Advance Auto Parts, Inc. — 2011 Q2 Form 10-Q
Business and period: Specialty retailer of automotive aftermarket parts and services, operating 3,627 stores through Advance Auto Parts (AAP) and Autopart International (AI). The quarter was the 12 weeks ended July 16, 2011; year-to-date results cover 28 weeks. Financial statements are unaudited.
Financial results and changes
- Quarter revenue: $1.480 billion, up 4.4% year over year. Comparable-store sales increased 2.5% (AAP 2.1%; AI 13.4%); growth also reflected 130 net new stores opened over the preceding 12 months.
- Quarter earnings: Operating income was $188.9 million, up from $171.6 million; net income was $113.1 million, up from $100.9 million. Diluted EPS rose to $1.46 from $1.16, reflecting higher operating income and share repurchases.
- Quarter margins: Gross margin declined to 49.7% from 50.4%, while SG&A fell to 37.0% of sales from 38.3%. Operating margin improved to 12.8% from 12.1%; net margin was 7.6% versus 7.1%.
- Year-to-date: Revenue was $3.378 billion, up 4.0%; comparable-store sales grew 1.9%. Operating income increased to $374.9 million from $353.8 million; net income was $222.7 million versus $210.3 million. Diluted EPS was $2.79 versus $2.34. Gross margin was 50.2% versus 50.1%, and operating margin was 11.1% versus 10.9%.
- Cash flow and investment: For the 28 weeks, operating cash flow was $469.6 million, down from $495.5 million; capital spending was $151.6 million versus $99.3 million. Cash increased $9.6 million to $68.8 million. Higher inventory, net of accounts payable, was a principal drag on operating cash flow.
- Liquidity and debt: Current assets were $2.342 billion and current liabilities $2.086 billion at July 16. Total debt was $566.4 million, up $264.6 million from fiscal year-end, including $265 million drawn on a new $750 million revolving facility and $298.9 million of 5.75% notes due 2020. Revolver availability, after $93.3 million of letters of credit, was $391.7 million. The company reported compliance with debt covenants and said expected operating cash, cash on hand, and available borrowing should fund primary obligations for the next fiscal year.
- Capital returns: The company repurchased approximately 4.0 million shares for $239.7 million in the quarter and approximately 8.2 million shares for $509.7 million year to date. A new $300 million repurchase authorization was approved August 9, replacing the prior program’s remaining authorization. A quarterly dividend of $0.06 per share was declared after quarter-end.
Management outlook, risks, and notable items
- Management said sales growth improved from the prior quarter but expected growth to remain constrained by the challenging economy. It slowed the pace of strategic changes while maintaining investment in Service Leadership and Superior Availability.
- Management expected fiscal 2011 gross margin to be below fiscal 2010, citing fuel costs, shrink, inflation, and supply-chain investment. Quarter gross margin also faced pressure from higher product acquisition and supply-chain costs and a greater mix of lower-margin Commercial sales.
- Commercial sales represented 37% of second-quarter sales, versus 34% a year earlier. Management expected Commercial growth to outpace DIY growth and reiterated a longer-term goal of an even sales mix.
- Fiscal 2011 store plans called for 110–120 AAP openings, about 10 AI openings, and approximately 10 closures. Capital spending was higher year to date, particularly for IT, supply chain, and existing-store needs.
- Inflationary pressures and lower-than-expected sales contributed to inventory growth of 15.1% versus July 2010. The company recorded a $9.1 million LIFO-related increase to year-to-date cost of sales, compared with a $27.2 million reduction in the prior-year period.
- The new five-year revolver has financial and other restrictive covenants. Variable-rate borrowing exposes the company to interest-rate changes; $275 million of legacy interest-rate swaps, with a $2.9 million fair-value liability, were due to mature in October 2011. Credit ratings were BBB- and Baa3, both with stable outlooks.
- The filing identifies general risks including weaker demand, competition, macroeconomic conditions, execution and expansion risks, supply-chain capacity, weather and business interruptions, and legal or regulatory matters. It reports no off-balance-sheet arrangements as defined by SEC rules and no material change in contractual obligations. Management stated disclosure controls were effective and reported no material change in internal controls.
Key facts for investors to verify
- Whether comparable-store sales and customer demand sustain the second-quarter improvement, particularly given management’s caution on the economy.
- Whether gross-margin pressure from inflation, shrink, fuel, supply-chain costs, and Commercial mix offsets SG&A leverage.
- Inventory growth, its sell-through and availability benefits, and its effect on operating cash flow and working capital.
- Debt and liquidity after the large repurchases and capital investments, including variable-rate exposure, swap maturity, and covenant headroom.
- Progress against store-opening plans and strategic investments, and the financial impact of the new $300 million repurchase program.