Advance Auto Parts, Inc. — Q1 2017 Form 10-Q
Reporting period: Sixteen weeks ended April 22, 2017. Unaudited results; comparisons are with the sixteen weeks ended April 23, 2016. Amounts below are in millions except per-share data.
Business context
Advance Auto Parts sells automotive aftermarket parts to Professional and DIY customers. At quarter-end it operated 5,059 stores and 130 distribution branches, and served approximately 1,250 independently owned Carquest-branded stores. The quarter is the company’s 16-week first quarter; the remaining quarters are 12 weeks.
Financial results and key metrics
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net sales | $2,890.8 | $2,979.8 | Down 3.0%; comparable store sales down 2.7% |
| Gross profit / margin | $1,270.7 / 44.0% | $1,349.9 / 45.3% | Margin down 135 basis points |
| Operating income / margin | $179.8 / 6.2% | $271.0 / 9.1% | Down $91.2; margin down 288 basis points |
| Net income / margin | $108.0 / 3.7% | $158.8 / 5.3% | Down $50.9 |
| Diluted EPS | $1.46 | $2.14 | Adjusted EPS, a non-GAAP measure, was $1.60 vs. $2.51 |
| Operating cash flow | $35.1 | $88.4 | Down $53.4 |
| Capital expenditures | $65.3 | $89.1 | Investing cash outflow was $64.1 vs. $87.9 |
Cash, debt and liquidity: Cash was $126.1 at April 22, 2017, compared with $135.2 at December 31, 2016. Total debt, including current maturities, was $1,073.9, up from $1,043.3. The new $1.0 billion unsecured revolver had $30.0 outstanding and $787.8 available after letters of credit and covenant restrictions. The company reported compliance with its financial covenants. It had $3,659.6 of current liabilities and $5,306.7 of current assets.
Other balance-sheet items: Inventory was $4,413.8, up 2.0% from year-end, consistent with the seasonal spring inventory build. Stockholders’ equity was $3,023.7. The company declared a $0.06 per-share dividend for the quarter.
Material changes and management commentary
- Sales fell primarily due to lower comparable sales, store closures and Carquest store consolidations. Management attributed weaker traffic to holiday timing, winter-related demand pulled into late 2016, and softer industry demand in February and March. Transactions declined, partly offset by higher average transaction value.
- Gross margin contracted with supply-chain expense deleverage and lower inventory growth versus the prior year. SG&A increased as a share of sales because of customer-service investments and deleverage, partly offset by lower integration and restructuring costs.
- Management said it continued investment in customer service and strategic initiatives despite sales softness. Professional-customer availability and delivery programs were being expanded; an enhanced technology platform was expected to be fully deployed in Q3 2017. DIY service standardization was being piloted.
- Productivity initiatives include zero-based budgeting, supply-chain optimization and reducing product costs. Management expected cost savings in the second half of 2017.
- Operating cash flow declined mainly because of lower net income and greater cash outflows associated with accounts payable; slower inventory growth partly offset the decline. Cash flow from operations was below capital expenditures during the quarter.
Outlook, risks and unusual items
- No full-year earnings or sales guidance is provided in the filing. Management expected 2017 capital expenditures of approximately $250 million and 75–85 store and Worldpac branch openings. It described the industry outlook as generally favorable, while noting deferred maintenance and longer replacement intervals on newer vehicles.
- The company recognized $8.4 million of income from a GPI acquisition-related indemnification agreement. The lower effective tax rate, 35.0% versus 37.8%, included $4.1 million of excess tax benefits from share-based awards.
- GPI integration and store consolidation costs were $12.9 million, and acquired-intangible amortization was $12.3 million. Adjusted EPS excludes specified items and is non-GAAP; it should not be viewed as a substitute for GAAP results.
- Carquest integration continued: during the quarter, six stores were consolidated and 38 converted; 565 stores remained under the Carquest name. Exit liabilities totaled $42.3 million, mainly closed-facility lease obligations, with payments expected through 2028.
- Risks highlighted include demand and competitive pressures, execution of the business strategy and GPI integration, supplier quality and availability, macroeconomic conditions, weather, cybersecurity, legal and regulatory matters, and debt-related constraints on flexibility or liquidity. The company guaranteed $24.4 million of loans to independent Carquest stores; management considered performance under those guarantees remote.
- Adoption of the new lease standard was expected to materially increase reported assets and liabilities, but the impact was not yet quantified. Management did not expect the revenue-recognition standard to have a material financial impact.
Important facts for investors to verify
- Whether comparable-sales trends, transaction counts and operating margins improve after the quarter’s weak performance.
- Whether customer-service and productivity investments produce the planned second-half savings without further margin pressure.
- Progress and remaining costs of Carquest integration, including the $42.3 million exit-liability balance and expected payment schedule.
- Cash generation relative to capital spending, inventory levels, debt and revolver availability.
- How the $8.4 million indemnification income and $4.1 million share-based tax benefit affect comparisons with future periods, and how non-GAAP adjustments reconcile to GAAP results.