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AAP > SEC Filings for AAP > Form 10-Q on 28-May-2013All Recent SEC Filings

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Form 10-Q for ADVANCE AUTO PARTS INC


28-May-2013

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 judgments, 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 29, 2012 (filed with the Securities and Exchange Commission, or SEC, on February 25, 2013), which we refer to as our 2012 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 dependence on our suppliers to provide us with products that comply with safety and quality standards;

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

the potential for fluctuations in the market price of our common stock and the resulting exposure to securities class action litigations;

deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, higher tax rates or uncertain credit markets 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;

a 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 independent garages, service stations and auto dealers. At April 20, 2013, we operated a total of 3,969 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 (inclusive of South Central) 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 April 20, 2013, we operated 3,746 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 April 20, 2013, we operated 223 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, Mid-Atlantic and Southeastern regions of the United States. 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 $1.65 during our sixteen weeks ended April 20, 2013 (or the first quarter of Fiscal 2013) compared to $1.79 for the comparable period of Fiscal 2012. The decrease in our diluted EPS was primarily due to a decrease in our operating income. Our first quarter sales remained constrained in many of our markets where we've seen a slower start to the spring selling season resulting in lower than expected sales of maintenance and discretionary products. The current economic conditions also continue to negatively affect our sales consistent with many other retailers, including our peer companies in the automotive aftermarket industry, as consumers have dealt with payroll tax increases, delayed income tax refunds and rising gas prices throughout much of our first quarter.

Despite our performance during the first quarter, 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) recent indicators that our business has responded positively to the eventual beginning of spring weather in certain of our markets. We continue to generate a significant amount of cash on-hand to invest in capital improvements and initiatives to support our two key strategies, which are discussed later in "Business and Industry Update."

On December 31, 2012, we acquired B.W.P. Distributors, Inc. ("BWP"), a privately held company that supplies, markets and distributes automotive aftermarket parts and products principally to Commercial customers. BWP operated or supplied 216 locations in the Northeastern United States. We believe this acquisition will enable us to continue our expansion in the competitive Northeast, which is a strategic growth area for us due to the large population and overall size of the market, and to gain valuable information to apply to our existing operations as a result of BWP's expertise in Commercial. Concurrent with the closing of the acquisition, we transferred BWP's rights to distribute to 92 independently owned locations and one distribution center to an affiliate of General Parts International, Inc. ("GPI"), a privately held auto supply company. We will operate the 124 BWP company-owned stores and two distribution centers and plan to integrate the BWP stores into our Advance Auto operations over the next twelve to fifteen months beginning in our second quarter of Fiscal 2013.


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Summary of First Quarter Financial Results

A high-level summary of our financial results for the first quarter of Fiscal 2013 is included below:

Net sales during the first quarter of Fiscal 2013 were $2,015.3 million, an increase of 3.0% as compared to the first quarter of Fiscal 2012, primarily driven by the 124 acquired BWP stores and the addition of 163 net new stores over the past 12 months partially offset by a 3.2% decrease in comparable store sales.

Our operating income for the first quarter of Fiscal 2013 was $204.1 million, a decrease of $20.5 million from the comparable period of Fiscal 2012. As a percentage of total sales, operating income was 10.1%, a decrease of 135 basis points, due to higher SG&A combined with a slight decrease in gross profit rate.

Our inventory balance as of April 20, 2013 increased $316.8 million, or 15.0%, over our inventory balance as of April 21, 2012 to support our inventory availability initiatives and as a result of the BWP acquisition and new store openings.

We generated operating cash flow of $135.3 million during the sixteen weeks ended April 20, 2013, a decrease of 42.5% from the comparable period in Fiscal 2012, with the largest portion of the decrease consisting of a decrease in cash flows from inventory, net of accounts payable, driven primarily by the timing of payments to vendors.

Refer to the "Results of Operations" and "Liquidity and Capital Resources" 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 the first quarter of Fiscal 2013. 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 41% for the first quarter of Fiscal 2013 compared to 38% for the same period in Fiscal 2012. This increase was more pronounced this quarter due to the contribution of the acquired BWP stores which are more weighted in Commercial than our Advance stores.

A few of the priorities under our strategies include:

Growing our Commercial business through improved delivery speed and reliability; increased customer retention; increased volume with national and regional accounts; and the acquisition and integration of BWP;

Improving localized parts availability through the continued increase in number of our larger HUB stores, strengthened focus on in-store availability and leveraging the advancement of our supply chain infrastructure;

Accelerating our new store growth rate; and

Continuing our focus on store execution through more effective scheduling, product on-hand accuracy, sales training and customer engagement.

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 in the automotive aftermarket, we remain confident that the long-term dynamics of the 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:

higher and more volatile gas prices;

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

deferral of elective automotive maintenance in the near term as more consumers contemplate new automobile purchases.


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While we believe our lower 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 2013 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 sixteen weeks ended April 20, 2013 and April 21,
2012, respectively, and the fiscal years ended December 29, 2012 and
December 31, 2011. We use these key statistics and metrics to measure the
financial progress of our key strategies.

                                              Sixteen Weeks Ended
                                      April 20, 2013      April 21, 2012        FY 2012          FY 2011
Operating Results:
Total net sales (in 000s)            $    2,015,304      $     1,957,292     $ 6,205,003      $ 6,170,462
Comparable store sales growth (1)              (3.2 )%               2.1 %          (0.8 )%           2.2 %
Gross profit                                   50.0  %              50.1 %          49.9  %          49.7 %
SG&A                                           39.9  %              38.6 %          39.3  %          39.0 %
Operating profit                               10.1  %              11.5 %          10.6  %          10.8 %
Diluted earnings per share           $         1.65      $          1.79     $      5.22      $      5.11

Key Statistics and Metrics:
Number of stores, end of period               3,969                3,682           3,794            3,662
Total store square footage, end of
period (in 000s)                             29,021               26,843          27,806           26,663
Total Team Members, end of period            54,280               54,038          53,473           52,002
Sales per store (in 000s)(2)(3)      $        1,637      $         1,711     $     1,664      $     1,708
Operating income per store (in
000s)(2)(4)                          $          166      $           193     $       176      $       184
Gross margin return on inventory
(2)(5)                                          9.0                  6.8             9.3              6.6

(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 sixteen weeks ended April 20, 2013 and April 21, 2012 by segment. We lease approximately 79% of our AAP stores. We lease 100% of our AI stores.

                  AAP
                                            Sixteen Weeks Ended
                                          April 20,     April 21,
                                            2013           2012
Number of stores at beginning of period     3,576          3,460
New stores                                     49             22
Acquired BWP stores                           124              -
Closed stores                                  (3 )            -
Number of stores, end of period             3,746          3,482
Relocated stores                                2              4
Stores with commercial delivery programs    3,443          3,159

                   AI
                                            Sixteen Weeks Ended
                                          April 20,     April 21,
                                            2013           2012
Number of stores at beginning of period       218            202
New stores                                      7              3
Closed stores                                  (2 )           (5 )
Number of stores, end of period               223            200
Relocated stores                                6              2
Stores with commercial delivery programs      223            200

During Fiscal 2013, we anticipate adding approximately 155 to 165 AAP stores (excluding the 124 BWP stores acquired on December 31, 2012) and 10 to 15 AI 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 sixteen weeks ended April 20, 2013, we consistently applied the critical accounting policies discussed in our 2012 Form 10-K. For a complete discussion regarding these critical accounting policies, refer to the 2012 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)


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warehouse and distribution costs. We seek to minimize fluctuations in merchandise costs and instability of supply by entering 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.

                                                               Sixteen Week Periods Ended
                                                           April 20, 2013      April 21, 2012
Net sales                                                        100.0  %             100.0  %
Cost of sales, including purchasing and warehousing costs         50.0                 49.9
Gross profit                                                      50.0                 50.1
Selling, general and administrative expenses                      39.9                 38.6
Operating income                                                  10.1                 11.5
Interest expense                                                  (0.5 )               (0.5 )
Other expense, net                                                 0.0                  0.0
Provision for income taxes                                         3.6                  4.2
Net income                                                         6.0  %               6.8  %

Sixteen Weeks Ended April 20, 2013 Compared to Sixteen Weeks Ended April 21, 2012

Net Sales

Net sales for the sixteen weeks ended April 20, 2013 were $2,015.3 million, an increase of $58.0 million, or 3.0%, as compared to net sales for the sixteen weeks ended April 21, 2012. The sales increase was primarily due to sales from the acquired BWP stores and sales from the new AAP and AI stores opened during the last twelve months partially offset by a decrease in comparable store sales.

For the sixteen weeks ended April 20, 2013, AAP produced net sales of $1,918.1 million, an increase of $49.7 million, or 2.7%, as compared to net sales for the sixteen weeks ended April 21, 2012. This growth was primarily a result of sales from the 124 acquired BWP stores and sales from the net addition of 140 new stores over the past year partially offset by a comparable store sales decrease of 3.3%. The comparable store sales decrease was driven by a decrease in transaction count partially offset by an increase in transaction value, which was primarily due to price optimization and increase in mix of higher priced products sold. For the sixteen weeks ended April 20, 2013, AI produced net sales of $102.2 million, an increase of $8.6 million, or 9.2%, as compared to net sales for the sixteen weeks ended April 21, 2012.

                                                        Sixteen Weeks Ended
                                              April 20, 2013              April 21, 2012
                                          AAP       AI       Total     AAP     AI     Total
Comparable store sales %                (3.3 %)   (2.1 %)   (3.2 %)   1.9 %   6.2 %    2.1 %
Net stores opened in last twelve months  140        23       163       85      (3 )     82
Acquired BWP stores                      124         -       124        -       -        -


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Gross Profit

Gross profit for the sixteen weeks ended April 20, 2013 was $1,008.2 million, or 50.0% of net sales, as compared to $980.7 million, or 50.1% of net sales, for the comparable period of last year, representing a decrease of 8 basis points. The 8 basis-point decrease in gross profit rate was primarily due to planned inefficiencies in supply chain costs associated with the ramp-up in shipments of inventory from our new distribution center and the impact of BWP sales, which have a lower gross profit rate due to the higher mix of Commercial sales, partially offset by the continued improvement in shrink.

SG&A

SG&A expenses for the sixteen weeks ended April 20, 2013 were $804.1 million, or 39.9% of net sales, as compared to $756.1 million, or 38.6% of net sales, for the comparable period of last year, representing an increase of 127 basis points. This increase as a percentage of net sales was primarily due to expense deleverage as a result of the Company's 3.2% comparable store sales decline and increased new store openings, partially offset by lower advertising expense and a decrease in credit card fees as a result of the insourcing of our Commercial credit program in Fiscal 2012.

Operating Income

Operating income for the sixteen weeks ended April 20, 2013 was $204.1 million, or 10.1% of net sales, as compared to $224.6 million, or 11.5% of net sales, for the comparable period of last year, representing a decrease of 135 basis points. This decrease was reflective of an increase in our SG&A as a percentage of net sales, driven primarily by the decline in our comparable store sales and increased new store openings, coupled with a slight decrease in our gross profit rate.

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