Business context and reporting period
Advance Auto Parts, Inc. is an automotive aftermarket parts retailer serving do-it-yourself and Commercial customers through its Advance Auto Parts and Autopart International segments. The second quarter ended July 17, 2010 and covered 12 weeks; year-to-date results cover 28 weeks. The unaudited interim statements include only normal recurring adjustments, and management cautions that interim results are not necessarily indicative of full-year results. The company operated 3,497 stores.
Key financial results
Amounts below are in millions except per-share figures and percentages.
| Metric | 12 weeks ended July 17, 2010 | Prior-year 12 weeks | 28 weeks ended July 17, 2010 | Prior-year 28 weeks |
|---|---|---|---|---|
| Net sales | $1,418.0 | $1,322.8 | $3,248.6 | $3,006.5 |
| Comparable-store sales growth | 5.8% | 4.8% | 6.9% | 6.7% |
| Gross margin | 50.4% | 49.3% | 50.1% | 49.0% |
| SG&A as % of sales | 38.3% | 39.1% | 39.2% | 39.3% |
| Operating income | $171.6 | $134.8 | $353.8 | $292.4 |
| Operating margin | 12.1% | 10.2% | 10.9% | 9.7% |
| Net income | $100.9 | $80.3 | $210.3 | $173.9 |
| Diluted EPS | $1.16 | $0.83 | $2.34 | $1.82 |
Management attributed sales growth to comparable-store gains and recently opened stores. Gross-margin improvement reflected merchandising and pricing initiatives, better parts availability, and supply-chain efficiencies. The quarterly SG&A rate improved 81 basis points; excluding prior-year store-divestiture costs, the reduction was 10 basis points. Year-to-date SG&A rate improved 16 basis points, but excluding those prior-year costs, it increased 34 basis points as strategic investments continued.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $495.5 million, versus $433.8 million. Capital expenditures were $99.3 million; operating cash flow less capital expenditures was $396.2 million.
- Cash and cash equivalents were $160.8 million at July 17, up from $100.0 million at January 2. Inventory increased to $1,817.0 million from $1,631.9 million; accounts payable increased to $1,266.2 million from $966.3 million.
- Total debt was $302.3 million, up $98.1 million from year-end, including $298.8 million of 5.75% senior notes due May 2020. The company issued $300 million principal amount of notes in April and used net proceeds of approximately $294.2 million to repay its term loan and revolving borrowings.
- No balance was drawn on the $750 million revolving facility; $104.0 million of letters of credit left $646.0 million available. The facility matures in October 2011. The company reported compliance with its financial covenants.
- Financing cash outflow was $335.5 million, including $455.5 million of share repurchases and $16.0 million of dividends. Year-to-date repurchases totaled 10.3 million shares at an average $44.31 per share.
Changes, outlook, risks and unusual items
- Year-over-year diluted EPS growth reflected higher operating income and a lower average share count after repurchases. The company repurchased 12.4 million shares over the prior four fiscal quarters, according to management.
- Commercial sales were approximately 34% of second-quarter sales, versus 31% a year earlier; management’s stated goal is a 50% Commercial/DIY sales mix. Commercial delivery investments had reached approximately half of AAP stores, with rollout planned at a slower pace over the next two years.
- The company anticipated opening approximately 110 AAP and 40 AI stores and closing 10 to 15 stores in fiscal 2010. It also planned continued investment in stores, supply chain and information systems. No full-year earnings or sales guidance is provided in the filing.
- On August 10, 2010, after quarter-end, the board authorized a new $300 million repurchase program, replacing the $500 million program then in place. A quarterly dividend of $0.06 per share was also declared for payment in October.
- After repayment of hedged bank debt, interest-rate swaps no longer qualified for hedge accounting. Subsequent fair-value changes are recognized in earnings, and prior accumulated losses will be amortized through October 2011. Swap fair-value liability was $14.1 million at quarter-end.
- Management cited risks including economic weakness, reduced product demand, competition and pricing, vendor relationships and credit-market deterioration, weather and natural disasters, execution of growth strategies, and legal or regulatory matters. The filing reports no off-balance-sheet arrangements as defined by SEC rules and no material change in contractual obligations other than the debt refinancing.
- The filing describes favorable aftermarket conditions, including consumers keeping vehicles longer, more miles driven, an aging vehicle fleet, and dealership closures. These conditions and execution of company initiatives are not assured to persist.
Important facts for investors to verify
- Whether comparable-store growth, margin gains and Commercial expansion continued after the reported quarter, and how much growth came from new stores versus existing stores.
- Whether inventory growth and the substantial rise in accounts payable are supporting availability and cash generation sustainably.
- The effect of ongoing repurchases and the new $300 million authorization on liquidity, leverage and per-share results.
- Interest-rate swap accounting and exposure, refinancing needs around the revolving facility’s October 2011 maturity, and any changes in credit ratings or covenant headroom.
- Actual fiscal 2010 store openings and closures, capital spending, and progress on strategic investments relative to the stated plans.