Why Advance Auto Parts Crashed Today

Key Points

• Advance Auto Parts beat earnings in its Q2 report Thursday.

• Actual GAAP profits were cut in half, however, and less than half of reported adjusted earnings.

• Advance Auto Parts' free cash flow ran negative, and more than 4 times worse than a year ago.

• 10 stocks we like better than Advance Auto Parts ›

Advance Auto Parts (NYSE: AAP) stock plummeted nearly 16% in early trading Thursday before clawing back some losses in the afternoon. As of 12:15 p.m. ET, Advance Auto Parts stock remains down -- but only 9.5%.

And why is it down? That's an excellent question. Reporting second-quarter earnings this morning, Advance Auto Parts beat forecasts for a $0.58-per-share adjusted profit on less than $2 billion in revenue. In fact, Advance earned $0.69, and sales were precisely $2 billion.

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Advance Auto stock Q2 earnings

But not all the news was good. Revenue beat estimates, for example, but was still down 9% year over year. Gross profit margin slipped 10 basis points, and selling, general, and administrative costs got 130 basis points more expensive.

This all naturally ate into profits, with operating margin falling by more than half to just 1.1%. On the bottom line, the company's earnings as calculated according to generally accepted accounting principles (GAAP) were just $0.25 per share -- barely 36% of the company's adjusted profit -- and less than half the $0.51 per share Advance Auto Parts earned in last year's Q2.

Yes, you read that right: Profits got cut in half. Worse, the company reported negative free cash flow of $201 million in the quarter -- 4 times worse than last year.

Is Advance Auto Parts stock a buy?

These numbers were objectively terrible, and yet CEO Shane O'Kelly insisted "the Advance team delivered solid second-quarter results," which kind of defies common sense.

Management did forecast positive same-store-sales growth this year, about 1% year over year, and promised positive profits and improved (but still negative) free cash flow. With the stock still trading for roughly 29 times current-year earnings, however, I just can't bring myself to recommend buying Advance Auto Parts stock.

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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.