Exterior view of the Advance Auto Parts store at Sunbury Plaza.
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Company: Advanced Auto Parts (AAP)
Business: Advanced auto parts is an automotive aftermarket parts supplier, serving professional installers and do-it-yourself customers. Its stores and affiliates offer a selection of brands, original equipment manufacturers and brand-owned replacement auto parts, accessories, batteries and auto maintenance items to a wide variety of brands. range of vehicle. It operates approximately 4,770 stores and 316 branches in the United States, Canada, Puerto Rico and the U.S. Virgin Islands.
Stock market value: $4.19 billion ($70.50 per share)
Activist: Third Point and Saddle Point Management
Ownership ratio: Economic risk 8.04%
Average costs: Not available
Comments from activists: The third point is a multi-strategy hedge fund founded by Dan Loeb, which will take selective active positions. Loeb was one of the true pioneers in the field of shareholder activism and one of the few activists who shaped what has become modern-day shareholder activism. He invented pen writing at a time when pens were often needed. Times have changed, he has moved from a poisonous pen to the power of reason. Third Point has amicably won board representation at companies like Baxter and Disney, but it also won’t hesitate to wage a proxy fight if it’s ignored.
Third Point has formed a team in this investment with Saddle Point. The group has collective economic ownership of 4,781,557 shares (8.04%) of AAP stock, a combination of common shares and derivatives, the majority of which are owned by Third Point. Saddle Point is an investment firm run by Roy Katzovicz, former chief legal officer of Pershing Square Capital Management.
What’s happening
ABOVE March 11Third Point and Saddle Point are entered an agreement with Advance Auto Parts, under which the following three directors were appointed to the board of directors: (i) Tom Seboldt, president of Seboldt Consulting Services and former chief operating officer at O’Reilly Automotive; (ii) Gregory Smith, EVP, global operations and supply chain, Medtronic and former EVP, supply chain, Walmart; and (iii) Brent Windom, former president and CEO of Uni-Select.
Behind the scene
Third Point and Saddle Point were not the first activists in this field. Starboard Value has had an active campaign at Advance Auto Parts since September 2015 to May 2020 and stopped investing in Q1 2021 when the stock was trading at about $185 per share. In late 2021, the stock peaked at around $240 per share, but declined over time to around $120 per share in May 2023. After reporting a significant drop in Q1 2023 earnings of 72 cents per share, 68% lower than the same period in 2022. Compared to the consensus estimate of $2.57 per share, the stock price plummeted to $72.89 on March 31. 5 2023. This is where it really gets interesting as an entry point for investors watching the stock.
Advance Auto Parts has two businesses: its core retail auto parts business and Worldpac, its wholesale auto parts distribution business. Worldpac is in a similar industry – auto parts distribution – but is a completely different business with its own supply chain and distribution network. The first opportunity to create value here is to sell Worldpac. Advance Auto Parts does not separately report Worldpac’s financials, but it is widely considered the company’s crown jewel and the seller estimates its value at about $1.5 billion. But with about $2 billion in revenue and earnings before interest, taxes, depreciation, and amortization rates estimated to be at least high single digits, Worldpac could rake in at least $2 billion at a moderate 10x multiple. Right. The sale would allow management to sell off debt, immediately stabilize the company’s balance sheet and raise its S&P junk debt rating.
Equally important, this will allow management to focus on its core retail business, which trades at significantly lower prices than its peers. After backing the Worldpac business at $2 billion, Advance Auto Parts’ 4,770 stores are valued at about $1.25 million each, while peers O’Reilly and AutoZone have The price of each store is 11 million USD and 8 million USD respectively. While part of this valuation difference is Worldpac’s estimated value and part is balance sheet issues, the real issue is revenue and margins. O’Reilly generates about $2.5 million in revenue per store compared to AAP’s $1.8 million. This is not a marketing problem, a pricing problem, or a salesperson problem. Rather, it’s a supply chain and inventory issue. There is little, if any, brand loyalty in the auto parts business. Customers go to stores that have the products they need. AAP’s biggest problem is keeping parts in stock for sale, so customers will go elsewhere. Solving this problem not only increased their revenue to match that of their peers, but also significantly improved their EBITDA margins. With a gross margin of 50%, almost half of the extra revenue dollars are going to the bottom line just from having parts in stock.
The good news is that Advance Auto Parts has a relatively new CEO who is extremely capable and ready for the job. Shane O’Kelly became CEO in September 2023. He has a strong background in retail and is a West Point graduate with the leadership ability to manage teams and the discipline to manage costs. The only thing he needed was industry expertise and board-level support. That’s what Third Point and Saddle Point are providing for the recent settlement agreement. On March 11, two activists won board seats for Thomas Seboldt, Gregory Smith and Brent Windom, all of whom are industry executives with combined experience in the auto and supply chain. Seboldt spent most of his career with O’Reilly Automotive. Windom is an experienced executive in the automotive industry who most recently served as president and CEO of Uni-Select. Smith, is a proven supply chain expert with experience at Medtronic, Walmart and Goodyear. Finding the right directors to support a strong CEO is how many practices, including Third Point, create value for portfolio companies. In fact, when Third Point received three or more board seats in activist campaigns, it averaged returns of 49.79% compared to 37.77% for the S&P 500 over the same period .
Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and founder and portfolio manager of 13D Activist Fund, a mutual investment in the activist’s 13D portfolio.
