORLY) and AutoZone (AZO). To that end, he is concerned that price and inventory investments may not provide adequate returns.