Advance Auto Parts, Inc. — FY 2011 Form 10-K
Business context and reporting period. Advance Auto Parts is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items, serving do-it-yourself (DIY) and Commercial customers. It operates Advance Auto Parts (AAP) and Autopart International (AI), including e-commerce. Fiscal 2011 was 52 weeks, ended December 31, 2011; the fourth quarter was 12 weeks. The company operated 3,662 stores at year-end.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $6.170 billion | $5.925 billion |
| Comparable-store sales growth | 2.2% | 8.0% |
| Gross profit / margin | $3.069 billion / 49.7% | $2.961 billion / 50.0% |
| Operating income / margin | $664.6 million / 10.8% | $584.9 million / 9.9% |
| Net income | $394.7 million | $346.1 million |
| Diluted EPS | $5.11 | $3.95 |
| Cash from operating activities | $828.8 million | $666.2 million |
| Capital expenditures | $268.1 million | $199.6 million |
| Cash and cash equivalents, year-end | $57.9 million | $59.2 million |
| Total debt, year-end | $416.0 million | $301.8 million |
| Net debt, as reported | $358.1 million | $252.2 million |
Fourth quarter: Sales were $1.328 billion versus $1.270 billion in Q4 2010; net income was $66.4 million versus $48.1 million; diluted EPS was $0.90 versus $0.57.
Fiscal 2011 sales increased 4.1%. Commercial sales were 37% of total sales, up from 34.2%. AI sales rose 20.7% to $301.1 million; AAP sales rose 3.4% to $5.885 billion. Inventory was $2.043 billion, up 9.6%, and inventory turnover declined to 1.59 from 1.70. Net working capital fell to $105.9 million from $276.2 million.
Material changes and management commentary
- Operating income increased $79.7 million and operating margin improved 90 basis points. SG&A fell to 39.0% of sales from 40.1%, reflecting lower incentive compensation, labor productivity and administrative expense reductions.
- Gross margin declined 24 basis points, primarily from higher shrink, supply-chain costs and fuel costs, and commodity inflation combined with the timing of retail price changes.
- Operating cash flow rose 24%, supported by higher net income and working-capital movements, including increased accounts payable.
- The company repurchased 9.9 million shares for $609.7 million under its buyback program. Diluted EPS growth reflected both higher earnings and the lower share count.
Liquidity, debt and capital allocation
Year-end debt included $115.0 million drawn on a $750 million revolving credit facility, $298.9 million of 5.75% senior notes due 2020, and other debt. Revolver availability after $96.6 million of letters of credit was $538.4 million. The company reported compliance with debt covenants. Operating, investing and financing cash flows were $828.8 million, $(290.0) million and $(540.2) million, respectively. The board continued a quarterly dividend of $0.06 per share.
In January 2012, Advance issued $300 million of 4.50% notes due 2022, receiving approximately $297.5 million net; part of the proceeds repaid revolver borrowings. Management expected operating cash flow, available cash and revolver capacity to fund obligations for the next fiscal year.
Outlook, risks and unusual items
- For fiscal 2012, management anticipated 110–120 new AAP stores, 10–20 new AI stores, approximately 10 closures, and capital expenditures of $275–$300 million. It planned to open its ninth AAP distribution center in Remington, Indiana, in the third quarter.
- Management described a long-term goal of a 50/50 Commercial and DIY sales mix, with Commercial growth expected to outpace DIY. No specific fiscal 2012 earnings or sales guidance was provided in the supplied filing text.
- Key risks include weak consumer demand, competition and pricing pressure, fuel and commodity-cost increases, execution of growth and supply-chain plans, inventory shrink and availability, employee retention, cyber or systems disruptions, and regulatory or litigation exposure.
- Pending asbestos-related claims and employment-related matters were described as not expected to have a material adverse effect based on information then available; adverse uninsured outcomes or a substantial rise in claims could be material. Environmental compliance had not materially affected operations to date.
- Two small technology acquisitions increased goodwill by $42.0 million and added $27.8 million of contingent consideration. Fiscal 2011 inventory reserves increased $12.6 million, primarily due to shrink. No material impairment charge was reported for 2011.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether the lower comparable-store sales growth (2.2% versus 8.0%) and declining gross margin persist, and whether SG&A leverage can continue.
- Inventory growth, lower turnover, shrink reserves and the effect of Superior Availability investments on cash generation and margins.
- Debt and lease obligations, revolver covenant headroom, and the effect of the 2022 notes and subsequent repayment of revolver borrowings.
- Returns from the substantial share repurchases, store expansion, distribution-center investment and technology acquisitions.
- Developments in asbestos, employment and tax contingencies, and execution of fiscal 2012 store and capital-spending plans.