Advance Auto Parts, Inc. — Q3 2010 Form 10-Q
Reporting period: Unaudited results for the 12 weeks ended October 9, 2010, compared with the 12 weeks ended October 10, 2009; year-to-date results cover 40 weeks. The company operates Advance Auto Parts (AAP) and Autopart International (AI), with 3,540 stores at period-end.
Financial performance
| Metric | Q3 2010 | Q3 2009 | 40 weeks 2010 | 40 weeks 2009 |
|---|---|---|---|---|
| Net sales | $1,406.5 million | $1,262.6 million | $4,655.1 million | $4,269.1 million |
| Comparable-store sales growth | 9.9% | 4.7% | 7.8% | 6.1% |
| Gross margin | 50.3% | 49.2% | 50.1% | 49.1% |
| Operating income | $147.2 million | $104.9 million | $501.0 million | $397.2 million |
| Operating margin | 10.5% | 8.3% | 10.8% | 9.3% |
| Net income | $87.6 million | $62.0 million | $297.9 million | $235.9 million |
| Diluted EPS | $1.03 | $0.65 | $3.37 | $2.46 |
Q3 sales rose 11.4%; management attributed growth to comparable-store gains and recently opened stores. Gross margin improved 110 basis points in Q3, supported by merchandising, pricing, product availability and supply-chain initiatives. SG&A was 39.9% of sales, down from 40.9%; operating income increased 40.4%. EPS also benefited from a lower average share count following repurchases.
For the 40 weeks, operating cash flow was $596.5 million versus $628.5 million. Capital expenditures were $147.2 million, and cash used in investing activities was $147.0 million. Financing activities used $355.0 million, including $478.1 million of share repurchases. Cash increased $94.5 million to $194.5 million.
Financial position and liquidity
- At October 9, cash was $194.5 million; current assets were $2,201.7 million and current liabilities were $1,827.9 million. Inventory was $1,839.5 million, up from $1,631.9 million at fiscal year-end.
- Total debt was $302.2 million, including $298.8 million of 5.75% senior unsecured notes due 2020 and $3.4 million of other financing. The company issued $300 million of notes in April and used net proceeds to repay its term loan and revolving-credit borrowings.
- No revolver borrowings were outstanding; $103.6 million of letters of credit left $646.4 million available under the $750 million facility, which matures October 2011. The company reported compliance with financial covenants.
- Operating cash flow declined year over year, primarily reflecting working-capital movements and lower deferred-tax cash-flow benefit, partly offset by higher net income. The filing states management expects operating cash, available cash and revolver availability to fund obligations for the next fiscal year.
Changes, outlook and risks
- AAP Q3 sales increased 11.0%; AI sales increased 23.7%. AI operating income fell to $2.4 million from $3.8 million, which management attributed to earlier offshore sourcing disruptions, lower-than-projected sales and gross profit, and costs associated with faster store openings.
- Commercial sales represented about 34% of sales, compared with 32% in the comparable prior-year period. Management plans to extend additional Commercial staffing, vehicle and delivery investments across the AAP chain at a slower pace over the next two years; it expects Commercial growth to outpace DIY if execution and customer relationships remain successful.
- Management anticipated approximately 110 new AAP stores and 40 new AI stores, with about five total closures, in fiscal 2010. It also described continued investment in existing stores, supply chain and information systems. No full-year revenue or EPS guidance is provided in the filing text.
- The $300 million repurchase authorization had $279.3 million remaining at quarter-end. The board declared a $0.06-per-share dividend payable January 7, 2011.
- Interest-rate swaps totaling $275 million no longer qualified for hedge accounting after the decision to repay bank debt. Their fair-value liability was $12.3 million; changes in fair value are now recognized in earnings, and the swaps mature in October 2011.
- Key disclosed risks include economic weakness, lower product demand, competition, vendor relationships, execution of growth strategies, hiring and retention, adverse weather, insurance costs, and legal or regulatory matters. The filing also notes that credit-market deterioration could impair vendor-financing benefits or increase revolver borrowing needs. The business is seasonal and weather-sensitive.
Investor verification priorities
- Assess whether strong comparable-store growth and gross-margin gains are sustainable, including the contribution from LIFO inventory accounting and pricing initiatives.
- Track inventory growth, accounts-payable funding and operating cash flow to gauge working-capital quality and liquidity.
- Review the economics and execution of AI expansion, sourcing recovery, and Commercial investments, including expected returns from new stores.
- Monitor debt costs, the October 2011 revolver maturity, covenant headroom and the remaining swap liability and earnings exposure.
- Compare actual store openings, repurchases and capital spending with management’s stated plans; confirm that no more specific earnings guidance is available in this filing.