Advance Auto Parts, Inc. — Q2 2018 Form 10-Q
Reporting period: Second quarter, the 12 weeks ended July 14, 2018; year-to-date period, the 28 weeks ended July 14, 2018. Comparisons are with the corresponding 2017 periods. Advance Auto Parts sells automotive aftermarket parts to professional and do-it-yourself customers and operated 5,026 stores and 133 branches at quarter-end.
Financial performance
| Metric | Q2 2018 | Q2 2017 | 28 weeks 2018 | 28 weeks 2017 |
|---|---|---|---|---|
| Net sales | $2,326.7 million | $2,263.7 million | $5,200.5 million | $5,154.6 million |
| Gross profit | $1,011.6 million | $993.1 million | $2,283.8 million | $2,263.8 million |
| Operating income | $167.5 million | $146.7 million | $365.8 million | $326.5 million |
| Net income | $117.8 million | $87.0 million | $254.6 million | $195.0 million |
| Diluted EPS | $1.59 | $1.17 | $3.43 | $2.63 |
- Q2 sales rose 2.8%, matching comparable-store sales growth. Year-to-date comparable-store sales increased 0.8%.
- Q2 gross margin was 43.5%, down 39 basis points; operating margin was 7.2%, up 72 basis points; net margin was 5.1%, versus 3.8%.
- Year-to-date gross margin was 43.9%, essentially unchanged; operating margin rose to 7.0% from 6.3%, and net margin to 4.9% from 3.8%.
- Q2 Adjusted EPS, a non-GAAP measure, was $1.97 versus $1.58; year-to-date Adjusted EPS was $4.07 versus $3.18. Adjustments include transformation and GPI integration-related items and acquired-intangible amortization.
- Operating cash flow for the 28 weeks was $444.0 million, up from $267.3 million. Investing cash outflow was $61.2 million, versus $121.0 million; capital expenditures were $61.8 million. Financing cash outflow was $25.2 million. Cash increased $355.3 million to $902.2 million.
- At July 14, 2018, long-term debt was $1,045.1 million, with no revolver borrowings and $897.5 million of available borrowing capacity. The company reported compliance with debt covenants. Current assets were $5,877.8 million and current liabilities $3,598.2 million.
- Quarterly dividends declared were $0.06 per share. The board authorized a new $600 million share repurchase program on August 8, replacing the prior program’s remaining $415.1 million authorization.
Changes, outlook and commentary
- Management attributed Q2 sales strength partly to severe winter weather late in Q1 delaying spring demand into early Q2, a strong spring selling season, and strength in several regions and product categories. It cautioned that interim results are not necessarily indicative of full-year results.
- Operating margin improvement reflected productivity from prior investments and lower labor and insurance costs, partly offset by higher transportation, fuel and distribution-center costs and higher bonuses. Q2 gross margin was pressured by supply-chain costs.
- The lower effective tax rate—25.2% in Q2 versus 36.0%—primarily reflected the U.S. federal tax rate reduction. The company estimated this benefited net income by $22.0 million, or $0.30 per diluted share, in Q2 and $47.4 million, or $0.64 per diluted share, year to date.
- The company expected up to $220 million of 2018 capital expenditures and stated that operating cash generation, cash on hand and credit availability should fund primary obligations for the next year. It did not provide full-year sales or earnings guidance in the supplied filing text.
- Store and supply-chain rationalization actions were expected to generate up to $70 million of charges in 2018. Q2 charges were $12.4 million, including $5.3 million in cost of sales; year-to-date charges were $15.6 million. The company continued Carquest integration and broader transformation initiatives.
- Management is preparing to adopt lease accounting guidance in 2019 and expects a material increase in reported assets and liabilities, but could not yet quantify the impact. It did not expect a material effect on operating results.
- Risks noted include fuel and other macroeconomic factors, competition, customer demand and vehicle-related trends, as well as the potential for actual results to differ from forward-looking statements. A securities class action filed in February 2018 remained at a preliminary stage; the company disputed the allegations and intended to defend itself.
Important facts for investors to verify
- Whether Q2 comparable-sales growth and margin gains persist after weather-related demand shifted between quarters.
- How much of earnings growth reflects tax-rate changes versus operating improvement, and the nature and recurrence of non-GAAP adjustments.
- Progress and total costs of the store, supply-chain and transformation initiatives, including the expected 2018 charge range.
- Cash conversion, working-capital trends, capital spending, and the extent to which the new $600 million repurchase authorization is used.
- The eventual balance-sheet effect of lease-standard adoption and developments in the securities class action.