- One of the few retailers benefiting from the cold winter.
- Momentum is driven by weather and integration process of General Parts.
- Long-term appeal remains, yet after significant share price momentum, I remain cautious for the short run.
Advance Auto Parts (NYSE:AAP) continues to show impressive returns, as the company is one of the few retailers actually benefiting from the harsh winter conditions.
The acquisition of General Parts and solid integration execution momentum is driving earnings and the share price in recent months. After the significant momentum, I remain a bit more reserved although the company remains a solid long-term play.
First Quarter Highlights
Advance Auto Parts reported first quarter sales of $2.97 billion, which was up by 47.3% on the year before thanks to the acquisition of General Parts.
Reported GAAP earnings came in at $147.7 million, up 21.3% on the year before. Despite the deal with General Parts, Advance managed to repurchase shares over the past year, boosting earnings to $2.01 per diluted share.
Comparable non-GAAP earnings came in at $2.25 per share. The difference between both earnings metrics is explained by integration and amortization costs related to the deal.
Looking Into The Numbers
Of course, headline revenue growth was spectacular thanks to the deal with General Parts. On an organic basis, Advance managed to report comparable store sales growth of 2.4% aided by the poor weather.
Gross margins came in at 45.6% of revenues, down 4.4% compared to last year as a result of the acquisition. Fortunately, the acquisition had a favorable impact on selling, general and administrative expenses as well, with costs falling by 380 basis points to 36.0% of sales.
A Solid Start To The Year Feeds Confidence
Based on the first quarter performance, Advance Auto Parts is upbeat about the integration process and anticipated synergies.
Given the strong momentum in execution, comparable cash earnings per share are now seen at $7.30 to $7.50 per share. The guidance is ten cents higher than previously provided.
A Leveraged Balance Sheet
As a result of the deal with General Parts, Advance Auto Parts now holds just $83 million in cash and equivalents while holding $2.07 billion in total debt. This results in a net debt position of around $2 billion. In comparison, the net debt position was just around $200 million in the same period last year.
At around $123 per share, Advance's equity is valued at $9.0 billion. It is still early in the year, but the company could be on track to generate revenues of $9.5-$10 billion on which it could earn around $540 million. As such, the company is valued at 0.9 times annual revenues and roughly 16-17 times earnings.
The company pays a negligible dividend of $0.06 per share on a quarterly basis, providing investors with a mere 0.2% dividend yield.
Growing Operations With The Acquisition Of General Parts
Back in October of last year, Advance Auto Parts announced the acquisition of General Parts in a deal, which created the largest automotive aftermarket provider in North America.
The market reacted with great enthusiasm to the $2.04 billion deal. Shares of Advance rose by 16.6% on the day of the announcement increasing the value of the company by nearly a billion.
Investors were very enthusiastic about the $160 million in projected synergies in three years following closure of the deal. The deal valued General Parts at 9.3 times EBITDA and 5.4 times EBITDA after factoring in the anticipated synergies.
The deal is important for Advance as it drives further industry consolidation and brings scale to the company, something crucial in a capital-intensive industry in which the company operates with so many stock-keeping units to maintain in inventory.
Service in terms of availability as well as advice is crucial in this relatively inelastic price business, a reason why internet competition from the likes of Amazon.com (NASDAQ:AMZN) has not impacted the business of Advance Auto Parts so much.
Implications For Investors
Following the deal, Advance Auto Parts now operates 5,276 company-owned stores and another 105 Worldpac branches. In total, the company now employs 74,000 workers in 49 states.
Shares of the company have risen nearly another 30% following the announcement of the deal. At current levels of $123, shares trade near all time highs of $130 per share.
Shares currently trade at 16-17 times earnings, as incremental synergies of at least a $100 million are foreseen, pushing earnings towards $650 million. This implies a valuation of 13-14 times earnings going forward. The deal has resulted in significant leverage of $2.0 billion, limiting the company's capabilities for near-term deal making.
That being said, the company has the capacity to reduce leverage at a quick pace given the lack of share repurchases and low current dividend yield. Shares are appealing on dips for the long term, yet don't expect the recent significant momentum to continue forever as shares have returned nearly 50% over the past year.