ADVANCE AUTO PARTS INC quarterly report, Q1 FY2020

Advance Auto Parts, Inc. — Q1 2019 Form 10-Q

Reporting period: Sixteen weeks ended April 20, 2019; comparison is the sixteen weeks ended April 21, 2018. Financial statements are unaudited. Advance Auto Parts serves professional and do-it-yourself automotive aftermarket customers and operated 4,931 stores and 146 Worldpac branches, alongside 1,238 independently owned Carquest-branded stores.

Financial results

MetricQ1 2019Prior periodChange
Net sales$2,952.0 million$2,873.8 million+2.7%
Comparable-store sales+2.7%—Growth in DIY omni-channel and Professional
Gross profit / margin$1,304.6 million / 44.2%$1,272.3 million / 44.3%Profit +$32.3 million; margin down 8 bps
Operating income / margin$207.9 million / 7.0%$198.2 million / 6.9%+$9.7 million; margin up 15 bps
Net income / margin$142.5 million / 4.8%$136.7 million / 4.8%+$5.8 million
Diluted EPS$1.98$1.84+7.6%
Operating cash flow$204.5 million$154.0 million+$50.5 million

Adjusted diluted EPS, a non-GAAP measure, was $2.46 versus $2.10. The company reported adjustments for transformation expenses, acquired-intangible amortization, an out-of-period inventory-related correction and early debt-redemption charges.

Financial position and cash flows

  • Cash and cash equivalents were $537.3 million at April 20, down from $896.5 million at December 29, 2018.
  • Long-term debt was $746.8 million, compared with $1,045.7 million at year-end. The company had no revolver borrowings and reported $998.5 million in borrowing availability; it was in compliance with financial covenants.
  • Operating lease liabilities totaled $2,503.9 million, including $449.7 million current; the balance sheet also showed $2,371.4 million of operating lease right-of-use assets.
  • Investing cash outflow was $60.8 million, principally capital expenditures of $61.3 million. Financing cash outflow was $503.2 million, including the $300 million note redemption and share repurchases.

Material changes and management commentary

  • Sales growth reflected comparable-store growth, with strength in parts and batteries, accessories and chemicals. Management noted weather volatility, including a prolonged winter and rainy start to spring.
  • Gross-profit improvement was attributed to sales growth, favorable product margin and inventory management, partly offset by supply-chain labor investment and higher shrink. SG&A rose with wages, merit increases, IT and supply-chain professional services, and transportation costs.
  • Operating cash flow increased 32.8%, which management attributed mainly to higher earnings and improved working-capital management. Capital spending increased, including investment in information technology.
  • On February 28, 2019, the company redeemed all $300 million principal amount of its 5.75% notes due 2020. It recorded $10.1 million of make-whole charges and $0.7 million of debt-issuance-cost charges.
  • Adoption of the new lease accounting standard recorded approximately $2.4 billion of lease assets and liabilities and reduced retained earnings by $23.2 million, net of tax. The company said adoption did not materially affect quarterly operating results or cash flows.
  • An out-of-period correction increased accounts payable and cost of sales by $13.0 million for received-but-not-invoiced inventory. The company also reported a $26.4 million increase in cost of sales from interim LIFO valuation.

Outlook, risks and contingencies

  • Management expected 2019 capital expenditures of $250 million to $300 million, subject to business conditions, and said cash from operations, available cash and credit-facility availability should fund primary obligations for the next year. No full-year earnings or sales guidance is provided in the supplied filing text.
  • Strategic priorities include improving customer experience and execution, demand-based assortment, supply-chain and distribution optimization, Professional digital capabilities, TechNet expansion, Worldpac growth, and digital investment for DIY customers. Management expected significant transformation expenses over the next several years.
  • A securities class action alleging disclosure violations relating to 2016–2017 remained in early stages. The company disputed the allegations and intended to defend itself.
  • Management identified risks to forward-looking statements and noted that actual results could differ; credit-rating deterioration could increase borrowing costs or working-capital needs. Market-risk exposure had no significant change from year-end.
  • The Board declared a $0.06-per-share quarterly dividend payable July 5, 2019. The $600 million repurchase authorization had $200 million remaining at April 20; management reported $127.2 million of program repurchases during the period.

Important facts for investors to verify

  • Assess whether comparable-store growth and margin performance persist, given weather-related demand and cost pressures.
  • Review the $13 million correction and the sensitivity of interim results to estimated year-end LIFO costs.
  • Track cash deployment, planned $250–$300 million capital spending, remaining repurchase authorization and liquidity after the note redemption.
  • Evaluate lease obligations alongside reported debt when assessing leverage and fixed commitments.
  • Monitor transformation spending, execution of supply-chain and technology initiatives, and developments in the securities litigation.