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Expect Breakdowns at Advance Auto Parts

The departure of its CEO will likely lead to more problems.

The departure of

Advance Auto Parts

(AAP) - Get Advance Auto Parts, Inc. Report

CEO Michael Coppola caught nearly everyone off guard -- but it was welcomed by investors.

The auto-parts retailer's stock jumped more than 3% in heavy volume Tuesday following the announcement that Coppola resigned "to pursue other opportunities."

I suspect, however, that investors won't be as enthusiastic over the coming months as the company scrambles to fix what was wrong, while potentially losing what was right.

The language of Advance Auto's press release signals that Coppola was fired. The company said a "comprehensive business review" convinced the board there were areas that could be improved.

Also, the former CEO spoke at an investor conference less than a week ago. Unless he needed the frequent flyer miles, that's probably not something an executive who was contemplating resigning would do.

So what went wrong? If Coppola were a politician, no doubt he would be a target for right-wing talk show hosts, as he tended to throw money at problems.

In 2006, his first full year as CEO, operating margin fell 90 basis points amid a 120-basis-point increase in sales, general and administrative expenses.

The rise came as Coppola, a former grocery executive, remodeled many of the company's stores. Paul Anderson, a consultant with Scheduling Dynamics, which works with Advance Auto, points out that the shops are attractive and don't look like traditional auto-parts stores, but he questions the importance of aesthetics.

"Do you get a return for that?" he asks. "Do people really shop with you because your store is more attractive? In a supermarket, yes. But I'm not sure in an auto-parts store."

Advanced Auto serves both the "do-it-yourself" and the "do-it-for me" markets. As the name suggests, the do-it-yourself customers buy their own parts and make the repairs themselves. The do-it-for-me business serves professionals such as mechanics and auto body shops.

It's the latter business that was giving the company trouble. Coppola attempted to jump-start the do-it-for-me segment by overstaffing, Anderson says.

The consultant estimates there are 300 to 400 stores that "will never be profitable" and need to be shuttered. The company currently has nearly 3,100 stores in the U.S.

Advance Auto will probably look for a CEO who will reign in costs and boost margin, which is hard to argue against. But it is unlikely that they'll find someone who will be as sales-oriented as Coppola, according to Anderson.

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"He is a very smart guy and an incredibly talented merchandiser," he says.

Last year, under Coppola's leadership, Advance Auto Parts' same-store sales grew 2.1%, which is solid considering the company was coming off an 8.7% rise the year before.

In comparison, same-store merchandise sales declined at

Pep Boys

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last year, while

O'Reilly Auto Parts

(ORLY) - Get O'Reilly Automotive, Inc. Report

posted a 3.1% rise on top of a 7.5% number the year before.

So while a more skilled handler of the cost side may meet margin and spending goals, it may be challenging to grow or even hang on to the sales that the company fought so hard to achieve in a difficult environment last year. And in such a competitive market, pricing pressures will also hurt the top line.

Now, I'm not saying Coppola should have stayed. Clearly, things weren't working the way the board wanted. But I expect that while they fix some of the holes in the business, problems on the sales side will emerge.

Take your profits here, and let the dust settle. It's going to be a tough year.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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