Advance Auto Parts Earnings Call Nuggets: Outlook Analysis and Pace of Improvement

Advance Auto Parts (NYSE:AAP) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Outlook Analysis

Matthew Fassler – Goldman Sachs: Two quick ones. Both related to the outlook. On your last call I believe you had given some directional color for gross margin and for growth in SG&A per store on the year. As you maintained your guidance in essence for the first quarter, it was a bit off more originally thought, is there any change to the geography of the P&L considered in your outlook?

Mike Norona – EVP and CFO: First of all what we said in our outlook is that our margin would be modestly up for the year and we still expect our margin – our gross profit margin to be modestly up for the year. Then from an SG&A per store perspective, we said that we expected it to be up 3% to 5% for the year and I would expect now since we somewhat tempered our annual outlook to the low end, we guided to the low end that we would be in the low end of that SG&A per store.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Matthew Fassler – Goldman Sachs: Then secondly, welcome back to the world of share repurchases, it’s been a while and it is good to see you buying back stock. It was kind of dipping the toe end backend relative to the rate that we have been accustomed to when you were most active, what’s your thought process on the kind of money you would look to put back in through buybacks given that your free cash flow remains substantial?

Mike Norona – EVP and CFO: So, first of all, I just want to remind everyone we haven’t changed our view on how we deploy capital. We take a long-term disciplined approach to our capital and we prioritize investing in the business first and then looking for nonorganic strategic investments in areas that are strategically alignment with our Company, i.e., the BWP acquisition. So that hasn’t changed. We also see buybacks as kind of that third leg to return back to the shareholders, but our priority is always to give back, to invest in the business first. You saw that we bought back about $59 million of shares in the quarter, in terms dollars and we typically, we don’t give a forward outlook in terms of how many shares we buy back but, our capital allocation hasn’t changed and as you saw, last time, we said we were going to start buying shares back and you saw us do that in the quarter…

Matthew Fassler – Goldman Sachs: Just very quickly, a cleanup, if you think about the guidance you initially issued, I’m not sure that there’s any buyback in there, you’ve since bought back from stock, so should we assume that the implied share count is in line with no incremental buybacks but the buybacks that we’ve seen year-to-date?

Mike Norona – EVP and CFO: Yes, that’s right. So, we won’t include any – no future buyback is included in our outlook, but we have incorporated what we’ve purchased to-date in our outlook.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Pace of Improvement

Michael Lasser – UBS: I want to talk about the pace of improvement that you saw towards the end of the first quarter and it sounds like it continued into the first period. It sounds like you’ve been kind of guarded on your optimism that – about the acceleration and may not have been to the same degree that some of the other players within the industry have talked. So, is that fair and is there an explanation for that?

Darren Jackson – CEO: Yeah, sure Michael. This is Darren. So, a couple of things, you’re absolutely right. Our comments do reflect that we are guarded. When we look back at the first 16 weeks of the quarter, it’s our longest quarter over the year, as I said in my comments, our last two weeks were as we expected materially improved in terms of our sales trend, but before that it was pretty uneven. Matter of fact, I’d say we started in period one very strong, the middle part of the quarter was very challenging, particularly March and we expected part of that and particularly in our colder weather markets because of the early spring that affected us and many others in the industry and related industries. So, we got into Q2 as I said in my remarks, if we look over this, the first four weeks we’ve been absolutely positive in the low-single digits as I said in my remarks. I’m a little guarded because I’m not sure if it’s a head-fake a little bit in terms of the consumer. So, when I look through the trends we certainly can see take our maintenance categories, we’ve had an enormous bounce back in our maintenance categories, maintenance is about 45% of our business, so it tends to skew higher than say some of the others in the industry. So that maintenance category has just been stubborn and erratic for the better part of the year, so that’s going to include your oil, that’s going to include brakes. So, I guess it’s just prudent on our part to temper those expectations till we get more then call it a six-week trend at this point. Now having said that internally, you can imagine we are planning to higher expectations, but we think responsibly we should manage both of our topline expectations, manage our costs in the right way to get to the right profitability outcomes at the end of the year.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Michael Lasser – UBS: That’s very helpful commentary. The follow-up question, Darren, in your prepared remarks you called out rising new car sales and the intention of consumers to buy new cars. In the past industry has kind of had an uneven or inconsistent relationship with new car sales, there’s been periods where the industry has done really well in in a pretty high star environment and then obviously, when the SAAR fell the industry also did quite well. So what’s driving that viewpoint right now and maybe you could talk a little bit about your decision to include that in this?

Darren Jackson – CEO: Yes, happy to do that. Let’s say, more broadly when we look into consumers, the one thing in our category we do see is failure has been a consistent performer for us and failure categories again, think about batteries is probably the anchor in the failure category business. So we know when something actually breaks the consumer does spend and that’s been a consistent performer as well. When we get into the maintenance categories and how it ties to new car sales is that, not just the cars that are being sold, it’s the cars that are contemplating – consumers contemplating a new purchase. The other thing I would say is that, when our industry really benefited in ’09 and ’10, what we saw was that release in terms of the deferred maintenance spend. It came at the cost of probably some adjacent industries to us. So we saw housing slowdown in terms of the spend in housing. We saw home improvements slowdown at that moment of time. I think sometimes we nearly just think about our industry versus that consumer has a wallet and those dollars tend to go different places. Clearly they are choosing to use part of that wallet in some adjacent categories today. The contemplation of a new car will actually make them more selective in terms of what they invest, in terms of their aging vehicle and then candidly there is just more cars being spent. So I think a lot of times there are industry-specific things that we must pay attention to in seasonal cycles and we have to be realistic. Ultimately it comes down to a consumer’s wallet and how much open to buy they do have and so my comments really reflect that guarded, but I think pragmatic view about what the consumers face.

A Closer Look: Advance Auto Parts Earnings Cheat Sheet>>