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Follow Up

• How AAP makes money
• Components of COGS (Sankey)
• Components of SGA (Sankey)

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Macro drivers affecting the future of car repairs

Think: people need to get around. Usage of cars (potentially) continues to increase in popularity (also need to think about transportation in cities versus rural areas and subsequently, growth in populations…potentially, income too).

Key Points of Interest
In observing Advance’s ability to execute, I’m curious of the following:

• Integration problems are driving concerns: difficulty rolling out daily replenishment whilst preserving high fill rates, which leads to dissatisfied customers and potential loss of market share
• The absence of growth negates the prospect of unlocking shareholder value due to the high leverage structure in the business. Assuming constant costs, a !5% operating margin for AAP would require 6% revenue growth a 20% margin 13% revenue growth
• Working capital optimization has the capacity to enable cash flow growth. The business currently has high levels of inventory from opening a new DC (for worldpac) and consolidation of CarQuest stores – more importantly, where will the company allocate its cash flow, if and when it begins to strengthen?

Status Quo

• Abysmal comparable store sales (due to continued integration of CarQuest stores. Greco noted that they’ll slow down integration efforts to continually focus on best practices)
• Albeit improved versus recent periods, Gross Margin and SG&A still hostage to declining top-line performance