Net Sales of $2.18 Billion, Revenue Decline of
3.0%; Comparable Store Sales Decreased 3.4%
Adjusted EPS $1.43; Diluted EPS $1.30
Reaffirms Full Year 2017 Guidance
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 third-quarter ended
October 7, 2017.
Third Quarter Performance Summary
Twelve Weeks
Ended Forty Weeks Ended October 7, 2017
October 8, 2016 October 7, 2017
October 8, 2016
Q3 BPSInc (Dec)
Net Sales (in millions) $ 2,182.2 $ 2,248.9 $ 7,336.8
$ 7,484.8
Comp Store Sales % (3.4 %) (1.0 %) (2.0 %)
(2.4 %)
Gross Profit (in millions) $ 947.7 $ 988.2 $
3,211.5 $ 3,348.4 Gross Profit (% sales) 43.4 % 43.9 % 43.8 % 44.7
% (51 )
SG&A (in millions) $ 791.1 $ 794.4 $
2,728.4 $ 2,666.9 SG&A (% sales) 36.3 % 35.3 % 37.2 % 35.6 % 93
Adjusted SG&A (in millions) (1) $ 775.5 $ 770.6 $
2,638.9 $ 2,572.6 Adjusted SG&A (% sales) 35.5 % 34.3 % 36.0 %
34.4 % 127
Operating Income (in millions) $ 156.6 $
193.8 $ 483.1 $ 681.5 Operating Income (% sales) 7.2 % 8.6 % 6.6 %
9.1 % (144 )
Adjusted Operating Income (in millions)
(1) $ 172.2 $ 217.6 $ 572.6 $ 775.7 Adjusted Operating Income (%
sales) 7.9 % 9.7 % 7.8 % 10.4 % (178 )
Diluted EPS $
1.30 $ 1.53 $ 3.93 $ 5.36
Adjusted EPS (1) $ 1.43 $ 1.73 $
4.60 $ 6.14
Average Diluted Shares (in thousands)
74,106 73,860 74,097 73,847 (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 continue to take steps to build the foundation for future
growth. We executed key transformational initiatives, including a
complete restructure of our field operations and professional sales
leadership teams. This important step in our journey sets us up
well for the future. In the third quarter, we delivered
improvements in cost initiatives while positioning the business for
future success. We remain on track to deliver our 2017 guidance,”
said Tom Greco, President and Chief Executive Officer.
Third Quarter 2017 Highlights
Total net sales for the third quarter came in at $2.18 billion,
a 3.0% decrease versus the prior-year period. Comparable store
sales for the quarter decreased 3.4%.
The Company's Gross Profit margin decreased 51 basis points
year-over-year to 43.4%. The decline was primarily driven by
increased supply chain costs and shrink, which negatively impacted
margins by 44 basis points. In addition, the non-cash impact of
inventory optimization efforts negatively impacted gross margins by
23 basis points. These were partially offset by 17 basis points in
favorable material cost improvements.
Adjusted SG&A was 35.5% of net sales, a 127 basis point
increase year-over-year. The increase was primarily driven by 131
basis points of higher labor, medical and insurance claims.
Additionally, increased marketing expenses accounted for 26 basis
points. These increases were partially offset by third-party fee
reductions in addition to improvements in utility, maintenance and
repair costs. The Company's GAAP SG&A was 36.3% of net sales, a
93 basis points increase year-over-year to $791.1 million versus
the prior-year period.
The Company's Adjusted Operating Income was $172.2 million, 7.9%
of net sales, which declined 178 basis points versus the prior-year
period, primarily driven by the declines in gross profit and
SG&A factors described above. On a GAAP basis, the Company's
Operating Income was $156.6 million, 7.2% of net sales, a decline
of 144 basis points.
Operating cash flow decreased 6.1% to $401.0 million through the
third quarter of 2017 from $427.0 million through the third quarter
of 2016. Free cash flow was $240.0 million through the third
quarter of 2017 compared to $222.8 million in the prior-year
period, an increase of 7.7%, primarily driven by inventory
optimization efforts.
2017 Annual Outlook
The Company reaffirmed the following full 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
Dividend
On November 7, 2017, the Company's Board of Directors
declared a regular quarterly cash dividend of $0.06 per share to be
paid on January 5, 2018 to stockholders of record as of
December 22, 2017.
Investor Conference Call
The Company will detail its results for the third quarter of
2017 on a conference call scheduled to begin at 8 a.m. Eastern Time
on Tuesday, November 14, 2017, which will be made available
concurrently on the Company’s website, www.AdvanceAutoParts.com.
The call is also available by dialing (844) 877-5989 and
referencing conference identification number 6275719. 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 October 7, 2017, Advance
operated 5,074 stores and 129 Worldpac branches and employed
approximately 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 defined by 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 future financial performance
including store growth, comparable store sales, gross profit rate,
SG&A, adjusted operating income, income tax rate, General Parts
integration costs, transformation costs, adjusted operating income
rate targets, capital expenditures, inventory levels and free cash
flow; statements regarding expected growth and future performance
of Advance Auto Parts, Inc. (the “Company”), expectations regarding
leadership changes and their impact on the Company’s strategies,
opportunities and results; statements regarding enhancements to
shareholder value, strategic plans or initiatives, growth or
profitability, productivity targets and all other statements that
are not statements of historical facts. These forward-looking
statements are based on estimates, projections, beliefs and
assumptions and are not guarantees of future performance. Such
statements are subject to significant risks and uncertainties and
actual future events or results may differ materially from such
forward-looking statements. Such differences may result from, among
other things, the Company’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 the Company’s products; the market for auto
parts; inflation; consumer debt levels; weather; business
interruptions; information technology security; availability of
suitable real estate; and dependence on foreign suppliers. Other
factors besides those listed here may also affect the Company, and
may be material to the Company. Please refer to the “Risk Factors”
section of the annual report on Form 10-K for the fiscal year-ended
December 31, 2016, and other filings made by the Company with the
Securities and Exchange Commission for additional risk factors that
could materially affect the Company’s actual results. Readers are
cautioned not to place undue reliance on these forward-looking
statements. The Company intends these forward-looking statements to
speak only as of the time of this communication and does not
undertake to update or revise any such forward-looking statements
as more information becomes available.
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands)
(unaudited)
October 7, 2017 December 31, 2016
Assets
Current assets: Cash and cash equivalents $ 363,302 $
135,178 Receivables, net 679,359 641,252 Inventories 4,219,321
4,325,868 Other current assets 105,970 70,466 Total
current assets 5,367,952 5,172,764
Property and
equipment, net 1,418,486 1,446,340
Goodwill 994,408
990,877
Intangible assets, net 608,520 640,903
Other
assets, net 78,858 64,149 $ 8,468,224 $
8,315,033
Liabilities and
Stockholders' Equity
Current liabilities: Accounts payable $ 2,921,653 $
3,086,177 Accrued expenses 572,360 554,397 Other current
liabilities 43,396 35,472 Total current liabilities
3,537,409 3,676,046
Long-term debt 1,044,008
1,042,949
Deferred income taxes 429,194 454,282
Other
long-term liabilities 226,826 225,564
Total stockholders'
equity 3,230,787 2,916,192 $ 8,468,224 $
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 Forty Week Periods Ended October 7, 2017 and October 8,
2016 (in thousands, except per share data) (unaudited)
Q3 2017
Q3 2016 YTD 2017 YTD 2016 Net sales $
2,182,233 $ 2,248,855 $ 7,336,798 $ 7,484,788 Cost of sales
1,234,525 1,260,650 4,125,318 4,136,437
Gross profit 947,708 988,205 3,211,480 3,348,351 Selling, general
and administrative expenses 791,139 794,437 2,728,420
2,666,900 Operating income 156,569 193,768
483,060 681,451 Other, net: Interest expense
(13,314 ) (13,581 ) (45,665 ) (46,545 ) Other income, net 745
(2,349 ) 8,727 7,018 Total other, net (12,569
) (15,930 ) (36,938 ) (39,527 ) Income before provision for income
taxes 144,000 177,838 446,122 641,924 Provision for income taxes
48,004 63,994 155,117 244,667 Net
income $ 95,996 $ 113,844 $ 291,005 $ 397,257
Basic earnings per share (a) $ 1.30 $ 1.54
$ 3.94 $ 5.38 Average shares outstanding (a)
73,866 73,638 73,827 73,524
Diluted earnings per share (a) $ 1.30 $ 1.53 $ 3.93
$ 5.36 Average diluted shares outstanding (a) 74,106
73,860 74,097 73,847
(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 October 7,
2017 and October 8, 2016, we had 73,877 and 73,653 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 Forty
Week Periods Ended October 7, 2017 and October 8, 2016
(in thousands) (unaudited)
October 7, 2017 October 8,
2016 Cash flows from operating activities: Net
income $ 291,005 $ 397,257 Depreciation and amortization 192,753
199,262 Share-based compensation 28,156 11,664 (Benefit) provision
for deferred income taxes (25,712 ) 21,130 Other non-cash
adjustments to net income 6,954 1,945 Net change in: Receivables,
net (35,760 ) (87,488 ) Inventories 116,957 (175,678 ) Accounts
payable (170,227 ) (9,222 ) Accrued expenses 36,564 84,897 Other
assets and liabilities (39,685 ) (16,735 ) Net cash provided by
operating activities 401,005 427,032
Cash flows from
investing activities: Purchases of property and equipment
(160,960 ) (204,213 ) Proceeds from sales of property and equipment
6,120 1,483 Other, net 20 (2,672 ) Net cash used in
investing activities (154,820 ) (205,402 )
Cash flows
from financing activities: (Decrease) increase in bank
overdrafts 4,676 8,765 Net borrowings (payments) on credit
facilities — (160,000 ) Dividends paid (17,828 ) (17,734 ) Proceeds
from the issuance of common stock 3,142 3,438 Tax withholdings
related to the exercise of stock appreciation rights (6,414 )
(15,764 ) Repurchase of common stock (3,380 ) (12,300 ) Other, net
(2,095 ) (323 ) Net cash used in financing activities (21,899 )
(193,918 ) Effect of exchange rate changes on cash 3,838
1,000
Net increase in cash and cash
equivalents 228,124 28,712
Cash and cash equivalents,
beginning of period 135,178 90,782
Cash and
cash equivalents, end of period $ 363,302 $ 119,494
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 $17,615 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 (1) non-operational expenses associated with (i) the
integration of General Parts International, Inc. ("General Parts")
and (ii) store closure and consolidation costs; (2) non-cash
charges related to the acquired General Parts intangibles; and (3)
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 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 October 7, 2017, 759
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 transformation
expenses over the next several years as it transitions from its
integration of the Advance Auto Parts and Carquest US ("AAP/CQUS")
businesses to a plan that involves a more holistic and integrated
transformation of the entire company across all four banners,
including Worldpac and Autopart International. These expenses will
include, but not be limited to, restructuring costs, third party
professional services and other significant costs to integrate and
streamline the Company's operating structure across the enterprise.
The Company focused its initial transformation efforts on
restructuring the AAP/CQUS field structure in the second quarter
and is beginning to review other areas such as supply chain and
information technology.
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 Forty Week Periods
Ended
(in thousands, except per share data)
(in thousands, except per share data)
October 7, 2017 October 8,
2016 October 7, 2017 October
8, 2016 Net income (GAAP) $ 95,996 $ 113,844 $ 291,005 $
397,257 SG&A adjustments: GPI integration and store
consolidation costs 3,562 14,390 23,345 62,745 GPI amortization of
acquired intangible assets 9,090 9,426 30,494 31,547 Transformation
expenses 2,973 — 35,726 — Other income adjustment (a) — — (8,878 )
— Provision for income taxes on adjustments (b) (5,938 ) (9,050 )
(30,661 ) (35,831 ) Adjusted net income (Non-GAAP) $ 105,683
$ 128,610 $ 341,031 $ 455,718 Diluted
earnings per share (GAAP) $ 1.30 $ 1.53 $ 3.93 $ 5.36 Adjustments,
net of tax 0.13 0.20 0.67 0.78 Adjusted
EPS (Non-GAAP) $ 1.43 $ 1.73 $ 4.60 $ 6.14
Reconciliation of
Adjusted Selling, General and Administrative
Expenses:
Twelve Week Periods Ended Forty Week Periods
Ended
(in thousands)
(in thousands)
October 7, 2017 October 8, 2016
October 7, 2017 October 8, 2016
SG&A (GAAP) $ 791,139 $ 794,437 $ 2,728,420 $ 2,666,900
SG&A adjustments (15,625 ) (23,816 ) (89,565 ) (94,292 )
Adjusted SG&A (Non-GAAP) $ 775,514 $ 770,621 $
2,638,855 $ 2,572,608
Reconciliation of
Adjusted Operating Income:
Twelve Week Periods Ended Forty Week Periods
Ended
(in thousands)
(in thousands)
October 7, 2017 October 8, 2016
October 7, 2017 October 8, 2016
Operating income (GAAP) $ 156,569 $ 193,768 $ 483,060 $ 681,451
SG&A adjustments 15,625 23,816 89,565
94,292 Adjusted operating income (Non-GAAP) $ 172,194
$ 217,584 $ 572,625 $ 775,743
(a)
The adjustment to Other income for the
forty weeks ended October 7, 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:
Forty Week Periods Ended October 7, 2017
October 8, 2016 Cash flows from operating activities
$ 401,005 $ 427,032 Purchases of property and equipment (160,960 )
(204,213 ) Free cash flow $ 240,045 $ 222,819
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 October 7, 2017
December 31, 2016 Total debt $ 1,044,358 $ 1,043,255
3,195,228 3,221,202 Adjusted debt 4,239,586 4,264,457
Operating income 589,207 787,598 Add: Adjustments (a) 69,155
72,828 Depreciation and amortization 251,878 258,387
Adjusted EBITDA 910,240 1,118,813 Rent expense (less favorable
lease amortization of $2,372 and $3,498, respectively) 532,538
536,867 Adjusted EBITDAR $ 1,442,778 $ 1,655,680
Adjusted Debt to Adjusted EBITDAR 2.9
2.6
(a)
The adjustments to the four quarters ended
October 7, 2017 include General Parts integration, store
consolidation costs and transformation expenses of $69.2 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 October 7, 2017, the Company operated 5,074 stores
and 129 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 forty weeks ended October 7, 2017.
AAP AI
CARQUEST WORLDPAC Total
July 15, 2017
4,381 186 506 131 5,204 New 10 —
1 — 11 Closed (2 ) (1 ) (4 ) (2 ) (9 ) Consolidated — — (3 ) — (3 )
Converted 37 — (37 ) —
—
October 7, 2017
4,426 185
463 129 5,203
December 31, 2016 4,273 181
608 127 5,189 New 31 5 7 4 47 Closed (7 ) (1 )
(8 ) (2 ) (18 ) Consolidated (3 ) — (12 ) — (15 ) Converted
132 — (132 ) — —
October 7, 2017 4,426
185 463 129
5,203
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171114005409/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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