Advance Auto Meets but Profits Fall

Advance Auto Parts Inc. ( AAP - Analyst Report ) posted a 14.2% fall in earnings per share to $1.21 in the third quarter of the year from $1.41 in the same quarter a year-ago due to weak sales in the cold weather markets,. However, the EPS tallied the Zacks Consensus Estimate during the quarter. Net income dipped 15.2% to $89.5 million from $105.6 million a year ago.

Revenues in the quarter slid $7.5 million or 0.5% to $1.5 billion, reflecting a 1.8% decrease in comparable store versus a comparable store sales increase of 2.2% during the third quarter of 2011, offset partially by the positive impact of net addition of 82 stores during the past 12 months.

Gross margin increased marginally by 31 basis points to 49.8% from 49.5% in the third quarter of 2011. The improvement in margin was attributable to increased shrink, cost deflation and supply chain efficiencies, offset partially by enhanced promotional activity. However, operating margin shrank 180 basis points to 10.3% from 12.1% in the fiscal 2011 quarter.

During the quarter, Advance Auto Parts opened 35 stores, including 7 Autopart International stores. With this, the company has opened 70 stores, including 13 Autopart International stores, year-to-date. As of October 6, 2012, the company’s total store count stood at 3,727, including 210 Autopart International stores. The company is close to reaching the goal of 120 to 140 store openings in fiscal 2012.

During the quarter, Advance Auto Parts repurchased shares worth $25.2 million compared with the year-ago level of $629.2 million. At the end of the quarter, the company had nearly $500 million shares remaining under its share repurchase authorization.

Advance Auto Parts had cash and cash equivalents of $479.4 million as of October 6, 2012, significantly up from $65.9 million as of October 8, 2011. Long-term debt remained flat at $600.2 million as of October 6, 2012 compared with $600.4 million as of October 8, 2011. However, long-term debt-to-capitalization ratio improved to 34.3% from 43.6% a year ago due to a rise in shareholder’s equity.

In the 40-week period ended October 6, 2012, the company’s operating cash flow declined to $504.8 million from $611.0 million in the year-ago period mainly due to lower profits and higher receivables. Meanwhile, capital expenditures (net) decreased marginally to $200.9 million from $206.4 million a year ago.

Advance Auto Parts lowered its earnings outlook for 2012 due to the short-term softness in sales. The company now expects to earn between $5.05 and $5.15 per share for the year, down from the prior guidance of $5.25 to $5.35.

Advance Auto Parts, Inc. operates in the U.S. automotive aftermarket industry and is primarily engaged in selling replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks. The company is the second leading retailer catering to the DIY and DIFM (or commercial) customers.

There are unconfirmed published reports claiming that Advanced Auto Parts was exploring to sell the company. It competes with AutoZone Inc. ( AZO - Analyst Report ) , O’Reilly Automotive Inc. ( ORLY - Analyst Report ) and Pep Boys-Manny, Moe & Jack ( PBY - Snapshot Report ) and currently retains a Zacks #4 Rank on its stock, which translates to a short-term (1 to 3 months) rating of Sell.