Business context and reporting period
Advance Auto Parts, Inc. is a North American automotive aftermarket parts retailer and distributor serving Commercial and do-it-yourself customers. This Form 10-K covers fiscal 2014, ended January 3, 2015; the year included 53 weeks, versus 52 weeks in fiscal 2013. Fiscal Q4 had 13 weeks, compared with 12 weeks in the prior-year quarter.
The January 2, 2014 acquisition of General Parts International (GPI), including Carquest and Worldpac, substantially expanded the business. At year-end Advance operated 5,261 stores and 111 distribution branches.
Key financial results
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $9.844 billion | $6.494 billion |
| Gross profit / margin | $4.454 billion / 45.2% | $3.252 billion / 50.1% |
| Operating income / margin | $851.7 million / 8.7% | $660.3 million / 10.2% |
| Net income / diluted EPS | $493.8 million / $6.71 | $391.8 million / $5.32 |
| Operating cash flow | $709.0 million | $545.3 million |
| Capital expenditures | $228.4 million | $195.8 million |
| Cash and cash equivalents | $104.7 million | $1.112 billion |
| Total debt / net debt | $1.637 billion / $1.532 billion | $1.054 billion / net cash of $58.9 million |
| Net working capital | $998.0 million | $1.225 billion |
Comparable-store sales grew 2.0%, reversing a 1.5% decline in 2013. Commercial sales rose to 57.0% of total sales from 40.4%, largely reflecting GPI. GAAP diluted EPS was $6.71; management’s non-GAAP comparable cash EPS was $7.59 excluding the 53rd week, integration costs and acquired-intangible amortization, or $7.76 including the extra week.
Fourth-quarter sales were $2.237 billion, net income was $84.4 million and diluted EPS was $1.15, versus $1.409 billion, $49.3 million and $0.67, respectively, in the prior-year quarter. The quarters differ in length and fiscal 2014 included GPI, limiting direct comparability.
Material changes versus the prior period
- Sales increased 51.6%, driven primarily by $3.040 billion of GPI sales, plus 2.0% comparable-store growth, new stores and $150.4 million from the extra week.
- Gross margin fell 484 basis points, mainly due to the higher Commercial sales mix and increased supply-chain costs. SG&A fell as a share of sales, from 39.9% to 36.6%, reflecting GPI’s lower cost structure, partly offset by integration expense and acquired-intangible amortization. Operating margin nevertheless declined 152 basis points.
- Interest expense rose to $73.4 million from $36.6 million as acquisition-related borrowing increased. Debt rose by $583.3 million year over year.
- Operating cash flow increased 30.0%, but investing cash outflow reached $2.288 billion, primarily reflecting the GPI acquisition. Year-end cash fell by $1.008 billion.
Outlook, risks and unusual items
- Management anticipated 2015 capital expenditures of $325–$340 million and approximately 100–120 new stores and branches.
- The multi-year GPI integration was expected to cost $190 million through 2018, mostly by the end of 2016; management expected $160 million of savings from acquisition synergies over that period. Fiscal 2014 included $73.2 million of GPI integration expense and $61.0 million of realized synergies.
- Management cited improving miles driven, lower fuel costs and an improving job market as potentially supportive of industry demand, while noting continued execution priorities around Commercial growth, availability, service and integration.
- Key risks include failure to realize integration benefits, customer or employee losses, execution and supply-chain challenges, competitive pricing, demand and weather variability, product-quality issues, cybersecurity incidents, and the increased debt burden. Variable-rate bank borrowings expose the company to interest-rate changes.
- Other notable items include $11.8 million of impairment losses on store and corporate assets, planned store consolidations, and estimated office-relocation and restructuring costs of approximately $28.8 million through 2015. The company reported asbestos and employment-related litigation; management did not expect currently pending matters, in aggregate, to materially affect results, but outcomes remain uncertain.
- The company reported compliance with credit-agreement covenants and sufficient expected liquidity for the next fiscal year. The revolver had $782.3 million of availability after outstanding borrowings and letters of credit. Long-term operating lease commitments totaled $3.247 billion.
Important facts for investors to verify
- How much of reported sales and EPS growth reflects GPI, the extra fiscal week and comparable-store performance, and how results compare on a consistent basis.
- Whether gross-margin pressure stabilizes and the projected GPI synergies are realized relative to integration costs and timelines.
- Debt repayment, interest expense and liquidity trends, including the impact of variable rates, lease obligations and working-capital needs.
- Whether planned 2015 capital spending and store openings generate expected returns, alongside progress on Carquest integration and store consolidations.
- Developments in litigation, restructuring, inventory reserves and other estimates that could affect future cash flows or reported earnings.