Interest expense, net of interest income, was $10.9 million in the quarter compared to $9.5 million last year.
Approximately half of the company’s debt is hedged to fixed rates, and its current borrowing cost is approximately 6% at today’s rates.
The first-quarter income tax rate was 38.5% as compared to 36.6% last year.
Last year’s tax rate of 36.6% included a $1.8 million tax benefit related to the favorable resolution of certain tax contingencies. This reduced last year’s tax rate by 150 basis points and favorably impacted earnings by nearly 2 cents per share.
With the adoption of FIN 48 on certain tax positions, which took effect in first quarter, the firm’s effective tax rate will slightly increase. Going forward, the company expects its tax rate to be in the 38.4% to 38.6% range. Approximately 30 basis points of this increase is a reclassification from interest expense to tax.
- In the first quarter, the firm generated free cash flow of $105.1 million.
- For the quarter inventory increased 9.5% on a sales increase of 5.4%. The rate of inventory growth in the quarter was greater than the sales growth due to an inventory build in the new AI distribution center; first-quarter sales coming in below expectations; and several merchandising initiatives, including an expanded parts assortment in selected stores. For the remainder of the year, the firm expects that inventory will be more in line with sales.
- The accounts payable to inventory ratio was 57%. This ratio grew 3.8% in the quarter versus a 3.1% growth in last year’s quarter. As a result of working with the suppliers, the company expects this ratio to exceed the prior year’s corresponding quarter for the remainder of the year.
In the quarter, the company spent $75.9 million in CapEx as compared to $78 million last year.
The company has taken a number of steps to curtail CapEx growth in 2007. With fewer new stores, relocated stores, and remodels as compared to 2006, and the lower-cost remodel program, the firm continues to expect CapEx for the year to be approximately $250 million to $270 million as compared to $259 million in 2006. Also, this year’s estimate includes approximately $30 million for our ninth distribution center, which the firm expects to open in 2008. The company is taking a fresh look at all capital spending with a focus on improving return on invested capital. With nearly flat growth in CapEx for the year, the firm would expect free cash flow to grow more than 50% in 2007 to a range of $125 million to $145 million
The firm had another strong quarter with its new store growth, with new store productivity comparable to last year.
The firm continues to expect new stores to generate approximately 70% of an average store’s volume in their first full year of operation. During the first quarter, the firm opened 70 new stores; 62 of these new stores opened as Advance Auto Parts, and eight opened as Autopart International. The company closed two stores in the quarter.
The company’s pipeline of new stores remains solid as it completed the first quarter. The management still anticipates opening 200 to 210 new stores in 2007, through a combination of Advance and AI stores. This represents a 6.5% rate of unit growth, which is down from 7.5% last year growth. That slower growth rate translates into less CapEx and less SG&A for new stores.
The firm has also remodeled 34 stores in the first quarter. The company reviewed its remodel program scope and identified opportunities to reduce this investment. All remodels are now being done with this new approach, which reduced CapEx per store by more than $60,000. Over the next few months, the firm will be measuring the sales increase produced by this new remodel program.
In the first quarter, the company also relocated eight stores and foresees a total of approximately 35 relocations in 2007. The firm ended the quarter with 3,055 Advance Auto Parts stores and 95 Autopart International stores, for a total count of 3,150 stores.
Autopart International also continued to grow in the first quarter.
The firm significantly accelerated AI’s new store growth rate in 2006 with 25 new stores. The firm opened an additional eight stores in the first quarter, bringing the total store count to 95. For the first quarter, AI contributed $36 million in total sales. The AI team also successfully opened their new distribution center in Norton, Massachusetts, in the first quarter, which provides them the capacity to serve up to 300 stores. Transition to this new DC and the close of their old facility somewhat impacted AI’s operations during the first quarter, but with this opening behind them, the management is pleased with the results it has seen in the last several weeks.
Outlook
Looking forward, the company is keeping its sales guidance at low single-digit comps for the second quarter and full year 2007. Based on this guidance, second-quarter earnings are expected to be 65 cents to 69 cents per diluted share, and full year 2007 earnings are expected to be $2.38 to $2.48 per diluted share.
Key questions and answers from the first quarter fiscal 2007 earnings call conducted by Advanced Auto Parts Inc. on May 17, 2007.
Armando Lopez (Morgan Stanley): In terms of the new strategy review, historically, Advance has talked about an operating margin target of 11% to 12%. Could you comment on how you’re thinking about that now with the review that was ongoing?
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