Why Advance Auto Parts Stock Dived Today

What happened

A credit rating downgrade is a tough blow for any company. After one was meted out to Advance Auto Parts (AAP -8.12%) on Tuesday, the company’s share price sank by over 8%. That was notably worse than the S&P 500 index’s dip of 0.6%.

So what

That downgrade came from ever-influential credit evaluator S&P Global Ratings. That company has tagged both Advance’s issuer credit and unsecured debt with BBB- ratings, one peg below its former estimation of BB+ for the pair. That takes the auto retailer down from S&P Global Ratings’ lowest rating of what it considers to be investment-grade debt, to the top tier of speculative grade.

In the press release announcing the downgrade, S&P Global Ratings laid out its reasons for the move. In its opinion, the retailer has not effectively improved its product availability and its inventory. The agency also characterized as “misguided” Advance’s attempts to boost its profit margins and pointed out that its sales have been stagnant across the past 18 months. Some competitors, meanwhile, have seen double-digit rises.

S&P Global Ratings wrote in the press release that Advance’s “strategic execution challenges have led to persistent underperformance, diminishing its competitive position and pressuring credit protection metrics.”

Now what

This is only the latest hit Advance has had to absorb. S&P Global Ratings’ criticism about stagnating revenue is accurate; while the company’s profitability has eroded lately, its free cash flow (FCF) flipped into the red, and it just brought in a new CEO, Shane O’Kelly. This is a business that needs some good news; investors will be hoping this arrives sooner than later.

Eric Volkman 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.

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