This is a summary of the second quarter fiscal 2008 earnings call conducted by Advance Auto Parts, Inc. (AAP) on August 7, 2008.
Management:
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President and CEO: Darren Jackson
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VP, Finance and Investor Relations: Judd Nystrom
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Executive VP, Customer Development Officer – DIY: Elwyn Murray
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Executive VP, Customer Development Officer – Commercial: Jim Wade
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Executive VP and Chief Financial Officer: Mike Norona
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Executive VP, Merchandising, Supply Chain and IT: Kevin Freeland
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Senior VP, Human Resources: Keith Oreson
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Senior VP, Customer Experience Officer: Ken Wirth
Key Investor Issues:
- Second-quarter net income of $75.4 million, or 79 cents a share, up from $68.4 million, or 64 cents, in the year-ago quarter.
- Revenue for the latest quarter rose 5% to $1.23 billion from $1.17 billion a year ago.
- Same-store sales increased 2.9%, vs. a 1.2% increase in last year''s second quarter.
- Advance Auto Parts opened 138 new stores in the past fiscal year, and now operates 3,325 stores in 40 states.
Second Quarter Highlights:
Total revenue increased 5.6% to $1.24 billion compared with revenue of $1.17 billion in the second quarter last year.
- This revenue increase reflected the net addition of 138 new stores in the past 12 months and a comp sales increase of 2.9% on top of a 1.2% increase last year.
- Year-to-date revenue is $2.76 billion.
The comp sales gain is comprised of a 13.5% increase in commercial sales, partially offset by a 0.8% decrease in DIY sales. This compares to a 5.4% increase in commercial and 0.2% decrease in DIY in the second quarter of last year. Year-to-date, comp sales have increased 1.6%.
Second quarter commercial sales represented 29% of total sales compared to 26% last year.
- For the quarter, the total commercial sales were $358 million, resulting in a 17.2% increase over last year.
- Currently, 83% of Advance stores have commercial programs as compared to 82% last year.
Gross profit rate was 48.6% in the second quarter, as compared to 48.1% last year, which reflects a 51 basis point improvement.
This improvement was primarily due to lower supply chain and logistics cost combined with more effective pricing. SG&A expenses were 38.3% of sales compared to 38% last year. This 23 basis point increase was driven by increased incentive compensation, increased spending on strategic initiatives, and higher gasoline expenses related to commercial delivery.
Partially offsetting the SG&A increases were cost savings realized from actions taken last year combined with expense leverage as a result of a solid second quarter comp. Net interest expense was $7.3 million in the quarter compared to $6.9 million last year. The current borrowing costs remain at approximately 5%.
Earnings per share increased 23%, $0.79 for the quarter, as compared to $0.64 for the second quarter last year.
This 23% increase in EPS was primarily driven by a 9% increase in operating income and the benefit of 13 million shares repurchased over the past year. For the first half of the year, EPS has increased 22%.
For the quarter, inventory increased 8.1% to $507,000 per store.
As previously communicated, the increase in inventory was driven by the company’s parts availability initiative, as well as initial inventory buildup of the new MOOG and Wagner brands partially offset by the company’s focus plan to improve inventory productivity.
Inventory per store was slightly higher as compared to prior year, given Advance Auto Parts is funding the majority of parts availability initiative through some inventory reduction initiative.
In the quarter, accounts payable to inventory ratio was 61.6% compared to 57.1% last year.
Operating cash flow for the year increased $7 million to $350 million. Free cash flow for the year increased 25% to $244.6 million, which reflects a $48.7 million improvement as compared to last year. This increase is primarily driven by higher net income and lower owned inventory.
Capital expenditures were $106 million for the year, as compared to $115.7 million last year.
Sales, margin rate, and bottom line exceeded expectations and SG&A came in higher given the investments the company is making in its strategic initiatives.
The company’s turnaround involves transforming from primarily a retail business model to an integrated operating model that is focused on both retail and commercial customers.
