Intrinsic value of Advance Auto Parts - AAP

Previous Close

$86.78

  Intrinsic Value

$120.27

stock screener

  Rating & Target

buy

+39%

Previous close

$86.78

 
Intrinsic value

$120.27

 
Up/down potential

+39%

 
Rating

buy

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of AAP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 6.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -1.74
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  9,568
  9,759
  9,984
  10,240
  10,528
  10,848
  11,198
  11,579
  11,992
  12,437
  12,914
  13,425
  13,970
  14,550
  15,166
  15,820
  16,514
  17,248
  18,024
  18,844
  19,710
  20,623
  21,587
  22,602
  23,672
  24,799
  25,986
  27,235
  28,549
  29,931
  31,386
Variable operating expenses, $m
 
  7,562
  7,733
  7,929
  8,150
  8,394
  8,661
  8,953
  9,269
  9,609
  9,974
  10,265
  10,682
  11,125
  11,597
  12,097
  12,627
  13,188
  13,782
  14,409
  15,071
  15,769
  16,506
  17,283
  18,101
  18,962
  19,870
  20,825
  21,830
  22,887
  23,999
Fixed operating expenses, $m
 
  1,432
  1,468
  1,504
  1,542
  1,581
  1,620
  1,661
  1,702
  1,745
  1,788
  1,833
  1,879
  1,926
  1,974
  2,023
  2,074
  2,126
  2,179
  2,233
  2,289
  2,346
  2,405
  2,465
  2,527
  2,590
  2,655
  2,721
  2,789
  2,859
  2,930
Total operating expenses, $m
  8,780
  8,994
  9,201
  9,433
  9,692
  9,975
  10,281
  10,614
  10,971
  11,354
  11,762
  12,098
  12,561
  13,051
  13,571
  14,120
  14,701
  15,314
  15,961
  16,642
  17,360
  18,115
  18,911
  19,748
  20,628
  21,552
  22,525
  23,546
  24,619
  25,746
  26,929
Operating income, $m
  788
  766
  783
  807
  837
  873
  916
  966
  1,021
  1,083
  1,152
  1,327
  1,409
  1,499
  1,596
  1,700
  1,813
  1,934
  2,063
  2,202
  2,350
  2,507
  2,676
  2,854
  3,045
  3,247
  3,461
  3,689
  3,930
  4,186
  4,457
EBITDA, $m
  1,046
  1,044
  1,065
  1,093
  1,129
  1,171
  1,221
  1,277
  1,340
  1,410
  1,488
  1,573
  1,665
  1,765
  1,874
  1,990
  2,116
  2,250
  2,394
  2,547
  2,711
  2,886
  3,071
  3,269
  3,479
  3,701
  3,938
  4,188
  4,453
  4,734
  5,032
Interest expense (income), $m
  55
  51
  56
  63
  70
  78
  86
  96
  107
  118
  130
  144
  158
  173
  189
  206
  224
  243
  263
  285
  307
  331
  357
  383
  411
  441
  472
  505
  539
  576
  614
Earnings before tax, $m
  739
  715
  727
  744
  767
  796
  830
  869
  915
  965
  1,022
  1,183
  1,251
  1,326
  1,407
  1,494
  1,589
  1,691
  1,800
  1,917
  2,042
  2,176
  2,319
  2,471
  2,633
  2,806
  2,989
  3,184
  3,391
  3,610
  3,843
Tax expense, $m
  279
  193
  196
  201
  207
  215
  224
  235
  247
  261
  276
  319
  338
  358
  380
  403
  429
  456
  486
  518
  551
  588
  626
  667
  711
  758
  807
  860
  915
  975
  1,038
Net income, $m
  460
  522
  530
  543
  560
  581
  606
  635
  668
  705
  746
  864
  914
  968
  1,027
  1,091
  1,160
  1,234
  1,314
  1,399
  1,491
  1,589
  1,693
  1,804
  1,922
  2,048
  2,182
  2,324
  2,475
  2,635
  2,805

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  135
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  8,315
  8,341
  8,533
  8,752
  8,999
  9,272
  9,571
  9,897
  10,250
  10,630
  11,038
  11,474
  11,940
  12,436
  12,963
  13,522
  14,114
  14,742
  15,405
  16,106
  16,846
  17,627
  18,450
  19,318
  20,233
  21,196
  22,210
  23,277
  24,401
  25,582
  26,825
Adjusted assets (=assets-cash), $m
  8,180
  8,341
  8,533
  8,752
  8,999
  9,272
  9,571
  9,897
  10,250
  10,630
  11,038
  11,474
  11,940
  12,436
  12,963
  13,522
  14,114
  14,742
  15,405
  16,106
  16,846
  17,627
  18,450
  19,318
  20,233
  21,196
  22,210
  23,277
  24,401
  25,582
  26,825
Revenue / Adjusted assets
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
  1.170
Average production assets, $m
  2,104
  2,147
  2,196
  2,253
  2,316
  2,386
  2,464
  2,547
  2,638
  2,736
  2,841
  2,953
  3,073
  3,201
  3,337
  3,480
  3,633
  3,794
  3,965
  4,146
  4,336
  4,537
  4,749
  4,972
  5,208
  5,456
  5,717
  5,992
  6,281
  6,585
  6,905
Working capital, $m
  1,497
  1,386
  1,418
  1,454
  1,495
  1,540
  1,590
  1,644
  1,703
  1,766
  1,834
  1,906
  1,984
  2,066
  2,154
  2,247
  2,345
  2,449
  2,559
  2,676
  2,799
  2,928
  3,065
  3,210
  3,361
  3,521
  3,690
  3,867
  4,054
  4,250
  4,457
Total debt, $m
  1,043
  1,149
  1,276
  1,421
  1,583
  1,763
  1,961
  2,176
  2,409
  2,660
  2,929
  3,217
  3,524
  3,852
  4,199
  4,568
  4,959
  5,373
  5,811
  6,274
  6,762
  7,278
  7,821
  8,394
  8,998
  9,633
  10,303
  11,007
  11,748
  12,528
  13,349
Total liabilities, $m
  5,399
  5,505
  5,632
  5,777
  5,939
  6,119
  6,317
  6,532
  6,765
  7,016
  7,285
  7,573
  7,880
  8,208
  8,555
  8,924
  9,315
  9,729
  10,167
  10,630
  11,118
  11,634
  12,177
  12,750
  13,354
  13,989
  14,659
  15,363
  16,104
  16,884
  17,705
Total equity, $m
  2,916
  2,836
  2,901
  2,976
  3,060
  3,152
  3,254
  3,365
  3,485
  3,614
  3,753
  3,901
  4,060
  4,228
  4,407
  4,597
  4,799
  5,012
  5,238
  5,476
  5,728
  5,993
  6,273
  6,568
  6,879
  7,207
  7,551
  7,914
  8,296
  8,698
  9,121
Total liabilities and equity, $m
  8,315
  8,341
  8,533
  8,753
  8,999
  9,271
  9,571
  9,897
  10,250
  10,630
  11,038
  11,474
  11,940
  12,436
  12,962
  13,521
  14,114
  14,741
  15,405
  16,106
  16,846
  17,627
  18,450
  19,318
  20,233
  21,196
  22,210
  23,277
  24,400
  25,582
  26,826
Debt-to-equity ratio
  0.358
  0.410
  0.440
  0.480
  0.520
  0.560
  0.600
  0.650
  0.690
  0.740
  0.780
  0.820
  0.870
  0.910
  0.950
  0.990
  1.030
  1.070
  1.110
  1.150
  1.180
  1.210
  1.250
  1.280
  1.310
  1.340
  1.360
  1.390
  1.420
  1.440
  1.460
Adjusted equity ratio
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340
  0.340

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  460
  522
  530
  543
  560
  581
  606
  635
  668
  705
  746
  864
  914
  968
  1,027
  1,091
  1,160
  1,234
  1,314
  1,399
  1,491
  1,589
  1,693
  1,804
  1,922
  2,048
  2,182
  2,324
  2,475
  2,635
  2,805
Depreciation, amort., depletion, $m
  258
  278
  282
  287
  292
  298
  304
  311
  319
  327
  336
  246
  256
  267
  278
  290
  303
  316
  330
  345
  361
  378
  396
  414
  434
  455
  476
  499
  523
  549
  575
Funds from operations, $m
  262
  800
  813
  830
  852
  879
  910
  946
  987
  1,032
  1,082
  1,110
  1,170
  1,235
  1,305
  1,381
  1,463
  1,550
  1,644
  1,745
  1,852
  1,967
  2,089
  2,218
  2,356
  2,503
  2,659
  2,824
  2,999
  3,184
  3,381
Change in working capital, $m
  -239
  27
  32
  36
  41
  45
  50
  54
  59
  63
  68
  73
  77
  82
  88
  93
  98
  104
  110
  116
  123
  130
  137
  144
  152
  160
  168
  177
  187
  196
  207
Cash from operations, $m
  501
  773
  781
  794
  811
  834
  861
  892
  928
  969
  1,014
  1,037
  1,092
  1,152
  1,217
  1,288
  1,364
  1,446
  1,534
  1,628
  1,729
  1,837
  1,952
  2,074
  2,204
  2,343
  2,490
  2,646
  2,812
  2,988
  3,174
Maintenance CAPEX, $m
  0
  -175
  -179
  -183
  -188
  -193
  -199
  -205
  -212
  -220
  -228
  -237
  -246
  -256
  -267
  -278
  -290
  -303
  -316
  -330
  -345
  -361
  -378
  -396
  -414
  -434
  -455
  -476
  -499
  -523
  -549
New CAPEX, $m
  -260
  -43
  -49
  -56
  -63
  -70
  -77
  -84
  -91
  -98
  -105
  -112
  -120
  -128
  -136
  -144
  -153
  -161
  -171
  -180
  -190
  -201
  -212
  -223
  -235
  -248
  -261
  -275
  -289
  -304
  -320
Cash from investing activities, $m
  -262
  -218
  -228
  -239
  -251
  -263
  -276
  -289
  -303
  -318
  -333
  -349
  -366
  -384
  -403
  -422
  -443
  -464
  -487
  -510
  -535
  -562
  -590
  -619
  -649
  -682
  -716
  -751
  -788
  -827
  -869
Free cash flow, $m
  239
  554
  552
  554
  560
  570
  585
  603
  625
  651
  681
  688
  726
  769
  815
  866
  922
  982
  1,047
  1,118
  1,193
  1,275
  1,362
  1,455
  1,555
  1,661
  1,774
  1,895
  2,024
  2,160
  2,305
Issuance/(repayment) of debt, $m
  -166
  106
  127
  145
  162
  180
  198
  215
  233
  251
  269
  288
  307
  327
  348
  369
  391
  414
  438
  463
  488
  515
  543
  573
  604
  636
  669
  705
  741
  780
  820
Issuance/(repurchase) of shares, $m
  -14
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -177
  106
  127
  145
  162
  180
  198
  215
  233
  251
  269
  288
  307
  327
  348
  369
  391
  414
  438
  463
  488
  515
  543
  573
  604
  636
  669
  705
  741
  780
  820
Total cash flow (excl. dividends), $m
  62
  661
  679
  699
  723
  750
  782
  818
  858
  902
  950
  976
  1,034
  1,096
  1,163
  1,235
  1,313
  1,396
  1,485
  1,580
  1,682
  1,790
  1,905
  2,028
  2,158
  2,297
  2,444
  2,600
  2,765
  2,940
  3,126
Retained Cash Flow (-), $m
  -455
  -55
  -65
  -75
  -84
  -93
  -102
  -111
  -120
  -129
  -139
  -148
  -158
  -169
  -179
  -190
  -201
  -213
  -226
  -238
  -252
  -265
  -280
  -295
  -311
  -327
  -345
  -363
  -382
  -402
  -423
Prev. year cash balance distribution, $m
 
  135
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  740
  614
  624
  639
  658
  680
  707
  738
  773
  811
  828
  875
  927
  984
  1,045
  1,111
  1,183
  1,259
  1,342
  1,430
  1,524
  1,625
  1,733
  1,847
  1,969
  2,099
  2,237
  2,383
  2,538
  2,703
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  710
  562
  543
  526
  510
  494
  478
  461
  444
  425
  393
  374
  353
  330
  307
  282
  257
  232
  207
  182
  158
  135
  114
  94
  77
  61
  48
  37
  28
  20
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Advance Auto Parts, Inc. provides automotive aftermarket parts in North America, serving do-it-for-me (Professional) and do-it-yourself (DIY), customers. The Company's stores and branches offer a 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. It serves through various channels ranging from traditional brick and mortar store locations to self-serving e-commerce sites. As of December 31, 2016, it operated 5,062 total stores and 127 branches primarily under the trade names Advance Auto Parts, Autopart International, Carquest and Worldpac. As of December 31, 2016, its Advance Auto Parts operations consisted of three geographic divisions, which included the operations of the stores operating under the Advance Auto Parts, Carquest and Autopart International trade names.

FINANCIAL RATIOS  of  Advance Auto Parts (AAP)

Valuation Ratios
P/E Ratio 13.9
Price to Sales 0.7
Price to Book 2.2
Price to Tangible Book
Price to Cash Flow 12.8
Price to Free Cash Flow 26.6
Growth Rates
Sales Growth Rate -1.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.6%
Cap. Spend. - 3 Yr. Gr. Rate 5.8%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 35.8%
Total Debt to Equity 35.8%
Interest Coverage 14
Management Effectiveness
Return On Assets 6%
Ret/ On Assets - 3 Yr. Avg. 6.8%
Return On Total Capital 12.1%
Ret/ On T. Cap. - 3 Yr. Avg. 13.6%
Return On Equity 17.1%
Return On Equity - 3 Yr. Avg. 22.1%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 44.5%
Gross Margin - 3 Yr. Avg. 45.1%
EBITDA Margin 11%
EBITDA Margin - 3 Yr. Avg. 11.2%
Operating Margin 8.2%
Oper. Margin - 3 Yr. Avg. 8.5%
Pre-Tax Margin 7.7%
Pre-Tax Margin - 3 Yr. Avg. 7.8%
Net Profit Margin 4.8%
Net Profit Margin - 3 Yr. Avg. 4.9%
Effective Tax Rate 37.8%
Eff/ Tax Rate - 3 Yr. Avg. 37.2%
Payout Ratio 3.9%

AAP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AAP stock intrinsic value calculation we used $9568 million for the last fiscal year's total revenue generated by Advance Auto Parts. The default revenue input number comes from 2016 income statement of Advance Auto Parts. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AAP stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for AAP is calculated based on our internal credit rating of Advance Auto Parts, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Advance Auto Parts.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AAP stock the variable cost ratio is equal to 77.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1397 million in the base year in the intrinsic value calculation for AAP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.9% for Advance Auto Parts.

Corporate tax rate of 27% is the nominal tax rate for Advance Auto Parts. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AAP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AAP are equal to 22%.

Life of production assets of 12 years is the average useful life of capital assets used in Advance Auto Parts operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AAP is equal to 14.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $2916 million for Advance Auto Parts - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 73.865 million for Advance Auto Parts is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Advance Auto Parts at the current share price and the inputted number of shares is $6.4 billion.

Management's discussion and analysis

We are a leading automotive aftermarket parts provider in North America, serving both "do-it-for-me", or Professional, and "do-it-yourself", or DIY, customers. As of December 31, 2016 we operated a total of 5,062 stores and 127 branches. We operate primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. Our stores operate primarily under the trade names "Advance Auto Parts", "Autopart International" and "Carquest" and our distribution branches operate under the "Worldpac" trade name. In addition, we served approximately 1,250 independently-owned Carquest branded stores as of December 31, 2016 across these locations in addition to Mexico, the Bahamas, Turks and Caicos, the British Virgin Islands and the Pacific Islands. 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 Professional and DIY customers from our store locations and online at www.AdvanceAutoParts.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 Professional customers consist primarily of delivery customers for whom we deliver products from our store locations to our Professional customers’ places of business, including independent garages, service stations and auto dealers. Our Professional customers can also conveniently place their orders online.

Management Overview

We generated diluted earnings per share, or diluted EPS, of $6.20 during 2016 compared to $6.40 for 2015. When adjusted for the following non-operational items, our adjusted diluted earnings per share ("Adjusted EPS") in 2016 was $7.15 compared to $7.82 during 2015:
Total sales for 2016 decreased 1.7% from 2015 and comparable store sales decreased 1.4%. Our sales were negatively impacted in 2016 by challenges with inventory availability and service levels. We are making investments to better serve our customers, accelerate sales momentum and gain market share. While these investments have pressured our operating margins, we began to experience improvements in our comparable store sales trends towards the end of the year. Our first priority is to stabilize sales growth to consistently deliver positive comparable store sales performance and then turn our attention to bottom 
line profitability margins. We remain confident in the long-term growth and profitability opportunity as we balance our investments in the business with productivity measures to expand margins.

2016 Highlights

A high-level summary of our financial results and other highlights from 2016 include:
   
Total sales during 2016 decreased 1.7% to $9,567.7 million as compared to 2015. This decrease was primarily driven by a decline in comparable store sales of 1.4%, store closures and the effect of Carquest store consolidations, partially offset by new store openings.
   
Our operating income for 2016 was $787.6 million, a decrease of $38.2 million from 2015. As a percentage of total sales, operating income was 8.2%, a decrease of 25 basis points as compared to 2015, due to a decrease in our gross profit rate, partially offset by a decrease in our SG&A rate.
   
Our inventory balance as of December 31, 2016 increased $151.1 million, or 3.6%, over the prior year driven mainly by the build-up of transitional inventory associated with our Carquest product and store integration that began to drop by the end of the year, and the opening of new locations, including a new Worldpac distribution center.
   
We generated operating cash flow of $500.9 million during 2016, a decrease of 27.4% compared to 2015, primarily due to a decrease in net income and accounts payable.
Refer to “Consolidated Results of Operations” and “Liquidity and Capital Resources” for further details of our income statement and cash flow results, respectively.

Business Update

Our focus in 2017 is to regain top line sales growth as the first step towards driving sustainable, long-term financial performance improvement. Under the leadership of our CEO, who joined the Company in April 2016, we have evaluated all facets of our business in conjunction with the development of a strategic business plan that is intended to significantly improve our customer service and financial performance over the next five years. Our first priority is to refocus on the customer by implementing and reinforcing the best drivers for improving customer satisfaction. Once we stabilize the drivers to consistently deliver an outstanding experience for our customers and consistent positive comparable store sales performance, we will turn our attention to bottom line profitability margins.
The underlying framework of this plan focuses on growth, productivity, people and culture. The growth and margin expansion elements of our strategic business plan include i) Supply Chain, ii) Professional, iii) DIY and iv) Productivity.
Supply Chain - By 2018, we plan to begin rolling out new supply chain capabilities that will enhance inventory positioning in our network, improve assortment and in-market availability and improve speed and accuracy of delivery. Over the longer-term we will continue to further streamline our supply chain network and systems from the GPI acquisition to enable a more seamless inventory transfer throughout the entire chain across both Company owned and independent stores, driving productivity. The GPI integration plan has been fully embedded in our strategic business plan.
Professional - For our Professional customers our focus is on providing high quality parts, improved product availability, consistency of service and fast delivery. We believe we have the right parts assortment and are focused on improving sales and customer service capabilities. We will continue to leverage best practices and technology platforms, including market differentiators like TechNet and the Carquest and Worldpac Training Institutes, across all of our Professional businesses to simplify the customer experience.
DIY - We are also focused on growing sales to DIY customers. We are strengthening our Speedperks program to build stronger loyalty. We have also initiated test markets for DIY designed to improve the customer experience in the store, online and at each touchpoint. This includes more focused and enhanced training along with investments in mobile and digital to better serve our customers when and where they want to be served.
Productivity - Our productivity agenda will focus on removing unnecessary costs while driving new capabilities and investing in long-term growth creation. Our productivity pipeline is sequenced over the five year horizon of our strategic business plan. We are not simply cutting costs to drive short-term profit results, but are materially changing our processes to drive permanent cost reductions.
This agenda will be supported and executed with a focus on our talent and culture. Throughout our Company, we are hard at work evolving our culture to one which is focused on the customer and driving high levels of accountability, ownership and a drive for results throughout the organization.

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 our industry favorably in 2017 as continued lower fuel costs, a stabilized labor market and increasing disposable income should help to provide a positive impact. In addition, industry fundamentals continue to be strong with miles driven increasing and the number of vehicles 11 years and older continuing to increase.
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 from the Federal Highway Administration, the total number of vehicle miles traveled on U.S. roads increased by approximately 3.0% in 2016, which we attribute primarily to decreased gasoline prices. Long-term industry forecasts remain favorable, as lower gas prices and continued strength in the labor market are expected to result in an annual miles driven growth rate of 2% through 2019.
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 the products we sell within the automotive aftermarket industry. As vehicles age and go out-of-warranty, they generate a stronger demand for automotive aftermarket products due to both routine maintenance requirements and more frequent mechanical failures. During 2016, the number of registered vehicles grew 2.4% to a record 264 million vehicles. According to industry analysts, the number of vehicles on the road is expected to continue to climb and will reach 278 million vehicles by 2019. The average vehicle age, which has exceeded 11 years for the past five years, also points to favorable growth in the industry. Despite continued growth in new car registrations, the vehicle scrappage rate for 2016 fell to its lowest rate in 14 years resulting in an increase in number of older vehicles on the road as reflected by a five-year compounded annual growth rate is 4.1% for vehicles over 11 years old compared to a compounded annual growth rate for all vehicles of 1.1%. We believe that the 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 increased complexity of automobiles.

2016 Compared to 2015

Net Sales
Net sales for 2016 were $9,567.7 million, a decline of $169.3 million, or 1.7%, from net sales in 2015. This decrease was primarily due to our comparable store sales decline of 1.4% and the portion of sales that did not transfer from stores that were consolidated. During 2016, we consolidated 159 stores and closed 23 stores, which was partially offset by the opening of 78 new stores. Our decline in comparable store sales was driven by a decline in overall transactions, partially offset by an increase in the average transaction value. While the number of comparable store transactions decreased from the comparable period in all four quarters of 2016, we saw improving trends in the second half of the year.
Our comparable store sales for the year were negatively impacted by challenges with product availability and service levels, particularly in our Northeast and Great Lakes markets. On a quarterly basis our comparable store sales decreased 1.9%, 4.1% and 1.0% in the first, second and third quarters of 2016, respectively, and increased 3.1% in the fourth quarter of 2016. We attribute the improvement in our comparable store sales in the last half of the year to our efforts to improve our focus on the customer, including sustained investments in availability, customer service and incentives for front line employees, as well as improved levels of execution throughout our supply chain. We also benefited in the fourth quarter of 2016 from the timing of the Christmas and New Years holidays.
Gross Profit
Gross profit for 2016 was $4,255.9 million, or 44.5% of net sales, as compared to $4,422.8 million, or 45.4% of net sales, in 2015, a decrease of 94 basis points. The decrease in gross profit as a percentage of net sales was primarily the result of higher supply chain costs driven by significantly higher inventory levels in the first half of 2016 and disruption in our distributions centers located in our Northeast and Great Lakes markets resulting from changes in delivery frequency.

[Source: Form 10-K dated 2017-02-28]

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Financial statements of AAP
Valuation of Stocks

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