Key Points
The conflict in the Persian Gulf remains dynamic, and it's too early to draw firm conclusions.
Management's turnaround plan appears to be making progress.
Shares in auto parts retailer Advance Auto Parts(NYSE: AAP) rose by 7.4% by 12:30 today. The move comes on a day of a sharp correction in oil and gasoline prices after the Trump administration suggested there might be a resolution to the current conflict.
Why Advance Auto's stock does well when gasoline prices fall
High gasoline prices discourage driving by making it more expensive, and fewer miles driven mean fewer accidents on the road and less vehicle wear and tear. That's bad news for auto parts retailers. On the other hand, when the price of gasoline declines, as it did today, then the opposite is true. That's why the stock is up.
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What does it mean for investors?
That said, it's just a day of trading on the back of commentary alluding to constructive discussions between the U.S. and Iran. Moreover, as yet, Iran is denying that any such negotiations have taken place, and the Strait of Hormuz remains closed to most commercial traffic.
However, the market has decided to focus on President Trump's dialogue on the matter. A declining gasoline price is particularly good news for Advance Auto Parts, as it makes its ongoing restructuring easier to achieve.
The company appears to be making progress on its restructuring plan, which involves closing underperforming stores, focusing on geographies and store locations where it has leadership, and opening larger strategic market hub stores.
Image source: Getty Images.
The proof of the pudding is in its margin expansion, with management expecting to build on the 2.5% adjusted operating margin in 2025 by hitting 3.8%-4.5% in 2026. That margin expansion will be a lot harder to achieve if a combination of raw material inflation and higher gasoline prices kicks in. Moreover, assessing the company's underlying performance will be much harder.
Where next for Advance Auto Parts
The conflict is far from over, and it's very hard to guess where oil prices are headed next. As such, just as investors shouldn't overly panic in response to near-term events, they shouldn't rush to conclude that those events are resolved.
Should you buy stock in Advance Auto Parts right now?
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Lee Samaha 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.
