ADVANCE AUTO PARTS INC - Quarter Report: 2021 October (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 9, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 001-16797
________________________
ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________
| Delaware | 54-2049910 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
2635 East Millbrook Road, Raleigh, North Carolina 27604
(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 | ||||||||||||
| Common Stock, $0.0001 par value | AAP | New York Stock Exchange | ||||||||||||
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.
| Large accelerated filer | ☒ | 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 12, 2021, the number of shares of the registrant’s common stock outstanding was 62,355,177 shares.
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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 (“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)
| October 9, 2021 | January 2, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 604,645 | $ | 834,992 | |||||||
| Receivables, net | 931,758 | 749,999 | |||||||||
| Inventories | 4,450,452 | 4,538,199 | |||||||||
| Other current assets | 174,406 | 146,811 | |||||||||
| Total current assets | 6,161,261 | 6,270,001 | |||||||||
Property and equipment, net of accumulated depreciation of $2,349,872 and $2,189,165 | 1,483,246 | 1,462,602 | |||||||||
| Operating lease right-of-use assets | 2,514,375 | 2,379,987 | |||||||||
| Goodwill | 994,562 | 993,590 | |||||||||
| Intangible assets, net | 658,545 | 681,127 | |||||||||
| Other assets | 52,182 | 52,329 | |||||||||
| $ | 11,864,171 | $ | 11,839,636 | ||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 3,750,835 | $ | 3,640,639 | |||||||
| Accrued expenses | 731,786 | 606,804 | |||||||||
| Other current liabilities | 472,608 | 496,472 | |||||||||
| Total current liabilities | 4,955,229 | 4,743,915 | |||||||||
| Long-term debt | 1,034,002 | 1,032,984 | |||||||||
| Non-current operating lease liabilities | 2,154,364 | 2,014,499 | |||||||||
| Deferred income taxes | 375,069 | 342,445 | |||||||||
| Other long-term liabilities | 148,972 | 146,281 | |||||||||
Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, nonvoting, $0.0001 par value | — | — | |||||||||
Common stock, voting, $0.0001 par value | 8 | 8 | |||||||||
| Additional paid-in capital | 835,033 | 783,709 | |||||||||
| Treasury stock, at cost | (2,203,584) | (1,394,080) | |||||||||
| Accumulated other comprehensive loss | (21,826) | (26,759) | |||||||||
| Retained earnings | 4,586,904 | 4,196,634 | |||||||||
| Total stockholders’ equity | 3,196,535 | 3,559,512 | |||||||||
| $ | 11,864,171 | $ | 11,839,636 | ||||||||
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 3, 2020 | October 9, 2021 | October 3, 2020 | ||||||||||||||||||||
| Net sales | $ | 2,621,229 | $ | 2,541,928 | $ | 8,601,014 | $ | 7,741,190 | |||||||||||||||
Cost of sales, including purchasing and warehousing costs | 1,438,775 | 1,413,457 | 4,744,383 | 4,343,272 | |||||||||||||||||||
| Gross profit | 1,182,454 | 1,128,471 | 3,856,631 | 3,397,918 | |||||||||||||||||||
Selling, general and administrative expenses | 953,256 | 871,660 | 3,130,376 | 2,799,837 | |||||||||||||||||||
| Operating income | 229,198 | 256,811 | 726,255 | 598,081 | |||||||||||||||||||
| Other, net: | |||||||||||||||||||||||
| Interest expense | (8,587) | (11,925) | (28,085) | (37,590) | |||||||||||||||||||
| Loss on early redemptions of senior unsecured notes | — | (48,022) | — | (48,022) | |||||||||||||||||||
| Other income (expense), net | 1,810 | 674 | 7,790 | (2,198) | |||||||||||||||||||
| Total other, net | (6,777) | (59,273) | (20,295) | (87,810) | |||||||||||||||||||
| Income before provision for income taxes | 222,421 | 197,538 | 705,960 | 510,271 | |||||||||||||||||||
| Provision for income taxes | 52,608 | 50,062 | 171,521 | 129,247 | |||||||||||||||||||
| Net income | $ | 169,813 | $ | 147,476 | $ | 534,439 | $ | 381,024 | |||||||||||||||
| Basic earnings per common share | $ | 2.70 | $ | 2.14 | $ | 8.28 | $ | 5.51 | |||||||||||||||
| Weighted-average common shares outstanding | 62,854 | 68,965 | 64,555 | 69,097 | |||||||||||||||||||
| Diluted earnings per common share | $ | 2.68 | $ | 2.13 | $ | 8.22 | $ | 5.50 | |||||||||||||||
| Weighted-average common shares outstanding | 63,348 | 69,267 | 65,008 | 69,325 | |||||||||||||||||||
Condensed Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 9, 2021 | October 3, 2020 | October 9, 2021 | October 3, 2020 | ||||||||||||||||||||
| Net income | $ | 169,813 | $ | 147,476 | $ | 534,439 | $ | 381,024 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Changes in net unrecognized other postretirement costs, net of tax of $25, $26, $69 and $29 | (70) | (73) | (194) | (80) | |||||||||||||||||||
| Currency translation adjustments | 1,527 | 5,298 | 5,127 | (4,065) | |||||||||||||||||||
| Total other comprehensive income (loss) | 1,457 | 5,225 | 4,933 | (4,145) | |||||||||||||||||||
| Comprehensive income | $ | 171,270 | $ | 152,701 | $ | 539,372 | $ | 376,879 | |||||||||||||||
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 9, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance, July 17, 2021 | 63,499 | $ | 8 | $ | 818,126 | $ | (1,973,371) | $ | (23,283) | $ | 4,480,085 | $ | 3,301,565 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 169,813 | 169,813 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | 1,457 | — | 1,457 | ||||||||||||||||||||||||||||||||||
Restricted stock units and deferred stock units vested | 29 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 16,040 | — | — | — | 16,040 | ||||||||||||||||||||||||||||||||||
Stock issued under employee stock purchase plan | 4 | — | 868 | — | — | — | 868 | ||||||||||||||||||||||||||||||||||
Repurchases of common stock | (1,119) | — | — | (230,213) | — | — | (230,213) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($1.00 per common share) | — | — | — | — | — | (62,994) | (62,994) | ||||||||||||||||||||||||||||||||||
| Other | — | — | (1) | — | — | — | (1) | ||||||||||||||||||||||||||||||||||
| Balance, October 9, 2021 | 62,413 | $ | 8 | $ | 835,033 | $ | (2,203,584) | $ | (21,826) | $ | 4,586,904 | $ | 3,196,535 | ||||||||||||||||||||||||||||
| Twelve Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance, July 11, 2020 | 69,139 | $ | 8 | $ | 760,535 | $ | (961,592) | $ | (43,939) | $ | 3,971,507 | $ | 3,726,519 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 147,476 | 147,476 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | 5,225 | — | 5,225 | ||||||||||||||||||||||||||||||||||
Restricted stock units and deferred stock units vested | 27 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 11,089 | — | — | — | 11,089 | ||||||||||||||||||||||||||||||||||
Stock issued under employee stock purchase plan | 5 | — | 693 | — | — | — | 693 | ||||||||||||||||||||||||||||||||||
Repurchases of common stock | (726) | — | — | (111,127) | — | — | (111,127) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.25 per common share) | — | — | — | — | — | (17,207) | (17,207) | ||||||||||||||||||||||||||||||||||
| Other | — | — | (4) | — | — | — | (4) | ||||||||||||||||||||||||||||||||||
| Balance, October 3, 2020 | 68,445 | $ | 8 | $ | 772,313 | $ | (1,072,719) | $ | (38,714) | $ | 4,101,776 | $ | 3,762,664 | ||||||||||||||||||||||||||||
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 9, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 2, 2021 | 66,361 | $ | 8 | $ | 783,709 | $ | (1,394,080) | $ | (26,759) | $ | 4,196,634 | $ | 3,559,512 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 534,439 | 534,439 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | 4,933 | — | 4,933 | ||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | 277 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 49,631 | — | — | — | 49,631 | ||||||||||||||||||||||||||||||||||
Stock issued under employee stock purchase plan | 23 | — | 1,737 | — | — | — | 1,737 | ||||||||||||||||||||||||||||||||||
Repurchases of common stock | (4,285) | — | — | (809,504) | — | — | (809,504) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($2.25 per common share) | — | — | — | — | — | (144,169) | (144,169) | ||||||||||||||||||||||||||||||||||
Other | 37 | — | (44) | — | — | — | (44) | ||||||||||||||||||||||||||||||||||
| Balance, October 9, 2021 | 62,413 | $ | 8 | $ | 835,033 | $ | (2,203,584) | $ | (21,826) | $ | 4,586,904 | $ | 3,196,535 | ||||||||||||||||||||||||||||
| Forty Weeks Ended October 3, 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 | 69,232 | $ | 8 | $ | 735,183 | $ | (924,389) | $ | (34,569) | $ | 3,772,848 | $ | 3,549,081 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 381,024 | 381,024 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | (4,145) | — | (4,145) | ||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | 206 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 34,927 | — | — | — | 34,927 | ||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | 20 | — | 2,211 | — | — | — | 2,211 | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (1,013) | — | — | (148,330) | — | — | (148,330) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.75 per common share) | — | — | — | — | — | (52,096) | (52,096) | ||||||||||||||||||||||||||||||||||
| Other | — | — | (8) | — | — | — | (8) | ||||||||||||||||||||||||||||||||||
| Balance, October 3, 2020 | 68,445 | $ | 8 | $ | 772,313 | $ | (1,072,719) | $ | (38,714) | $ | 4,101,776 | $ | 3,762,664 | ||||||||||||||||||||||||||||
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 | October 3, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 534,439 | $ | 381,024 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 194,737 | 192,911 | |||||||||
| Share-based compensation | 49,631 | 34,927 | |||||||||
| Loss and impairment of long-lived assets | 7,570 | 1,582 | |||||||||
| Loss on early redemption of senior unsecured notes | — | 48,022 | |||||||||
| Provision for deferred income taxes | 32,425 | 8,975 | |||||||||
| Other, net | 1,388 | 1,212 | |||||||||
| Net change in: | |||||||||||
| Receivables, net | (180,605) | (154,888) | |||||||||
| Inventories | 90,993 | 62,181 | |||||||||
| Accounts payable | 108,393 | 106,831 | |||||||||
| Accrued expenses | 137,395 | 111,136 | |||||||||
| Other assets and liabilities, net | (51,430) | 15,305 | |||||||||
| Net cash provided by operating activities | 924,936 | 809,218 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (190,983) | (192,632) | |||||||||
| Purchase of an indefinite-lived intangible asset | — | (230) | |||||||||
| Proceeds from sales of property and equipment | 2,102 | 914 | |||||||||
| Net cash used in investing activities | (188,881) | (191,948) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowing on revolving credit facility | — | 500,000 | |||||||||
| Payment on revolving credit facility | — | (500,000) | |||||||||
| Proceeds from issuances of senior unsecured notes, net | — | 847,092 | |||||||||
| Early redemptions of senior unsecured notes, net | — | (602,568) | |||||||||
| Dividends paid | (160,925) | (56,210) | |||||||||
Proceeds from the issuance of common stock | 1,737 | 2,211 | |||||||||
| Repurchases of common stock | (809,504) | (148,330) | |||||||||
| Other, net | (46) | (8,735) | |||||||||
| Net cash (used in) provided by financing activities | (968,738) | 33,460 | |||||||||
| Effect of exchange rate changes on cash | 2,336 | (1,190) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (230,347) | 649,540 | |||||||||
Cash and cash equivalents, beginning of period | 834,992 | 418,665 | |||||||||
Cash and cash equivalents, end of period | $ | 604,645 | $ | 1,068,205 | |||||||
| Non-cash transactions: | |||||||||||
| Accrued purchases of property and equipment | $ | 8,632 | $ | 16,302 | |||||||
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 October 9, 2021, we operated a total of 4,727 stores and 234 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of October 9, 2021, we served 1,325 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,” “Carquest” and “Autopart International,” and our branches operate under the “Worldpac” trade name.
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 2020 as filed with the SEC on February 22, 2021.
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 remaining three quarters consist of twelve weeks.
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 3, 2020 | October 9, 2021 | October 3, 2020 | ||||||||||||||||||||
| Percentage of Net sales, by product group: | |||||||||||||||||||||||
| Parts and batteries | 68 | % | 67 | % | 66 | % | 66 | % | |||||||||||||||
| Accessories and chemicals | 19 | 20 | 21 | 21 | |||||||||||||||||||
| Engine maintenance | 12 | 12 | 12 | 12 | |||||||||||||||||||
| Other | 1 | 1 | 1 | 1 | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
3. Inventories
Inventories are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately 89% of inventories as of October 9, 2021 and 88% of inventories as of January 2, 2021. Under the LIFO method, our Cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in the forty weeks ended October 9, 2021 and prior years. We recorded an increase to Cost of sales of $29.4 million and a reduction to Cost of sales of $15.9 million for the twelve weeks ended October 9, 2021 and October 3, 2020 and an increase to Cost of sales of $71.6 million and a reduction to Cost of sales of $3.9 million for the forty weeks ended October 9, 2021 and October 3, 2020 to state inventories at LIFO.
7
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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) | October 9, 2021 | January 2, 2021 | |||||||||
| Inventories at first in, first out (“FIFO”) | $ | 4,366,631 | $ | 4,382,779 | |||||||
| Adjustments to state inventories at LIFO | 83,821 | 155,420 | |||||||||
| Inventories at LIFO | $ | 4,450,452 | $ | 4,538,199 | |||||||
4. Intangible Assets
Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $7.2 million and $7.3 million for the twelve weeks ended October 9, 2021 and October 3, 2020 and $24.1 million and $24.3 million for the forty weeks ended October 9, 2021 and October 3, 2020.
5. Receivables, net
Receivables, net consists of the following:
| (in thousands) | October 9, 2021 | January 2, 2021 | |||||||||
| Trade | $ | 585,174 | $ | 449,403 | |||||||
| Vendor | 282,377 | 278,180 | |||||||||
| Other | 74,528 | 34,345 | |||||||||
| Total receivables | 942,079 | 761,928 | |||||||||
| Less: Allowance for doubtful accounts | (10,321) | (11,929) | |||||||||
| Receivables, net | $ | 931,758 | $ | 749,999 | |||||||
6. Long-term Debt and Fair Value of Financial Instruments
Long-term debt consists of the following:
| (in thousands) | October 9, 2021 | January 2, 2021 | |||||||||
| 4.50% Senior Unsecured Notes due December 1, 2023 | $ | 193,167 | $ | 192,990 | |||||||
| 1.75% Senior Unsecured Notes due October 1, 2027 | 346,251 | 345,854 | |||||||||
| 3.90% Senior Unsecured Notes due April 15, 2030 | 494,584 | 494,140 | |||||||||
| Total long-term debt | $ | 1,034,002 | $ | 1,032,984 | |||||||
| Fair value of long-term debt | $ | 1,103,627 | $ | 1,145,000 | |||||||
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.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Bank Debt
As of October 9, 2021 and January 2, 2021, we had no 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 October 9, 2021 and January 2, 2021, we had $92.6 million and $100.0 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 9, 2021.
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 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.
On July 28, 2020, we completed an exchange offer whereby 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”), were exchanged for a like principal amount of 3.90% senior unsecured notes due 2030 (the “Exchange Notes” or “2030 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 September 29, 2020, we issued $350.0 million aggregate principal amount of senior unsecured notes (the “2027 Notes”). The 2027 Notes were issued at 99.67% of the principal amount of $350.0 million, are due October 1, 2027 and bear interest at 1.75% per year payable semi-annually in arrears on April 1 and October 1 of each year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs. Our 2023 Notes, 2027 Notes and 2030 Notes are collectively referred to herein as our “senior unsecured notes.”
Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of our 2023 Notes with the net proceeds from the 2027 Notes. In connection with this tender offer, we incurred charges relating to tender premiums and debt issuance costs of $30.5 million and $1.4 million.
Debt Guarantees
We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $27.7 million and $23.6 million as of October 9, 2021 and January 2, 2021. 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 $69.6 million and $57.5 million as of October 9, 2021 and January 2, 2021. We believe that the likelihood of performance under these guarantees is remote.
7. Leases
Substantially all of our leases are for facilities and vehicles. The initial term for facilities is typically 5 years to 10 years, with renewal options at 5 year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically 3 years to 5 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Operating lease liabilities consist of the following:
| (in thousands) | October 9, 2021 | January 2, 2021 | |||||||||
| Total operating lease liabilities | $ | 2,610,491 | $ | 2,477,087 | |||||||
| Less: Current portion of operating lease liabilities | (456,127) | (462,588) | |||||||||
| Noncurrent operating lease liabilities | $ | 2,154,364 | $ | 2,014,499 | |||||||
The current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheets.
Total lease cost is included in Cost of sales and Selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. Total lease cost is comprised of the following:
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| (in thousands) | October 9, 2021 | October 3, 2020 | October 9, 2021 | October 3, 2020 | |||||||||||||||||||
| Operating lease cost | $ | 124,084 | $ | 121,869 | $ | 410,253 | $ | 403,381 | |||||||||||||||
| Variable lease cost | 35,144 | 31,469 | 112,864 | 105,862 | |||||||||||||||||||
| Total lease cost | $ | 159,228 | $ | 153,338 | $ | 523,117 | $ | 509,243 | |||||||||||||||
The future maturity of lease liabilities are as follows:
| (in thousands) | October 9, 2021 | ||||
| Remainder of 2021 | $ | 141,957 | |||
| 2022 | 503,001 | ||||
| 2023 | 481,738 | ||||
| 2024 | 415,170 | ||||
| 2025 | 368,761 | ||||
| Thereafter | 1,063,114 | ||||
| Total lease payments | 2,973,741 | ||||
| Less: Imputed interest | (363,250) | ||||
| Total operating lease liabilities | $ | 2,610,491 | |||
As of October 9, 2021, our operating lease payments include $66.9 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $183.8 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 7.2 years and 3.3% as of October 9, 2021. 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.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Other information relating to our lease liabilities is as follows:
| Forty Weeks Ended | |||||||||||
| (in thousands) | October 9, 2021 | October 3, 2020 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 418,596 | $ | 433,934 | |||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 460,351 | $ | 305,930 | |||||||
8. Warranty Liabilities
The following table presents changes in our warranty reserves:
| Forty Weeks Ended | Fifty-Three Weeks Ended | ||||||||||
| (in thousands) | October 9, 2021 | January 2, 2021 | |||||||||
| Warranty reserve, beginning of period | $ | 14,120 | $ | 36,820 | |||||||
| Additions to warranty reserves | 8,112 | 14,907 | |||||||||
| Reduction and utilization of reserve | (19,077) | (37,607) | |||||||||
| Warranty reserve, end of period | $ | 3,155 | $ | 14,120 | |||||||
9. Share Repurchase Program
On April 19, 2021, our Board of Directors authorized an additional $1.0 billion share repurchase program. This new authorization was incremental to the $700.0 million share repurchase program that was authorized by our Board of Directors in November 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 October 9, 2021, we repurchased 1.1 million shares of our common stock at an aggregate cost of $228.3 million, or an average price of $205.65 per share, in connection with our share repurchase program. During the twelve weeks ended October 3, 2020, we repurchased 0.7 million shares of our common stock at an aggregate cost of $109.6 million, or an average price of $153.06 per share, in connection with our share repurchase program. During the forty weeks ended October 9, 2021 and October 3, 2020, we repurchased 4.2 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 forty weeks ended October 9, 2021 and October 3, 2020 were at an aggregate cost of $791.7 million and $138.6 million, or an average price of $189.43 and $147.13 per share. We had $640.5 million remaining under our share repurchase program as of October 9, 2021.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
10. Earnings per Share
The computations of basic and diluted earnings per share are as follows:
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| (in thousands, except per share data) | October 9, 2021 | October 3, 2020 | October 9, 2021 | October 3, 2020 | |||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net income applicable to common shares | $ | 169,813 | $ | 147,476 | $ | 534,439 | $ | 381,024 | |||||||||||||||
| Denominator | |||||||||||||||||||||||
| Basic weighted-average common shares | 62,854 | 68,965 | 64,555 | 69,097 | |||||||||||||||||||
| Dilutive impact of share-based awards | 494 | 302 | 453 | 228 | |||||||||||||||||||
Diluted weighted-average common shares (1) | 63,348 | 69,267 | 65,008 | 69,325 | |||||||||||||||||||
| Basic earnings per common share | $ | 2.70 | $ | 2.14 | $ | 8.28 | $ | 5.51 | |||||||||||||||
| Diluted earnings per common share | $ | 2.68 | $ | 2.13 | $ | 8.22 | $ | 5.50 | |||||||||||||||
(1)For the twelve weeks ended October 9, 2021, there were no restricted stock units (“RSUs”) that were anti-dilutive. For the forty weeks ended October 9, 2021, 10,974 RSUs were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the twelve and forty weeks ended October 3, 2020, 101 thousand and 134 thousand RSUs were excluded from the diluted calculation as their inclusion would have been anti-dilutive.
11. Share-Based Compensation
During the forty weeks ended October 9, 2021, we granted 234 thousand time-based RSUs, 63 thousand market-based RSUs and 124 thousand Stock Options. The general terms of the time-based, performance-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 options are granted at an exercise price equal to the closing market price of Advance's common stock on the date of the grant, expire after 10 years and vest one-third annually over three years. 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 9, 2021 were $181.10 and $204.97 per share. 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 fair value of each market-based RSU was determined using a Monte Carlo simulation model.
The weighted-average fair values of stock options granted during the forty weeks ended October 9, 2021 was $47.19 per share. No stock options were granted in the twelve weeks ended October 9, 2021. The fair value was estimated on the date of grant by applying the Black-Scholes option-pricing valuation model.
Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 9, 2021 was $4.1 million and $12.3 million. Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 3, 2020 was $2.8 million and $8.8 million. As of October 9, 2021, there was $82.4 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted-average period of 1.6 years.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
12. Subsequent Events
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. On November 5, 2021, the parties executed a confidential binding term sheet to settle all claims. The settlement amount will be fully covered by our insurance carriers, and the settlement is subject to court approval.
On November 9, 2021, we entered into a new credit agreement that provides a $1.2 billion unsecured revolving credit facility (the “2021 Credit Agreement”) with Advance Auto Parts, Inc. as Borrower, the lenders party thereto, and Bank of America, N.A., Administrative Agent. This new revolver under the 2021 Credit Agreement replaced the revolver under the Credit Agreement. The new revolver provides for the issuance of letters of credit with a sublimit of $200.0 million. We may request that the total revolving commitment be increased by an amount not exceeding $500.0 million during the term of the 2021 Credit Agreement.
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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 2, 2021 (filed with the SEC on February 22, 2021), which we refer to as our 2020 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 ongoing COVID-19 pandemic, we have continued prioritizing protecting the health and safety of our team members and customers; driving financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and ensuring that our team will emerge even stronger following the pandemic. We have continued to take additional measures to help ensure the health and safety of our team members and customers, including the continuation of 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 the first half of 2020. These contributed to negative impacts to demand, primarily during the last six weeks of the sixteen weeks ended April 18, 2020. However, as the remainder of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY omnichannel business. This has continued in the forty weeks ended October 9, 2021, though demand in the professional business is now outpacing the DIY channel, particularly in the second and third quarters, driven partially by multiple rounds of government stimulus, consumers’ increased use of personal vehicles and the continued reopening of businesses throughout the United States. In addition, we believe the execution of prioritized internal initiatives, including our new marketing campaign and providing a variety of shopping choices for customers with our Advance Same Day® options, as well as improved store execution, all contributed to the improvement in demand. We have also continued to make progress on the development of our key supply chain initiatives, including cross-banner replenishment and our single warehouse management system.
Despite the increase in Net sales during the twelve and forty weeks ended October 9, 2021, 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 3.1% in the third quarter of 2021 compared with the same period in the prior year, primarily driven by an overall channel shift back to professional and a return to stores for DIY customers. Within professional we’re seeing increasing strength in certain geographies that lagged the country last year as the gradual return to work of professional workers in large urban markets catches up with the rest of the country. Our regional strength was led by the Southwest and West, along with a strong recovery in the MidAtlantic and Northeast. Category growth was led by brakes, motor oil and filters as miles driven reliant categories improved.
We generated diluted earnings per share (“diluted EPS”) of $2.68 during our third quarter of 2021 compared with $2.13 for the comparable period of 2020. When adjusted for non-operational items in the following table, our adjusted diluted earnings per share (“Adjusted EPS”) for the twelve weeks ended October 9, 2021 and October 3, 2020 was $3.21 and $2.64.
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For the forty weeks ended October 9, 2021 and October 3, 2020, diluted EPS was $8.22 and $5.50. When adjusted for non-operational items in the following table, our Adjusted EPS for the forty weeks ended October 9, 2021 and October 3, 2020 was $9.93 and $6.59.
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||
| October 9, 2021 | October 3, 2020 | October 9, 2021 | October 3, 2020 | ||||||||||||||||||||
| LIFO impacts | $ | 0.35 | $ | (0.17) | $ | 0.82 | $ | (0.05) | |||||||||||||||
| Transformation expenses | $ | 0.10 | $ | 0.09 | $ | 0.64 | $ | 0.39 | |||||||||||||||
| General Parts International, Inc. (“GPI”) amortization of acquired intangible assets | $ | 0.08 | $ | 0.07 | $ | 0.25 | $ | 0.23 | |||||||||||||||
| Other adjustments | $ | — | $ | 0.52 | $ | — | $ | 0.52 | |||||||||||||||
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 Third Quarter Financial Results
A high-level summary of our financial results for the third quarter of 2021 includes:
•Net sales during the third quarter of 2021 were $2.6 billion, an increase of 3.1% compared with the third quarter of 2020, primarily driven by an increase in comparable store sales resulting from a strong recovery in our professional business.
•Gross profit margin for the third quarter of 2021 was 45.1% of Net sales, an increase of 72 basis points compared with the third quarter of 2020. This increase was primarily due to our ongoing category management initiatives, including strategic pricing, strategic sourcing and owned brand expansion as well as favorable product mix.
•SG&A expenses for the third quarter of 2021 were 36.4% of Net sales, an increase of 208 basis points compared with the third quarter of 2020.
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.
•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 launch of 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.
•Ongoing 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.
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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. Refer to our 2020 Form 10-K, as updated by our subsequent filings with the SEC, and the “Impact of COVID-19 on Our Business” section included within this Form 10-Q.
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 forty weeks ended October 9, 2021, 25 stores and branches were opened and 40 were closed or consolidated, resulting in a total of 4,961 stores and branches as of October 9, 2021, compared with a total of 4,976 stores and branches as of January 2, 2021.
Results of Operations
| Twelve Weeks Ended | $ Favorable/ (Unfavorable) | Basis Points | |||||||||||||||||||||||||||||||||
| ($ in millions) | October 9, 2021 | October 3, 2020 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 2,621.2 | 100.0 | % | $ | 2,541.9 | 100.0 | % | $ | 79.3 | — | ||||||||||||||||||||||||
Cost of sales | 1,438.8 | 54.9 | 1,413.5 | 55.6 | (25.3) | (72) | |||||||||||||||||||||||||||||
| Gross profit | 1,182.5 | 45.1 | 1,128.5 | 44.4 | 54.0 | 72 | |||||||||||||||||||||||||||||
| SG&A | 953.3 | 36.4 | 871.7 | 34.3 | (81.6) | (208) | |||||||||||||||||||||||||||||
| Operating income | 229.2 | 8.7 | 256.8 | 10.1 | (27.6) | (136) | |||||||||||||||||||||||||||||
| Interest expense | (8.6) | (0.3) | (11.9) | (0.5) | 3.3 | 14 | |||||||||||||||||||||||||||||
| Loss on early redemptions of senior unsecured notes | — | — | (48.0) | (1.9) | 48.0 | 189 | |||||||||||||||||||||||||||||
| Other income, net | 1.8 | 0.1 | 0.7 | — | 1.1 | 4 | |||||||||||||||||||||||||||||
| Provision for income taxes | 52.6 | 2.0 | 50.1 | 2.0 | (2.5) | (4) | |||||||||||||||||||||||||||||
| Net income | $ | 169.8 | 6.5 | % | $ | 147.5 | 5.8 | % | $ | 22.3 | 68 | ||||||||||||||||||||||||
| Forty Weeks Ended | $ Favorable/ (Unfavorable) | Basis Points | |||||||||||||||||||||||||||||||||
| ($ in millions) | October 9, 2021 | October 3, 2020 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 8,601.0 | 100.0 | % | $ | 7,741.2 | 100.0 | % | $ | 859.8 | — | ||||||||||||||||||||||||
Cost of sales | 4,744.4 | 55.2 | 4,343.3 | 56.1 | (401.1) | (95) | |||||||||||||||||||||||||||||
| Gross profit | 3,856.6 | 44.8 | 3,397.9 | 43.9 | 458.7 | 95 | |||||||||||||||||||||||||||||
| SG&A | 3,130.4 | 36.4 | 2,799.8 | 36.2 | (330.6) | (23) | |||||||||||||||||||||||||||||
| Operating income | 726.3 | 8.4 | 598.1 | 7.7 | 128.2 | 72 | |||||||||||||||||||||||||||||
| Interest expense | (28.1) | (0.3) | (37.6) | (0.5) | 9.5 | 16 | |||||||||||||||||||||||||||||
| Loss on early redemptions of senior unsecured notes | — | — | (48.0) | (0.6) | 48.0 | 62 | |||||||||||||||||||||||||||||
| Other income (expense), net | 7.8 | 0.1 | (2.2) | — | 10.0 | 12 | |||||||||||||||||||||||||||||
| Provision for income taxes | 171.5 | 2.0 | 129.2 | 1.7 | (42.3) | (32) | |||||||||||||||||||||||||||||
| Net income | $ | 534.4 | 6.2 | % | $ | 381.0 | 4.9 | % | $ | 153.4 | 129 | ||||||||||||||||||||||||
Note: Table amounts may not foot due to rounding.
Net Sales
Net sales for the twelve weeks ended October 9, 2021 increased 3.1% compared with the same period of 2020, primarily driven by a 3.1% increase in comparable store sales resulting from a strong recovery in our professional business. Our regional strength was led by the Southwest and West, along with a strong recovery in the MidAtlantic and Northeast. Category growth was led by brakes, motor oil and filters as miles driven reliant categories improved.
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For the forty weeks ended October 9, 2021, Net sales increased 11.1% compared with the same period of 2020, primarily driven by an 11.4% increase in comparable store sales resulting from a strong recovery of our professional business and an increase in demand in our DIY business compared with the same period in the prior year, which was significantly impacted by the COVID-19 pandemic.
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 9, 2021 was $1,182.5 million, or 45.1% of Net sales, compared with $1,128.5 million, or 44.4% of Net sales, for the twelve weeks ended October 3, 2020. This increase in Gross profit as a percentage of Net sales was primarily driven by improvements in category management, including strategic pricing, strategic sourcing and owned brand expansion as well as favorable product mix offset by inflationary costs and unfavorable channel mix.
Gross profit for the forty weeks ended October 9, 2021 was $3,856.6 million, or 44.8% of Net sales, compared with $3,397.9 million, or 43.9% of Net sales, for the forty weeks ended October 3, 2020. This increase in Gross profit as a percentage of Net sales was primarily due to improvements in net pricing, increases in vendor related funding and favorable product mix, partially offset by increased LIFO related expenses and unfavorable channel mix.
As a result of changes in our LIFO reserve, an expense of $29.4 million and a benefit of $15.9 million were included in the twelve weeks ended October 9, 2021 and October 3, 2020. An expense of $71.6 million and a benefit of $3.9 million were included in the forty weeks ended October 9, 2021 and October 3, 2020.
Selling, general and administrative expenses
SG&A expenses for the twelve weeks ended October 9, 2021 were $953.3 million, or 36.4% of Net sales, compared with $871.7 million, or 34.3% of Net sales, for the twelve weeks ended October 3, 2020. This increase of 208 basis points compared with the third quarter of 2020 was primarily driven by increased inflationary headwinds in store labor as well as higher delivery and fuel expenses associated with the recovery of the professional business. We incurred higher incentive compensation and incremental startup costs for new store openings when compared with the prior year.
SG&A expenses for the forty weeks ended October 9, 2021 were $3,130.4 million, or 36.4% of Net sales, compared with $2,799.8 million, or 36.2% of Net sales, for the forty weeks ended October 3, 2020. The increase in SG&A expenses was driven by higher labor and benefit costs, marketing initiatives and contract services.
Provision for income taxes
Our Provision for income taxes for the twelve weeks ended October 9, 2021 was $52.6 million, compared with $50.1 million for the twelve weeks ended October 3, 2020. Our effective tax rate was 23.7% and 25.3% for the twelve weeks ended October 9, 2021 and October 3, 2020.
Our Provision for income taxes for the forty weeks ended October 9, 2021 was $171.5 million, compared with $129.2 million for the forty weeks ended October 3, 2020. Our effective tax rate was 24.3% and 25.3% for the forty weeks ended October 9, 2021 and October 3, 2020.
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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) 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 — Beginning the first quarter of 2021, 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.
•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.
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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 | Forty Weeks Ended | ||||||||||||||||||||||
| (in thousands, except per share data) | October 9, 2021 | October 3, 2020 | October 9, 2021 | October 3, 2020 | |||||||||||||||||||
| Net income (GAAP) | $ | 169,813 | $ | 147,476 | $ | 534,439 | $ | 381,024 | |||||||||||||||
Cost of sales adjustments: | |||||||||||||||||||||||
LIFO impacts (1) | 29,410 | (15,855) | 71,599 | (3,908) | |||||||||||||||||||
| Transformation expenses: | |||||||||||||||||||||||
| Other significant costs | 143 | 79 | 2,611 | 1,627 | |||||||||||||||||||
SG&A adjustments: | |||||||||||||||||||||||
GPI amortization of acquired intangible assets | 6,341 | 6,324 | 21,246 | 21,086 | |||||||||||||||||||
| Transformation expenses: | |||||||||||||||||||||||
| Restructuring costs | 2,360 | 2,581 | 27,063 | 12,221 | |||||||||||||||||||
| Third-party professional services | 4,823 | 4,660 | 18,394 | 8,924 | |||||||||||||||||||
| Other significant costs | 1,492 | 1,438 | 7,406 | 13,560 | |||||||||||||||||||
Other income adjustment (2) | 36 | 48,022 | — | 48,022 | |||||||||||||||||||
Provision for income taxes on adjustments (3) | (11,151) | (11,812) | (37,080) | (25,383) | |||||||||||||||||||
| Adjusted net income (Non-GAAP) | $ | 203,267 | $ | 182,913 | $ | 645,678 | $ | 457,173 | |||||||||||||||
| Diluted earnings per share (GAAP) | $ | 2.68 | $ | 2.13 | $ | 8.22 | $ | 5.50 | |||||||||||||||
| Adjustments, net of tax | 0.53 | 0.51 | 1.71 | 1.09 | |||||||||||||||||||
| Adjusted EPS (Non-GAAP) | $ | 3.21 | $ | 2.64 | $ | 9.93 | $ | 6.59 | |||||||||||||||
(1)The twelve and forty weeks ended October 3, 2020 non-GAAP expenses have been adjusted to be comparable with our 2021 presentation.
(2)During the twelve and forty weeks ended October 3, 2020, we incurred charges relating to a make-whole provision and tender premiums of $46.3 million and debt issuance costs of $1.7 million resulting from the early redemption of our 2022 and 2023 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.
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.
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Share Repurchase Program
On April 19, 2021, our Board of Directors authorized an additional $1.0 billion to our current share repurchase program. This authorization was incremental to the $700.0 million that was authorized previously by our Board of Directors in November 2019.
During the twelve weeks ended October 9, 2021, we repurchased 1.1 million shares of our common stock at an aggregate cost of $228.3 million, or an average price of $205.65 per share, in connection with our share repurchase program. During the twelve weeks ended October 3, 2020, we repurchased 0.7 million shares of our common stock at an aggregate cost of $109.6 million, or an average price of $153.06 per share, in connection with our share repurchase program. During the forty weeks ended October 9, 2021 and October 3, 2020, we repurchased 4.2 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 forty weeks ended October 9, 2021 and October 3, 2020 were at an aggregate cost of $791.7 million and $138.6 million, or an average price of $189.43 and $147.13 per share. We had $640.5 million remaining under our share repurchase program as of October 9, 2021.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| Forty Weeks Ended | |||||||||||
| (in thousands) | October 9, 2021 | October 3, 2020 | |||||||||
| Cash flows provided by operating activities | $ | 924,936 | $ | 809,218 | |||||||
| Cash flows used in investing activities | (188,881) | (191,948) | |||||||||
| Cash flows (used in) provided by financing activities | (968,738) | 33,460 | |||||||||
| Effect of exchange rate changes on cash | 2,336 | (1,190) | |||||||||
| Net (decrease) increase in Cash and cash equivalents | $ | (230,347) | $ | 649,540 | |||||||
Operating Activities
For the forty weeks ended October 9, 2021, Cash flows provided by operating activities increased by $115.7 million to $924.9 million compared with the same period of the prior year. The net increase in cash flows provided by operating activities compared with the prior year was primarily driven by the increased cash generated from operations due to higher sales.
Investing Activities
For the forty weeks ended October 9, 2021, Cash flows used in investing activities decreased by $3.1 million to $188.9 million compared with the same period of the prior year. Cash used in investing activities for the forty weeks ended October 9, 2021 consisted primarily of purchases of property and equipment of $191.0 million primarily driven by investments in information technology as we remain focused on the complete back office integration throughout the enterprise and supply chain.
Financing Activities
For the forty weeks ended October 9, 2021, Cash flows used in financing activities was $968.7 million, a decrease of $1,002.2 million compared with the same period of the prior year. The change over prior year was primarily attributable to the repurchase of $791.7 million of common stock under our share repurchase program and dividends paid of $160.9 million during the forty weeks ended October 9, 2021 compared with share repurchases of $138.6 million of common stock under our share repurchase program and dividends paid of $56.2 million for the forty weeks ended October 3, 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 November 9, 2021, we declared a regular cash dividend of $1.00 per share to be paid on January 3, 2022 to all common stockholders of record as of December 17, 2021.
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Long-Term Debt
As of October 9, 2021, 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.
On November 9, 2021, we entered into a new credit agreement (the “2021 Credit Agreement”). For additional information on our Long-term debt and the 2021 Credit Agreement, refer to Note 6, Long-term Debt and Fair Value of Financial Instruments and Note 12, Subsequent Events of the Notes to the Condensed Consolidated Financial Statements included herein.
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 forty weeks ended October 9, 2021, there were no changes to the critical accounting policies discussed in our 2020 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2020 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.
Certain 100% wholly owned domestic subsidiaries of the Issuer, including our Material Subsidiaries (as defined in the 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 present summarized financial information for the Issuer and Guarantor Subsidiaries on a combined basis 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.
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Summarized Financial Information
| Balance Sheets | |||||||||||
| Issuer and Guarantor Subsidiaries | |||||||||||
| (in millions) | October 9, 2021 | January 2, 2021 | |||||||||
| Assets | |||||||||||
Current assets (1) | $ | 5,472.8 | $ | 5,796.3 | |||||||
Non-current assets (2) | $ | 5,519.7 | $ | 5,395.4 | |||||||
| Liabilities | |||||||||||
| Current liabilities | $ | 4,674.5 | $ | 4,539.1 | |||||||
| Intercompany payables, net due to Non-Guarantor Subsidiaries | $ | 173.0 | $ | 290.7 | |||||||
| Other non-current liabilities | $ | 3,560.4 | $ | 3,401.7 | |||||||
(1)Current assets includes $4,214.0 million and $4,318.6 million of Inventories as of October 9, 2021 and January 2, 2021.
(2)Non-current assets includes $1,564.4 million and $1,585.9 million of Goodwill and Intangible assets, net as of October 9, 2021 and January 2, 2021.
| Statements of Operations | |||||||||||
| Issuer and Guarantor Subsidiaries | |||||||||||
| Forty Weeks Ended | Fifty-Three Weeks Ended | ||||||||||
| (in millions) | October 9, 2021 | January 2, 2021 | |||||||||
| Net sales | $ | 8,276.9 | $ | 9,735.8 | |||||||
| Gross profit | $ | 3,704.9 | $ | 4,335.1 | |||||||
| Operating income | $ | 718.4 | $ | 687.8 | |||||||
| Income before provision for income taxes | $ | 696.1 | $ | 598.0 | |||||||
| Net income | $ | 527.8 | $ | 453.4 | |||||||
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposure to market risk since January 2, 2021. Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2020 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.
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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 9, 2021. 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 9, 2021 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
Please refer to Note 12, Subsequent Events of the Notes to the Condensed Consolidated Financial Statements included herein for material legal proceedings.
ITEM 1A.RISK FACTORS
Please refer to “Item 1A. Risk Factors” found in our 2020 Form 10-K filed for the year ended January 2, 2021, as updated by our subsequent filings with the SEC, 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 9, 2021:
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 18, 2021 to August 14, 2021 | 382,871 | $ | 209.15 | 382,707 | $ | 788,800 | ||||||||||||||||||||
| August 15, 2021 to September 11, 2021 | 652,631 | $ | 204.42 | 643,687 | $ | 657,247 | ||||||||||||||||||||
| September 12, 2021 to October 9, 2021 | 84,010 | $ | 199.46 | 83,936 | $ | 640,505 | ||||||||||||||||||||
| Total | 1,119,512 | $ | 205.67 | 1,110,330 | ||||||||||||||||||||||
(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 $1.9 million, or an average price of $207.68 per share, during the twelve weeks ended October 9, 2021.
(2)On April 19, 2021, our Board of Directors authorized an additional $1.0 billion share repurchase program. This new authorization was incremental to the $700.0 million share repurchase program that was authorized by our Board of Directors in November 2019.
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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 | |||||||||||||||
| 10-Q | 3.2 | 8/18/2020 | |||||||||||||||
| 8-K | 10.1 | 11/15/2021 | |||||||||||||||
| 8-K | 10.2 | 11/15/2021 | |||||||||||||||
| 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: November 16, 2021 | /s/ Jeffrey W. Shepherd | |||||||
| Jeffrey W. Shepherd Executive Vice President, Chief Financial Officer | ||||||||
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