Advance Auto Parts, Inc. — Q2 2015 Form 10-Q
Reporting period: Twelve weeks ended July 18, 2015; year-to-date results cover the twenty-eight weeks ended that date. Comparative periods ended July 12, 2014. Financial statements are unaudited. The company operated 5,252 stores and 117 distribution branches, and served approximately 1,300 independently owned Carquest stores.
Financial performance
| Metric | Q2 2015 | Q2 2014 | 28 weeks 2015 | 28 weeks 2014 |
|---|---|---|---|---|
| Net sales | $2,370.0 million | $2,347.7 million | $5,408.3 million | $5,317.2 million |
| Gross profit | $1,087.3 million | $1,062.1 million | $2,481.2 million | $2,415.2 million |
| Gross margin | 45.9% | 45.2% | 45.9% | 45.4% |
| Operating income | $257.0 million | $240.7 million | $519.6 million | $496.5 million |
| Operating margin | 10.8% | 10.3% | 9.6% | 9.3% |
| Net income | $150.0 million | $139.5 million | $298.1 million | $287.2 million |
| Diluted EPS | $2.03 | $1.89 | $4.03 | $3.90 |
Q2 sales and comparable-store sales each increased 1.0%. Q2 GAAP net margin was 6.3%, versus 5.9% a year earlier. Management also reported non-GAAP “Comparable Cash EPS” of $2.27 versus $2.08, excluding GPI integration/store consolidation expenses and acquired-intangible amortization; this measure is supplemental, not a substitute for GAAP results.
For the twenty-eight weeks, operating cash flow was $330.8 million, compared with $320.6 million. Capital expenditures were $114.5 million; cash used in investing activities was $130.5 million, versus $2,165.3 million in the prior period, which included the GPI acquisition. Cash and cash equivalents were $114.5 million at July 18, 2015.
Balance sheet, debt and liquidity
- Total assets were $8.17 billion; stockholders’ equity was $2.29 billion. Current assets were $4.98 billion and current liabilities $3.88 billion.
- Debt, including the current portion, was approximately $1.454 billion, down from $1.637 billion at January 3, 2015, primarily due to credit-facility repayments. Cash was $114.5 million; approximate net debt was $1.34 billion.
- The company had $819.3 million of available revolver capacity after $120.7 million of letters of credit. It reported compliance with credit-agreement covenants.
- Variable-rate borrowings totaled $400 million; fixed-rate senior notes totaled $1.05 billion, with stated coupon rates of 4.50% and 5.75%. Moody’s upgraded the rating to Baa2 on August 5, 2015; S&P rated the company BBB-, with stable outlooks reported for both.
Changes, outlook and material items
- Q2 sales increased 1.0%; operating income rose $16.4 million, and gross margin expanded 64 basis points. Lower product acquisition costs and merchandise synergies supported gross margin. Lower insurance and administrative costs helped offset higher integration costs and sales-related expense deleverage.
- Commercial sales remained affected by disruption from the more operational phase of GPI integration; Carquest commercial sales were soft. DIY comparable sales improved from Q1, while upper Midwest markets underperformed, principally due to weather. Canadian foreign exchange reduced Q2 comparable sales by 34 basis points.
- Management expected approximately $80 million of GPI integration and store consolidation costs in fiscal 2015, and targeted an annualized synergy run rate of $160 million by the end of 2016. Through the first 28 weeks, it reported $51.3 million of such costs and approximately $57.6 million of synergies.
- Fiscal 2015 outlook included capital expenditures of approximately $325–$340 million and 100–120 new stores and branches. Management said expected operating cash generation, cash balances and available borrowing should fund primary obligations for the next fiscal year. No full-year EPS guidance is stated in the provided filing text.
- After quarter-end, the company approved plans to close 50 underperforming stores and eliminate certain corporate positions. Estimated restructuring costs were $16–$20 million for store closures plus approximately $6 million for position eliminations, mostly cash expenditures. Separately, approximately $25.7 million of office relocation/consolidation costs and $8.5 million of fiscal 2015 Carquest exit costs had been estimated.
- Key risks include integration disruption or failure to realize synergies, softer demand and competitive pressure, weather and macroeconomic conditions, inventory and working-capital needs, and higher borrowing costs if credit ratings decline. The company also guaranteed $29.5 million of loans to independent Carquest customers; management considered performance under the guarantees remote.
Important facts for investors to verify
- Whether comparable sales and Commercial performance improve as GPI integration disruption moderates, particularly at Carquest.
- Progress toward the $160 million annualized synergy target, alongside integration costs and execution of the store and corporate closures.
- Inventory growth and working-capital conversion: inventory increased 4.6% from year-end, partly due to product changeovers and new locations.
- Debt reduction, revolver availability, covenant compliance and the effect of variable rates or rating changes on interest expense.
- Actual fiscal 2015 capital spending and store openings relative to management’s stated ranges; the filing does not provide full-year EPS guidance.