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
| Metric | Q1 2019 | Prior period | Change |
|---|---|---|---|
| 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.