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AAP > SEC Filings for AAP > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ADVANCE AUTO PARTS INC

Form 10-Q for ADVANCE AUTO PARTS INC


12-Nov-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;

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;

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

the ability to close the proposed acquisition of GPI on the expected terms and within the anticipated time period, or at all, which is dependent on the parties' ability to satisfy certain closing conditions;

the risk that regulatory approvals that are required to complete the proposed acquisition of GPI may not be received, may take longer than expected or may impose adverse conditions;

the failure to obtain the necessary financing for the acquisition of GPI, including as contemplated by the financing commitment obtained by us at the time of signing the merger agreement;

the risk that the benefits of the proposed acquisition of GPI, including synergies, may not be fully realized or may take longer to realize than expected;

the possibility that the proposed acquisition of GPI may not advance our business strategy;


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the risk that we may experience difficulty integrating GPI's employees, business systems and technology;

the potential diversion of our management's attention from our other businesses resulting from the proposed transaction; and

the impact of the proposed transaction on third-party relationships, including customers, wholesalers, independently owned and jobber stores and suppliers.

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.

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 October 5, 2013, we operated a total of 4,018 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 October 5, 2013, we operated 3,796 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 homes or businesses. Our Commercial customers can conveniently place their orders online.

At October 5, 2013, we operated 222 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 $1.42 during our twelve weeks ended October 5, 2013 (or the third quarter of Fiscal 2013) compared to $1.21 for the comparable period of Fiscal 2012. The increase in our diluted EPS was primarily due to an increase in our operating income. We increased operating income over the comparable period of last year by improving our gross profit rate and disciplined expense control despite a 2.0% comparable store sales decline. Similar to previous quarters this year, sales remained constrained in many of our markets in part due to the ongoing uncertainty in the macroeconomic environment and increased competition in our operating area. During much of our third quarter, we believe consumer spending was suppressed as consumers faced the uncertainty regarding a potential federal government shutdown and the apprehension regarding the impact of health care reform. We believe that our core consumers are performing only the repairs that are absolutely necessary to keep their vehicles on the road which has resulted in a record level of deferred maintenance. We continue to generate a significant amount of cash on-hand to invest in capital improvements and initiatives to support our two key strategies, Superior Availability and Service Leadership, which are discussed later in "Business and Industry Update."

Acquisitions Update

On December 31, 2012, we acquired B.W.P. Distributors, Inc. ("BWP"), a privately held company that supplied, marketed and distributed automotive aftermarket parts and products principally to Commercial customers. Prior to the acquisition, BWP operated or supplied 216 locations in the Northeastern United States. Concurrent with the closing of the acquisition, we transferred one distribution center and BWP's rights to distribute to 92 independently owned locations to an affiliate of General Parts International, Inc. ("GPI"), a privately held auto supply company. 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


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of the market, and to gain valuable information to apply to our existing operations as a result of BWP's expertise in Commercial.

During the second quarter, we began integrating the 124 BWP company-owned stores and two distribution centers into our Advance Auto Parts operations and plan to finish the integration by mid-2014. The integration of BWP stores will consist of converting or consolidating those locations into Advance Auto Parts locations.

On October 15, 2013, we entered into a definitive agreement to acquire GPI, a leading privately held distributor and supplier of original equipment and aftermarket replacement products for commercial markets operating under the CARQUEST and WORLDPAC brands. The acquisition of GPI will allow us to expand our geographic presence and commercial capabilities to better serve customers. The transaction is subject to regulatory approvals and customary closing conditions and is expected to close by late 2013 or early 2014. Under the terms of the merger agreement, we intend to acquire GPI in an all-cash transaction with an enterprise value of $2.04 billion.

Summary of Third Quarter Financial Results

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

Net sales during the third quarter of Fiscal 2013 were $1,520.1 million, an increase of 4.3% as compared to the third quarter of Fiscal 2012. This increase was primarily driven by the addition of the acquired BWP stores and 170 net new stores over the past 12 months partially offset by a 2.0% decrease in comparable store sales.

Our operating income for the third quarter of Fiscal 2013 was $170.7 million, an increase of $20.4 million from the comparable period of Fiscal 2012. As a percentage of total sales, operating income was 11.2%, an increase of 91 basis points, due to a lower SG&A rate combined with a higher gross profit rate.

Our inventory balance as of October 5, 2013 increased $270.6 million, or 12.3%, over our inventory balance as of October 6, 2012 driven by the BWP acquisition, new store openings and support of our inventory availability initiatives.

We generated operating cash flow of $398.5 million during the forty weeks ended October 5, 2013, a decrease of 21.1% from the comparable period in Fiscal 2012, primarily due to 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 are Superior Availability and Service Leadership. 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 in our stores and on-line. Through these two key strategies, we believe we can continue to build on the initiatives discussed below to 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 third quarter of Fiscal 2013 compared to 39% for the same period in Fiscal 2012. This increase has been more pronounced in Fiscal 2013 due to the contribution of the acquired BWP stores which are more weighted in Commercial than our Advance stores.

Our strategic priorities include:

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

Improving localized parts availability through the continued increase in the number of our larger HUB stores, strengthened focus on in-store availability and leveraging the advancement of our supply chain infrastructure, which includes the continued ramp-up of our new Remington distribution center;

Accelerating our new store growth rate; and

Continuing our focus on store execution through more effective scheduling, increased productivity and simplification, improved product on-hand accuracy, expanded sales training and continued measurement of 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


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confidence and spending habits, and competition. While we believe 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 the number and average age of vehicles;

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

a fragmented commercial market.

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

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

longer maintenance and part failure intervals on newer cars due to improved quality; and

higher and more volatile gas prices.

Despite our sales performance during the third quarter, we remain encouraged by
(i) the long-term fundamentals of the automotive aftermarket industry and (ii) initiatives that are underway in support of our key strategies. While we believe our lower comparable sales will not be a long-term trend given the overall positive long-term industry dynamics, we do anticipate constrained comparable 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 twelve and forty weeks ended October 5, 2013 and
October 6, 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.

                               Twelve Weeks Ended                     Forty Weeks Ended
                                                                 October 5,       October 6,
                      October 5, 2013      October 6, 2012          2013             2012           FY 2012          FY 2011
Operating Results:
Total net sales (in
000s)                $     1,520,144      $     1,457,527      $ 5,085,001      $ 4,875,802      $ 6,205,003      $ 6,170,462
Comparable store
sales growth (1)                (2.0 %)              (1.8 )%          (2.0 )%          (0.5 )%          (0.8 )%           2.2 %
Gross profit                    50.2 %               49.8  %          50.2  %          49.9  %          49.9  %          49.7 %
SG&A                            39.0 %               39.4  %          39.0  %          38.8  %          39.3  %          39.0 %
Operating profit                11.2 %               10.3  %          11.2  %          11.2  %          10.6  %          10.8 %
Diluted earnings per
share                $          1.42      $          1.21      $      4.65      $      4.34      $      5.22      $      5.11

Key Statistics and
Metrics:
Number of stores,
end of period                  4,018                3,727            4,018            3,727            3,794            3,662
Total store square
footage, end of
period (in 000s)              29,427               27,194           29,427           27,194           27,806           26,663
Total Team Members,
end of period                 54,238               54,220           54,238           54,220           53,473           52,002
Sales per store (in
000s)(2)(3)          $         1,656      $         1,683      $     1,656      $     1,683      $     1,664      $     1,708
Operating income per
store (in
000s)(2)(4)          $           176      $           178      $       176      $       178      $       176      $       184
Gross margin return
on inventory (2)(5)              8.3                  6.9              8.3              6.9              9.3              6.6


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(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.

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 5, 2013 and October 6, 2012 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 5,       October 6,     October 5,       October 6,
                                     2013             2012           2013             2012
Number of stores at beginning of
period                                3,763            3,489          3,576            3,460
New stores                               35               28            105               57
Acquired BWP stores                       -                -            124                -
Closed stores                            (2 )              -             (9 )              -
Number of stores, end of period       3,796            3,517          3,796            3,517
Relocated stores                          1                2              3                9
Stores with Commercial delivery
programs                              3,484            3,212          3,484            3,212

                              AI
                                      Twelve Weeks Ended               Forty Weeks Ended
                                  October 5,       October 6,     October 5,       October 6,
                                     2013             2012           2013             2012
Number of stores at beginning of
period                                  227              203            218              202
New stores                                -                7             12               13
Closed stores                            (5 )              -             (8 )             (5 )
Number of stores, end of period         222              210            222              210
Relocated stores                          1                1             10                5
Stores with Commercial delivery
programs                                222              210            222              210

Included in our store closures during the twelve and forty weeks ended October 5, 2013 are two and three BWP stores, respectively, that were consolidated into existing Advance Auto Parts stores. 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 twelve and forty weeks ended October 5, 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.


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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 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 and benefits, 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 and acquisition related costs, 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 5,       October 6,
                                             2013             2012       October 5, 2013     October 6, 2012
Net sales                                   100.0  %          100.0  %        100.0  %              100.0  %
Cost of sales, including purchasing and
warehousing costs                            49.8              50.2            49.8                  50.1
Gross profit                                 50.2              49.8            50.2                  49.9
Selling, general and administrative
expenses                                     39.0              39.4            39.0                  38.8
Operating income                             11.2              10.3            11.2                  11.2
Interest expense                             (0.5 )            (0.6 )          (0.5 )                (0.5 )
Other expense, net                            0.0               0.0             0.0                   0.0
Provision for income taxes                    3.9               3.6             4.0                   4.0
Net income                                    6.8  %            6.1  %          6.7  %                6.6  %
. . .
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