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AAP > SEC Filings for AAP > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for ADVANCE AUTO PARTS INC


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. Our first quarter consists of 16 weeks divided into four equal periods. Our remaining three quarters consist of 12 weeks with each quarter divided into three equal periods.

Certain statements in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are usually identified by the use of words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "likely," "may," "plan," "position," "possible," "potential," "probable," "project," "projection," "should," "strategy," "will," or similar expressions. We intend for any forward-looking statements to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available.

Although we believe that our plans, intentions and expectations as reflected in or suggested by any forward-looking statements are reasonable, we do not guarantee or give assurance that such plans, intentions or expectations will be achieved. Actual results may differ materially from our anticipated results described or implied in our forward-looking statements, and such differences may be due to a variety of factors. Our business could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.

Listed below and discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 (filed with the Securities and Exchange Commission, or SEC, on February 28, 2012), which we refer to as our 2011 Form 10-K, are some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from any forward-looking statements made or implied in this report. These include, but are not limited to, the following:

a decrease in demand for our products;

competitive pricing and other competitive pressures;

our ability to implement our business strategy;

our ability to expand our business, including the location of available and suitable real estate for new store locations, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency;

our ability to attract and retain qualified employees, or Team Members;

deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, uncertain credit markets or other recessionary type conditions could have a negative impact on our business, financial condition, results of operations and cash flows;

regulatory and legal risks, such as environmental or OSHA risks, including being named as a defendant in administrative investigations or litigation, and the incurrence of legal fees and costs, the payment of fines or the payment of sums to settle litigation cases or administrative investigations or proceedings;

security breach or other cyber security incident;

business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism; and

the impact of global climate change or legal and regulatory responses to such change.

We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the SEC and you should not place undue reliance on those statements.


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Introduction

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both "do-it-yourself," or DIY, and "do-it-for-me," or Commercial, customers. Our Commercial customers consist primarily of delivery customers for whom we deliver products from our store locations to our Commercial customers' places of business, including national garage chains, independent garages, service stations and auto dealers. At October 6, 2012, we operated a total of 3,727 stores.

We operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart International, Inc., or AI. The AAP segment is comprised of our store operations within the Northeastern, Southeastern and Midwestern regions of the United States, Puerto Rico and the Virgin Islands which primarily operate under the trade names "Advance Auto Parts" and "Advance Discount Auto Parts." At October 6, 2012, we operated 3,517 stores in the AAP segment. Our AAP stores offer a broad selection of brand name and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars and light trucks. Through our integrated operating approach, we serve our DIY and Commercial customers from our store locations and online at www.AdvanceAutoParts.com. Our online website allows our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their home or business. Our Commercial customers can conveniently place their orders online.

At October 6, 2012, we operated 210 stores in the AI segment under the "Autopart International" trade name. AI's business primarily serves the Commercial market from its store locations in the Northeastern and Mid-Atlantic regions of the United States and Florida. For additional information regarding our segments, see Note 11, Segment and Related Information, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Management Overview

We generated earnings per diluted share, or diluted EPS, of $1.21 during our twelve weeks ended October 6, 2012 ( or the third quarter of Fiscal 2012) compared to $1.41 for the comparable period of Fiscal 2011. The decrease in our diluted EPS was primarily due to a decrease in our operating income. Consistent with our second quarter, our sales during the third quarter remained constrained particularly in our colder weather markets. The current economy affected our sales consistent with many other retailers, including our peer companies in the automotive aftermarket industry, as consumers faced high unemployment and gas prices and low consumer confidence. During the third quarter, we increased store labor and advertising along with more targeted promotional activity in response to the difficult sales environment. The increase in store labor was focused on providing better service to our Commercial customers and improving weekend staffing to better serve our DIY customers. While price promotions negatively impacted our top line during the third quarter, we believe they will positively contribute to our growth in the future by retaining current customers and attracting new customers. Despite our current performance, we remain encouraged by (i) the long-term dynamics of the automotive aftermarket industry, (ii) initiatives that are underway in support of our strategies and (iii) the improvement in our comparable Commercial sales from the second quarter to the third quarter.

Although our operating income for the third quarter of Fiscal 2012 declined over the comparable period of last year, we generated significant operating cash flow through the third quarter of Fiscal 2012. We currently have a significant amount of cash on-hand to invest in capital improvements and initiatives to support our strategies. As discussed later in the "Business and Industry Update," we remain committed to investing in our two key strategies.


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Summary of Third Quarter Financial Results

A high-level summary of our financial results for the third quarter of Fiscal 2012 is included below:

Net sales during the third quarter of Fiscal 2012 were $1,457.5 million, a decrease of 0.5% as compared to the third quarter of Fiscal 2011, driven by a 1.8% decrease in comparable store sales partially offset by the addition of 82 net new stores over the past 12 months.

Our operating income for the third quarter of Fiscal 2012 was $150.4 million, a decrease of $27.5 million over the comparable period of Fiscal 2011. As a percentage of total sales, operating income was 10.3%, a decrease of 182 basis points, due to higher SG&A partially offset by a slight improvement in gross profit rate.

Our inventory balance as of October 6, 2012 increased $83.6 million, or 4.0%, over the comparable period last year to support our inventory availability initiatives.

We generated operating cash flow of $504.8 million during the forty weeks ended October 6, 2012, a decrease of 17.4% over the comparable period in Fiscal 2011, with the largest portion of the decrease consisting of an increase in accounts receivable resulting from the in-sourcing of our Commercial credit program.

Refer to the "Results of Operations" and "Liquidity" sections for further details of our income statement and cash flow results, respectively.

Business and Industry Update

Our two key strategies, Superior Availability and Service Leadership, remain unchanged in Fiscal 2012. Superior Availability is aimed at product availability and maximizing the speed, reliability and efficiency of our supply chain. Service Leadership leverages our product availability in addition to more consistent execution of customer-facing initiatives to strengthen our integrated operating approach of serving our DIY and Commercial customers whether in our stores or on-line. Through these two key strategies, we believe we can continue to build on the initiatives discussed below and produce favorable financial results over the long term. Sales to Commercial customers remain the biggest opportunity for us to increase our overall market share in the automotive aftermarket industry. Our Commercial sales, as a percentage of total sales, increased to 38% for the third quarter of Fiscal 2012 compared to 37% for the same period in Fiscal 2011.

A few of the priorities under our strategies include:

Improving in-market availability through the continued expansion of our HUB network and completion of store inventory upgrades;

The commencement of outbound shipments to our stores from our new Remington, Indiana distribution center during the third quarter of Fiscal 2012, which will provide needed capacity and upgraded supply chain technology;

Our continued efforts to enhance e-commerce offerings; and

The in-sourcing of our Commercial credit function and addition of other customer offerings to support the continued investment in our Commercial business.

The automotive aftermarket industry is influenced by a number of general macroeconomic factors similar to those affecting the overall retail industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and spending habits, and competition. While we feel that the difficult conditions affecting the macroeconomic environment continue to constrain consumer spending, we remain confident that the long-term dynamics of the automotive aftermarket industry are positive.

Favorable industry dynamics include:

an increase in number and average age of vehicles;

a long-term expectation that miles driven will increase based on historical trends; and

a fragmented commercial market.

Conversely, the factors negatively affecting the automotive aftermarket industry include:

high gas prices and unemployment rates and relatively low consumer confidence;

later maintenance and part failure intervals on newer cars due to an increase in quality; and

an overall reduction in discretionary spending on elective maintenance and other accessories.


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While we believe the deceleration in our sales will not be a long-term trend given the overall positive long-term industry dynamics, we do anticipate constrained sales for the remainder of Fiscal 2012 based on the current trend of lower customer demand. Despite the lower sales, we are committed to achieving our long-term sales growth and profitability goals by remaining focused on our Commercial sales growth while balancing support and discretionary expenses with the additional cost of investments in our key strategies.

Consolidated Operating Results and Key Statistics and Metrics

The following table highlights certain consolidated operating results and key
statistics and metrics for the twelve and forty weeks ended October 6, 2012 and
October 8, 2011, respectively, and the fiscal years ended December 31, 2011 and
January 1, 2011. We use these key statistics and metrics to measure the
financial progress of our key strategies.

                              Twelve Weeks Ended                         Forty Weeks Ended
                     October 6, 2012      October 8, 2011      October 6, 2012      October 8, 2011        FY 2011         FY 2010
Operating Results:
Total net sales (in
000s)               $     1,457,527      $      1,464,988     $     4,875,802      $      4,842,890     $ 6,170,462     $ 5,925,203
Comparable store
sales growth(1)                (1.8 %)                2.2 %              (0.5 )%                2.0 %           2.2 %           8.0 %
Gross profit                   49.8 %                49.5 %              49.9  %               49.9 %          49.7 %          50.0 %
SG&A                           39.4 %                37.3 %              38.8  %               38.5 %          39.0 %          40.1 %
Operating profit               10.3 %                12.1 %              11.2  %               11.4 %          10.8 %           9.9 %
Diluted earnings
per share           $          1.21      $           1.41     $          4.34      $           4.19     $      5.11     $      3.95

Key Statistics and
Metrics:
Number of stores,
end of period                 3,727                 3,645               3,727                 3,645           3,662           3,563
Total store square
footage, end of
period (in 000s)             27,194                26,533              27,194                26,533          26,663          25,950
Total Team Members,
end of period                54,220                52,386              54,220                52,386          52,002          51,017
Sales per store
  (in 000s)(2)(3)   $         1,683      $          1,702     $         1,683      $          1,702     $     1,708     $     1,697
Operating income
per store (in
000s)(2)(4)         $           178      $            177     $           178      $            177     $       184     $       168
Gross margin return
on inventory(2)(5)              6.9                   5.8                 6.9                   5.8             6.6             5.1

(1) Comparable store sales include net sales from our stores and e-commerce website. The change in store sales is calculated based on the change in net sales starting once a store has been open for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store sales from the original date of opening.

(2) These financial metrics presented for each quarter are calculated on an annualized basis and accordingly reflect the last four fiscal quarters completed.

(3) Sales per store is calculated as net sales divided by the average of the beginning and ending store count for the respective period.

(4) Operating income per store is calculated as operating income divided by the average of beginning and ending total store count for the respective period.

(5) Gross margin return on inventory is calculated as gross profit divided by an average of beginning and ending inventory, net of accounts payable and financed vendor accounts payable.


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Store Development by Segment

The following table sets forth the total number of new, closed and relocated stores and stores with Commercial delivery programs during the twelve and forty weeks ended October 6, 2012 and October 8, 2011 by segment. We lease approximately 79% of our AAP stores. We lease 100% of our AI stores.

                                  AAP
                                               Twelve Weeks Ended               Forty Weeks Ended
                                            October 6,       October 8,     October 6,     October 8,
                                               2012             2011           2012           2011
Number of stores at beginning of period       3,489              3,424         3,460           3,369
New stores                                       28                 20            57              76
Closed stores                                     -                 (2 )           -              (3 )
Number of stores, end of period               3,517              3,442         3,517           3,442
Relocated stores                                  2                  -             9               4
Stores with commercial delivery programs      3,212              3,099         3,212           3,099

                                   AI
                                               Twelve Weeks Ended               Forty Weeks Ended
                                            October 6,       October 8,     October 6,     October 8,
                                               2012             2011           2012           2011
Number of stores at beginning of period         203                203           202             194
New stores                                        7                  -            13               9
Closed stores                                     -                  -            (5 )             -
Number of stores, end of period                 210                203           210             203
Relocated stores                                  1                  -             5               2
Stores with commercial delivery programs        210                203           210             203

During Fiscal 2012, we anticipate adding approximately 110 to 120 AAP stores and 10 to 20 AI stores, respectively, and closing approximately 10 total stores.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates. During the twelve and forty weeks ended October 6, 2012, we consistently applied the critical accounting policies discussed in our 2011 Form 10-K. For a complete discussion regarding these critical accounting policies, refer to the 2011 Form 10-K.

Components of Statement of Operations

Net Sales

Net sales consist primarily of merchandise sales from our retail store locations to both our DIY and Commercial customers and sales from our e-commerce website. Our total sales growth is comprised of both comparable store sales and new store sales. We calculate comparable store sales based on the change in store sales starting once a store has been opened for 13 complete accounting periods (approximately one year) and by including e-commerce sales. We include sales from relocated stores in comparable store sales from the original date of opening.

Cost of Sales

Our cost of sales consists of merchandise costs, net of incentives under vendor programs; inventory shrinkage, defective merchandise and warranty costs; and warehouse and distribution expenses. Gross profit as a percentage of net sales may be affected by (i) variations in our product mix, (ii) price changes in response to competitive factors and fluctuations in merchandise costs, (iii) vendor programs, (iv) inventory shrinkage, (v) defective merchandise and warranty costs and (vi) warehouse and distribution costs. We seek to minimize fluctuations in merchandise costs and instability of supply by entering


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into long-term purchasing agreements, without minimum purchase volume requirements, when we believe it is advantageous. Our gross profit may not be comparable to that of our competitors due to differences in industry practice regarding the classification of certain costs.

Selling, General and Administrative Expenses

SG&A expenses consist of store payroll, store occupancy (including rent and depreciation), advertising expenses, Commercial delivery expenses, other store expenses and general and administrative expenses, including salaries and related benefits of store support center Team Members, share-based compensation expense, store support center administrative office expenses, data processing, professional expenses, self-insurance costs, closed store expense, impairment charges, if any, and other related expenses.

Results of Operations

The following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.

                                       Twelve Week Periods Ended            Forty Week Periods Ended
                                       October 6,       October 8,
                                          2012             2011       October 6, 2012     October 8, 2011
Net sales                                100.0  %          100.0  %        100.0  %              100.0  %
Cost of sales, including purchasing
and warehousing costs                     50.2              50.5            50.1                  50.1
Gross profit                              49.8              49.5            49.9                  49.9
Selling, general and administrative
expenses                                  39.4              37.3            38.8                  38.5
Operating income                          10.3              12.1            11.2                  11.4
Interest expense                          (0.6 )            (0.6 )          (0.5 )                (0.5 )
Other expense, net                         0.0               0.0             0.0                   0.0
Provision for income taxes                 3.6               4.3             4.0                   4.1
Net income                                 6.1  %            7.2  %          6.6  %                6.8  %

Twelve and Forty Weeks Ended October 6, 2012 Compared to Twelve and Forty Weeks Ended October 8, 2011

Net Sales

Net sales for the twelve weeks ended October 6, 2012 were $1,457.5 million, a decrease of $7.5 million, or 0.5%, as compared to net sales for the twelve weeks ended October 8, 2011. The sales decrease was primarily due to a decrease in comparable store sales partially offset by sales from new AAP and AI stores opened in the last twelve months.

For the twelve weeks ended October 6, 2012, AAP produced net sales of $1,386.8 million, a decrease of $8.1 million, or 0.6%, as compared to net sales for the twelve weeks ended October 8, 2011. The sales decline was driven by decreases in both transaction count and pricing. Despite a slight improvement from the second quarter, we continued to experience a decrease in transactions through weaker customer demand from both DIY and Commercial customers which we believe to be driven by the difficult economic environment and lingering effects from this year's warmer winter in certain of our colder weather markets. Pricing was negatively impacted by (i) an increase in promotional activity in response to the lower customer demand, (ii) a lower mix of parts sales partially due to customers' decision to defer routine maintenance and (iii) cost deflation in certain of our product categories compared to the same period last year. For the twelve weeks ended October 6, 2012, AI produced net sales of $74.5 million, an increase of $0.9 million, or 1.3%, as compared to net sales for the twelve weeks ended October 8, 2011.

                                                        Twelve Weeks Ended
                                             October 6, 2012            October 8, 2011
                                          AAP      AI      Total     AAP      AI     Total
Comparable store sales %                (1.9 %)   0.2 %   (1.8 %)    1.9 %   7.8 %    2.2 %
Net stores opened in last twelve months   75        7       82        93      12      105


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Net sales for the forty weeks ended October 6, 2012 were $4,875.8 million, an increase of $32.9 million, or 0.7%, as compared to net sales for the forty weeks ended October 8, 2011. This growth was primarily due to an increase in sales from new AAP and AI stores opened in the last twelve months.

For the forty weeks ended October 6, 2012, AAP produced net sales of $4,646.7 million, an increase of $28.1 million, or 0.6%, as compared to net sales for the forty weeks ended October 8, 2011. The sales increase was primarily due to sales from new AAP and AI stores opened in the last twelve months partially offset by a decrease in comparable store sales. The AAP comparable store sales decrease of 0.7% was driven by an increase in promotional activity and a decrease in transaction count. For the forty weeks ended October 6, 2012, AI produced net sales of $241.1 million, an increase of $4.7 million, or 2.0%, as compared to net sales for the forty weeks ended October 8, 2011.

                                                         Forty Weeks Ended
                                             October 6, 2012            October 8, 2011
                                          AAP      AI      Total     AAP      AI     Total
Comparable store sales %                (0.7 %)   1.9 %   (0.5 )%    1.7 %   9.4 %    2.0 %
Net stores opened in last twelve months   75        7       82        93      12      105
. . .
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