Advance Auto Parts has done it! Advanced Auto Parts Q3 earnings were just reported and the results were a dandy. In this column we will highlight the key metrics you should be aware of in the report. Before presenting the numbers, we want to remind you that Quad 7 Capital is PREDICTING a very favorable winter for auto parts stores, and this is key to a long thesis. Let us discuss the highlights which are sending shares up 20% here:

Sales were down year-over year, as expected, but the key here is that profit beat expectations. Total net sales for the third quarter came in at $2.18 billion, a 3.0% decrease versus the prior-year period. One sticking point was that comparable store sales for the quarter decreased 3.4%. The Company’s gross margin decreased 51 basis points year-over-year to 43.4%. The decline was primarily driven by increased supply chain costs and shrink, which negatively impacted margins by 44 basis points. In addition, the non-cash impact of inventory optimization efforts negatively impacted gross margins by 23 basis points. These were partially offset by 17 basis points in favorable material cost improvements.

What about expenses? Well, adjusted SG&A was 35.5% of net sales, a 127 basis point increase year-over-year. The increase was primarily driven by 131 basis points of higher labor, medical and insurance claims. Additionally, increased marketing expenses accounted for 26 basis points. These increases were partially offset by third-party fee reductions in addition to improvements in utility, maintenance and repair costs. The company’s GAAP SG&A was 36.3% of net sales, a 93 basis points increase year-over-year to $791.1 million versus the prior-year period.

Turning to actual income, we see that The company’s adjusted operating Income was $172.2 million, 7.9% of net sales, which declined 178 basis points versus the prior-year period, primarily driven by the declines in gross profit and SG&A factors described above. On a GAAP basis, the Company’s Operating Income was $156.6 million, 7.2% of net sales, a decline of 144 basis points. On a per share basis, the company brought in earnings of $1.43 on an adjusted basis, surpassing our expectations. Finally, operating cash flow decreased 6.1% to $401.0 million through the third quarter of 2017 from $427.0 million through the third quarter of 2016. Free cash flow was $240.0 million through the third quarter of 2017 compared to $222.8 million in the prior-year period, an increase of 7.7%, primarily driven by inventory optimization efforts. We expect these efforts to continue.

Looking ahead, the company has reaffirmed guidance at:

New Stores 60-65 new stores
Comparable Store Sales -3% to -1%
Adjusted Operating Income Rate 200 to 300 basis points year over year reduction
Income Tax Rate 37.5% to 38.0%
Integration & Transformation Expenses Approximately $100 to $150 million
Capital Expenditures Approximately $250 million
Free Cash Flow Minimum $300 million


While Quad 7 Capital is bullish on the sector, after a 20% spike in shares, let the dust settle before buying Advance Auto Parts.



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