Advance Auto Parts CEO and Finance Chief Depart - C-Suite Transitions - InsideArbitrage (2024)

In recent months, a notable trend of simultaneous CEO and CFO departures has emerged, drawing attention to turmoil in the top ranks of certain companies. We highlight three examples of this trend below.

1. A few weeks ago, we wrote about the departure of GameStop’s (GME) CFO, coupled with the unexpected termination of Matthew Furlong’s role as President and CEO, a move that raised eyebrows. Since the time we covered these departures in an article titled Second Executive Departs in Two Months at GameStop, the stock went on to drop nearly 22% before rebounding a little in the last four days.
2. RB Global (RBA) also saw the departure of both the CEO and CFO. This situation took an unexpected turn as not only did the CEO exit following disputes over her compensation package but the resignation part is also still in question.
3. The trend continued with PayPal’s (PYPL) announcement earlier in the year, where the CFO departed the company following a leave of absence for health reasons. Furthermore, the CEO, Dan Schulman, is set to step down effective September 2023.

This week, the pattern persisted with the automotive parts retailer Advance Auto Parts (AAP), with both the CEO and CFO stepping down. According to a filing on August 23, CFO Jeff Shepherd departed the company on August 18, 2023.

Welcome to edition 56 of C-Suite Transitions, a weekly series on InsideArbitrage that tracks appointments and departures at publicly traded companies during the prior week. We highlight five appointments and departures each week by picking the largest companies from the full list of management changes.

Sudden Departures

1. PRAA: On August 21, 2023, PRA Group Chief Financial Officer Peter M. Graham notified the company’s Board of Directors of his decision to resign from the company, effective September 15, 2023, to pursue another employment opportunity.
2. DSGN: On August 25, 2023, Design Therapeutics President and Chief Executive Officer João Siffert, M.D., and the Board of Directors of Design Therapeutics agreed to the resignation of Dr. Siffert from all offices of the company and from the Board, effective immediately.
3. BIO: On August 21, 2023, Bio-Rad Laboratories Chief Accounting Officer Ajit Ramalingam notified the company of his plans to resign from the company, effective September 18, 2023.
4. CBAT: On August 22, 2023, CBAK Energy Technology interim Chief Financial Officer Xiangyu Pei resigned from her position effectively immediately. CBAK Energy Technology announced that Ms. Pei’s resignation was due to personal reasons and not because of any disagreement with the company.
5. AAP: On August 20, 2023, the Board of Directors of Advance Auto Parts announced current President, and Chief Executive Officer, Thomas R. Greco, is stepping down effective September 11, 2023. Mr. Greco has resigned from the Board effective September 11, 2023, and will serve as an advisor to the company until March 9, 2024. Chief Financial Officer, Jeffrey W. Shepherd also separated from the company effective August 18, 2023.
6. WSFS: On August 18, 2023, WSFS Financial Corporation terminated without cause the employment of Chief Financial Officer Dominic C. Canuso effective August 31, 2023.
7. TRN: On August 21, 2023, Trinity Industries Chief Legal Officer Sarah R. Teachout informed the company of her intention to resign to pursue another employment opportunity outside the company, effective September 8, 2023.
8. KAMN: On August 22, 2023, Kaman Corporation Chief Financial Officer James G. Coogan notified the company that he intends to resign from his position effective August 28, 2023.
9. MRTX: On August 17, 2023, Mirati Therapeutics Chief Financial Officer Laurie Stelzer notified the company of her intention to resign from her position effective September 8, 2023, in order to pursue an opportunity with another biotechnology company.
10. DBRG: On August 22, 2023, DigitalBridge Group Chief Accounting Officer Sonia Kim informed the company of her intention to resign effective September 8, 2023, to pursue other opportunities.
11. EFOI: On August 24, 2023, the Board of Directors of Energy Focus approved the termination of Chief Executive Officer, Lesley Matt, effective immediately.
12. URI: On August 28, 2023, United Rentals Chief Operating Officer Dale Asplund will voluntarily resign effective September 29, 2023.
13. MVLA: On August 21, 2023, Movella Holdings and Boele de Bie, Chief Operating Officer, agreed that Mr. de Bie will step down from his position as Chief Operating Officer effective August 21, 2023.

Advance Auto Parts (AAP): $66.94

Advance Auto Parts, a prominent automotive aftermarket retailer in the United States, specializes in offering both professional installers and do-it-yourself enthusiasts a broad selection of automobile parts, accessories, tools, and maintenance items.

The company runs stores under the Advance Auto Parts, Autopart International, and Carquest names as well as branches under the Worldpac brand.

Advance Auto Parts managed 4,790 stores and 319 Worldpac branches mainly in the U.S., along with outlets in Canada, Puerto Rico, and the U.S. Virgin Islands. The company also provides products to 1,307 independently owned Carquest stores and extends its reach to Mexico and several Caribbean islands.

On August 20, 2023, Advance Auto Parts appointed Shane M. O’Kelly to the position of President, Chief Executive Officer, and as a director of the company, commencing September 11, 2023.

On August 18, 2023, Advance Auto Parts appointed Anthony A. Iskander to the position of Interim Chief Financial Officer, effective immediately. The company’s former Executive Vice President and Chief Financial Officer, Jeffrey W. Shepherd, separated from the company effective August 18, 2023.

Tom Greco

Earlier this year, in February, Advance Auto Parts disclosed that President and Chief Executive Officer Tom Greco had communicated his intention to retire by the year’s end.

Greco added, “I believe now is the right time to begin to transition leadership for two primary reasons. First, we are in the final year of our three-year strategic business plan and are in the process of updating our next multi-year strategy. This transition will enable my successor to play a role in developing the next chapter of Advance’s strategy and help ensure the long-term success of Advance. Secondly, by planning for retirement in advance, I will be able to work with the Board’s Succession Committee to identify my successor and facilitate a smooth transition. In the meantime, I’m committed to the execution of our 2023 plan to continue delivering for customers and driving long-term shareholder value.”

Advance Auto Parts announced that following the appointment of Shane M. O’Kelly, Thomas R. Greco, will step down from the role and board effective September 11, 2023, and will serve as an advisor to the company until March 9, 2024.

Mr. Greco assumed the role of President and Chief Executive Officer in August 2016, after serving as CEO since April 2016. Greco joined Advance Auto Parts following a successful 30-year career at PepsiCo. Prior to that, from September 2014 to April 2016, he held the position of Chief Executive Officer at Frito-Lay North America, a division of PepsiCo.

Shane M. O’Kelly

Mr. O’Kelly brings over three decades of expertise in operations, strategic development, integration, and supply chain management. He previously held the position of CEO at HD Supply, a subsidiary of The Home Depot, and prior to that, he led PetroChoice as its CEO, overseeing the largest distribution of lubricants and lubrication solutions in the U.S.

Mr. O’Kelly said, “I am honored to be joining Advance at such an important inflection point for the company. As we undertake an operational and strategic review of the business, I look forward to working alongside the entire Advance team and our board of directors to drive growth, operational excellence and value for all stakeholders.”

Mr. O’Kelly will be entitled to an annual base salary of $1,125,000 and, beginning in 2024, will be eligible to participate in the company’s annual incentive bonus plan with a bonus target of 150% of base salary and a maximum bonus opportunity of 200% of the target bonus amount, based on the company’s performance.

CFO

Advance Auto Parts (AAP) announced that Jeff Shepherd, who had been Advance Auto Parts’ CFO since 2018, departed the company on August 18, 2023.

Tony Iskander who joined Advance Auto Parts in August 2017, assumed the role of Interim Chief Financial Officer. He would concurrently maintain his position as Senior Vice President, Finance, and Treasurer, which he has held since October 2020.

Prior to this role, Tony served as Vice President, Finance and Treasurer from July 2018 to October 2020, and Assistant Treasurer from August 2017 to July 2018. Mr.Iskander will receive an increase in base salary to $406,000 and an increase in target 2024 equity award value to $350,000, as well as a monthly cash payment of $25,000 for each month during which he serves as the Interim CFO.

Comparison to Peers

Amidst the pandemic-induced reduction in car availability, industry peers O’Reilly Automotive (ORLY) and AutoZone (AZO) saw their businesses catch a tailwind as consumers had to hold on to older cars for longer. In contrast, Advance Auto Parts appears to be struggling. The company experienced its most substantial single-day decline to date in May, triggered by the release of its first-quarter results accompanied by a dividend reduction.

In the past year, AutoZone (AZO) saw its stock rise 17%, while O’Reilly Automotive (ORLY) has surged 34%. Over the same period Advance Auto Parts (AAP) saw its stock decline nearly 61%.

Despite a gradual rise in Advance Auto Parts revenue, this growth has not adequately translated into bottom line profits. In July 2023, Advance Auto Parts reported revenue of $2.68B and only managed to generate$85M of net income. Gross profit margin was 42.74% but net income margin remains relatively modest at just 4%.

O’Reilly Automotive’s (ORLY) revenue has been steadily increasing over the years. In June, O’Reilly reported revenue of $4.08B with $627M net income, gross profit margin of 51.28%, and net income margin of about 15%. The company is also a cannibal, retiring 18% of its shares outstanding in the last 12 quarters.

Similarly for the May 2023 quarter, AutoZone (AZO) reported revenue of $4.09B with a net income of $647M, a gross profit margin of 53.47% and net income margin of $15.82%. AutoZone is a well-known cannibal, having repurchased more than 20% of its shares outstanding in the last 12 quarters.

AAP Loses its S&P 500 Spot

Standard & Poor’s announced that effective August 25, Kenvue Inc. (KVUE) is set to replace Advance Auto Parts Inc. (AAP) in the S&P 500 index. Simultaneously, Advance Auto Parts will take the place of Emergent BioSolutions Inc. (EBS) in the S&P SmallCap 600 index

Valuation, Dividend

The company has a market cap of $3.95B and an enterprise value of $8.27B on account of $4.32B of net debt, including 2.72 billion in capital leases. It trades at a forward EV/EBITDA of 10.92 and forward P/E 14.43.

Advance Auto Parts pays a quarterly dividend of $0.25 per share, which works out to an annual yield of 1.49% at current prices and a payout ratio of 60.36%. The dividend, previously $1.50, was significantly reduced to $0.25, marking an 83% decline.

Second Quarter 2023 Results (Press Release)

Advance Auto Parts CEO Tom Greco said in a statement, “Profitability in the quarter was below expectations, primarily related to our inability to price to cover inflation. However, we began to see early signs that the strategic investments we are making are beginning to drive an improvement in top-line sales and transactions.”

• AAP has initiated a comprehensive operational and strategic review.
• Net sales amounted to $2.7 billion, a 0.8% increase compared with the second quarter of the prior year
• Gross profit decreased 3.2% to $1.1 billion. Gross profit margin was 42.7% of Net sales compared with 44.5% of Net sales in the second quarter of the prior year. This was primarily driven by higher product costs and supply chain deleverage that were not fully covered by pricing actions, partially offset by a reduction in LIFO-related expenses.
• Comparable Store Sales experienced a 0.6% decrease.
• SG&A expenses were $1.0 billion, which was 37.7% of Net sales compared with 36.9% in the second quarter of the prior year.
• Operating income was $134.4 million, or 5.0% of Net sales, compared with 7.6% in the second quarter of the prior year
• Net cash used in operating activities was $164.6 million through the second quarter of 2023 versus $308.5 million provided by operating activities in the same period of the prior year. This reduction was due to lower net income and increased cash used for working capital, particularly in accounts payable.
• Free cash flow for Q2 2023 showed an outflow of $309.4 million, compared with an inflow of $97.3 million in the same period of the prior year.
• The effective tax rate stood at 25.9%, compared with 24.3% in the second quarter of the prior year
• Diluted EPS was $1.43, compared with $2.38 in the second quarter of the prior year.

Full Year 2023 Guidance

Tony Iskander, interim chief financial officer, said, “We are updating our full-year guidance, which considers a modest step up in net and comparable store sales growth driven by strengthening of our professional business. However, we are reducing our outlook for operating income margin rate, diluted earnings per share and free cash flow. This reflects additional headwinds anticipated in the back half of the year driven by our ongoing commitment to maintain competitive price targets, impacts from a shift in channel mix and investments in our team to help retain top talent.”

• Net sales projected: $11.25B -$11.35B, compared to consensus estimate of $11.21B.
• Diluted EPS expected: $4.50 – $5.10, contrasting with the consensus estimate of $5.92.
• Comparable store sales anticipated: -0.5% to 0.5%.

Conclusion

Since assuming leadership in April 2016, CEO Tom Greco has presided over a stock decline of over 59% for Advance Auto Parts, while O’Reilly and AutoZone have seen their stocks appreciate by more than 200%. Amid escalating costs and inflationary pressures, Advance Auto Parts remains mired in challenges, creating an opportunity for its competitors to gain ground.

It is evident that O’Reilly Automotive (ORLY) and AutoZone (AZO) are performing well and so the issues plaguing Advance Auto Parts were related to the company’s management. Turnarounds rarely turn but given the industry dynamics, it is possible that the new management team can engineer a turnaround with AAP. It would be worth tracking the performance of the company, especially on the expense side over the next few quarters, to see if a turnaround is actually taking place as the stock price will eventually follow.

Appointments

1. SLM Corp. (SLM): $14.29

On August 25, 2023, the Board of Directors of SLM Corporation approved the appointment of Peter M. Graham as Chief Financial Officer, effective as of October 27, 2023.