Portrait Weekly Winners & Losers: AAP & ENS
Welcome to this week’s edition of the Portrait Weekly Winners & Losers. This week, we’ll take a look at Advance Auto Parts (AAP) and EnerSys (ENS).
This week, Advance Auto Parts and EnerSys caught our attention for big stock price moves. While AAP’s turnaround momentum led to an astonishing 57% jump, EnerSys struggled with its own earnings. Let’s dive into each company.
ENS
After a second consecutive cut to revenue guidance, ENS’ stock fell 15%. With simultaneously deteriorating cash flow, EnerSys is struggling to meet investor expectations.
What happened?
With a combination of deteriorating financials, leadership uncertainty, and regulatory headwinds, EnerSys’ recent earnings seemed to provide a perfect storm of disappointment.
Core Issues Driving Market Disappointment
EnerSys (ENS) has experienced significant stock weakness following recent earnings reports, driven by several fundamental issues that have concerned investors despite some positive headline metrics.
Deteriorating Revenue Outlook
The most significant factor driving ENS's stock weakness has been the company's repeated downward revisions of revenue guidance. In Q2 FY2025, management reduced full-year revenue guidance to $3.675B-$3.765B from the previous $3.735B-$3.885B (ENS 8-K 11/06/24 Earnings Release). This was followed by a further reduction in Q3 to $3.603B-$3.643B, representing approximately a $100M cut at the midpoint from the original guidance (ENS 8-K 02/05/25 Earnings Release). These sequential guidance reductions signal management's diminishing confidence in near-term growth prospects.
The revenue challenges are evident in the company's actual performance, with Q1 FY2025 showing a 6% year-over-year decline to $853 million (EnerSys, Q1 2025 Earnings Call, Aug 08, 2024) and Q2 FY2025 declining 2% year-over-year to $884 million (ENS 8-K 11/06/24 Earnings Release). While Q3 FY2025 showed a 5% year-over-year increase to $906 million, this was primarily driven by acquisitions rather than organic growth (ENS 8-K 02/05/25 Earnings Release).
Severe Cash Flow Deterioration
Perhaps the most alarming metric for investors has been the dramatic collapse in free cash flow. In Q2 FY2025, free cash flow plummeted to just $3.2 million from $91.0 million in the prior year period, representing a 96.5% year-over-year decrease (EnerSys Presents at Bank of America Securities 2024 Leveraged Finance Conference). This deterioration continued in Q3, with free cash flow of $56.8 million, down from $111.4 million in the prior year period (ENS 8-K 02/05/25 Earnings Release).
The free cash flow conversion rate (free cash flow as a percentage of adjusted net earnings) declined precipitously from 119.0% in Q2 FY2024 to just 3.7% in Q2 FY2025 (EnerSys, Q2 2025 Earnings Call), raising serious questions about the quality of earnings and the company's operational efficiency.
Segment-Specific Weaknesses
The company's performance has been hampered by significant challenges in key business segments:
Energy Systems (43% of revenue): This segment experienced prolonged weakness with a 15% year-over-year revenue decline in Q1 FY2025 (EnerSys, Q1 2025 Earnings Call) and a 10% decline in Q2 FY2025 (EnerSys, Q2 2025 Earnings Call). While Q3 showed a 4% year-over-year improvement, management acknowledged this was "the first year-over-year revenue gains in 6 quarters" (EnerSys, Q3 2025 Earnings Call), confirming this has been a persistent problem area. The weakness was primarily attributed to a "Communications spending pause" by major customers.
Specialty (15-17% of revenue): While showing revenue growth of 9.3% in Q2 FY2025, the segment experienced a 92.3% decline in operating earnings (EnerSys Presents at Bank of America Securities 2024 Leveraged Finance Conference). In Q1, adjusted operating earnings fell 50% year-over-year to just $4.9 million with a 350 basis point margin erosion to 3.9% (EnerSys, Q1 2025 Earnings Call). The segment has been negatively impacted by "Class 8 truck OEM market softness" and "under absorption in MO plants."
Motive Power (40-42% of revenue): While this segment has been the most stable performer with 3% year-over-year revenue growth in Q2 FY2025 and 8% growth in adjusted operating earnings (EnerSys, Q2 2025 Earnings Call), Q3 results showed stagnation with revenue up only 1% year-over-year and adjusted operating earnings flat compared to the prior year (EnerSys, Q3 2025 Earnings Call).
Heavy Reliance on IRA Tax Credits
A significant concern for investors has been the company's increasing reliance on Inflation Reduction Act (IRA) Section 45X tax credits to drive earnings growth. In Q3 FY2025, the company recorded $75 million of IRA tax credits, including a $36 million retroactive benefit adjustment (EnerSys, Q3 2025 Earnings Call, Feb 06, 2025). Excluding these benefits, the company's adjusted metrics showed much more modest growth:
Adjusted Operating Earnings: +13% vs. reported +19%
Adjusted EBITDA: +13% vs. reported +19%
Adjusted EPS: +10% vs. reported +22%
This heavy reliance on tax credits rather than operational improvements has raised questions about the sustainability of earnings growth.
Leadership Transition Uncertainty
In November 2024, EnerSys announced that CEO David Shaffer would retire in May 2025, with Shawn O'Connell, President of Energy Systems Global, named as successor (News - November 2024 - ENS.UP). This leadership transition during a period of operational challenges has likely contributed to investor uncertainty.
What signs were there, in hindsight?
Looking back at the past 6-12 months, we find increasing restructuring charges and leadership departures standing out as key red flags.
Warning Signs from the Past 6-12 Months
Several warning signs were evident in the past 6-12 months that may have predicted the current troubles:
Persistent Energy Systems Weakness
The Energy Systems segment showed consistent weakness for an extended period. In Q3 FY2025, management acknowledged this was "the first year-over-year revenue gains in 6 quarters and the first year-over-year increase in operating earnings in 5 quarters" (EnerSys, Q3 2025 Earnings Call). This prolonged underperformance in a key segment (43% of revenue) was a clear warning sign.
Deteriorating Cash Flow Metrics
Free cash flow has shown a consistent downward trend:
Q1 FY2025: Negative $26 million, representing an $85 million year-over-year deterioration (EnerSys, Q1 2025 Earnings Call)
Q2 FY2025: $3.2 million, down from $91.0 million in Q2 FY2024 (EnerSys Presents at Bank of America Securities 2024 Leveraged Finance Conference)
Q3 FY2025: $56.8 million, down from $111.4 million in Q3 FY2024 (ENS 8-K 02/05/25 Earnings Release)
This consistent deterioration in cash flow generation despite headline earnings growth was a significant warning sign of underlying operational issues.
Increasing Reliance on Tax Credits
The company's increasing dependence on IRA tax credits to drive earnings growth was evident in December 2024, when EnerSys announced "incremental benefits from IRA section 45X tax credits" and increased FY adjusted EPS guidance to $9.65-9.95 from $8.75-9.05 (News - December 2024 - ENS.UP). This reliance on tax benefits rather than operational improvements to drive earnings growth was a concerning trend.
Restructuring Actions
The company implemented several restructuring initiatives, indicating management's awareness of operational challenges:
In Q1 FY2025, the company realized "$7M in savings from ES restructuring actions" (EnerSys, Q1 2025 Earnings Call)
In April 2025, EnerSys announced the closure of its Monterrey, Mexico facility as part of a strategic manufacturing restructuring, expecting to incur a pre-tax charge of approximately $20 million (News - April 2025 - ENS.UP)
These restructuring actions suggested ongoing operational challenges that required significant intervention.
Executive Departures
In March 2025, EnerSys disclosed the departure of CTO Joern Tinnemeyer and appointed Mark Matthews, President of Specialty Global, as Acting CTO (News - March 2025 - ENS.UP). This executive change, followed by the CEO retirement announcement in November 2024, indicated potential instability in the leadership team.
Acquisition Strategy Amid Weakening Fundamentals
In July 2024, EnerSys completed the acquisition of Bren-Tronics for $208 million (News - July 2024 - ENS.UP), increasing leverage and potentially diverting management attention during a period of operational challenges. This acquisition, while potentially strategic long-term, added financial strain during a period of weakening fundamentals.
Who else might be impacted, and what next?
Interestingly, other businesses levered to communication networks capex might be at risk, as EnerSys cited this issue as a key driver of weakness.
Companies and Sectors Potentially Affected
The challenges facing EnerSys have implications for several other companies and sectors:
Telecommunications Infrastructure Providers
The "U.S. Communication Networks CapEx pause" cited by EnerSys as a key driver of Energy Systems segment weakness could impact other companies in this space, including:
Network equipment providers
Tower companies
Power solution providers for telecommunications infrastructure
Companies with significant exposure to broadband and wireless network buildouts
Management noted in Q3 FY2025 that "carriers realize they have a deficit when it comes to passing AI traffic through their networks" (EnerSys, Q4 2025 Earnings Call), suggesting potential future recovery but current spending constraints.
Class 8 Truck Manufacturing Ecosystem
The "temporary softening in Class 8 truck OEM market" affecting EnerSys's Specialty segment has implications for:
Heavy-duty truck manufacturers
Component suppliers to the trucking industry
Transportation aftermarket parts suppliers
Companies with significant exposure to freight and logistics capital spending
Management noted in Q3 FY2025 that "Recent industry data shows North American Class 8 truck net orders were up 29% over prior year in December" (EnerSys, Q3 2025 Earnings Call), suggesting a potential recovery, but also acknowledged that "tariff and macro uncertainty have paused the Class 8 truck recovery expected for early fiscal '26" (EnerSys, Q4 2025 Earnings Call).
Looking ahead, the market will be focusing not only on EnerSys’ ability to turnaround its KPIs, but also tariff impacts and DOE funding.
Key Debates and Concerns Going Forward
Sustainability of Earnings Growth
A central debate is whether EnerSys can sustain earnings growth without heavy reliance on IRA tax credits. In Q3 FY2025, excluding these benefits, adjusted EPS growth was only 10% versus the reported 22% (EnerSys, Q3 2025 Earnings Call, Feb 06, 2025). The company expects "to record annual tax credits as a reduction to cost of goods sold and not subject to taxation to be in the range of ~$135M to $175M" (News - December 2024 - ENS.UP), but investors may question the quality and sustainability of these earnings.
Revenue Growth Trajectory
Despite positive commentary, EnerSys has repeatedly lowered revenue guidance, raising questions about the company's growth trajectory. Management's Q4 FY2025 guidance of $960M to $1,000M (ENS 8-K 02/05/25 Earnings Release) and decision to pause full-year quantitative guidance for FY2026 due to "the evolving policy environment and pacing of demand normalization" (ENS 8-K 05/21/25 Earnings Release) reflect significant uncertainty about future revenue growth.
Lithium Gigafactory Execution Risk
EnerSys is making a significant bet on lithium-ion technology with a $665 million investment in a new gigafactory in Greenville, South Carolina (EnerSys - Special Call). This represents a substantial capital commitment and execution risk, particularly given the company's weakening cash flow and increased leverage. The project timeline is extended, with construction expected to begin in calendar year 2025 and commercial production operations in calendar year 2028 (News - September 2024 - ENS.UP).
Leadership Transition Impact
The retirement of CEO David Shaffer in May 2025 and the appointment of Shawn O'Connell as successor (News - November 2024 - ENS.UP) create uncertainty during a challenging period. O'Connell's strategic priorities, as outlined in Q4 FY2025, include a "focus on helping customers address energy security and labor scarcity" and a "narrow focus on select growth verticals, expand service capabilities, and achieve operational efficiencies" (EnerSys, Q4 2025 Earnings Call).
Tariff Impacts
The company faces significant tariff exposure, with management noting in Q4 FY2025 that "direct tariff exposure is approximately $92 million, down from $160 million prior to the May 12 U.S. administration updates" (EnerSys, Q4 2025 Earnings Call). The company expects "some near-term friction in Q1 due to stranded tariffs that can't be passed on to customers and shifting customer order patterns."
DOE Funding for Lithium Plant
The company has been selected for a $199 million award negotiation from the U.S. Department of Energy to develop its lithium-ion cell gigafactory (News - September 2024 - ENS.UP). However, this funding is "subject to final contract and funding negotiations between the DOE and EnerSys, which could take ~120 days to conclude." The outcome of these negotiations and the timing of funding disbursement remain uncertain.
In conclusion, EnerSys faces multiple challenges that have contributed to its recent stock weakness, including revenue growth concerns, cash flow deterioration, segment-specific weaknesses, balance sheet pressures, and significant capital commitments. While the company has taken steps to address these issues through restructuring initiatives and strategic acquisitions, investors remain concerned about the sustainability of earnings growth, the timeline for segment recoveries, and the execution risks associated with the lithium gigafactory investment. The upcoming leadership transition adds another layer of uncertainty during this critical period.
AAP
After beating analyst expectations, AAP’s stock posted its largest one day gain since its IPO in 2001.
What happened?
With Portrait, we learn that AAP is demonstrating progress in its turnaround, with momentum in its Pro business and successful store optimization.
Drivers of AAP's Positive Reaction on 5/22/25
Advance Auto Parts (AAP) stock experienced a remarkable rally on May 22, 2025, soaring approximately 52% to $47.59 per share, marking its highest level since February and potentially the largest one-day gain since its IPO in 2001 (Web - Research - AAP.UP). This dramatic movement was driven by several key factors:
1. Significant Earnings Outperformance
AAP reported Q1 2025 earnings that substantially exceeded analyst expectations. The company posted a loss per share of $0.22, significantly outperforming consensus estimates of -$0.82, representing a 72.84% positive earnings surprise (Web - Research - AAP.UP). Revenue came in at approximately $2.58 billion, exceeding estimates of $2.51 billion despite being down 7% year-over-year (Web - Research - AAP.UP). This marked the third time in four quarters that AAP surpassed consensus revenue estimates, demonstrating improving operational execution.
2. Pro Business Momentum
During the earnings call, management highlighted that the Pro business grew in the low single-digit range in Q1, including 8 consecutive weeks of positive comparable sales growth in the U.S. (Advance Auto Parts, Inc., Q1 2025 Earnings Call, May 22, 2025). This positive momentum in the Pro segment has continued during the first 4 weeks of Q2, driven by the company's focus on customer service. The Pro business outperformed the DIY channel, which declined in the low single-digit range (AAP.UP 8-K 05/22/25 Unknown).
3. Successful Completion of Store Optimization
The company announced it had completed its store footprint optimization program in March, ahead of the original mid-2025 timeline (News - March 2025 - AAP.UP). Approximately 75% of the revised store footprint is now concentrated in markets where AAP holds the #1 or #2 position based on store density, strengthening its competitive positioning (Advance Auto Parts, Inc., Q1 2025 Earnings Call, May 22, 2025). This strategic realignment appears to be yielding positive results faster than anticipated.
4. Resilience Against Tariff Impacts
Despite sourcing products from Mexico, China, and Canada, the company maintained its previous profit forecast even after including the impact of current tariffs (Web - Research - AAP.UP). Management reaffirmed its adjusted 2025 earnings guidance of $1.50 to $2.50 per share, which aligns with FactSet consensus estimates (Web - Research - AAP.UP). During the earnings call, management noted that they had run various scenarios for tariff impacts and had mitigation strategies in place (Advance Auto Parts, Inc., Q1 2025 Earnings Call, May 22, 2025).
What signs were there, in hindsight?
Looking through the past 6-12 months, we discover AAP made several positive moves in its turnaround plan, including asset sales and supply chain transformation.
Clues of Incoming Strength (Past 6-12 Months)
Looking back at the past 6-12 months, several indicators suggested potential for AAP's stock strength:
1. Strategic Divestiture of Worldpac
On August 22, 2024, AAP announced the sale of its Worldpac business to Carlyle Group for $1.5 billion (AAP 8-K 08/22/24 Entry into a Material Definitive Agreement). The transaction closed on November 1, 2024, providing the company with approximately $1.45 billion in net proceeds after transaction costs and excluding the impact of taxes (AAP 8-K 11/13/24 Earnings Release). This strategic move significantly strengthened AAP's balance sheet, providing capital to fund its turnaround initiatives while allowing management to focus on the core Advance blended box business.
2. Comprehensive Restructuring Plan
In November 2024, AAP's Board of Directors approved a restructuring and asset optimization plan designed to improve profitability and streamline operations (AAP 8-K 11/13/24 Earnings Release). The plan included:
Closure of approximately 500 stores, 200 independent locations, and four distribution centers
Reduction in U.S. asset footprint to focus on markets where AAP holds strong positions
Standardization of store operating model and improving labor productivity
Consolidation of distribution centers to operate 13 large facilities by 2026
Opening of 60 market hub locations by mid-2027
This decisive action to address underperforming assets signaled management's commitment to improving operational efficiency and profitability.
3. Analyst Upgrades
In October 2024, Wedbush Securities upgraded AAP to outperform from neutral with a $55 target price, representing 39% upside at that time (News - October 2024 - AAP.UP). This upgrade suggested growing confidence in AAP's turnaround potential among some analysts.
4. Supply Chain Transformation Progress
Throughout 2024, AAP made significant progress on its supply chain transformation, including:
Consolidation of distribution centers from 38 to 28 by the end of 2024, with plans to further reduce to 16 by the end of 2025 (Advance Auto Parts, Inc., Q4 2024 Earnings Call, Feb 26, 2025)
Opening of 19 market hubs by the end of 2024, with plans for 10 more in 2025 (Advance Auto Parts, Inc., Q4 2024 Earnings Call, Feb 26, 2025)
Implementation of a new inventory management system completed in July 2024, 6 months ahead of schedule (Advance Auto Parts, Inc., Q2 2024 Earnings Call, Aug 22, 2024)
These improvements in the supply chain infrastructure laid the groundwork for better parts availability and service levels.
Who else might be impacted, and what next?
Reading through AAP’s results, we find that other auto parts retailers may be minimally affected by tariffs.
Companies/Sectors Potentially Affected
The developments at AAP could have implications for several companies and sectors:
1. Direct Competitors
O'Reilly Automotive (ORLY) and AutoZone (AZO): These companies may face increased competitive pressure in markets where AAP is focusing its resources. Truist analysts noted that auto parts retailers, particularly AZO and ORLY, are positioned to be least negatively impacted by tariffs (News - March 2025 - AAP.UP).
Genuine Parts Company (GPC): As the parent company of NAPA Auto Parts, GPC could be affected by AAP's improved competitive positioning, particularly in the Pro segment.
2. Auto Service Providers
Independent repair shops and service chains: AAP's renewed focus on the Pro segment and improved parts availability could impact the relationships between parts suppliers and service providers.
3. Auto Parts Suppliers and Manufacturers
Parts manufacturers: Changes in AAP's merchandising strategy and vendor relationships could affect parts manufacturers, particularly those with exposure to tariffs.
Worldpac (now owned by Carlyle Group): As a supplier to AAP post-divestiture, Worldpac's performance could be affected by AAP's operational changes.
Taking a forward view, execution remains central to AAP’s success, as the turnaround still has plenty of work left.
Key Debates and Concerns Going Forward
Despite the positive momentum, several key debates and concerns remain for AAP:
1. Execution Risk
The ambitious turnaround plan involves complex operational changes across merchandising, supply chain, and store operations. Any execution missteps could delay or diminish expected benefits. As noted during the Q4 2024 earnings call, "sales and margin realization will lag implementation," suggesting that the full benefits of these initiatives will take time to materialize (Advance Auto Parts, Inc., Q4 2024 Earnings Call, Feb 26, 2025 (Presentation)).
2. Sales Growth Challenges
While margin improvement is evident, the company still faces challenges in driving comparable sales growth. Q1 2025 comparable store sales declined 0.6% (AAP.UP 8-K 05/22/25 Unknown), and management noted they are seeing "more week-to-week volatility in sales performance" in Q1 2025 (Advance Auto Parts, Inc., Q4 2024 Earnings Call, Feb 26, 2025). The company's ability to achieve its projected positive low-single-digit growth in future years remains uncertain.
3. Competitive Landscape
The auto parts retail sector remains highly competitive, with well-capitalized competitors who may respond aggressively to AAP's renewed focus on core markets. As noted by UBS analyst Michael Lasser, "industry peers will not/have not sat idle and points to DIFM and DIY competition losses over recent years" (News - November 2024 - AAP.UP).
4. DIY Segment Weakness
The DIY segment continues to show weakness compared to the Pro segment. During the Q1 2025 earnings call, management noted that "DIY consumers remain cautious in their overall spending" and that "the DIY environment [is expected] to remain challenged due to the potential for higher broad-based consumer goods inflation impacting household budgets" (Advance Auto Parts, Inc., Q1 2025 Earnings Call, May 22, 2025).
To dive further into AAP, ENS, or any other public company, head over to Portrait!