Business context and reporting period
Advance Auto Parts, Inc. is a North American automotive aftermarket parts retailer and distributor serving professional installers and do-it-yourself customers. This Form 10-K covers the 52-week fiscal year ended December 29, 2018; it also reports unaudited fourth-quarter results for the 12 weeks ended that date. The company operated 4,966 stores and 143 Worldpac branches at year-end and served 1,231 independently owned Carquest stores. Professional sales were approximately 58% of annual sales.
Financial and operating results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $9.581 billion | $9.374 billion | Up 2.2% |
| Comparable-store sales | Up 2.3% | Down 2.0% | Improved |
| Gross profit / margin | $4.219 billion / 44.0% | $4.085 billion / 43.6% | Margin up 46 bps |
| Operating income / margin | $604.3 million / 6.3% | $570.2 million / 6.1% | Margin up 22 bps |
| Net income | $423.8 million | $475.5 million | Down 10.9% |
| Diluted EPS | $5.73 | $6.42 | Down 10.7% |
| Operating cash flow | $811.0 million | $600.8 million | Up 35.0% |
| Capital expenditures | $193.7 million | $189.8 million | Up $4.0 million |
Annual net margin was 4.4%, versus 5.1% in 2017. Cash flow from operations less capital expenditures was approximately $617 million. Cash and cash equivalents were $896.5 million at year-end, up from $546.9 million. Inventory increased 4.7% to $4.363 billion.
Fourth quarter
Q4 net sales were $2.105 billion, versus $2.037 billion in Q4 2017; gross profit was $928.6 million, versus $873.6 million. Net income fell to $53.4 million from $184.5 million, and diluted EPS was $0.74 versus $2.49. The substantial prior-year comparison includes the 2017 Tax Act benefit; the filing’s quarterly table does not provide a full quarter-specific reconciliation of the year-over-year net income difference.
Liquidity, debt and capital allocation
Total debt was $1.046 billion at year-end, principally senior notes due in 2020, 2022 and 2023. No revolving-credit borrowings were outstanding; availability was $998 million, subject to the facility’s terms. The company reported BBB- and Baa2 credit ratings, both with stable outlooks, and stated that expected operating cash flow, cash and available borrowing capacity should fund primary obligations for the next year. Current liabilities were $3.886 billion and total assets were $9.041 billion.
The company repurchased 1.7 million shares for $272.8 million in 2018 under a $600 million authorization; $327.2 million remained at year-end. It paid $17.8 million in dividends, with declared dividends of $0.24 per share. After year-end, it repurchased a further 0.8 million shares for $127.2 million. In January 2019, it announced plans to redeem $300 million of 5.75% notes due 2020. Contractual operating lease payments totaled $2.876 billion.
Material changes, outlook and risks
- Management attributed sales growth to stronger comparable sales, Professional and Canadian business growth, and increased sales in several product categories. Gross margin improved through inventory management and material-cost optimization, partly offset by higher fuel and transportation costs. SG&A as a percentage of sales rose to 37.7% from 37.5%, reflecting transformation costs, bonuses and marketing spending.
- GAAP diluted EPS fell, while management’s non-GAAP adjusted EPS rose to $7.13 from $5.37. Adjustments included transformation expenses, acquired-intangible amortization, GPI integration/closure costs and tax-reform effects; adjusted EPS is not a GAAP measure.
- Management forecast 2019 capital expenditures of $250 million to $300 million. It expected approximately $2.5 billion of lease assets and liabilities to be recognized on adoption of the new lease standard in 2019, with an insignificant expected effect on the income statement and cash flows.
- A 2018 store-rationalization plan could generate charges of up to approximately $50 million; no stores had closed under that initiative by year-end. The separate 2017 store and supply-chain rationalization was expected to involve up to approximately $70 million in total charges; the company incurred $50.8 million of related costs in 2018.
- Key risks include intense competition, changes in consumer demand and weather, supplier and tariff disruptions, higher fuel and freight costs, supply-chain execution, ERP and other systems implementation, and the ability to execute the transformation and improve margins. The company also identified cybersecurity, environmental, regulatory and litigation risks.
- A putative securities class action filed in 2018 alleges misleading disclosures during 2016–2017; the company disputes the allegations and intends to defend the case. The filing also discusses asbestos-related lawsuits and says management does not expect pending matters to materially affect consolidated results or financial position.
Most important facts for investors to verify
- Whether comparable-sales gains and gross-margin improvement persist, and whether transformation spending produces sustained operating leverage.
- How much of the Q4 earnings decline reflects the prior-year tax benefit versus underlying operating performance; the filing’s quarterly data do not clearly quantify that split.
- Cash-flow durability given inventory growth, working-capital movements, planned capital expenditures and shareholder repurchases.
- The timing and costs of store rationalization, supply-chain optimization and ERP implementation, including the expected lease-standard balance-sheet impact.
- Debt maturity and redemption execution, covenant compliance, and potential developments in the securities and asbestos litigation.