Advance Auto Parts(AAP) - 2022 Q3 - Quarterly Report

Note Regarding Forward-Looking Statements This section outlines the nature of forward-looking statements within the report, emphasizing their inherent risks and uncertainties - The report contains forward-looking statements, identifiable by specific terminology, reflecting views based on historical results, current information, and future development assumptions, subject to risks and uncertainties detailed in the company's Form 10-K[5] Part I. Financial Information Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes for specified periods Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | October 8, 2022 | January 1, 2022 | | :--------------------------------------- | :-------------- | :-------------- | | Total current assets | $6,162,519 | $6,275,476 | | Total assets | $12,132,079 | $12,194,209 | | Total current liabilities | $5,442,901 | $5,180,307 | | Total liabilities | $9,416,004 | $9,065,918 | | Total stockholders' equity | $2,716,075 | $3,128,291 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Twelve Weeks Ended Oct 8, 2022 | Twelve Weeks Ended Oct 9, 2021 | Forty Weeks Ended Oct 8, 2022 | Forty Weeks Ended Oct 9, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Net sales | $2,641,341 | $2,621,229 | $8,680,977 | $8,601,014 | | Gross profit | $1,179,851 | $1,182,454 | $3,872,089 | $3,856,631 | | Operating income | $177,198 | $229,198 | $582,149 | $726,255 | | Net income | $110,982 | $169,813 | $395,176 | $534,439 | | Basic earnings per common share | $1.85 | $2.70 | $6.52 | $8.28 | | Diluted earnings per common share | $1.84 | $2.68 | $6.47 | $8.22 | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Twelve Weeks Ended Oct 8, 2022 | Twelve Weeks Ended Oct 9, 2021 | Forty Weeks Ended Oct 8, 2022 | Forty Weeks Ended Oct 9, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Net income | $110,982 | $169,813 | $395,176 | $534,439 | | Total other comprehensive (loss) income | $(33,509) | $1,457 | $(31,671) | $4,933 | | Comprehensive income | $77,473 | $171,270 | $363,505 | $539,372 | Condensed Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (Forty Weeks Ended October 8, 2022, in thousands) | Metric | Amount | | :--------------------------------------- | :-------------------- | | Balance at January 1, 2022 | $3,128,291 | | Net income | $395,176 | | Total other comprehensive loss | $(31,671) | | Repurchases of common stock | $(542,608) | | Cash dividends declared ($4.50 per common share) | $(274,144) | | Balance at October 8, 2022 | $2,716,075 | Changes in Stockholders' Equity (Forty Weeks Ended October 9, 2021, in thousands) | Metric | Amount | | :--------------------------------------- | :-------------------- | | Balance at January 2, 2021 | $3,559,512 | | Net income | $534,439 | | Total other comprehensive income | $4,933 | | Repurchases of common stock | $(809,504) | | Cash dividends declared ($2.25 per common share) | $(144,169) | | Balance at October 9, 2021 | $3,196,535 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Forty Weeks Ended, in thousands) | Metric | October 8, 2022 | October 9, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $483,094 | $924,936 | | Net cash used in investing activities | $(331,818) | $(188,881) | | Net cash used in financing activities | $(545,838) | $(968,738) | | Net decrease in cash and cash equivalents | $(410,224) | $(230,347) | | Cash and cash equivalents, end of period | $191,204 | $604,645 | Notes to the Condensed Consolidated Financial Statements 1. Nature of Operations and Basis of Presentation - Advance Auto Parts, Inc. is a leading automotive aftermarket parts provider in North America, serving both professional installers and 'do-it-yourself' customers[24] - As of October 8, 2022, the company operated 4,747 stores and 313 branches, primarily in the U.S., and served 1,335 independently owned Carquest branded stores[25] 2. Significant Accounting Policies - Revenues Disaggregated Revenue by Product Group (Percentage of Sales) | Product Group | October 8, 2022 (Twelve Weeks) | October 9, 2021 (Twelve Weeks) | October 8, 2022 (Forty Weeks) | October 9, 2021 (Forty Weeks) | | :---------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Parts and Batteries | 67 % | 68 % | 66 % | 66 % | | Accessories and Chemicals | 20 % | 19 % | 20 % | 21 % | | Engine Maintenance | 12 % | 12 % | 13 % | 12 % | | Other | 1 % | 1 % | 1 % | 1 % | | Total | 100 % | 100 % | 100 % | 100 % | 3. Inventories - The company uses the LIFO method for approximately 90.8% of inventories as of October 8, 2022 (89.8% as of January 1, 2022)[30] - LIFO adjustments increased Cost of sales by $67.5 million for the twelve weeks ended October 8, 2022 (vs. $29.4 million prior year) and by $240.8 million for the forty weeks ended October 8, 2022 (vs. $71.6 million prior year)[30] Inventory Balances (in thousands) | Metric | October 8, 2022 | January 1, 2022 | | :--------------------------------------- | :-------------- | :-------------- | | Inventories at FIFO | $5,134,220 | $4,625,900 | | Adjustments to state inventories at LIFO | $(207,641) | $33,118 | | Inventories at LIFO | $4,926,579 | $4,659,018 | 4. Intangible Assets Amortization Expense (in thousands) | Period | Amortization Expense | | :--------------------------------------- | :------------------- | | Twelve weeks ended October 8, 2022 | $7,000 | | Twelve weeks ended October 9, 2021 | $7,200 | | Forty weeks ended October 8, 2022 | $23,600 | | Forty weeks ended October 9, 2021 | $24,100 | 5. Receivables, net Receivables, net (in thousands) | Metric | October 8, 2022 | January 1, 2022 | | :--------------------------------------- | :-------------- | :-------------- | | Trade | $659,373 | $506,725 | | Vendor | $193,019 | $201,933 | | Other | $13,820 | $84,289 | | Total receivables | $866,212 | $792,947 | | Less: allowance for credit losses | $(20,545) | $(10,162) | | Receivables, net | $845,667 | $782,785 | - The decrease in 'Other receivables' as of October 8, 2022, was primarily due to the release of a $49.3 million settlement related to securities class action litigation, fully paid by insurance carriers on June 13, 2022[34] 6. Long-term Debt and Fair Value of Financial Instruments Long-term Debt Composition (in thousands) | Debt Type | October 8, 2022 | January 1, 2022 | | :--------------------------------------- | :-------------- | :-------------- | | 4.50% Senior Unsecured Notes due Dec 1, 2023 | — | $193,220 | | 1.75% Senior Unsecured Notes due Oct 1, 2027 | $346,816 | $346,382 | | 3.90% Senior Unsecured Notes due Apr 15, 2030 | $495,427 | $494,718 | | 3.50% Senior Unsecured Notes due Mar 15, 2032 | $345,673 | — | | Revolver credit facility | $185,000 | — | | Total | $1,372,916 | $1,034,320 | | Less: Current portion of long-term debt | $(185,000) | — | | Long-term debt, excluding current portion | $1,187,916 | $1,034,320 | | Fair value of long-term debt | $998,000 | $1,092,000 | - As of October 8, 2022, the company had $185.0 million in outstanding borrowings and $1.0 billion in borrowing availability under its unsecured revolving credit facility, compared to no outstanding borrowings and $1.2 billion availability as of January 1, 2022[39] - On April 4, 2022, the remaining $193.2 million principal amount of 4.50% senior unsecured notes due December 1, 2023, were redeemed using proceeds from the issuance of 3.50% senior unsecured notes due March 15, 2032, incurring $7.4 million in charges[40] 7. Leases Operating Lease Liabilities (in thousands) | Metric | October 8, 2022 | January 1, 2022 | | :--------------------------------------- | :-------------- | :-------------- | | Total operating lease liabilities | $2,713,940 | $2,802,772 | | Less: Current portion of operating lease liabilities | $(462,380) | $(465,121) | | Noncurrent operating lease liabilities | $2,251,560 | $2,337,651 | Total Lease Cost (in thousands) | Metric | Twelve Weeks Ended Oct 8, 2022 | Twelve Weeks Ended Oct 9, 2021 | Forty Weeks Ended Oct 8, 2022 | Forty Weeks Ended Oct 9, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Operating lease cost | $130,108 | $124,084 | $433,147 | $410,253 | | Variable lease cost | $40,910 | $35,144 | $136,183 | $112,864 | | Total lease cost | $171,018 | $159,228 | $569,330 | $523,117 | - As of October 8, 2022, the weighted-average remaining lease term for operating leases was 7.0 years, and the weighted-average discount rate was 3.3%[51] 8. Share Repurchase Program - On February 8, 2022, the Board of Directors authorized an additional $1.0 billion for the share repurchase program, incremental to the existing $1.7 billion authorization[53] Share Repurchases (in millions, except average price per share) | Period | Shares Repurchased | Aggregate Cost | Average Price per Share | | :--------------------------------------- | :---------------------------- | :------------------------ | :---------------------- | | Twelve weeks ended Oct 8, 2022 | 0.4 | $75.0 | $168.93 | | Twelve weeks ended Oct 9, 2021 | 1.1 | $228.3 | $205.65 | | Forty weeks ended Oct 8, 2022 | 2.5 | $523.2 | $207.50 | | Forty weeks ended Oct 9, 2021 | 4.2 | $791.7 | $189.43 | - As of October 8, 2022, $1.0 billion remained under the share repurchase program[54] 9. Earnings per Share Earnings per Share Calculation (in thousands, except per share data) | Metric | Twelve Weeks Ended Oct 8, 2022 | Twelve Weeks Ended Oct 9, 2021 | Forty Weeks Ended Oct 8, 2022 | Forty Weeks Ended Oct 9, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Net income applicable to common shares | $110,982 | $169,813 | $395,176 | $534,439 | | Basic weighted-average common shares | 60,053 | 62,854 | 60,656 | 64,555 | | Diluted weighted-average common shares | 60,384 | 63,348 | 61,045 | 65,008 | | Basic earnings per common share | $1.85 | $2.70 | $6.52 | $8.28 | | Diluted earnings per common share | $1.84 | $2.68 | $6.47 | $8.22 | 10. Share-Based Compensation - During the forty weeks ended October 8, 2022, the company granted 188 thousand time-based RSUs, 58 thousand market-based RSUs, and 114 thousand stock options[57] - The weighted-average fair values of time-based and market-based RSUs granted were $201.89 and $205.52 per share, respectively[58] - As of October 8, 2022, $76.0 million of unrecognized compensation expense related to share-based awards remained, expected to be recognized over a weighted-average period of 1.5 years[58] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial performance, condition, and liquidity, highlighting key drivers and challenges Management Overview - Net sales increased 0.8% in Q3 2022 year-over-year, driven by strategic pricing and new store openings, while comparable store sales decreased 0.7% due to owned brand penetration[61] Key Financial Highlights (Q3 2022 vs. Q3 2021, in billions, except percentages and EPS) | Metric | Q3 2022 | Q3 2021 | Change | | :--------------------------------------- | :------ | :------ | :----- | | Net sales | $2.64 billion | $2.62 billion | +0.8% | | Gross profit margin | 44.7% | 45.1% | -44 bps | | SG&A expenses (% of Net sales) | 38.0% | 36.4% | +159 bps | | Diluted EPS | $1.84 | $2.68 | -31.3% | | Adjusted Diluted EPS (Non-GAAP) | $2.84 | $3.21 | -11.5% | Business and Risks Update - The company is progressing on a strategic business plan focused on improving customer experience, margin expansion, and consistent execution for professional and DIY customers[63] - Strategic initiatives include developing demand-based assortment, optimizing footprint, evolving marketing campaigns, implementing efficient supply chain processes, enhancing e-commerce, pursuing new store openings, and negotiating with vendors to mitigate inflationary pressures[63][65][66] - The automotive aftermarket industry is influenced by macroeconomic factors such as inflationary pressures (logistics, labor), global supply chain disruptions, rising fuel costs, miles driven, unemployment rates, consumer confidence, competition, new car sales changes, economic/geopolitical uncertainty, and increased foreign currency exchange volatility[66] Stores and Branches - During the forty weeks ended October 8, 2022, 115 stores and branches were opened, and 27 were closed or consolidated, resulting in a total of 5,060 stores and branches[67] Results of Operations Net Sales - Net sales for the twelve weeks ended October 8, 2022, increased 0.8% year-over-year, driven by strategic pricing and new store openings, while comparable store sales decreased 0.7%[70] - Net sales for the forty weeks ended October 8, 2022, increased 0.9% year-over-year, also driven by strategic pricing and new store openings, but partially offset by softness in DIY omnichannel[70] - Category growth for both periods was led by batteries, fluids and chemicals, and brakes[70] Gross Profit - Gross profit margin for the twelve weeks ended October 8, 2022, was 44.7% of Net sales, a decrease of 44 basis points year-over-year[72] - The margin decrease was primarily due to inflationary product costs (including LIFO impact), unfavorable channel mix, and supply chain headwinds (labor, transportation), partially offset by strategic pricing and owned brand expansion[72] - LIFO related expenses increased Cost of sales by $67.5 million for the twelve weeks and $240.8 million for the forty weeks ended October 8, 2022[73] Selling, General and Administrative Expenses - SG&A expenses for the twelve weeks ended October 8, 2022, were 38.0% of Net sales, an increase of 159 basis points year-over-year, driven by inflation in store labor, medical, and fuel costs[74] - For the forty weeks ended October 8, 2022, SG&A expenses were 37.9% of Net sales, an increase of 150 basis points year-over-year, primarily due to inflation in store labor and fuel costs, and new store opening costs, partially offset by decreased incentive compensation and COVID-19 related expenses[74] Loss on Early Redemption of Senior Unsecured Notes - During the forty weeks ended October 8, 2022, the company incurred charges of $7.0 million (make-whole provision) and $0.4 million (debt issuance costs) related to the early redemption of its 4.50% senior unsecured notes due December 1, 2023[75] Provision for Income Taxes - Provision for income taxes for the twelve weeks ended October 8, 2022, was $36.4 million (effective tax rate of 24.7%), down from $52.6 million (23.7%) in the prior year, primarily due to lower income before taxes[76] - For the forty weeks ended October 8, 2022, the provision was $126.1 million (effective tax rate of 24.2%), down from $171.5 million (24.3%) in the prior year, also due to lower income before taxes[76] Reconciliation of Non-GAAP Financial Measures - Non-GAAP financial measures, including Adjusted net income and Adjusted EPS, are presented to provide insights into base operations by excluding LIFO impacts, transformation expenses, non-cash amortization of acquired GPI intangible assets, and other non-recurring adjustments[77] Reconciliation of GAAP to Non-GAAP Financial Measures (in thousands, except per share data) | Metric | Twelve Weeks Ended Oct 8, 2022 | Twelve Weeks Ended Oct 9, 2021 | Forty Weeks Ended Oct 8, 2022 | Forty Weeks Ended Oct 9, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Net income (GAAP) | $110,982 | $169,813 | $395,176 | $534,439 | | LIFO impacts | $67,491 | $29,410 | $240,758 | $71,599 | | Transformation expenses (Cost of sales) | — | $143 | $2,572 | $2,611 | | GPI amortization of acquired intangible assets | $6,308 | $6,341 | $21,065 | $21,246 | | Transformation expenses (SG&A) | $6,996 | $8,675 | $27,930 | $52,865 | | Other income adjustment | — | $36 | $7,408 | — | | Provision for income taxes on adjustments | $(20,198) | $(11,151) | $(74,933) | $(37,080) | | Adjusted net income (Non-GAAP) | $171,579 | $203,267 | $619,976 | $645,678 | | Diluted earnings per share (GAAP) | $1.84 | $2.68 | $6.47 | $8.22 | | Adjustments, net of tax | $1.00 | $0.53 | $3.68 | $1.71 | | Adjusted EPS (Non-GAAP) | $2.84 | $3.21 | $10.15 | $9.93 | Liquidity and Capital Resources Overview - Primary cash requirements include payroll, inventory, contractual obligations, capital expenditures, taxes, strategic initiatives, and debt interest[83] - Cash requirements are primarily funded by operations, supplemented by credit facilities and notes offerings, deemed sufficient for long-term obligations[83] - Proceeds from the 3.50% senior unsecured notes due 2032, issued March 4, 2022, were used to fund the early redemption of 2023 Notes and supplement operational and capital expenditures[84] Share Repurchase Program - The Board authorized an additional $1.0 billion for the share repurchase program on February 8, 2022, adding to the existing $1.7 billion[85] - During the forty weeks ended October 8, 2022, 2.5 million shares were repurchased at an aggregate cost of $523.2 million (average $207.50/share)[86] - As of October 8, 2022, $1.0 billion remained available under the share repurchase program[86] Analysis of Cash Flows Operating Activities - Cash flows from operating activities decreased by $441.8 million to $483.1 million for the forty weeks ended October 8, 2022, compared to the prior year[87] - The decrease was primarily driven by lower Net income and a decrease in overall working capital, mainly due to increased cash used by inventories from direct product cost increases and higher inventory on hand[87] Investing Activities - Cash flows used in investing activities increased by $142.9 million to $331.8 million for the forty weeks ended October 8, 2022[89] - This increase was primarily due to $333.6 million in purchases of property and equipment, driven by investments in information technology for back-office integration and leasehold improvements for new store openings[89] Financing Activities - Cash flows used in financing activities decreased by $422.9 million to $545.8 million for the forty weeks ended October 8, 2022[90] - This decrease was attributed to net proceeds from 2032 Notes, a $266.9 million decrease in share repurchases, and $185.0 million from credit facility borrowings, partially offset by the early redemption of 2023 Notes and a $175.3 million increase in dividends paid[90] Long-Term Debt - On March 4, 2022, the company issued $350.0 million aggregate principal amount of 3.50% senior unsecured notes due March 15, 2032[92] - On April 3, 2022, the remaining $193.2 million principal amount of 2023 Notes was redeemed, incurring $7.4 million in charges[92] - As of October 8, 2022, the company held credit ratings of BBB- from Standard & Poor's (positive outlook) and Baa2 from Moody's Investor Service (stable outlook)[93] Critical Accounting Policies and Estimates - There were no changes to the critical accounting policies discussed in the company's 2021 Form 10-K during the forty weeks ended October 8, 2022[96] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no significant changes in market risk exposure since January 1, 2022 - No significant changes in market risk exposure have occurred since January 1, 2022[97] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and the absence of material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of October 8, 2022[99] - No material changes in internal control over financial reporting occurred during the quarter ended October 8, 2022[100] Part II. Other Information Item 1. Legal Proceedings This section details the settlement of a securities class action lawsuit, fully paid by insurance carriers - A securities class action lawsuit was settled for $49.3 million, fully paid by insurance carriers, with final court approval on June 13, 2022[102] Item 1A. Risk Factors This section refers to the 2021 Form 10-K for a comprehensive description of the company's risk factors - Refers to 'Item 1A. Risk Factors' in the 2021 Form 10-K for a description of risks and uncertainties[103] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details common stock repurchases and remaining authorization under the share repurchase program Common Stock Repurchases (Quarter Ended October 8, 2022, in thousands, except average price per share) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--------------------------------------- | :----------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | July 17, 2022 to August 13, 2022 | 25 | $190.65 | — | $1,097,338 | | August 14, 2022 to September 10, 2022 | 451,942 | $169.12 | 443,969 | $1,022,339 | | September 11, 2022 to October 08, 2022 | 7 | $169.06 | — | $1,022,339 | | Total | 451,974 | $169.19 | 443,969 | | - On February 8, 2022, the Board of Directors authorized an additional $1.0 billion for the existing share repurchase program[105] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report