Advance Auto Parts, Inc. — Q3 2019 Form 10-Q
Business and period. Advance Auto Parts sells automotive aftermarket parts and serves professional installers and DIY customers. At October 5, 2019, it operated 4,891 stores and 152 branches and served 1,260 independently owned Carquest stores. The third quarter was the 12 weeks ended October 5, 2019; year-to-date figures cover 40 weeks.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 40 weeks 2019 | 40 weeks 2018 |
|---|---|---|---|---|
| Net sales | $2,312.1m | $2,275.0m | $7,596.4m | $7,475.5m |
| Gross margin | 43.8% | 44.3% | 43.8% | 44.0% |
| SG&A as % of sales | 36.3% | 37.5% | 36.5% | 37.1% |
| Operating income | $172.3m | $154.2m | $551.0m | $520.0m |
| Net income | $123.7m | $115.8m | $391.0m | $370.4m |
| Diluted EPS | $1.75 | $1.56 | $5.46 | $4.99 |
Q3 sales rose 1.6%, including comparable-store sales growth of 1.2%; management attributed growth to comparable sales, the independent Carquest network and added branches. Q3 operating margin increased to 7.5% from 6.8%, while gross margin fell 49 basis points. Adjusted diluted EPS, a non-GAAP measure, was $2.10 versus $1.89. For the 40-week period, adjusted diluted EPS was $6.55 versus $5.96.
Cash, debt and liquidity
- Operating cash flow for the first 40 weeks was $708.5m, up from $681.5m. Capital spending was $169.2m, versus $105.1m; investing cash outflow was $160.5m.
- Financing cash outflow was $870.9m, mainly reflecting $486.4m of share repurchases, redemption of $300m principal of senior notes, and dividends. Cash declined by $322.8m to $573.7m.
- At October 5, 2019, long-term debt was $747.1m, down from $1,045.7m at year-end 2018. The company had no revolver borrowings and $1.0bn of availability; it reported compliance with debt covenants.
- Operating lease liabilities were $2,441.2m, including $443.5m current and $1,997.7m noncurrent. Lease adoption added approximately $2.4bn of lease assets and liabilities; this accounting change did not materially affect reported operating results or cash flows.
- Current assets were $5,826.6m and current liabilities were $4,463.9m. Management said expected operating cash generation, cash on hand and available credit should fund obligations for the next year.
Changes, outlook and notable items
- Q3 SG&A declined to 36.3% of sales, benefiting from lower incident and claims costs and improved labor and occupancy costs; IT investment partly offset these savings. Gross-margin pressure was attributed partly to the enhanced loyalty program, partly offset by supply-chain productivity.
- Management cited strategic work on demand-based assortment, supply-chain efficiency, store and distribution-center footprint optimization, DIY e-commerce, the Walmart.com partnership, Speed Perks 2.0, and Professional growth. During the 40 weeks, 16 stores and branches opened and 82 closed or were consolidated.
- Management expected 2019 capital expenditures of $250m–$300m. No earnings or sales guidance was provided in the supplied filing text. It noted that interim results are not necessarily indicative of full-year results.
- The company made a $13.0m out-of-period cost-of-sales correction in the first quarter related to received-not-invoiced inventory. It also recorded $10.8m of charges associated with the early redemption of 2020 notes. The redemption covered $300m principal of 5.75% notes.
- On August 7, the board authorized a $400m repurchase program; $201.4m remained at October 5. On November 8, after quarter-end, the board added $700m to the program and declared a regular $0.06 quarterly dividend.
- A securities class action alleging disclosure violations remained at an early stage, with a motion to dismiss pending; the company disputed the allegations and intended to defend the case. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether sales and comparable-store growth persist, and whether loyalty initiatives continue to weigh on gross margin.
- Whether the planned $250m–$300m capital investment delivers supply-chain, technology and sales benefits, given higher year-to-date capital spending.
- The cash-flow and balance-sheet impact of the substantial buyback authorization alongside lease obligations and ongoing investment needs.
- How the inventory correction, LIFO estimates and adjustments used in non-GAAP results affect comparability with GAAP performance.
- Developments in the securities litigation and any changes to credit ratings, borrowing terms or management’s liquidity assessment.