Advance Auto Parts(AAP) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Advance Auto Parts reported a slight increase in net sales to $3.37 billion, but a decrease in net income to $139.8 million, with operating cash flow turning negative due to working capital changes Condensed Consolidated Balance Sheets Total assets slightly decreased to $12.00 billion, driven by reduced cash, while total liabilities marginally increased and stockholders' equity declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | April 23, 2022 | January 1, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $138,733 | $601,428 | | Inventories | $4,778,849 | $4,659,018 | | Total current assets | $6,057,780 | $6,275,476 | | Total assets | $12,002,481 | $12,194,209 | | Liabilities & Equity | | | | Accounts payable | $3,942,388 | $3,922,007 | | Long-term debt | $1,187,170 | $1,034,320 | | Total liabilities | $9,092,801 | $9,065,918 | | Total stockholders' equity | $2,909,680 | $3,128,291 | Condensed Consolidated Statements of Operations Net sales increased 1.3% to $3.37 billion, but operating income and net income decreased to $203.3 million and $139.8 million respectively, leading to lower diluted EPS Statement of Operations Summary (in thousands, except per share data) | Metric | Sixteen Weeks Ended April 23, 2022 | Sixteen Weeks Ended April 24, 2021 | | :--- | :--- | :--- | | Net sales | $3,374,210 | $3,330,370 | | Gross profit | $1,506,520 | $1,484,926 | | Operating income | $203,270 | $252,129 | | Net income | $139,791 | $185,930 | | Diluted EPS | $2.26 | $2.81 | - The company recorded a $7.4 million loss on early redemption of senior unsecured notes, absent in the prior year period[10] Condensed Consolidated Statements of Cash Flows Operating activities resulted in a $54.9 million net cash outflow, a significant reversal from the prior year, with increased cash usage in investing and financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Sixteen Weeks Ended April 23, 2022 | Sixteen Weeks Ended April 24, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(54,940) | $329,932 | | Net cash used in investing activities | $(114,026) | $(70,294) | | Net cash used in financing activities | $(273,735) | $(216,689) | | Net (decrease) increase in cash | $(462,695) | $45,241 | Notes to the Condensed Consolidated Financial Statements Notes detail operations, accounting policies, and financial activities, including store count, LIFO impact, debt issuance, and share repurchases - As of April 23, 2022, the company operated 4,687 stores and 311 branches under "Advance Auto Parts" and "Carquest" trade names[21] - The LIFO method, applied to 90.3% of inventories, increased Cost of Sales by $81.5 million in Q1 2022, compared to $3.1 million in Q1 2021[26] - Total long-term debt increased to $1.19 billion from $1.03 billion, driven by issuing $350 million in 3.50% Senior Unsecured Notes due 2032 and redeeming $193.2 million of 4.50% notes due 2023[31][34][36] - The company repurchased 1.1 million shares for $248.2 million in Q1 2022, with $1.3 billion remaining under the repurchase authorization[48] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales increased 1.3%, but gross profit margin remained flat, while SG&A expenses rose, leading to decreased GAAP EPS but increased Adjusted EPS, with operating cash flow significantly impacted by working capital Management Overview and Results of Operations Net sales grew 1.3% with 0.6% comparable store sales growth, gross profit margin remained flat at 44.6%, and SG&A expenses increased to 38.6% of sales due to inflation, reducing operating income - Net sales increased 1.3% in Q1 2022, driven by professional and independent businesses, with comparable store sales up 0.6%[58][61][66] - Gross profit margin was flat at 44.6% of Net sales, with strategic pricing offset by LIFO expense, inflationary costs, and unfavorable product mix[61][67] - SG&A as a percentage of Net sales increased by 161 basis points to 38.6%, primarily due to inflationary cost increases in store labor, fuel, and delivery, and new store openings[61][68] GAAP vs. Adjusted EPS | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Diluted EPS (GAAP) | $2.26 | $2.81 | | Adjusted EPS (Non-GAAP) | $3.57 | $3.34 | Liquidity and Capital Resources Operating cash flow significantly decreased to a $54.9 million use of cash due to working capital changes, while the company issued new senior notes, repurchased shares, and declared a dividend - Cash flow from operating activities decreased by $384.9 million to a use of $54.9 million, primarily due to increased cash used by Inventories and Receivables, and decreased cash from Accounts Payable[82] - The company issued $350.0 million of 3.50% senior unsecured notes due 2032 and redeemed the remaining $193.2 million of its 4.50% notes due 2023[80][87] - During the quarter, 1.1 million shares were repurchased for $248.2 million, with an additional $1 billion authorized, leaving $1.3 billion available for repurchase[81] - A regular cash dividend of $1.50 per share was declared on May 18, 2022[86] Item 3. Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risk exposure have occurred since January 1, 2022, with further details available in the 2021 Form 10-K - There were no significant changes in the company's exposure to market risk since the fiscal year-end of January 1, 2022[91] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of April 23, 2022, with no material changes to internal control over financial reporting during the quarter - The principal executive and financial officers concluded that disclosure controls and procedures were effective at a reasonable assurance level as of April 23, 2022[93] - No material changes occurred to the company's internal control over financial reporting during the quarter ended April 23, 2022[94] PART II. OTHER INFORMATION Item 1. Legal Proceedings A $49.3 million class action settlement, fully covered by insurance, received preliminary court approval and awaits finalization - A settlement agreement for $49.3 million in a class action lawsuit will be fully covered by the company's insurance carriers[96] - The settlement received preliminary court approval on January 11, 2022, and remains subject to final court approval[96] Item 1A. Risk Factors No new risk factors were identified, with a comprehensive discussion of potential business risks available in the 2021 Form 10-K - The company refers to "Item 1A. Risk Factors" in its 2021 Form 10-K for a description of risks that could materially adversely affect its business[97] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1.16 million shares for an average of $229.37 per share during the quarter, with an additional $1 billion authorized for the repurchase program Share Repurchases for the Quarter Ended April 23, 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2 - Jan 29, 2022 | 646,647 | $235.05 | | Jan 30 - Feb 26, 2022 | 430,251 | $225.67 | | Feb 27 - Mar 26, 2022 | 77,970 | $203.17 | | Mar 27 - Apr 23, 2022 | 1,365 | $202.68 | | Total | 1,156,233 | $229.37 | - On February 8, 2022, the Board of Directors authorized an additional $1 billion for the share repurchase program[99] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including debt agreements, stock award forms, and officer certifications - Exhibits filed include the Ninth Supplemental Indenture for the 3.500% Notes due 2032, various employee stock award agreements, and CEO and CFO certifications[101]