S&P Global Ratings dropped its issuer-credit rating on Advance Auto Parts (NYSE:AAP) to BB+ from BBB-. The ratings agency has a Stable outlook on the auto retailer, reflecting its expectation that sales and profitability will gradually improve as Advance Auto Parts (AAP) stabilizes performance through better inventory management, sales team wage investments, and cost controls.
S&P turned more cautious on Advance Auto Parts (AAP) for the near-term on the expectation that credit metrics will be weaker than its previous forecast. AAP’s operating performance was noted to have experienced significant pressure this year. S&P said the company’s efforts to improve its inventory and product availability have languished due to inconsistent execution.
“Furthermore, we believe the company’s misguided strategic decision to preserve and attempt to expand margins while its competitors invested in price has eroded its value proposition. Over the past eighteen months, Advance’s sales have largely been flat, while its peers’ revenues have grown in a low-teen percent. We believe Advance has ceded market share and its competitive standing in the industry has weakened. We accordingly have revised our business risk assessment to fair from satisfactory.”
Working against AAP, back-to-back quarters of negative comparable store sales amid an inflationary cost environment have led to meaningful margin erosion. Meanwhile, execution risk is said to remain high amid internal operating challenges and elevated competitive threats. AAP is seen struggling to implement initiatives intended to strengthen its competitive position. and inventory availability remains a key competitive competence in the automotive aftermarket industry. “We think Advance’s inability to execute on its strategies likely resulted in professional installers electing to buy parts from its competitors, resulting in lower comparable sales relative to peers,” warned S&P.
Shares of Advance Auto Parts (AAP) fell 6.9% in late trading on Tuesday are off more than 60% on a year-to-date basis.