Business context and reporting period
Advance Auto Parts, Inc. filed this unaudited Form 10-Q for the 12 weeks ended October 10, 2015 (third quarter of fiscal 2015) and the 40 weeks ended October 10, 2015. Comparisons are with the corresponding periods ended October 4, 2014. The company operates automotive aftermarket stores and distribution branches serving DIY and Commercial customers; it reported 5,240 stores and 118 distribution branches, primarily in the U.S., Canada, Puerto Rico and the U.S. Virgin Islands.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | 40 weeks 2015 | 40 weeks 2014 |
|---|---|---|---|---|
| Net sales | $2,295.2m | $2,289.5m | $7,703.5m | $7,606.7m |
| Gross profit / margin | $1,032.4m / 45.0% | $1,034.4m / 45.2% | $3,513.6m / 45.6% | $3,449.7m / 45.4% |
| Operating income / margin | $205.5m / 9.0% | $209.2m / 9.1% | $725.1m / 9.4% | $705.6m / 9.3% |
| Net income | $120.5m | $122.2m | $418.6m | $409.4m |
| Diluted EPS | $1.63 | $1.66 | $5.66 | $5.56 |
- Q3 comparable-store sales grew 0.5%; Commercial sales rose modestly while DIY sales were essentially flat. Commercial represented 58% of Q3 sales.
- Q3 gross margin fell 20 basis points, reflecting higher inventory costs tied to product integration and supply-chain expense deleverage, partly offset by lower product acquisition costs and synergies. Year-to-date gross margin increased 26 basis points.
- Q3 reported diluted EPS declined 2%; management’s non-GAAP “Comparable Cash EPS” was $1.95 versus $1.89, excluding specified integration, restructuring and acquired-intangible amortization costs. This is a non-GAAP measure, not a substitute for reported results.
- Interest expense declined to $14.4m in Q3 and $51.6m year to date, principally due to credit-facility repayments. Effective tax rates were 37.4% for both 2015 periods.
- Operating cash flow was $520.1m for the 40 weeks, down 3.7% from $540.3m. Capital expenditures were $161.2m. Cash and equivalents were $105.3m at October 10, versus $104.7m at January 3.
- Total debt was $1,293.7m, down $343.2m from January 3. Current liabilities were $3,950.9m and current assets $5,008.4m. Revolver and term-loan borrowings totaled $240.0m; $821.4m of revolver capacity remained available after letters of credit. The company reported compliance with debt covenants.
Material changes versus comparable periods
Q3 sales increased 0.3%, but operating income fell $3.6m and net income fell $1.7m. Management attributed sales pressure to the extended GPI integration, softness at Carquest stores, foreign exchange and some Worldpac customer transfers between branches; these were partly offset by new locations and sales transfers to consolidated stores. Q3 comparable sales trends weakened mid-quarter. Year-to-date sales rose 1.3%, operating income rose 2.8%, and net income rose 2.2%. Year-to-date operating cash flow declined, principally due to working-capital movements, including inventory outflows net of accounts payable.
Outlook, commentary, risks and unusual items
- Management expects fiscal 2015 capital expenditures of $240m–$260m and approximately 110–120 new stores and branches. The filing provides no clear full-year revenue or earnings guidance.
- Fiscal 2015 GPI integration, store-consolidation and support-center restructuring costs are expected to total $101m–$120m. The company reported $79.8m incurred through October 10, offset by approximately $83.6m of synergies; it expects synergies to reach a $160m annualized run rate by year-end 2016.
- The company approved closures of 80 underperforming stores and corporate-position eliminations. Estimated store-closure restructuring costs are $26m–$35m, plus approximately $6m for corporate-position eliminations, mostly expected to be cash costs. The longer-term plan is to complete Carquest integration by fiscal 2017.
- Other notable items include $8.7m of impairment charges for the 40-week period and a $46.4m LIFO-related reduction to cost of sales. The LIFO amount is based on management estimates pending year-end inventory valuation.
- Key disclosed risks include weak demand or competitive pricing, delayed GPI synergies or integration difficulties, added leverage and liquidity pressure, supply-chain execution, macroeconomic and weather effects, cybersecurity incidents, legal and regulatory matters, and retention of employees. Floating-rate debt exposes the company to interest-rate changes; no derivatives were outstanding.
- Management said liquidity from operations, cash and available credit should cover primary obligations for the next fiscal year. It declared a $0.06-per-share dividend payable January 8, 2016. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether GPI integration and store-conversion execution improve Commercial sales and comparable-store growth, particularly at Carquest locations.
- Progress toward projected $160m annualized synergies by year-end 2016, and whether the related costs and store-closure estimates remain on plan.
- Inventory growth, working-capital conversion and operating cash flow, given transitional inventory needs and the lower year-to-date cash generation.
- Debt repayment, covenant headroom, ratings and interest-rate exposure; reported total debt includes fixed-rate notes and variable-rate facilities.
- The distinction between GAAP EPS and management’s non-GAAP comparable EPS, including the recurring nature and cash impact of excluded costs.