Advance Auto Parts, Inc. has announced its financial results for the first quarter ended April 23, 2016. First quarter adjusted earnings per diluted share (Adjusted Cash EPS) were $2.51. These results exclude $0.11 of amortization of acquired intangible assets and integration and restructuring costs of $0.26, primarily associated with the acquisition of General Parts International, Inc. (General Parts).
Advance is the owner of the Carquest Canada distribution network.
Fiscal 2016 and 2015 include certain non-operational expenses. The Adjusted SG&A, Adjusted Operating Income and Adjusted Cash EPS for the sixteen weeks ended April 23, 2016 and April 25, 2015, respectively, have been reported on an adjusted basis to exclude General Parts integration, store consolidation costs and support center restructuring costs of $31.4 million and $32.7 million, respectively, and General Parts amortization of acquired intangible assets of $12.7 million and $13.0 million, respectively. For a better understanding of the Company’s adjusted results, refer to the presentation of the respective financial measures on a GAAP basis and reconciliation of the financial results reported on an adjusted basis to the GAAP basis in the accompanying financial tables in this press release.
“Our first quarter results did not meet our expectations,” said Tom Greco, chief executive officer. “We are moving forward with urgency to drive improved performance. Our customers are our top priority and we are elevating our intensity to get the right parts to the right place at the right time as we empower our team members to serve the customer better than anyone else.”
Greco continued, “I have been energized by the strength and the quality of our team and the opportunity that lies ahead. I am confident our focus and commitment around delivering improved service for our customers will translate into increased profitability and shareholder value.”
First Quarter 2016 Highlights
Total sales for the first quarter decreased 1.9% to $2.98 billion, as compared with total sales during the first quarter of fiscal 2015 of $3.04 billion. The sales decline was driven by the comparable store sales decrease of 1.9% primarily due to availability and service shortfalls. The comparable sales cadence experienced a more pronounced decline in the latter portion of the quarter. The Company’s comparable store sales were also partially impacted by lower demand due to unfavorable weather during the quarter and benefited from the favorable consolidation impact from Carquest stores.
The Company’s Gross Profit rate was 45.3% of sales during the first quarter as compared to 45.9% during the first quarter last year. The 58 basis-point decrease in gross profit rate was primarily the result of supply chain expense deleverage due to the comparable store sales decline.
The Company’s Adjusted SG&A rate was 34.7% of sales during the first quarter as compared to 35.7% during the same period last year. The 100 basis-point decrease was primarily the result of the Company’s continued cost reduction initiatives and benefits from the cost reduction actions taken in 2015 partially offset by expense deleverage. On a GAAP basis, the Company’s SG&A rate was 36.2% of sales during the first quarter as compared to 37.2% during the same period last year.
The Company’s Adjusted Operating Income was $315.0 million during the first quarter, an increase of 2.2% versus the first quarter of fiscal 2015. As a percentage of sales, Adjusted Operating Income in the first quarter expanded to 10.6% versus 10.1% during the first quarter of fiscal 2015. On a GAAP basis, the Company’s operating income during the first quarter of $271.0 million increased 3.2% versus the first quarter of fiscal 2015. On a GAAP basis, the Operating Income rate was 9.1% during the first quarter as compared to 8.6% during the first quarter of fiscal 2015.
Operating cash flow decreased approximately 26.3% to $75.3 million in the first quarter of fiscal 2016 from $102.2 million in the first quarter of fiscal 2015. Free cash flow was a decrease of $13.8 million in the first quarter of fiscal 2016 compared to an increase of $45.2 million in the first quarter of fiscal 2015. Capital expenditures in the first quarter of fiscal 2016 were $89.1 million as compared to $57.0 million in the first quarter of fiscal 2015.
As of April 23, 2016, the Company operated 5,086 stores and 125 Worldpac branches and served approximately 1,300 independently owned Carquest stores. The below table summarizes the changes in the number of the company-operated stores and branches during the sixteen weeks ended April 23, 2016.
Updated 2016 Key Assumptions
Due to the sales trends the Company experienced as it exited its first quarter and outlook for the balance of the year, the assumption for annual comparable store sales is now expected to be between negative 3% and negative 5% and given this updated assumption, the Company no longer expects to achieve its annual Free Cash Flow assumption of a minimum of $500 million for fiscal 2016. In addition, the Company is no longer targeting an Adjusted Operating Income (a) rate of 12% for fiscal 2016. The Company intends to provide additional commentary on its first quarter earnings conference call.
As previously provided, the Company reaffirms other key assumptions for fiscal 2016 below:
New Stores 65 to 75 new stores including Worldpac branches
Carquest Store Consolidations, Conversions & Relocations 325 to 350
Income tax rate 5% to 38.0%
One-time Integration & Restructuring Expenses (b)
Approximately $75 million to $90 million
Capital Expenditures $260 million to $280 million
Diluted Share Count Approximately 74 million shares
(a)Adjusted Operating Income excludes one-time expenses related to the integration of General Parts, restructuring expenses and the recurring amortization of General Parts’ intangible assets. Adjusted Operating Income is a non-GAAP measure. Because of the forward-looking nature of these non-GAAP financial measures, specific quantifications of the amounts that would be required to reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures are not available at this time. Management believes Adjusted Operating Income is an important measure in assessing the overall performance of the business and utilizes this metric in its ongoing reporting. On that basis, Management believes it is useful to provide Adjusted Operating Income to investors and prospective investors to evaluate Advance’s operating performance across periods adjusting for non-operational items. Adjusted Operating Income might not be calculated in the same manner as, and thus might not be comparable to, similarly titled measures reported by other companies. Adjusted Operating Income should not be used by investors or third parties as the sole basis for formulating investment decisions, as it excludes a number of important cash and non-cash recurring items.
(b)The $75 million to $90 million estimate of incremental one-time costs includes $65 million to $75 million related to ongoing integration efforts and an additional $10 million to $15 million related to supply chain optimization work which includes the closure of the Company’s Sutton, MA distribution center and additional activities contemplated as part of the first phase of work. The Company will provide additional details of its multi-year supply chain optimization work and potential future one-time costs as it finalizes those plans. One-time integration related costs are expected to exceed the initial $190 million estimate previously shared at the time of the GPI acquisition as we have trued up estimates, expanded the scope and taken additional structural actions to drive improved efficiency and profitability.
Advance Commences CFO Transition
Advance also announced that Mike Norona, Chief Financial Officer, will be leaving the Company. Mr. Norona has agreed to remain in his current role until a successor has been named and will assist with an orderly transition. The Company has commenced an external search for a new CFO.
Mr. Greco commented, “I want to thank Mike for his eight years of strong financial leadership during a time when the company more than doubled its market cap. He has played a key role in developing a strong finance team and building a capital structure to support our future growth. I am appreciative of Mike’s willingness to support our transition with his leadership, passion and experience.”
On May 17, 2016, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.06 per share to be paid on July 1, 2016 to stockholders of record as of June 17, 2016.