Advance Auto Parts, Inc. — Q1 2018 Form 10-Q
Reporting period: Sixteen weeks ended April 21, 2018; unaudited. The company operates automotive aftermarket parts stores and distribution branches, serving Professional and DIY customers. It reported 5,044 stores, 131 distribution branches and 1,225 independently owned Carquest-branded stores.
Financial results
| Metric | Q1 2018 | Comparable 2017 period |
|---|---|---|
| Net sales | $2,873.8 million | $2,890.8 million |
| Gross profit / margin | $1,272.3 million / 44.3% | $1,270.7 million / 44.0% |
| Operating income / margin | $198.2 million / 6.9% | $179.8 million / 6.2% |
| Net income | $136.7 million | $108.0 million |
| Diluted EPS | $1.84 | $1.46 |
| Operating cash flow | $154.0 million | $35.1 million |
| Capital expenditures | $34.5 million | $65.3 million |
Comparable-store sales declined 0.8%. Net sales fell 0.6%; sales were approximately $17.0 million lower year over year. The effective tax rate decreased to 24.5% from 35.0%; the Tax Cuts and Jobs Act reduced Q1 tax expense by $25.3 million, or $0.34 per diluted share. Management’s non-GAAP adjusted EPS was $2.10, versus $1.60 a year earlier; this measure excludes specified integration, acquired-intangible amortization and transformation expenses, among other adjustments.
Balance sheet and liquidity
At April 21, 2018, cash and equivalents were $639.1 million, inventories $4,230.5 million, and total current assets $5,617.5 million. Current liabilities were $3,480.1 million. Long-term debt was $1,044.8 million, with no revolver borrowings; available revolver capacity was $888.3 million, after considering leverage-based availability and $111.7 million of letters of credit. The company stated it was in compliance with debt covenants. Cash increased $92.2 million during the period.
Operating cash flow improved by $118.9 million year over year, which management attributed mainly to higher net income and improved working-capital management. Investing cash outflow was $33.9 million; financing cash outflow was $26.8 million. The quarterly dividend declared was $0.06 per share. Total stockholders’ equity was $3,546.6 million.
Changes and management commentary
- Despite lower sales, gross margin expanded 32 basis points and operating margin improved 68 basis points. Management cited lower material costs, shrink and defectives, as well as expense-management actions; higher fuel-related transportation costs and costs at recently opened distribution centers partly offset those gains.
- Management attributed weaker comparable sales chiefly to unusually cold, wet weather in Northeast and North Central markets in the final five weeks of the quarter. Professional and Canadian business growth partly offset the weakness.
- Management reported sequential improvement in sales performance and continued transformation work, including a shared product catalog, demand-based assortment development, supply-chain and footprint optimization, digital/omni-channel initiatives, and an Uber supplier partnership. These are management statements, not quantified guidance.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of up to $250 million, subject to business conditions, and stated that cash from operations, cash on hand and available credit should fund primary obligations for the next year.
- A store and supply-chain rationalization plan was expected to generate up to $70 million of charges in 2018: $35 million for lease terminations, $15 million for inventory and supply-chain asset impairments, $15 million for other facility closures and $5 million for severance. Q1 recorded $3.2 million of these costs.
- The company continues its multi-year Carquest integration. At period-end, 427 stores still operated under the Carquest name. The filing also reports $31.2 million of total exit liabilities, with closed-facility lease payments expected through 2028.
- Adoption of the new lease standard in 2019 was expected to materially increase reported assets and liabilities; the company could not yet quantify the effect. It did not expect a material income-statement impact.
- The company was still assessing possible Tax Act adjustments pending completion of its 2017 U.S. tax return. It also guaranteed $26.3 million of loans to independent Carquest customers, while management considered performance under the guarantees remote.
- A putative securities class action filed in February 2018 alleges disclosure violations relating to the 2016–2017 class period. The company disputes the allegations and intends to defend the case; it was at a preliminary stage.
- Other risks cited include fuel prices, competition, consumer and economic conditions, vehicle-use and maintenance trends, and possible deterioration in credit ratings. The filing reported no significant change in market-risk exposure.
Key facts for investors to verify
- Whether comparable-store sales and overall revenue recover, particularly after the weather-related Q1 weakness.
- Whether gross-margin gains persist as fuel, distribution-center and other supply-chain costs evolve.
- Progress and realized costs of the transformation and store/supply-chain rationalization against the stated 2018 charge estimate.
- Working-capital and operating-cash-flow trends, planned capital spending, and continued access to revolver capacity while maintaining covenant compliance.
- The final Tax Act accounting, the balance-sheet effect of lease-standard adoption, and developments in the securities litigation and customer-loan guarantees.