- Q2 sales increased year over year to
$2.26 Billion. Comparable store sales flat.
- Year to date free cash flow more than
doubled versus prior year. Year to date operating cash flow grew
28% versus prior year.
Advance Auto Parts, Inc. (NYSE: AAP), a leading automotive
aftermarket parts provider in North America, that serves both
professional installer and do-it-yourself customers, today
announced its financial results for the second quarter ended
July 15, 2017. Second quarter GAAP earnings per diluted share
(Diluted EPS) were $1.17. Second quarter Adjusted earnings per
diluted share (Adjusted EPS) were $1.58, which excludes $0.41 of
non-GAAP adjustments.
Second Quarter Performance Summary
Twelve Weeks Ended
Twenty-Eight Weeks Ended July 15, 2017 July
16, 2016 July 15, 2017 July 16,
2016
Q2 BPSInc (Dec)
Sales (in millions) $ 2,263.7 $ 2,256.2 $ 5,154.6 $
5,235.9
Comp Store Sales % 0.0 % (4.1 %) (1.5 %) (2.8
%)
Gross Profit (in millions) $ 993.1 $ 1,010.3 $
2,263.8 $ 2,360.1 Gross Profit (% sales) 43.9 % 44.8 % 43.9 % 45.1
% (91 )
SG&A (in millions) $ 846.4 $ 793.6 $
1,937.3 $ 1,872.5 SG&A (% sales) 37.4 % 35.2 % 37.6 % 35.8 %
222
Adjusted SG&A (in millions) (1) $ 797.6 $
767.1 $ 1,863.3 $ 1,802.0 Adjusted SG&A (% sales) 35.2 % 34.0 %
36.1 % 34.4 % 123
Operating Income (in millions) $
146.7 $ 216.7 $ 326.5 $ 487.7 Operating Income (% sales) 6.5 % 9.6
% 6.3 % 9.3 % (312 )
Adjusted Operating Income (in
millions) (1) $ 195.5 $ 243.1 $ 400.4 $ 558.2 Adjusted Operating
Income (% sales) 8.6 % 10.8 % 7.8 % 10.7 % (214 )
Diluted
EPS $ 1.17 $ 1.68 $ 2.63 $ 3.82
Adjusted EPS (1) $ 1.58
$ 1.90 $ 3.18 $ 4.41
Average Diluted Shares (in
thousands) 74,093 73,835 74,093 73,842
(1)
For a better understanding of the
Company's adjusted results, refer to the reconciliation of non-GAAP
adjustments in the accompanying financial tables in this press
release.
“We delivered sales growth and continued to close the comp
sales performance gap versus the industry in Q2 while more than
doubling year to date Free Cash Flow. Our revised guidance for
the year incorporates the impact of industry headwinds in the
first half, which we expect to continue in the second half of
the year and we are taking the appropriate actions to adapt to
this environment. We’ve now assembled a world class leadership team
that is executing our transformation plan to significantly
drive growth and long term shareholder value,” said Tom
Greco, President and Chief Executive Officer.
Second Quarter 2017 Highlights
Total sales for second quarter came in at $2.26 Billion, a 0.3%
increase vs. the prior year period. Comparable store sales for the
quarter were flat.
The Company's Gross Profit margin decreased 91 basis points year
over year to 43.9%. The decline was primarily driven by the
non-cash accounting impact of the planned inventory reduction as
well as the increase in supply chain costs, unfavorable mix and
commodity headwinds. These factors were partially offset by the
Company’s efforts to drive favorable material cost performance. The
non-cash accounting impact of the year over year inventory
reduction was 26 basis points in Q2. Excluding the non-cash
accounting impact of the inventory reduction, the Company’s Gross
Profit margin decreased 65 basis points year over year.
The Company has purchased inventory at higher costs in the past,
which are reflected in the balance sheet on a LIFO basis. In
addition, under accounting rules certain supply chain costs
associated with inventory have been capitalized. As the Company
reduced the inventory, these costs moved from the balance sheet and
generated a non-cash negative impact to gross margin. As we
continue to reduce inventory, it will improve cash flow, but there
will continue to be a non-cash negative impact to gross margin.
Adjusted SG&A was 35.2% of sales, a 123 basis point increase
year over year. The increase was primarily driven by investments in
customer focused strategies. In addition, higher medical and
insurance expenses and support center costs related to increased
personnel costs also contributed to the increase. The Company's
GAAP SG&A increased 222 basis points versus the prior year.
The Company's Adjusted Operating Income of $195.5M (8.6% margin)
declined 214 basis points versus prior year, primarily driven by
the declines in gross profit and SG&A factors described above.
Excluding the non-cash impact of the inventory reduction the
Adjusted Operating income would have been $207.3M (9.2% margin), a
decline of 188 basis points on a year over year basis. On a GAAP
basis, the Company's Operating Income declined 312 basis
points.
Operating cash flow increased approximately 28.3% to $267.3
million through the second quarter of 2017 from $208.4 million
through the second quarter of 2016. Free cash flow was $145.0
million through the second quarter of 2017 compared to $70.5
million through the second quarter of 2016 primarily driven by
inventory reduction efforts.
2017 Annual Outlook
The Company provided the following update to its full fiscal
year 2017 guidance:
New Stores
60-65 new stores Comparable Store Sales -3% to
-1% Adjusted Operating Income Rate 200 to 300
basis points year over year reduction Income Tax Rate
37.5% to 38.0% Integration & Transformation Expenses
Approximately $100 to $150 million Capital
Expenditures Approximately $250 million Free
Cash Flow Minimum $300 million Diluted Share
Count Approximately 74 million shares
The Company expects to continue reducing inventory levels to
improve cash flow, and therefore will experience the associated
non-cash accounting gross margin headwinds. Excluding the non-cash
impact of the year over year inventory reduction which is estimated
to be 75 basis points, the year over year reduction on Adjusted
Operating income rate is expected be 125 basis points to 225 basis
points.
Dividend
On August 10, 2017, the Company's Board of Directors
declared a regular quarterly cash dividend of $0.06 per share to be
paid on October 6, 2017 to stockholders of record as of
September 22, 2017.
Investor Conference Call
The Company will detail its results on a conference call
scheduled to begin at 8 a.m. Eastern Time on Tuesday, August 15,
2017, which will be made available concurrently on the Company’s
website, www.AdvanceAutoParts.com. The call is also available by
dialing (877) 704-4453 or (201) 389-0920 if calling
internationally. A replay of the conference call will be available
on the Advance website for one year.
About Advance Auto Parts
Advance Auto Parts, Inc. is a leading automotive aftermarket
parts provider that serves both professional installer and
do-it-yourself customers. As of July 15, 2017, Advance
operated 5,073 stores and 131 Worldpac branches and employed 73,000
Team Members in the United States, Canada, Puerto Rico and the U.S.
Virgin Islands. The Company also serves approximately 1,250
independently owned Carquest branded stores across these locations
in addition to Mexico and the Bahamas, Turks and Caicos, British
Virgin Islands and Pacific Islands. Additional information about
the Company, employment opportunities, customer services, and
on-line shopping for parts, accessories and other offerings can be
found on the Company's website at www.AdvanceAutoParts.com.
Forward Looking Statements
Certain statements contained in this release are forward-looking
statements, as that term is used in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements address
future events or developments, and typically use words such as
believe, anticipate, expect, intend, plan, forecast, outlook or
estimate. These forward looking statements include, but are not
limited to, key assumptions for 2017 financial performance
including adjusted operating income; statements regarding expected
growth and future performance of Advance Auto Parts, Inc. (AAP),
including store growth, capital expenditures, comparable store
sales, gross profit rate, SG&A, adjusted operating income,
inventory levels, free cash flow, income tax rate, General Parts
integration costs, transformation costs and adjusted operating
income rate targets; expectations regarding leadership changes and
their impact on the company’s strategies, opportunities and
results; statements regarding enhancements to shareholder value;
statements regarding strategic plans or initiatives, growth or
profitability; statements regarding productivity targets; and all
other statements that are not statements of historical facts. These
forward-looking statements are subject to significant risks,
uncertainties and assumptions, and actual future events or results
may differ materially from such forward-looking statements. Such
differences may result from, among other things, AAP’s ability to
implement its business and growth strategy; ability to attract,
develop and retain executives and other employees; changes in
regulatory, social and political conditions, as well as general
economic conditions; competitive pressures; demand for AAP’s
products; the market for auto parts; the economy in general;
inflation; consumer debt levels; the weather; business
interruptions; information technology security; availability of
suitable real estate; dependence on foreign suppliers; and other
factors disclosed in AAP’s 10-K for the fiscal year ended December
31, 2016 and other filings made by AAP with the Securities and
Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements. AAP intends these
forward-looking statements to speak only as of the time of this
communication and does not undertake to update or revise them as
more information becomes available.
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands)
(unaudited)
July
15, 2017 December 31, 2016
Assets
Current assets: Cash and cash equivalents $ 257,230 $
135,178 Receivables, net 680,503 641,252 Inventories 4,293,367
4,325,868 Other current assets 95,115 70,466 Total current
assets 5,326,215 5,172,764
Property and equipment,
net 1,431,294 1,446,340
Goodwill 993,916 990,877
Intangible assets, net 618,879 640,903
Other assets,
net 67,109 64,149 $ 8,437,413 $ 8,315,033
Liabilities and
Stockholders' Equity
Current liabilities: Accounts payable $ 2,937,096 $
3,086,177 Accrued expenses 629,088 554,397 Other current
liabilities 32,143 35,472 Total current liabilities
3,598,327 3,676,046
Long-term debt 1,043,690
1,042,949
Deferred income taxes 438,782 454,282
Other
long-term liabilities 228,337 225,564
Total stockholders'
equity 3,128,277 2,916,192 $ 8,437,413 $
8,315,033
NOTE: These preliminary condensed consolidated balance sheets
have been prepared on a basis consistent with our previously
prepared balance sheets filed with the Securities and Exchange
Commission, but do not include the footnotes required by generally
accepted accounting principles, or GAAP, for complete financial
statements.
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations Twelve
and Twenty-Eight Week Periods Ended July 15, 2017 and July
16, 2016 (in thousands, except per share data) (unaudited)
Q2 2017 Q2 2016 YTD 2017
YTD 2016 Net sales $ 2,263,727 $ 2,256,155 $
5,154,565 $ 5,235,933 Cost of sales 1,270,639 1,245,898
2,890,793 2,875,787 Gross profit 993,088
1,010,257 2,263,772 2,360,146 Selling, general and administrative
expenses 846,377 793,573 1,937,281 1,872,463
Operating income 146,711 216,684 326,491
487,683 Other, net: Interest expense (13,921 )
(14,021 ) (32,351 ) (32,964 ) Other income, net 3,169 6,244
7,982 9,367 Total other, net (10,752 ) (7,777
) (24,369 ) (23,597 ) Income before provision for income taxes
135,959 208,907 302,122 464,086 Provision for income taxes 48,910
84,307 107,113 180,673 Net income $
87,049 $ 124,600 $ 195,009 $ 283,413
Basic earnings per share (a) $ 1.18 $ 1.69 $
2.64 $ 3.84 Average shares outstanding (a) 73,848
73,576 73,810 73,476 Diluted
earnings per share (a) $ 1.17 $ 1.68 $ 2.63 $
3.82 Average diluted shares outstanding (a) 74,093
73,835 74,093 73,842
(a)
Average shares outstanding is calculated
based on the weighted average number of shares outstanding during
the quarter or year-to-date period, as applicable. At July 15, 2017
and July 16, 2016, we had 73,862 and 73,613 shares outstanding,
respectively.
NOTE: These preliminary condensed consolidated statements of
operations have been prepared on a basis consistent with our
previously prepared statements of operations filed with the
Securities and Exchange Commission, but do not include the
footnotes required by GAAP for complete financial statements.
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Twenty-Eight Week Periods Ended July 15, 2017 and July
16, 2016 (in thousands) (unaudited)
July 15, 2017 July 16,
2016 Cash flows from operating activities: Net
income $ 195,009 $ 283,413 Depreciation and amortization 135,200
139,265 Share-based compensation 19,938 9,142 (Benefit) provision
for deferred income taxes (16,006 ) 11,454 Other non-cash
adjustments to net income 6,212 1,012 Net change in: Receivables,
net (37,012 ) (57,241 ) Inventories 41,923 (236,403 ) Accounts
payable (153,750 ) 11,611 Accrued expenses 91,333 51,488 Other
assets and liabilities (15,498 ) (5,301 ) Net cash provided by
operating activities 267,349 208,440
Cash flows from
investing activities: Purchases of property and equipment
(122,364 ) (137,920 ) Proceeds from sales of property and equipment
1,311 1,293 Other, net 20 (2,430 ) Net cash used in
investing activities (121,033 ) (139,057 )
Cash flows
from financing activities: (Decrease) increase in bank
overdrafts (4,202 ) 13,656 Net borrowings (payments) on credit
facilities — (34,500 ) Dividends paid (13,363 ) (13,291 ) Proceeds
from the issuance of common stock 2,281 2,222 Tax withholdings
related to the exercise of stock appreciation rights (6,230 )
(12,489 ) Repurchase of common stock (3,303 ) (12,179 ) Other, net
(2,027 ) (224 ) Net cash used in financing activities (26,844 )
(56,805 ) Effect of exchange rate changes on cash 2,580
1,467
Net increase in cash and cash
equivalents 122,052 14,045
Cash and cash equivalents,
beginning of period 135,178 90,782
Cash and
cash equivalents, end of period $ 257,230 $ 104,827
NOTE: These preliminary condensed consolidated statements of
cash flows have been prepared on a consistent basis with previously
prepared statements of cash flows filed with the Securities and
Exchange Commission, but do not include the footnotes required by
GAAP for complete financial statements. The Company retrospectively
adopted ASU 2016-09 in the first quarter of 2017, which resulted in
a reclassification of $15,535 of excess tax benefits related to
share-based compensation from financing activities to operating
activities in the comparable period of last year.
Reconciliation of Non-GAAP Financial
Measures
The Company's financial results include certain financial
measures not derived in accordance with generally accepted
accounting principles (“GAAP”). Non-GAAP financial measures
should not be used as a substitute for GAAP financial measures, or
considered in isolation, for the purpose of analyzing our operating
performance, financial position or cash flows. However, the Company
has presented these non-GAAP financial measures as management
believes that the presentation of its financial results that
exclude non-cash charges related to the acquired General Parts
intangibles and non-operational expenses associated with i) the
integration of General Parts, ii) store closure and consolidation
costs and iii) transformation expenses under our strategic business
plan is useful and indicative of its base operations because the
expenses vary from period to period in terms of size, nature and
significance and relate to the integration of General Parts and
store closure activity in excess of historical levels. These
measures assist in comparing the Company's current operating
results with past periods and with the operational performance of
other peer companies in its industry. The disclosure of these
measures allows investors to evaluate the Company’s performance
using the same measures management uses in developing internal
budgets and forecasts and in evaluating management’s compensation.
Included below is a description of the expenses the Company has
determined are not normal, recurring cash operating expenses
necessary to operate the Company’s business and the rationale for
why providing these measures is useful to investors as a supplement
to the GAAP measures.
General Parts Integration Expenses
- As disclosed in the Company’s filings with the Securities and
Exchange Commission, the Company acquired General Parts
International, Inc. (“General Parts”) for $2.08 billion on January
2, 2014 and is in the midst of a multi-year integration plan to
integrate the operations of General Parts with Advance Auto Parts.
This includes the integration of product brands and assortments,
supply chain and information technology. The integration is being
completed in phases and the nature and timing of expenses will vary
from quarter to quarter over several years. The integration of
product brands and assortments was primarily completed in 2015 and
the focus shifted to integrating the supply chain and information
technology systems. Due to the size of the acquisition, the Company
considers these expenses to be outside of its base business.
Therefore, the Company believes providing additional information in
the form of non-GAAP measures that exclude these costs is
beneficial to the users of its financial statements in evaluating
the operating performance of the base business and its
sustainability once the integration is completed.
Store Closure and Consolidation
Expenses - Store closure and consolidation expenses consist
of expenses associated with the Company’s plans to convert and
consolidate the Carquest stores acquired from General Parts. The
conversion and consolidation of the Carquest stores is a multi-year
process that began in 2014. As of July 15, 2017, 719 Carquest
stores acquired from General Parts had been consolidated into
existing Advance Auto Parts stores format. While periodic store
closures are common, these closures represent a major program
outside of the Company’s typical market evaluation process. The
Company believes it is useful to provide additional non-GAAP
measures that exclude these costs to provide investors greater
comparability of its base business and core operating performance.
The Company also continues to have store closures that occur as
part of its normal market evaluation process and has not excluded
the expenses associated with these store closures in computing the
Company’s non-GAAP measures.
Transformation Expenses - The
Company expects to incur a significant amount of expenses over the
next several years as it transitions from its integration plan to a
transformation plan that involves a complete transformation and
integration of the entire company. During the second quarter, the
Company completed a significant restructuring of its field
structure and streamlined other support center functions to better
position the Company to deliver on its growth and profitability
priorities. The Company recognized severance and other costs in the
second quarter related to these actions. In addition, the Company
incurred professional services for assistance in its strategic
business plan efforts, including its productivity agenda that the
Company expects to start producing significant savings in the
second half of 2017.
The Company has included a reconciliation of this information to
the most comparable GAAP measures in the following tables.
Reconciliation of
Adjusted Net Income and Adjusted EPS:
Twelve Week Periods Ended
(in thousands, except per share data)
Twenty-Eight Week Periods Ended
(in thousands, except per share data)
July 15, 2017 July 16,
2016 July 15, 2017 July 16, 2016
Net income (GAAP) $ 87,049 $ 124,600 $ 195,009 $ 283,413 SG&A
adjustments: GPI integration and store consolidation costs 6,919
17,002 19,783 48,355 GPI amortization of acquired intangible assets
9,124 9,459 21,403 22,121 Transformation expenses 32,753 — 32,753 —
Other income adjustment (a) (502 ) — (8,878 ) — Provision for
income taxes on adjustments (b) (18,351 ) (10,055 ) (24,723
) (26,781 ) Adjusted net income (Non-GAAP) $ 116,992
$ 141,006 $ 235,347 $ 327,108 Diluted
earnings per share (GAAP) $ 1.17 $ 1.68 $ 2.63 $ 3.82 Adjustments,
net of tax 0.41 0.22 0.55 0.59
Adjusted EPS (Non-GAAP) $ 1.58 $ 1.90 $ 3.18
$ 4.41
Reconciliation of
Adjusted Selling, General and Administrative
Expenses:
Twelve Week Periods Ended
(in thousands)
Twenty-Eight Week Periods Ended
(in thousands)
July 15, 2017 July 16, 2016 July
15, 2017 July 16, 2016 SG&A (GAAP) $
846,377 $ 793,573 $ 1,937,281 $ 1,872,463 SG&A adjustments
(48,795 ) (26,461 ) (73,939 ) (70,476 ) Adjusted
SG&A (Non-GAAP) $ 797,582 $ 767,112 $ 1,863,342
$ 1,801,987
Reconciliation of
Adjusted Operating Income:
Twelve Week Periods Ended
(in thousands)
Twenty-Eight Week Periods Ended
(in thousands)
July 15, 2017 July 16, 2016 July
15, 2017 July 16, 2016 Operating income
(GAAP) $ 146,711 $ 216,684 $ 326,491 $ 487,683 SG&A adjustments
48,795 26,461 73,939 70,476
Adjusted operating income (Non-GAAP) $ 195,506 $
243,145 $ 400,430 $ 558,159
(a)
The adjustment to Other income for the
twelve and twenty-eight weeks ended July 15, 2017 relates to income
recognized from an indemnification agreement associated with the
acquisition of General Parts.
(b)
The income tax impact of non-GAAP
adjustments is calculated using the estimated tax rate in effect
for the respective non-GAAP adjustments.
Reconciliation of
Free Cash Flow:
Twenty-Eight Week Periods Ended July 15, 2017
July 16, 2016 Cash flows from operating activities $
267,349 $ 208,440 Purchases of property and equipment (122,364 )
(137,920 ) Free cash flow $ 144,985 $ 70,520
NOTE: Management uses free cash flow as a measure of our
liquidity and believes it is a useful indicator to stockholders of
our ability to implement our growth strategies and service our
debt. Free cash flow is a non-GAAP measure and should be considered
in addition to, but not as a substitute for, information contained
in our condensed consolidated statement of cash flows.
Adjusted Debt to
Adjusted EBITDAR:
(In thousands, except adjusted debt to adjusted EBITDAR ratio)
Four Quarters Ended July 15, 2017 December
31, 2016 Total debt $ 1,044,108 $ 1,043,255 Add:
Capitalized lease obligation (Rent expense * 6) 3,246,204
3,221,202 Adjusted debt 4,290,312 4,264,457 Operating income
626,406 787,598 Add: Adjustments (a) 77,009 72,828 Depreciation and
amortization 254,332 258,387 Adjusted EBITDA 957,747
1,118,813 Rent expense (less favorable lease amortization of $2,732
and $3,498, respectively) 541,034 536,867 Adjusted EBITDAR $
1,498,781 $ 1,655,680
Adjusted Debt to Adjusted
EBITDAR 2.9 2.6 (a) The adjustments to the
four quarters ended July 15, 2017 include General Parts
integration, store consolidation costs and transformation expenses
of $77.0 million. The adjustments to Fiscal 2016 include General
Parts integration and store consolidation costs of $72.8 million.
NOTE: Management believes its Adjusted Debt to Adjusted EBITDAR
ratio (“leverage ratio”) is a key financial metric for debt
securities, as reviewed by rating agencies, and believes its debt
levels are best analyzed using this measure. The Company’s goal is
to maintain a 2.5 times leverage ratio and investment grade rating.
The Company's credit rating directly impacts the interest rates on
borrowings under its existing credit facility and could impact the
Company's ability to obtain additional funding. If the Company was
unable to maintain its investment grade rating this could
negatively impact future performance and limit growth
opportunities. Similar measures are utilized in the calculation of
the financial covenants and ratios contained in the Company's
financing arrangements. The leverage ratio calculated by the
Company is a non-GAAP measure and should not be considered a
substitute for debt to net earnings, net earnings or debt as
determined in accordance with GAAP. The Company adjusts the
calculation to remove rent expense and capitalize the Company’s
existing operating leases to provide a more meaningful comparison
with the Company’s peers and to account for differences in debt
structures and leasing arrangements. The use of a multiple of rent
expense to calculate the adjustment for capitalized operating lease
obligations is a commonly used method of estimating the debt the
Company would record for its leases that are classified as
operating if they had met the criteria for a capital lease or the
Company had purchased the property. The Company’s calculation of
its leverage ratio might not be calculated in the same manner as,
and thus might not be comparable to, similarly titled measures by
other companies.
Store Information:
As of July 15, 2017, the Company operated 5,073 stores and
131 Worldpac branches and served approximately 1,250 independently
owned Carquest stores. The below table summarizes the changes in
the number of the company-operated stores and branches during the
twelve and twenty-eight weeks ended July 15, 2017.
AAP AI CARQUEST WORLDPAC
Total
April 22, 2017 4,312 182 565
130 5,189 New 13 4 3 1 21 Closed (1 ) — (2 ) — (3 )
Consolidated — — (3 ) — (3 ) Converted 57
— (57 ) —
—
July 15, 2017
4,381 186
506 131
5,204 December 31, 2016
4,273 181 608 127 5,189 New 21 5
6 4 36 Closed (5 ) — (4 ) — (9 ) Consolidated (3 ) — (9 ) — (12 )
Converted 95 —
(95 ) — —
July
15, 2017 4,381
186 506 131
5,204
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170815005367/en/
Advance Auto Parts, Inc.Media ContactLaurie Stacy,
540-561-1206laurie.stacy@advanceautoparts.comorInvestor
Relations ContactPrabhakar Vaidyanathan,
919-227-5466invrelations@advanceautoparts.com
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