Advance Auto Parts, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended January 1, 2011 (52 weeks). The filing is an annual report, not a standalone quarterly filing; FY2010 fourth quarter was 12 weeks. Comparisons are with FY2009, also 52 weeks.
Business context
Advance Auto Parts is a U.S.-focused automotive aftermarket retailer serving do-it-yourself (DIY) and commercial customers. At year-end it operated 3,563 stores: 3,369 Advance Auto Parts stores and 194 Autopart International (AI) stores. Commercial sales represented 34.2% of total sales, up from 32.0% in FY2009.
Financial results and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $5,925.2 million | $5,412.6 million |
| Comparable-store sales growth | 8.0% | 5.3% |
| Gross profit / margin | $2,961.3 million / 50.0% | $2,644.2 million / 48.9% |
| SG&A / sales | 40.1% | 40.5% |
| Operating income / margin | $584.9 million / 9.9% | $454.4 million / 8.4% |
| Net income | $346.1 million | $270.4 million |
| Diluted EPS | $3.95 | $2.83 |
| Operating cash flow | $666.2 million | $699.7 million |
| Cash and cash equivalents, year-end | $59.2 million | $100.0 million |
| Total debt, year-end | $301.8 million | $204.3 million |
FY2010 investing cash flow was $(199.4) million and financing cash flow was $(507.6) million. Capital expenditures were $199.6 million. Net working capital was $276.2 million, down from $421.6 million. Inventory increased to $1,863.9 million from $1,631.9 million; accounts payable to inventory rose to 71.0% from 61.2%.
The company issued $300 million of 5.75% senior unsecured notes due 2020, using the net proceeds to repay bank debt, including a $200 million term loan. At January 1, 2011, it had no revolver borrowings and $657.4 million of availability after letters of credit. Subsequent to year-end, it borrowed $145 million under the revolving facility; remaining availability was $512.4 million at February 26, 2011. The revolving facility matures in October 2011. The company reported compliance with its debt covenants.
Fourth-quarter FY2010 sales were $1,270.1 million, gross profit $627.5 million, net income $48.1 million and diluted EPS $0.57. In the comparable FY2009 quarter, sales were $1,143.6 million, net income $34.5 million and diluted EPS $0.36.
Material changes versus FY2009
- Sales increased 9.5%, primarily from 8.0% comparable-store growth and new stores.
- Gross margin expanded 113 basis points, attributed to merchandising and pricing improvements, product availability, supply-chain efficiencies and global sourcing.
- Operating margin rose 148 basis points. SG&A as a percentage of sales fell 35 basis points, helped by the absence of prior-year store-divestiture costs and sales leverage.
- Net income rose 28%; diluted EPS increased 40%, supported by higher operating income and a lower average share count following substantial repurchases.
- Operating cash flow declined $33.5 million, partly because of inventory and payable-related working-capital movements, despite higher net income.
- Debt increased by $97.6 million year over year following the notes issuance, while cash declined by $40.8 million. FY2010 share repurchases totaled 13.0 million shares at a cost of $633.9 million.
- AI sales increased 23.2%, but AI operating income declined to $4.5 million from $7.6 million, reflecting lower gross margin and higher expenses from accelerated store openings.
Outlook, management commentary and risks
Management said favorable FY2010 results reflected strong comparable sales, margin improvement, strategic investments and industry conditions, including consumers keeping vehicles longer. It cited potential pressure from higher gasoline prices and a rebound in new-car sales. The company expects Commercial growth to outpace DIY growth, while continuing to pursue a 50/50 Commercial/DIY sales mix over time; this is a strategic goal, not a dated forecast.
For FY2011, management anticipated opening 110–120 AAP stores and 10–20 AI stores, closing approximately 10 stores, and spending approximately $275–$300 million on capital expenditures. Planned investment includes a new warehouse-management system and completion of the Remington, Indiana distribution center, projected to open in late 2011. Management stated that cash from operations, existing cash and available revolver capacity should be sufficient for primary obligations over the next fiscal year.
- Capital returns: A new $500 million repurchase authorization was approved February 8, 2011 after the prior program was completed; the quarterly dividend was $0.06 per share.
- Business and market risks: Demand, competitive pricing, macroeconomic conditions, fuel costs, weather, supplier terms, imported-product costs, store expansion and execution of Commercial and supply-chain strategies could affect results.
- Operational and regulatory risks: The company relies on its information systems and transportation network and faces environmental, employment, product and other regulatory and litigation exposures.
- Contingencies: Asbestos-related lawsuits, primarily involving brake parts, and employment-related matters were disclosed. Management did not expect currently pending matters in aggregate to materially affect results, financial position or liquidity, but noted uninsured adverse outcomes or a substantial increase in asbestos claims could be material.
- Other items: Interest-rate swaps with $275 million notional value were no longer designated as hedges after bank debt repayment; they had a $9.3 million fair-value liability and mature in October 2011. Operating lease commitments totaled $2.09 billion.
Important facts for investors to verify
- Whether comparable sales and the 50.0% gross margin were sustained, and how much improvement came from pricing, sourcing, vendor incentives and inventory effects.
- Whether the large FY2010 buybacks and post-year-end repurchases were funded sustainably, and the resulting effect on debt, liquidity and share count.
- How the October 2011 revolver maturity was addressed and whether subsequent borrowing affected covenant headroom and financing costs.
- Whether Commercial growth and planned store openings generated adequate returns, particularly given AI’s lower FY2010 operating income.
- Whether inventory growth, accounts-payable funding and working-capital requirements affected cash generation beyond FY2010.
- Developments in asbestos, employment and environmental matters, as well as the company’s substantial lease commitments and self-insurance reserves.