Advance Auto Parts: Did Earnings Defuse Tariff Concerns?

Key Points

• Advance Auto Parts stock rallied unexpectedly after it announced its quarterly earnings results, even though it missed on both the top and bottom lines.
• Markets rewarded the stock due to management's decision to sacrifice short-term comfort during tariffs.
• Now, consumers, as well as Wall Street analysts, will see a higher value for the company.

Navigating today’s stock market has become a rough sea of uncertainty and volatility. One week after another, new announcements are made regarding trade tariffs and other potential headwinds that might hit the United States economy in the short term. This is why keeping an eye out for new sets of indicators is key for investors to consider today.

That said, one company has proven that the odds can still be in its favor, despite countless reasons to expect otherwise. Tariffs have hit the retail sector, particularly in automotive, harder than most. Yet this stock has managed to hold on to what matters and adapt when necessary, even if it meant facing short-term pressure.

In the case of Advance Auto Parts Inc. NYSE: AAP, management navigated the uncertainty and supply chain bottlenecks triggered by the latest tariff cycle with a focus on long-term positioning. As investors will see, the outlook often matters more than the immediate results. That forward-thinking approach is exactly what has fueled an unexpected rebound in the stock.

The Market’s Narrative Has Changed

Investors will likely be surprised to learn that Advance Auto Parts stock rallied up to 41.7% over the past week after announcing its latest quarterly earnings results. However, the figures gave no reason for this to be the natural reaction in the stock price.

Digging into what the press release showed the market, all measures of performance in the company were down. Revenue, gross profit margins, and operating income were all down over the past 12 months. However, it seems that management is now celebrating the fact that the company did better than most bears expected, especially during the new tariff uncertainty.

More than that, particularly in the retail sector, a new indicator is flying under the radar. Most companies in the automotive space and others in retail have chosen to withdraw further financial guidance due to tariff uncertainty, perhaps shielding themselves from what could be worse-than-expected results.

Not Advance Auto Parts, though. Management chose to keep its guidance and forecasts steady for the future, making the company stand out compared to its peers. This is a new sign of confidence for investors to consider as well in this name moving forward.

Can Advance Auto Parts Actually Make It?

This was a “saved by the bell” sort of moment for the company, but now investors need to figure out whether this new rally can catch a second wind moving forward in order to justify itself as a potential buy in some portfolios. For this, management action can be put to the test.

If there is any single metric investors should look at, it is the cash flow statement. Willing to endure short-term scrutiny and criticism from shareholders, management decided to ensure that the company’s future remained stable, as can be seen through the net $156 million net outflow from operations.

This is a major change from the net $3 million in flows from the same quarter last year, and it can all be credited to the $114 million investment in inventories made. This matters because it means the company was willing to take a risk and stretch liquidity thin to lock in pre-tariff prices on parts and equipment, therefore passing this benefit down to consumers.

Compared to other peers in the space, who might not have taken this solitary step, Advance Auto Parts could now have a major advantage in pricing power and offering its consumer base better prices to help them once other names start to raise theirs amid rising tariff costs.

Some on Wall Street also decided to reward this behavior from the company’s leadership team, such as Michael Lasser (an analyst from the UBS Group). The day after the earnings were released, this analyst decided to boost his valuation target for Advance Auto Parts stock up to $50 per share, a significant jump from his previous $36 per share view.

Compared to today’s prices, this valuation would call for an additional 3% upside after the big earnings rally, but that’s not the point. The point is that other analysts might start to follow suit after seeing this one boost the valuation by this much, starting to feel the fear of missing out on what could become one of the best calls for the coming quarter.

More than that, bearish traders showed other signs of the downside being relatively priced in today, as Advance Auto Parts stock’s short interest declined by 3.8% over the past month, contradicting the biggest bearish factor of tariffs being implemented. It wouldn’t be too far-fetched for investors to believe that this stock might be the best runner in automotive parts and equipment coming up.