U.S. News: Advance Auto Parts Reports Strong Quarterly Results

U.S. auto parts store chain Advance Auto Parts has reported that its same-store sales grew 1.1% in the quarter, ahead of an already strong quarter last year, which was up 7.8% on the previous year.
Earnings per diluted share of $0.14 were achieved for the first quarter ended April 19, 2003 after non-recurring expenses of $0.84 per diluted share. All figures in U.S. dollars.
The early repayment of debt resulted in non-recurring expenses of $0.79 per diluted share.
The remaining non-recurring expense of $0.05 per diluted share reflects the first quarter expense of integrating Discount Auto Parts. During the first quarter last year, the company produced earnings per diluted share of $0.34 after integration expense.
Comparable earnings per diluted share rose by 78.2% to $0.98 in the first quarter from $0.55 last year. Comparable results do not include the non- recurring expenses associated with the early prepayment of debt and the integration of Discount Auto Parts, as reconciled on the accompanying statements. The company uses this non-GAAP, comparable measure as an indication of its earnings from recurring operations and believes it is important to the company’s stockholders due to the non-recurring nature and significance of the excluded expenses.
On April 15, 2003, the company redeemed all $405 million of its then- outstanding 10.25% senior subordinated notes and 12.875% senior discount debentures. The debt was repaid, in part, with an additional $350 million in bank debt. The remaining funds came from free cash flow generated in the first quarter. The redemption of this high interest bearing debt will save approximately $14 million in before-tax interest expense in the remaining three-quarters of 2003 and approximately $20 million in 2004. Sales increased 2.9% in the first quarter to $1,033.5 million compared to $1,004.1 million last year. Same store sales grew 1.1% in the first quarter on top of a strong 7.8% in the same period last year.
The Discount Auto Parts stores, which are in the comparable store base this year, produced a comparable increase of 3.2% during the first quarter over 5.1% last year. Gross margin increased 179 basis points to 45.3% in the first quarter compared to 43.5% last year as the company reaped the benefits of its category management initiatives and leveraged its logistics expenses.
Comparable selling, general, and administrative expense rose by only 12 basis points as the company managed its expenses during a tough sales environment.
On a GAAP basis, selling, general and administrative expense declined to 38.1% from 38.7% last year, as the integration expenses associated with Discount Auto Parts acquisition declined to $3.4 million compared to $10.6 million last year. Comparable operating income increased 32.2% in the first quarter to $77.9 million from $58.9 million in the same quarter last year, generating an operating margin increase of over 160 basis points to 7.5%. On a GAAP basis, operating income increased 54.1% to $74.5 million. Comparable net income rose 86% in the first quarter to $36.0 million from $19.3 million in the first quarter last year.
On a GAAP basis, net income declined to $5.0 million, which includes $30.9 million of after-tax non- recurring expenses for the early repayment of debt and Discount Auto Parts’ integration expenses, compared to $12.1 million last year.
Commenting on the first quarter results, Larry Castellani, the company’s chairman and chief executive officer, said, “Despite the impact of the winter storms that effected most of our trade area, our team members produced solid results for the quarter. Our strong gross margin improvement clearly demonstrates that our category management and supply chain initiatives are producing strong results.”
During the first quarter, the company generated $94.1 million in free cash flow. Free cash flow is calculated as cash provided by operating activities reduced by cash used in investing activities. The $94.1 million in free cash flow did not include the non-recurring cash expense of $36.9 million associated with the early redemption of the company’s high interest bearing debt. Including these non-recurring cash expenses, the company generated $57.2 million in free cash flow.
The company used the free cash flow to reduce its total debt by $54.4 million and ended the quarter with $681.1 million in total debt. The company anticipates generating $150 million in free cash flow in 2003, which includes the $36.9 million of non-recurring expense, and ending the year with approximately $590 million in total debt. During the quarter 33 new stores were opened, 12 stores were relocated, and 12 stores were closed resulting in an ending store count of 2,456. During the first quarter of 2002, the company opened 17 stores and closed 122, 119 of these stores were Discount Auto Parts stores that overlapped with Advance stores that were closed as part of the integration.
The company expects to open approximately 125 new stores in 2003 and close approximately 25 under- performing stores with a net increase of 4% in total square footage. The company increased its comparable earnings per diluted share guidance for the second quarter to a range of $1.01 to $1.05 compared to $.77 for the same quarter last year.
The company also raised its comparable earnings per diluted share guidance for the 2003-year to a range of $3.85 to $3.95 compared to its previous guidance of $3.55, which had been adjusted for the impact of the debt pre-payment, all compared to $2.68 per diluted share in 2002.
This guidance excludes the non-recurring expenses of the bond refinancing, integration expenses, and the positive effect of the 53rd week. On a GAAP basis, the company raised its earnings per diluted share guidance to $2.90 to $3.00, which includes the non-recurring expenses associated with the pre- payment of debt outlined above and integration expenses related to the Discount Auto Parts acquisition.