Advance Auto Parts, Inc. — Q2 2020 Form 10-Q
Reporting period: Twelve weeks ended July 11, 2020; year-to-date figures cover 28 weeks. Financial statements are unaudited. Advance operates in the North American automotive aftermarket, serving professional and do-it-yourself customers.
Key financial results
| Metric | Q2 2020 | Q2 2019 | 28 weeks 2020 | 28 weeks 2019 |
|---|---|---|---|---|
| Net sales | $2.501 billion | $2.332 billion | $5.199 billion | $5.284 billion |
| Comparable-store sales | Up 7.5% | — | Down 1.8% | — |
| Gross margin | 43.8% | 43.3% | 43.6% | 43.8% |
| SG&A as % of sales | 33.3% | 36.0% | 37.1% | 36.6% |
| Operating income | $262.8 million | $170.8 million | $341.3 million | $378.7 million |
| Net income | $190.0 million | $124.8 million | $233.5 million | $267.3 million |
| Diluted EPS | $2.74 | $1.73 | $3.37 | $3.71 |
| Operating cash flow | Not separately stated | Not separately stated | $448.2 million | $492.2 million |
Q2 net margin was 7.6%, versus 5.4% a year earlier; year-to-date net margin was 4.5%, versus 5.1%. Management reported Q2 adjusted EPS of $2.92 versus $2.00, a non-GAAP measure that excludes specified transformation, acquired-intangible amortization, and other adjustments.
Financial position and liquidity
- At July 11, 2020, cash and cash equivalents were $1.142 billion, compared with $418.7 million at December 28, 2019. Inventory was $4.358 billion, down from $4.432 billion.
- Long-term debt was $1.240 billion, up from $747.3 million, including $500 million of 3.90% senior notes due 2030 issued in April. The company borrowed and repaid $500 million on its revolving facility during the 28-week period; at quarter-end it had no revolver borrowings and $1.0 billion of availability.
- Operating lease liabilities totaled $2.472 billion, including $431.1 million current. These are separate from reported long-term debt. The company reported compliance with debt covenants.
- Year-to-date investing cash outflow was $140.0 million, principally capital expenditures of $140.1 million. Financing cash inflow was $417.7 million, reflecting the notes issuance, offset in part by dividends, share repurchases, and other financing activity. Cash increased by $722.8 million over the period.
Changes, outlook, and risks
- Q2 sales rose 7.3%, primarily on 7.5% comparable-store growth and strength in DIY Omnichannel. Management cited particularly strong growth in Gulf Coast, Central, and Appalachia regions.
- Q2 gross margin improved 56 basis points, driven mainly by favorable channel mix and supply-chain efficiencies, partly offset by higher inventory-related costs. SG&A fell to 33.3% of sales, aided by lower labor costs, reduced travel, and lower insurance and claims expenses; marketing and pandemic-related costs partly offset savings.
- Year-to-date sales declined 1.6%, principally reflecting weaker demand during the pandemic-affected first-quarter period. Year-to-date operating income and net income also fell versus 2019.
- Management attributed the second-quarter demand rebound partly to external factors, including government stimulus and increased DIY automotive activity, as well as marketing and supply-chain initiatives. It emphasized that COVID-19 remains an evolving situation and that its future impact on operations, liquidity, covenant compliance, and results is uncertain and could be material. A renewed demand decline could increase impairment and asset-valuation risks.
- The filing provides no numerical full-year earnings or sales guidance. Management said expected operating cash generation, cash on hand, and available credit should fund obligations for the next year, while noting that cash priorities may change with pandemic conditions.
- On August 17, 2020, the company notified the trustee of its intent to redeem $300 million of 4.50% notes due 2022. On August 11, the board declared a $0.25-per-share dividend payable October 2. The company also said it lifted its temporary share-repurchase suspension effective August 12.
- A securities class action has surviving claims proceeding to discovery; related derivative complaints were filed in April and August 2020. The company disputes the allegations and intends to defend the cases.
Important facts for investors to verify
- Whether the Q2 DIY-driven sales rebound persists, and how comparable-store sales develop as pandemic-related conditions change.
- Whether margin improvements continue, particularly given inventory costs, tariffs, product mix, and supply-chain execution.
- Cash generation, capital spending, working-capital movements, and the planned redemption of the 2022 notes; also distinguish debt from substantial lease obligations.
- Any subsequent changes to the dividend, share repurchases, liquidity, or debt-covenant position.
- Developments in the COVID-19 outlook, potential asset impairments, and the securities and derivative litigation.