Business context and reporting period
Advance Auto Parts, Inc. filed this unaudited Form 10-Q for the 16 weeks ended April 21, 2012, its first quarter of fiscal 2012. The company operates automotive aftermarket stores and e-commerce businesses through Advance Auto Parts (AAP) and Autopart International (AI). It had 3,682 stores at quarter-end.
Financial performance and liquidity
| Metric | Q1 2012 | Comparable period |
|---|---|---|
| Net sales | $1,957.3 million | $1,898.1 million |
| Gross profit / margin | $980.7 million / 50.1% | $958.2 million / 50.5% |
| Operating income / margin | $224.6 million / 11.5% | $186.0 million / 9.8% |
| Net income | $133.5 million | $109.6 million |
| Diluted EPS | $1.79 | $1.35 |
| Operating cash flow | $235.4 million | $272.5 million |
| Capital expenditures | $82.5 million | $88.9 million |
Sales increased 3.1%, including 2.1% comparable-store growth and 82 net store additions over the prior 12 months. Gross margin fell 38 basis points, while SG&A as a share of sales declined 205 basis points. Operating margin improved 167 basis points. Management attributed the higher operating income to lower SG&A, partly offset by higher supply-chain costs; diluted EPS also benefited from share repurchases over the prior four fiscal quarters.
Cash and cash equivalents were $364.1 million at April 21, up from $57.9 million at December 31, 2011. Total debt was $600.6 million, up $184.7 million from year-end, following issuance of $300 million of 4.50% senior notes due 2022. The company had no revolving-facility borrowings, $92.3 million in letters of credit, and $657.7 million of available revolver capacity. It reported compliance with debt covenants. Current assets were $2,669.8 million and current liabilities $2,248.7 million.
Cash from operations was below the prior-year period, primarily due to working-capital movements and lower deferred-tax provision, partly offset by increased net income. Investing used $82.3 million; financing provided $153.0 million, including note proceeds. Cash increased by $306.2 million during the period.
Changes, outlook, and risks
- AAP sales rose 3.0%; AI sales rose 5.7%. Commercial sales were 38% of total sales, versus 37% a year earlier.
- Management said sales decelerated toward the end of the first quarter and into the start of the second, which it believed was temporary. It cited favorable long-term industry dynamics but also noted high fuel prices, increased new-car sales, reduced discretionary spending, economic uncertainty, and weather as potential headwinds.
- Management maintained its Service Leadership and Superior Availability strategies, including HUB expansion, e-commerce and commercial-platform investment, and a planned ninth AAP distribution center in Remington, Indiana, expected to begin shipping in the third quarter.
- Fiscal 2012 outlook: capital expenditures of approximately $275–$300 million; 110–120 new AAP stores, 10–20 new AI stores, and approximately 10 store closures.
- On May 14, 2012, the board authorized a $500 million stock-repurchase program, replacing the prior program. No shares were repurchased under the prior public program during the quarter; 60,000 shares costing $5.2 million were acquired through restricted-stock net settlement. The board also declared a $0.06-per-share dividend payable July 6, 2012.
- Other items to note: contingent consideration related to a business acquisition was valued at $27.8 million, with no change in fair value during the quarter. The company said it had no material changes in contractual obligations and no off-balance-sheet arrangements as defined by SEC rules. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the reported early-second-quarter sales slowdown proved temporary, and how comparable sales and Commercial growth subsequently developed.
- Whether gross-margin pressure from supply-chain costs persisted, and whether planned SG&A spending shifts affected later-quarter profitability.
- Execution, timing, and returns on the Remington distribution center, HUB expansion, and the planned $275–$300 million of fiscal-year capital expenditures.
- Debt, cash, and liquidity following the 2022 notes issuance, including covenant compliance and access to the revolving facility.
- Use of the new $500 million repurchase authorization and the effect of share-count changes on EPS.
- Actual results against the store-opening and closure outlook; interim results are not necessarily indicative of full-year performance.