Advance Auto Parts Pricing Spineometer: 4 of 5 Vertebrae

Advance Auto Parts , an automotive parts and accessories retailer, had a challenging FY 2023. Revenue rose 1.4% to $11.2 billion yet earnings before interest and taxes fell 15% to $714 million over last year.

A review of Advance Auto Parts Fourth Quarter 2023 earnings call held on 28 February 2024 and associated financial reports, provided insight regarding the importance of pricing on performance.

Shane O’Kelly, CEO of Advance Auto Parts, expressed acute awareness of the recent decline in profitability and outlined a 5-part plan for improvement.? The plan calls for

1. Selling off Worldpac, the Canadian business unit.?
2. Reducing SG&A costs while investing savings back into the front line.
3. Organizational changes.
4. Reassessing asset productivity.
5. Supply chain consolidation.

Ryan Grimsland, CFO of Advance Auto Parts, was on board with this plan stating, “As Shane mentioned, we are reducing expenses by building a cost-conscious mindset throughout Advance.”

Focusing on pricing and strategic marketing itself, the story becomes challenging.?

In 2022, Tom Greco, then CEO of Advance Auto Parts, invested in improving their pricing capability and “began taking surgical actions within our pricing strategy to ensure we were competitive.” Tom retired in 2023.? Shane O’Kelly replaced him and had his own vision.? One of his first actions was to reassign pricing under merchandising.

Shane O’Kelly also didn’t find the strategic marketing function to be performing well, stating “I think notably, marketing was an area where there were more significant cuts than in the other areas because we invested in marketing programs that didn’t have a yield.”

How is this strategy working for them?? It is too early to state but we do have some troubling early evidence. Ryan Grimsland reported that prices failed to keep up with costs stating, “Cost increases were not fully covered by price, contributed approximately 74 basis points to the full year decrease.”

Shane O’Kelly’s goal is simple.? “As it relates to price, we’ll be where the market sort of demands.”? Fair enough, but who will guide them there?

From an industry benchmark viewpoint, Advance Auto Parts should have between 23 and 115 professionals engaged in pricing.?

1. Advance Auto Parts is proud to offer one of the largest selections in automotive parts with most stores carrying between 16,000 and 28,000 items (SKU).? Each offering would face different competitive pressures, require unique price positioning, and have a different price elasticity of demand.?
2. Advance Auto Parts operates with roughly 5,000 locations across North America and the Caribbean.? Each location would face a different set of competitive dynamics.
3. Key to Advance Auto Parts's value proposition is having the right aftermarket part available and delivered expeditiously.? Many suppliers have been able to capture a positive price differential for delivering on these promises.
4. Macroeconomic and cultural changes do impact Advance Auto Parts’ opportunities.? The secular trend towards longer automotive lifetimes, now reported to be at 12.5 years on average, should increase demand for aftermarket parts.? Recessions tend to be associated with increases in demand for aftermarket auto parts. These two trends could deliver a strong opportunity in the coming months.? We do not however find any evidence in support or against Advance Auto Parts' preparedness to take advantage of such an opportunity shall it present itself.
5. Industry dynamics and business model dynamics for Advance Auto Parts is relatively stable, reducing the demand for pricing expertise.?

Research into the current pricing capability of Advance Auto Parts yielded encouraging results.? Over 30 professionals identified pricing or revenue management as their core responsibility.? Titles ranged from analyst and manager to director and vice president.? In keeping with the market geography, most of these professionals were located in North Carolina or other North American cities with an Indian support team (Shout out to the AAP team in Bengaluru, Delhi, Chandigarh, and Hyderabad.)? Responsibilities were heavily focused on data analytics and pricing science but other foci, such as pricing strategy itself, could also be identified.

Given the importance and capability of pricing at Advance Auto Parts as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of March 2024.

Advance Auto Parts Pricing Spineometer: 4 out of 5 Vertebrae. (With pricing reporting to merchandising and self critical statements regarding marketing, we suspect their are still some opportunities for improvement here.)

AAP (Advance Auto Parts, Inc.) rose from 65 the day prior to their earnings call to 73 one week later. FY 2023 revenue of $11.2 billion with a 6.4% operating margin and P/E ratio near 14.?

For FY 2023, a 1% improvement in price would yield a 16% improvement in operating profits holding all else constant at Advance Auto Parts.

?

(Compare and contrast this rating with their industry peers: AutoZone and GPC https://wiglafjournal.com/autozone-pricing-spineometer-4-of-5-vertebrae/ and https://wiglafjournal.com/strategic-movements-march-2023/ )

?

How many vertebrae are in your Rebate and Pricing Spineometer?? Come to Enable’s Catalyze with promocode “TSMITH100” for 100% off the entry fee. May 8-9 in Boston. Tim J. Smith’s educating, entertaining, and energizing keynote will and kick off Thursday morning.? https://enable.com/catalyze/catalyze-2024? #EnableCataylze