Advance Auto Parts, Inc. — Q1 2016 Form 10-Q
Business context and period. The filing covers the unaudited 16 weeks ended April 23, 2016; the comparable period was the 16 weeks ended April 25, 2015. Advance Auto Parts operated 5,086 stores and 125 distribution branches and served approximately 1,300 independently owned Carquest stores.
Financial performance
| Metric | Q1 2016 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $2,979.8 million | $3,038.2 million | Down 1.9% |
| Comparable-store sales | Down 1.9% | Not stated here | Declined |
| Gross profit | $1,349.9 million; 45.3% margin | $1,393.9 million; 45.9% margin | Margin down 58 basis points |
| SG&A | $1,078.9 million; 36.2% of sales | $1,131.4 million; 37.2% of sales | Rate improved 103 basis points |
| Operating income | $271.0 million; 9.1% margin | $262.5 million; 8.6% margin | Up $8.5 million |
| Net income | $158.8 million | $148.1 million | Up 7.2% |
| Diluted EPS | $2.14 | $2.00 | Up 7.0% |
| Operating cash flow | $75.3 million | $102.2 million | Down $26.9 million |
| Capital expenditures | $89.1 million | $57.0 million | Up $32.1 million |
Balance sheet, debt and liquidity
- Cash and cash equivalents were $103.7 million at April 23, 2016, versus $90.8 million at January 2, 2016. Inventory was $4,433.0 million, up $258.2 million, or 6.2%, from year-end.
- Total debt was $1,230.5 million, up $23.6 million from year-end. The company had $186.0 million outstanding under its revolver and term loan and $788.3 million of available revolver capacity after letters of credit.
- Current liabilities were $3,908.6 million; total stockholders’ equity was $2,629.1 million. Management said expected operating cash generation, cash and available borrowing capacity should fund primary obligations for the next fiscal year.
- The company was in compliance with credit-agreement financial covenants. S&P rated the company BBB- and Moody’s Baa2, both with stable outlooks.
Material changes and management commentary
- Sales weakness reflected a 1.9% comparable-store decline, lower sales transferred from consolidated stores, inconsistent product availability and service levels, and mild winter/delayed spring weather, particularly in colder markets. Transactions declined in both Commercial and DIY, while average ticket modestly increased.
- Gross margin fell mainly because of higher supply-chain costs from increased inventory and expense deleverage on lower comparable sales. Lower SG&A, from cost initiatives and disciplined support costs, more than offset the gross-margin decline and lifted operating margin.
- Operating cash flow decreased primarily because of working-capital outflows, especially inventory net of accounts payable; earnings were higher. Inventory investment supported product availability, seasonal build, new locations and a new Worldpac distribution center.
- Management’s 2016 priority is to regain sales growth. Following the April 2016 appointment of CEO Thomas Greco, the company said it was evaluating the business and emphasizing growth, productivity, customer execution and people and culture.
Outlook, unusual items and risks
- No full-year earnings or sales guidance is provided in the filing. Management anticipated 2016 capital expenditures of approximately $260–$280 million, about 65–75 new stores and branches, and consolidation or conversion of approximately 325–350 Carquest stores.
- Q1 included $44.0 million of GPI integration, store-consolidation and support-center restructuring costs and acquired-intangible amortization, or $0.37 per diluted share. The comparable 2015 amount was $45.8 million, or $0.39 per diluted share. Management reported non-GAAP Adjusted Cash EPS of $2.51 versus $2.39; this measure excludes those items and is not GAAP EPS.
- Carquest integration continues: 89 stores were consolidated and 27 converted during the quarter; 768 locations still operated under the Carquest name at period-end. Related exit costs were $12.2 million, versus $2.7 million a year earlier. Restructuring liabilities totaled $51.5 million.
- Weather and seasonality can materially affect demand; sales are usually highest in spring and summer. Other cited risks include competitive pressure, execution and integration challenges, product availability, macroeconomic conditions, leadership transitions, cybersecurity incidents, and legal or regulatory matters.
- The company guaranteed $28.3 million of loans to independent Carquest customers and considered performance under those guarantees remote. It reported no other off-balance-sheet arrangements as defined by SEC rules and no material change in contractual obligations from year-end.
- Other notable items: LIFO accounting reduced cost of sales by $31.5 million in Q1, compared with $16.5 million in the prior-year quarter. The board declared a $0.06-per-share dividend payable July 1, 2016.
Most important facts for investors to verify
- Whether product availability, service levels and comparable-store sales improve after management’s operational changes.
- Whether inventory growth supports sales and availability or continues to weigh on working capital, cash flow and gross margin.
- Progress and costs of the planned Carquest consolidations/conversions and broader GPI integration.
- Whether planned capital spending and store expansion remain within the stated range, and how they affect cash generation and borrowing.
- Debt, revolver availability, covenant compliance and credit ratings, including exposure to variable interest rates.