Why Shares in Advance Auto Parts Crashed This Week

Shares in Advance Auto Parts (NYSE: AAP) declined by 18% in the week to Friday morning, as investors continued to digest the newsflow from one of its suppliers' Chapter 11 bankruptcy process.

First Brands files for bankruptcy

When a supplier to Advance Auto Parts, AutoZone, and O'Reilly Auto Parts files for bankruptcy, the usual hope is that the Chapter 11 process will result in a restructuring or a sale that will keep at least part of the business running and parts supplied to retailers. That's a big consideration for Advance Auto Parts and others, because the key to running an auto parts retailer is maintaining a constant in-store inventory for customers.

As such, when First Brands filed for Chapter 11 on Sept. 28 , investors were hoping that the Advance Auto Parts supply chain (First Brands products include Carter fuel pumps, Trico windshield wipers, and Fram filters and other products) might not be severely impacted.

The latest news is not good

However, that hope may prove to be optimistic given the latest developments. First Brands owes $2.3 billion to working capital companies providing factoring services (a process where a company sells its receivables to a third party at a discount).

Image source: Getty Images.

According to this agreement, First Brands is required to immediately transfer funds to the working capital companies upon receiving payment from customers. However, lawyers representing First Brands claim that $1.9 billion hadn't been transferred, and the working capital company Raistone is requesting an independent investigation into the matter.

These developments are raising concerns that Advance Auto Parts' supply chain could be more negatively impacted than initially assessed by investors, giving reason to avoid the stock for now.

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.