Advance Auto Parts Inc 10-Q for FY2020 Q2
Advance Auto Parts Inc (AAP)
10-Q
2020-08-18
For: 2020-07-11
View Original
Added on
April 10, 2026
About this 10-Q
Advance Auto Parts Inc filed this 10-Q on August 18, 2020, covering the quarter ended July 11, 2020 (FY2020 Q2).
Headline figures
Quarter ended July 11, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.5B
- up 7.3% from $2.33B a year earlier
- Net income
- $189.96M
- up 52.2% from net income of $124.82M a year earlier
- Diluted EPS
- $2.74
- up 58.4% from $1.73 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________________________________
For the quarterly period ended July 11, 2020
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 August 13, 2020, the number of shares of the registrant’s common stock outstanding was 69,138,763 shares.
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,” “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, 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, 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, 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)
| July 11, 2020 | December 28, 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net of accumulated depreciation of $2,096,439 and $2,037,849 | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| $ | $ | ||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Noncurrent operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, nonvoting, $0.0001 par value | |||||||||||
| Common stock, voting, $0.0001 par value | |||||||||||
| Additional paid-in capital | |||||||||||
| Treasury stock, at cost | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total 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 | Twenty-Eight Weeks Ended | ||||||||||||||||||||||||||||||||||
| July 11, 2020 | July 13, 2019 | July 11, 2020 | July 13, 2019 | ||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Cost of sales, including purchasing and warehousing costs | |||||||||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||||||||||||||
| Other, net: | |||||||||||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Other income (expense), 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 | Twenty-Eight Weeks Ended | ||||||||||||||||||||||||||||||||||
| July 11, 2020 | July 13, 2019 | July 11, 2020 | July 13, 2019 | ||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
| Changes in net unrecognized other postretirement benefit (costs) income, net of tax of $26, $25, $3 and $8 | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Currency translation adjustments | ( | ||||||||||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||||||||
| 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 July 11, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 18, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 ($0.25 per common share) | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 11, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Twelve Weeks Ended July 13, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 20, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive loss | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 ($0.06 per common share) | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 13, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4
Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except per share data) (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Twenty-Eight Weeks Ended July 11, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 28, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive loss | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 ($0.50 per common share) | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 11, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Twenty-Eight Weeks Ended July 13, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 29, 2018 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of accounting change from adoption of ASU 2016-02, net of tax | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive loss | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 ($0.12 per common share) | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 13, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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)
| Twenty-Eight Weeks Ended | |||||||||||||||||
| July 11, 2020 | July 13, 2019 | ||||||||||||||||
| 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 | |||||||||||||||||
| Provision for deferred income taxes | |||||||||||||||||
| Other | |||||||||||||||||
| 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 | ( | ( | |||||||||||||||
| Purchase of an indefinite-lived intangible asset | ( | ||||||||||||||||
| Proceeds from sales of property and equipment | |||||||||||||||||
| Net cash used in investing activities | ( | ( | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Decrease in bank overdrafts | ( | ||||||||||||||||
| Proceeds from borrowings on revolving credit facility | |||||||||||||||||
| Payment on revolving credit facility | ( | ||||||||||||||||
| Proceeds from issuance of senior unsecured notes | |||||||||||||||||
| Redemption of senior unsecured notes | ( | ||||||||||||||||
| Dividends paid | ( | ( | |||||||||||||||
Proceeds from the issuance of common stock | |||||||||||||||||
| Repurchases of common stock | ( | ( | |||||||||||||||
| Other, net | ( | ( | |||||||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||||||||
| Net increase (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
(Unaudited)
1. Nature of Operations and Basis of Presentation
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 July 11, 2020, we operated a total of 4,819 stores and 167 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of July 11, 2020, we served 1,262 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico, the Bahamas, Turks and Caicos and the British Virgin Islands.
In March 2020, the World Health Organization categorized the COVID-19 outbreak as a pandemic (“the pandemic”). As a majority of our stores and facilities have remained open, we have taken additional measures to help protect the health and safety of our Team Members and customers. Such measures, among others, include the implementation of other labor-related benefits for Team Members and increased sanitation practices across Advance. Since the assumptions underpinning our long-term revenue and cash flow growth rates, operating models and business strategies have not been significantly impacted, there was no material impairment of our various assets during the twelve and twenty-eight weeks ended July 11, 2020.
The COVID-19 pandemic remains an evolving situation. If a period of decreased demand were to reoccur, it may lead to increased asset recovery and valuation risks in the future, such as impairment of goodwill, intangible assets and store and other assets. We will continue to assess the impact of the pandemic on our financial position. The extent to which the COVID-19 pandemic will impact our operations, liquidity, compliance with debt covenants or financial results in subsequent periods is uncertain, but such impact could be material.
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 guidance. 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 2019 as filed with the SEC on February 18, 2020.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Our first quarter of the year contains sixteen weeks. Our second and third quarter of 2020 consist of twelve weeks, while our fourth quarter of 2020 contains thirteen weeks due to the 53-week fiscal year in 2020.
2. Significant Accounting Policies
Revenues
The following table summarizes disaggregated revenue from contracts with customers by product group:
| Twelve Weeks Ended | Twenty-Eight Weeks Ended | ||||||||||||||||||||||||||||||||||
| July 11, 2020 | July 13, 2019 | July 11, 2020 | July 13, 2019 | ||||||||||||||||||||||||||||||||
| Percentage of Net sales, by product group: | |||||||||||||||||||||||||||||||||||
| Parts and batteries | % | % | % | % | |||||||||||||||||||||||||||||||
| Accessories and chemicals | |||||||||||||||||||||||||||||||||||
| Engine maintenance | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total | % | % | % | % | |||||||||||||||||||||||||||||||
7
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Recently Issued Accounting Pronouncements
During the sixteen weeks ended April 18, 2020, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which required us to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.
During the twelve weeks ended July 11, 2020, we early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
3. Inventories
An actual valuation of inventory under the LIFO method is performed by us at the end of each year based on the inventory levels and 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.
Inventory balances were as follows:
| (in thousands) | July 11, 2020 | December 28, 2019 | |||||||||
| Inventories at first in, first out (“FIFO”) | $ | $ | |||||||||
| Adjustments to state inventories at LIFO | |||||||||||
| Inventories at LIFO | $ | $ | |||||||||
4. Intangible Assets
8
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
5. Receivables, net
Receivables consist of the following:
| (in thousands) | July 11, 2020 | December 28, 2019 | |||||||||
| Trade | $ | $ | |||||||||
| Vendor | |||||||||||
| Other | |||||||||||
| Total receivables | |||||||||||
| Less: allowance for doubtful accounts | ( | ( | |||||||||
| Receivables, net | $ | $ | |||||||||
6. Long-term Debt and Fair Value of Financial Instruments
Long-term debt consists of the following:
| (in thousands) | July 11, 2020 | December 28, 2019 | |||||||||
| 4.50% Senior Unsecured Notes due January 15, 2022 | $ | $ | |||||||||
| 4.50% Senior Unsecured Notes due December 1, 2023 | |||||||||||
| 3.90% Senior Unsecured Notes due April 15, 2030 | |||||||||||
| Total long-term debt | $ | $ | |||||||||
| 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, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Senior Unsecured Notes
Our 4.50% senior unsecured notes due January 15, 2022 (the “2022 Notes”) were issued in January 2012 at 99.97 % of the principal amount of $300.0 million. The 2022 Notes bear interest at a rate of 4.50 % per year payable semi-annually in arrears on January 15 and July 15 of each year. 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 at a rate of 4.50 % per year payable semi-annually in arrears on June 1 and December 1 of each year.
On April 16, 2020, we issued $500.0 million aggregate principal amount of senior unsecured notes (the “Original Notes”). The Original Notes were issued at 99.65 % of the principal amount of $500.0 million, are due April 15, 2030 and bear interest at 3.90 % per year payable semi-annually in arrears on April 15 and October 15 of each year (collectively with the 2023 Notes and 2022 Notes, referred to as our “senior unsecured notes”).
During the twelve weeks ended July 11, 2020, the Company commenced an exchange offer to exchange the Original Notes in the aggregate principal amount of $500.0 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 3.90 % senior unsecured notes due 2030 (the “Exchange Notes”), which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except that 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. On July 28, 2020, the Original Notes were successfully exchanged for the Exchange Notes.
9
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
On August 17, 2020, we notified the trustee of our intent to redeem the $300 million aggregate principal of our 2022 Notes.
Bank Debt
During the twelve weeks ended July 11, 2020, we elected to repay the $500.0 million outstanding under our revolving credit facility that we borrowed during the first quarter of 2020. As of July 11, 2020, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under the unsecured revolving credit facility (the “2017 Credit Agreement”). As of December 28, 2019, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility.
As of July 11, 2020 and December 28, 2019, we had $100.1 million and $111.6 million of bilateral letters of credit issued separately from the 2017 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 July 11, 2020.
Debt Guarantees
We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $54.3 million and $26.4 million as of July 11, 2020 and December 28, 2019. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements is $65.7 million and $50.3 million as of July 11, 2020 and December 28, 2019. We believe that the likelihood of performance under these guarantees is remote.
7. Leases
Operating lease liabilities consist of the following:
| (in thousands) | July 11, 2020 | December 28, 2019 | |||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| Less: Current portion of operating lease liabilities | ( | ( | |||||||||
| Noncurrent operating lease liabilities | $ | $ | |||||||||
10
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
| Twelve Weeks Ended | Twenty-Eight Weeks Ended | ||||||||||||||||||||||||||||||||||
| (in thousands) | July 11, 2020 | July 13, 2019 | July 11, 2020 | July 13, 2019 | |||||||||||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The future maturity of lease liabilities are as follows:
| (in thousands) | July 11, 2020 | ||||
| Remainder of 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: Imputed interest | ( | ||||
| Total operating lease liabilities | $ | ||||
As of July 11, 2020, our operating lease payments include $86.2 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $56.9 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 are 7.1 years and 3.9 % as of July 11, 2020. 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:
| Twenty-Eight Weeks Ended | |||||||||||||||||
| (in thousands) | July 11, 2020 | July 13, 2019 | |||||||||||||||
| 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 | $ | $ | |||||||||||||||
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
8. Warranty Liabilities
The following table presents changes in our warranty reserves:
| Twenty-Eight Weeks Ended | Fifty-Two Weeks Ended | ||||||||||
| (in thousands) | July 11, 2020 | December 28, 2019 | |||||||||
| Warranty reserve, beginning of period | $ | $ | |||||||||
| Additions to warranty reserves | |||||||||||
| Reduction and utilization of reserve | ( | ( | |||||||||
| Warranty reserve, end of period | $ | $ | |||||||||
9. Share Repurchase Program
On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019. 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 July 11, 2020, we purchased no shares of our common stock under the share repurchase program. During the twelve weeks ended July 13, 2019, we purchased 0.1 million shares of our common stock under the share repurchase program at an aggregate cost of $10.9 million, or an average price of $151.58 per share. During the twenty-eight weeks ended July 11, 2020 and July 13, 2019, we repurchased 0.2 million and 0.9 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the twenty-eight weeks ended July 11, 2020 and July 13, 2019 were at an aggregate cost of $29.0 million and $138.1 million, or an average price of $128.36 and $158.98 per share. We had $861.7 million remaining under our share repurchase program as of July 11, 2020.
10. Earnings per Share
The computation of basic and diluted earnings per share are as follows:
| Twelve Weeks Ended | Twenty-Eight Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | July 11, 2020 | July 13, 2019 | July 11, 2020 | July 13, 2019 | |||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
(1)For the twelve and twenty-eight weeks ended July 11, 2020, 159 thousand and 326 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the twelve and twenty-eight weeks ended July 13, 2019, these anti-dilutive RSUs were insignificant.
12
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
11. Share-Based Compensation
During the twenty-eight weeks ended July 11, 2020, we granted 284 thousand time-based RSUs, 74 thousand performance-based RSUs and 37 thousand market-based RSUs. The general terms of the time-based, performance-based and market-based RSUs are similar to awards previously granted by us.
The weighted average fair values of the time-based, performance-based and market-based RSUs granted during the twenty-eight weeks ended July 11, 2020 were $134.04 , $130.03 and $145.04 per share. For time-based and performance-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 fair value of each market-based RSU was determined using a Monte Carlo simulation model.
Total income tax benefit related to share-based compensation expense for the twelve and twenty-eight weeks ended July 11, 2020 was $2.5 million and $6.0 million Total income tax benefit related to share-based compensation expense for the twelve and twenty-eight weeks ended July 13, 2019 was $2.3 million and $5.0 million As of July 11, 2020, there was $84.6 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.7 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 December 28, 2019 (filed with the SEC on February 18, 2020), which we refer to as our 2019 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Impact of COVID-19 on Our Business
During the COVID-19 pandemic we are prioritizing protecting the health and safety of our Team Members and customers; working to drive financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and working to help ensure that when the current period of crisis passes, our team will emerge even stronger.
In response to the COVID-19 pandemic, we have continued to take additional measures to help ensure the health and safety of our Team Members and customers. Such measures include retro-fitting our stores with plexiglass care shields, the continuation of certain labor-related benefits for Team Members, social distancing practices, sanitation practices, the use of health check screenings and offering contactless delivery.
Government imposed restrictions and stay at home orders related to the pandemic occurred during our first quarter of 2020. These contributed to negative impacts to demand, primarily during the last six weeks of the sixteen weeks ended April 18, 2020. While the majority of our stores remained opened during this time, we adjusted our store operating hours to better align our variable operating cost, such as labor-related and utility expenses, with the lower demand. As a result, at the beginning of the second quarter of 2020, we began prioritizing certain strategic projects and deferring certain marketing costs. However, as the second quarter of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY Omnichannel business, that we believe was largely attributable to higher overall industry demand driven by external factors such as government stimulus, an increase in unemployment benefits and other factors that may have contributed to an increase in DIY automotive projects. In addition to these external factors, we believe the execution of prioritized internal initiatives, including the introduction of our new marketing campaign and continued progress on our supply chain optimization efforts, including the implementation of a new pricing platform, contributed to the improvement in demand. As cash flow improved during the twelve weeks ended July 11, 2020, we elected to repay the $500.0 million outstanding under our revolving credit facility that we borrowed during the first quarter of 2020.
Despite the increase in Net sales during the twelve weeks ended July 11, 2020, the COVID-19 pandemic remains an evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our Team Members, customers, suppliers and stockholders.
Management Overview
Net sales increased 7.3% in the second quarter of 2020 as compared to the same period in the prior year, primarily driven by an increase in comparable store sales resulting from growth in our DIY Omnichannel business. We experienced our strongest sales growth in our Gulf Coast, Central and Appalachia regions, as well as increased sales in several product categories.
14
We generated diluted earnings per share (“diluted EPS”) of $2.74 during our second quarter of 2020 compared to $1.73 for the comparable period of 2019. When adjusted for the following non-operational items, our adjusted diluted earnings per share (“Adjusted EPS”) for the twelve weeks ended July 11, 2020 and July 13, 2019 were $2.92 and $2.00.
| Twelve Weeks Ended | Twenty-Eight Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 11, 2020 | July 13, 2019 | July 11, 2020 | July 13, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Transformation expenses | $ | 0.11 | $ | 0.20 | $ | 0.30 | $ | 0.35 | |||||||||||||||||||||||||||||||||||||||
| General Parts International, Inc. (“GPI”) amortization of acquired intangible assets | 0.07 | 0.07 | 0.16 | 0.15 | |||||||||||||||||||||||||||||||||||||||||||
| Other adjustments | — | — | — | 0.25 | |||||||||||||||||||||||||||||||||||||||||||
Refer to “Reconciliation of Non-GAAP Financial Measures” for further details of our comparable adjustments and the usefulness of such measures to investors.
Summary of Second Quarter Financial Results
A high-level summary of our financial results for the second quarter of 2020 includes:
•Net sales during the second quarter of 2020 were $2.5 billion, an increase of 7.3% as compared to the second quarter of 2019, primarily driven by an increase in comparable store sales of 7.5%, primarily driven by growth in our DIY Omnichannel business.
•Gross profit margin for the second quarter of 2020 was 43.8% of Net sales, an increase of 56 basis points as compared to the second quarter of 2019. This increase was primarily due to favorable channel mix, including growth in our DIY Omnichannel business, and supply chain efficiencies, partially offset by an increase in inventory related costs.
•SG&A expenses for the second quarter of 2020 were 33.3% of Net sales, a favorable impact of 262 basis points as compared to the second quarter of 2019, which was primarily due to a decrease in labor-related costs and suspension of travel due to the COIVD-19 pandemic. These improvements were partially offset by investments in marketing expenses associated with the launch of our new marketing campaign, as well as the promotion of the DieHard® brand, and an increase in supply costs incurred in response to the COVID-19 pandemic.
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 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:
•Development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach.
•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.
•The launch of our new marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the launch of the iconic DieHard® brand.
•Progress in the development of a more efficient end-to-end supply chain to deliver our broad assortment.
•Continued enhancement of ‘Advance Same Day’ Curbside Pick Up, ‘Advance Same Day’ Home Delivery and our mobile application and eCommerce performance.
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. For a complete discussion of these factors, refer to our 2019 Form 10-K, as updated by our subsequent filings with the SEC, including our Form 10-Q filed for the quarterly period ended April 18, 2020, and the “Impact of COVID-19 on Our Business” section included within this Form 10-Q.
15
Stores and Branches
Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. During the twenty-eight weeks ended July 11, 2020, four stores and branches were opened and 55 were closed or consolidated, resulting in a total of 4,986 stores and branches as of July 11, 2020, compared to a total of 5,037 stores and branches as of December 28, 2019.
Results of Operations
| Twelve Weeks Ended | $ Increase/(Decrease) | Basis Points | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | July 11, 2020 | July 13, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,501.4 | 100.0 | % | $ | 2,332.2 | 100.0 | % | $ | 169.2 | — | ||||||||||||||||||||||||||||||||||||||||||
Cost of sales | 1,404.7 | 56.2 | 1,322.8 | 56.7 | 81.9 | (56) | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 1,096.7 | 43.8 | 1,009.4 | 43.3 | 87.3 | 56 | |||||||||||||||||||||||||||||||||||||||||||||||
| SG&A | 833.9 | 33.3 | 838.7 | 36.0 | (4.8) | (262) | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 262.8 | 10.5 | 170.8 | 7.3 | 92.0 | 319 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (13.4) | (0.5) | (8.7) | (0.4) | (4.7) | (16) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other (expense) income, net | 3.1 | 0.1 | 4.1 | 0.2 | (1.0) | (5) | |||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 62.6 | 2.5 | 41.4 | 1.8 | 21.2 | 73 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 190.0 | 7.6 | % | $ | 124.8 | 5.4 | % | $ | 65.2 | 224 | ||||||||||||||||||||||||||||||||||||||||||
| Twenty-Eight Weeks Ended | $ Increase/(Decrease) | Basis Points | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | July 11, 2020 | July 13, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 5,199.3 | 100.0 | % | $ | 5,284.3 | 100.0 | % | $ | (85.0) | — | ||||||||||||||||||||||||||||||||||||||||||
Cost of sales | 2,929.8 | 56.4 | 2,970.2 | 56.2 | (40.4) | 14 | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 2,269.4 | 43.6 | 2,314.1 | 43.8 | (44.7) | (14) | |||||||||||||||||||||||||||||||||||||||||||||||
| SG&A | 1,928.2 | 37.1 | 1,935.3 | 36.6 | (7.1) | (46) | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 341.3 | 6.6 | 378.7 | 7.2 | (37.4) | (60) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (25.7) | (0.5) | (23.6) | (0.4) | (2.1) | (5) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other (expense) income, net | (2.9) | (0.1) | 1.9 | 0.0 | (4.8) | (9) | |||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 79.2 | 1.5 | 89.6 | 1.7 | (10.4) | (17) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 233.5 | 4.5 | % | $ | 267.3 | 5.1 | % | $ | (33.8) | (57) | ||||||||||||||||||||||||||||||||||||||||||
Note: Table amounts may not foot due to rounding.
Net Sales
Net sales increased 7.3% during the second quarter of 2020 compared to the same period of 2019, primarily driven by an increase in comparable store sales resulting from growth in our DIY Omnichannel business. We experienced our strongest sales growth in our Gulf Coast, Central and Appalachia regions, as well as increased sales in several product categories, including accessories and chemicals.
For the twenty-eight weeks ended July 11, 2020, Net sales decreased 1.6% compared to the same period of 2019, primarily driven by a 1.8% decrease in comparable store sales resulting from less overall demand caused principally by the COVID-19 pandemic, particularly in the six weeks ended April 18, 2020, partially offset by an increase in demand in the twelve weeks ended July 11, 2020 resulting from the factors discussed above.
16
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 July 11, 2020 was $1,096.7 million, or 43.8%, of Net sales, as compared to $1,009.4 million, or 43.3%, of Net sales for the twelve weeks ended July 13, 2019. This increase in Gross profit as a percentage of Net sales was primarily due to improvements in channel mix and supply chain efficiencies, partially offset by an increase in inventory related costs.
Gross profit for the twenty-eight weeks ended July 11, 2020 was $2,269.4 million, or 43.6% of Net sales, as compared to $2,314.1 million, or 43.8%, of Net sales for the twenty-eight weeks ended July 13, 2019. This decrease in Gross profit as a percentage of Net Sales was primarily due to supply chain deleverage, unfavorable product mix and higher tariff costs, partially offset by the factors discussed above.
As a result of changes in our LIFO reserve, an expense of $3.1 million and $16.5 million was included in the twelve weeks ended July 11, 2020 and July 13, 2019. For the twenty-eight weeks ended July 11, 2020 and July 13, 2019 the expense was $11.9 million and $42.9 million.
Selling, general and administrative expenses
SG&A expenses for the twelve weeks ended July 11, 2020 were $833.9 million, or 33.3% of Net sales, as compared to $838.7 million, or 36.0% of Net sales, for the twelve weeks ended July 13, 2019. This decrease in SG&A expenses as a percentage of Net sales was primarily due to a decrease in labor-related costs, suspension of travel due to the COVID-19 pandemic and a reduction in insurance and claims expenses. These improvements were partially offset by investments in marketing expenses associated with the launch of our new marketing campaign, as well as the promotion of the DieHard® brand, an increase in costs incurred in response to the COVID-19 pandemic and an increase in support contracts related to information technology solutions.
SG&A for the twenty-eight weeks ended July 11, 2020 was $1,928.2 million, or 37.1% of Net sales, as compared to $1,935.3 million, or 36.6% of Net sales, for the twenty-eight weeks ended July 13, 2019. This increase in SG&A as a percentage of Net sales was primarily due to an increase in costs incurred in response to the COVID-19 pandemic and investments in marketing expenses associated with the launch of our new marketing campaign, as well as the promotion of the DieHard® brand. These unfavorable variances were partially offset by a reduction professional services costs incurred as certain transformation-related projects have been postponed in an effort to preserve our financial flexibility in response to the COVID-19 pandemic.
Provision for income taxes
Our Provision for income taxes for the twelve weeks ended July 11, 2020 was $62.6 million, as compared to $41.4 million for the twelve weeks ended July 13, 2019. Our effective tax rate was 24.8% and 24.9% for the twelve weeks ended July 11, 2020 and July 13, 2019.
Our Provision for income taxes for the twenty-eight weeks ended July 11, 2020 was $79.2 million, as compared to $89.6 million for the twenty-eight weeks ended July 13, 2019. Our effective tax rate was 25.3% and 25.1% for the twenty-eight weeks ended July 11, 2020 and July 13, 2019.
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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) transformation expenses under our strategic business plan; (2) non-cash amortization related to the acquired GPI intangible assets; and (3) 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 the integration of GPI and 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.
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 will include, but not be 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 2018 Store Rationalization plan and 2017 Store and Supply Chain Rationalization plan.
•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 leases agreements, which we expect to be subject to amortization through 2025.
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We have included a reconciliation of this information to the most comparable GAAP measures in the following table:
| Twelve Weeks Ended | Twenty-Eight Weeks Ended | |||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | July 11, 2020 | July 13, 2019 | July 11, 2020 | July 13, 2019 | ||||||||||||||||||||||||||||||||||
| Net income (GAAP) | $ | 189,960 | $ | 124,820 | $ | 233,548 | $ | 267,320 | ||||||||||||||||||||||||||||||
Cost of sales adjustments: | ||||||||||||||||||||||||||||||||||||||
| Transformation expenses: | ||||||||||||||||||||||||||||||||||||||
| Restructuring costs | — | — | — | 281 | ||||||||||||||||||||||||||||||||||
| Other significant costs | 295 | — | 1,548 | — | ||||||||||||||||||||||||||||||||||
Other adjustment (1) | — | — | — | 13,010 | ||||||||||||||||||||||||||||||||||
SG&A adjustments: | ||||||||||||||||||||||||||||||||||||||
GPI amortization of acquired intangible assets | 6,319 | 6,336 | 14,762 | 14,795 | ||||||||||||||||||||||||||||||||||
| Transformation expenses: | ||||||||||||||||||||||||||||||||||||||
| Restructuring costs | 5,577 | 4,963 | 9,641 | 10,513 | ||||||||||||||||||||||||||||||||||
| Third-party professional services | 1,281 | 12,461 | 4,264 | 19,316 | ||||||||||||||||||||||||||||||||||
| Other significant costs | 2,962 | 1,892 | 12,122 | 3,418 | ||||||||||||||||||||||||||||||||||
Other income adjustment (2) | — | — | — | 10,756 | ||||||||||||||||||||||||||||||||||
Provision for income taxes on adjustments (3) | (4,109) | (6,413) | (10,585) | (18,022) | ||||||||||||||||||||||||||||||||||
| Adjusted net income (Non-GAAP) | $ | 202,285 | $ | 144,059 | $ | 265,300 | $ | 321,387 | ||||||||||||||||||||||||||||||
| Diluted earnings per share (GAAP) | $ | 2.74 | $ | 1.73 | $ | 3.37 | $ | 3.71 | ||||||||||||||||||||||||||||||
| Adjustments, net of tax | 0.18 | 0.27 | 0.46 | 0.75 | ||||||||||||||||||||||||||||||||||
| Adjusted EPS (Non-GAAP) | $ | 2.92 | $ | 2.00 | $ | 3.83 | $ | 4.46 | ||||||||||||||||||||||||||||||
(1)During the sixteen weeks ended April 20, 2019, we made an out-of-period correction, which increased Cost of sales by $13.0 million, related to received not invoiced inventory.
(2)During the sixteen weeks ended April 20, 2019, we incurred charges relating to a make-whole provision and debt issuance costs of $10.1 million and $0.7 million resulting from the early redemption of our 2020 senior unsecured notes.
(3)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. 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, given uncertainties related to the COVID-19 pandemic, 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 expected results of operations, available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our obligations for the next year.
Share Repurchase Program
On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program as an addition to the previous $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019.
During the twelve weeks ended July 11, 2020, we purchased no shares of our common stock under the share repurchase program. During the twelve weeks ended July 13, 2019, we purchased 0.1 million shares of our common stock under the share repurchase program at an aggregate cost of $10.9 million, or an average price of $151.58 per share. During the twenty-eight weeks ended July 11, 2020 and July 13, 2019, we repurchased 0.2 million and 0.9 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the twenty-eight weeks ended July 11, 2020 and July 13, 2019 were at an aggregate cost of $29.0 million and $138.1 million, or an average price of $128.36 and $158.98 per share. As previously disclosed, we temporarily discontinued the use of our share repurchase program in the first quarter of 2020. Based on current liquidity and overall financial position, we have lifted this temporary suspension as of August 12, 2020.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| Twenty-Eight Weeks Ended | |||||||||||||||||
| (in thousands) | July 11, 2020 | July 13, 2019 | |||||||||||||||
| Cash flows provided by operating activities | $ | 448,210 | $ | 492,161 | |||||||||||||
| Cash flows used in investing activities | (140,030) | (102,859) | |||||||||||||||
| Cash flows provided by (used in) financing activities | 417,723 | (538,566) | |||||||||||||||
| Effect of exchange rate changes on cash | (3,066) | 456 | |||||||||||||||
Net increase (decrease) in Cash and cash equivalents | $ | 722,837 | $ | (148,808) | |||||||||||||
Operating Activities
For the twenty-eight weeks ended July 11, 2020, net cash provided by operating activities decreased by $44.0 million to $448.2 million compared to the comparable period of 2019. The net decrease in operating cash flows compared to the prior year was primarily driven by a decrease in Net income, largely due to the impact of the COVID-19 pandemic in the six weeks ended April 18, 2020, and decreases in overall working capital, including a decrease in Accounts Payable, partially offset by an increase in Accrued expenses and Inventories.
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Investing Activities
For the twenty-eight weeks ended July 11, 2020, net cash used in investing activities increased by $37.2 million to $140.0 million compared to the comparable period of 2019. Cash used in investing activities for the twenty-eight weeks ended July 11, 2020 consisted primarily of purchases of property and equipment, which was $28.7 million higher than the comparable period of 2019, primarily driven by investments made in supply chain and e-commerce, as well as information technology as we remain focused on the complete back office integration throughout the enterprise.
Financing Activities
For the twenty-eight weeks ended July 11, 2020, net cash provided by financing activities was $417.7 million, an increase of $956.3 million as compared to the twenty-eight weeks ended July 13, 2019. This increase was primarily a result of issuing $500.0 million of senior unsecured notes during the twenty-eight weeks ended July 11, 2020.
Our Board of Directors has declared a quarterly cash dividend 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. On August 11, 2020, our Board of Directors declared a quarterly cash dividend of $0.25 per share to be paid on October 2, 2020 to all common shareholders of record as of September 18, 2020.
Long-Term Debt
As of July 11, 2020, 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 both stable. The current pricing grid used to determine our borrowing rate under our revolving credit facility 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, it 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.
On April 16, 2020, we issued senior unsecured notes at 99.65% of the principal amount of $500.0 million, which are due April 15, 2030 and bear interest at 3.90% per year payable semi-annually in arrears on April 15 and October 15 of each year. On July 28, 2020, these senior unsecured notes were exchanged for notes that are registered under the Securities Act and substantially identical to the original senior unsecured notes.
During the twenty-eight weeks ended July 11, 2020, we borrowed and repaid $500.0 million under our unsecured revolving credit facility, with a borrowing availability of $1.0 billion under such facility as of July 11, 2020.
On August 17, 2020, we notified the trustee of our intent to redeem the $300 million aggregate principal of our 2022 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.
During the twenty-eight weeks ended July 11, 2020, there were no changes to the critical accounting policies discussed in our 2019 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2019 Form 10-K.
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee.
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Certain 100% wholly owned domestic subsidiaries of the Issuer, including our Material Subsidiaries (as defined in the 2017 Credit Agreement) serve as guarantors (“Guarantor Subsidiaries”) of our senior unsecured notes. 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 Subsidiaries. Certain of our wholly owned subsidiaries, including all of our foreign subsidiaries and captive insurance subsidiary, do not serve as guarantors of our senior unsecured notes (“Non-Guarantor Subsidiaries”).
The following tables presents summarized financial information for the Issuer and Guarantor Subsidiaries on a combined basis after after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor Subsidiaries and (ii) equity in earnings from and investments in any subsidiaries that are a Non-Guarantor Subsidiary.
Summarized Financial Information
| Balance Sheets | |||||||||||||||||
| Issuer and Guarantor Subsidiaries | |||||||||||||||||
| (in millions) | July 11, 2020 | December 28, 2019 | |||||||||||||||
| Assets | |||||||||||||||||
Current assets (1) | $ | 6,026.0 | $ | 5,329.9 | |||||||||||||
Non-current assets (2) | 5,389.8 | 5,403.6 | |||||||||||||||
| Liabilities and equity | |||||||||||||||||
| Current liabilities | $ | 4,217.9 | $ | 4,264.3 | |||||||||||||
| Intercompany payables, net due to Non-Guarantor Subsidiaries | 374.2 | 342.8 | |||||||||||||||
| Other non-current liabilities | 3,656.7 | 3,128.2 | |||||||||||||||
(1)Current assets includes $4,176.1 million and $4,234.2 million of Inventories as of July 11, 2020 and December 28, 2019.
(2)Non-current assets includes $1,598.8 million and $1,613.8 million of Goodwill and Intangible assets, net as of July 11, 2020 and December 28, 2019.
| Statements of Operations | |||||||||||||||||
| Issuer and Guarantor Subsidiaries | |||||||||||||||||
| Twenty-Eight Weeks Ended | Fifty-Two Weeks Ended | ||||||||||||||||
| (in millions) | July 11, 2020 | December 28, 2019 | |||||||||||||||
| Net sales | $ | 5,014.5 | $ | 9,342.2 | |||||||||||||
| Gross profit | 2,194.8 | 4,089.8 | |||||||||||||||
| Operating income | 312.0 | 605.5 | |||||||||||||||
| Income before provision for income taxes | 289.6 | 569.0 | |||||||||||||||
| Net income | 233.5 | 486.9 | |||||||||||||||
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposure to market risk since December 28, 2019. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our 2019 Form 10-K.
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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 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 July 11, 2020. 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 July 11, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the COVID-19 pandemic that commenced during the first quarter of 2020, during the second quarter of 2020 certain of our Team Members continued to work remotely and certain stores and distribution centers continued to operate with limited Team Members on-site. We have not identified any material changes in our internal control over financial reporting as a result of these changes to the working environment. We are continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls 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 alleges 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. The surviving claims will now be subject to discovery. In addition, derivative complaints purportedly on behalf of the Company were filed against us as nominal defendant and certain of our current and former officers and directors related to similar allegations for the Class Period on April 29, 2020 in the U.S. District Court for the District of Delaware and August 13, 2020 in the Delaware Court of Chancery. We strongly dispute the allegations of the complaints and intend to defend the cases vigorously.
ITEM 1A. RISK FACTORS
Please refer to “Item 1a. Risk Factors.” found in our 2019 Form 10-K filed for the year ended December 28, 2019, as updated by our subsequent filings with the SEC, including our Form 10-Q filed for the quarterly period ended April 18, 2020, for risks that, if 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 July 11, 2020:
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) | |||||||||||||||||||||||
| April 19, 2020 to May 16, 2020 | — | $ | — | — | $ | 861,747 | ||||||||||||||||||||
| May 17, 2020 to June 13, 2020 | 10,468 | 137.69 | — | 861,747 | ||||||||||||||||||||||
| June 14, 2020 to July 11, 2020 | — | — | — | 861,747 | ||||||||||||||||||||||
| Total | 10,468 | $ | 137.69 | — | $ | 861,747 | ||||||||||||||||||||
(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 $1.4 million, or an average price of $137.69 per share, during the twelve weeks ended July 11, 2020.
(2)On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019.
ITEM 5.OTHER INFORMATION
Effective August 12, 2020, the Company’s Board of Directors (the “Board”) amended the Company’s Amended and Restated By-Laws to include additional language related to the ability to conduct meetings by means of remote communication and adjourn meetings, remove a provision regarding partially paid stock, remove language regarding director actions by written consent being filed with the Company’s minutes and implementing certain administrative and technical changes. A clean copy of the Amended and Restated By-Laws, as amended, is filed as Exhibit 3.2 to this Quarterly Report on Form 10-Q, and a redline copy of the Amended and Restated By-Laws is filed as Exhibit 3.3 to this Quarterly Report on Form 10-Q.
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ITEM 6.EXHIBITS
| Incorporated by Reference | Filed | ||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||||||||
| 10-Q | 3.1 | 8/14/2018 | |||||||||||||||||||||
| X | |||||||||||||||||||||||
| X | |||||||||||||||||||||||
| 8-K | 4.1 | 4/17/2020 | |||||||||||||||||||||
| 8-K | 4.2 | 4/17/2020 | |||||||||||||||||||||
| X | |||||||||||||||||||||||
| X | |||||||||||||||||||||||
| X | |||||||||||||||||||||||
| X | |||||||||||||||||||||||
| X | |||||||||||||||||||||||
| 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. | X | |||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | |||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | |||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. | X | |||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | |||||||||||||||||||||
| 104.1 | Cover Page Interactive Data file (Embedded within Inline XBRL Documents and Included in Exhibit 101.) | ||||||||||||||||||||||
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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: August 18, 2020 | /s/ Andrew E. Page | |||||||
| Andrew E. Page Senior Vice President, Controller and Chief Accounting Officer | ||||||||
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