Advance Auto Parts Inc 10-Q for FY2022 Q3
Advance Auto Parts Inc (AAP)
10-Q
2022-11-16
For: 2022-10-08
View Original
Added on
April 10, 2026
About this 10-Q
Advance Auto Parts Inc filed this 10-Q on November 16, 2022, covering the quarter ended October 8, 2022 (FY2022 Q3).
Headline figures
Quarter ended October 8, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.64B
- up 0.8% from $2.62B a year earlier
- Net income
- $110.98M
- down 34.6% from net income of $169.81M a year earlier
- Diluted EPS
- $1.84
- down 31.3% from $2.68 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________________________________
For the quarterly period ended October 8, 2022
For the transition period from ________ to ________.
Commission file number 001-16797
________________________
(Exact name of registrant as specified in its charter)
________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices) (Zip Code)
(540 ) 362-4911
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||||||||
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 14, 2022, the number of shares of the registrant’s common stock outstanding was 59,253,716 shares.
| TABLE OF CONTENTS | |||||||||||
Page | |||||||||||
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “should,” “strategy,” “will,” or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, current information and assumptions related to future developments. Except as may be required by law, we undertake no obligation to update any forward-looking statements made herein. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the timing and implementation of strategic initiatives, including with respect to labor shortages or disruptions and the impact on our ability to complete store openings, deterioration of general macroeconomic conditions, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business and factors related to the current global pandemic. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.
1
PART I. FINANCIAL INFORMATION
ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data) (Unaudited)
| Assets | January 1, 2022 | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Current portion of long-term debt | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Noncurrent operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, nonvoting, $ | |||||||||||
Common stock, voting, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Treasury stock, at cost | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
2
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data) (Unaudited)
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 9, 2021 | October 9, 2021 | ||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
Cost of sales, including purchasing and warehousing costs | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other, net: | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Loss on early redemption of senior unsecured notes | ( | ||||||||||||||||||||||
| Other (expense) income, net | ( | ( | |||||||||||||||||||||
| Total other, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
Condensed Consolidated Statements of Comprehensive Income
(in thousands) (Unaudited)
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 9, 2021 | October 9, 2021 | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
Changes in net unrecognized other postretirement costs, net of tax of $ | ( | ( | ( | ( | |||||||||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||||||||
| Total other comprehensive (loss) income | ( | ( | |||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
3
Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except per share data) (Unaudited) | |||||||||||||||||||||||||||||||||||||||||
| Twelve Weeks Ended October 8, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at July 16, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Issuance of shares upon the exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance at October 8, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Twelve Weeks Ended October 9, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at July 17, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance at October 9, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4
Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except per share data) (Unaudited) | |||||||||||||||||||||||||||||||||||||||||
| Forty Weeks Ended October 8, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Issuance of shares upon the exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance at October 8, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Forty Weeks Ended October 9, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 2, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance at October 9, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands) (Unaudited)
| Forty Weeks Ended | |||||||||||
| October 9, 2021 | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Loss and impairment of long-lived assets | |||||||||||
| Loss on early redemption of senior unsecured notes | |||||||||||
| Provision for deferred income taxes | |||||||||||
| Other, net | |||||||||||
| Net change in: | |||||||||||
| Receivables, net | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued expenses | ( | ||||||||||
| Other assets and liabilities, net | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sales of property and equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under credit facilities | |||||||||||
| Payments on credit facilities | ( | ||||||||||
| Borrowings on senior unsecured notes | |||||||||||
| Payments on senior unsecured notes | ( | ||||||||||
| Dividends paid | ( | ( | |||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Other, net | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
Cash and cash equivalents, beginning of period | |||||||||||
Cash and cash equivalents, end of period | $ | $ | |||||||||
| Non-cash transactions: | |||||||||||
| Accrued purchases of property and equipment | $ | $ | |||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
6
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
1. Nature of Operations and Basis of Presentation
Description of Business
Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both professional installers (“professional”) and “do-it-yourself” (“DIY”) customers. The accompanying condensed consolidated financial statements have been prepared by us and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and their subsidiaries (collectively referred to as “Advance,” “we,” “us” or “our”).
As of October 8, 2022 , we operated a total of 4,747 stores and 313 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of October 8, 2022 , we served 1,335 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands. Our stores operate primarily under the trade names “Advance Auto Parts” and “Carquest” and our branches operate under the “Worldpac” and “Autopart International” trade names.
The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting principles. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for 2021 as filed with the SEC on February 15, 2022.
2. Significant Accounting Policies
Revenues
The following table summarizes disaggregated revenue from contracts with customers by product group:
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 9, 2021 | October 9, 2021 | ||||||||||||||||||||||
| Percentage of Sales: | |||||||||||||||||||||||
| Parts and Batteries | % | % | % | % | |||||||||||||||||||
| Accessories and Chemicals | |||||||||||||||||||||||
| Engine Maintenance | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | % | % | % | % | |||||||||||||||||||
3. Inventories
7
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
An actual valuation of inventory under the LIFO method is performed by us at the end of each year based on inventory levels and carrying costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected inventory levels and costs at the end of the year.
| January 1, 2022 | |||||||||||
| Inventories at first in, first out (“FIFO”) | $ | $ | |||||||||
| Adjustments to state inventories at LIFO | ( | ||||||||||
| Inventories at LIFO | $ | $ | |||||||||
4. Intangible Assets
5. Receivables, net
Receivables, net, consisted of the following:
| January 1, 2022 | |||||||||||
| Trade | $ | $ | |||||||||
| Vendor | |||||||||||
Other (1) | |||||||||||
| Total receivables | |||||||||||
| Less: allowance for credit losses | ( | ( | |||||||||
| Receivables, net | $ | $ | |||||||||
(1) The decrease in Other receivables as of October 8, 2022 was primarily attributable to the release of the settlement in the second quarter of 2022 for the amount of $49.3 million, which was related to the securities class action litigation and was fully paid by our insurance carriers upon final court approval on June 13, 2022.
8
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
6. Long-term Debt and Fair Value of Financial Instruments
Long-term debt consists of the following:
| January 1, 2022 | |||||||||||
| $ | $ | ||||||||||
| Revolver credit facility | |||||||||||
| $ | $ | ||||||||||
| Less: Current portion of long-term debt | ( | ||||||||||
| Long-term debt, excluding the current portion | $ | $ | |||||||||
| Fair value of long-term debt | $ | $ | |||||||||
Fair Value of Financial Assets and Liabilities
The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The carrying amounts of our Cash and cash equivalents, Receivables, net, Accounts payable and Accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Bank Debt
As of October 8, 2022 , we had $185.0 million of outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility (the “Credit Agreement”). As of January 1, 2022, we had no outstanding borrowings, $1.2 billion of borrowing availability and no letters of credit outstanding under our Credit Agreement.
As of October 8, 2022 and January 1, 2022, we had $90.2 million and $92.0 million of bilateral letters of credit issued separately from the Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.
We were in compliance with financial covenants required by our debt arrangements as of October 8, 2022 .
Senior Unsecured Notes
Our 4.50 % senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69 % of the principal amount of $450.0 million. The 2023 Notes bear interest, payable semi-annually in arrears on June 1 and December 1, at a rate of 4.50 % per year. Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of the 2023 Notes with the net proceeds from the 2027 Notes. In connection with this tender offer, we incurred charges related to tender premiums and debt issuance costs of $30.5 million and $1.4 million. On April 4, 2022, we redeemed the remaining $193.2 million principal amount of our outstanding 2023 Notes with the net proceeds from the issuance of the 3.50 % senior unsecured notes due March 15, 2032 (the “2032 Notes”). In connection with this early redemption, we incurred charges related to the make-whole provision and debt issuance costs of $7.0 million and $0.4 million.
9
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
Our 3.90 % senior unsecured notes due April 15, 2030 (the “Original Notes”) were issued April 16, 2020, at 99.65 % of the principal amount of $500.0 million, and were not registered under the Securities Act of 1933, as amended (the “Securities Act”). The Original Notes bear interest, payable semi-annually in arrears on April 15 and October 15, at a rate of 3.90 % per year. On July 28, 2020, we completed an exchange offer whereby the Original Notes in the aggregate principal amount of $500.0 million were exchanged for a like principal amount (the “Exchange Notes” or “2030 Notes”), and which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes.
Our 1.75 % senior unsecured notes due October 1, 2027 (the “2027 Notes”) were issued September 29, 2020, at 99.67 % of the principal amount of $350.0 million. The 2027 Notes bear interest, payable semi-annually in arrears on April 1 and October 1, at a rate of 1.75 % per year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.
Our 2032 Notes were issued March 4, 2022, at 99.61 % of the principal amount of $350.0 million. The 2032 Notes bear interest, payable semi-annually in arrears on March 15 and September 15, at a rate of 3.50 % per year. In connection with the 2032 Notes offering, we incurred $3.2 million of debt issuance costs.
We may redeem some or all of the 2032 Notes at any time or from time to time, prior to December 15, 2031, at the redemption price described in the related indenture for the 2032 Notes (the “Indenture”). In addition, in the event of a change of control triggering event, as defined in the Indenture, we will be required to offer to repurchase the 2032 Notes at a price equal to 101 % of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. Currently, the 2032 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsubordinated unsecured basis by guarantor and subsidiary guarantees, as defined by the Indenture.
Debt Guarantees
We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are customers of ours. These loans totaled $66.5 million and $31.7 million as of October 8, 2022 and January 1, 2022 and are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements was $143.9 million and $86.9 million as of October 8, 2022 and January 1, 2022. We believe that the likelihood of performance under these guarantees is remote.
7. Leases
Operating lease liabilities consisted of the following:
| January 1, 2022 | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| Less: Current portion of operating lease liabilities | ( | ( | |||||||||
| Noncurrent operating lease liabilities | $ | $ | |||||||||
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 9, 2021 | October 9, 2021 | ||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
The future maturity of lease liabilities as of October 8, 2022 were as follows:
| Remainder of 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: Imputed interest | ( | |||||||
| Total operating lease liabilities | $ | |||||||
As of October 8, 2022 , our operating lease liabilities included $54.0 million related to options to extend lease terms that are reasonably certain of being exercised and excluded $100.0 million of legally binding minimum lease payments for leases signed but not yet commenced.
The weighted-average remaining lease term and weighted-average discount rate for our operating leases were 7.0 years and 3.3 % as of October 8, 2022 . We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.
Other information relating to our lease liabilities is as follows:
| Forty Weeks Ended | |||||||||||
| October 9, 2021 | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | $ | |||||||||
8. Share Repurchase Program
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
9. Earnings per Share
The computations of basic and diluted earnings per share are as follows:
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 9, 2021 | October 9, 2021 | ||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net income applicable to common shares | $ | $ | $ | $ | |||||||||||||||||||
| Denominator | |||||||||||||||||||||||
| Basic weighted-average common shares | |||||||||||||||||||||||
| Dilutive impact of share-based awards | |||||||||||||||||||||||
Diluted weighted-average common shares (1) | |||||||||||||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
10. Share-Based Compensation
During the forty weeks ended October 8, 2022 , we granted 188 thousand time-based RSUs, 58 thousand market-based RSUs and 114 thousand stock options. The general terms of the time-based and market-based RSUs are similar to awards previously granted by us. We grant options to purchase common stock to certain employees under our 2014 Long-Term Incentive Plan. The general terms of the stock options are similar to awards previously granted by us. We record compensation expense for the grant date fair value of the option awards evenly over the vesting period.
The weighted-average fair values of the time-based and market-based RSUs granted during the forty weeks ended October 8, 2022 were $201.89 and $205.52 per share. The fair value of each market-based RSU was determined using a Monte Carlo simulation model. For time-based RSUs, the fair value of each award was determined based on the market price of our stock on the date of grant adjusted for expected dividends during the vesting period, as applicable.
The total income tax benefit related to share-based compensation expense for the forty weeks ended October 8, 2022 was $9.9 million. As of October 8, 2022 , there was $76.0 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted-average period of 1.5 years.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 1, 2022 (filed with the SEC on February 15, 2022), which we refer to as our 2021 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Management Overview
Net sales increased 0.8% in the third quarter of 2022 compared with the same period in the prior year, primarily driven by improvements in strategic pricing and growth in new store openings. Comparable store sales decreased 0.7% for the quarter primarily due to owned brand penetration. Category growth was led by batteries, fluids and chemicals and brakes.
We generated Diluted earnings per share (“Diluted EPS”) of $1.84 during our third quarter of 2022, inclusive of foreign currency impact of $0.20 per diluted share, compared with $2.68 for the comparable period of 2021. When adjusted for non-operational items outlined in the following table, our Adjusted diluted earnings per share (“Adjusted EPS”), a non-GAAP measure, for the twelve weeks ended October 8, 2022 and October 9, 2021 was $2.84 and $3.21.
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 8, 2022 | October 9, 2021 | October 8, 2022 | October 9, 2021 | ||||||||||||||||||||
| Last-in, first-out (“LIFO”) impacts | $ | 0.83 | $ | 0.35 | $ | 2.96 | $ | 0.82 | |||||||||||||||
| Transformation expenses | 0.09 | 0.10 | 0.37 | 0.64 | |||||||||||||||||||
| General Parts International, Inc. (“GPI”) amortization of acquired intangible assets | 0.08 | 0.08 | 0.26 | 0.25 | |||||||||||||||||||
| Other Income adjustments | — | — | 0.09 | — | |||||||||||||||||||
| Total adjustments, net of tax | $ | 1.00 | $ | 0.53 | $ | 3.68 | $ | 1.71 | |||||||||||||||
Refer to “Reconciliation of Non-GAAP Financial Measures” for a definition and reconciliation of Adjusted EPS and other non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
A high-level summary of our financial results for the third quarter of 2022 includes:
•Net sales during the third quarter of 2022 was $2.64 billion, an increase of 0.8% compared with the third quarter of 2021, driven by improvements in strategic pricing and growth in new store openings. Comparable store sales decreased 0.7% primarily driven by an increase in owned brand penetration.
•Gross profit margin for the third quarter of 2022 was 44.7% of Net sales, a decrease of 44 basis points compared with the third quarter of 2021. Gross profit margin was negatively impacted by inflationary product costs, including the impact of LIFO related expenses, unfavorable channel mix and supply chain headwinds due to inflation in labor and transportation costs. These costs were partially offset by improvements in strategic pricing and owned brand expansion.
•Selling, General & Administrative (“SG&A”) expenses for the third quarter of 2022 were 38.0% of Net sales, an increase of 159 basis points compared with the third quarter of 2021. This increase was primarily driven by inflation in store labor, medical and fuel costs.
Business and Risks Update
We continue to make progress on the various elements of our strategic business plan, which is focused on improving the customer experience, margin expansion and driving consistent execution for both professional and DIY customers. To achieve these improvements, we have undertaken planned strategic initiatives to help build a foundation for long-term success across the organization, which include:
•Continued development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach.
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•Advancement towards optimizing our footprint by market, including consolidating our Worldpac and Autopart International businesses, to drive share, repurpose our in-market store and asset base and streamline our distribution network.
•Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the iconic DieHard® brand.
•Progress in the implementation of a more efficient end-to-end supply chain process to deliver our broad assortment and to help lessen the impact of external constraints.
•Enhancement of Advance Same Day® Curbside Pick Up, Advance Same Day® Home Delivery and our mobile application and e-commerce performance.
•Actively pursuing new store openings, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets, as well as expansion of our independent Carquest network.
•Continued negotiations with vendors on strategic sourcing and pricing to help mitigate inflationary pressures.
Industry Update
Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry, and include but are not limited to:
•Inflationary pressures, including logistics and labor
•Global supply chain disruptions
•Rising fuel costs
•Miles driven
•Unemployment rates
•Consumer confidence and purchasing power
•Competition
•Changes in new car sales
•Economic and geopolitical uncertainty
•Increased foreign currency exchange volatility
Stores and Branches
Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. 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 compared with a total of 4,972 stores and branches as of January 1, 2022.
Results of Operations
| Twelve Weeks Ended | $ Favorable/ (Unfavorable) | Basis Points | |||||||||||||||||||||||||||||||||
| ($ in millions) | October 8, 2022 | October 9, 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 2,641.3 | 100.0 | % | $ | 2,621.2 | 100.0 | % | $ | 20.1 | — | ||||||||||||||||||||||||
| Cost of sales | 1,461.5 | 55.3 | 1,438.8 | 54.9 | (22.7) | (44) | |||||||||||||||||||||||||||||
| Gross profit | 1,179.8 | 44.7 | 1,182.5 | 45.1 | (2.6) | (44) | |||||||||||||||||||||||||||||
| SG&A | 1,002.7 | 38.0 | 953.3 | 36.4 | (49.4) | (159) | |||||||||||||||||||||||||||||
| Operating income | 177.2 | 6.7 | 229.2 | 8.7 | (52.0) | (204) | |||||||||||||||||||||||||||||
| Interest expense | (12.0) | (0.5) | (8.6) | (0.3) | (3.4) | (13) | |||||||||||||||||||||||||||||
| Other (expense) income, net | (17.8) | (0.7) | 1.8 | 0.1 | (19.6) | (74) | |||||||||||||||||||||||||||||
| Provision for income taxes | 36.4 | 1.4 | 52.6 | 2.0 | 16.2 | 63 | |||||||||||||||||||||||||||||
| Net income | $ | 111.0 | 4.2 | % | $ | 169.8 | 6.5 | % | $ | (58.8) | (228) | ||||||||||||||||||||||||
Note: Table amounts may not foot due to rounding.
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| Forty Weeks Ended | $ Favorable/ (Unfavorable) | Basis Points | |||||||||||||||||||||||||||||||||
| ($ in millions) | October 8, 2022 | October 9, 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 8,681.0 | 100.0 | % | $ | 8,601.0 | 100.0 | % | $ | 80.0 | — | ||||||||||||||||||||||||
| Cost of sales | 4,808.9 | 55.4 | 4,744.4 | 55.2 | (64.5) | (23) | |||||||||||||||||||||||||||||
| Gross profit | 3,872.1 | 44.6 | 3,856.6 | 44.8 | 15.5 | (23) | |||||||||||||||||||||||||||||
| SG&A | 3,289.9 | 37.9 | 3,130.4 | 36.4 | (159.5) | (150) | |||||||||||||||||||||||||||||
| Operating income | 582.2 | 6.7 | 726.3 | 8.4 | (144.0) | (173) | |||||||||||||||||||||||||||||
| Interest expense | (35.1) | (0.4) | (28.1) | (0.3) | (7.0) | — | |||||||||||||||||||||||||||||
| Loss on early redemption of senior unsecured notes | (7.4) | (0.1) | — | — | (7.4) | — | |||||||||||||||||||||||||||||
| Other (expense) income, net | (18.3) | (0.2) | 7.8 | 0.1 | (26.1) | (30) | |||||||||||||||||||||||||||||
| Provision for income taxes | 126.1 | 1.5 | 171.5 | 2.0 | 45.4 | 54 | |||||||||||||||||||||||||||||
| Net income | $ | 395.2 | 4.6 | % | $ | 534.4 | 6.2 | % | $ | (139.1) | (149) | ||||||||||||||||||||||||
Note: Table amounts may not foot due to rounding.
Net Sales
Net sales for the twelve weeks ended October 8, 2022 increased 0.8% compared with the same period in 2021, driven by improvements in strategic pricing and growth in new store openings. Comparable store sales decreased 0.7% for the twelve weeks ended October 8, 2022 compared with the twelve weeks ended October 9, 2021, primarily driven by owned brand penetration. Category growth was led by batteries, fluids and chemicals and brakes.
Net sales for the forty weeks ended October 8, 2022 increased 0.9% compared with the same period in 2021, driven by improvements in strategic pricing and growth in new store openings, partially offset by softness in our DIY omnichannel. Comparable store sales declined slightly for the forty weeks ended October 8, 2022 compared with the forty weeks ended October 9, 2021. Category growth was led by fluids and chemicals as well as batteries.
We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently owned Carquest stores are excluded from our comparable store sales. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date. We include sales from relocated stores in comparable store sales from the original date of opening.
Gross Profit
Gross profit for the twelve weeks ended October 8, 2022 was $1.18 billion, or 44.7% of Net sales, compared with $1.18 billion, or 45.1% of Net sales, for the twelve weeks ended October 9, 2021. During the twelve weeks ended October 8, 2022,
Gross profit margin was negatively impacted by inflationary product costs, including the impact of LIFO related expenses, unfavorable channel mix and supply chain headwinds due to increases in labor and transportation costs. These costs were primarily offset by improvements in strategic pricing as well as owned brand expansion.
Gross profit for the forty weeks ended October 8, 2022 was $3.87 billion, or 44.6% of Net sales, compared with $3.86 billion, or 44.8% of Net sales, for the forty weeks ended October 9, 2021. This decrease in Gross profit as a percentage of Net sales was primarily due to inflationary product costs, including the impact of LIFO related expenses and unfavorable channel mix, partially offset by strategic pricing, product mix and owned brand expansion.
As a result of changes in our LIFO reserve, an expense of $67.5 million and $29.4 million were included in the twelve weeks ended October 8, 2022 and October 9, 2021. An expense of $240.8 million and $71.6 million were included in the forty weeks ended October 8, 2022 and October 9, 2021.
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Selling, General and Administrative Expenses
SG&A expenses for the twelve weeks ended October 8, 2022 were $1.0 billion, or 38.0% of Net sales, compared with $1.0 billion, or 36.4% of Net sales, for the twelve weeks ended October 9, 2021. The increase in SG&A as a percentage of Net sales for the twelve weeks ended was primarily driven by inflation in store labor, medical and fuel costs.
SG&A expenses for the forty weeks ended October 8, 2022 were $3.29 billion, or 37.9% of Net sales, compared with $3.13 billion, or 36.4% of Net sales, for the forty weeks ended October 9, 2021. For the forty weeks ended October 8, 2022, the increase was primarily driven by inflation in store labor and fuel costs as well as costs related to new store openings. These costs were partially offset by a year over year decrease in incentive compensation and COVID-19 related expenses.
Loss on Early Redemption of Senior Unsecured Notes
During the forty weeks ended October 8, 2022, we incurred charges related to a make-whole provision and debt issuance costs of $7.0 million and $0.4 million in connection with the early redemption of our 4.50% senior unsecured notes due December 1, 2023 (“2023 Notes”).
Provision for Income Taxes
Our Provision for income taxes for the twelve weeks ended October 8, 2022 was $36.4 million, compared with $52.6 million for the twelve weeks ended October 9, 2021. Our effective tax rate was 24.7% and 23.7% for the twelve weeks ended October 8, 2022 and October 9, 2021. The decrease in tax expense primarily resulted from lower Income before provision for income taxes compared with prior year.
Our Provision for income taxes for the forty weeks ended October 8, 2022 was $126.1 million, compared with $171.5 million for the forty weeks ended October 9, 2021. Our effective tax rate was 24.2% and 24.3% for the forty weeks ended October 8, 2022 and October 9, 2021. The decrease in tax expense resulted from lower Income before provision for income taxes compared with prior year.
Reconciliation of Non-GAAP Financial Measures
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non-GAAP financial measures, including Adjusted net income and Adjusted EPS, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. We have presented these non-GAAP financial measures as we believe that the presentation of our financial results that exclude (1) LIFO impacts; (2) transformation expenses under our strategic business plan; (3) non-cash amortization related to the acquired GPI intangible assets; and (4) other non-recurring adjustments are useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to store closure and consolidation activity in excess of historical levels. These measures assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. The disclosure of these measures allows investors to evaluate our performance using the same measures management uses in developing internal budgets and forecasts and in evaluating management’s compensation. Included below is a description of the expenses we have determined are not normal, recurring cash operating expenses necessary to operate our business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.
LIFO Impacts — To assist in comparing our current operating results with the operational performance of other companies in our industry, the impact of LIFO on our results of operations is a reconciling item to arrive at non-GAAP financial measures.
Transformation Expenses — Costs incurred in connection with our business plan that focuses on specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise, that we do not view to be normal cash operating expenses. These expenses include, but are not limited to the following:
•Restructuring costs - Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and team member severance in connection with our voluntary retirement program and continued optimization of our organization.
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•Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and supply chain projects in connection with our enterprise integration initiatives.
•Other significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with our enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise.
GPI Amortization of Acquired Intangible Assets — As part of our acquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and favorable lease agreements, which we expect to be subject to amortization through 2025.
We have included a reconciliation of this information to the most comparable GAAP measures in the following table:
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| (in thousands, except per share data) | October 8, 2022 | October 9, 2021 | October 8, 2022 | October 9, 2021 | |||||||||||||||||||
| Net income (GAAP) | $ | 110,982 | $ | 169,813 | $ | 395,176 | $ | 534,439 | |||||||||||||||
| Cost of sales adjustments: | |||||||||||||||||||||||
| LIFO impacts | 67,491 | 29,410 | 240,758 | 71,599 | |||||||||||||||||||
| Transformation expenses | — | 143 | 2,572 | 2,611 | |||||||||||||||||||
| SG&A adjustments: | |||||||||||||||||||||||
| GPI amortization of acquired intangible assets | 6,308 | 6,341 | 21,065 | 21,246 | |||||||||||||||||||
| Transformation expenses: | |||||||||||||||||||||||
| Restructuring costs | 964 | 2,360 | 3,270 | 27,063 | |||||||||||||||||||
| Third-party professional services | 4,877 | 4,823 | 20,429 | 18,394 | |||||||||||||||||||
| Other significant costs | 1,155 | 1,492 | 4,231 | 7,406 | |||||||||||||||||||
Other income adjustment (1) | — | 36 | 7,408 | — | |||||||||||||||||||
Provision for income taxes on adjustments (2) | (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 | |||||||||||||||
(1)During the forty weeks ended October 8, 2022, we incurred charges related to a make-whole provision and debt issuance costs of $7.0 million and $0.4 million, in connection with the early redemption of our 2023 Notes.
(2)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.
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Liquidity and Capital Resources
Overview
Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under our strategic business plan and other operational priorities, including payment of interest on our long-term debt. Historically, we have used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program, to pay our quarterly cash dividends and for acquisitions; however, in consideration of ongoing uncertainties related to general global macroeconomic conditions, our future uses of cash may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity, change. Typically, we have funded our cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our results of operations, available cash and cash equivalents and available borrowings under our credit facility will be sufficient to fund our obligations for the long term.
On March 4, 2022, we issued our 3.50% senior unsecured notes due 2032 (the “2032 Notes”). Refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein for further details. Proceeds from our 2032 Notes were utilized to fund the early redemption of our 2023 Notes and supplement operational and capital expenditures.
Share Repurchase Program
On February 8, 2022, our Board of Directors authorized an additional $1.0 billion towards the existing share repurchase program. This authorization is incremental to the $1.7 billion that was previously authorized by our Board of Directors. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.
During the twelve weeks ended October 8, 2022 and October 9, 2021, we repurchased 0.4 million and 1.1 million shares of our common stock under our share repurchase program at an aggregate cost of $75.0 million and $228.3 million, or an average price of $168.93 and $205.65 per share. During the forty weeks ended October 8, 2022 and October 9, 2021, we repurchased 2.5 million and 4.2 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the forty weeks ended October 8, 2022 and October 9, 2021 were at an aggregate cost of $523.2 million and $791.7 million, or an average price of $207.50 and $189.43 per share. We had $1.0 billion remaining under our share repurchase program as of October 8, 2022.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| Forty Weeks Ended | |||||||||||
| (in thousands) | October 8, 2022 | October 9, 2021 | |||||||||
| Cash flows provided by operating activities | $ | 483,094 | $ | 924,936 | |||||||
| Cash flows used in investing activities | (331,818) | (188,881) | |||||||||
| Cash flows used in financing activities | (545,838) | (968,738) | |||||||||
| Effect of exchange rate changes on cash | (15,662) | 2,336 | |||||||||
| Net decrease in cash and cash equivalents | $ | (410,224) | $ | (230,347) | |||||||
Operating Activities
For the forty weeks ended October 8, 2022, Cash flows provided by operating activities decreased by $441.8 million to $483.1 million compared with the same period of prior year. The net decrease in operating cash flows was primarily driven by lower Net income and a decrease in overall working capital compared with the same period of prior year. The decrease in working capital was primarily driven by an increase in cash used by Inventories, attributable to direct product cost increases driven by inflationary pressures and an increase of inventory on hand.
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Investing Activities
For the forty weeks ended October 8, 2022, Cash flows used in investing activities increased by $142.9 million to $331.8 million compared with the same period of prior year. Cash used in investing activities for the forty weeks ended October 8, 2022 consisted primarily of purchases of property and equipment of $333.6 million attributable to investments in information technology, as we remain focused on a complete back office integration throughout the enterprise, as well as investments in leasehold improvements for new store openings.
Financing Activities
For the forty weeks ended October 8, 2022, Cash flows used in financing activities was $545.8 million, a decrease of $422.9 million compared with the same period of prior year. The net decrease in cash used in financing activities was attributable to net proceeds received from the issuance of the 2032 Notes, a decrease in share repurchases of our common stock of $266.9 million and proceeds from net borrowings under our unsecured revolving credit facility of $185.0 million during the forty weeks ended October 8, 2022. The decrease in cash used was partially offset by the early redemption of our 2023 Notes and an increase in dividends paid of $175.3 million during the forty weeks ended October 8, 2022 compared with the forty weeks ended October 9, 2021.
Our Board of Directors has declared a cash dividend every quarter since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.
Long-Term Debt
On March 4, 2022, we issued $350.0 million aggregate principal amount of our 2032 Notes. The 2032 Notes were issued at 99.61% of the principal amount of $350.0 million, are due March 15, 2032 and bear interest at 3.50% per year payable semi-annually in arrears on March 15 and September 15 of each year.
On April 3, 2022, we redeemed the remaining $193.2 million principal amount of our outstanding 2023 Notes. In connection with this early redemption, we incurred charges related to the make-whole provision and debt issuance costs of $7.0 million and $0.4 million.
For additional information, refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein.
As of October 8, 2022, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa2. The current outlooks by Standard & Poor’s and Moody’s are positive and stable. The current pricing grid used to determine our borrowing rate under the Credit Agreement is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may be limited. In addition, declines could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
With respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee, Advance Stores, a wholly owned subsidiary of the Issuer, serves as the guarantor (“Guarantor Subsidiary”). The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiary. Our captive insurance subsidiary, an insignificant wholly owned subsidiary of the Issuer, does not serve as guarantor of our senior unsecured notes.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.
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During the forty weeks ended October 8, 2022, there were no changes to the critical accounting policies discussed in our 2021 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2021 Form 10-K.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposure to market risk since January 1, 2022. Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2021 Form 10-K.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only “reasonable assurance” with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of our internal controls may vary over time.
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of October 8, 2022. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our quarter ended October 8, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
On February 6, 2018, a putative class action on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 14, 2016 and August 15, 2017, inclusive (the “Class Period”), was commenced against us and certain of our current and former officers in the U.S. District Court for the District of Delaware. The plaintiff alleged that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 7, 2020, the court granted in part and denied in part our motion to dismiss. On November 6, 2020, the court granted the plaintiff’s motion for class certification. On March 15, 2021, we moved for reconsideration of the order denying in part our motion to dismiss, and on October 15, 2021, we filed a motion for summary judgment, seeking full dismissal of the case. Following mediation, on November 5, 2021, the parties executed a confidential binding term sheet to settle all claims and on December 23, 2021, the parties executed a settlement agreement fully documenting their agreement. The settlement agreement received final approval from the court on June 13, 2022. The settlement amount of $49.3 million was fully paid by our insurance carriers.
ITEM 1A.RISK FACTORS
Please refer to “Item 1A. Risk Factors” found in our 2021 Form 10-K filed for the year ended January 1, 2022 for risks that, if they were to occur, could materially adversely affect our business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of our common stock.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the information with respect to repurchases of our common stock for the quarter ended October 8, 2022:
Total Number of Shares Purchased (1) | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) (in thousands) | |||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
(1)The aggregate cost of repurchasing shares in connection with the net settlement of shares issued as a result of the vesting of restricted stock units was $1.5 million, or an average price of $183.67 per share, during the twelve weeks ended October 8, 2022.
(2)On February 8, 2022, our Board of Directors authorized an additional $1.0 billion to the existing share repurchase program. This authorization is incremental to the $1.7 billion that was previously authorized by our Board of Directors.
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ITEM 6.EXHIBITS
| Incorporated by Reference | ||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | ||||||||||
| 10-Q | 3.1 | 8/14/2018 | ||||||||||||
| 10-Q | 3.2 | 8/18/2020 | ||||||||||||
| 10-K | 22.1 | 2/15/2022 | ||||||||||||
31.1* | ||||||||||||||
31.2* | ||||||||||||||
32.1** | ||||||||||||||
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||
| 104.1* | Cover Page Interactive Data file (Embedded within Inline XBRL Documents and Included in Exhibit 101). | |||||||||||||
* Filed herewith
** Furnished herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ADVANCE AUTO PARTS, INC. | ||||||||
| Date: November 16, 2022 | /s/ William J. Pellicciotti Jr. | |||||||
| William J. Pellicciotti Jr. Senior Vice President, Controller and Chief Accounting Officer | ||||||||
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas R. Greco, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Advance Auto Parts, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 16, 2022 | ||
| /s/ Thomas R. Greco | ||
| Thomas R. Greco | ||
| President and Chief Executive Officer and Director | ||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey W. Shepherd, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Advance Auto Parts, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: November 16, 2022 | ||
| /s/ Jeffrey W. Shepherd | ||
| Jeffrey W. Shepherd | ||
| Executive Vice President, Chief Financial Officer | ||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas R. Greco, certify, pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report on Form 10-Q of Advance Auto Parts, Inc. for the quarterly period ended October 8, 2022 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in such Report fairly presents in all material respects the financial condition and results of operations of the Company. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying Report.
| Date: November 16, 2022 | /s/ Thomas R. Greco | |||||||
| Thomas R. Greco | ||||||||
| President and Chief Executive Officer and Director | ||||||||
I, Jeffrey W. Shepherd, certify, pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report on Form 10-Q of Advance Auto Parts, Inc. for the quarterly period ended October 8, 2022 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in such Report fairly presents in all material respects the financial condition and results of operations of the Company. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying Report.
| Date: November 16, 2022 | /s/ Jeffrey W. Shepherd | |||||||
| Jeffrey W. Shepherd | ||||||||
| Executive Vice President, Chief Financial Officer | ||||||||