Advance Auto Parts, Inc. — Q2 2019 Form 10-Q
Reporting period: Twelve weeks ended July 13, 2019; year-to-date figures cover the twenty-eight weeks ended July 13, 2019. The company is a North American automotive aftermarket parts retailer and distributor, operating 4,912 stores and 150 Worldpac branches and serving 1,250 independently owned Carquest stores at period-end.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Year to date 2019 | Year to date 2018 |
|---|---|---|---|---|
| Net sales | $2,332.2 million | $2,326.7 million | $5,284.3 million | $5,200.5 million |
| Gross profit | $1,009.4 million | $1,011.6 million | $2,314.1 million | $2,283.8 million |
| Gross margin | 43.3% | 43.5% | 43.8% | 43.9% |
| Operating income | $170.8 million | $167.5 million | $378.7 million | $365.8 million |
| Net income | $124.8 million | $117.8 million | $267.3 million | $254.6 million |
| Diluted EPS | $1.73 | $1.59 | $3.71 | $3.43 |
| Operating cash flow | Not separately stated for Q2 | Not separately stated for Q2 | $492.2 million | $444.0 million |
Financial position, cash flow and capital
- Cash and cash equivalents were $747.7 million at July 13, 2019, down from $896.5 million at December 29, 2018.
- Long-term debt was $747.0 million, compared with $1,045.7 million at year-end. The company had no borrowings under its $1.0 billion revolving credit facility and reported compliance with debt covenants.
- Operating lease liabilities were $2.48 billion, including $449.1 million current and $2.03 billion noncurrent. Adoption of the new lease standard added about $2.4 billion of lease assets and liabilities; the company said the adoption did not materially affect reported operations or cash flows.
- Year-to-date investing cash outflow was $102.9 million, primarily capital expenditures of $111.4 million. Financing cash outflow was $538.6 million, including redemption of $300 million of notes, share repurchases and dividends. Cash decreased by $148.8 million during the period.
- Year-to-date share repurchases were $138.1 million for 0.9 million shares; $189.1 million remained under the then-current authorization at July 13. On August 7, the board authorized a new $400 million program. The quarterly dividend was $0.06 per share.
Changes and management commentary
- Q2 sales rose 0.2%, while comparable-store sales were flat. Professional business growth supported sales; management cited unfavorable and volatile weather, which affected channel and product mix. Year-to-date sales increased 1.6%, with comparable-store sales up 1.5%.
- Q2 gross margin declined 20 basis points, reflecting lower product margin associated with a smaller DIY sales mix and planned supply-chain wage investment. Inventory utilization improvements partly offset pressure. Inflation and tariff-related material costs were offset by pricing actions.
- Q2 GAAP diluted EPS was $1.73 versus $1.59. Adjusted EPS, a non-GAAP measure, was $2.00 versus $1.97. Year-to-date adjusted EPS was $4.46 versus $4.07; adjustments included transformation costs, acquired-intangible amortization and certain other items.
- Management attributed higher year-to-date operating cash flow to improved net income and working-capital management. Capital spending increased to support supply chain, e-commerce, store and IT investments.
- The company closed or consolidated 59 stores and branches and opened 12 during the first 28 weeks, ending with 5,062 stores and branches. It described ongoing transformation work in assortment, supply chain, technology, customer loyalty and Professional growth.
Outlook, unusual items and risks
- Management forecast 2019 capital expenditures of $250 million to $300 million, subject to business conditions, and stated that expected operating cash generation, available cash and revolver capacity should fund primary obligations for the next year. No full-year sales or earnings guidance is provided in the filing text.
- A $13.0 million out-of-period correction increased cost of sales in the first sixteen weeks of 2019 for received-not-invoiced inventory. Year-to-date cost of sales also included a $42.9 million LIFO increase, versus a $32.3 million LIFO reduction in the prior-year period.
- The company redeemed its 5.75% 2020 notes early and recorded $10.8 million of make-whole and debt-issuance-cost charges in the first quarter. Both these costs and the inventory correction are reflected in the company’s non-GAAP adjustments.
- A securities class action alleging disclosure violations remained at an early stage, with a motion to dismiss pending; the company disputed the allegations and intended to defend itself. It also guaranteed $26.0 million of loans to independent Carquest stores and considered performance under those guarantees remote.
- Credit ratings were BBB- from S&P and Baa2 from Moody’s, both with stable outlooks. Management cautioned that downgrades could raise borrowing costs, constrain financing access or affect vendor financing arrangements. The filing reported no significant change in market-risk exposure.
Investor verification priorities
- Track comparable-store sales, Professional versus DIY mix, weather effects and whether gross-margin pressure persists.
- Assess the quality and repeatability of operating cash flow and working-capital improvements against increased capital spending.
- Reconcile GAAP and adjusted EPS, particularly ongoing transformation costs, the inventory correction, LIFO estimates and first-quarter debt-redemption charges.
- Monitor debt reduction alongside the substantial operating lease commitments and share repurchases.
- Follow developments in the securities litigation, the new repurchase authorization and execution of the stated transformation and capital-investment plans.