Advance Auto Parts, Inc. — FY2016 Form 10-K
Business context and reporting period
Advance Auto Parts is a North American automotive aftermarket parts retailer and distributor serving professional installers and do-it-yourself customers through store, branch and online channels. It reported as one segment. Fiscal 2016 ended December 31, 2016, comprised 52 weeks; fiscal 2015 also comprised 52 weeks. The filing is annual, with fourth-quarter results covering 12 weeks.
Financial and operating performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $9.568 billion | $9.737 billion |
| Comparable-store sales | (1.4%) | 0.0% |
| Gross profit / margin | $4.256 billion / 44.5% | $4.423 billion / 45.4% |
| Operating income / margin | $787.6 million / 8.2% | $825.8 million / 8.5% |
| Net income | $459.6 million | $473.4 million |
| Diluted EPS | $6.20 | $6.40 |
| Operating cash flow | $500.9 million | $689.6 million |
Fourth-quarter FY2016 sales were $2.083 billion versus $2.034 billion in the prior-year quarter; net income was $62.4 million versus $54.8 million, and diluted EPS was $0.84 versus $0.74. Comparable-store sales rose 3.1% in Q4 after declines in each of the first three quarters.
Cash and cash equivalents were $135.2 million at year-end, up $44.4 million. Inventory was $4.326 billion, up 3.6%; inventory turnover declined to 1.25 from 1.31. Capital expenditures were $259.6 million. Total debt was $1.043 billion, down $163.6 million; there were no revolver or term-loan borrowings, and $899.3 million remained available under the year-end revolver after letters of credit. Net working capital was $1.497 billion. Current assets were $5.173 billion and current liabilities $3.676 billion.
Material changes versus the prior comparable period
- Sales fell 1.7%, primarily reflecting lower comparable sales, store consolidations and closures, partly offset by new openings.
- Gross margin contracted 94 basis points, principally because of higher supply-chain costs associated with elevated inventory and distribution-center disruption in Northeast and Great Lakes markets.
- SG&A fell to 36.3% of sales from 36.9%, helped by lower GPI integration, closure and restructuring costs. This partially offset lower gross margin; operating margin declined 25 basis points.
- Operating cash flow decreased 27.4%, driven mainly by lower net income, lower accounts payable and working-capital payment timing.
- Professional sales were 57.5% of total sales, slightly above 57.2% in FY2015. The company consolidated 159 stores, closed 23 and opened 78; year-end locations totaled 5,189.
Outlook, management commentary, risks and unusual items
Management identified restoring sales growth and customer service as its first priority, with margin improvement to follow. Its five-year strategic plan emphasizes supply-chain improvements, Professional and DIY growth, productivity, and people and culture. The company planned to begin rolling out new supply-chain capabilities by 2018. For 2017, it anticipated capital expenditures of approximately $250 million and 75–85 new stores and branches. It gave no specific FY2017 revenue, earnings or EPS guidance.
Management cited favorable industry conditions, including increased miles driven, a growing vehicle population and an aging vehicle fleet, while noting that company results had been hurt by product-availability and service-level problems. It reported improving comparable-sales trends later in FY2016, while cautioning that execution and supply-chain integration remain important.
- FY2016 adjusted diluted EPS, a non-GAAP measure, was $7.15 versus $7.82 in FY2015. Adjustments included GPI integration/store consolidation/restructuring costs and acquired-intangible amortization; GAAP diluted EPS was $6.20.
- Long-term notes totaled $1.05 billion principal, with $300 million due in 2020, $300 million in 2022 and $450 million in 2023. A new $1 billion revolving credit agreement was entered into in January 2017, replacing the prior facility and extending maturity to 2022.
- Operating lease payments totaled $3.161 billion over future periods. The company noted that the forthcoming lease-accounting standard was expected to materially increase reported assets and liabilities, but the impact was not yet quantified.
- Risks include weak demand, competitive pricing, execution of the business plan and GPI integration, supplier/product-quality issues, labor and retention, cyber incidents, weather or other business interruptions, indebtedness and regulatory or litigation exposure.
- Asbestos-related and other lawsuits were pending. Management did not expect currently pending asbestos cases or legal matters in aggregate to materially affect results, but noted that adverse uninsured verdicts or a substantial increase in claims could be material; a range of loss for future unasserted asbestos claims could not be estimated.
Important facts for investors to verify
- Whether the Q4 comparable-sales improvement was sustained and reflected underlying demand, given management’s note that holiday timing contributed.
- Whether inventory availability and service levels improved, transitional inventory declined, and supply-chain investments delivered the planned productivity and margin benefits.
- How inventory reserves, vendor incentives and working-capital trends evolve; inventory reserves rose to $90.6 million from $70.4 million.
- Whether planned 2017 capital spending, store openings and the January 2017 refinancing proceeded as expected, and how lease obligations affect future liquidity.
- Developments in asbestos and other litigation, tax contingencies, and the company’s ability to manage debt covenants and maintain credit ratings.