Advance Auto Parts, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended January 2, 2016 (52 weeks). The comparable FY2014 included 53 weeks, including an additional fourth-quarter week. Advance Auto Parts sells automotive replacement parts and related products to commercial and do-it-yourself customers; it operated 5,171 stores and 122 branches and reported one segment.
Financial performance
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Net sales | $9.737 billion | $9.844 billion | Down 1.1% reported; up 0.4% excluding FY2014’s extra week |
| Comparable store sales | 0.0% | 2.0% | Fourth-quarter 2015 comps fell 2.5% |
| Gross profit / margin | $4.423 billion / 45.4% | $4.454 billion / 45.2% | Margin up 18 basis points |
| SG&A / sales | $3.597 billion / 36.9% | $3.602 billion / 36.6% | Rate increased 35 basis points |
| Operating income / margin | $825.8 million / 8.5% | $851.7 million / 8.7% | Operating income down $25.9 million |
| Net income / diluted EPS | $473.4 million / $6.40 | $493.8 million / $6.71 | Net income down 4.1%; diluted EPS down 4.6% |
| Operating cash flow | $689.6 million | $709.0 million | Down 2.7% |
| Capital expenditures | $234.7 million | $228.4 million | Up $6.3 million |
Management’s non-GAAP comparable diluted EPS, excluding specified integration, restructuring, acquired-intangible amortization and extra-week effects, was $7.82 versus $7.59. This measure is supplemental, not a substitute for GAAP results.
Liquidity, debt and capital
- Cash and cash equivalents were $90.8 million, versus $104.7 million a year earlier. Current assets were $4.941 billion and current liabilities $3.797 billion (working capital $1.143 billion).
- Total debt was $1.214 billion, down $423.1 million year over year. The company had $160 million outstanding on its revolver and term loan combined, plus $118.6 million in letters of credit; reported available revolver capacity was $801.4 million. Debt covenants were satisfied.
- Operating cash flow of $689.6 million was below net income; inventory rose 6.0% to $4.175 billion, largely reflecting product integration and store changes. The company paid $17.6 million in dividends and made no repurchases under its stock repurchase program.
- Operating lease commitments totaled $3.251 billion. Management said expected operating cash generation, cash and available credit should fund primary obligations for the next fiscal year.
Material changes and management commentary
- The General Parts International (GPI) acquisition, completed in January 2014 for approximately $2.08 billion, expanded commercial operations and added Carquest and Worldpac. Integration remained a major execution priority. In 2015, the company consolidated 80 Carquest stores and converted 160; management reported approximately $110 million in planned acquisition synergies for the year.
- Management said integration disruptions affected customer service and product availability. Softer comparable sales in the second half, particularly fourth-quarter weakness, also reflected unusually warm late-year weather, which reduced demand for batteries and cold-weather parts.
- Gross margin improved on lower product acquisition costs and GPI-related merchandise synergies, but SG&A as a percentage of sales increased due to integration, store closure and support-center restructuring costs. Those costs totaled $127.1 million; acquired-intangible amortization was $42.3 million.
- FY2015 included $7.4 million of foreign-currency transaction losses. The company recorded $11.0 million of impairment charges on store and corporate assets; goodwill and indefinite-lived intangible tests identified no impairment.
Outlook, risks and contingencies
- For 2016, management anticipated capital expenditures of $260 million to $280 million, approximately 65 to 75 new stores and branches, and consolidation or conversion of 325 to 350 additional Carquest stores. It did not provide a clear numerical sales or earnings forecast.
- Management described industry conditions as potentially favorable, citing lower fuel costs, improving employment and disposable income, increasing miles driven, and an aging vehicle fleet. These are expectations, not guaranteed outcomes.
- Key risks include failure or delay in GPI integration and synergy realization; competitive pressure and weak demand; inventory availability and supply-chain execution; debt and covenant constraints; weather and macroeconomic volatility; supplier, product-quality, cybersecurity and business-interruption risks; and environmental, regulatory and litigation exposure.
- The company anticipated board changes and was seeking a permanent chief executive officer following leadership changes and an agreement with Starboard Value. Management warned that transition could disrupt operations or alter strategic priorities.
- Pending asbestos-related and other litigation included claims with potentially substantial alleged damages. Management did not believe currently pending matters were likely to have a material adverse effect, but noted outcomes are uncertain and future asbestos losses cannot be estimated.
Most important facts for investors to verify
- Whether GPI integration restores service levels and inventory availability and delivers the expected cost synergies.
- Whether comparable sales and margins recover after FY2015’s flat full-year comps and 2.5% fourth-quarter decline.
- Whether inventory growth, working-capital needs and planned capital expenditures convert into stronger cash generation.
- Debt repayment capacity, covenant headroom, and the effect of interest rates, credit ratings and substantial lease commitments on financial flexibility.
- Execution of leadership and board transitions, planned store conversions and closures, and any material developments in litigation or other contingencies.
Assurance: Deloitte & Touche issued unqualified opinions on the FY2015 consolidated financial statements and internal control over financial reporting.