On Thursday afternoon, Advance Auto Parts AAP announced that the company has made changes to several key executive positions, in an effort to simplify the company’s organizational alignment. In our view, the three most significant developments are as follows: (1) George Sherman, formerly senior VP of services at Best Buy BBY , will take on the role of president (which was formerly held by Darren Jackson, who remains the chairman and CEO); (2) the Chief Operating Officer role has been eliminated, and Kevin Freeland, the current COO, will leave the company; and (3) Jim Durkin, current president of Autopart International, will become senior vice president of the commercial business. The exact implications of this reorganization remain uncertain, but we expect that management will provide more color on the decision during its Analyst Day on April 10.
At first glance, the most surprising development to us was that Freeland will depart from Advance. We do not see the COO role as inherently necessary for a company like Advance (in fact, neither AutoZone AZO nor O’Reilly ORLY employs one), and we think it makes sense for the company to utilize a more decentralized approach, where the division heads are given more responsibility over their respective domains. However, it appears that Sherman’s role as president will in many ways be similar to Freeland’s role as COO, so it is unclear how Sherman will approach his role differently.
Advance began to underperform its peers in 2012, and while we attribute this discrepancy to a large number of reasons, we suspect management’s actions may have also contributed. Management was focused on reducing costs in 2011, and we suspect the company inadvertently cut muscle along with fat. As COO, Sherman was one the key leaders in charge of executing this initiative, so that may have played a part in his departure. Since then, management has temporarily abandoned the cost reduction focus and rededicated itself to developing the commercial business, which we think is the right move. In the long run, though, we still believe Advance benefits from significant operating leverage potential and will improve its long-terms to the low- to midteen range.
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