We have been invested in Advance Auto Parts (NYSE:AAP) since 2016, shortly after new management took over. We believe that there was (and is) ample opportunity for the new management picked by Starboard Value to improve the company’s performance and bring it more in line with competitor O'Reilly Automotive (NASDAQ:ORLY) (which we also own). Both companies cater to roughly the same breakdown of commercial (usually referred to a Do It For Me or “DIFM”) and consumer (“DIY”) customers so there is every reason to believe that Advance can eventually reach Starboard’s goal and enjoy similar margins to those of O’Reilly.
What Advance Needs to Improve
For the trailing twelve months, O’Reilly reported operating margins of 19.7%. By contrast, Advance’s operating margin was only 6.08%. There is tremendous opportunity for Advance to expand its margins, even when adjusting for real estate differences between the two companies.
