Advance Auto Parts (AAP) Q1 Earnings Miss; Cuts View

Advance Auto Parts Inc. (NYSE:AAP) reported a 5% increase in adjusted earnings to $2.51 per share in the first quarter of fiscal 2016 (ended Apr 23, 2016) from $2.39 in the prior-year quarter. However, the figure missed the Zacks Consensus Estimate of $2.61. Adjusted net earnings improved 5.5% to $186.1 million from $176.5 million in the first quarter of fiscal 2015.

Revenues dropped 1.9% year over year to $2.98 billion and fell short of the Zacks Consensus Estimate of $3.01 billion. The decline resulted from a fall in comparable store sales. Comparable store sales slipped 1.9% in the reported quarter as against 0.7% growth recorded a year ago. The drop in comparable store sales was due to service shortfall and lower demand resulting from unfavorable weather.

Gross profit fell to $1.35 billion or 45.3% of sales in the quarter from $1.39 billion or 45.9% of sales a year ago. The decrease in gross profit margin can be attributed to supply chain expense stemming from a decline in comparable store sales.

Comparable selling, general and administrative (SG&A) expenses totaled $1.03 billion or 34.7% of sales in the quarter under review, compared with $1.09 billion or 35.7% of sales in first-quarter fiscal 2015. The decrease in SG&A margin resulted from continued cost-reduction initiatives, partially offset by expense de-leverage.

Comparable operating income rose 2.2% to $315 million from $308.3 million in the prior-year quarter. Operating margin was 10.6% versus 10.1% a year ago.

Dividend

On May 17, 2016, the board of directors of Advance Auto Parts declared a regular quarterly dividend of 6 cents per share, payable on Jul 1, to stockholders on record as of Jun 17, 2016.

Financial Position

Advance Auto Parts had cash and cash equivalents of $103.7 million as of Apr 23, 2016, reflecting an increase from $90.8 million as of Jan 2, 2016. Total long-term debt was $1.23 billion as of Apr 23, 2016, compared with $1.21 billion as of Jan 2, 2016.

During the first quarter of fiscal 2016, operating cash flow was $75.3 million compared with $102.2 million in the same period a year ago. Free cash outflow in the period amounted to $13.8 million compared with free cash flow of $45.2 million in the prior-year period. Capital expenditures in the said period amounted to $89.1 million compared with $57 million a year ago.

Outlook

Advance Auto Parts expects comparable store sales to be in the range of negative 3% to negative 5%, lower than the previous forecast of low-single digits growth. The revised outlook is based on the company’s performance in the reported quarter. The company no longer expects to achieve its adjusted operating margin target of 12% and free cash flow of $500 million.

Additionally, it expects to incur capital expenditures in the band of $260–$280 million in fiscal 2016. Income tax rate will likely be in the range of 37.5%–38%.

Advance Auto Parts enhances profits through its relentless focus on store expansion. In 2016, the company plans to open 65–75 new stores, including Worldpac branches.

Store Update

As of Apr 23, 2016, the company’s total store count was 5,211, including 125 Worldpac branches. Advance Auto Parts served roughly 768 independently owned Carquest stores as of that date.

Zacks Rank

Advance Auto Parts currently carries a Zacks Rank #4 (Sell).

Better-ranked automobile stocks include Autoliv, Inc. (NYSE:ALV) , Oshkosh Corporation (NYSE:OSK) and Superior Industries International, Inc. (NYSE:SUP) . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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