Advance Auto Parts, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 29, 2012 (52 weeks). The fourth quarter comprised 12 weeks. Advance Auto Parts is a U.S.-focused automotive aftermarket retailer serving do-it-yourself and commercial customers through its AAP and Autopart International (AI) segments.
Key financial and operating metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $6.205 billion | $6.170 billion |
| Comparable-store sales | -0.8% | +2.2% |
| Gross profit / margin | $3.098 billion / 49.9% | $3.069 billion / 49.7% |
| Operating income / margin | $657.3 million / 10.6% | $664.6 million / 10.8% |
| Net income | $387.7 million | $394.7 million |
| Diluted EPS | $5.22 | $5.11 |
| Operating cash flow | $685.3 million | $828.8 million |
| Capital expenditures | $271.2 million | $268.1 million |
- Sales rose 0.6%, principally from 132 net store additions, offset by lower comparable sales. AAP sales increased 0.5% to $5.915 billion, with comparable sales down 0.9%; AI sales increased 1.7% to $306.1 million, with comparable sales up 0.8%.
- Gross margin improved 19 basis points, reflecting improved shrink and lower product acquisition costs, partly offset by more promotions. SG&A rose to 39.3% of sales from 39.0%, as lower sales and new-store openings drove expense deleverage. Operating income consequently fell 1.1%.
- Net income declined 1.8%; diluted EPS increased because the average diluted share count fell to 74.1 million from 77.1 million.
- Cash from operations fell 17.3%, primarily reflecting higher receivables after the company brought its commercial credit program in-house and inventory investment. Inventory increased 13.0% to $2.309 billion; inventory turnover declined to 1.43 from 1.59.
- At year-end, cash was $598.1 million, total debt was $605.1 million, and net debt was approximately $7.0 million. No revolving-credit borrowings were outstanding; $671.2 million remained available after letters of credit. Current assets were $3.184 billion and current liabilities were $2.560 billion.
- Total assets were $4.614 billion and stockholders’ equity was $1.211 billion. The company declared $0.24 per share in annual dividends.
Material changes and notable items
- Management attributed weaker sales to unusually warm weather, particularly in colder markets, and continued consumer uncertainty. Transaction count declined, partly offset by higher average transaction value and a greater commercial-sales mix.
- Commercial sales rose to 38.1% of total sales from 37.0%. The company continued investing in commercial service, parts availability, HUB locations and supply-chain capacity; it opened a distribution center in Remington, Indiana.
- In January 2012, the company issued $300 million of 4.50% senior unsecured notes due 2022. It also had $300 million of 5.75% notes due 2020. The revolving facility matures in 2016, and the company reported compliance with its debt covenants.
- On December 31, 2012, after fiscal year-end, the company acquired B.W.P. Distributors for a stated purchase price of $191.5 million, including $188.2 million paid at closing and up to $3.3 million in contingent payments. It will operate 124 acquired company-owned stores and two distribution centers; certain distribution rights and locations were transferred to an affiliate of GPI. The acquisition’s initial purchase accounting was incomplete, and its results are included beginning in FY2013.
- The company repurchased $19.6 million of shares under its repurchase program in FY2012 and had $492.4 million remaining authorization at year-end.
Outlook, risks and contingencies
- For FY2013, management anticipated opening 155–165 AAP stores and 10–15 AI stores, excluding the 124 BWP stores, and capital expenditures of approximately $275–$300 million. It identified commercial growth, improved local parts availability, store expansion and stronger store execution as priorities. No specific FY2013 revenue or earnings guidance was provided in the filing text.
- Management said it believed operating cash flow, available cash and revolving-credit capacity would fund primary obligations for the next fiscal year. It noted ongoing exposure to demand, competition and pricing, weather, macroeconomic conditions, fuel and energy costs, supplier and product-quality risks, execution of growth and supply-chain plans, cybersecurity, regulation and litigation.
- Contractual obligations included $2.338 billion of operating-lease payments and $261.1 million of estimated interest payments, in addition to $605.1 million of debt principal. Asbestos and employment-related matters were disclosed; management did not believe pending matters would materially affect results, but stated that certain outcomes could be material and that future unasserted asbestos claims could not be estimated.
- Key estimates include vendor incentives, inventory reserves, warranties, self-insurance and uncertain tax positions. The company reported effective disclosure controls and internal control over financial reporting; Deloitte issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether comparable sales recover, particularly transaction counts in weather-sensitive markets, and whether commercial growth offsets DIY softness.
- Whether the expanded inventory and supply-chain investment improves availability and sales without further weakening turnover or cash generation.
- The impact of bringing commercial credit in-house on receivables, collections, credit losses and operating cash flow.
- BWP integration progress, realized synergies, final purchase accounting and the effect of the acquisition on debt, cash and FY2013 results.
- Capacity to fund planned capital spending, lease commitments, dividends and repurchases while maintaining liquidity and covenant compliance.
- Developments in asbestos, employment and other legal matters, along with changes in material accounting estimates.