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Why Highbridge sells its shares in Advance Auto Parts Inc.

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Highbridge Capital Management and Advance Auto Parts Inc.

Highbridge Capital traded notable positions in the second quarter. It initiated new stakes in Valeant Pharmaceuticals (VRX), International Business Machines (or IBM), PVH Corp. (or PVH), and Tyson Foods Inc. (or TSN). During 2Q14, the fund also sold its shares in Celgene Corp. (CELG), FirstEnergy Corp. (FE), Advance Auto Parts Inc. (AAP), and Eli Lilly & Co. (LLY).

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Highbridge Capital exited its position in Advance Auto Parts Inc. (AAP). Advance Auto Parts Inc. accounted for 0.60% of the fund’s first quarter portfolio.

Company overview

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AAP is headquartered in Roanoke, Virginia. It’s the largest automotive aftermarket parts provider in North America. AAP serves the do-it-yourself and professional installer markets. As of April 19, 2014, it operated 5,276 company-operated stores and 105 Worldpac branches. It served ~1,400 independently owned Carquest branded stores in 49 states, Puerto Rico, the Virgin Islands, and Canada.

Sales up on acquisition

It reported that total sales increased 51.5% to $2.35 billion—compared with total sales during 2Q13 of $1.55 billion. The sales increase was driven by the acquisition of General Parts. The acquisition led to a comparable store sales increase of 2.6%. It also lead to the addition of new stores over the past 12 months.

AAP’s gross profit rate was 45.2% of sales during the second quarter—compared to 50.3% during the second quarter last year. The decrease in gross profit rate was due to a higher mix of commercial sales. It had a lower gross margin rate as a result of the General Parts acquisition.

The company’s comparable selling, general, and administrative (or SG&A) rate was 34% of sales during the second quarter—compared to 37.6% during the same quarter last year. The decrease was the result of the General Parts acquisition. General Parts had lower SG&A costs and fixed cost leverage from the positive sales performance.

Increased earnings during 2Q14

AAP noted that second quarter comparable diluted cash earnings per share (or EPS) were $2.08. This was an increase of 30% compared to the second quarter last year.

The second quarter comparable results didn’t include $0.08 of amortization of acquired intangible assets, integration costs of $0.08 associated with the acquisition of General Parts, and $0.02 of integration costs associated with the integration of B.W.P. Distributors Inc. (or BWP).

The next part of the series, we’ll discuss Highbridge Capital’s exit from Eli Lilly.

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