Business context and reporting period
Advance Auto Parts, Inc. filed this 10-K for fiscal 2013, the 52 weeks ended December 28, 2013. It operated 4,049 stores, primarily in the United States, serving do-it-yourself and commercial automotive aftermarket customers through Advance Auto Parts and Autopart International (AI). The results do not include General Parts International (GPI), acquired January 2, 2014.
Financial results and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Net sales | $6.494 billion | $6.205 billion |
| Gross profit / margin | $3.252 billion / 50.1% | $3.098 billion / 49.9% |
| Operating income / margin | $660.3 million / 10.2% | $657.3 million / 10.6% |
| Net income / diluted EPS | $391.8 million / $5.32 | $387.7 million / $5.22 |
| Operating cash flow | $545.3 million | $685.3 million |
| Capital expenditures | $195.8 million | $271.2 million |
| Cash and cash equivalents at year-end | $1.112 billion | $598.1 million |
| Total debt at year-end | $1.054 billion | $605.1 million |
Fiscal 2013 net sales rose 4.7%, primarily from BWP stores acquired at the end of 2012 and net new stores; comparable-store sales declined 1.5%. Commercial sales were 40.4% of total sales, up from 38.1%. Inventory was $2.557 billion, up 10.7%, and net working capital was $1.225 billion. Cash exceeded reported debt by approximately $58.9 million at year-end, before the subsequent GPI financing.
Fourth-quarter (12 weeks ended December 28, 2013) sales were $1.409 billion versus $1.329 billion a year earlier; net income was $49.3 million versus $65.1 million, and diluted EPS was $0.67 versus $0.88.
Material changes versus the prior comparable period
- Annual gross margin improved 20 basis points, reflecting merchandise margins, product mix and shrink improvements, partly offset by supply-chain ramp-up costs and greater Commercial mix.
- SG&A rose to 39.9% of sales from 39.3%; operating margin fell 42 basis points. Fiscal 2013 included $25.0 million of GPI transaction expenses and $8.0 million of BWP integration costs.
- Operating cash flow declined 20.4%, chiefly due to inventory growth net of accounts payable. Inventory turnover decreased to 1.33 from 1.43.
- Debt increased by $448.5 million, largely following issuance of $450 million of 4.50% senior notes in December 2013 in preparation for the GPI acquisition.
Outlook, commentary, risks and unusual items
Management cited constrained consumer spending, competition and deferred vehicle maintenance during much of 2013, with fourth-quarter sales benefiting in some colder markets from unusually cold weather. It identified Superior Availability and Service Leadership as core strategies, with emphasis on commercial growth, supply-chain and store execution, and new-store expansion. No specific sales or earnings guidance is provided.
For fiscal 2014, management anticipated $325–$350 million of capital expenditures and 120–140 openings across AAP, AI and Worldpac; 2014 is a 53-week fiscal year. The company expected significant GPI integration costs over the following three years. GPI was acquired for approximately $2.08 billion; the company used cash and borrowed $700 million under a term loan and about $306 million under its revolver. GPI’s financial results were not included in fiscal 2013, and the filing states that acquisition pro forma earnings and purchase-price allocation were not yet practicable to provide.
Key risks include realizing GPI synergies and integrating operations, retaining GPI personnel, increased debt and interest-rate exposure, competitive pricing, soft demand, weather and macroeconomic sensitivity, supplier and product-quality issues, cyber incidents, and litigation or environmental liabilities. Management reported covenant compliance at year-end. It did not believe pending litigation was likely to have a material adverse effect, but noted asbestos claims could become material if claims increased or uninsured adverse verdicts occurred. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Post-acquisition debt, liquidity, borrowing costs and covenant headroom after funding GPI; year-end cash and debt figures predate that financing.
- GPI integration costs, purchase-price allocation, realized synergies and contribution to earnings and cash flow.
- Whether comparable-store sales recover and whether the Commercial mix growth supports profit margins.
- Inventory growth, turnover, working-capital requirements and operating cash-flow conversion.
- Execution against fiscal 2014 capital spending and store-opening plans, including the effect of the 53-week year.
- Developments in asbestos, employment and other legal contingencies, along with cyber and product-safety risks.