Advance Auto Loses Its Starboard Bounce


Kristen Scholer

Nov 11, 2015

Shares of Advance Auto Parts Inc.AAP -15.01% drove off a cliff Thursday morning.


The automotive retailer’s stock is down as much as 14%, seeing its worst intraday percentage slide since late August, after the company said its chief executive was headed out the door and reported disappointing quarterly results, cut its profit outlook and announced store closures. The drop wiped out some big gains the stock had posted after an activist investor revealed a stake back in September.


“The softer than expected back half to 2015 indicates that the company has a tough road ahead as it searches for a permanent CEO to turn the company around,” said Kate McShane, an analyst at Citigroup Inc.C -1.73% She thinks the stock is down because of the poor results and outlook, but that the management change should be viewed as a positive by investors. CEO Darren Jackson is retiring Jan. 2 after spending more than 11 years with the company.


At the end of September, The Wall Street Journal reported activist hedge fund Starboard Value LP had built a 3.7% stake in Advance Auto, urging it to drive margins higher so that it could compete with peers AutoZone Inc.AZO -0.97% and O’Reilly Automotive Inc.


Don Bilson, head of event-driven research at Gordon Haskett Research Advisors, said Thursday that when the Starboard stake was revealed, “it didn’t require a heat sensor to deduce that CEO Darren Jackson was…on the hot seat.”


Up until Starboard revealed its stake, shares of Advance Auto were up 7.1% on the year versus gains of 26% and 17%, respectively, for O’Reilly and AutoZone.


“For far too long, Jackson has been the steward of an underwhelming story and with Starboard now involved, we didn’t like his chances of making it to 2017,” Mr. Bilson added.


News of Starboard’s stake brought a pop in Advance Auto’s stock, with shares of the company rising 14% through Wednesday’s close, compared to increases of 11% and 8.6%, each, for AutoZone and O’Reilly. But Thursday’s plunge has erased those gains entirely, as investors digested the news that the company wouldn’t be turned around overnight.


In a separate release Thursday morning, Advance Auto also said that it reached an agreement with Starboard, under which the New York hedge fund’s chief executive, Jeffrey Smith, would be added to Advance Auto’s board. In addition, Starboard and Advance Auto will each add two directors to the board, increasing its size to 13 members from 12.


“With so many new directors coming aboard, no CEO in place and knowing Starboard’s affinity for putting hardline companies together, we certainly wouldn’t rule out an attempt to merge the company,” said Mr. Bilson.


The company’s earnings call recently got underway at 10 a.m. Eastern time.