ADVANCE AUTO PARTS INC - Quarter Report: 2023 April (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 April 22, 2023
☐ 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
_______________________________
![aaplogocolornotaga391a01.jpg](https://www.sec.gov/Archives/edgar/data/0001158449/000115844923000142/aap-20230422_g1.jpg)
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.) |
4200 Six Forks Road, Raleigh, North Carolina 27609
(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 May 26, 2023, the number of shares of the registrant’s common stock outstanding was 59,443,852 shares.
TABLE OF CONTENTS | |||||||||||
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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,” “guidance,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “should,” “strategy,” “will,” or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, current information and assumptions related to future developments. Except as may be required by law, we undertake no obligation to update any forward-looking statements made herein. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the company’s leadership transition, the timing and implementation of strategic initiatives, including with respect to labor shortages or disruptions and the impact on our ability to complete store openings, deterioration of general macroeconomic conditions, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain and challenges with transforming and growing our business. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.
1
PART I. FINANCIAL INFORMATION
ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data) (Unaudited)
Assets | April 22, 2023 | December 31, 2022 | |||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 226,499 | $ | 269,282 | |||||||
Receivables, net | 782,093 | 698,613 | |||||||||
Inventories, net | 5,015,973 | 4,915,262 | |||||||||
Other current assets | 177,127 | 163,695 | |||||||||
Total current assets | 6,201,692 | 6,046,852 | |||||||||
Property and equipment, net of accumulated depreciation of $2,672,665 and $2,590,382 | 1,694,337 | 1,690,139 | |||||||||
Operating lease right-of-use assets | 2,628,899 | 2,607,690 | |||||||||
Goodwill | 990,573 | 990,471 | |||||||||
Other intangible assets, net | 612,104 | 620,901 | |||||||||
Other assets | 54,633 | 62,429 | |||||||||
Total assets | $ | 12,182,238 | $ | 12,018,482 | |||||||
Liabilities and Stockholders’ Equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 3,682,749 | $ | 4,123,462 | |||||||
Accrued expenses | 718,290 | 634,447 | |||||||||
Current portion of long-term debt | 116,000 | 185,000 | |||||||||
Other current liabilities | 466,416 | 427,480 | |||||||||
Total current liabilities | 4,983,455 | 5,370,389 | |||||||||
Long-term debt | 1,784,596 | 1,188,283 | |||||||||
Noncurrent operating lease liabilities | 2,269,280 | 2,278,318 | |||||||||
Deferred income taxes | 422,984 | 415,997 | |||||||||
Other long-term liabilities | 85,762 | 87,214 | |||||||||
Total liabilities | 9,546,077 | 9,340,201 | |||||||||
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 | 914,184 | 897,560 | |||||||||
Treasury stock, at cost | (2,931,373) | (2,918,768) | |||||||||
Accumulated other comprehensive loss | (44,355) | (45,143) | |||||||||
Retained earnings | 4,697,697 | 4,744,624 | |||||||||
Total stockholders’ equity | 2,636,161 | 2,678,281 | |||||||||
Total liabilities and stockholders’ equity | $ | 12,182,238 | $ | 12,018,482 |
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)
Sixteen Weeks Ended | |||||||||||
April 22, 2023 | April 23, 2022 | ||||||||||
Net sales | $ | 3,417,594 | $ | 3,374,210 | |||||||
Cost of sales, including purchasing and warehousing costs | 1,946,931 | 1,867,690 | |||||||||
Gross profit | 1,470,663 | 1,506,520 | |||||||||
Selling, general and administrative expenses | 1,380,664 | 1,303,250 | |||||||||
Operating income | 89,999 | 203,270 | |||||||||
Other, net: | |||||||||||
Interest expense | (29,718) | (12,868) | |||||||||
Loss on early redemption of senior unsecured notes | — | (7,408) | |||||||||
Other (expense) income, net | (674) | 136 | |||||||||
Total other, net | (30,392) | (20,140) | |||||||||
Income before provision for income taxes | 59,607 | 183,130 | |||||||||
Provision for income taxes | 16,956 | 43,339 | |||||||||
Net income | $ | 42,651 | $ | 139,791 | |||||||
Basic earnings per common share | $ | 0.72 | $ | 2.28 | |||||||
Weighted-average common shares outstanding | 59,334 | 61,261 | |||||||||
Diluted earnings per common share | $ | 0.72 | $ | 2.26 | |||||||
Weighted-average common shares outstanding | 59,544 | 61,732 |
Condensed Consolidated Statements of Comprehensive Income
(in thousands) (Unaudited)
Sixteen Weeks Ended | |||||||||||
April 22, 2023 | April 23, 2022 | ||||||||||
Net income | $ | 42,651 | $ | 139,791 | |||||||
Other comprehensive income (loss): | |||||||||||
Changes in net unrecognized other postretirement benefits, net of tax of $70 and $9 | 197 | 24 | |||||||||
Currency translation adjustments | 591 | (18,462) | |||||||||
Total other comprehensive income (loss) | 788 | (18,438) | |||||||||
Comprehensive income | $ | 43,439 | $ | 121,353 |
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) | |||||||||||||||||||||||||||||||||||||||||
Sixteen Weeks Ended April 22, 2023 | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 59,264 | $ | 8 | $ | 897,560 | $ | (2,918,768) | $ | (45,143) | $ | 4,744,624 | $ | 2,678,281 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 42,651 | 42,651 | ||||||||||||||||||||||||||||||||||
Total other comprehensive income | — | — | — | — | 788 | — | 788 | ||||||||||||||||||||||||||||||||||
Restricted stock units and deferred stock units vested | 256 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 16,524 | — | — | — | 16,524 | ||||||||||||||||||||||||||||||||||
Stock issued under employee stock purchase plan | 18 | — | 1,100 | — | — | — | 1,100 | ||||||||||||||||||||||||||||||||||
Repurchases of common stock | (94) | — | — | (12,605) | — | — | (12,605) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($1.50 per common share) | — | — | — | — | — | (89,578) | (89,578) | ||||||||||||||||||||||||||||||||||
Other | — | — | (1,000) | — | — | — | (1,000) | ||||||||||||||||||||||||||||||||||
Balance at April 22, 2023 | 59,444 | $ | 8 | $ | 914,184 | $ | (2,931,373) | $ | (44,355) | $ | 4,697,697 | $ | 2,636,161 | ||||||||||||||||||||||||||||
Sixteen Weeks Ended April 23, 2022 | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2022 | 62,009 | $ | 8 | $ | 845,407 | $ | (2,300,288) | $ | (22,627) | $ | 4,605,791 | $ | 3,128,291 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 139,791 | 139,791 | ||||||||||||||||||||||||||||||||||
Total other comprehensive loss | — | — | — | — | (18,438) | — | (18,438) | ||||||||||||||||||||||||||||||||||
Issuance of shares upon the exercise of stock options | 1 | — | 233 | — | — | — | 233 | ||||||||||||||||||||||||||||||||||
Restricted stock units and deferred stock units vested | 234 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 16,978 | — | — | — | 16,978 | ||||||||||||||||||||||||||||||||||
Stock issued under employee stock purchase plan | 10 | — | 933 | — | — | — | 933 | ||||||||||||||||||||||||||||||||||
Repurchases of common stock | (1,156) | — | — | (264,469) | — | — | (264,469) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($1.50 per common share) | — | — | — | — | — | (92,539) | (92,539) | ||||||||||||||||||||||||||||||||||
Other | — | — | (1,100) | — | — | — | (1,100) | ||||||||||||||||||||||||||||||||||
Balance at April 23, 2022 | 61,098 | $ | 8 | $ | 862,451 | $ | (2,564,757) | $ | (41,065) | $ | 4,653,043 | $ | 2,909,680 |
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 Cash Flows
(in thousands) (Unaudited)
Sixteen Weeks Ended | |||||||||||
April 22, 2023 | April 23, 2022 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 42,651 | $ | 139,791 | |||||||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
Depreciation and amortization | 92,554 | 85,581 | |||||||||
Share-based compensation | 16,524 | 16,978 | |||||||||
Loss and impairment of long-lived assets | 90 | 1,237 | |||||||||
Loss on early redemption of senior unsecured notes | — | 7,408 | |||||||||
Provision for deferred income taxes | 6,899 | 9,681 | |||||||||
Other, net | 391 | 1,020 | |||||||||
Net change in: | |||||||||||
Receivables, net | (83,370) | (174,895) | |||||||||
Inventories, net | (100,178) | (119,550) | |||||||||
Accounts payable | (440,995) | 20,225 | |||||||||
Accrued expenses | 85,035 | (98,978) | |||||||||
Other assets and liabilities, net | 1,534 | 56,562 | |||||||||
Net cash used in operating activities | (378,865) | (54,940) | |||||||||
Cash flows from investing activities: | |||||||||||
Purchases of property and equipment | (89,996) | (114,854) | |||||||||
Proceeds from sales of property and equipment | 325 | 828 | |||||||||
Net cash used in investing activities | (89,671) | (114,026) | |||||||||
Cash flows from financing activities: | |||||||||||
Borrowings under credit facilities | 2,886,000 | 275,000 | |||||||||
Payments on credit facilities | (2,955,000) | (275,000) | |||||||||
Borrowings on senior unsecured notes | 599,571 | 348,618 | |||||||||
Payments on senior unsecured notes | — | (201,081) | |||||||||
Dividends paid | (89,487) | (154,796) | |||||||||
Repurchases of common stock | (12,605) | (264,469) | |||||||||
Other, net | (2,819) | (2,007) | |||||||||
Net cash provided by (used in) financing activities | 425,660 | (273,735) | |||||||||
Effect of exchange rate changes on cash | 93 | (19,994) | |||||||||
Net decrease in cash and cash equivalents | (42,783) | (462,695) | |||||||||
Cash and cash equivalents, beginning of period | 269,282 | 601,428 | |||||||||
Cash and cash equivalents, end of period | $ | 226,499 | $ | 138,733 | |||||||
Non-cash transactions: | |||||||||||
Accrued purchases of property and equipment | $ | 6,909 | $ | 15,272 |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
1. Nature of Operations and Basis of Presentation
Description of Business
Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both professional installers (“professional”) and “do-it-yourself” (“DIY”) customers. The accompanying condensed consolidated financial statements have been prepared by us and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and their subsidiaries (collectively referred to as “Advance,” “we,” “us” or “our”).
As of April 22, 2023, we operated a total of 4,778 stores and 318 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of April 22, 2023, we served 1,315 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands. Our stores operate primarily under the trade names “Advance Auto Parts” and “Carquest” and our branches operate under the “Worldpac” and “Autopart International” trade names.
The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting principles. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for 2022 as filed with the SEC on February 28, 2023.
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 each consist of twelve weeks.
Out-of-Period Charge
The sixteen weeks ended April 22, 2023 included an out-of-period charge of $17.3 million, reflected in Selling, general and administrative (“SG&A”) expenses, and related tax benefit of $4.3 million in the Condensed Consolidated Statement of Operations, related to costs incurred in prior years but not previously expensed. The out-of-period charge was not material to the current period or any previously issued financial statements.
6
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
2. Significant Accounting Policies
Revenues
The following table summarizes disaggregated revenue from contracts with customers by product group:
Sixteen Weeks Ended | |||||||||||
April 22, 2023 | April 23, 2022 | ||||||||||
Percentage of Sales: | |||||||||||
Parts and Batteries | 66 | % | 66 | % | |||||||
Accessories and Chemicals | 20 | 20 | |||||||||
Engine Maintenance | 13 | 13 | |||||||||
Other | 1 | 1 | |||||||||
Total | 100 | % | 100 | % |
Recently Issued Accounting Pronouncements - Adopted
Supplier Finance Programs
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”), which requires a buyer in a supplier finance program to disclose sufficient information about the program, enabling users of the financial statements to understand the nature of the program and activity and changes during the period. ASU 2022-04 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the requirement on rollforward information, which is effective for fiscal years beginning after December 15, 2023. During the first quarter 2023, we adopted ASU 2022-04, which did not have a material impact on our consolidated financial position, results of operations and cash flows. Refer to Note 11. Supplier Finance Programs for further details.
3. Inventories, net
Inventories, net, are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately 92% of inventories as of April 22, 2023 and December 31, 2022. 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 sixteen weeks ended April 22, 2023 and prior years. As a result of changes in the LIFO reserve, we recorded a reduction to Cost of sales of $6.6 million for the sixteen weeks ended April 22, 2023 and an increase to Cost of sales of $81.5 million for the sixteen weeks ended April 23, 2022 to state inventories at LIFO.
An actual valuation of inventory under the LIFO method is performed by us at the end of each fiscal year based on inventory levels and carrying costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected inventory levels and costs at the end of the year.
7
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
Inventory balances were as follows:
April 22, 2023 | December 31, 2022 | ||||||||||
Inventories at first in, first out (“FIFO”) | $ | 5,287,977 | $ | 5,193,911 | |||||||
Adjustments to state inventories at LIFO | (272,004) | (278,649) | |||||||||
Inventories at LIFO | $ | 5,015,973 | $ | 4,915,262 |
4. Intangible Assets
Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $9.2 million and $9.5 million for the sixteen weeks ended April 22, 2023 and April 23, 2022.
5. Receivables, net
Receivables, net, consisted of the following:
April 22, 2023 | December 31, 2022 | ||||||||||
Trade | $ | 626,922 | $ | 576,548 | |||||||
Vendor | 163,755 | 126,640 | |||||||||
Other | 9,465 | 10,638 | |||||||||
Total receivables | 800,142 | 713,826 | |||||||||
Less: allowance for credit losses | (18,049) | (15,213) | |||||||||
Receivables, net | $ | 782,093 | $ | 698,613 |
6. Long-term Debt and Fair Value of Financial Instruments
Long-term debt consists of the following:
April 22, 2023 | December 31, 2022 | ||||||||||
5.90% Senior Unsecured Notes due March 9, 2026 | $ | 297,941 | $ | — | |||||||
1.75% Senior Unsecured Notes due October 1, 2027 | 347,122 | 346,947 | |||||||||
5.95% Senior Unsecured Notes due March 9, 2028 | 297,882 | — | |||||||||
3.90% Senior Unsecured Notes due April 15, 2030 | 495,743 | 495,562 | |||||||||
3.50% Senior Unsecured Notes due March 15, 2032 | 345,908 | 345,774 | |||||||||
Revolver credit facility | 116,000 | 185,000 | |||||||||
$ | 1,900,596 | $ | 1,373,283 | ||||||||
Less: Current portion of long-term debt | (116,000) | (185,000) | |||||||||
Long-term debt, excluding the current portion | $ | 1,784,596 | $ | 1,188,283 | |||||||
Fair value of long-term debt | $ | 1,784,176 | $ | 1,021,396 |
8
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
Fair Value of Financial Assets and Liabilities
The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The carrying amounts of our Cash and cash equivalents, Receivables, net, Accounts payable and Accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Bank Debt
On February 27, 2023, we entered into Amendment No. 1 (the “Amendment”) to the 2021 Credit Agreement. The Amendment extends the maturity date of the 2021 Credit Agreement by one year from November 9, 2026, to November 9, 2027. The Amendment also replaces an adjusted LIBOR benchmark rate with a term secured overnight financing rate benchmark rate, as adjusted by an increase of ten basis points, plus the applicable margin under 2021 Credit Agreement. The Amendment made no other material changes to the terms of the 2021 Credit Agreement.
As of April 22, 2023, we had $116.0 million of outstanding borrowings, $1.1 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility (the “Credit Agreement”). As of December 31, 2022, we had $185.0 million outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our Credit Agreement.
As of April 22, 2023 and December 31, 2022, we had $91.0 million and $90.2 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 April 22, 2023.
Senior Unsecured Notes
Our 3.90% senior unsecured notes due April 15, 2030 (the “Original Notes”) were issued April 16, 2020, at 99.65% of the principal amount of $500.0 million, and were not registered under the Securities Act of 1933, as amended (the “Securities Act”). The Original Notes bear interest, payable semi-annually in arrears on April 15 and October 15, at a rate of 3.90% per year. On July 28, 2020, we completed an exchange offer whereby the Original Notes in the aggregate principal amount of $500.0 million were exchanged for a like principal amount (the “Exchange Notes” or “2030 Notes”), and which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes.
Our 1.75% senior unsecured notes due October 1, 2027 (the “2027 Notes”) were issued September 29, 2020, at 99.67% of the principal amount of $350.0 million. The 2027 Notes bear interest, payable semi-annually in arrears on April 1 and October 1, at a rate of 1.75% per year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.
Our 3.50% senior unsecured notes due 2032 (the “2032 Notes”) were issued March 4, 2022, at 99.61% of the principal amount of $350.0 million. The 2032 Notes bear interest, payable semi-annually in arrears on March 15 and September 15, at a rate of 3.50% per year. In connection with the 2032 Notes offering, we incurred $3.2 million of debt issuance costs.
9
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
Our 5.90% senior unsecured notes due March 9, 2026 (the “2026 Notes”) were issued March 9, 2023, at 99.94% of the principal amount of $300.0 million. The 2026 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of 5.90% per year. In connection with the 2026 Notes offering, we incurred $1.6 million of debt issuance costs.
Our 5.95% senior unsecured notes due March 9, 2028 (the “2028 Notes”) were issued March 9, 2023, at 99.92% of the principal amount of $300.0 million. The 2028 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of 5.95% per year. In connection with the 2028 Notes offering, we incurred $1.7 million of debt issuance costs.
We may redeem some or all of our 2026 Notes and 2028 Notes (the “Notes”) at any time, or from time to time, prior to March 9, 2026 in the case of our 2026 Notes, or February 9, 2028 in the case of our 2028 Notes, at the redemption price described in the related indenture for the Notes (the “Indenture”). In the event of a change of control triggering event, as defined in the Indenture, we will be required to offer the repurchase of the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. Currently, the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsubordinated unsecured basis by guarantor and subsidiary guarantees, as defined by the Indenture.
Debt Guarantees
We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are customers of ours. These loans totaled $104.0 million and $96.9 million as of April 22, 2023 and December 31, 2022 and are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements was $177.7 million and $174.6 million as of April 22, 2023 and December 31, 2022. 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 to ten years, with renewal options typically at five-year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment lease terms are typically to six years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
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 comprised of the following:
Sixteen Weeks Ended | |||||||||||
April 22, 2023 | April 23, 2022 | ||||||||||
Operating lease cost | $ | 173,659 | $ | 173,035 | |||||||
Variable lease cost | 51,346 | 53,296 | |||||||||
Total lease cost | $ | 225,005 | $ | 226,331 |
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
Other information relating to our lease liabilities is as follows:
Sixteen Weeks Ended | |||||||||||
April 22, 2023 | April 23, 2022 | ||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows from operating leases | $ | 153,363 | $ | 190,542 | |||||||
Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
Operating leases | $ | 181,167 | $ | 147,015 |
8. Share Repurchase Program
Our Board of Directors had previously authorized $2.7 billion to our share repurchase program. 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 sixteen weeks ended April 22, 2023, we purchased no shares of our common stock under our share repurchase program. During the sixteen weeks ended April 23, 2022, we repurchased 1.1 million shares at an aggregate cost of $248.2 million, or an average price of $231.41 per share. We had $947.3 million remaining under our share repurchase program as of April 22, 2023.
9. Earnings per Share
The computations of basic and diluted earnings per share were as follows:
Sixteen Weeks Ended | |||||||||||
April 22, 2023 | April 23, 2022 | ||||||||||
Numerator | |||||||||||
Net income applicable to common shares | $ | 42,651 | $ | 139,791 | |||||||
Denominator | |||||||||||
Basic weighted-average common shares | 59,334 | 61,261 | |||||||||
Dilutive impact of share-based awards | 210 | 471 | |||||||||
Diluted weighted-average common shares (1) | 59,544 | 61,732 | |||||||||
Basic earnings per common share | $ | 0.72 | $ | 2.28 | |||||||
Diluted earnings per common share | $ | 0.72 | $ | 2.26 |
(1)For the sixteen weeks ended April 22, 2023 and April 23, 2022, 190 thousand and 21 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive.
10. Share-Based Compensation
During the sixteen weeks ended April 22, 2023, we granted 237 thousand time-based RSUs, 22 thousand performance-based RSUs, 73 thousand market-based RSUs and 148 thousand stock options. The general terms of the time-based and market-based RSUs are similar to awards previously granted by us. The performance-based RSUs granted may vest following a one-year period subject to the achievements of certain financial goals and employment service as specified in the grant agreement. We grant options to purchase common stock to certain employees under our 2014 Long-Term Incentive Plan. The general terms of the stock options are similar to awards
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
previously granted by us. We record compensation expense for the grant date fair value of the option awards evenly over the vesting period.
The weighted-average fair values of the time-based, performance-based and market-based RSUs granted during the sixteen weeks ended April 22, 2023 were $135.13, $135.13 and $139.75 per share. The fair value of each market-based RSU was determined using a Monte Carlo simulation model. 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 weighted-average fair value of stock options granted during the sixteen weeks ended April 22, 2023 was $35.38 per share. The fair value was estimated on the date of grant by applying the Black-Scholes option-pricing valuation model.
Sixteen Weeks Ended | |||||
April 22, 2023 | |||||
Risk-free interest rate (1) | 4.1 | % | |||
Expected term (2) | 6 years | ||||
Expected volatility (3) | 35.1 | % | |||
Expected dividend yield (4) | 4.1 | % |
(1) The risk-free interest rate is based on the yield in effect at grant for zero-coupon U.S. Treasury notes with maturities equivalent to the expected term of the stock options.
(2) The expected term represents the period of time options granted are expected to be outstanding. As we do not have sufficient historical data, we utilized the simplified method provided by the SEC to calculate the expected term as the average of the contractual term and vesting period.
(3) Expected volatility is the measure of the amount by which the stock price has fluctuated or is expected to fluctuate. We utilized historical trends and the implied volatility of our publicly traded financial instruments in developing the volatility estimate for our stock options.
(4) The expected dividend yield is calculated based on our expected quarterly dividend and the three month average stock price as of the grant date.
The total income tax benefit related to share-based compensation expense for the sixteen weeks ended April 22, 2023 was $4.0 million. As of April 22, 2023, there was $95.7 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.
11. Supplier Finance Programs
We maintain supply chain financing agreements with third-party financial institutions to provide our suppliers with enhanced receivables options. Through these agreements, our suppliers, at their sole discretion, may elect to sell its receivables due from us to the third-party financial institution at terms negotiated between the supplier and the third-party financial institution. We do not provide any guarantees to any third party in connection with these financing arrangements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted, and no assets are pledged under the agreements. All outstanding amounts due to third-party financial institutions related to suppliers participating in such financing arrangements are recorded within Accounts payable represent obligations outstanding under these supplier finance programs for invoices that were confirmed as valid and owed to the third-party financial institutions in our Condensed Consolidated Balance Sheets. As of April 22, 2023 and December 31, 2022, $3.1 billion and $3.2 billion of our Accounts payable were to suppliers participating in these financing arrangements.
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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 31, 2022 (filed with the SEC on February 28, 2023), which we refer to as our 2022 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Management Overview
A high-level summary of our financial results for the first quarter of 2023 includes:
•Net sales during the first quarter of 2023 was $3.42 billion, an increase of 1.3% compared with the first quarter of 2022, driven predominately by new store openings, partially offset by a decline in comparable store sales. Comparable store sales declined 0.4% primarily driven by a decrease in demand within our professional business, partially offset by an increase in our DIY omnichannel business.
•Gross profit margin for the first quarter of 2023 was 43.0% of Net sales, a decrease of 162 basis points compared with the first quarter of 2022. Gross profit margin was negatively impacted by inflationary product costs, which were not fully covered by pricing actions. Additionally, supply chain headwinds and unfavorable product mix contributed to gross margin decline.
•Selling, General & Administrative (“SG&A”) expenses for the first quarter of 2023 were 40.4% of Net sales, an increase of 177 basis points compared with the first quarter of 2022. This increase was primarily driven by inflation in labor and benefit-related expenses as well as deleverage associated with new store openings, partially offset by a decrease in startup costs related to our California expansion. Additionally, SG&A expenses included an out-of-period charge of $17.3 million related to costs incurred in prior years but not previously expensed.
•We generated Diluted earnings per share (“Diluted EPS”) of $0.72 during our first quarter of 2023, compared with $2.26 for the comparable period of 2022.
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 refinement of a demand-based assortment, leveraging purchase and search history from our common catalog.
•Advancement towards optimizing our footprint by market 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 innovate to meet their needs, inclusive of the iconic DieHard® brand.
•Progress in the implementation of a more efficient end-to-end supply chain to deliver our broad assortment of inventory.
•Actively pursuing new store openings in 2023, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets.
•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, and include but are not limited to:
•Inflationary pressures, including logistics and labor
•Global supply chain disruptions
•Rising fuel costs
•Miles driven
•Unemployment rates
•Consumer confidence and purchasing power
•Competition
•Changes in new car sales
•Economic and geopolitical uncertainty
•Increased foreign currency exchange volatility
Stores and Branches
Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. During the sixteen weeks ended April 22, 2023, 21 stores and branches were opened and 11 were closed or consolidated, resulting in a total of 5,096 stores and branches compared with a total of 5,086 stores and branches as of December 31, 2022.
Results of Operations
Sixteen Weeks Ended | $ Favorable/ (Unfavorable) | Basis Points | |||||||||||||||||||||||||||||||||
($ in millions) | April 22, 2023 | April 23, 2022 | |||||||||||||||||||||||||||||||||
Net sales | $ | 3,417.6 | 100.0 | % | $ | 3,374.2 | 100.0 | % | $ | 43.4 | — | ||||||||||||||||||||||||
Cost of sales | 1,946.9 | 57.0 | 1,867.7 | 55.4 | (79.2) | (162) | |||||||||||||||||||||||||||||
Gross profit | 1,470.7 | 43.0 | 1,506.5 | 44.6 | (35.8) | (162) | |||||||||||||||||||||||||||||
SG&A (1) | 1,380.7 | 40.4 | 1,303.3 | 38.6 | (77.4) | (177) | |||||||||||||||||||||||||||||
Operating income | 90.0 | 2.6 | 203.3 | 6.0 | (113.2) | (339) | |||||||||||||||||||||||||||||
Interest expense | (29.7) | (0.9) | (12.9) | (0.4) | (16.8) | (49) | |||||||||||||||||||||||||||||
Loss on early redemptions of senior unsecured notes | — | — | (7.4) | (0.2) | 7.4 | 22 | |||||||||||||||||||||||||||||
Other (expense) income, net | (0.7) | 0.0 | 0.1 | — | (0.8) | (2) | |||||||||||||||||||||||||||||
Provision for income taxes | 17.0 | 0.5 | 43.3 | 1.3 | 26.3 | 79 | |||||||||||||||||||||||||||||
Net income | $ | 42.7 | 1.2 | % | $ | 139.8 | 4.1 | % | $ | (97.1) | (289) |
Note: Table amounts may not foot due to rounding.
(1) The sixteen weeks ended April 22, 2023 included an out-of-period charge of $17.3 million related to costs incurred in prior years but not expensed in the corresponding periods. The company determined the cumulative impact was not material to the current period or any previously issued financial statements.
Net Sales
Net sales for the sixteen weeks ended April 22, 2023 increased 1.3% compared with the same period in 2022, driven predominately by new store openings. This was partially offset by a decline of comparable store sales of 0.4% for the sixteen weeks ended April 22, 2023 compared with the sixteen weeks ended April 23, 2022. Category growth was led by motor oil and brakes.
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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 sixteen weeks ended April 22, 2023 was $1.47 billion, or 43.0% of Net sales, compared with $1.51 billion, or 44.6% of Net sales, for the sixteen weeks ended April 23, 2022. During the sixteen weeks ended April 22, 2023, Gross profit margin was negatively impacted by continued inflationary product costs, which were not fully covered by pricing actions. Additionally, unfavorable product mix and supply chain headwinds contributed to gross margin decline.
Selling, General and Administrative Expenses
SG&A expenses for the sixteen weeks ended April 22, 2023 were $1.38 billion, or 40.4% of Net sales, compared with $1.30 billion, or 38.6% of Net sales, for the sixteen weeks ended April 23, 2022. The increase in SG&A as a percentage of Net sales was primarily driven by inflation in labor and benefit-related expenses as well as costs associated with new store openings, partially offset by a decrease in startup costs related to our California expansion. SG&A expenses for the sixteen weeks ended April 22, 2023 also included an out-of-period charge of $17.3 million related to costs incurred in prior years but not previously expensed.
Provision for Income Taxes
Our Provision for income taxes for the sixteen weeks ended April 22, 2023 was $17.0 million compared with $43.3 million for the sixteen weeks ended April 23, 2022. The decrease in tax expense primarily resulted from lower Income before provision for income taxes compared with prior year. Our effective tax rate was 28.4% and 23.7% for the sixteen weeks ended April 22, 2023 and April 23, 2022. The higher effective income tax rate for the sixteen weeks ended April 22, 2023 compared with April 23, 2022 reflected a discrete charge related to share based compensation.
Liquidity and Capital Resources
Overview
Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under our strategic business plan and other operational priorities, including payment of interest on our long-term debt. Historically, we have also used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our share repurchase program, to pay our quarterly cash dividend and for acquisitions. However, our future uses of cash may differ, including with respect to the weight we place on the preservation of cash and liquidity, degree of investment in our business and other capital allocation factors.
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. We also believe such funds, cash and available borrowings, together with our ability to generate cash through credit facilities and notes offerings as needed, will be sufficient to fund our ongoing obligations.
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Our supplier finance programs did not have a material impact on our liquidity or capital resources in the periods presented nor do we expect such arrangements to have a material impact on our liquidity or capital resources for the foreseeable future. See Note 11. Supplier Finance Programs of our condensed consolidated financial statements for further discussion.
On March 9, 2023, we issued our 5.90% senior unsecured notes due 2026 (the “2026 Notes”) and our 5.95% senior unsecured notes due 2028 (the “2028 Notes”). Refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein for further details. Proceeds from our 2026 Notes and 2028 Notes were utilized to make repayments on our revolving facility and supplement operational and capital expenditures.
On February 27, 2023, we entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement, dated November 9, 2021, with Advance Auto Parts, Inc., as Borrower, Advance Stores Company, Incorporated, as a Guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent (the “2021 Credit Agreement”). The Amendment extends the maturity date of the 2021 Credit Agreement by one year from November 9, 2026, to November 9, 2027. The Amendment also replaces an adjusted LIBOR benchmark rate with a Term Secured Overnight Financing Rate (“Term SOFR”) benchmark rate, as adjusted by an increase of ten basis points, plus the applicable margin under 2021 Credit Agreement. The Amendment made no other material changes to the terms of the 2021 Credit Agreement.
Share Repurchase Program
Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time. We expect to continue our temporary pause on repurchases under our existing share repurchase program and to continue to evaluate current and expected business conditions with respect to resumption of share repurchase activity.
During the sixteen weeks ended April 22, 2023, we purchased no shares of our common stock under our share repurchase program. During the sixteen weeks ended April 23, 2022, we repurchased 1.1 million shares of our common stock under our share repurchase program at an aggregate cost of $248.2 million, or an average price of $231.41 per share. We had $947.3 million remaining under our share repurchase program as of April 22, 2023.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
Sixteen Weeks Ended | |||||||||||
(in thousands) | April 22, 2023 | April 23, 2022 | |||||||||
Cash flows used in operating activities | $ | (378,865) | $ | (54,940) | |||||||
Cash flows used in investing activities | (89,671) | (114,026) | |||||||||
Cash flows provided by (used in) financing activities | 425,660 | (273,735) | |||||||||
Effect of exchange rate changes on cash | 93 | (19,994) | |||||||||
Net decrease in cash and cash equivalents | $ | (42,783) | $ | (462,695) |
Operating Activities
For the sixteen weeks ended April 22, 2023, Cash flows used in operating activities increased by $323.9 million to $378.9 million compared with the same period of prior year. The net increase in cash flows used in operating activities was primarily driven by lower Net income and an increase in cash used in working capital, primarily in Accounts payable.
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Investing Activities
For the sixteen weeks ended April 22, 2023, Cash flows used in investing activities decreased by $24.4 million to $89.7 million compared with the same period of prior year. The decrease in cash used in investing activities was primarily attributable to lower capital spend in the current year.
Financing Activities
For the sixteen weeks ended April 22, 2023, Cash flows provided by financing activities was $425.7 million, an increase of $699.4 million compared with the same period of prior year. The increase in cash provided by financing activities was attributable to net proceeds received from the issuance of the 2026 Notes and 2028 Notes, a decrease in share repurchases of our common stock and a decrease in dividends paid during the sixteen weeks ended April 22, 2023.
Our Board of Directors has declared a cash dividend every quarter since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.
Long-Term Debt
On March 9, 2023, we issued $300.0 million aggregate principal amount of our 2026 Notes and $300.0 million aggregate principal amount of our 2028 Notes. The 2026 Notes were issued at 99.94% of the principal amount of $300.0 million, are due March 9, 2026 and bear interest at 5.90% per year payable semi-annually in arrears on March 9 and September 9 of each year. The 2028 Notes were issued at 99.92% of the principal amount of $300.0 million, are due March 9, 2028 and bear interest at 5.95% per year payable semi-annually in arrears on March 9 and September 9 of each year.
For additional information, refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein.
As of April 22, 2023, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa2. As of April 22, 2023, the outlooks by Standard & Poor’s and Moody’s on our credit rating were stable. On June 5, 2023, Standard & Poor’s and Moody’s updated their outlooks to negative. The current pricing grid used to determine our borrowing rate under the Credit Agreement is based on our credit ratings. If our credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may be limited. In addition, declines could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
With respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee, Advance Stores, a wholly owned subsidiary of the Issuer, serves as the guarantor (“Guarantor Subsidiary”). The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiary. Our captive insurance subsidiary, an insignificant wholly owned subsidiary of the Issuer, does not serve as guarantor of our senior unsecured notes.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments
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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 sixteen weeks ended April 22, 2023, there were no changes to the critical accounting policies discussed in our 2022 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2022 Form 10-K.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposure to market risk since December 31, 2022. Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2022 Form 10-K.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only “reasonable assurance” with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of our internal controls may vary over time.
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of April 22, 2023. 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 not effective to accomplish their objectives at the reasonable assurance level solely due to the material weakness described below.
Control Environment
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In the course of preparing our financial statements for the interim period ended April 22, 2023, management identified a material weakness in our internal control over financial reporting that existed due to turnover of key accounting positions during the first quarter. The Company was not able to attract, develop and retain sufficient resources to fulfill internal control responsibilities during the first quarter, resulting in the lack of a sufficient complement of personnel with an appropriate degree of knowledge and experience as of April 22, 2023.
Management believes that the Condensed Consolidated Financial Statements and related financial information included in this Form 10-Q fairly present, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as of and for the periods presented.
As an initial step in remediation of this material weakness, we are engaging temporary third-party resources with the appropriate level of knowledge and experience in accounting and internal control matters to complement the existing organizational structure.
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We are also actively developing and implementing a comprehensive remediation plan. We have engaged a leading public accounting firm to support this work. We expect the remediation plan will include the following:
•hire, develop and retain incremental personnel with appropriate accounting and internal controls expertise;
•review and update (as appropriate) the organizational design of the controllership function;
•review and update (as appropriate) our methodologies, policies and procedures designed to ensure adequate internal control over financial reporting, including underlying information technology and business process controls; and
•review and update (as appropriate) training programs on relevant internal control over financial reporting matters.
The material weakness will not be considered remediated until management completes the remediation plan and keeps it in place for a sufficient period of time. The Company is committed to the improvement of its internal control over financial reporting and, together with its outside consultant(s), will continue to develop, refine and implement its remediation plan for the material weakness, including responding as necessary to any additional employee turnover or other internal or external factors that may impact execution of the plan.
Changes in Internal Control Over Financial Reporting
The Company is in the process of implementing certain changes in its internal controls to remediate the material weakness described above. There has been no change in the Company’s internal control over financial reporting during the quarter ended April 22, 2023 that has materially affected or is reasonably likely to materially affect its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
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PART II. OTHER INFORMATION
ITEM 1A.RISK FACTORS
Please refer to “Item 1A. Risk Factors” found in our 2022 Form 10-K filed for the year ended December 31, 2022 for risks that, if they were to occur, could materially adversely affect our business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of our common stock.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the information with respect to repurchases of our common stock for the quarter ended April 22, 2023:
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 | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | |||||||||||||||||||||||
January 1, 2023 to January 28, 2023 | 19 | $ | 152.26 | — | $ | 947,339 | ||||||||||||||||||||
January 29, 2023 to February 25, 2023 | 1,699 | $ | 141.52 | — | $ | 947,339 | ||||||||||||||||||||
February 26, 2023 to March 25, 2023 | 92,132 | $ | 134.14 | — | $ | 947,339 | ||||||||||||||||||||
March 26, 2023 to April 22, 2023 | 33 | $ | 94.48 | — | $ | 947,339 | ||||||||||||||||||||
Total | 93,883 | $ | 139.24 | — |
(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 $13.1 million, or an average price of $139.24 per share, during the sixteen weeks ended April 22, 2023.
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ITEM 6.EXHIBITS
Incorporated by Reference | ||||||||||||||
Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | ||||||||||
10-Q | 3.1 | 8/14/2018 | ||||||||||||
10-Q | 3.2 | 8/18/2020 | ||||||||||||
8-K | 4.1 | 3/9/2023 | ||||||||||||
8-K | 4.2 | 3/9/2023 | ||||||||||||
8-K | 4.3 | 3/9/2023 | ||||||||||||
10.1* | ||||||||||||||
10.2* | ||||||||||||||
10.3* | ||||||||||||||
10.4* | ||||||||||||||
10.5* | ||||||||||||||
10.6* | ||||||||||||||
10.7* | ||||||||||||||
10.8* | ||||||||||||||
8-K | 10.1 | 4/13/2023 | ||||||||||||
22.1* | ||||||||||||||
31.1* | ||||||||||||||
31.2* | ||||||||||||||
32.1** | ||||||||||||||
101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||
101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |||||||||||||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||
104.1* | Cover Page Interactive Data file (Embedded within Inline XBRL Documents and Included in Exhibit 101). |
* Filed herewith
** Furnished herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADVANCE AUTO PARTS, INC. | ||||||||
Date: June 5, 2023 | /s/ William J. Pellicciotti Jr. | |||||||
William J. Pellicciotti Jr. Senior Vice President, Controller and Chief Accounting Officer |
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