Advance Auto Parts, Inc. — Q1 2015 Form 10-Q
Reporting period: Sixteen weeks ended April 25, 2015; comparisons are with the sixteen weeks ended April 19, 2014. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context
Advance Auto Parts sells automotive aftermarket parts and related products to do-it-yourself and commercial customers. At quarter-end, it operated 5,235 stores and 115 distribution branches across the U.S., Canada, Puerto Rico and the U.S. Virgin Islands, and served approximately 1,300 independently owned Carquest stores. The company continued integrating General Parts International (GPI), acquired in January 2014, and planned to complete integration of company-operated Carquest stores by the end of fiscal 2017.
Financial results and liquidity
| Metric | Q1 2015 | Prior comparable period | Change / context |
|---|---|---|---|
| Net sales | $3,038.2 | $2,969.5 | Up 2.3%; comparable-store sales up 0.7% |
| Gross profit / margin | $1,393.9 / 45.9% | $1,353.1 / 45.6% | Margin increased 31 basis points |
| Operating income / margin | $262.5 / 8.6% | $255.8 / 8.6% | Income increased; margin was flat |
| Net income / margin | $148.1 / 4.9% | $147.7 / 5.0% | Net income was nearly flat |
| Diluted EPS | $2.00 | $2.01 | Down $0.01; comparable EPS excluding specified items was $2.39 vs. $2.25 |
| Operating cash flow | $102.2 | $81.1 | Up $21.1, or 26%; timing of payments contributed |
| Capital expenditures | $57.0 | $60.5 | Operating cash flow less capex was approximately $45.2 |
| Cash and cash equivalents | $123.8 | $104.7 at Jan. 3, 2015 | Quarter-end balance |
| Total debt | $1,610.3 | $1,636.9 at Jan. 3, 2015 | Lower by $26.6; cash balance was $123.8 |
Current assets were $4,936.9 and current liabilities were $3,824.5 at April 25, 2015. The company had $556.7 million outstanding under its revolving facility and term loan, $124.3 million of letters of credit, and $809.0 million of revolver availability. It reported compliance with debt covenants. Long-term debt carrying value was $1,609.7 million; disclosed fair value was $1,689.0 million.
Material changes and management commentary
- Sales grew 2.3%, primarily from 0.7% comparable-store growth and net additions of stores and branches. Commercial sales grew modestly, while DIY sales declined slightly; Commercial represented 57% of sales versus 56% a year earlier.
- Management said severe weather in Northeastern and Great Lakes markets and disruption from the more complex phases of GPI integration weighed on sales and customer traffic. The quarter included integration of field organizations, product and brand conversions, and pricing alignment.
- Gross-margin improvement was attributed primarily to merchandise-cost synergies, partly offset by costs at the Hartford distribution center. SG&A rose to 37.2% of sales from 37.0%, reflecting integration and store-consolidation costs and higher advertising, partly offset by synergies and lower incentive compensation.
- Interest expense declined to $21.8 million from $23.6 million, primarily due to credit-facility repayments. The effective tax rate increased to 38.0% from 36.5%; the prior period benefited from a favorable state tax settlement.
- Cash from operations increased, partly because of payment timing, while inventory growth, net of accounts payable, partly offset the increase. The large year-over-year decline in investing cash outflow mainly reflects the prior-year GPI acquisition.
Outlook, risks and unusual items
- Management expected approximately $80 million of GPI integration and store-consolidation costs in fiscal 2015, with approximately $32.7 million incurred in Q1. It expected acquisition synergies to reach an annualized run rate of $160 million by the end of 2016; Q1 synergies were approximately $32 million.
- Fiscal 2015 capital expenditures were expected to be $325–$340 million, with approximately 100–120 new stores and branches planned. Management said cash from expected operations, cash on hand and available revolver capacity should fund primary obligations for the next fiscal year. It also expected to continue paying down credit-facility borrowings during 2015.
- The board declared a $0.06 per-share dividend payable July 2, 2015. No shares were repurchased under the public repurchase program during the quarter; 10,052 shares were bought for $1.6 million in connection with employee award net settlement.
- Restructuring actions included office relocations and closures, Carquest store integration, and completed conversions of 40 Autoparts International stores in Florida. Management estimated approximately $28.8 million of office relocation and severance costs through 2015 and approximately $8 million of fiscal 2015 Carquest store exit costs. The company recorded $2.7 million of costs for the Florida plan in the quarter.
- Key disclosed risks include weaker product demand, competitive pressure, delays or shortfalls in GPI integration and synergies, integration-related customer or employee disruption, additional debt and liquidity constraints, macroeconomic conditions, adverse weather, cyber incidents, and legal or regulatory matters. Variable-rate debt exposes the company to interest-rate changes; no derivative instruments were outstanding at quarter-end.
- The company guaranteed approximately $31.0 million of loans to independent Carquest stores; management considered performance under the guarantees remote. The filing reported no other off-balance-sheet arrangements as defined by SEC rules and no material change in contractual obligations.
Important facts for investors to verify
- Whether sales and comparable-store performance improve as GPI integration disruption eases, particularly in commercial and DIY channels.
- Progress against the $80 million fiscal 2015 integration-cost estimate and the $160 million year-end 2016 annualized synergy target.
- Whether gross-margin gains persist and offset integration expenses, higher SG&A and distribution-center costs.
- Inventory growth, operating cash flow quality, planned capital spending, debt repayment, and continued access to $809 million of revolver capacity.
- Execution of planned store conversions, closures and new openings, and the impact of weather and other seasonal factors.
- The filing provides operating targets and management expectations, but no formal full-year revenue, earnings or EPS guidance.