In this column, we take a look at Advance Auto Parts (AAP) which has caught our attention after reporting earnings. Specifically, we discuss the key results you need to be aware of, as well as our expectations for 2018 and beyond.

Key results to be aware of:

First, we need to know about sales. They declined. Total net sales for the fourth quarter came in at $2.04 billion, a 2.2% decrease versus the prior-year period. Here is where we have major concerns; comps. Comparable store sales for the quarter decreased 2.6%. Net sales for full year 2017 were $9.37 billion, versus $9.57 billion in 2016. Comparable store sales for the full year decreased 2.0%. Ouch.

Lower sales hurt but so do higher costs of business. Advanced Auto Parts' gross profit margin decreased 69 basis points in the fourth quarter to 42.9% from 43.6% in the same time period in the prior year. The decline was primarily driven by increased supply chain costs. In addition, the non-cash impact of inventory optimization negatively affected gross margins by 20 basis points in the fourth quarter. Continued material cost improvement in the quarter helped partially offset these costs. Total gross profit margin for full year 2017 was also down to 43.6% compared to full year 2016 of 44.5%.

Adjusted SG&A was 37.3% of net sales for the fourth quarter, a 24 basis point favorable improvement from the fourth quarter 2016. Continued progress in expense management during the quarter, including labor and third-party fee reductions, were partially offset by higher medical costs and insurance claims.

Combining expenses and top-line revenues, we see that Advanced Auto Parts' adjusted operating income was $113.7 million, 5.6% of net sales for the quarter. This represented a decline of 45 basis points versus the prior-year period, primarily driven by the declines in revenue and gross profit as well as the SG&A factors described above. On a GAAP basis, the company’s operating income was $87.2 million, 4.3% of net sales, a decline of 82 basis points. For full-year 2017, the company's adjusted operating income was 7.3% versus 9.4% during full year 2016. Ouch again.

Tax reform will help, however. The impact of recently signed tax reform resulted in a lower federal tax rate in the fourth quarter. Adjusted EPS was $0.77 for the quarter. On a GAAP basis, diluted EPS was $2.49, which includes a benefit of $1.94 related to the tax reform. We expect this to carry over in 2018 as well, as the company enjoys a lower tax rate.

2018 projections

We think 2018 continues to see pressure, though earnings will be helped by taxes. We are looking for flat comparable sales and a top line of $9.25 billion on the year. We expect continued margin pressure but are targeting 7.5%, and cash flows of $450 million. All things considered, if you must play this space, we prefer a competitor given the trends we have seen. The numbers are particularly worrisome given the difficult winter we experienced in the United States.