UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 001-16797
________________________
ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________
Delaware (State or other jurisdiction of incorporation or organization) | 54-2049910 (I.R.S. Employer Identification No.) |
5008 Airport Road Roanoke, VA (Address of Principal Executive Offices) | 24012 (Zip Code) |
(540) 362-4911
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act
Title of each class Common Stock ($0.0001 par value) | Name of each exchange on which registered New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of July 11, 2014, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the 72,625,896 shares of Common Stock held by non-affiliates of the registrant was $9,680,305,678, based on the last sales price of the Common Stock on July 11, 2014, as reported by the New York Stock Exchange.
As of February 26, 2015, the registrant had outstanding 73,140,749 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).
Documents Incorporated by Reference:
Portions of the definitive proxy statement of the registrant to be filed within 120 days of January 3, 2015, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for the 2015 Annual Meeting of Stockholders to be held on May 20, 2015, are incorporated by reference into Part III.
TABLE OF CONTENTS | |||
Page | |||
FORWARD-LOOKING STATEMENTS
Certain statements in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are usually identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “projection,” “should,” “strategy,” “will,” or similar expressions. We intend for any forward-looking statements to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available.
Although we believe that our plans, intentions and expectations as reflected in, or suggested by, any forward-looking statements are reasonable, we do not guarantee or give assurance that such plans, intentions or expectations will be achieved. Actual results may differ materially from our anticipated results described or implied in our forward-looking statements, and such differences may be due to a variety of factors. Our business could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.
Listed below and discussed elsewhere in further detail in this report are some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from any forward-looking statements made or implied in this report. These include, but are not limited to, the following:
• | a decrease in demand for our products; |
• | competitive pricing and other competitive pressures; |
• | the risk that the anticipated benefits of the acquisition of General Parts International, Inc. (“GPI”), including synergies, may not be fully realized or may take longer to realize than expected, that we may experience difficulty integrating GPI’s operations into our operations, or that management's attention may be diverted from our other businesses in association with the acquisition of GPI; |
• | the possibility that the acquisition of GPI may not advance our business strategy or prove to be an accretive investment or may impact third-party relationships, including customers, wholesalers, independently-owned and jobber stores and suppliers; |
• | the risk that the additional indebtedness from the new financing agreements in association with the acquisition of GPI may limit our operating flexibility or otherwise strain our liquidity and financial condition; |
• | the risk that we may experience difficulty retaining key GPI employees; |
• | our ability to implement our business strategy; |
• | our ability to expand our business, including the location of available and suitable real estate for new store locations, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency; |
• | our dependence on our suppliers to provide us with products that comply with safety and quality standards; |
• | our ability to attract and retain qualified employees, or Team Members; |
• | the potential for fluctuations in the market price of our common stock and the resulting exposure to securities class action litigation; |
• | deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, higher tax rates or uncertain credit markets; |
• | regulatory and legal risks, including being named as a defendant in administrative investigations or litigation, and the incurrence of legal fees and costs, the payment of fines or the payment of sums to settle litigation or administrative investigations or proceedings; |
• | a security breach or other cyber security incident; |
• | business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism; |
• | the impact of global climate change or legal and regulatory responses to such change; and |
• | other statements that are not of historical fact made throughout this report, including the sections entitled “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” |
We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties,
1
together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission, or SEC, and you should not place undue reliance on those statements.
2
PART I
Item 1. Business.
Unless the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms refer to Advance Auto Parts, Inc., its predecessor, its subsidiaries and their respective operations. References to the acquisition of GPI refer to our January 2, 2014 acquisition of General Parts International, Inc. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31st of each year. Fiscal 2014 included 53 weeks of operations. Our last 53-week year prior to 2014 was in 2008.
Overview
We are the largest automotive aftermarket parts provider in North America, serving "do-it-for-me", or Commercial, and "do-it-yourself", or DIY, customers as well as independently-owned operators. Our stores and branches offer a broad selection of brand name, original equipment manufacturer ("OEM") and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks.
We were founded in 1929 as Advance Stores Company, Incorporated and operated as a retailer of general merchandise until the 1980s. During the 1980s, we began targeting the sale of automotive parts and accessories to DIY customers. We began our Commercial delivery program in 1996 and have steadily increased our sales to Commercial customers since 2000. We have grown significantly as a result of comparable store sales growth, new store openings and strategic acquisitions. Our parent company, Advance Auto Parts, Inc., a Delaware corporation, was incorporated in 2001 in conjunction with the acquisition of Discount Auto Parts, Inc.
Our most recent strategic acquisition was on January 2, 2014 when we acquired GPI. GPI, formerly a privately held company, is a leading distributor and supplier of original equipment and aftermarket automotive replacement products for Commercial markets operating under the Carquest and Worldpac names. As of the acquisition date, GPI operated 1,233 Carquest stores and 103 Worldpac branches located in 45 states and Canada and serviced approximately 1,400 independently-owned Carquest stores. We believe the acquisition will allow us to expand our geographic presence, Commercial capabilities and overall scale to better serve our customers. As of January 3, 2015, the end of our 2014 fiscal year, or 2014, we operated 5,261 total stores and 111 distribution branches primarily under the trade names "Advance Auto Parts", "Autopart International", "Carquest" and "Worldpac".
Our Internet address is www.AdvanceAutoParts.com. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish them to, the Securities and Exchange Commission ("SEC"). The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at www.sec.gov.
Operating Segments
During 2014 we operated as a single reportable segment comprised of our stores and distribution branch operations. A discussion of our segment structure and disclosure of sales by product category is available in Note 21, Segment and Related Information, of the Notes to Consolidated Financial Statements, included in Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.
Store Names
Through our integrated operating approach, we serve our Commercial and DIY customers through a variety of channels ranging from traditional "brick and mortar" store locations to self-serving e-commerce sites. We believe we are better able to meet our customers' needs by operating under several store names.
Advance Auto Parts - Consists of 3,888 stores as of January 3, 2015 generally located in freestanding buildings with a heavy focus on both Commercial and DIY customers. The average size of an Advance store is approximately 7,600 square feet with the size of our typical new stores ranging from approximately 6,000 to 8,500 square feet. These stores carry a wide variety of products serving aftermarket auto part needs for both domestic and import vehicles. Our Advance Auto Parts stores carry a product offering of approximately 20,000 stock keeping units, or SKUs, generally consisting of a custom mix of product based on each store's respective market. Supplementing the inventory on-hand
3
at our stores, we have 405 larger stores, known as HUB stores, which stock an additional 15,000 less common SKUs that are available to our stores within the HUB store's service areas on a same-day or next-day basis.
Carquest - Consists of 1,125 stores as of January 3, 2015 generally located in freestanding buildings with a heavy focus on the Commercial customer, but also serving the DIY customer. The average size of a Carquest store is approximately 7,500 square feet. These stores carry a wide variety of products serving the aftermarket auto part needs for both domestic and import vehicles with a product offering of approximately 19,000 SKUs. Supplementing the inventory on-hand at our stores, we have 16 HUB stores providing additional SKUs on a same-day or next-day basis. We have already begun our integration plan to fully convert or consolidate the Carquest stores with our Advance Auto Parts stores over the next few years and are in the process of completing product conversions to align the product offering between our Carquest and Advance Auto Parts stores. As of January 3, 2015, Carquest also served approximately 1,325 independently-owned stores which operate under the Carquest name.
As of January 3, 2015, we also operated 38 stores under the Carquest name that were acquired as part of the acquisition of B.W.P. Distributors, Inc. ("BWP") on December 31, 2012. These locations are expected to be converted or consolidated with our Advance Auto Parts stores over the next few years.
Worldpac - Consists of 111 branches as of January 3, 2015 that principally serve Commercial customers utilizing an efficient and sophisticated delivery process. The Worldpac branches are generally larger than our other store locations averaging approximately 30,000 square feet in size. Worldpac specializes in imported, OEM parts. Worldpac's complete product offering includes over 120,000 SKUs for over 40 import and domestic vehicle carlines.
Autopart International - Consists of 210 stores as of January 3, 2015 operating primarily in the Northeastern, Mid-Atlantic and Southeastern regions of the United States focusing on the Commercial customer. These stores specialize in imported aftermarket and private label branded auto parts. The AI stores offer approximately 33,000 SKUs through routine replenishment from its supply chain.
We acquired the Carquest and Worldpac operations as part of our acquisition of GPI on January 2, 2014. We have plans to fully integrate the Carquest company-operated stores and overall operations into Advance Auto Parts over the next few years and to integrate the availability of all of our product offerings throughout the entire chain. In the short-term, we have been able to utilize cross-sourcing of inventory between most of our locations to expand availability and the breadth of our product offerings to better meet the needs of our customers.
Through our integrated operating approach, we also serve our customers online at www.AdvanceAutoParts.com, www.Carquest.com and www.Worldpac.com. Our Commercial customers, consisting primarily of delivery customers for whom we deliver product from our store or branch locations to our Commercial customers’ places of business, can conveniently place their orders online through these websites. Our online websites also allow our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their homes.
We strive to be the leader in the automotive aftermarket industry by fulfilling our promise, 'Service is our best part®', through our Superior Availability and Service Leadership strategies. We offer our customers quality products which are covered by a solid warranty. Many of our products are offered at a good, better or best recommendation differentiated by price and quality.
The primary categories of products we offer include:
• | Parts, including alternators, batteries, belts and hoses, brakes and brake pads, chassis parts, climate control parts, clutches, driveshafts, engines and engine parts, ignition parts, lighting, radiators, starters, spark plugs and wires, steering and alignment parts, transmissions, water pumps and windshield wiper blades; |
• | Accessories, including air fresheners, automotive paint, anti-theft devices, emergency road kits, floor mats, ice scrapers, mirrors, seat and steering wheel covers, and vent shades; |
• | Chemicals, including antifreeze, brake and power steering fluid, car washes and waxes, freon, fuel additives, and windshield washer fluid; |
• | Oil, transmission fluid and other automotive petroleum products; and |
• | Other miscellaneous offerings, including certain eServices. |
The product in our store locations is generally arranged in a uniform and consistent manner based on standard store formats and merchandise presentation. The parts inventory is generally located on shelves behind the customer service counter with the remaining product, or front room merchandise, arranged on the sales floor to provide easy customer access, maximize selling
4
space and prominently display high-turnover products and accessories to customers. We utilize aisle displays to feature high-demand or seasonal merchandise, new items and advertised specials, including bilingual signage based on the demographics in each store's geographic area.
Our Customers
We serve both Commercial and DIY customers. Our Commercial customers consist primarily of delivery customers for whom we use our commercial delivery fleet to deliver product from our store or branch locations to our Commercial customers’ places of business, including independent garages, service stations and auto dealers. We also serve approximately 1,325 independently-owned Carquest stores with shipments directly from our distribution centers. Our DIY customers are primarily served through our stores and can also order online to pick up merchandise at a conveniently located store or have their purchases shipped directly to them.
A majority of our stores include at least two parts professionals, or parts pros, who have extensive technical knowledge of automotive replacement parts and other related applications to better serve our Commercial and DIY customers. Many of our stores also include bilingual Team Members to better serve our diverse customer base. We offer training to all of our Team Members, including formal classroom workshops, e-learning and certification by the National Institute for Automotive Service Excellence, or ASE. ASE is broadly recognized for training certification in the automotive industry.
Since 2008, we have concentrated a significant amount of our investments on increasing our Commercial sales at a faster rate in light of favorable market dynamics. We have added key product brands in our stores that are well recognized by our Commercial customers and have increased the number of parts professionals, delivery vehicles and other support services to serve those customers. In 2012, we added eService offerings for our Commercial customers, including online training solutions, fully searchable diagnostic and repair resources and online marketing services, which are available on a subscription basis. We believe these investments and the commitment to consistent delivery times and order accuracy will enable us to gain more Commercial customers as well as increase our sales to existing customers who will use us as their “first call” supplier. Our acquisition of GPI, which is highly concentrated in the Commercial market, also increased our market penetration and Commercial capabilities. As a result, our Commercial sales represented approximately 57.0% of our sales in 2014 compared to 40.4% in 2013.
While Commercial is our growth engine, DIY customers remain a sizable portion of our business and we remain focused on continuing to deliver on our value proposition to our core DIY customers as well. Store Team Members utilize our point-of-sale ("POS") system, including a fully integrated electronic parts catalog ("EPC"), to identify and suggest the appropriate quality and price options for the SKUs we carry, as well as the related products, tools or additional information that is required by our DIY customers to complete their automotive repair projects properly and safely. Except where prohibited, we also provide a variety of services in our stores free of charge to our customers including:
• | Battery and wiper installation; |
• | Battery charging; |
• | Check engine light reading; |
• | Electrical system testing, including batteries, starters, alternators and sensors; |
• | “How-To” video clinics; |
• | Oil and battery recycling; and |
• | Loaner tool programs. |
Store Development
Our store development program has historically focused on adding new stores and branches within existing markets where we can achieve a larger presence, remodeling or relocating existing stores and entering new markets. The addition of new locations, along with strategic acquisitions, has played a significant role in our growth and success. We believe the opening of new stores, and their strategic location in relation to our Commercial and DIY customers, will continue to play a significant role in our future growth and success.
We open and operate stores in both large, densely-populated markets and small, less densely-populated areas. We complete substantial research prior to entering a new market. Key factors in selecting new site and market locations include population, demographics, traffic count, vehicle profile, number and strength of competitors' stores and the cost of real estate.
5
Our 5,372 stores and branches were located in the following states, territories and international locations as of January 3, 2015:
Location | Number of Stores | Location | Number of Stores | Location | Number of Stores | ||||||||
U.S. States: | |||||||||||||
Alabama | 149 | Louisiana | 87 | Ohio | 268 | ||||||||
Alaska | 12 | Maine | 50 | Oklahoma | 33 | ||||||||
Arizona | 17 | Maryland | 123 | Oregon | 31 | ||||||||
Arkansas | 28 | Massachusetts | 127 | Pennsylvania | 262 | ||||||||
California | 97 | Michigan | 161 | Rhode Island | 21 | ||||||||
Colorado | 93 | Minnesota | 53 | South Carolina | 155 | ||||||||
Connecticut | 75 | Mississippi | 68 | South Dakota | 12 | ||||||||
District of Columbia | 1 | Missouri | 72 | Tennessee | 162 | ||||||||
Delaware | 16 | Montana | 28 | Texas | 251 | ||||||||
Florida | 583 | Nebraska | 37 | Utah | 16 | ||||||||
Georgia | 281 | Nevada | 5 | Vermont | 13 | ||||||||
Idaho | 8 | New Hampshire | 30 | Virginia | 246 | ||||||||
Illinois | 196 | New Jersey | 124 | Washington | 32 | ||||||||
Indiana | 138 | New Mexico | 12 | West Virginia | 77 | ||||||||
Iowa | 46 | New York | 257 | Wisconsin | 121 | ||||||||
Kansas | 43 | North Carolina | 329 | Wyoming | 14 | ||||||||
Kentucky | 119 | North Dakota | 9 | ||||||||||
U.S. Territories: | |||||||||||||
Puerto Rico | 28 | Virgin Islands | 1 | ||||||||||
Canadian Provinces: | |||||||||||||
Alberta | 3 | New Brunswick | 10 | Ontario | 58 | ||||||||
British Columbia | 4 | Newfoundland and Labrador | 3 | Prince Edward Island | 1 | ||||||||
Manitoba | 1 | Nova Scotia | 12 | Quebec | 63 | ||||||||
The following table sets forth information concerning increases in the total number of our stores and branches during the past five years:
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Beginning Stores | 4,049 | 3,794 | 3,662 | 3,563 | 3,420 | |||||||||
Stores Acquired (1) | 1,336 | 124 | — | — | — | |||||||||
New Stores (2) | 151 | 172 | 137 | 104 | 148 | |||||||||
Stores Closed (3) | (164 | ) | (41 | ) | (5 | ) | (5 | ) | (5 | ) | ||||
Ending Stores | 5,372 | 4,049 | 3,794 | 3,662 | 3,563 | |||||||||
(1) | Includes 1,336 stores and branches resulting from our acquisition of GPI on January 2, 2014 and 124 stores resulting from our acquisition of BWP on December 31, 2012. |
(2) | Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores. |
(3) | The number of store closures in 2014 includes planned consolidations of 145 AI, BWP and Carquest stores and in 2013 includes the planned consolidations of 20 BWP stores. |
6
Store Technology
Each of our store names utilizes a unique store operating system comprised of an integrated POS and EPC, which enables our store Team Members to assist our customers in their parts selection and ordering based on the year, make, model and engine type of their vehicles. In conjunction with our integration of the Advance Auto Parts and Carquest stores, we plan to eventually utilize one POS system and EPC in the longer-term and leverage the benefits of each system.
Currently, information maintained by our Advance Auto Parts store operating system is used to formulate pricing, marketing and merchandising strategies and to replenish inventory accurately and rapidly. It also provides real-time inventory tracking at the store level allowing store Team Members to check the quantity of on-hand inventory for any SKU, adjust stock levels for select items for store specific events, automatically process returns and defective merchandise, designate SKUs for cycle counts and track merchandise transfers. If a hard-to-find part or accessory is not available at one of our Advance Auto Parts stores, the store system can determine whether the part is carried and in-stock through our HUB network, can be cross-sourced enterprise wide or can be ordered directly from one of our vendors. Available parts and accessories are then ordered electronically with immediate confirmation of price, availability and estimated delivery time.
The Worldpac speedDIAL® parts catalog and fulfillment ordering system provides expanded capabilities to Worldpac's Commercial customers and other stores throughout our enterprise. This tool allows customers to check real-time parts availability on over 100,000 parts, view images on over 90,000 parts, check prices, place orders, view invoices and self-service returns.
Store Support Centers
We are headquartered in Roanoke, VA and serve our Advance Auto Parts and Carquest stores primarily from our store support centers in Roanoke, VA and Raleigh, NC. We also maintain a store support center in Newark, CA to support our Worldpac and e-commerce operations and in Norton, MA to support our Autopart International stores.
Merchandising. In 2014, we purchased merchandise from over 500 vendors, with no single vendor accounting for more than 6% of purchases. Our purchasing strategy involves negotiating agreements with most of our vendors to purchase merchandise over a specified period of time along with other terms, including pricing, payment terms and volume.
Our merchandising teams have developed strong vendor relationships in the industry and, in a collaborative effort with our vendor partners, utilizes a category management process where we manage the mix of our product offerings to meet customer demand. We believe this process, which develops a customer-focused business plan for each merchandise category, and our global sourcing operation are critical to improving comparable store sales, gross margin and inventory productivity.
Our merchandising strategy is to carry a broad selection of high quality and reputable brand name automotive parts and accessories which we believe will generate DIY customer traffic and also appeal to our Commercial customers. Since our acquisition of GPI, we have rolled out cross-sourcing capabilities to the majority of our stores and more recently we have begun integrating our product offerings in our Advance Auto Parts and Carquest stores. Some of our brands include Bosch®, Castrol®, Dayco®, Denso®, Gates®, Moog®, Monroe®, NGK®, Prestone®, Purolator®, Trico® and Wagner®. In addition to these branded products, we stock a wide selection of high quality private label products that appeal to value-conscious customers. These lines of merchandise include chemicals, interior automotive accessories, batteries and parts under various private label names such as Autocraft®, Autopart International®, Driveworks®, Tough One® and Wearever®as well as the Carquest® brand acquired from GPI.
Supply Chain. Our supply chain consists of a network of distribution centers, HUBs, stores and branches which enable us to provide same-day or next-day availability to our customers. Our inventory management teams utilize replenishment systems to monitor inventory levels across the network and order additional product when appropriate while streamlining handling costs. Our replenishment systems utilize the most up-to-date information from our POS systems as well as inventory movement forecasting based upon sales history, sales trends by SKU, seasonality (and weather patterns) and demographic shifts in demand. These factors are combined with service level goals, vendor lead times and cost of inventory assumptions to determine the timing and size of purchase orders. The vast majority of our purchase orders are sent to our merchandise vendors via electronic data interchange.
The acquisition of GPI significantly increased the number of distribution centers that we operate. As of January 3, 2015, we operated fifty distribution centers compared to twelve distribution centers as of December 28, 2013. The thirty-four distribution centers serving Carquest stores are significantly smaller at an average of 125,000 square feet than our existing Advance Auto Parts distribution centers which average approximately 500,000 square feet. One of our integration priorities in
7
2015 is to begin aligning the product offering in our Advance Auto Parts and Carquest distribution centers and to eventually connect their respective systems so we can operate as one integrated supply chain. Worldpac will continue to operate four distribution centers to service its branches and provide cross-sourcing to our Advance Auto Parts and Carquest stores.
In addition to the distribution centers acquired with GPI, we also opened our newest distribution center in Hartford, CT in late 2014. This facility incorporates our more advanced warehouse management system, similar to the system utilized by our Remington, IN facility which opened in 2012. This technology has furthered our ability to roll out daily replenishment to the stores served by these facilities. Our supply chain initiatives to further increase the efficient utilization of our distribution capacity, including planning for the roll-out of the advanced technology used at the Hartford and Remington facilities to other facilities in our supply chain network, will now get incorporated into our overall integration plan.
Marketing & Advertising. Our marketing and advertising program is designed to drive brand awareness, consideration and omni-channel traffic by positioning Advance Auto Parts as the leader in parts availability and project support within the aftermarket auto parts category. We strive to exceed our customers' expectations end to end through a comprehensive online experience, extensive parts assortment, speed at the parts counter and our DIY customer loyalty program, Speed Perks.
The current campaign was developed based on extensive research with our customers. The campaign targets core DIY customers and emphasizes our understanding of what motivates their passion to work on cars. It is built around a multi-channel communications plan which brings together radio, television, direct marketing, mobile and social media and in-store and event signage directed to both our general market and Hispanic and Latino customers.
We also have Commercial marketing programs that are designed to build loyalty with our Commercial customers who rely on us for quality products and services each and every day so they can in turn successfully serve their customers. In addition to various loyalty and rebate programs, we offer dedicated training support and other eServices to our Commercial customers, including:
TECH-NET Professional Auto Service® - is our marketing solutions program offered to the commercial shop owner to help them attract and retain customers by having consistent branding, banner programs and solutions for attracting automotive technicians and other technical resources.
CARQUEST Technical Institute® (CTI) - offers our valued customers the tools and training to stay ahead of an increasingly competitive and fast-changing marketplace. We target service facility owners, shop managers, service consultants and professional technicians. CTI instructors have over 350 ASE certifications and understand the technical skills required to be productive and profitable and reach over 25,000 technicians annually.
MotoShop - is a technology solution portfolio consisting of a suite of electronic tools that supports our Commercial customers with: (i) online marketing solutions, (ii) fully searchable diagnostic and repair service resources, (iii) online shop tech training and (iv) a shop management system.
Seasonality
Our business is somewhat seasonal in nature, with the highest sales usually occurring in the spring and summer months. In addition, our business can be affected by weather conditions. While unusually heavy precipitation tends to soften sales as elective maintenance is deferred during such periods, extremely hot or cold weather tends to enhance sales by causing automotive parts to fail at an accelerated rate. Our fourth quarter is generally our most volatile as weather and spending trade-offs typically influence our Commercial and DIY sales.
Team Members
As of February 26, 2015, we employed approximately 41,600 full-time Team Members and approximately 31,400 part-time Team Members. Our workforce consisted of 87% of our Team Members employed in store-level operations, 9% employed in distribution and 4% employed in our corporate offices. As of February 26, 2015, less than 1% of our Team Members were represented by labor unions. We have never experienced any labor disruption. We believe that our Team Member relations are solid.
8
Intellectual Property
We own a number of trade names and own and have federally registered several service marks and trademarks, including "Advance Auto Parts”, “Autopart International”, “Carquest", “CARQUEST Technical Institute”, “DriverSide”, “MotoLogic”, “MotoShop”, “Worldpac”, “Service is our best part”, “speedDIAL” and “TECH-NET Professional Auto Service” for use in connection with the automotive parts business. In addition, we own and have registered a number of trademarks for our private label brands. We believe that these trade names, service marks and trademarks are important to our merchandising strategy. We do not know of any infringing uses that would materially affect the use of these trade names and marks and we actively defend and enforce them.
Competition
We operate in both the Commercial and DIY markets of the automotive aftermarket industry. Our primary competitors are (i) both national and regional chains of automotive parts stores, including AutoZone, Inc., NAPA, O'Reilly Automotive, Inc., The Pep Boys-Manny, Moe & Jack and Uni-Select, Inc, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobber stores, including those associated with national parts distributors or associations, (iv) independently-owned stores, (v) automobile dealers that supply parts and (vi) internet-based retailers. We believe that chains of automotive parts stores that, like us, have multiple locations in one or more markets, have competitive advantages in customer service, marketing, inventory selection, purchasing and distribution as compared to independent retailers and jobbers that are not part of a chain or associated with other retailers or jobbers. The principal methods of competition in our business include customer service, product offerings, availability, quality, price and store location.
Environmental Matters
We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing collection, transportation and recycling of automotive lead-acid batteries, used automotive oil and other recyclable items, and ownership and operation of real property. We sell products containing hazardous materials as part of our business. In addition, our customers may bring automotive lead-acid batteries, used automotive oil or other recyclable items onto our properties. We currently provide collection and recycling programs for used lead-acid batteries, used oil and other recyclable items at a majority of our stores as a service to our customers. Pursuant to agreements with third party vendors, lead-acid batteries, used oil and other recyclable items are collected by our Team Members, deposited onto pallets or into vendor supplied containers and stored by us until collected by the third party vendors for recycling or proper disposal. The terms of our contracts with third party vendors require that they are in compliance with all applicable laws and regulations. Our third party vendors who arrange for the removal, disposal, treatment or other handling of hazardous or toxic substances may be liable for the costs of removal or remediation at any affected disposal, treatment or other site affected by such substances. Based on our experience, we do not believe that there are any material environmental costs associated with the current business practice of accepting lead-acid batteries, used oil and other recyclable items as these costs are borne by the respective third party vendors.
We own and lease real property. Under various environmental laws and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. These laws often impose joint and several liability and may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous or toxic substances. Other environmental laws and common law principles also could be used to impose liability for releases of hazardous materials into the environment or work place, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. From time to time, we receive notices from the Environmental Protection Agency and state environmental authorities indicating that there may be contamination on properties we own, lease or operate or may have owned, leased or operated in the past or on adjacent properties for which we may be responsible. Compliance with these laws and regulations and clean up of released hazardous substances have not had a material impact on our operations to date.
Item 1A. Risk Factors.
Our business is subject to a variety of risks, both known and unknown. Our business, financial condition, results of operations and cash flows could be negatively impacted by the following risk factors. These risks are not the only risks that may impact our business.
If overall demand for products sold by our stores slows or declines, our business, financial condition, results of operations and cash flows will suffer. Decreased demand could also negatively impact our stock price.
9
Overall demand for products sold by our stores depends on many factors and may slow or decrease due to any number of reasons, including:
• | the number and average age of vehicles being driven, because the majority of vehicles that are seven years old and older are generally no longer covered under the manufacturers' warranties and tend to need maintenance and repair. If the number and average age of vehicles being driven were to decrease it would negatively impact demand for our products; |
• | the economy, because during periods of declining economic conditions, both Commercial and DIY customers may defer vehicle maintenance or repair; conversely, during periods of favorable economic conditions, more of our DIY customers may pay others to repair and maintain their cars or they may purchase new cars; |
• | the weather, because milder weather conditions may lower the failure rates of automobile parts while extended periods of rain and winter precipitation may cause our customers to defer elective maintenance and repair of their vehicles; |
• | the average duration of manufacturer warranties and the decrease in the number of annual miles driven, because newer cars typically require fewer repairs and will be repaired by the manufacturers' dealer network using dealer parts; and lower vehicle mileage, which may be affected by gas prices and other factors, decreases the need for maintenance and repair (while higher miles driven increases the need); |
• | technological advances and the increase in quality of vehicles manufactured, because vehicles that need less frequent maintenance and have low part failure rates will require less frequent repairs using aftermarket parts; |
• | our vendors, because if any of our key vendors do not supply us with products on terms that are favorable to us or fail to develop new products we may not be able to meet the demands of our customers and our results of operations could be negatively affected; |
• | our reputation and our brands, because our reputation is critical to our continued success. If we fail to maintain high standards for, or receive negative publicity (whether through social media or normal media channels) relating to, product safety, quality or integrity, it could reduce demand for our products. The product we sell is branded both in brands of our vendors and in our own private label brands. If the perceived quality or value of the brands we sell declines in the eyes of our customers, our results of operations could be negatively affected; and |
• | the refusal of vehicle manufacturers to make available diagnostic, repair and maintenance information to the automotive aftermarket industry that our Commercial and DIY customers require to diagnose, repair and maintain their vehicles, because this may force consumers to have a majority of diagnostic work, repairs and maintenance performed by the vehicle manufacturers’ dealer network. |
If any of these factors cause overall demand for the products we sell to decline, our business, financial condition, results of operations and cash flows could be negatively impacted.
If we are unable to compete successfully against other companies in the automotive aftermarket industry we may lose customers, our revenues may decline, and we may be less profitable or potentially unprofitable.
The sale of automotive parts, accessories and maintenance items is highly competitive in many ways, including name recognition, location, price, quality, product availability and customer service. We compete in both the Commercial and DIY categories of the automotive aftermarket industry, primarily with: (i) national and regional retail automotive parts chains, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesaler distributors, (iv) jobber stores, (v) independently-owned stores, (vi) automobile dealers that supply parts and (vii) internet-based retailers. These competitors and the level of competition vary by market. Some of our competitors may possess advantages over us in certain markets we share, including a greater amount of marketing activities, a larger number of stores, more lucrative store locations, better store layouts, longer operating histories, greater name recognition, larger and more established customer bases, more favorable vendor relationships, lower prices, and better product warranties.
These competitive disadvantages may require us to reduce our prices below our normal selling prices or increase our promotional spending, which would lower our revenue and profitability. Competitive disadvantages may also prevent us from introducing new product lines, require us to discontinue current product offerings, or change some of our current operating strategies. If we do not have the resources, expertise, consistent execution or otherwise fail to develop successful strategies to address these competitive disadvantages, we may lose customers, our revenues and profit margins may decline and we may be less profitable or potentially unprofitable.
10
We may not be able to successfully integrate GPI’s operations with ours; the GPI business may not achieve the expected business results and could cause us to incur unexpected liabilities; the GPI acquisition has caused and may continue to cause us to incur significant transaction and integration costs; our level of indebtedness could limit the cash flow available for operations and could adversely affect our ability to service our debt or obtain additional financing; and we may not be able to retain key GPI personnel.
Integration Issues and Business Expectations
We cannot be certain whether, and to what extent, any strategic, operational, financial or other anticipated benefits resulting from the acquisition of GPI will be achieved. In order to obtain the anticipated benefits of the transaction, we must integrate GPI’s operations with ours. This integration may be complex and failure to do so quickly and effectively may negatively affect our earnings. The market price of our common stock may decline as a result of the acquisition if our integration of GPI is unsuccessful, takes longer than expected or fails to achieve financial benefits to the extent anticipated by financial analysts or investors, or the effect of the acquisition on our financial results is otherwise not consistent with the expectations of financial analysts or investors.
The acquisition of GPI could cause disruptions in and create uncertainty surrounding GPI’s and our businesses, including affecting GPI’s and our relationships with existing and future customers, wholesalers, independently-owned and jobber stores, suppliers and employees, which could have an adverse effect on GPI’s and our businesses, financial results and operations. In particular, GPI and Advance could lose customers or suppliers, and new customer or supplier contracts could be delayed or decreased or otherwise adversely affected in economic value. In addition, we have diverted, and will continue to divert, significant management resources towards the integration efforts, which could adversely affect our business and results of operations.
In connection with our acquisition of GPI, we assumed all of the liabilities of GPI, including any actual or contingent liabilities to which GPI is or may become subject. GPI may be or may become subject to loss contingencies, known or unknown, which could relate to past, present, or future facts, events, circumstances or occurrences. Although the agreement pursuant to which we acquired GPI provides us with certain indemnification provisions, potential costs relating to any such liabilities could exceed the amount of any such indemnification or extend beyond the indemnification period.
Additional Transaction and Integration Costs
In connection with the GPI acquisition, we have incurred significant one-time transaction costs and entered into new financing agreements and issued new debt instruments. We expect to incur additional transaction and integration costs in connection with the acquisition. Although efficiencies related to the integration of the businesses may allow us to offset incremental transaction and integration costs over time, this net benefit may not be achieved in the near term, or at all.
Level of Indebtedness
In connection with our acquisition of GPI our level of indebtedness increased significantly. Our indebtedness could restrict our operations and make it more difficult for us to satisfy our debt obligations. For example, our level of indebtedness could, among other things:
• | affect our liquidity by limiting our ability to obtain additional financing for working capital, limit our ability to obtain financing for capital expenditures and acquisitions or make any available financing more costly; |
• | require us to dedicate all or a substantial portion of our cash flow to service our debt, which would reduce funds available for other business purposes, such as capital expenditures, dividends or acquisitions; |
• | limit our flexibility in planning for or reacting to changes in the markets in which we compete; |
• | place us at a competitive disadvantage relative to our competitors who may have less indebtedness; |
• | render us more vulnerable to general adverse economic and industry conditions; and |
• | make it more difficult for us to satisfy our financial obligations, including those relating to the notes associated with the acquisition of GPI. |
In addition, the indenture governing the notes related to the GPI acquisition and the credit agreement governing the new credit facilities contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt, including such notes.
11
Retention of Key GPI Personnel
The success of the integration with GPI will depend in part on the ability to retain key GPI employees who are expected to continue employment with the combined company. If any of these employees decide not to remain with the combined company, it is possible we may be unable to locate suitable replacements for such key employees or to secure employment of suitable replacements on reasonable terms. In addition, if key employees terminate their employment, management’s attention might be diverted from successfully integrating GPI’s operations to hiring suitable replacements and the combined company's business might suffer.
We may not be able to successfully implement our business strategy, including increasing comparable store sales, enhancing our margins and increasing our return on invested capital, which could adversely affect our business, financial condition, results of operations, cash flows and liquidity.
We have implemented numerous initiatives as part of our business strategy to increase comparable store sales, enhance our margins and increase our return on invested capital in order to increase our earnings and cash flow. If we are unable to implement these initiatives efficiently and effectively, or if these initiatives are unsuccessful, our business, financial condition, results of operations, cash flows and liquidity could be adversely affected.
Successful implementation of our business strategy also depends on factors specific to the automotive aftermarket industry and numerous other factors that may be beyond our control. In addition to the aforementioned risk factors, adverse changes in the following factors could undermine our business strategy and have a material adverse effect on our business, financial condition, results of operations and cash flows:
• | the competitive environment in the automotive aftermarket retail sector that may force us to reduce prices below our desired pricing level or increase promotional spending; |
• | our ability to anticipate changes in consumer preferences and to meet customers’ needs for automotive products (particularly parts availability) in a timely manner; |
• | our ability to maintain and eventually grow DIY market share; and |
• | our ability to continue our Commercial sales growth. |
For that portion of our inventory manufactured and/or sourced outside the United States, geopolitical changes, changes in trade regulations, currency fluctuations, shipping related issues, natural disasters, pandemics and other factors beyond our control may increase the cost of items we purchase or create shortages which could have a material adverse effect on our sales and profitability.
We will not be able to expand our business if our growth strategy, including the availability of suitable locations for new store openings and the continued increase in supply chain capacity and efficiency, is not successful, which could adversely affect our business, financial condition, results of operations and cash flows.
New Store Openings
We have increased our store count significantly in the last ten years from 2,652 stores at the end of our 2004 fiscal year to 5,372 stores as of January 3, 2015. We intend to continue to increase the number of our stores and expand the markets we serve as part of our growth strategy, primarily by opening new stores. We may also grow our business through strategic acquisitions. We do not know whether the implementation of our growth strategy will be successful. As we open more stores it becomes more critical that we have consistent execution across our entire store chain. The actual number of new stores to be opened and their success will depend on a number of factors, including, among other things:
•the availability of desirable store locations;
•the negotiation of acceptable lease or purchase terms for new locations;
•the availability of financial resources, including access to capital at cost-effective interest rates; and
•our ability to manage the expansion and to hire, train and retain qualified Team Members.
We are unsure whether we will be able to open and operate new stores on a timely or sufficiently profitable basis, or that opening new stores in markets we already serve will not harm existing store profitability or comparable store sales. The newly opened and existing stores’ profitability will depend on the competition we face as well as our ability to properly merchandise, market and price the products desired by customers in these markets.
12
Supply Chain
Our store inventories are primarily replenished by shipments from our network of distribution centers, warehouses and HUB stores. As we service our growing store base, we will need to increase the capacity of our supply chain network in order to provide the added parts availability under our Superior Availability strategy while maintaining productivity and profitability expectations. We cannot be assured of the availability of potential locations on lease or purchase terms that would be acceptable to us, of our ability to integrate those new locations into our existing supply chain network or of our ability to increase the productivity and efficiency of our overall supply chain network to desired levels.
We are dependent on our suppliers to supply us with products that comply with safety and quality standards.
If our merchandise offerings do not meet our customers’ expectations regarding safety and quality, we could experience lost sales, increased costs and exposure to legal and reputational risk. All of our suppliers must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and/or private litigation and result in costly product recalls and other liabilities. To the extent our suppliers are subject to additional government regulation of their product design and/or manufacturing processes, the cost of the merchandise we purchase may rise. In addition, negative customer perceptions regarding the safety or quality of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our customers.
We depend on the services of many qualified Team Members, whom we may not be able to attract and retain.
Our success depends to a significant extent on the continued services and experience of our Team Members. As of February 26, 2015, we employed 73,000 Team Members. We may not be able to retain our current qualified Team Members or attract and retain additional qualified Team Members who may be needed in the future. Our ability to maintain an adequate number of qualified Team Members is highly dependent on an attractive and competitive compensation and benefits package. In addition, less than one percent of our team members are represented by unions. If these team members were to engage in a strike, work stoppage, or other slowdown, or if the terms and conditions in labor agreements were renegotiated, we could experience a disruption in our operations and higher ongoing labor costs. If we fail or are unable to maintain competitive compensation, our customer service and execution levels could suffer by reason of a declining quality of our workforce, which could adversely affect our business, financial condition, results of operations and cash flows.
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions. Downturns in the stock market may cause the price of our common stock to decline. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.
Deterioration in global credit markets and changes in our credit ratings and deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, and higher tax rates could have a negative impact on our business, financial condition, results of operations and cash flows.
Deterioration in general macro-economic conditions impacts us through (i) potential adverse effects from deteriorating and uncertain credit markets, (ii) the negative impact on our suppliers and customers and (iii) an increase in operating costs from higher energy prices.
Impact of Credit Market Uncertainty and Changes in Credit Ratings
Significant deterioration in the financial condition of large financial institutions in 2008 and 2009 resulted in a severe loss of liquidity and available credit in global credit markets and in more stringent borrowing terms. We can provide no assurance that the credit market events during 2008 and 2009 will not occur again in the foreseeable future. Conditions and events in the global credit market could have a material adverse effect on our access to short and long-term borrowings to finance our operations and the terms and cost of that debt. It is possible that one or more of the banks that provide us with financing under our revolving credit facility may fail to honor the terms of our existing credit facility or be financially unable to provide the unused credit.
13
Our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets or other factors which may or may not be within our control. The interest rates on our publicly issued debt, term loan and revolving credit facility are linked directly to our credit ratings. Accordingly, any negative impact on our credit rating would likely result in higher interest rates and interest expense on any borrowings under our revolving credit facility, term loan or from future issuances of public debt and less favorable terms on other operating and financing arrangements. In addition, it could reduce the attractiveness of our vendor payment program, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements. An inability to obtain sufficient financing at cost-effective rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Impact on our Suppliers
Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability and willingness to sell quality products to us at favorable prices and terms. Many factors outside our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. Such factors include a general decline in the economy and economic conditions and prolonged recessionary conditions. These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements. Financial or operational difficulties that some of our suppliers may face could also increase the cost of the products we purchase from them or our ability to source product from them. We might not be able to pass our increased costs onto our customers. In addition, the trend towards consolidation among automotive parts suppliers as well as the off-shoring of manufacturing capacity to foreign countries may disrupt or end our relationship with some suppliers, and could lead to less competition and result in higher prices. We could also be negatively impacted by suppliers who might experience bankruptcies, work stoppages, labor strikes or other interruptions to or difficulties in the manufacture or supply of the products we purchase from them.
Impact on our Customers
Deterioration in macro-economic conditions may have a negative impact on our customers’ net worth, financial resources and disposable income. While macro-economic conditions have improved since 2008 and 2009, unemployment rates have remained at relatively high levels, consumer confidence continues to fluctuate, payroll taxes increased for most U.S. workers as a result of the changes in tax legislation effective for 2013 and many consumers are now facing increased healthcare costs as a result of the recently enacted Affordable Care Act. This impact could reduce our customers' willingness or ability to pay for accessories, maintenance or repair of their vehicles, which results in lower sales in our stores. Higher fuel costs may also reduce the overall number of miles driven by our customers resulting in fewer parts failures and elective maintenance needed to be completed.
Impact on Operating Costs
Rising energy prices could directly impact our operating and product costs, including our merchandise distribution, commercial delivery, utility and product acquisition costs.
Because we are involved in litigation from time to time, and are subject to numerous laws and governmental regulations, we could incur substantial judgments, fines, legal fees and other costs.
We are sometimes the subject of complaints or litigation from customers, Team Members or others for various actions. From time to time, we are involved in litigation involving claims related to, among other things, breach of contract, tortious conduct, employment law matters, payment of wages, asbestos exposure, real estate regulatory compliance and product defects. The damages sought against us in some of these litigation proceedings are substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a claim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental protection, product quality standards, building and zoning requirements, and employment law matters. The implementation of and compliance with existing and future laws and regulations could increase the cost of doing business and adversely affect our results of operations. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs. In addition, our capital and operating expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.
14
We work diligently to maintain the privacy and security of our customer and business information and the functioning of our computer systems, website and other on-line offerings. In the event of a security breach or other cyber security incident, we could experience certain operational problems or interruptions, incur substantial additional costs, or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace and added costs on an ongoing basis.
The nature of our business requires us to receive, retain and transmit certain personally identifiable information that our customers provide to purchase products or services, register on our websites, or otherwise communicate and interact with us. While we have taken and continue to undertake significant steps to protect our customer and confidential information and the functioning of our computer systems, website and other online offerings, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers or business being obtained by unauthorized persons or other operational problems or interruptions. We develop and update processes and maintain systems in an effort to try to prevent this from occurring, but the development and maintenance of these processes and systems are costly and requires ongoing monitoring and updating as technologies change, privacy and information security regulations change, and efforts to overcome security measures become more sophisticated.
Consequently, despite our efforts, our security measures have been breached in the past and may be breached in the future due to cyber attack, team member error, malfeasance, fraudulent inducement or other acts. Unauthorized parties have in the past obtained, and may in the future, obtain access to our data or our customers’ data. While costs associated with past security breaches have not been significant, any breach or unauthorized access in the future could result in significant legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others we interact with will protect confidential information, there is a risk the confidentiality of data held or accessed by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and, possibly, subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise which may adversely impact our sales and profitability.
War or acts of terrorism, hurricanes, tornadoes, earthquakes or other natural disasters, or the threat of any of these calamities or others, may have a negative impact on our ability to obtain merchandise to sell in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or Team Members, or otherwise negatively impact our operations. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to import into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected.
In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty receiving merchandise from our suppliers and shipping it to our stores.
Terrorist attacks, war in the Middle East, or insurrection involving any oil producing country could result in an abrupt increase in the price of crude oil, gasoline and diesel fuel. Such price increases would increase the cost of doing business for us and our suppliers, and also would negatively impact our customers’ disposable income and have an adverse impact on our business, sales, profit margins and results of operations.
We rely extensively on our computer systems and the systems of our business partners to manage inventory, process transactions and report results. Any such systems are subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events. If our computer systems or those of our business partners fail we may experience loss of critical data and interruptions or delays in our ability to process transactions and manage inventory. Any such loss, if widespread or extended, could adversely affect the operation of our business and our results of operations.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The concern over climate change has led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions (GHG). For example, proposals that would impose mandatory requirements on GHG continue to be considered by policy makers in the United States and elsewhere. Laws enacted to reduce GHG that directly or indirectly affect our suppliers (through an increase in their cost of production) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. New federal or state restrictions on emissions that may be imposed on vehicles could also adversely affect
15
annual miles driven or the demand for the products we sell and lead to changes in automotive technology. Changes in automotive technology and compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers all of which could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers and principal corporate offices at the end of 2014:
Square Footage (in thousands) | ||||||||
Location | Leased | Owned | ||||||
Distribution Centers | 50 locations in 32 states and 4 Canadian provinces | 5,999 | 4,098 | |||||
Store Support Centers: | ||||||||
Roanoke, Virginia | Roanoke, Virginia | 270 | — | |||||
Raleigh, North Carolina | Raleigh, North Carolina | 195 | — | |||||
As of January 3, 2015, we owned 819 of our stores and leased 4,553 stores and branches. We also operate several smaller warehouse locations and subsidiary offices to support our operations.
Item 3. Legal Proceedings.
We currently and from time to time are involved in litigation and regulatory proceedings incidental to the conduct of our business, including litigation arising from claims of employment discrimination or other types of employment matters as a result of claims by current and former Team Members. Although we diligently defend against these claims, we may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interests of the Company and our shareholders. The damages claimed against us in some of these proceedings are substantial. Although the amount of liability that may result from these matters cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our consolidated financial condition, future results of operations or cash flow.
Our Western Auto subsidiary, together with other defendants including, but not limited to, automobile manufacturers, automotive parts manufacturers and their material suppliers and other retailers, has been named as a defendant in lawsuits alleging injury as a result of exposure to asbestos-containing products. We and some of our other subsidiaries also have been named as a defendant in many of these lawsuits. The automotive products at issue in these lawsuits are primarily brake parts. The plaintiffs have alleged that these products contained asbestos and were manufactured, distributed and/or sold by the various defendants. Many of the pending cases against us and our subsidiaries are in early stages of litigation. The damages claimed against the defendants in some of these proceedings are substantial. Additionally, many of the suppliers and manufacturers of asbestos and asbestos-containing products have dissolved or declared bankruptcy, which will limit plaintiffs’ ability to recover monetary damages from those entities. Although we diligently defend against these claims, we may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interests of the Company and our shareholders. We also believe that many of these claims are at least partially covered by insurance. Based on discovery to date, we do not believe the cases currently pending will have a material adverse effect on us. However, if we were to incur an adverse verdict in one or more of these claims and were ordered to pay substantial damages that were not covered by insurance, these claims could have a material adverse effect on our operating results, financial position and cash flows. Historically, our asbestos claims have been inconsistent in fact patterns alleged and number and have been immaterial. Furthermore, the outcome of such legal matters is uncertain and our liability, if any, could vary widely. As a result, we are unable to estimate a possible range of loss with respect to unasserted asbestos claims that may be filed against the Company or its subsidiaries in the future. If the number of claims filed against us or any of our subsidiaries alleging injury as a result of exposure to asbestos-containing products increases substantially, the costs associated with concluding these claims,
16
including damages resulting from any adverse verdicts, could have a material adverse effect on our operating results, financial position and cash flows in future periods.
Item 4. Mine Safety Disclosures.
Not applicable.
17
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “AAP”. The table below sets forth the high and low sale prices per share for our common stock, as reported by the NYSE, for the fiscal periods indicated.
High | Low | |||||||
Fiscal Year Ended January 3, 2015 | ||||||||
Fourth Quarter | $ | 163.36 | $ | 130.14 | ||||
Third Quarter | $ | 139.58 | $ | 119.71 | ||||
Second Quarter | $ | 136.12 | $ | 118.51 | ||||
First Quarter | $ | 129.99 | $ | 108.76 | ||||
Fiscal Year Ended December 28, 2013 | ||||||||
Fourth Quarter | $ | 111.94 | $ | 80.28 | ||||
Third Quarter | $ | 84.93 | $ | 78.91 | ||||
Second Quarter | $ | 88.74 | $ | 78.75 | ||||
First Quarter | $ | 83.52 | $ | 71.30 | ||||
The closing price of our common stock on February 26, 2015 was $155.38. At February 26, 2015, there were 1,061 holders of record of our common stock (which does not include the number of individual beneficial owners whose shares were held on their behalf by brokerage firms in street name).
Our Board of Directors has declared a $0.06 per share quarterly cash dividend since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.
The following table sets forth information with respect to repurchases of our common stock for the fourth quarter ended January 3, 2015 (amounts in thousands, except per share amounts):
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Dollar Value that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||
October 5, 2014 to November 1, 2014 | — | $ | — | — | $ | 415,092 | ||||||||
November 2, 2014 to November 29, 2014 | — | — | — | 415,092 | ||||||||||
November 30, 2014 to January 3, 2015 | 28 | 154.14 | — | 415,092 | ||||||||||
Total | 28 | $ | 154.14 | — | $ | 415,092 | ||||||||
(1) | We repurchased 27,996 shares of our common stock at an aggregate cost of $4.3 million, or an average purchase price of $154.14 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the fourth quarter ended January 3, 2015. We did not repurchase any shares under our $500.0 million stock repurchase program during our fourth quarter ended January 3, 2015. |
(2) | Our stock repurchase program authorizing the repurchase of up to $500.0 million in common stock was authorized by our Board of Directors and publicly announced on May 14, 2012. |
18
Stock Price Performance
The following graph shows a comparison of the cumulative total return on our common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s Retail Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on January 2, 2010, and that any dividends have been reinvested. The comparison in the graph below is based solely on historical data and is not intended to forecast the possible future performance of our common stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE AUTO PARTS, INC., S&P 500 INDEX
AND S&P RETAIL INDEX
Company/Index | January 2, 2010 | January 1, 2011 | December 31, 2011 | December 29, 2012 | December 28, 2013 | January 3, 2015 | ||||||||||||||||||
Advance Auto Parts | $ | 100.00 | $ | 164.14 | $ | 173.41 | $ | 178.69 | $ | 274.66 | $ | 396.20 | ||||||||||||
S&P 500 Index | 100.00 | 112.78 | 112.78 | 125.77 | 165.13 | 184.58 | ||||||||||||||||||
S&P Retail Index | 100.00 | 123.66 | 127.26 | 155.56 | 227.23 | 249.51 | ||||||||||||||||||
19
Item 6. Selected Consolidated Financial Data.
The following table sets forth our selected historical consolidated statement of operations, balance sheet, cash flows and other operating data. Included in this table are key metrics and operating results used to measure our financial progress. The selected historical consolidated financial and other data (excluding the Selected Store Data and Performance Measures) as of January 3, 2015 and December 28, 2013 and for the three years ended January 3, 2015 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this report. The historical consolidated financial and other data as of December 29, 2012, December 31, 2011 and January 1, 2011 and for the years ended December 31, 2011 and January 1, 2011 have been derived from our audited consolidated financial statements and the related notes that have not been included in this report. You should read this data along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and our consolidated financial statements and the related notes included elsewhere in this report.
Fiscal Year (1) | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(in thousands, except per share data, store data and ratios) | ||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 9,843,861 | $ | 6,493,814 | $ | 6,205,003 | $ | 6,170,462 | $ | 5,925,203 | ||||||||||
Cost of sales | 5,390,248 | 3,241,668 | 3,106,967 | 3,101,172 | 2,963,888 | |||||||||||||||
Gross profit | 4,453,613 | 3,252,146 | 3,098,036 | 3,069,290 | 2,961,315 | |||||||||||||||
Selling, general and administrative expenses (2) | 3,601,903 | 2,591,828 | 2,440,721 | 2,404,648 | 2,376,382 | |||||||||||||||
Operating income | 851,710 | 660,318 | 657,315 | 664,642 | 584,933 | |||||||||||||||
Interest expense (3) | (73,408 | ) | (36,618 | ) | (33,841 | ) | (30,949 | ) | (26,861 | ) | ||||||||||
Other income (expense), net | 3,092 | 2,698 | 600 | (457 | ) | (1,017 | ) | |||||||||||||
Income before provision for income taxes | 781,394 | 626,398 | 624,074 | 633,236 | 557,055 | |||||||||||||||
Income tax expense | 287,569 | 234,640 | 236,404 | 238,554 | 211,002 | |||||||||||||||
Net income | $ | 493,825 | $ | 391,758 | $ | 387,670 | $ | 394,682 | $ | 346,053 | ||||||||||
Per Share Data: | ||||||||||||||||||||
Net income per basic share | $ | 6.75 | $ | 5.36 | $ | 5.29 | $ | 5.21 | $ | 4.00 | ||||||||||
Net income per diluted share | $ | 6.71 | $ | 5.32 | $ | 5.22 | $ | 5.11 | $ | 3.95 | ||||||||||
Cash dividends declared per basic share | $ | 0.24 | $ | 0.24 | $ | 0.24 | $ | 0.24 | $ | 0.24 | ||||||||||
Weighted average basic shares outstanding | 72,932 | 72,930 | 73,091 | 75,620 | 86,082 | |||||||||||||||
Weighted average diluted shares outstanding | 73,414 | 73,414 | 74,062 | 77,071 | 87,155 | |||||||||||||||
Cash flows provided by (used in): | ||||||||||||||||||||
Operating activities | $ | 708,991 | $ | 545,250 | $ | 685,281 | $ | 828,849 | $ | 666,159 | ||||||||||
Investing activities | $ | (2,288,237 | ) | $ | (362,107 | ) | $ | (272,978 | ) | $ | (289,974 | ) | $ | (199,350 | ) | |||||
Financing activities | $ | 575,911 | $ | 331,217 | $ | 127,907 | $ | (540,183 | ) | $ | (507,618 | ) | ||||||||
Balance Sheet and Other Financial Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 104,671 | $ | 1,112,471 | $ | 598,111 | $ | 57,901 | $ | 59,209 | ||||||||||
Inventory | $ | 3,936,955 | $ | 2,556,557 | $ | 2,308,609 | $ | 2,043,158 | $ | 1,863,870 | ||||||||||
Inventory turnover (4) | 1.47 | 1.33 | 1.43 | 1.59 | 1.70 | |||||||||||||||
Inventory per store (5) | $ | 733 | $ | 631 | $ | 609 | $ | 558 | $ | 523 | ||||||||||
Accounts payable to Inventory ratio (6) | 78.6 | % | 85.3 | % | 87.9 | % | 80.9 | % | 71.0 | % | ||||||||||
Net working capital (7) | $ | 997,974 | $ | 1,224,599 | $ | 624,562 | $ | 105,945 | $ | 276,222 | ||||||||||
Capital expenditures | $ | 228,446 | $ | 195,757 | $ | 271,182 | $ | 268,129 | $ | 199,585 | ||||||||||
Total assets | $ | 7,962,358 | $ | 5,564,774 | $ | 4,613,814 | $ | 3,655,754 | $ | 3,354,217 | ||||||||||
Total debt | $ | 1,636,893 | $ | 1,053,584 | $ | 605,088 | $ | 415,984 | $ | 301,824 | ||||||||||
Total net debt (8) | $ | 1,532,222 | $ | (58,887 | ) | $ | 6,977 | $ | 358,083 | $ | 252,171 | |||||||||
Total stockholders' equity | $ | 2,002,912 | $ | 1,516,205 | $ | 1,210,694 | $ | 847,914 | $ | 1,039,374 | ||||||||||
20
Fiscal Year (1) | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(in thousands, except per share data, store data and ratios) | ||||||||||||||||||||
Selected Store Data and Performance Measures: | ||||||||||||||||||||
Comparable store sales growth (9) | 2.0 | % | (1.5 | %) | (0.8 | %) | 2.2 | % | 8.0 | % | ||||||||||
Number of stores at beginning of year | 4,049 | 3,794 | 3,662 | 3,563 | 3,420 | |||||||||||||||
New stores (10) | 1,487 | 296 | 137 | 104 | 148 | |||||||||||||||
Closed stores (11) | (164 | ) | (41 | ) | (5 | ) | (5 | ) | (5 | ) | ||||||||||
Number of stores, end of period | 5,372 | 4,049 | 3,794 | 3,662 | 3,563 | |||||||||||||||
Stores with commercial delivery program, end of period | 4,981 | 3,702 | 3,484 | 3,326 | 3,212 | |||||||||||||||
Total Commercial sales, as a percentage of total sales | 57.0 | % | 40.4 | % | 38.1 | % | 37.0 | % | 34.2 | % | ||||||||||
Total store square footage, end of period (in 000s) | 43,338 | 29,701 | 27,806 | 26,663 | 25,950 | |||||||||||||||
(1) | Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest to December 31st. All fiscal years presented are 52 weeks, with the exception of 2014, which consisted of 53 weeks. The impact of week 53 included in sales, gross profit and selling, general and administrative expenses was $150,386, $67,780 and $46,720, respectively. |
(2) | Selling, general and administrative expenses include the impact of GPI integration costs of $73,192 and amortization of GPI intangibles of $42,696 for 2014 and acquisition costs associated with our acquisition of GPI on January 2, 2014 of $24,983 for 2013. It also includes integration costs associated with our integration of BWP of $9,042 and $8,004 for 2014 and 2013, respectively. |
(3) | Interest expense includes the impact of acquisition costs associated with our acquisition of GPI on January 2, 2014 of $1,987 for 2013. |
(4) | Inventory turnover is calculated as cost of sales divided by the average of beginning and ending inventories. For 2014 the ratio was calculated using an average of ending inventories over the last five quarters to adjust for the impact of the acquisition of GPI and its inventories on January 2, 1014. |
(5) | Inventory per store is calculated as ending inventory divided by ending store and branch count. Our branches have a larger footprint than our stores. |
(6) | Accounts payable to inventory ratio is calculated as ending accounts payable divided by ending inventory. Financed vendor accounts payable separately presented on the balance sheet in 2010 was included with accounts payable to calculate our accounts payable to inventory ratio. |
(7) | Net working capital is calculated by subtracting current liabilities from current assets. |
(8) | Net debt includes total debt less cash and cash equivalents. |
(9) | Comparable store sales include net sales from our stores and e-commerce website. The change in store sales is calculated based on the change in net sales starting once a store has been open for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year). Comparable store sales growth for 2014 excludes sales from the 53rd week. |
(10) | Includes 1,336 stores and branches resulting from our acquisition of GPI during 2014 and 124 stores resulting from our acquisition of BWP during 2013. |
(11) | The number of store closures in 2014 includes planned consolidations of 145 stores and in 2013 includes the planned consolidations of 20 stores. |
(1) |
21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data,” our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the sections entitled “Forward-Looking Statements” and “Risk Factors” elsewhere in this report.
Our fiscal year ends on the Saturday nearest December 31st of each year, which results in an extra week every several years (fiscal 2014 contained 53 weeks). Our first quarter consists of 16 weeks, and the other three quarters consist of 12 weeks, with the exception of the fourth quarter of fiscal 2014 which contained 13 weeks due to our 53-week fiscal year in 2014. Our last 53-week fiscal year was in 2008.
Unless otherwise noted, our financial results have been presented on a GAAP basis. In limited instances, we have presented our financial results on a GAAP and non-GAAP (comparable) basis which is described further in the section entitled "Reconciliation of Non-GAAP Financial Measures."
Introduction
We are the largest automotive aftermarket parts provider in North America, serving both "do-it-for-me", or Commercial, and "do-it-yourself", or DIY, customers. As of January 3, 2015 we operated a total of 5,261 stores and 111 distribution branches. We operated primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. Our stores operate primarily under trade names "Advance Auto Parts", "Autopart International" and "Carquest" and our distribution branches operate under the "Worldpac" trade name. In addition, we served approximately 1,325 independently-owned Carquest stores as of January 3, 2015. We acquired the Carquest and Worldpac operations as part of our acquisition of GPI on January 2, 2014.
Our stores and branches offer a broad selection of brand name, OEM and private label automotive replacement parts, accessories, batteries, and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. Through our integrated operating approach, we serve our Commercial and DIY customers from our store locations and online at www.AdvanceAutoParts.com, www.Carquest.com and www.Worldpac.com. Our DIY customers can elect to pick up merchandise ordered online at a conveniently located store or have their purchases shipped directly to them. Our Commercial customers consist primarily of delivery customers for whom we deliver products from our store locations to our Commercial customers’ places of business, including independent garages, service stations and auto dealers. Our Commercial customers can also conveniently place their orders online.
Management Overview
We generated earnings per diluted share, or diluted EPS, of $6.71 during 2014 compared to $5.32 for 2013. The increase in our diluted EPS was driven primarily by the acquired GPI operations, a 2.0% increase in comparable store sales and an additional week of operations in 2014. When adjusted for the following comparable adjustments, our comparable earnings per diluted share ("Comparable Cash EPS") was $7.59:
•$0.61 of GPI integration expenses;
•$0.36 of amortization related to the acquired intangible assets from GPI;
•$0.08 of BWP integration expenses; and
•$0.17 from the 53rd week partially offsetting the above expenses.
When including the results of the 53rd week, our Comparable Cash EPS was $7.76. Our diluted EPS for 2013 included $0.27 of transaction expenses related to our acquisition of GPI and $0.08 of expenses associated with our integration of BWP.
During 2014 we generated a comparable store sales increase of 2.0%. This increase was driven by consistent strength in Commercial sales throughout the year with increases in both customer traffic and average ticket for the year. We are beginning to realize the benefits from the investments we have made to better serve our Commercial customers, including but not limited to, additional availability of inventory from one of our 421 HUB stores, daily replenishment in certain markets and roll-out of cross-sourcing of inventory throughout a majority of our enterprise; integration of eService offerings in our Advance Auto Parts and Carquest stores; and increased focus on national and regional accounts. Our DIY sales were not as consistent as
22
Commercial in 2014. Sales of seasonal and maintenance parts categories fluctuated more than anticipated in many of our markets due to the cooler summer and warmer start to the winter selling season.
Acquisitions
On January 2, 2014, we acquired GPI in an all-cash transaction for $2.08 billion. GPI, formerly a privately-held company, is a leading distributor and supplier of original equipment and aftermarket replacement products for Commercial markets operating under the Carquest and Worldpac brands. As of the acquisition date, GPI operated 1,233 Carquest stores and 103 Worldpac branches located in 45 states and Canada and served approximately 1,400 independently-owned Carquest stores. We believe the acquisition of GPI will allow us to expand our geographic presence, Commercial capabilities and overall scale to better serve customers. For additional information on the GPI acquisition, refer to Note 4, "Acquisitions," in the Notes to our Consolidated Financial Statements.
On December 31, 2012, we acquired BWP, a privately-held company that supplied, marketed and distributed automotive aftermarket parts and products principally to Commercial customers. Prior to the acquisition, BWP operated or supplied 216 locations in the Northeastern United States. Concurrent with the closing of the acquisition, we transferred one distribution center and BWP’s rights to distribute to 92 independently owned locations to an affiliate of GPI. The integration of BWP stores consisted of converting or consolidating those locations into Advance Auto Parts locations. As of the end of 2014, most of the BWP stores have been integrated into the Advance Auto Parts operations.
2014 Highlights
A high-level summary of our financial results and other highlights from our 2014 include:
Financial
• | Total sales during 2014 increased 51.6% to $9,843.9 million as compared to 2013. This increase was primarily driven by the acquisition of GPI, a comparable store sales increase of 2.0%, $150.4 million in sales from the 53rd week and sales from new stores opened during the past year. |
• | Our operating income for 2014 was $851.7 million, an increase of $191.4 million from the comparable period in 2013. As a percentage of total sales, operating income was 8.7%, a decrease of 152 basis points, due to a lower gross profit rate partially offset by a favorable SG&A rate. |
• | Our inventory balance as of January 3, 2015 increased $1,380.4 million, or 54.0%, over the prior year driven primarily by the acquisition of GPI as well as inventory upgrades and increases from new stores and HUB stores. |
• | We generated operating cash flow of $709.0 million during 2014, an increase of 30.0% compared to 2013, primarily due to an increase in net income and non-cash expenses. |
Refer to the “Consolidated Results of Operations” and “Liquidity and Capital Resources” sections for further details of our income statement and cash flow results, respectively.
Business Update
We have two essential priorities - (i) deliver results by executing under our key strategies of Superior Availability and Service Leadership and (ii) successfully achieve the goals of the multi-year GPI integration plan. Our key strategies remain consistent with 2014. Superior Availability is aimed at product availability and maximizing the speed, reliability and efficiency of our supply chain. Service Leadership leverages our product availability in addition to more consistent execution of customer-facing initiatives to strengthen our integrated operating approach of serving our customers in our stores and on-line. Through these two key strategies and the integration of GPI, we believe we can continue to build on the initiatives discussed below to produce favorable financial results over the long term. Sales to Commercial customers remain the largest opportunity for us to increase our overall market share in the automotive aftermarket industry. Our Commercial sales, as a percentage of total sales, increased to 57.0% in 2014 compared to 40.4% in 2013. This increase is primarily due to the contribution of the acquired GPI and BWP operations which are significantly more heavily weighted in Commercial than our Advance Auto Parts stores. In addition, our comparable store sales growth has been driven primarily by sales to Commercial customers.
23
Our strategic priorities include:
• | Growing our Commercial business through improved delivery speed and reliability, increased customer retention, increased volume with national and regional accounts, and the integration of GPI; |
• | Improving localized parts availability through the continued increase in the number of our larger HUB stores, an increased focus on in-store availability enabled by rolling out a second source network between store brands and leveraging the advancement of our supply chain infrastructure, including the opening of our Hartford, CT distribution center and gradually expanding to other distribution centers; |
• | Maintaining a steady new store growth rate including new markets; and |
• | Continuing our focus on store execution through more effective scheduling, increased productivity and simplification, improved product on-hand accuracy, expanded sales training and continued measurement of customer satisfaction. |
We are pleased with the first year results of our multi-year GPI integration plan. Our plan is to fully integrate the Carquest owned stores and overall operations into Advance Auto Parts over the next few years and to integrate the availability of all of our product offerings throughout the entire chain. We expect to incur $190.0 million of GPI integration expenses through the end of 2018 with the majority of the expenses being incurred by the end of 2016. We expect $160.0 million of these expenses to be offset during this period by savings from acquisition synergies.
During 2014 our focus was on Team Member retention, achievement of initial cost savings and synergies, improvement of inventory availability, including the roll-out of cross-sourcing with Worldpac and Carquest, and leveraging our differentiated customer programs. During 2015 our priorities in the integration plan will include:
• | Continuing to integrate the two organizations into a single structure; |
• | Successfully executing the product and brand changeovers; |
• | Continuing with store consolidations and ramping up store conversions by market; and |
• | Integrating our critical customer capabilities within supply chain and information technology. |
Automotive Aftermarket Industry
Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors similar to those affecting the overall retail industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and competition. We believe the macroeconomic environment should position the industry favorably in 2015 as a steadily improving job market along with lower fuel costs should help to provide a positive impact. In addition, industry fundamentals continue to be strong with miles driven showing improvement. As a result, we expect to see a decrease in deferred maintenance over time.
We believe that two key drivers of demand within the automotive aftermarket are (i) the number of miles driven in the U.S. and (ii) the number and average age of vehicles on the road.
Miles Driven
We believe that the number of total miles driven in the U.S. influences the demand for the repair and maintenance of vehicles. As the number of miles driven increases, consumers’ vehicles are more likely to need repair and maintenance, resulting in an increase in the need for automotive parts and maintenance items. According to the latest statistics available, the total number of vehicle miles traveled on U.S. roads increased slightly by 1.4% in 2014, which was a significant improvement from the 0.1% increase in 2013, due to improved economic conditions and the drop in gasoline prices. Industry data suggests that the increase in miles driven will likely remain under pre-recession levels due to pressure from a lower labor force participation rate and less vehicle usage by the most recent generation of drivers. While we believe there are ongoing macroeconomic pressures on our consumers, we believe the return of increases in miles driven will continue to drive demand in the automotive aftermarket industry.
Number of Registered Vehicles and Increase in Average Vehicle Age
We believe that the total number of vehicles (excluding medium and heavy duty trucks) on the road and the average age of vehicles on the road also heavily influence the demand for products sold within the automotive aftermarket industry. As vehicles age and go out-of-warranty, they generate a stronger demand for automotive aftermarket products due to routine maintenance cycles and more frequent mechanical failures. Since the recession low of 248 million vehicles in 2011, the number of vehicles on the road has increased over the last three years. According to industry analysts, the number of vehicles on the road is expected to continue to climb and will reach 261 million vehicles by 2017. The overall mix of vehicles on the road is beginning to shift as a result of the increased rate of new car sales. The percentage of vehicles that are 6 to 11 years old is
24
expected to decline and the percentage of vehicles that are new to five years old is expected to increase. This will slow the growth of average vehicle age, which increased from 10.3 years in 2009 to 11.4 years in 2013. However, we believe that the stabilization of average age of vehicles will continue to benefit our industry in the near term and the overall increase in the total number of vehicles on the road is positive for the longer term as these vehicles age outside of their manufacturer warranty period and require more expensive maintenance and repairs due to the increase in complexity of automobile parts.
Store Development
We serve our Commercial and DIY customers in a similar fashion through four different store brands. The table below sets forth detail of our store development activity for the year ended January 3, 2015, including the consolidation of stores as part of our integration plans and the number of locations with Commercial delivery programs. During 2015, we anticipate adding approximately 100 to 120 new stores and branches.
AAP | AI | BWP | CARQUEST | WORLDPAC | Total | |||||||||||||
December 28, 2013 | 3,741 | 217 | 91 | — | — | 4,049 | ||||||||||||
New | 126 | 5 | — | 12 | 8 | 151 | ||||||||||||
Closed | (6 | ) | (1 | ) | — | (12 | ) | — | (19 | ) | ||||||||
Acquired (1) | — | — | — | 1,233 | 103 | 1,336 | ||||||||||||
Consolidated (2) | (2 | ) | (11 | ) | (34 | ) | (98 | ) | — | (145 | ) | |||||||
Converted (3) | 29 | — | (19 | ) | (10 | ) | — | — | ||||||||||
January 3, 2015 | 3,888 | 210 | 38 | 1,125 | 111 | 5,372 | ||||||||||||
Stores with commercial delivery programs | 3,497 | 210 | 38 | 1,125 | 111 | 4,981 | ||||||||||||
(1) We acquired 1,233 Carquest stores and 103 Worldpac branches as a result of the acquisition of GPI on January 2, 2014.
(2) Consolidated stores include BWP and Carquest stores whose operations were consolidated into existing AAP locations as a result of the planned integration of BWP and Carquest. In 2014, we began the multi-year process of consolidating and converting our Carquest stores into AAP locations. In addition, we began the consolidation of our 33 AI stores located in Florida into existing AAP locations which is expected to be completed by the end of 2015.
(3) Converted stores include BWP and Carquest stores that were re-branded as an AAP store as a result of the planned integration of BWP and Carquest.
Components of Statement of Operations
Net Sales
Net sales consist primarily of merchandise sales from our store and branch locations to both our Commercial and DIY customers, sales from our e-commerce websites and sales to independently-owned Carquest stores. Sales are recorded net of discounts and rebates, sales taxes and estimated returns and allowances. Our total sales growth is comprised of both comparable store sales and new store sales. We calculate comparable store sales based on the change in store sales starting once a store has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. We include sales from relocated stores in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year). Comparable store sales growth for 2014 excludes sales from the 53rd week. Sales to independently-owned Carquest stores will be excluded from our comparable store sales.
Cost of Sales
Our cost of sales consists of merchandise costs, net of incentives under vendor programs; inventory shrinkage, defective merchandise and warranty costs; and warehouse and distribution expenses, including depreciation and amortization. Gross profit as a percentage of net sales may be affected by (i) variations in our product mix, (ii) price changes in response to competitive factors and fluctuations in merchandise costs, (iii) vendor programs, (iv) inventory shrinkage, (v) defective merchandise and warranty costs and (vi) warehouse and distribution costs. We seek to minimize fluctuations in merchandise costs and instability of supply by entering into long-term purchasing agreements, without minimum purchase volume
25
requirements, when we believe it is advantageous. Our cost of sales and gross profit rates may not be comparable to that of our competitors due to differences in industry practice regarding the classification of certain costs and mix of Commercial and DIY sales. See Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements elsewhere in this report for additional discussion of these costs.
Selling, General and Administrative Expenses
SG&A expenses consist of store payroll, store occupancy (including rent and depreciation), advertising expenses, acquisition and integration related expenses, Commercial delivery expenses, other store expenses and general and administrative expenses, including salaries and related benefits of store support center Team Members, share-based compensation expenses, store support center administrative office expenses, data processing, professional expenses, self-insurance costs, depreciation and amortization, closed store expense and impairment charges, if any, and other related expenses. See Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements for additional discussion of these costs.
Consolidated Results of Operations
The following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated.
Fiscal Year Ended | |||||||||
January 3, 2015 | December 28, 2013 | December 29, 2012 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales, including purchasing and warehousing costs | 54.8 | 49.9 | 50.1 | ||||||
Gross profit | 45.2 | 50.1 | 49.9 | ||||||
Selling, general and administrative expenses | 36.6 | 39.9 | 39.3 | ||||||
Operating income | 8.7 | 10.2 | 10.6 | ||||||
Interest expense | (0.7 | ) | (0.6 | ) | (0.5 | ) | |||
Other, net | 0.0 | 0.0 | 0.0 | ||||||
Provision for income taxes | 2.9 | 3.6 | 3.8 | ||||||
Net income | 5.0 | % | 6.0 | % | 6.2 | % | |||
2014 Compared to 2013
Net Sales
Net sales for 2014 were $9,843.9 million, an increase of $3,350.0 million, or 51.6%, over net sales for 2013. This growth was primarily due to sales of $3,040.5 million from the acquired GPI operations, $150.4 million in sales from the 53rd week, comparable store sales of 2.0% and sales from new stores opened during 2014. Our comparable store sales increase reflected stronger performance from Commercial, driven by increases in both traffic and average transaction amount, partially offset by a decrease in DIY sales driven by lower traffic count. Our overall transaction value increased primarily due to higher priced products sold and a higher mix of Commercial sales.
2014 | 2013 | |||||
Comparable Store Sales % | 2.0 | % | (1.5 | )% | ||
Net Stores Added (excluding GPI stores) | 124 | 151 | ||||
Gross Profit
Gross profit for 2014 was $4,453.6 million, or 45.2% of net sales, as compared to $3,252.1 million, or 50.1% of net sales, in 2013, a decrease of 484 basis points. The decrease in gross profit as a percentage of net sales was primarily due to the higher mix of Commercial sales which has a lower gross margin rate resulting from the acquisition of GPI and increased supply chain costs, partially offset by acquisition synergy savings.
26
SG&A Expenses
SG&A expenses for 2014 were $3,601.9 million, or 36.6% of net sales, as compared to $2,591.8 million, or 39.9% of net sales, for 2013, a decrease of 332 basis points. The primary driver of the net decrease in SG&A expenses, as a percentage of net sales, was the result of the acquired GPI business having a lower SG&A cost structure. Partially offsetting this decrease were$73.2 million, or 74 basis points, of GPI integration expenses, $42.7 million, or 43 basis points, of amortization of acquired GPI intangible assets and $9.0 million, or 9 basis points, of BWP integration expenses.
Operating Income
Operating income for 2014 was $851.7 million, representing 8.7% of net sales, as compared to $660.3 million, or 10.2% of net sales, for 2013, a decrease of 152 basis points. This decrease was due to a lower gross profit rate partially offset by a lower SG&A rate. These decreases on a rate basis were due to the gross profit and SG&A drivers previously discussed.
Interest Expense
Interest expense for 2014 was $73.4 million, or 0.7% of net sales, as compared to $36.6 million, or 0.6% of net sales, in 2013. The increase in interest expense was due to additional borrowings related to the GPI acquisition.
Income Taxes
Income tax expense for 2014 was $287.6 million, as compared to $234.6 million for 2013. Our effective income tax rate was 36.8% and 37.5% for 2014 and 2013, respectively. Our income tax rate in 2014 was lower than the prior year primarily due to certain non-deductible costs related to the GPI acquisition that increased the rate in 2013. Our income tax rates in both 2014 and 2013 reflect favorable income tax settlements and statute of limitation expirations.
Net Income
Net income was $493.8 million, or $6.71 per diluted share, for 2014 as compared to $391.8 million, or $5.32 per diluted share, for 2013. As a percentage of net sales, net income for 2014 was 5.0%, as compared to 6.0% for 2013. The increase in diluted EPS was driven primarily by the increase in net income.
2013 Compared to 2012
Net Sales
Net sales for 2013 were $6,493.8 million, an increase of $288.8 million, or 4.7%, over net sales for 2012. This growth was primarily due to sales from the acquired BWP stores and sales from the new AAP and AI stores added within 2013 partially offset by a 1.5% decrease in comparable store sales. The comparable store sales decrease was driven by a decrease in transaction count partially offset by an increase in transaction value despite more promotional activity in response to lower customer demand. The increase in transaction value was primarily due to (i) the gradual increase in cost and complexity of automotive parts and commodity prices and (ii) the positive impact from a higher mix of Commercial sales.
2013 | 2012 | |||||
Comparable Store Sales % | (1.5 | )% | (0.8 | )% | ||
Net Stores Added (excluding BWP stores) | 151 | 132 | ||||
Gross Profit
Gross profit for 2013 was $3,252.1 million, or 50.1% of net sales, as compared to $3,098.0 million, or 49.9% of net sales, in 2012, an increase of 15 basis points. The increase in gross profit as a percentage of net sales was driven by increased merchandise margins, due to lower acquisition costs and a favorable product mix, and improvement in shrink partially offset by planned inefficiencies in supply chain costs associated with the ramp-up in shipments of inventory from our new distribution center and the impact from a higher mix of Commercial sales which have a lower gross profit rate. The increase in our Commercial mix of sales was primarily due to the sales from the acquired BWP stores.
27
SG&A Expenses
SG&A expenses for 2013 were $2,591.8 million, or 39.9% of net sales, as compared to $2,440.7 million, or 39.3% of net sales, for 2012, an increase of 58 basis points. Included in SG&A expenses in 2013 were $25.0 million, or 38 basis points, of transaction expenses associated with our acquisition of GPI and $8.0 million, or 12 basis points, of expenses associated with our integration of BWP. Other primary drivers of the net increase in SG&A expenses, as a percentage of net sales, include costs associated with increased new store openings and higher incentive compensation, partially offset by lower marketing expense and a decrease in overall administrative and support costs.
Operating Income
Operating income for 2013 was $660.3 million, representing 10.2% of net sales, as compared to $657.3 million, or 10.6% of net sales, for 2012, a decrease of 42 basis points. This decrease was due to a higher SG&A rate partially offset by a higher gross profit rate.
Interest Expense
Interest expense for 2013 was $36.6 million, or 0.6% of net sales, as compared to $33.8 million, or 0.5% of net sales, in 2012.
Income Taxes
Income tax expense for 2013 was $234.6 million, as compared to $236.4 million for 2012. Our effective income tax rate was 37.5% and 37.9% for 2013 and 2012, respectively.
Net Income
Net income was $391.8 million, or $5.32 per diluted share, for 2013 as compared to $387.7 million, or $5.22 per diluted share, for 2012. As a percentage of net sales, net income for 2013 was 6.0%, as compared to 6.2% for 2012. The increase in diluted EPS was driven primarily by the increase in net income.
28
Reconciliation of Non-GAAP Financial Measures
"Management’s Discussion and Analysis of Financial Condition and Results of Operations" include certain financial measures not derived in accordance with generally accepted accounting principles (“GAAP”). Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented the non-GAAP financial measures, as we believe the reporting of financial results on a non-GAAP basis to remain comparable is important in assessing the overall performance of the business and is therefore useful to investors and prospective investors. We believe that the presentation of financial results that exclude the 53rd week of operations, non-cash charges related to the acquired GPI intangibles and expenses associated with the integration of GPI and BWP provide meaningful supplemental information to both management and investors, which is indicative of our base operations. We have included a reconciliation of this information to the most comparable GAAP measures in the following table.
(in thousands, except per share data) | ||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||
Comparable Adjustments (a) | ||||||||||||||||||||||||||||
As Reported | 53rd Week | Integration Costs | Comparable | As Reported | Comparable Adjustments (a) | Comparable | ||||||||||||||||||||||
(53 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | |||||||||||||||||||||||||
Net sales | $ | 9,843,861 | $ | (150,386 | ) | $ | — | $ | 9,693,475 | $ | 6,493,814 | $ | — | $ | 6,493,814 | |||||||||||||
Cost of sales | 5,390,248 | (82,606 | ) | — | 5,307,642 | 3,241,668 | — | 3,241,668 | ||||||||||||||||||||
Gross profit | 4,453,613 | (67,780 | ) | — | 4,385,833 | 3,252,146 | — | 3,252,146 | ||||||||||||||||||||
Selling, general and administrative expenses | 3,601,903 | (46,720 | ) | (124,930 | ) | 3,430,253 | 2,591,828 | (32,987 | ) | 2,558,841 | ||||||||||||||||||
Operating income | 851,710 | (21,060 | ) | 124,930 | 955,580 | 660,318 | 32,987 | 693,305 | ||||||||||||||||||||
Other, net: | ||||||||||||||||||||||||||||
Interest expense | (73,408 | ) | 1,291 | — | (72,117 | ) | (36,618 | ) | 1,987 | (34,631 | ) | |||||||||||||||||
Other income, net | 3,092 | (212 | ) | — | 2,880 | 2,698 | — | 2,698 | ||||||||||||||||||||
Total other, net | (70,316 | ) | 1,079 | — | (69,237 | ) | (33,920 | ) | 1,987 | (31,933 | ) | |||||||||||||||||
Income before provision for income taxes | 781,394 | (19,981 | ) | 124,930 | 886,343 | 626,398 | 34,974 | 661,372 | ||||||||||||||||||||
Provision for income taxes | 287,569 | (7,610 | ) | 47,473 | 327,432 | 234,640 | 9,268 | 243,908 | ||||||||||||||||||||
Net income | $ | 493,825 | $ | (12,371 | ) | $ | 77,457 | $ | 558,911 | $ | 391,758 | $ | 25,706 | $ | 417,464 | |||||||||||||
Basic earnings per common share (b) | $ | 6.75 | $ | (0.17 | ) | $ | 1.06 | $ | 7.64 | $ | 5.36 | $ | 0.35 | $ | 5.71 | |||||||||||||
Diluted earnings per common share (b) | $ | 6.71 | $ | (0.17 | ) | $ | 1.05 | $ | 7.59 | $ | 5.32 | $ | 0.35 | $ | 5.67 | |||||||||||||
Weighed average common shares outstanding (b) | 72,932 | 72,932 | 72,932 | 72,932 | 72,930 | 72,930 | 72,930 | |||||||||||||||||||||
Weighted average diluted common shares outstanding (b) | 73,414 | 73,414 | 73,414 | 73,414 | 73,414 | 73,414 | 73,414 | |||||||||||||||||||||
(a) | The comparable adjustments to 2014 include adjustments to remove the impact of the 53rd week of operations and adjustments to Selling, general and administrative expenses for BWP integration costs of $9,042, GPI integration costs of $73,192 and GPI amortization of $42,696 related to the acquired intangible assets. The comparable adjustments for 2013 include transaction expenses related to our GPI acquisition of $26,970, of which $1,987 million was interest related, and BWP integration costs of $8,004. |
(b) | Average common shares outstanding is calculated based on the weighted average number of shares outstanding during the year-to-date period. At January 3, 2015 and December 28, 2013, we had 73,074 and 72,840 shares outstanding, respectively. |
29
Quarterly Consolidated Financial Results (in thousands, except per share data)
16-Weeks Ended 4/20/2013 | 12-Weeks Ended 7/13/2013 | 12-Weeks Ended 10/5/2013 | 12-Weeks Ended 12/28/2013 | 16-Weeks Ended 4/19/2014 | 12-Weeks Ended 7/12/2014 | 12-Weeks Ended 10/4/2014 | 13-Weeks Ended 1/3/2015 | |||||||||||||||||||||||||
Net Sales | $ | 2,015,304 | $ | 1,549,553 | $ | 1,520,144 | $ | 1,408,813 | $ | 2,969,499 | $ | 2,347,697 | $ | 2,289,456 | $ | 2,237,209 | ||||||||||||||||
Gross profit | 1,008,206 | 779,223 | 762,940 | 701,777 | 1,353,122 | 1,062,108 | 1,034,442 | 1,003,941 | ||||||||||||||||||||||||
Net income | 121,790 | 116,871 | 103,830 | 49,267 | 147,726 | 139,488 | 122,177 | 84,434 | ||||||||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 1.66 | $ | 1.60 | $ | 1.42 | $ | 0.68 | $ | 2.02 | $ | 1.91 | $ | 1.67 | $ | 1.15 | ||||||||||||||||
Diluted | $ | 1.65 | $ | 1.59 | $ | 1.42 | $ | 0.67 | $ | 2.01 | $ | 1.89 | $ | 1.66 | $ | 1.15 | ||||||||||||||||
Liquidity and Capital Resources
Overview
Our primary cash requirements to maintain our current operations include payroll and benefits, the purchase of inventory, contractual obligations, capital expenditures and the payment of income taxes. In addition, we have used available funds for acquisitions, to repay borrowings under our credit agreement, to periodically repurchase shares of our common stock under our stock repurchase programs and for the payment of quarterly cash dividends. We have funded these requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowing under our credit facility will be sufficient to fund our primary obligations for the next fiscal year. Cash holdings in our foreign affiliates are not significant relative to our overall operations and therefore would not restrict our liquidity needs for our domestic operations.
As of January 3, 2015, our cash and cash equivalents balance was $104.7 million, a decrease of $1,007.8 million compared to December 28, 2013. This decrease in cash was primarily a result of cash used in the acquisition of GPI, partially offset by cash generated from operations and net borrowings under credit facilities. Additional discussion of our cash flow results, including the comparison of 2014 activity to 2013, is set forth in the Analysis of Cash Flows section.
As of January 3, 2015, our outstanding indebtedness was $1,636.9 million, or $583.3 million higher when compared to December 28, 2013, as a result of additional borrowings of $490.0 million under our term loan and $93.4 million under our credit facility. Additionally, we had $124.3 million in letters of credit outstanding, which reduced the available borrowings on our revolver to $782.3 million as of January 3, 2015. The letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.
GPI Acquisition and Exit Activities
We borrowed $1,006.0 million under a term loan and revolving credit facility, which we used along with cash on-hand to fund the $2.08 billion acquisition of GPI on January 2, 2014 as discussed elsewhere in this Annual Report on Form 10-K. In addition to the normal operations of GPI, we expect to incur $190.0 million of GPI integration expenses through the end of 2018 with the majority of the expenses being incurred by the end of 2016. We expect $160.0 million of these expenses to be offset during this period by savings from acquisition synergies. During 2014, we incurred $73.2 million of GPI integration expenses partially offset by $61.0 million of synergies.
Capital Expenditures
Our primary capital requirements have been the funding of our new store development (leased and owned locations), maintenance of existing stores and investments under our Superior Availability and Service Leadership strategies, including supply chain and information technology. We lease approximately 85% of our stores. Our capital expenditures were $228.4 million in 2014, an increase of $32.7 million from 2013. In addition to routine capital expenditures, our capital investments during 2014 included the acquisition of GPI and nine independent stores for $2,060.8 million, net of cash acquired.
Our future capital requirements will depend in large part on the number and timing of new stores we open within a given year and the investments we make in existing stores, information technology, supply chain network and the integration of GPI.
30
In 2015, we anticipate that our capital expenditures will be approximately $325 million to $340 million. These investments will primarily include GPI integration expenditures for store conversions and supply chain and systems integration activities; new store development (leased and owned locations); and investments in our existing stores, supply chain network and systems. We anticipate opening between 100 to 120 stores and branches during 2015.
Stock Repurchases
We have a stock repurchase program that allows us to repurchase our common stock on the open market or in privately negotiated transactions from time to time in accordance with the requirements of the SEC. As of January 3, 2015, we had $415.1 million remaining under our $500 million stock repurchase program authorized by our Board of Directors on May 14, 2012. During 2014, we made no repurchases under the stock repurchase program.
During 2014, we repurchased 34,682 shares of our common stock at an aggregate cost of $5.2 million, or an average price of $148.85 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock or restricted stock units.
Dividend
Since 2006, our Board of Directors has declared quarterly dividends of $0.06 per share to stockholders of record. On February 11, 2015, our Board of Directors declared a quarterly dividend of $0.06 per share to be paid on April 3, 2015 to all common stockholders of record as of March 20, 2015.
Analysis of Cash Flows
A summary and analysis of our cash flows for 2014, 2013 and 2012 is reflected in the table and following discussion.
Fiscal Year | |||||||||||
2014 | 2013 | 2012 | |||||||||
(in millions) | |||||||||||
Cash flows from operating activities | $ | 709.0 | $ | 545.3 | $ | 685.3 | |||||
Cash flows from investing activities | (2,288.2 | ) | (362.1 | ) | (273.0 | ) | |||||
Cash flows from financing activities | 575.9 | 331.2 | 127.9 | ||||||||
Net (decrease) increase in cash and cash equivalents | $ | (1,007.8 | ) | $ | 514.4 | $ | 540.2 | ||||
Operating Activities
For 2014, net cash provided by operating activities increased $163.7 million to $709.0 million. This net increase in operating cash flow was primarily driven by higher net income and non-cash expenses along with an increase in accounts payable. This was partially offset by a decrease in cash flows from accrued expenses and other assets related to the timing of payroll and payments to non-merchandise vendors. The benefit from accounts payable was expected as we were able to integrate terms for certain vendors serving both Carquest and Advance Auto Parts.
For 2013, net cash provided by operating activities decreased $140.0 million to $545.3 million. This net decrease in operating cash flow was primarily driven by a $206.3 million increase in inventory, net of accounts payable, primarily due to an increase in inventory related to new stores and other inventory availability initiatives combined with the deceleration in our accounts payable ratio. Partially offsetting these decreases in operating cash flow was a $57.1 million decrease in the outflow of cash related to receivables resulting from the transition of our in-house Commercial credit program in 2012 and a $22.4 million increase in accrued expenses related to the timing of payments to vendors.
Investing Activities
For 2014, net cash used in investing activities increased by $1,926.1 million to $2,288.2 million. The increase in cash used in investing activities was primarily driven by cash used in the acquisition of GPI.
For 2013, net cash used in investing activities increased by $89.1 million to $362.1 million. The increase in cash used in investing activities was primarily driven by cash used in the acquisition of BWP, partially offset by a reduction in investments
31
in property and equipment as a result of less spending on existing stores, new store development, information technology, and investments in supply chain.
Financing Activities
For 2014, net cash provided by financing activities increased by $244.7 million to $575.9 million. This increase was primarily a result of net borrowings associated with the acquisition of GPI, partially offset by the issuance of unsecured notes in the prior year, and a decrease in repurchases of common stock in 2014.
For 2013, net cash provided by financing activities increased by $203.3 million to $331.2 million. This increase was primarily a result of a net change in borrowings under our senior unsecured notes and credit facilities, partially offset by a $53.7 million increase in the repurchase of common stock under our stock repurchase program.
Long-Term Debt
Bank Debt
On December 5, 2013, we entered into a new credit agreement (the "2013 Credit Agreement") which provides a $700.0 million unsecured term loan and a $1.0 billion unsecured revolving credit facility with Advance Stores Company, Inc. ("Advance Stores"), as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. This revolving credit facility replaced the revolver under our former Credit Agreement dated as of May 27, 2011 with Advance Stores, as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “2011 Credit Agreement”). Upon execution of the 2013 Credit Agreement, the lenders’ commitments under the 2011 Credit Agreement were terminated and the liabilities of us and our subsidiaries with respect to obligations under the 2011 Credit Agreement were discharged. The new revolving credit facility also provides for the issuance of letters of credit with a sub-limit of $300.0 million and swingline loans in an amount not to exceed $50.0 million. We may request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not to exceed $250.0 million by those respective lenders (up to a total commitment of $1.25 billion) during the term of the 2013 Credit Agreement. Voluntary prepayments and voluntary reductions of the revolving balance are permitted in whole or in part, at our option, in minimum principal amounts as specified in the 2013 Credit Agreement. Under the terms of the 2013 Credit Agreement, the revolving credit facility terminates in December 2018 and the term loan matures in January 2019.
As of January 3, 2015, under the 2013 Credit Agreement, we had outstanding borrowings of $93.4 million under the revolver and $490.0 million under the term loan. As of January 3, 2015, we also had letters of credit outstanding of $124.3 million, which reduced the availability under the revolver to $782.3 million. The letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.
The interest rate on borrowings under the revolving credit facility is based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.30% and 0.30% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. A facility fee is charged on the total amount of the revolving credit facility, payable in arrears. The current facility fee rate is 0.20% per annum. Under the terms of the 2013 Credit Agreement, the interest rate and facility fee are subject to change based on our credit rating.
The interest rate on the term loan is based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.50% and 0.50% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. Under the terms of the term loan, the interest rate is subject to change based on our credit rating.
The 2013 Credit Agreement contains customary covenants restricting the ability of: (a) subsidiaries of Advance Stores to, among other things, create, incur or assume additional debt; (b) Advance Stores and its subsidiaries to, among other things, (i) incur liens, (ii) make loans and investments, (iii) guarantee obligations, and (iv) change the nature of its business conducted by itself and its subsidiaries; (c) Advance, Advance Stores and their subsidiaries to, among other things (i) engage in certain mergers, acquisitions, asset sales and liquidations, (ii) enter into certain hedging arrangements, (iii) enter into restrictive agreements limiting its ability to incur liens on any of its property or assets, pay distributions, repay loans, or guarantee indebtedness of its subsidiaries, and (iv) engage in sale-leaseback transactions; and (d) Advance to, among other things, change its holding company status. Advance and Advance Stores are required to comply with financial covenants with respect to a maximum leverage ratio and a minimum consolidated coverage ratio. The 2013 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults to Advance Stores’ other material indebtedness. We were in compliance with our covenants with respect to the 2013 Credit Agreement at January 3, 2015.
32
Senior Unsecured Notes
We issued 4.50% senior unsecured notes in December 2013 at 99.69% of the principal amount of $450 million which are due December 1, 2023 (the “2023 Notes”). The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year. The net proceeds from the offering of these notes were approximately $445.2 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The net proceeds from the 2023 Notes were used in aggregate with borrowings under our revolving credit facility and term loan and cash on-hand to fund our acquisition of GPI on January 2, 2014.
We previously issued 4.50% senior unsecured notes in January 2012 at 99.968% of the principal amount of $300 million which are due January 15, 2022 (the “2022 Notes”). The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. We also previously issued 5.75% senior unsecured notes in April 2010 at 99.587% of the principal amount of $300 million which are due May 1, 2020 (the “2020 Notes” or collectively with the 2023 Notes and the 2022 Notes, “the Notes”). The 2020 Notes bear interest at a rate of 5.75% per year payable semi-annually in arrears on May 1 and November 1 of each year. Advance served as the issuer of the Notes with certain of Advance's domestic subsidiaries currently serving as subsidiary guarantors. The terms of the Notes are governed by an indenture (as amended, supplemented, waived or otherwise modified, the “Indenture”) among us, the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee.
We may redeem some or all of the Notes at any time or from time to time, at the redemption price described in the Indenture. In addition, in the event of a Change of Control Triggering Event (as defined in the Indenture for the Notes), we will be required to offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The Notes are currently fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by each of the subsidiary guarantors. We will be permitted to release guarantees without the consent of holders of the Notes under the circumstances described in the Indenture: (i) upon the release of the guarantee of our other debt that resulted in the affected subsidiary becoming a guarantor of this debt; (ii) upon the sale or other disposition of all or substantially all of the stock or assets of the subsidiary guarantor; or (iii) upon our exercise of our legal or covenant defeasance option.
The Indenture contains customary provisions for events of default including for: (i) failure to pay principal or interest when due and payable; (ii) failure to comply with covenants or agreements in the Indenture or the Notes and failure to cure or obtain a waiver of such default upon notice; (iii) a default under any debt for money borrowed by us or any of our subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25.0 million without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by us of notice of the default by the Trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding; and (iv) events of bankruptcy, insolvency or reorganization affecting us and certain of our subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indenture also contains covenants limiting the ability of us and our subsidiaries to incur debt secured by liens and to enter into sale and lease-back transactions.
As of January 3, 2015, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa3. The current outlooks by Standard & Poor’s and Moody’s are both stable. The current pricing grid used to determine our borrowing rate under our revolving credit facility is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may become more limited. In addition, it could reduce the attractiveness of our vendor payment program, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
Off-Balance-Sheet Arrangements
We guarantee loans made by banks to various of our independent store customers totaling $33.6 million as of January 3, 2015. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. We believe the likelihood of performance under these guarantees is remote and that the fair value of these guarantees is very minimal. As of January 3, 2015, we had no other off-balance-sheet arrangements as defined in Regulation S-K Item 303 of the SEC regulations. We include other off-balance-sheet arrangements in our Contractual Obligations table including operating lease payments, interest payments on our Notes and revolving credit facility and letters of credit outstanding.
33
Contractual Obligations
In addition to our Notes and revolving credit facility, we utilize operating leases as another source of financing. The amounts payable under these operating leases are included in our schedule of contractual obligations. Our future contractual obligations related to long-term debt, operating leases and other contractual obligations as of January 3, 2015 were as follows:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt (1) | $ | 1,636,893 | $ | 582 | $ | 35,000 | $ | 548,400 | $ | 1,052,911 | ||||||||||
Interest payments | 447,827 | 62,219 | 138,144 | 130,031 | 117,433 | |||||||||||||||
Operating leases (2) | 3,246,525 | 460,655 | 842,111 | 681,136 | 1,262,623 | |||||||||||||||
Other long-term liabilities (3) | 580,069 | — | — | — | — | |||||||||||||||
Purchase obligations (4) | 68,685 | 39,241 | 15,788 | 5,432 | 8,224 | |||||||||||||||
$ | 5,979,999 | $ | 562,697 | $ | 1,031,043 | $ | 1,364,999 | $ | 2,441,191 | |||||||||||
Note: For additional information refer to Note 8, Long-term Debt; Note 15, Income Taxes; Note 16, Lease Commitments; Note 17, Contingencies; and Note 18, Benefit Plans, in the Notes to Consolidated Financial Statements, included in Item 15. Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.
(1) | Long-term debt primarily represents the principal amount of our 2020 Notes, 2022 Notes and 2023 Notes, which become due in 2020, 2022 and 2023, respectively. |
(2) | We lease certain store locations, distribution centers, office space, equipment and vehicles. Our property leases generally contain renewal and escalation clauses and other concessions. These provisions are considered in our calculation of our minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations. |
(3) | Includes the long-term portion other liabilities for which no contractual payment schedule exists and we expect the payments to occur beyond 12 months from January 3, 2015. Accordingly, the related balances have not been reflected in the “Payments Due by Period” section of the table. For additional information on the amounts included in this balance see Note 12, Other Current and Long-term Liabilities. |
(4) | Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Included in the table above is the lesser of the remaining obligation or the cancellation penalty under the agreement. Our open purchase orders related to merchandise inventory are based on current operational needs and are fulfilled by our vendors within a short period of time. We currently do not have minimum purchase commitments under our vendor supply agreements nor are our open purchase orders binding agreements. Accordingly, we have excluded open purchase orders from the above table. |
34
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.
The preparation of our financial statements included the following significant estimates and exercise of judgment.
Acquisition Impacts
We acquired GPI on January 2, 2014. The process of integrating GPI with AAP has begun, and we expect the integration to continue for a few years. We have used various valuation methodologies to estimate the fair value of assets acquired and liabilities assumed, including using a market participant perspective when applying certain generally accepted valuation techniques, supplemented with market appraisals where appropriate. Significant judgments and estimates were required in preparing these fair value estimates. Final decisions about product offerings, brand usage, store conversions and other elements of the integration plan could be different from current plans. Accordingly, critical accounting policies and estimates such as, but not limited to, inventory valuation/obsolescence, asset impairments, goodwill and other intangible assets and income taxes may have additional acquisition-related impacts beyond what is described in the following respective critical accounting policies.
Goodwill and Intangible Assets
We evaluate goodwill and indefinite-lived intangibles for impairment annually as of the first day of our fiscal fourth quarter or whenever events or changes in circumstances indicate the carrying value of the goodwill or other intangible asset may not be recoverable. We test for goodwill impairment at the reporting unit level. As of January 3, 2015, the vast majority of our goodwill balance was allocated to three of our five reporting units. Our detailed impairment testing involves comparing the fair value of each reporting unit to its carrying value, including goodwill. If the fair value exceeds carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. We complete our impairment evaluation by combining information from our internal valuation analyses, considering other publicly available market information and using an independent valuation firm.
We determine fair value using widely accepted valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses require management to make assumptions as a marketplace participant would and to apply judgment to estimate industry economic factors and the profitability of future business strategies of our company and our reporting units. These assumptions and estimates are a major component of the derived fair value of our reporting units. Critical assumptions include projected sales growth, gross profit rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates.
The carrying value of goodwill was $995.4 million and $199.8 million at January 3, 2015 and December 28, 2013, respectively. The increase to goodwill in 2014 was primarily due to our acquisition of GPI, and has been allocated between our Carquest and Worldpac reporting units. For the periods presented, the impairment assessments indicated that the fair values of each reporting unit exceeded the carrying values of the respective reporting units and therefore no impairment existed. The margin of calculated fair value over the respective carrying value of our recently acquired reporting units may not be indicative of the total company because there have been no significant changes in valuation assumptions since the acquisition date. We have not made any material changes in the accounting methodology we use to assess impairment loss during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Income Tax Reserves