Advance Auto Parts, Inc. — Q2 2012 Form 10-Q
Reporting period: Twelve weeks ended July 14, 2012; year-to-date figures cover 28 weeks. Comparisons are with the corresponding periods ended July 16, 2011. The company operated 3,692 stores, serving DIY and Commercial customers through Advance Auto Parts and Autopart International.
Financial performance
- Q2 revenue: $1,461.0 million, down 1.3%; comparable-store sales declined 2.7%. Commercial sales were 38% of sales.
- Q2 profit: Gross profit was $728.9 million (49.9% margin, up 16 basis points); operating income was $169.2 million (11.6% margin, down 119 basis points); net income was $99.6 million; diluted EPS was $1.34.
- 28-week results: Revenue was $3,418.3 million, up 1.2%; comparable-store sales were flat. Operating income was $393.8 million (11.5% margin), net income was $233.1 million, and diluted EPS was $3.14.
- Cash flow: Operating cash flow was $411.4 million, versus $469.6 million. Capital expenditures were $146.3 million, and cash increased $390.7 million to $448.6 million.
- Debt and liquidity: Debt totaled $600.5 million, up $184.5 million from year-end 2011, principally reflecting a $300 million note issuance. The company had no revolver borrowings, $657.3 million available under its $750 million facility after letters of credit, and was compliant with debt covenants. Cash less debt was approximately negative $151.9 million.
- Balance sheet: Current assets were $2,765.2 million and current liabilities $2,292.0 million. Inventory was $2,096.3 million.
Changes versus prior period
- Q2 sales and earnings weakened: revenue fell 1.3%, operating income fell $19.7 million, and diluted EPS declined from $1.46 to $1.34. Share repurchases partly offset the EPS decline by reducing shares outstanding.
- Management attributed softer sales to weak DIY and Commercial demand, particularly in Northeast and Great Lakes markets. It said unusually mild winter weather pulled demand into Q1; high fuel prices, unemployment and lower consumer confidence also weighed on demand.
- Q2 gross margin improved modestly, supported by lower shrink and supply-chain costs, but higher promotional activity and SG&A deleverage pressured operating margin. For the 28-week period, operating margin improved versus 2011, largely from lower SG&A as a share of sales.
- Year-to-date operating cash flow fell $58.2 million, mainly due to working-capital movements, deferred taxes and lower excess tax benefits from share-based compensation. Financing cash flow improved against the prior-year period, which included substantially larger share repurchases.
Outlook, commentary and risks
- Management anticipated constrained sales for the remainder of fiscal 2012, while maintaining its long-term confidence in the aftermarket and its focus on Commercial growth, service leadership and product availability.
- Fiscal 2012 plans called for approximately $275–$300 million in capital expenditures; 110–120 new AAP stores, 10–20 new AI stores and about 10 store closures. A new Remington, Indiana distribution center was expected to open in Q3.
- The company began bringing Commercial credit processing in-house and expected receivables to increase by approximately $80–$100 million by year-end, with the working-capital impact expected to be primarily limited to fiscal 2012. The board declared a $0.06 per-share dividend payable October 5, 2012.
- Risks cited include weaker demand, competitive pricing, macroeconomic conditions, execution of growth and supply-chain plans, labor availability, legal and regulatory matters, cyber incidents, weather and business interruptions. The business is seasonal and weather-sensitive. Management said available cash, operating cash generation and revolver capacity should fund obligations for the next fiscal year.
- Unusual or relevant items: the company recorded a $9.3 million year-to-date reduction in cost of sales from estimated LIFO accounting, versus a $9.1 million increase in the prior-year period. Actual LIFO valuation is determined at fiscal year-end. A $4.8 million contingent-consideration payment related to a prior acquisition was made during Q2.
Investor verification points
- Track comparable-store sales, transaction counts and promotional intensity, especially in cold-weather markets.
- Assess whether margin and expense trends recover as sales growth and planned investments develop.
- Monitor the Commercial credit transition, receivables growth and its effect on working capital and operating cash flow.
- Verify capital-spending, store-opening and distribution-center execution against management’s fiscal-year plans.
- Review debt levels, revolver availability, covenant compliance and the assumptions underlying interim LIFO and contingent-consideration estimates.