Advance Auto Parts, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks). The filing also reports fourth-quarter results; FY2016 was the comparable 52-week year ended December 31, 2016. Advance Auto Parts is a North American automotive aftermarket retailer and distributor serving Professional and DIY customers.
Financial and operating results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $9.374 billion | $9.568 billion | Down 2.0% |
| Comparable-store sales | Down 2.0% | Down 1.4% | Weaker |
| Gross profit | $4.085 billion | $4.256 billion | Down 4.0% |
| Gross margin | 43.6% | 44.5% | Down 90 basis points |
| Operating income | $570.2 million | $787.6 million | Down $217.4 million |
| Operating margin | 6.1% | 8.2% | Down 215 basis points |
| Net income | $475.5 million | $459.6 million | Up $15.9 million |
| Diluted EPS | $6.42 | $6.20 | Up $0.22 |
| Operating cash flow | $600.8 million | $523.3 million | Up $77.5 million |
| Capital expenditures | $189.8 million | $259.6 million | Down $69.8 million |
FY2017 net income and reported EPS benefited from a net $143.8 million tax-reform benefit. The company reported adjusted EPS of $5.37, down from $7.15 in FY2016; this is a non-GAAP measure. Fourth-quarter sales were $2.037 billion and net income was $184.5 million, including the tax-reform effects.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $546.9 million at year-end, versus $135.2 million a year earlier. Total debt was approximately $1.045 billion, broadly unchanged year over year; stockholders’ equity was $3.415 billion.
- Inventory was $4.168 billion, down $157.4 million, or 3.6%, as management pursued inventory optimization. The reduction contributed to stronger operating cash flow.
- No revolver borrowings were outstanding. Reported borrowing availability was $517.6 million, and letters of credit outstanding were $111.7 million. The company was in compliance with its credit agreement covenants.
- Operating cash flow less capital expenditures was approximately $411 million (derived). The company declared $0.24 per share in dividends for the year and stated that available cash, expected operating cash flow and credit-facility availability should fund obligations for the next year.
- Contractual obligations included $1.05 billion of debt principal and $2.96 billion of future operating lease payments. The filing reported $4.81 billion of total contractual obligations, including interest and other items.
Material changes and management commentary
- Management attributed the sales decline to transformation-related disruption, broader aftermarket softness, lower transactions and weather. Mild summer weather weighed on cooling-parts and chemicals sales; more favorable winter weather supported fourth-quarter demand. Professional sales were approximately 58% of annual sales.
- Gross margin declined amid higher supply-chain costs, unfavorable commodity prices and inventory-optimization impacts, partly offset by material-cost improvements. SG&A rose to 37.5% of sales from 36.3%, reflecting transformation costs and higher store labor, incentives and medical costs.
- Management’s transformation program included field-structure changes, a common product catalog, demand-driven assortment work, supply-chain improvements, fleet-management technology and enhanced digital/omni-channel capabilities. It also entered a strategic Interstate Batteries partnership.
- During 2017, the company opened 60 stores, closed 50 and consolidated 16. At year-end it operated 5,054 stores and 129 Worldpac branches. It expected to continue converting or consolidating remaining U.S. Carquest stores.
- The board-approved store and supply-chain rationalization plan was expected to generate up to $70 million of charges in 2018, including lease termination, asset impairment, facility closure and severance costs. No stores or distribution centers had yet been closed under that plan at year-end; a $6.9 million impairment charge had been recorded.
Outlook, risks and contingencies
- Management forecast 2018 capital expenditures of up to $250 million, subject to business conditions. The filing provides no clear numerical 2018 sales or EPS guidance.
- Key risks include weak demand and comparable sales, competition from national chains and online sellers, weather and fuel-price effects, execution of transformation and integration plans, supply-chain and inventory availability, labor retention, cybersecurity and data protection, and access to financing or higher borrowing costs.
- The company cited approximately $24.8 million of guarantees on loans to independently owned Carquest stores and considered performance under those guarantees remote. Management did not expect pending litigation, including asbestos-related matters, to materially affect the company, based on information then available.
- The 2019 lease-accounting standard was expected to materially increase reported assets and liabilities; management did not then expect a material impact on the income statement. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Separate recurring operating performance from the $143.8 million tax-reform benefit and reconcile GAAP EPS of $6.42 with adjusted EPS of $5.37.
- Track comparable sales, transaction trends, gross-margin recovery and whether transformation costs and investments produce improved execution.
- Assess whether inventory reductions improve cash generation without harming product availability or Professional customer service.
- Monitor delivery and cost outcomes from the 2018 store and supply-chain rationalization, including charges against the stated maximum of $70 million.
- Review debt maturities, lease commitments, revolver availability and the potential balance-sheet effects of adopting the new lease standard.