Starboard Value Letter to Advance Auto Parts
September 30, 2015
Advance Auto Parts, Inc.
5008 Airport Road
Roanoke, VA 24012
Attn: Darren R. Jackson, Chief Executive Officer
cc: Board of Directors
Thank you for taking the time to meet with us earlier this month. Our discussion was helpful for us in gaining a better understanding of Advance Auto Parts, Inc. ("Advance", or the "Company"), its challenges, and its opportunities. As you know, we have conducted extensive research on Advance and the aftermarket auto parts industry. We believe that the current market price of Advance does not fully reflect the value of its businesses and that opportunities exist within the control of management and the board of directors of the Company (the "Board") to create substantial value for all shareholders. We look forward to continuing our discussions with you regarding these opportunities.
Starboard Value LP, together with its affiliates ("Starboard"), currently has an ownership interest of approximately 3.7% of Advance, making us one of the Company's largest shareholders. Later today, we will be discussing Advance at the C4K Sohn Canada Conference 2015, where we will outline our views as to why Advance is undervalued and the opportunities we see for substantial value creation. In our presentation, we discuss how Advance's operating margins are approximately 800-900 basis points below its closest peers, O'Reilly Automotive and AutoZone, and our belief that Advance can close the bulk of that gap over the next several years by implementing a series of operational improvements. Despite this tremendous margin improvement opportunity and a best-in-class business mix, Advance currently trades at an approximately 2-5 turn discount to its peers on an EBITDA multiple basis.
We believe that Advance can achieve a share price of more than $350 by implementing a comprehensive margin improvement program, together with additional value creation opportunities, including substantial working capital improvements, realizing the value of Worldpac, and implementing a daily delivery program to drive commercial sales. Moreover, if Advance realizes margins and multiples in line with O'Reilly, which we believe is achievable, its stock could be worth well over $400.
We believe Advance's tremendous operational improvement opportunity, combined with its discounted trading multiple, makes Advance an extremely compelling investment opportunity, and therefore have chosen to discuss Advance at the conference. Since the conference materials will be public, but may not be widely disseminated, we have included them as an attachment to this letter, so that you and the Board, as well as all shareholders of the Company, can understand our view of this compelling opportunity for Advance.
We look forward to continuing our constructive relationship.
Jeffrey C. Smith