Advance Auto Parts Reports Second Quarter Results

Advance Auto Parts, Inc. (NYSE:AAP), a leading retailer of automotive aftermarket parts, accessories, batteries, and maintenance items, today announced its financial results for the fiscal second quarter ended July 14, 2007. Earnings per diluted share for the second quarter were $0.64, compared to $0.59 last year, an 8.5% increase. In the second quarter, sales increased to $1.17 billion from $1.11 billion last year. Comparable-store sales increased 1.3% in the quarter, comprised of a 0.1% decrease in do-it-yourself (DIY) and a 5.8% increase in do-it-for-me (DIFM). The 1.3% comparable-store sales increase compares to a 1.2% increase in last year’s second quarter. "For the second quarter, our comp store sales increase was at the lower end of our low single digit guidance range, which was consistent with our sales trend in the first quarter,” said Jack Brouillard, Chairman, President and CEO. "Our earnings per share of $0.64 came in slightly below our $0.65 to $0.69 guidance." Second quarter gross margin was 48.1% of sales, a 51 basis point improvement compared to last year’s quarter, primarily reflecting improved procurement and logistics costs. Second quarter selling, general and administrative (SG&A) expenses were 38.0% of sales, compared to 37.6% in second quarter 2006, a 41 basis point increase. This increase was primarily due to a 50 basis point loss of leverage on rent, depreciation and other fixed costs from modest comparable-store sales. Year to date sales increased to $2.64 billion from $2.50 billion last year. Year to date comparable-store sales increased 1.2% comprised of a 0.1% decrease in do-it-yourself (DIY) and a 5.4% increase in do-it-for-me (DIFM). The year to date 1.2% comparable-store sales increase compares to a 2.7% increase last year. Year to date earnings per diluted share were $1.35, compared to $1.27 last year. Year to date gross margin was 48.2% of sales, a 55 basis point improvement compared to last year. Year to date selling, general and administrative (SG&A) expenses were 38.7% of sales, compared to 38.2% in 2006, a 44 basis point increase. This increase was primarily due to a 60 basis point loss of leverage on rent, depreciation and other fixed costs from modest comparable-store sales. Store Information During the second quarter, the Company opened 43 new stores, of which 5 were Autopart International (AI) stores. The Company also relocated 11 existing stores, remodeled 27 stores, and closed 6 stores. Year to date, the Company has opened 113 new stores, of which 13 were AI stores. The Company has also relocated 19 existing stores, remodeled 61 stores, and closed 8 stores. Strategy Review Update The recent business strategy review and related customer research identified a number of key strategies that the Company needed to pursue to drive comp store sales growth, reduce its expense structure, and improve return on invested capital. To better tailor merchandise offerings to targeted customer segments, the Company has undertaken an initiative to improve parts availability in its stores. The Company expects to increase both DIY and DIFM sales with this initiative. The Company believes it can fund a portion of this initiative with tighter management of its existing inventory. Most of the increase in parts availability is expected to be in stores by year end. The Company is placing a renewed focus on commercial sales growth with a series of initiatives to take greater advantage of the potential of the large and growing commercial market. These initiatives will be discussed in more detail as they are implemented. All aspects of the commercial program are being reviewed including store staffing and compensation, truck utilization, and merchandising programs. To better align the Company’s cost structure with the customer segments it is pursuing and increase the return on these investments, the Company announced initiatives that will reduce certain expenses by over $20 million in the second half of 2007 and over $50 million in 2008, and reduce capital expenditures by over $20 million in the second half of 2007 and over $65 million in 2008. These initiatives include: Staffing at the store support center and in the field organization has been reduced by 250 positions. New store openings will be reduced to 190 to 200 stores for 2007 from the previous guidance of 200 to 210 stores, and to 140 to 150 stores for 2008. Store relocations will be reduced to 20 stores in 2008 from 35 in 2007. The 2010 store remodel program has been halted and will be reevaluated. The Advance TV network in the stores has been discontinued. Certain advertising expenditures have been eliminated and other marketing and advertising expenses are being reevaluated. All capital expenditure plans in logistics, IT, and other support areas have been evaluated and those investments with inadequate return have been eliminated. Mr. Brouillard stated, "Over the past three months our team has made significant progress in taking the initial steps to position us to implement the findings from our strategy review and to strengthen our business going forward. Many of the decisions that have been made are difficult and are only the beginning as we take steps to drive our sales and reduce our expenses to more appropriate levels. We appreciate the contributions of the team members who will be leaving our company and we will assist them as they transition to the next phases of their careers.” 2007 Guidance The Company is providing earnings guidance based on comparable-store sales of (2%) to flat for the third quarter and flat to 2% for the fourth quarter. Quarter-to-date sales results are running within that range. The Company is basing its sales guidance on an expectation that a challenging macroeconomic environment will likely continue for the remainder of the year and that the Company’s sales building initiatives will positively impact sales only to a limited degree in second half 2007 because of their implementation timeframe. The Company forecasts third quarter 2007 earnings per diluted share in the range of $0.53 to $0.57, which compares to $0.56 in last year’s third quarter. Included in this guidance is $0.04 per diluted share in severance expense and asset write-offs associated with the Company’s expense reduction initiatives. The Company expects full year 2007 earnings per diluted share to be in the range of $2.24 to $2.32, including the previously referenced $0.04 per share. Capital expenditures are now anticipated to be approximately $230 to $240 million in 2007 as compared to the Company’s prior guidance of $250 to $270 million. Free cash flow is expected to be $150 to $170 million in 2007 as compared to prior guidance of $125 to $145 million. Free cash flow is expected to grow more than 80% over $83.2 million of free cash flow in 2006. Share Repurchase Authorization The Company’s Board of Directors today authorized a $500 million share repurchase program. This new authorization replaces the Company’s $300 million share repurchase program authorized in August 2005, which had been nearly completed. Under the $300 million share repurchase authorization, the Company repurchased 6.2 million shares at an average price of $37.37 per share. Dividend The Company’s Board of Directors also today declared a regular quarterly cash dividend of six cents per share to be paid on October 5, 2007 to stockholders of record as of September 21, 2007. Investor Conference Call The Company will host a conference call on Thursday August 9, at 8:00 a.m. Eastern Standard Time to discuss its quarterly results. To listen to the live call, please log on to the Company’s Web site, www.AdvanceAutoParts.com, or dial (866) 908-1AAP. The call will be archived on the Company’s Web site until August 9, 2008. About Advance Auto Parts Headquartered in Roanoke, Va., Advance Auto Parts is the second-largest retailer of automotive aftermarket parts, accessories, batteries, and maintenance items in the United States, based on store count and sales. As of July 14, 2007, the Company operated 3,187 stores in 40 states, Puerto Rico, and the Virgin Islands. The Company serves both the do-it-yourself and professional installer markets. Certain statements contained in this release are forward-looking statements, as that statement is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events or developments, and typically use words such as believe, anticipate, expect, intend, plan, forecast, outlook or estimate. These statements discuss, among other things, expected growth and future performance, including store growth, comparable-store sales, gross margin and SG&A rates, and earnings per share for third quarter 2007 and fiscal year 2007. These forward-looking statements are subject to risks, uncertainties and assumptions including, but not limited to, competitive pressures, demand for the Company’s products, the market for auto parts, the economy in general, inflation, consumer debt levels, the weather, acts of terrorism, availability of suitable real estate, dependence on foreign suppliers and other factors disclosed in the Company’s 10-K for the fiscal year ended December 30, 2006, on file with the Securities and Exchange Commission. Actual results may differ materially from anticipated results described in these forward-looking statements. The Company intends these forward-looking statements to speak only as of the time of this news release and does not undertake to update or revise them, as more information becomes available. -Financial Tables to Follow- Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands) (unaudited)   July 14, December 30, July 15,   2007   2006   2006   Assets   Current assets: Cash and cash equivalents $ 82,647 $ 11,128 $ 13,128 Receivables, net 90,689 97,046 87,414 Inventories, net 1,560,507 1,463,340 1,433,126 Other current assets   45,128   40,459   41,088 Total current assets 1,778,971 1,611,973 1,574,756   Property and equipment, net 1,019,252 994,977 954,620 Assets held for sale 2,796 1,548 4,099 Goodwill 33,918 33,718 67,208 Intangible assets, net 27,345 27,926 - Other assets, net   13,107   12,539   22,037 $ 2,875,389 $ 2,682,681 $ 2,622,720   Liabilities and Stockholders' Equity   Current liabilities: Bank overdrafts $ 15,771 $ 34,206 $ 38,297 Current portion of long-term debt 68 67 37,767 Financed vendor accounts payable 154,695 127,543 128,511 Accounts payable 736,563 651,587 688,727 Accrued expenses 298,097 252,975 291,278 Other current liabilities   44,420   47,042   44,628 Total current liabilities 1,249,614 1,113,420 1,229,208   Long-term debt 350,332 477,173 392,651 Other long-term liabilities 63,418 61,234 67,765 Total stockholders' equity   1,212,025   1,030,854   933,096 $ 2,875,389 $ 2,682,681 $ 2,622,720   NOTE: These preliminary condensed consolidated balance sheets have been prepared on a basis consistent with our previously prepared balance sheets filed with the Securities and Exchange Commission for our prior quarter and annual reports, but do not include the footnotes required by generally accepted accounting principles for complete financial statements. Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Operations Twelve Week Periods Ended July 14, 2007 and July 15, 2006 (in thousands, except per share data) (unaudited)   July 14, July 15,   2007     2006       Net sales $ 1,169,859 $ 1,107,857   Cost of sales, including purchasing and warehousing costs   606,998     580,498     Gross profit 562,861 527,359   Selling, general and administrative expenses   445,051     416,913     Operating income   117,810     110,446     Other, net: Interest expense (7,392 ) (8,752 ) Other income (expense), net   508     (21 ) Total other, net   (6,884 )   (8,773 )   Income before provision for income taxes 110,926 101,673   Provision for income taxes   42,502     38,737       Net income $ 68,424   $ 62,936     Basic earnings per share $ 0.64 $ 0.60 Diluted earnings per share $ 0.64 $ 0.59   Average common shares outstanding ( a ) 106,486 105,650 Dilutive effect of share-based compensation   984     1,143   Average common shares outstanding - assuming dilution   107,470     106,793     ( a ) Average common shares outstanding is calculated based on the weighted average number of shares outstanding for the quarter. At July 14, 2007 and July 15, 2006, we had 106,962 and 105,005 shares outstanding, respectively. NOTE: These preliminary condensed consolidated statements of operations have been prepared on a basis consistent with our previously prepared statements of operations filed with the Securities and Exchange Commission for our prior quarter and annual reports , but do not include the footnotes required by generally accepted accounting principles for complete financial statements. Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Operations Twenty-Eight Week Periods Ended July 14, 2007 and July 15, 2006 (in thousands, except per share data) (unaudited)   July 14, July 15,   2007     2006       Net sales $ 2,637,979 $ 2,500,867   Cost of sales, including purchasing and warehousing costs   1,365,715     1,308,340     Gross profit 1,272,264 1,192,527   Selling, general and administrative expenses   1,019,761     955,783     Operating income   252,503     236,744     Other, net: Interest expense (18,666 ) (18,915 ) Other income, net   850     599   Total other, net   (17,816 )   (18,316 )   Income before provision for income taxes 234,687 218,428   Provision for income taxes   90,162     81,411       Net income $ 144,525   $ 137,017     Basic earnings per share $ 1.36 $ 1.28 Diluted earnings per share $ 1.35 $ 1.27   Average common shares outstanding ( a ) 106,034 106,923 Dilutive effect of share-based compensation   965     1,277   Average common shares outstanding - assuming dilution   106,999     108,200     ( a ) Average common shares outstanding is calculated based on the weighted average number of shares outstanding for the year. At July 14, 2007 and July 15, 2006, we had 106,962 and 105,005 shares outstanding, respectively. NOTE: These preliminary condensed consolidated statements of operations have been prepared on a basis consistent with our previously prepared statements of operations filed with the Securities and Exchange Commission for our prior quarter and annual reports , but do not include the footnotes required by generally accepted accounting principles for complete financial statements. Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows Twenty-Eight Week Periods Ended July 14, 2007 and July 15, 2006 (in thousands) (unaudited) July 14, July 15,   2007     2006   Cash flows from operating activities: Net income $ 144,525 $ 137,017 Depreciation and amortization 79,436 70,860 Share-based compensation 10,412 9,892 Benefit for deferred income taxes (13,385 ) (7,425 ) Excess tax benefit from share-based compensation (10,618 ) (3,427 ) Other non-cash adjustments to net income 4,110 791 Decrease (increase) in: Receivables, net 3,101 7,395 Inventories, net (97,167 ) (66,027 ) Other assets (626 ) 5,391 Increase in: Accounts payable 84,976 59,479 Accrued expenses 69,978 44,339 Other liabilities   5,242     (861 ) Net cash provided by operating activities 279,984 257,424   Cash flows from investing activities: Purchases of property and equipment (115,652 ) (132,015 ) Business acquisitions, net of cash acquired - (12,500 ) Insurance proceeds related to damaged property 3,251 - Proceeds from sales of property and equipment   1,150     6,788   Net cash used in investing activities (111,251 ) (137,727 )   Cash flows from financing activities: Decrease in bank overdrafts (18,435 ) (11,873 ) Increase in financed vendor accounts payable 27,152 9,160 Dividends paid (19,093 ) (12,839 ) Net payments on credit facilities (126,800 ) (8,350 ) Proceeds from the issuance of common stock, primarily exercise of stock options 32,599 10,586 Excess tax benefit from share-based compensation 10,618 3,427 Repurchase of common stock (3,426 ) (137,560 ) Other   171     97   Net cash used in financing activities   (97,214 )   (147,352 )   Net increase in cash and cash equivalents 71,519 (27,655 ) Cash and cash equivalents, beginning of period   11,128     40,783   Cash and cash equivalents, end of period $ 82,647   $ 13,128     NOTE: These preliminary condensed consolidated statements of cash flows have been prepared on a consistent basis with previously prepared statements of cash flows filed with the Securities and Exchange Commission for our prior quarter and annual reports, but do not include the footnotes required by generally accepted accounting principles for complete financial statements. Advance Auto Parts, Inc. and Subsidiaries Supplemental Financial Schedules Twenty-Eight Week Periods Ended July 14, 2007 and July 15, 2006 (in thousands, except per share data) (unaudited)   Reconciliation of Free Cash Flow   July 14, July 15,   2007     2006     Cash flows from operating activities $ 279,984 $ 257,424 Cash flows used in investing activities   (111,251 )   (137,727 ) 168,733 119,697   Increase in financed vendor accounts payable   27,152     9,160     Free cash flow $ 195,885   $ 128,857     Note: Management uses free cash flow as a measure of our liquidity and believes it is a useful indicator to stockholders of our ability to implement our growth strategies and service our debt. Free cash flow is a non-GAAP measure and should be considered in addition to, but not as a substitute for, information contained in our condensed consolidated statement of cash flows.