Genuine Parts Company (GPC 3.15%) released second-quarter 2019 earnings before the markets opened on Thursday. The automotive and truck replacement parts distributor recorded low-single-digit revenue growth, which markedly relied on acquired revenue to offset core weakness. Below, we'll walk through the headline numbers and unpack relevant details from the last three months. Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter.
Genuine Parts results: The raw numbers
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $4.93 billion | $4.82 billion | 2.3% |
| Net income | $224.4 million | $227.0 million | (1.1%) |
| Diluted earnings per share | $1.53 | $1.54 | (0.6%) |
Data source: Genuine Parts Company.
What happened with Genuine Parts this quarter?
Image source: Getty Images.
- The company's slight revenue advance was comprised of 1.6% comparable sales growth and 2.7% in sales contributed from acquisition. This total was offset by 0.5% of foregone sales from the company's first-quarter sale of Grupo Auto Todo, and 1.5% of negative foreign currency effects.
- In addition to a series of acquisitions over the last few quarters, Genuine Parts announced yesterday that its London-based subsidiary, Alliance Automotive Group (AAG), is acquiring Normandy, France-based Todd Group for an undisclosed sum. Todd distributes truck parts in the French heavy-duty parts aftermarket. Genuine Parts expects the acquisition to add about $85 million to AAG's annual revenue.
- Gross margin rose 80 basis points, to 32.4%.
- The higher gross margin helped Genuine Parts improve operating margin by roughly 1 percentage point, to 26.1%. Gross profitability offset increases in operating expenses, particularly in selling and administrative expense, and depreciation and amortization (which are rising due to the company's frequent acquisitions).
- After removing transaction costs related to AAG's June 2019 acquisition of Dutch parts distributor PartsPoint Group, the company reported adjusted earnings per share of $1.57.
Management's perspective
In Genuine Parts' earnings press release, CEO Paul Donahue provided detail on second-quarter growth in each of the organization's business segments:
Our second quarter results were highlighted by positive total sales growth across each of our automotive businesses and in our industrial segment. In addition, we were pleased to generate significant improvement in our gross margin. In the automotive segment, our U.S., Australasian and Canadian operations delivered another quarter of positive sales comps and steady growth, while our business in Europe remained challenged by transitory factors such as the mild winter weather and a softening economic environment. Our industrial business continues to perform well in North America, and we are excited to move forward with the additional growth opportunities presented by Inenco, our new industrial business in Australasia.
However, Donahue also addressed the quarter's anemic organic revenue growth of just 1.7%, which was coupled with a lack of progress in boosting the bottom line:
While not satisfied with our results in the quarter, we remain confident in our overall strategy and the additional growth opportunities we continue to pursue across our global platform. Our immediate focus is on the execution of our initiatives to control costs and improve our profitability. This is essential in our quest to deliver improved results and create additional shareholder value as we move forward.
Looking forward
Genuine Parts tweaked its revenue and earnings outlook on Thursday. The company now expects full-year revenue growth of 4.5% to 5.5% against 2018. While the new figure is higher than the previous growth range of 3% to 4%, it includes 2 percentage points of revenue from two recent acquisitions (PartsPoint and Inenco). Thus, full-year organic revenue expansion has effectively been revised downward by 0.5%. Management attributed the core revision to the truck and automobile parts market in Europe, which will probably remain sluggish for the rest of the year.
Genuine Parts anticipates slightly lower profitability against its previous full-year outlook. The company now pegs 2019 diluted earnings per share at between $5.42 and $5.52, versus an initial range of $5.56 to $5.71. As Donahue observed above, management is focused on improving the company's profit margin profile, even as it continues to purchase smaller global parts distributors. Shareholders apparently would appreciate higher core revenue growth and improved profitability soon: Shares of Genuine Parts had slipped by roughly 4 percentage points at midday on Thursday.
