Advance Auto Parts, Inc. — Q1 2011 Form 10-Q
Reporting period: Sixteen weeks ended April 23, 2011. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context and operating results
Advance Auto Parts is an automotive aftermarket retailer serving do-it-yourself (DIY) and Commercial customers through 3,600 stores: 3,397 in Advance Auto Parts (AAP) and 203 in Autopart International (AI). Management said sales and earnings momentum slowed from fiscal 2010, citing severe weather in some regions, higher gasoline prices, weaker industry growth, and the pace of internal strategic changes.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,898.1 | $1,830.6 | +3.7% |
| Comparable-store sales | +1.4% | +7.7% | Slower growth |
| Gross profit | $958.2; 50.5% margin | $910.8; 49.8% | Margin +73 bps |
| SG&A | $772.2; 40.7% of sales | $728.6; 39.8% | Rate +88 bps |
| Operating income | $186.0; 9.8% margin | $182.2; 10.0% | +2.1%; rate -15 bps |
| Net income | $109.6 | $109.4 | Nearly flat |
| Diluted EPS | $1.35 | $1.19 | +13.4% |
| Operating cash flow | $272.5 | $338.0 | -19.4% |
Sales growth reflected 138 net store additions over the prior 12 months as well as comparable-store growth. AAP sales rose 2.8% and AI sales rose 28.6%; comparable sales were up 1.2% for AAP and 7.5% for AI. Commercial sales increased to 37% of total sales from 33%.
Gross-margin improvement was attributed to merchandising, pricing, parts availability, and global sourcing, partly offset by higher supply-chain costs. SG&A rose as a share of sales primarily due to advertising, store payroll, and fixed-cost deleverage. Management attributed higher diluted EPS mainly to share repurchases: average diluted shares fell to 81.0 million from 91.5 million.
Cash flow, balance sheet, and capital allocation
- Cash and equivalents were $53.7 at April 23, 2011, versus $59.2 at fiscal year-end. Operating cash flow was $272.5; investing cash use was $87.9, including $88.9 of capital expenditures; financing cash use was $190.1.
- Operating cash flow declined mainly because inventory increased more than accounts payable, alongside working-capital fluctuations. Inventory was $2,118.1, up $372.6 (21.3%) from April 2010, reflecting availability initiatives, store growth, seasonal needs, and lower-than-expected sales.
- Total debt was $431.8, including $130.2 drawn on the revolver and $298.9 of 5.75% senior unsecured notes due in 2020. The company had $93.3 of letters of credit and $526.5 of revolver availability. It reported compliance with debt covenants.
- During the period, the company repurchased 4.2 million shares for $270.0 at an average price of $63.72; it paid $9.7 in dividends. It declared a further $0.06-per-share quarterly dividend after period-end.
- On May 27, 2011, the company replaced its maturing revolver with a new $750.0 million unsecured five-year facility and used proceeds to repay $165.0 million of prior revolver borrowings. It incurred approximately $3.6 million in financing costs. The new facility has higher stated initial borrowing margins and a 0.25% facility fee.
Outlook, risks, and notable items
- Management expected gross-margin gains to be more constrained for the rest of fiscal 2011 due to fuel costs, supply-chain investment, commodity inflation, and competitive limits on passing costs to customers.
- Fiscal 2011 store plans were 110–120 new AAP stores, approximately 10 new AI stores, and approximately 10 closures. Management said it would continue investing in service, inventory availability, supply chain, and information technology, while adapting the pace of strategic change.
- The company identified risks including demand declines, competitive pressure, execution of strategy, macroeconomic conditions, employee retention, legal and regulatory matters, severe weather and other business interruptions, and fuel and energy costs. It noted that weather can either reduce elective maintenance or accelerate parts failures.
- Interest expense increased to $9.7 from $6.0, partly because of amortization of previously recorded swap losses. At quarter-end, interest-rate swaps had $275.0 notional and a $5.8 fair-value liability; they matured in October 2011. The company did not enter into new swaps with the revolver refinancing.
- LIFO accounting reduced cost of sales by $4.1 in Q1 2011 versus $18.3 in Q1 2010. Interim LIFO estimates depend on expected year-end inventory levels and costs. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter. The filing reported no off-balance-sheet arrangements as defined by SEC rules.
Important facts for investors to verify
- Whether comparable-store sales recover after the sharp slowdown, and how weather, fuel prices, and broader industry conditions affect demand.
- Whether inventory growth converts into sales and cash generation, and whether supply-chain investments improve availability without further margin or working-capital pressure.
- Execution of the new five-year revolver, its higher pricing, covenant terms, and the company’s liquidity and leverage following continued buybacks.
- The sustainability of EPS growth, given that net income was nearly flat and share repurchases materially reduced the share count.
- Management’s expectation of more constrained gross-margin improvement and the remaining fiscal 2011 store-opening and investment plans.