Why Advance Auto Parts Stock Plummeted Today

Key Points

• Advance Auto Parts told investors today it's on track to beat sales estimates this quarter.

• Advance also said it will be taking on more debt -- a lot more.

• 10 stocks we like better than Advance Auto Parts ›

Advance Auto Parts (NYSE: AAP) stock tumbled 7.3% through 1 p.m. ET Thursday, leaving investors wondering "what went wrong?"

The auto parts retailer preannounced "highlights" from its Q2 earnings today, and the highlight-iest part of all was this: Q2 revenue that Wall Street predicted at $1.97 billion will definitely beat that number, and might rise as high as $2 billion.

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Advance Auto Parts Q2 earnings

So what's wrong with that, you ask? According to Advance Auto Parts, the company's turnaround is progressing, and sales are tracking toward "the upper range of our expectations." Same-store sales look positive, up perhaps 0.1%, and adjusted operating margins could rise as high as 3%.

That's the good news. Now here's the bad: Advance Auto Parts also announced today that to further its turnaround, it's issuing $1.5 billion-worth of senior unsecured notes (i.e., debt) in two tranches, coming due in 2030 and 2033, respectively, and entering into a new asset-based loan revolving credit facility (which is also debt) as well.

Is Advance Auto Parts stock a sell?

At least some of the new debt will be used to roll over old debt coming due in 2026, with the rest going to "general corporate purposes." Advance Auto Parts kind of needs to do this, because it's currently burning cash at the rate of more than $250 million a year, and really needs some cash.

Advance hasn't yet told us whether its new debt will pay interest higher or lower than the debt it's paying off, however, making it hard to say if this is good news for the stock. All I can say for sure now is that it looks like the company's total debt load appears to be getting bigger -- and that, at least, doesn't seem like good news at all.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.