Advance Auto Parts, Inc. — Q1 2010 Form 10-Q
Reporting period: Sixteen weeks ended April 24, 2010. The interim financial statements are unaudited; results may not indicate full-year performance. The company operated 3,462 stores and served DIY and Commercial customers.
Financial results and liquidity
| Metric | Q1 2010 | Comparable period | Change |
|---|---|---|---|
| Net sales | $1,830.6 million | $1,683.6 million | +8.7% |
| Comparable-store sales growth | 7.7% | 8.2% | Down 0.5 percentage points |
| Gross profit / margin | $910.8 million / 49.8% | $822.0 million / 48.8% | Margin up 93 basis points |
| SG&A / sales | $728.6 million / 39.8% | $664.4 million / 39.5% | Rate up 34 basis points |
| Operating income / margin | $182.2 million / 10.0% | $157.6 million / 9.4% | Income +15.6% |
| Net income | $109.4 million | $93.6 million | +16.9% |
| Diluted EPS | $1.19 | $0.98 | +21.4% |
| Operating cash flow | $338.0 million | $292.7 million | +15.5% |
| Capital expenditures | $60.7 million | $50.2 million | +$10.5 million |
Cash was $133.3 million at quarter-end, versus $100.0 million at January 2, 2010. Current assets were $2,023.3 million and current liabilities $1,697.7 million (current ratio approximately 1.19). Inventory was $1,745.6 million, up from $1,631.9 million at year-end.
Debt at April 24 totaled approximately $279.0 million, including $75.0 million drawn on the revolver, a $200.0 million term loan, and $4.0 million of other debt. The $750 million revolver had $571.0 million available after $104.0 million of letters of credit. The company reported compliance with debt covenants. Operating cash flow exceeded capital expenditures; financing outflows included $289.4 million of share repurchases and $10.9 million of dividends.
Changes, management commentary, and outlook
- Sales growth reflected 7.7% comparable-store growth and net additions of 57 stores over the prior four fiscal quarters. AAP sales increased 8.5%; AI sales increased 19.1%, including a 5.7% comparable-store increase. AI operating income declined to $0.9 million from $1.4 million, primarily due to expenses at new stores.
- Management attributed improved gross margin to price optimization, merchandising, global sourcing, and product availability. SG&A growth reflected customer-facing investments, including Commercial, e-commerce, and global sourcing initiatives; higher sales partly leveraged occupancy costs.
- Commercial sales represented approximately 33% of total sales. Management said Commercial and DIY results benefited from strategic initiatives and favorable aftermarket conditions, and expected Commercial growth to continue to outpace DIY if customer relationships and delivery service goals were achieved. A business-to-business e-commerce platform was expected to roll out later in 2010.
- Fiscal 2010 plans included approximately 110 AAP and 40 AI store additions, 10–15 total store closures, and capital expenditures of approximately $220–$240 million. The company declared a $0.06-per-share dividend payable July 9, 2010.
- On April 29, 2010, after quarter-end, the company issued $300 million of 5.75% senior unsecured notes due 2020, receiving approximately $294.3 million net. Proceeds repaid borrowings under the revolver and term loan; repaid revolver amounts may be reborrowed. The issuance led the company to discontinue hedge accounting for its interest-rate swaps; subsequent fair-value changes will affect earnings.
- The company repurchased 6.9 million shares under a new $500 million authorization for $287.7 million, averaging $41.62 per share; $212.3 million remained authorized. The buybacks contributed to lower average shares and higher EPS.
- Risks cited include economic weakness and reduced product demand, competition and pricing, vendor relationships and credit-market access, execution of growth strategies, staffing, weather and natural disasters, and legal or regulatory matters. The business is seasonal, with typically higher sales in spring and summer. No off-balance-sheet arrangements were reported; the filing noted no material changes in contractual obligations apart from increased revolver borrowings.
Key facts for investors to verify
- Whether comparable-store growth and margin gains persist, and whether strategic investments generate returns sufficient to offset higher SG&A.
- How the $300 million notes issuance and use of proceeds affect net debt, interest expense, and future refinancing or variable-rate exposure.
- Execution of store-opening and capital-spending plans, including the ability of AI expansion and Commercial initiatives to improve profitability.
- Working-capital trends, particularly inventory growth and the company’s reliance on accounts payable and vendor financing arrangements.
- Potential earnings effects from discontinued hedge accounting and future interest-rate-swap fair-value changes; the filing does not provide a clear quantified estimate of those future effects.