Advance Auto Parts, Inc. — Q3 2011 Form 10-Q
Reporting period: Twelve weeks ended October 8, 2011; year-to-date figures cover forty weeks. Unaudited consolidated results are compared with the corresponding 2010 periods. Amounts below are in millions, except per-share data and where noted.
Business context and financial results
Advance Auto Parts operated 3,645 stores: 3,442 in its AAP segment and 203 in Autopart International (AI). It serves do-it-yourself and Commercial customers and includes e-commerce operations.
| Metric | Q3 2011 | Q3 2010 | 40 weeks 2011 | 40 weeks 2010 |
|---|---|---|---|---|
| Net sales | $1,465.0 | $1,406.5 | $4,842.9 | $4,655.1 |
| Comparable-store sales growth | 2.2% | 9.9% | 2.0% | 7.8% |
| Gross profit / margin | $724.5 / 49.5% | $707.8 / 50.3% | $2,418.6 / 49.9% | $2,333.8 / 50.1% |
| SG&A / sales | $546.7 / 37.3% | $560.6 / 39.9% | $1,865.8 / 38.5% | $1,832.8 / 39.4% |
| Operating income / margin | $177.8 / 12.1% | $147.2 / 10.5% | $552.7 / 11.4% | $501.0 / 10.8% |
| Net income | $105.6 | $87.6 | $328.2 | $297.9 |
| Diluted EPS | $1.41 | $1.03 | $4.19 | $3.37 |
Cash flow, liquidity and debt
- Forty-week operating cash flow was $611.0, versus $596.5 a year earlier. Investing used $224.6, mainly for store, supply-chain and IT investments and a technology acquisition; financing used $379.7. Cash increased $6.7 to $65.9.
- Capital expenditures were $207.5, up $60.3 year over year. Inventory was $2,109.7 at October 8, up $270.2, or 14.7%, from the prior-year date; management attributed the increase mainly to availability initiatives and store growth.
- Total debt was $600.4, including $299.2 drawn on the revolving facility and $298.9 of 5.75% senior notes due 2020. The $750.0 unsecured revolver matures in 2016; after $96.2 of letters of credit, reported availability was $354.6. Cash plus stated revolver availability was approximately $420.5. The company said it was in compliance with debt covenants.
- Stockholders’ equity declined to $777.6 from $1,142.0 a year earlier, alongside $614.2 of treasury-stock purchases during the forty weeks and dividends. The company repurchased 9.9 million shares under its program for $609.7; $200.0 remained authorized at quarter-end.
Material changes and management commentary
- Q3 sales rose 4.2%, supported by new stores and 2.2% comparable-store growth. The comparable-sales pace was substantially below the prior-year 9.9% growth. AI sales grew 15.9% in Q3; AAP sales grew 3.6%.
- Q3 operating income increased $30.6 and operating margin rose 167 basis points. Lower SG&A as a percentage of sales—reflecting lower incentive compensation, labor productivity and reduced support/discretionary costs—more than offset gross-margin pressure.
- Gross margin fell 87 basis points in Q3. Management cited shrink, supply-chain investment costs, fuel and commodity inflation, and the timing of retail price changes. For the forty weeks, LIFO accounting increased cost of sales by $16.7; the comparable 2010 period benefited from a $33.4 reduction.
- Management described industry conditions as supported by an aging vehicle fleet and other favorable trends, but noted higher fuel prices, reduced near-term miles driven and weaker discretionary spending. It slowed the pace of strategic changes amid year-to-date performance and economic uncertainty, while remaining committed to Service Leadership and Superior Availability initiatives.
Outlook, risks and unusual items
- Management expected fiscal 2011 gross-profit rate to be below fiscal 2010, citing fuel costs, shrink, inflation and supply-chain investment. It anticipated approximately 100 new AAP stores and 10 AI stores, with about 10 closures, and planned to open its tenth distribution center in Remington, Indiana, in fiscal Q2 2012. No specific full-year earnings or sales guidance was stated.
- Management said expected operating cash generation, cash on hand and available revolver borrowings should be sufficient for primary obligations over the next fiscal year. It also stated a commitment to manage debt to preserve investment-grade ratings; both cited agency outlooks were stable.
- On September 22, the company entered $300.0 of forward Treasury rate locks, at an average rate of 1.85%, to hedge the benchmark-rate exposure of debt it anticipated issuing. The filing does not specify the amount, timing or terms of any eventual issuance.
- The company acquired a technology company to support e-commerce; investing cash outflow was $18.2, with $6.2 of contingent consideration accrued. Key risks include demand and competition, execution of strategy and acquisitions, macroeconomic conditions, fuel and inflation, supply-chain capacity, weather and other disruptions, and legal or regulatory matters.
- The company reported no material change in contractual obligations, no off-balance-sheet arrangements as defined by SEC rules, and effective disclosure controls. Interim results may not indicate full-year performance.
Investor verification points
- Confirm the sustainability of comparable-sales growth and margin improvement, particularly as Q3 sales growth slowed versus 2010 and gross margin contracted.
- Track inventory growth, shrink, supply-chain spending and the expected benefits and opening schedule of the Remington distribution center.
- Review the use of revolver borrowings, planned debt issuance and rate-lock settlement, as well as covenant headroom and credit-rating implications.
- Assess the returns and financing impact of substantial share repurchases, alongside capital expenditures, store expansion and dividends.
- Verify acquisition-related contingent consideration and the progress and contribution of e-commerce and Commercial initiatives.