Advance Auto Parts, Inc. — Q1 2020 Form 10-Q
Reporting period: Sixteen weeks ended April 18, 2020; prior-year comparison is the sixteen weeks ended April 20, 2019. Figures below are in U.S. dollars.
Business context and period
Advance Auto Parts is a North American automotive aftermarket parts provider serving professional installers and do-it-yourself customers. At quarter-end, it operated 4,843 stores and 168 branches, and served 1,258 independently owned Carquest stores. COVID-19 restrictions and reduced driving adversely affected demand, particularly in the final six weeks of the quarter.
Financial performance
| Metric | Q1 2020 | Prior-year period | Change |
|---|---|---|---|
| Net sales | $2.698 billion | $2.952 billion | Down 8.6%; comparable store sales down 9.3% |
| Gross profit / margin | $1.173 billion / 43.5% | $1.305 billion / 44.2% | Margin down 72 basis points |
| SG&A / sales | $1.094 billion / 40.6% | $1.097 billion / 37.2% | Expense ratio up about 341 basis points |
| Operating income / margin | $78.4 million / 2.9% | $207.9 million / 7.0% | Operating income down $129.5 million |
| Net income | $43.6 million | $142.5 million | Down $98.9 million |
| Diluted EPS | $0.63 | $1.98 | Down $1.35 |
| Adjusted diluted EPS (non-GAAP) | $0.91 | $2.46 | Down $1.55 |
| Operating cash flow | $10.9 million | $204.5 million | Down $193.7 million |
| Capital expenditures | $83.0 million | $61.3 million | Up $21.7 million |
Operating cash flow less property and equipment purchases was approximately negative $72.1 million. Management attributed weaker gross margin primarily to supply-chain deleverage, unfavorable product mix and higher tariff costs, partly offset by pricing. SG&A as a share of sales increased because of lower sales productivity and pandemic-related employee benefits and sanitation supplies; reduced professional-services costs partly offset these factors.
Financial position, debt and liquidity
- Cash and cash equivalents were $1.280 billion at April 18, 2020, compared with $418.7 million at December 28, 2019.
- Debt comprised $500 million of revolving-credit borrowings and $1.241 billion of long-term debt. Long-term debt included $500 million principal amount of 3.90% notes due in 2030, issued April 16, 2020, and existing notes due in 2022 and 2023.
- After the $500 million revolver draw, $500 million remained available under the $1 billion revolving facility. The company reported compliance with debt covenants at quarter-end.
- Operating lease liabilities totaled $2.441 billion, including $444.8 million current and $1.996 billion noncurrent.
- Financing cash flow was $936.9 million, mainly reflecting the $500 million note issuance and $500 million revolver borrowing. Investing cash outflow was $83.1 million.
- Management stated that expected operating cash generation, available cash and remaining revolver capacity should fund obligations for the next year.
Material changes, outlook and risks
- The pandemic reduced demand across DIY retail traffic and professional customer car counts. Most stores remained open, with adjusted hours and added health and safety measures, including incremental employee benefits, sanitation, screening, social distancing and curbside service.
- Management reduced and reprioritized planned spending, pursued cost reductions, deferred some marketing and temporarily discontinued share repurchases. The company had repurchased $29 million under its program during the period; $861.7 million remained authorized.
- The company launched a mobile application and “Advance Same Day” pickup, curbside and delivery services. Strategic initiatives also included supply-chain and footprint optimization, ERP migration and a planned DieHard brand launch in summer 2020.
- No numerical full-year guidance was provided. Management said the pandemic’s duration and effects were uncertain; prolonged weakness could affect demand, supply, liquidity, covenant compliance, credit ratings and asset values. No material asset impairment was recorded in the quarter, but management warned of possible future impairment if demand remains weak.
- On May 15, 2020, the board declared a $0.25-per-share quarterly dividend, payable July 3, 2020. Future dividends remain at the board’s discretion.
- A securities class action had surviving claims proceeding to discovery following a February 2020 court ruling; a related derivative complaint was filed April 29, 2020. The company disputed the allegations and intended to defend the cases.
Key facts for investors to verify
- Whether sales and comparable-store trends recovered after the pandemic-related weakness at quarter-end, and how professional and DIY demand evolved.
- Whether gross-margin pressure, elevated SG&A as a percentage of sales and low operating cash generation persisted.
- Cash use, working-capital movements, capital spending and remaining revolver availability, alongside covenant headroom and credit ratings.
- Whether pandemic-related supply or operational disruptions, prolonged demand declines or asset impairments emerged in subsequent periods.
- Progress and costs of strategic initiatives, the temporary share-repurchase suspension, dividend policy and developments in the disclosed litigation.