Advance Auto Profits Dip

Zacks

Advance Auto Parts Inc. (AAP) announced an 8.2% fall in earnings per share to $1.34 in the second quarter of 2012 compared to $1.46 in the corresponding quarter last year, missing the Zacks Consensus Estimate by 6 cents. In absolute terms, profits decreased 12% to $99.6 million compared with $113.1 million in the year-ago quarter.

Revenues fell marginally by 1.3% to $1.46 billion in the reported quarter, missing the Zacks Consensus Estimate of $1.48 billion. The decline in revenues was attributable to a 2.7% drop in store sales versus a 2.5% rise in the same during the second quarter of fiscal 2011. Revenues were positively affected by addition of 65 new stores during the past 12 months.

Gross profit amounted to $728.9 million, down $6.9 million or 1% from $735.8 million in the second quarter of 2011. Gross margin was 49.9% in the reported quarter compared to 49.7% in the year ago quarter. The rise in gross margin was due to improved store shrink and lower supply costs, partially offset by augmented promotional activity.

SG&A expenses for the quarter went up 2.3% to $559.7 million or 38.3% of sales from $546.9 million or 36.9% in the year ago quarter. The increase in SG&A expenses was attributable to a shift in expenses to the reported quarter along with lower sales volume.

Operating income went down 10.4% to $169.2 million or 11.6% of sales in the quarter from $188.9 million or 12.8% of sales in the year-ago quarter. The decline was driven by a shift in SG&A expenses to the reported quarter, partially offset by lower incentive compensation expenses.

Store Opening

During the second quarter, Advance Auto Parts opened 10 new stores, including 3 Autopart International stores. During the first half of 2012, the company  opened 35 stores, including 6 Autopart International stores. As of July 14, 2012, the company had 3,692 stores, including 203 Autopart International stores. It also plans to open 120 to 140 stores in 2012.

Financials

Advance Auto Parts had cash and cash equivalents of $448.6 million as of July 14, 2012 compared with $68.8 million as of July 16, 2011. Long-term debt was $600.5 million as of July 14, 2012, compared to $566.4 million as of July 16, 2011.

In the twenty-eight week period ended July 14, 2012, operating cash flow went down to $411.4 million from $469.5 million in the prior-year period. Capital expenditures were $146.3 million in the period, compared to $151.6 million a year ago. Free cash flow for the period was $265.4 million compared to $287.3 million a year ago.

Guidance

Advance Auto Parts anticipates that comparable store sales would be slightly lower or flat compared to the last year due to the soft business environment. Earnings per share would be in the range of $5.25 to $5.35 per share for 2012.

Our Take

Advance Auto Parts, Inc. operates in the U.S. automotive aftermarket industry and is primarily engaged in selling replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks. It is the one of the leading retailer ensuring quality and confidence of the customers at affordable prices.

However, sluggish economy and uncertainty in the market are leading to weak consumer demand. Further, the company faces strong competition from other automotive retailers including AutoZone Inc. (AZO) and O’Reilly Automotive Inc. (ORLY). These factors have led the company to retain a Zacks #5 Rank, which translates into a short-term (1 to 3 months) Strong Sell rating.
 

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