Advance Auto Parts, Inc. — Q3 2013 Form 10-Q
Business context and period. The unaudited report covers the 12 weeks ended October 5, 2013, and year-to-date results for the 40 weeks ended that date. Advance Auto Parts operates automotive aftermarket stores serving do-it-yourself and commercial customers. It reported 4,018 stores, including 3,796 AAP stores and 222 Autopart International stores.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 40 weeks 2013 | 40 weeks 2012 |
|---|---|---|---|---|
| Net sales | $1,520.1m | $1,457.5m | $5,085.0m | $4,875.8m |
| Gross profit / margin | $762.9m / 50.2% | $725.4m / 49.8% | $2,550.4m / 50.2% | $2,434.9m / 49.9% |
| Operating income / margin | $170.7m / 11.2% | $150.4m / 10.3% | $569.5m / 11.2% | $544.1m / 11.2% |
| Net income | $103.8m | $89.5m | $342.5m | $322.6m |
| Diluted EPS | $1.42 | $1.21 | $4.65 | $4.34 |
| Operating cash flow | Not presented for the quarter | $398.5m | $504.8m |
- Q3 sales rose 4.3%, while comparable store sales declined 2.0%. Growth reflected BWP and new stores; the comparable-sales decline was driven by lower transaction counts, particularly among DIY customers.
- Q3 operating margin improved 91 basis points as gross margin increased and SG&A as a percentage of sales fell to 39.0% from 39.4%. For the 40-week period, SG&A rose to 39.0% of sales from 38.8%, leaving operating margin flat at 11.2%.
- Cash and cash equivalents were $567.3m at October 5, 2013. Total debt was approximately $605.1m, including $599.0m of senior notes and $6.0m of other debt. No revolving-facility borrowings were outstanding; $662.3m remained available after letters of credit. The company reported compliance with debt covenants.
- Year-to-date operating cash flow fell $106.3m, primarily reflecting the timing of vendor payments and a $143.7m increase in inventory net of accounts payable. Investing cash outflow was $317.4m, including the BWP acquisition; financing cash outflow was $111.9m, including $78.6m of share repurchases.
Material changes and notable items
- Advance acquired B.W.P. Distributors on December 31, 2012, for $187.1m. It began integrating 124 acquired company-owned stores and two distribution centers, with integration expected to finish by mid-2014. The acquisition added $123.4m of goodwill.
- On October 15, 2013, after the reporting period, the company agreed to acquire General Parts International (CARQUEST and WORLDPAC) in an all-cash transaction with enterprise value of $2.04bn. Closing was expected by late 2013 or early 2014, subject to approvals and other conditions. The company expected to use cash on hand and additional bank debt and senior notes to fund the transaction.
- Q3 SG&A included $5.1m in costs related to the proposed GPI acquisition. The company repurchased $77.3m of shares during the 40-week period; $415.1m remained under its repurchase authorization. The quarterly dividend remained $0.06 per share.
Outlook, management commentary, and risks
- Management expected comparable sales to remain constrained for the rest of fiscal 2013, citing lower customer demand and macroeconomic uncertainty. It described consumer maintenance deferrals as elevated, while pointing to favorable long-term industry factors such as an aging vehicle fleet.
- Fiscal 2013 store-opening expectations were approximately 155–165 AAP stores, excluding acquired BWP stores, and 10–15 AI stores. Management highlighted commercial sales growth, parts availability, supply-chain investment, and store execution as strategic priorities.
- Key GPI risks include failure or delay in obtaining regulatory and other approvals or financing, integration challenges, failure to realize expected benefits, added indebtedness and liquidity pressure, management distraction, and loss of employees, customers, or suppliers. Other cited business risks include weak demand, competition, macroeconomic conditions, supply-chain execution, weather, and cyber incidents.
- The company stated that it expected available cash, operating cash generation, and its revolving facility to fund ordinary obligations for the next fiscal year. It also stated there were no material changes to contractual obligations and no off-balance-sheet arrangements as defined by SEC rules.
Important facts for investors to verify
- Whether negative comparable sales persist and whether the stated demand and deferred-maintenance trends improve.
- Progress and costs of integrating BWP, including store conversions and supply-chain performance.
- GPI transaction approvals, financing terms, closing timing, resulting leverage, and realized integration benefits.
- Whether inventory growth and vendor-payment timing continue to weigh on operating cash flow and liquidity.
- Execution of store-opening plans and the effect of new-store and strategic investments on margins and returns.