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All
tuned up
Roanoke’s Advance Auto Parts sets its sights on
being No. 1
Related
story:
Revving for profits
by
Peter Galuszka
Virginia
Business
August 2003
In
late 1999, supermarket executive Lawrence P. Castellani
had already built a strong, 35-year career. The former
chief of the Buffalo, N.Y.-based Tops Friendly Market
food chain was in Latin America advising store managers
from Dutch food store giant Ahold, which had bought
Tops. The next step seemed to be retirement. With his
children grown, Castellani and his wife were ready for
a quieter life.
Yet
when the call came from Roanoke, the job prospect from
the mountains of Southwest Virginia was appealing. Advance
Auto Parts, a specialty parts retailer, needed a new
chairman and CEO. Advance was undergoing big changes,
namely an ongoing acquisitions binge that had quadrupled
the number of stores — all company owned —
and more than doubled the number of its employees. Poised
to go public to fund its expansion, the company sought
new leadership.
Castellani, now 57, liked what he saw. The demographics
were right: Americans are keeping their cars longer
and need auto parts after warranties expire. The marketing
expertise he had developed at Tops would come in handy,
not to mention the $3.3 million signing bonus that would
be his after taking the position.
Best
of all, Advance’s culture fit with Castellani’s
people-oriented business philosophy. Founded in 1932
in Roanoke by Arthur Taubman and later run by his son
Nicholas, the company prized such traditional values
as honesty, loyalty and hard work. “We were started
in small towns,” recalls Nick Taubman, a former
CEO and major shareholder who left the board of directors
this March. “If you make people in small towns
mad, you won’t have any customers.”
Such
homespun shrewdness sold Castellani, who accepted the
job. Thus, the stage was set for one of the newest arrivals
on this year’s Fortune 500 list of the country’s
largest public companies. Under Castellani’s leadership,
Advance Auto Parts went public in 2001 and its stock
price headed skyward. This year it has ranged from $36
a share to a new high in June of nearly $63 per share.
Operating margins are expected to nearly double from
4.9 percent in 2001 to an estimated 8.2 percent this
year. Sales increased from $2.5 billion in 2001 to $3.3
billion last year. Stores got facelifts and earnings
per share doubled to $2.68. Advance became the No. 2
specialty auto parts retailer in the U.S., following
only Memphis-based AutoZone Inc. Not bad for a company
that maintains a modest headquarters near Roanoke’s
airport.
Now
the company, which has more than 2,000 stores and 33,000
employees in 37 states, Puerto Rico and the Virgin Islands,
plans an advance on AutoZone. President and Chief Financial
Officer Jim Wade says that within three to four years,
Advance wants to boost its operating margins to 11 percent
— a significant increase but still not better than
Auto-Zone’s industry-leading 17.2 percent operating
margin. Even so, the continual improvement in margins,
stock price and earnings per share has impressed industry
analysts. Says a gushy report from investment house
Zacks: “With an excellent record of surpassing
quarterly expectations, Ad-vance Auto Parts appears
to have the pedal to the metal to have your portfolio
humming along.”
Advance Auto Parts’ story closely follows major
changes in the automotive industry — which in Virginia
employs more than 25,000 people — showing just
how much things have changed and how much certain standards
remain winners. In the early 1930s, the Taubman family
lived in Baltimore and operated a chain of stores in
the Northeast. The Depression broke the business, and
Arthur Taubman was forced to look for opportunities
elsewhere. He found them in Virginia in 1932, where
Pep Boys was selling two auto parts stores in Roanoke
and one in Lynchburg.
The
elder Taubman, who died in 1994, built his reputation
by insisting on high service standards. “We had
a culture focused very strongly on the people who worked
for the company,” says 68-year-old Nick. “You
treat customers the way you want to be treated and you
run a flat organization — you’re in the trenches
with your people all of the time.”
Like
many auto parts retailers, the Taubmans had a tough
time following World War II. Military demands meant
few auto parts were available. So, like Western Auto,
the then-larger competitor that Advance would later
buy out, the Roanoke-based outfit expanded into household
goods — tires, toys and other items that might
show up under Christmas trees.
In
time, Nick took over and, by the 1980s, it was clear
that Advance needed to refocus. Running miniature department
stores was out, as discount mass retailers popped up
with stores everywhere. The younger Taubman pondered
a solution and decided to focus tightly on only auto
parts and chuck the rest. Out went the Christmas trees,
bicycles and tires.
The
strategy worked. By 1995, the company grew from 100
to 500 stores and was starting to compete nip and tuck
with various other parts retailers, such as the NAPA
chain, Pep Boys and others. Advance benefited from another
trend as well. After getting whipped on quality by Asian
and European carmakers, Detroit’s auto companies
finally got serious and greatly improved their products.
Thus, cars and trucks lasted much longer than they did
before. Owners tended to hang on to them longer. Yet
to do so, they needed replacement parts.
As
the market for specialty auto parts grew, Taubman dreamed
up plans to expand Advance even more and take it public.
He and his board conceived of a long-range plan to do
so. They enticed Freeman Spogli & Co., a Los Angeles-based
investment house that specializes in setting up private
companies for initial public offerings, to provide substantial
financing. From then until recently, when the firm started
to unload stock as planned, Freeman Spogli owned about
90 percent of the company’s stock and provided
advice about going public.
Its war chest secured, Advance went on a buying spree.
In 1998, it bought out Western Auto Supply and its 550
stores from Sears. In 2001, it took over Florida-based
Discount Auto Parts, scoring another 670 stores. In
July 2002, it received bankruptcy court approval to
add 55 Trak Auto Parts stores to the fold. Plus it launched
new stores of its own. “We’ve opened 100 or
more stores a year for the last 10 years,” says
Wade.
Digesting
stores after mergers is never an easy task, but Castellani
and Wade claim that Advance limited its problems by
doing plenty of due diligence. Keeping employees and
managers after the mergers also smoothed the transition.
Advance’s executive vice president and chief operating
officer, for example, is David R. Reid, who used to
be Western Auto’s CEO.
Keeping
up with the Taubman philosophy of close relations with
employees, Castellani expanded a company-wide human
resources department in 2001, hiring a top executive
from a major food retailer to head it. “We believe
people are our core competence,” says Castellani.
Other members of Advance’s management team have
backgrounds in retailing or services, such as hotel
management. Wade, for instance, has a department store
and hotel company background.
Castellani
applies his experience in grocery sales to Advance’s
drive to become No. 1. “Jim and I are exposing
our people to best-in-class retailing that I learned
in food,” he says. One example is the makeover
that Advance has launched. Storefronts are painted in
bold red, black and yellow with the company’s new
checkered-flag logo well displayed. Inside, there’s
“a better selection of products, enhancing our
mix,” says Castellani. The firm is still reviewing
what products it wants to sell and how it displays them.
One lesson learned is that customers don’t necessarily
want just the cheapest products, but a decent “good-better-best”
selection.
As
its stores grow to about 2,500 this year, Advance needs
to improve distribution. It’s a big job because
system wide the company carries about 120,000 parts
with an average store handling about 18,000 parts. The
firm relies on eight distribution centers around the
country, 19 so-called “PDQ” (parts delivered
quickly) warehouses for expedited orders and 25 local
area warehouses for stockpiles. Information technology
can help, so this year Advance is investing $25 million
in a paperless, Windows-based inventory system for each
store.
The
company is firmly embedded in the Roanoke area. Wade
and Castellani say their firm, the largest private employer
in the area, is aided by a hard-working and loyal labor
force and by good schools, hospitals and recreation.
The only major drawback is the lack of efficient and
inexpensive air service from Roanoke’s airport,
but Advance and other local companies are trying to
convince more air carriers to offer service. The biggest
advantage is that the values the Taubmans embraced still
endure. Says Castellani: “It’s a terrific
environment.”
Return
to Virginia Business - August 2003
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