Advance Auto Parts, Inc. — Q2 2013 Form 10-Q
Reporting period: Twelve weeks ended July 13, 2013; year-to-date figures cover the twenty-eight weeks ended July 13, 2013. Comparisons are to the corresponding 2012 periods. Amounts below are in millions except per-share data, percentages, and store counts.
Business context
Advance Auto Parts is an automotive aftermarket retailer serving DIY and Commercial customers through its AAP and Autopart International (AI) segments. It operated 3,990 stores at quarter-end. Results include B.W.P. Distributors (BWP), acquired December 31, 2012; Advance retained 124 company-owned stores and two distribution centers after transferring certain operations to an affiliate of General Parts International.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | 28 weeks 2013 | 28 weeks 2012 |
|---|---|---|---|---|
| Net sales | $1,549.6 | $1,461.0 | $3,564.9 | $3,418.3 |
| Gross profit / margin | $779.2 / 50.3% | $728.9 / 49.9% | $1,787.4 / 50.1% | $1,709.5 / 50.0% |
| SG&A / sales | $584.5 / 37.7% | $559.7 / 38.3% | $1,388.7 / 39.0% | $1,315.8 / 38.5% |
| Operating income / margin | $194.7 / 12.6% | $169.2 / 11.6% | $398.8 / 11.2% | $393.8 / 11.5% |
| Net income | $116.9 | $99.6 | $238.7 | $233.1 |
| Diluted EPS | $1.59 | $1.34 | $3.23 | $3.14 |
| Operating cash flow | Not provided for the quarter alone | $310.1 | $411.4 |
At July 13, cash was $521.0, total current assets were $3,276.3 and current liabilities were $2,639.7. Inventory was $2,407.0. Total debt was approximately $605.0, including $599.0 of senior notes and $6.0 of economic development notes. No revolver borrowings were outstanding; $87.7 of letters of credit left $662.3 available under the $750.0 facility. The company reported compliance with debt covenants. Long-term debt carrying value was $604.1; fair value was $630.0.
Year-to-date investing cash outflow was $282.2, including $187.2 for the BWP acquisition, partly offset by $16.8 from the sale of acquired assets. Financing cash outflow was $105.1, including $75.8 of share repurchases and $13.2 of dividends paid. Cash declined $77.1 from fiscal year-end. The company declared a quarterly dividend of $0.06 per share payable October 4, 2013.
Material changes versus prior comparable periods
- Q2 sales increased 6.1%, chiefly from BWP and new stores, while comparable-store sales declined 0.3% (AAP -0.4%; AI +2.6%). For the 28-week period, sales rose 4.3% while comparable sales declined 2.0%.
- Q2 operating income rose $25.5 and operating margin improved 98 basis points. Gross margin increased 40 basis points and SG&A as a share of sales fell 58 basis points. Year to date, operating margin declined 33 basis points as SG&A deleveraged against weaker comparable sales.
- Q2 net income increased to $116.9 and diluted EPS rose to $1.59. Year-to-date net income was $238.7 and diluted EPS was $3.23.
- Year-to-date operating cash flow declined $101.3, primarily due to payment timing with vendors and higher receivables. Investing outflow increased with the acquisition; financing cash flow shifted from $125.3 provided in 2012 to $105.1 used in 2013, reflecting prior-year note issuance and greater share repurchases.
- Year-end-to-quarter-end cash decreased, while goodwill increased to $199.8, mainly reflecting $123.4 of BWP goodwill. BWP acquisition consideration was $187.0; $1.2 remained unsettled at quarter-end.
Outlook, management commentary, and risks
- Management expects comparable sales to remain constrained for the rest of fiscal 2013, citing lower customer demand. Heavy rainfall in Eastern markets hurt seasonal-product sales; payroll tax increases, unemployment, and consumer financial stress also weighed on demand. Management noted stronger comparable sales during the first six weeks of Q2 but expressed confidence in long-term industry fundamentals.
- Fiscal 2013 capital expenditures were forecast at approximately $250–$275. Management anticipated 155–165 new AAP stores, excluding acquired BWP stores, and 10–15 new AI stores. BWP integration was planned for completion by mid-2014.
- Commercial sales represented 40% of Q2 sales versus 38% a year earlier, partly due to BWP. Strategic priorities include Commercial growth, product availability, supply-chain investment, store growth, and execution improvements.
- Gross margin benefited from lower merchandise acquisition costs, product mix, and year-to-date shrink improvement; these benefits were partly offset by supply-chain ramp-up inefficiencies and a higher Commercial sales mix. Q2 expense improvement included lower marketing and credit-card costs and better labor productivity.
- Risks cited include demand and competitive pressures, macroeconomic conditions, weather, supplier and execution risks, acquisition integration, labor retention, legal and regulatory matters, cybersecurity, and business interruptions. The company stated that expected operating cash, cash on hand, and revolver availability should fund obligations for the next fiscal year. No material change in contractual obligations or off-balance-sheet arrangements was reported.
Key facts for investors to verify
- Whether comparable-sales weakness persists and whether management’s anticipated remainder-of-year constraint changes.
- Progress and costs of integrating BWP, including the planned mid-2014 completion and expected commercial benefits.
- Operating cash conversion and working-capital trends, especially vendor payment timing, receivables, and inventory growth.
- Delivery of planned store openings and capital spending, and whether supply-chain ramp-up inefficiencies abate.
- Debt covenant compliance, available revolver capacity, and the scale and pace of buybacks relative to cash generation.