Intrinsic value of Advance Auto Parts - AAP

Previous Close

$168.37

  Intrinsic Value

$108.38

stock screener

  Rating & Target

sell

-36%

Previous close

$168.37

 
Intrinsic value

$108.38

 
Up/down potential

-36%

 
Rating

sell

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 0001), $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 12.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  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
  9,561
  9,781
  10,033
  10,315
  10,627
  10,971
  11,344
  11,749
  12,184
  12,652
  13,152
  13,686
  14,254
  14,858
  15,499
  16,179
  16,898
  17,658
  18,461
  19,309
  20,205
  21,148
  22,143
  23,192
  24,296
  25,458
  26,682
  27,969
  29,324
  30,749
Variable operating expenses, $m
  8,774
  8,972
  9,199
  9,453
  9,735
  10,044
  10,381
  10,745
  11,138
  11,559
  11,850
  12,331
  12,843
  13,388
  13,965
  14,577
  15,225
  15,910
  16,634
  17,398
  18,205
  19,055
  19,952
  20,896
  21,891
  22,938
  24,041
  25,201
  26,421
  27,705
Fixed operating expenses, $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
Total operating expenses, $m
  8,774
  8,972
  9,199
  9,453
  9,735
  10,044
  10,381
  10,745
  11,138
  11,559
  11,850
  12,331
  12,843
  13,388
  13,965
  14,577
  15,225
  15,910
  16,634
  17,398
  18,205
  19,055
  19,952
  20,896
  21,891
  22,938
  24,041
  25,201
  26,421
  27,705
Operating income, $m
  787
  809
  834
  862
  893
  927
  964
  1,004
  1,047
  1,093
  1,302
  1,355
  1,411
  1,471
  1,534
  1,601
  1,673
  1,748
  1,827
  1,911
  2,000
  2,093
  2,192
  2,296
  2,405
  2,520
  2,641
  2,768
  2,903
  3,044
EBITDA, $m
  1,132
  1,158
  1,188
  1,221
  1,258
  1,299
  1,343
  1,391
  1,443
  1,498
  1,557
  1,621
  1,688
  1,759
  1,835
  1,916
  2,001
  2,091
  2,186
  2,286
  2,392
  2,504
  2,622
  2,746
  2,877
  3,014
  3,159
  3,312
  3,472
  3,641
Interest expense (income), $m
  55
  58
  64
  71
  78
  87
  96
  107
  118
  130
  143
  158
  173
  189
  206
  224
  244
  264
  286
  309
  333
  359
  386
  415
  445
  476
  510
  545
  582
  621
  662
Earnings before tax, $m
  729
  745
  763
  784
  806
  830
  857
  886
  917
  950
  1,144
  1,182
  1,222
  1,265
  1,310
  1,358
  1,408
  1,462
  1,518
  1,578
  1,641
  1,707
  1,777
  1,851
  1,928
  2,010
  2,096
  2,187
  2,282
  2,382
Tax expense, $m
  197
  201
  206
  212
  218
  224
  231
  239
  248
  256
  309
  319
  330
  341
  354
  367
  380
  395
  410
  426
  443
  461
  480
  500
  521
  543
  566
  590
  616
  643
Net income, $m
  532
  544
  557
  572
  588
  606
  626
  647
  669
  693
  835
  863
  892
  923
  956
  991
  1,028
  1,067
  1,108
  1,152
  1,198
  1,246
  1,297
  1,351
  1,408
  1,467
  1,530
  1,596
  1,666
  1,739

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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
Total assets, $m
  8,653
  8,852
  9,079
  9,335
  9,618
  9,928
  10,266
  10,632
  11,027
  11,450
  11,902
  12,386
  12,900
  13,446
  14,027
  14,641
  15,292
  15,980
  16,707
  17,475
  18,285
  19,139
  20,039
  20,988
  21,987
  23,039
  24,146
  25,312
  26,537
  27,827
Adjusted assets (=assets-cash), $m
  8,653
  8,852
  9,079
  9,335
  9,618
  9,928
  10,266
  10,632
  11,027
  11,450
  11,902
  12,386
  12,900
  13,446
  14,027
  14,641
  15,292
  15,980
  16,707
  17,475
  18,285
  19,139
  20,039
  20,988
  21,987
  23,039
  24,146
  25,312
  26,537
  27,827
Revenue / Adjusted assets
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
  1.105
Average production assets, $m
  2,266
  2,318
  2,378
  2,445
  2,519
  2,600
  2,689
  2,784
  2,888
  2,999
  3,117
  3,244
  3,378
  3,521
  3,673
  3,834
  4,005
  4,185
  4,375
  4,576
  4,788
  5,012
  5,248
  5,496
  5,758
  6,034
  6,324
  6,629
  6,950
  7,287
Working capital, $m
  1,425
  1,457
  1,495
  1,537
  1,583
  1,635
  1,690
  1,751
  1,815
  1,885
  1,960
  2,039
  2,124
  2,214
  2,309
  2,411
  2,518
  2,631
  2,751
  2,877
  3,010
  3,151
  3,299
  3,456
  3,620
  3,793
  3,976
  4,167
  4,369
  4,582
Total debt, $m
  1,143
  1,262
  1,398
  1,550
  1,719
  1,904
  2,106
  2,325
  2,560
  2,813
  3,083
  3,371
  3,678
  4,005
  4,351
  4,718
  5,106
  5,517
  5,951
  6,410
  6,893
  7,403
  7,941
  8,507
  9,104
  9,732
  10,393
  11,088
  11,820
  12,590
Total liabilities, $m
  5,166
  5,284
  5,420
  5,573
  5,742
  5,927
  6,129
  6,347
  6,583
  6,835
  7,106
  7,394
  7,701
  8,028
  8,374
  8,741
  9,129
  9,540
  9,974
  10,432
  10,916
  11,426
  11,963
  12,530
  13,126
  13,754
  14,415
  15,111
  15,843
  16,613
Total equity, $m
  3,487
  3,567
  3,659
  3,762
  3,876
  4,001
  4,137
  4,285
  4,444
  4,614
  4,797
  4,991
  5,199
  5,419
  5,653
  5,900
  6,163
  6,440
  6,733
  7,042
  7,369
  7,713
  8,076
  8,458
  8,861
  9,285
  9,731
  10,201
  10,695
  11,214
Total liabilities and equity, $m
  8,653
  8,851
  9,079
  9,335
  9,618
  9,928
  10,266
  10,632
  11,027
  11,449
  11,903
  12,385
  12,900
  13,447
  14,027
  14,641
  15,292
  15,980
  16,707
  17,474
  18,285
  19,139
  20,039
  20,988
  21,987
  23,039
  24,146
  25,312
  26,538
  27,827
Debt-to-equity ratio
  0.330
  0.350
  0.380
  0.410
  0.440
  0.480
  0.510
  0.540
  0.580
  0.610
  0.640
  0.680
  0.710
  0.740
  0.770
  0.800
  0.830
  0.860
  0.880
  0.910
  0.940
  0.960
  0.980
  1.010
  1.030
  1.050
  1.070
  1.090
  1.110
  1.120
Adjusted equity ratio
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  532
  544
  557
  572
  588
  606
  626
  647
  669
  693
  835
  863
  892
  923
  956
  991
  1,028
  1,067
  1,108
  1,152
  1,198
  1,246
  1,297
  1,351
  1,408
  1,467
  1,530
  1,596
  1,666
  1,739
Depreciation, amort., depletion, $m
  345
  349
  354
  360
  366
  372
  380
  387
  396
  405
  255
  266
  277
  289
  301
  314
  328
  343
  359
  375
  392
  411
  430
  451
  472
  495
  518
  543
  570
  597
Funds from operations, $m
  877
  893
  911
  932
  954
  979
  1,005
  1,034
  1,065
  1,098
  1,091
  1,129
  1,169
  1,212
  1,257
  1,305
  1,356
  1,410
  1,467
  1,527
  1,590
  1,657
  1,728
  1,802
  1,880
  1,962
  2,048
  2,139
  2,235
  2,336
Change in working capital, $m
  28
  33
  37
  42
  47
  51
  56
  60
  65
  70
  75
  80
  85
  90
  96
  101
  107
  113
  120
  126
  133
  141
  148
  156
  165
  173
  182
  192
  202
  212
Cash from operations, $m
  849
  860
  874
  890
  907
  927
  950
  974
  1,000
  1,029
  1,016
  1,049
  1,084
  1,122
  1,162
  1,204
  1,249
  1,297
  1,347
  1,401
  1,457
  1,517
  1,579
  1,645
  1,715
  1,789
  1,866
  1,948
  2,033
  2,124
Maintenance CAPEX, $m
  -182
  -186
  -190
  -195
  -200
  -206
  -213
  -220
  -228
  -237
  -246
  -255
  -266
  -277
  -289
  -301
  -314
  -328
  -343
  -359
  -375
  -392
  -411
  -430
  -451
  -472
  -495
  -518
  -543
  -570
New CAPEX, $m
  -40
  -52
  -60
  -67
  -74
  -81
  -89
  -96
  -103
  -111
  -119
  -127
  -135
  -143
  -152
  -161
  -170
  -180
  -190
  -201
  -212
  -224
  -236
  -248
  -262
  -276
  -290
  -305
  -321
  -338
Cash from investing activities, $m
  -222
  -238
  -250
  -262
  -274
  -287
  -302
  -316
  -331
  -348
  -365
  -382
  -401
  -420
  -441
  -462
  -484
  -508
  -533
  -560
  -587
  -616
  -647
  -678
  -713
  -748
  -785
  -823
  -864
  -908
Free cash flow, $m
  627
  622
  624
  628
  633
  640
  648
  658
  669
  681
  652
  667
  684
  702
  721
  742
  765
  788
  814
  841
  870
  900
  933
  967
  1,003
  1,041
  1,082
  1,124
  1,169
  1,216
Issuance/(repayment) of debt, $m
  99
  119
  136
  152
  169
  185
  202
  219
  235
  253
  270
  288
  307
  326
  346
  367
  388
  411
  434
  458
  484
  510
  538
  566
  597
  628
  661
  696
  732
  770
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  99
  119
  136
  152
  169
  185
  202
  219
  235
  253
  270
  288
  307
  326
  346
  367
  388
  411
  434
  458
  484
  510
  538
  566
  597
  628
  661
  696
  732
  770
Total cash flow (excl. dividends), $m
  725
  741
  760
  780
  802
  825
  850
  876
  904
  934
  922
  956
  991
  1,028
  1,068
  1,109
  1,153
  1,199
  1,248
  1,299
  1,353
  1,410
  1,470
  1,533
  1,600
  1,669
  1,743
  1,820
  1,901
  1,986
Retained Cash Flow (-), $m
  -72
  -80
  -92
  -103
  -114
  -125
  -136
  -147
  -159
  -171
  -182
  -195
  -207
  -220
  -234
  -248
  -262
  -277
  -293
  -309
  -326
  -344
  -363
  -382
  -403
  -424
  -446
  -470
  -494
  -520
Prev. year cash balance distribution, $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 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
  653
  661
  668
  677
  688
  700
  713
  729
  745
  763
  740
  761
  784
  808
  834
  861
  891
  922
  955
  990
  1,027
  1,066
  1,107
  1,151
  1,197
  1,245
  1,296
  1,350
  1,407
  1,466
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
  626
  605
  582
  558
  533
  508
  482
  455
  428
  400
  351
  325
  298
  271
  245
  219
  194
  170
  147
  126
  106
  88
  73
  59
  47
  36
  28
  21
  15
  11
Current shareholders' claim on cash, %
  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 27
Price to Sales 1.3
Price to Book 4.3
Price to Tangible Book
Price to Cash Flow 24.8
Price to Free Cash Flow 51.5
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 $9373.784 million for the last fiscal year's total revenue generated by Advance Auto Parts. The default revenue input number comes from 0001 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 91.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 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 5.6% 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 23.7%.

Life of production assets of 12.2 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 14.9%. 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 - $3415.196 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 74.081 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 $12.5 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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