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| Non-cash transactions: | | | |
| Accrued purchases of property and equipment | $ | | | | $ | | |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
1.
,the Company operated a total of stores and branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of , the Company served independently owned Carquest branded stores across the same geographic locations served by the Company’s stores and branches in addition to Mexico and various Caribbean islands. The Company’s stores operate primarily under the trade names “Advance Auto Parts” and “Carquest” and the Company’s branches operate under the “Worldpac” and “Autopart International” trade names.
Basis of Presentation
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 the Company’s Annual Report on Form 10-K for 2023 (“2023 Form 10-K”) as filed with the SEC on March 12, 2024.
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. The Company’s first quarter of the year contains sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.
Revision of Previously Issued Financial Statements for Correction of Immaterial Errors
During the year ended December 30, 2023, the Company identified errors impacting cost of sales, selling, general and administrative expenses (“SG&A”) and other income (expense), net, of , and incurred in prior years but not previously recognized. These charges primarily related to product costs and vendor credits. Management assessed the materiality of the errors, including the presentation on prior period consolidated financial statements, on a qualitative and quantitative basis in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections. The Company concluded that these errors and the related impacts did not result in a material misstatement of its previously issued consolidated financial statements as of and for the years ended December 31, 2022 and January 1, 2022 and its previously issued unaudited condensed consolidated interim financial statements as of and for the sixteen weeks ended April 22, 2023; the twelve and twenty-eight weeks ended July 15, 2023; and the twelve and forty weeks ended October 7, 2023. Correcting the cumulative effect of these errors in the fifty-two weeks ended December 30, 2023 would have had a significant effect on the results of operations for such periods.
| April 22, 2023 | | Percentage of Sales: | | | |
| Parts and Batteries | | % | | | % |
| Accessories and Chemicals | | | | | |
| Engine Maintenance | | | | | |
| Other | | | | | |
| Total | | % | | | % |
Recently Issued Accounting Pronouncements - Not Yet Adopted
Disclosure Improvements
In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-06, Disclosure Improvements (“ASU 2023-06”), which defers when companies will be required to improve and clarify disclosure and presentation requirements by June 2027. ASU 2023-06 applies to all entities subject to meeting the SEC disclosure requirements. These updates would require additional qualitative information to the statement of cash flows, earnings per share, debt and shareholder’s equity disclosures. The related disclosures are effective for the fiscal year beginning after December 15, 2024. The Company is currently evaluating the impact of adopting ASU 2023-06 on the consolidated financial statements and related disclosures, and does not believe it will have a material impact on the consolidated financial statements.
Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires a company to disclose additional, more detailed information about a reportable segment’s significant expenses, even if there is one reportable segment, and is intended to improve the disclosures about a public entity’s reportable segments. The ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2023-07 and does not believe it will have a material impact on the consolidated financial statements and segment reporting.
Income Tax Disclosure Improvements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (“ASU 2023-09”), which requires a company to enhance their income tax disclosures. In each annual reporting period, the company should disclose the specific categories used in the rate reconciliation and additional information for reconciling items that meet a quantitative threshold, including disaggregation of taxes paid by jurisdiction. The related disclosures are effective for the fiscal year beginning after December 15, 2024. The Company is currently evaluating the impact of adopting ASU 2023-09
Climate Disclosure Requirements
In March 2024, the SEC issued its final climate disclosure rules, which require the disclosure of climate-related information in annual reports and registration statements. The rules require disclosure in the audited financial statements of certain effects of severe weather events and other natural conditions and greenhouse gas emissions above certain financial thresholds, as well as amounts related to carbon offsets and renewable energy credits or certificates, if material. Additionally, the rule established disclosure requirements regarding material climate-related risks, descriptions of board oversight and risk management activities, the material impacts of these risks on a registrants' strategy, business model and outlook and any material climate-related targets or goals. On April 4, 2024, the SEC determined to voluntarily stay the final rules pending certain legal challenges. Prior to the stay in the new rules, disclosures would have been effective for annual periods beginning January 1, 2025, except for the greenhouse gas emissions disclosure which would have been effective for annual periods beginning January 1, 2026. The Company is currently evaluating the impact of the new rules on the consolidated financial statements and related disclosures.
3.
% of inventories as of and % as of December 30, 2023. As a result, the Company recorded a reduction to cost of sales of $ million for the sixteen weeks ended and $ million for the sixteen weeks ended April 22, 2023 to state inventories at LIFO.
Purchasing and warehousing costs included in inventories as of and December 30, 2023 were $ million and $ million.
| December 30, 2023 | | Inventories at first in, first out (“FIFO”) | $ | | | | $ | | |
| Adjustments to state inventories at LIFO | () | | | () | |
| Inventories at LIFO | $ | | | | $ | | |
4.
million and $ million for the sixteen weeks ended and April 22, 2023.
5.
| December 30, 2023 | | Trade | $ | | | | $ | | |
| Vendor | | | | | |
| Other | | | | | |
| Total receivables | | | | | |
| Less: allowance for credit losses | () | | | () | |
| Receivables, net | $ | | | | $ | | |
6.
| December 30, 2023 | % Senior Unsecured Notes due March 9, 2026 | $ | | | | $ | | |
% Senior Unsecured Notes due October 1, 2027 | | | | | |
% Senior Unsecured Notes due March 9, 2028 | | | | | |
% Senior Unsecured Notes due April 15, 2030 | | | | | |
% Senior Unsecured Notes due March 15, 2032 | | | | | |
| Revolver credit facility | | | | | |
| $ | | | | $ | | |
| Less: Current portion of long-term debt | | | | | |
| Long-term debt, excluding the current portion | $ | | | | $ | | |
| Fair value of long-term debt | $ | | | | $ | | |
Fair Value of Financial Assets and Liabilities
The fair value of the Company’s senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The carrying amounts of the Company’s 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 26, 2024, the Company entered into Amendment No. 4 (“Amendment No. 4”) to the Company’s unsecured revolving credit facility (“2021 Credit Agreement”) to enable certain addbacks to the definition of Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) contained therein for specific write-downs of inventory and vendor receivables. Amendment No. 4 also updated certain limitations on future incurrences of other indebtedness and liens, replacing the cap thereon of 10% of consolidated net tangible assets with , and eliminated the basket for accounts receivable securitization transactions. Amendment No. 4 made no other material changes to the terms of the 2021 Credit Agreement.
The 2021 Credit Agreement contains customary covenants restricting the ability of: (a) Advance Auto Parts, Inc. and its subsidiaries to, among other things, (i) create, incur or assume additional debt (only with respect to subsidiaries of Advance Auto Parts, Inc.), (ii) incur liens, (iii) guarantee obligations, and (iv) change the nature of
and December 30, 2023, the Company had outstanding borrowings, $ billion of borrowing availability and letters of credit outstanding under the 2021 Credit Agreement.
As of and December 30, 2023, the Company had $ 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 the Company’s self-insurance policies.
The Company was in compliance with financial covenants required by the Company’s debt arrangements as of .
Senior Unsecured Notes
The Company’s % senior unsecured notes due April 15, 2030 (the “Original Notes”) were issued April 16, 2020, at % of the principal amount of $ 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 % per year. On July 28, 2020, the Company completed an exchange offer whereby the Original Notes in the aggregate principal amount of $ 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.
The Company’s % senior unsecured notes due October 1, 2027 (the “2027 Notes”) were issued September 29, 2020, at % of the principal amount of $ million. The 2027 Notes bear interest, payable semi-annually in arrears on April 1 and October 1, at a rate of % per year. In connection with the 2027 Notes offering, the Company incurred $ million of debt issuance costs.
The Company’s % senior unsecured notes due 2032 (the “2032 Notes”) were issued March 4, 2022, at % of the principal amount of $ million. The 2032 Notes bear interest, payable semi-annually in arrears on March 15 and September 15, at a rate of % per year. In connection with the 2032 Notes offering, the Company incurred $ million of debt issuance costs.
The Company’s % senior unsecured notes due March 9, 2026 (the “2026 Notes”) were issued March 9, 2023, at % of the principal amount of $ million. The 2026 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of % per year. In connection with the 2026 Notes offering, the Company incurred $ million of debt issuance costs.
The Company’s % senior unsecured notes due March 9, 2028 (the “2028 Notes”) were issued March 9, 2023, at % of the principal amount of $ million. The 2028 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of % per year. In connection with the 2028 Notes offering, the Company incurred $ million of debt issuance costs.
% 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
The Company is a guarantor of loans made by banks to various independently owned Carquest-branded stores that are customers of the Company. These loans totaled $ million and $ million as of and December 30, 2023 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 $ million and $ million as of and December 30, 2023. The Company believes that the likelihood of performance under these guarantees is remote.
7.
, with renewal options typically at intervals, with the exercise of lease renewal options at the Company’s sole discretion. The Company’s vehicle and equipment lease terms are typically three to . The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
| April 22, 2023 | | Operating lease cost | $ | | | | $ | | |
| Variable lease cost | | | | | |
| Total lease cost | $ | | | | $ | | |
| April 22, 2023 | | Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | | | | $ | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | | | | $ | | |
During first quarter 2024, the Company entered into a sales-leaseback transaction where the Company sold a building and land and entered into a three-year lease of the property upon the sale. This transaction resulted in a gain of $ million and is included in selling, general and administrative expenses on the condensed consolidated statement of operations.
8.
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 and April 22, 2023, the Company did not purchase shares of the Company’s common stock under the share repurchase program. The Company had $ million remaining under the share repurchase program as of .
9.
| April 22, 2023 | | Numerator | | | |
| Net income applicable to common shares | $ | | | | $ | | |
| Denominator | | | |
| Basic weighted-average common shares | | | | | |
| Dilutive impact of share-based awards | | | | | |
Diluted weighted-average common shares (1) | | | | | |
| | | |
| Basic earnings per common share | $ | | | | $ | | |
| Diluted earnings per common share | $ | | | | $ | | |
(1) For the sixteen weeks ended and April 22, 2023, thousand and thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive.
10.
, the Company granted thousand time-based RSUs, thousand market-based RSUs and thousand stock options. The Company grants options to purchase common stock to certain employees under the Company’s 2023 Omnibus Incentive Compensation Plan. The general terms of the time-based and market-based RSUs and stock options are similar to awards previously granted by the Company. The Company records 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 sixteen weeks ended were $ and $ per share. The fair value of each market-based RSU was determined using a Monte Carlo simulation model.
was $ per share. The fair value was estimated on the date of grant by applying the Black-Scholes option-pricing valuation model.
% | Expected term (2) | years |
Expected volatility (3) | | % |
Expected dividend yield (4) | | % |
(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 sufficient historical data is not available, the Company 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. The Company 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 the Company’s 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 was $ million. As of , there was $ million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted-average period of years.
billion and $ billion of the Company’s accounts payable were to suppliers participating in these financing arrangements.
| | $ | | | | $ | | | | Gross profit | | | | () | | | | |
| Selling, general and administrative expenses | | | | () | | | | |
| Operating income | | | | | | | | |
| |
| |
| |
| |
| |
| Income before provision for income taxes | | | | | | | | |
| Provision for income taxes | | | | | | | | |
| Net income | $ | | | | $ | | | | $ | | |
| | | | | |
| Basic earnings per share | $ | | | | $ | | | | $ | | |
| |
| |
| Diluted earnings per common share | $ | | | | $ | | | | $ | | |
| |
|
)
| () | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | |
| Condensed Consolidated Statement of Cash Flows |
| Sixteen Weeks Ended April 22, 2023 |
| As Previously Reported | | Adjustments | | As Corrected |
| Net income | $ | | | | $ | | | | $ | | |
| Other, net | | | | | | | | |
| Net change in: | | | | | |
| Receivables, net | () | | | () | | | () | |
| Inventories, net | () | | | () | | | () | |
| Accounts payable | () | | | | | | () | |
| Accrued expenses | | | | | | | | |
| Other assets and liabilities, net | | | | () | | | () | |
| Net cash used in operating activities | () | | | () | | | () | |
Other, net (1) | () | | | () | | | () | |
| Net cash used in financing activities | | | | () | | | | |
| Effect of exchange rate changes on cash | | | | () | | | | |
| Net (decrease) increase in cash and cash equivalents | () | | | () | | | () | |
| Cash and cash equivalents, beginning of period | | | | | | | | |
| Cash and cash equivalents, end of period | $ | | | | $ | () | | | $ | | |
during the five-year lookback period.
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 the Company’s Annual Report on Form 10-K for the year ended December 30, 2023 (filed with the SEC on March 12, 2024), which the Company refers to as the 2023 Form 10-K, and the Company’s condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. The Company’s first quarter of the year contains sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.
Management Overview
A high-level summary of the Company’s financial results for the first quarter of 2024 includes:
•Net sales during the first quarter of 2024 were $3.41 billion, a decrease of 0.3% compared with the first quarter of 2023. Comparable store sales declined 0.2%.
•Gross profit margin for the first quarter of 2024 was 42.0% of net sales, a decrease of 82 basis points compared with the first quarter of 2023. Gross profit margin was negatively impacted by increased costs not fully covered by pricing actions, partially offset by supply chain productivity.
•Selling, general & administrative (“SG&A”) expenses for the first quarter of 2024 were 39.4% of net sales, an improvement of 48 basis points compared with the first quarter of 2023. This was primarily driven by cost control efforts initiated at the end of 2023 and a net gain on sale of assets, partially offset by increased field wages and training and ongoing expense inflationary pressure.
•The Company generated diluted earnings per share (“Diluted EPS”) of $0.67 during the first quarter of 2024, compared with $0.81 for the comparable period of 2023.
Business and Risks Update
The Company continues to make progress on the various elements of the Company’s 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, the Company has undertaken planned strategic actions to help build a foundation for long-term success across the organization, which include:
•Conducting sales process for the potential disposition of Worldpac;
•Reducing costs to remain competitive while reinvesting in the frontline;
•Making organizational changes to position the Company for success;
•Assessing the productivity of all assets, including company-owned stores and Carquest Independents; and
•Consolidating the Company’s supply chain.
Industry Update
Operating within the automotive aftermarket industry, the Company is 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 the Company operates include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. During the sixteen weeks ended April 20, 2024, seven stores and branches were opened and 17 were closed, resulting in a total of 5,097 stores and branches compared with a total of 5,107 stores and branches as of December 30, 2023.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sixteen Weeks Ended | | $ Favorable/ (Unfavorable) | | Basis Points |
| ($ in millions) | April 20, 2024 | | April 22, 2023 | | |
| Net sales | $ | 3,406.3 | | | 100.0 | % | | $ | 3,417.6 | | | 100.0 | % | | $ | (11.3) | | | — | |
| Cost of sales | 1,977.2 | | | 58.0 | | | 1,955.7 | | | 57.2 | | | (21.5) | | | (83) | |
| Gross profit | 1,429.1 | | | 42.0 | | | 1,461.9 | | | 42.8 | | | (32.8) | | | (82) | |
SG&A | 1,343.1 | | | 39.4 | | | 1,364.0 | | | 39.9 | | | 20.9 | | | 48 | |
| Operating income | 86.0 | | | 2.5 | | | 97.9 | | | 2.9 | | | (11.9) | | | (34) | |
| Interest expense | (24.9) | | | (0.7) | | | (29.7) | | | (0.9) | | | 4.8 | | | 14 | |
| | | | | | | |
Other expense, net | (1.3) | | | — | | | (0.7) | | | — | | | (0.6) | | | (2) | |
| Provision for income taxes | 19.8 | | | 0.6 | | | 19.2 | | | 0.6 | | | (0.6) | | | (2) | |
| Net income | $ | 40.0 | | | 1.2 | % | | $ | 48.3 | | | 1.4 | % | | $ | (8.3) | | | (24) | |
Note: Table amounts may not foot due to rounding.
Net Sales
For the first quarter of 2024, net sales decreased 0.3% and comparable store sales declined 0.2% compared with the first quarter of 2023.
The Company calculates 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 and exclude sales fulfilled by distribution centers to independently owned Carquest locations. Acquired stores are included in the Company’s comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date. The Company includes sales from relocated stores in comparable store sales from the original date of opening.
Gross Profit
Gross profit for the first quarter of 2024 was $1.43 billion, or 42.0% of net sales, compared with $1.46 billion, or 42.8% of net sales, for the first quarter of 2023. During the first quarter of 2024, gross profit margin was negatively impacted by increased costs that were not fully covered by pricing actions. These were partially offset by supply chain productivity.
Selling, General and Administrative Expenses
SG&A expenses for the first quarter of 2024 were $1.34 billion, or 39.4% of net sales, compared with $1.36 billion, or 39.9% of net sales, for the first quarter of 2023. The improvement in SG&A as a percentage of net sales was driven by cost control efforts initiated at the end of 2023, including reduced corporate expenditures from the decrease in headcount and significant reduction of marketing expenses, as well as a net gain on asset sales (see Note 7. Leases for additional information). These were partially offset by increased field wages and training and ongoing expense inflationary pressure.
Provision for Income Taxes
The Company’s provision for income taxes for the first quarter of 2024 was $19.8 million compared with $19.2 million for the same period in 2023. The Company’s effective tax rate was 33.2% for the first quarter of 2024 and 28.5% for the first quarter of 2023. The higher effective income tax rate for the first quarter of 2024 compared with the same period in the prior year was due to a discrete charge for stock-based compensation in the first quarter of 2024.
Liquidity and Capital Resources
Overview
The Company’s primary cash requirements necessary to maintain the Company’s current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under the Company’s strategic business plan and other operational priorities, including payment of interest on the Company’s long-term debt. Historically, the Company has also used available funds to repay borrowings under the Company’s credit facility, to periodically repurchase shares of the Company’s common stock under the share repurchase program, to pay the Company’s quarterly cash dividend and for acquisitions. However, the Company’s future uses of cash may differ, including with respect to the weight the Company places on the preservation of cash and liquidity, degree of investment in the Company’s business and other capital allocation factors.
Typically, the Company has funded its cash requirements primarily through cash generated from operations, supplemented by borrowings under the Company’s credit facilities and notes offerings as needed. The Company believes funds generated from its expected results of operations, available cash and cash equivalents, and available borrowings under the Company’s credit facility will be sufficient to fund its obligations for the next year. The Company also believes such funds, cash and available borrowings, together with the Company’s ability to generate cash through credit facilities and notes offerings as needed, will be sufficient to fund its ongoing obligations.
The Company’s supplier finance programs did not have a material impact on its liquidity or capital resources in the periods presented nor does the Company expect such arrangements to have a material impact on its liquidity or capital resources for the foreseeable future. See Note 11. Supplier Finance Programs of the Company’s condensed consolidated financial statements for further discussion.
On February 26, 2024, the Company entered into Amendment No. 4 (“Amendment No. 4”) to the 2021 Credit Agreement to enable certain addbacks to the definition of Consolidated EBITDA contained therein for specific write-downs of inventory and vendor receivables. Amendment No. 4 also updated certain limitations on future incurrences of other indebtedness and liens, replacing the cap thereon of 10% of consolidated net tangible assets with $400 million, and eliminated the $250 million basket for accounts receivable securitization transactions. Amendment No. 4 made no other material changes to the terms of the 2021 Credit Agreement.
Share Repurchase Program
The Company’s share repurchase program permits the repurchase of the Company’s common stock on the open market and in privately negotiated transactions from time to time. The Company expects to continue its temporary pause on repurchases under the existing share repurchase program and to continue to evaluate current and expected business conditions with respect to resumption of share repurchase activity.
During the first quarter of 2024 and 2023, the Company did not purchase any shares of its common stock under the share repurchase program. The Company had $947.3 million remaining under the share repurchase program as of April 20, 2024.
Analysis of Cash Flows
The following table summarizes the Company’s cash flows from operating, investing and financing activities:
| | | | | | | | | | | |
| Sixteen Weeks Ended |
| (in thousands) | April 20, 2024 | | April 22, 2023 |
| Cash flows provided by (used in) operating activities | $ | 2,688 | | | $ | (382,524) | |
| Cash flows used in investing activities | (38,929) | | | (89,671) | |
| Cash flows (used in) provided by financing activities | (25,644) | | | 425,202 | |
| Effect of exchange rate changes on cash | 9,417 | | | 68 | |
| Net decrease in cash and cash equivalents | $ | (52,468) | | | $ | (46,925) | |
Operating Activities
For the first quarter of 2024, cash flows provided by operating activities increased by $385.2 million to $2.7 million compared with the same period of prior year. The net increase in cash flows provided by operating activities was driven by an increase in working capital, namely accounts payable, inventories and accrued expenses.
Investing Activities
For the first quarter of 2024, cash flows used in investing activities decreased by $50.7 million to $38.9 million compared with the same period of prior year. The decrease in cash used in investing activities was due to lower capital spend in the current year coupled with higher proceeds on asset sales (see Note 7. Leases for additional information).
Financing Activities
For the first quarter of 2024, cash flows used in financing activities was $25.6 million, a decrease of $450.8 million compared with the same period of prior year. The decrease in cash provided by financing activities was due to no issuances of senior unsecured notes offset by a decrease in dividends paid during the first quarter of 2024 compared with the same period of prior year.
The Company’s 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 the Company’s Board of Directors and will depend upon the Company’s results of operations, cash flows, capital requirements and other factors deemed relevant by the Board of Directors.
Long-Term Debt
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 the Issuer’s 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. The Company’s captive insurance subsidiary, an insignificant wholly owned subsidiary of the Issuer, does not serve as guarantor of its senior unsecured notes.
As of April 20, 2024, the Company had a credit rating from Standard & Poor’s of BB+ and from Moody’s Investor Service of Baa3. As of April 20, 2024, the outlooks by Standard & Poor’s and Moody’s on the Company’s credit rating were stable and negative. The current pricing grid used to determine the Company’s borrowing rate under the Credit Agreement is based on the Company’s credit ratings. If the Company’s credit ratings decline, the interest rate on outstanding balances may increase and the Company’s 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 the Company’s vendors based on the Company’s credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, the Company’s interest rate may decrease.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 20, 2024. 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 weaknesses described below.
Material Weaknesses in Internal Control over Financial Reporting
In our Form 10-Q for the 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 of 2023. The Company was unable to attract, develop and retain sufficient resources to fulfill internal control responsibilities during the first quarter 2023. Additionally, we did not design and implement effective control activities including account reconciliations. This relates to account reconciliations of cash and a small number of other miscellaneous accounts.
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.
Management believes that the Condensed Consolidated Financial Statements and related financial information included in this Form 10-Q present fairly, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as of and for the periods presented.
Details on Account Reconciliation Material Weakness
As discussed above, subsequent to December 30, 2023, in connection with the preparation of the quarterly financial statements contained in this Form 10-Q, management identified certain cash account reconciliations whereby a former employee in the Company’s Indian Shared Service Center circumvented a cash reconciliation controls policy and concealed unreconciled items. This individual did not follow the Company’s policy to display all reconciling items in the reconciliation process. Management determined that the adjustments necessary to correct identified errors are immaterial.
The Audit Committee was informed of a significant deficiency regarding cash reconciliations in March 2024 by management and discussed the deficiency with the Company’s independent registered accounting firm. This significant deficiency has now been elevated to a material weakness due to noncompliance with policy. The Company believes the cash reconciliation policy noncompliance primarily related to inadequately trained and supervised personnel and is closely linked to the material weakness disclosed in the Form 10-Q for the period ended April 22, 2023.
As a result, the Company is concurrently amending its Form 10-K for the fiscal year ended December 30, 2023 to amend (1) management’s annual report on internal control over financial reporting and (2) Deloitte & Touche LLP’s report on the Company’s internal control over financial reporting, in each case, to reflect the additional material weakness.
Remediation Efforts to Address the Material Weaknesses
The Company has devoted, significant time and resources to complete its remediation of the material weaknesses. The following components of the remediation plan, among others, have been executed:
•Backfilled open roles and hired approximately 30 experienced personnel (both permanent employees and contract labor) with the requisite accounting and internal controls knowledge and experience to sufficiently complement the existing global controllership organization;
•Completed the review of the organizational structure of the global controllership function by a third-party consultant and implemented recommended changes;
•Assessed our methodologies, policies, and procedures to ensure adequate design and effectiveness of processes supporting internal control over financial reporting;
•Added redundant and compensating internal controls to enhance our internal control structure;
•Assessed the specific training needs for newly hired and existing personnel and developed and delivered training programs designed to uphold our internal controls standards;
•Following the departure of the Company’s Chief Financial Officer during the third fiscal quarter of 2023, hired a new Chief Financial Officer who began employment with the Company on November 27, 2023;
•Following the departure of the Company’s Chief Accounting Officer during the fourth fiscal quarter of 2023, hired a new Chief Accounting Officer who began employment with the Company on January 9, 2024; and
•Reperformed cash reconciliations for 2023 year end and will continue to execute the same comprehensive testing until this matter is considered fully remediated.
The Company considers that the actions described above are comprehensive and will remediate the material weaknesses and strengthen the Company’s internal control over financial reporting. Given the limited time that the open roles have been filled, the Company believes that additional time will be beneficial to demonstrate that personnel have the ability to consistently perform their responsibilities to ensure that the material weaknesses have been fully remediated. Therefore, the Company has concluded that these material weaknesses will not be considered fully remediated until the remediation actions, including those above, have operated effectively for a sufficient period of time and have been sufficiently tested. The Company is targeting completion of the remediation and testing of these material weaknesses in the second half of fiscal 2024.
Changes in Internal Control Over Financial Reporting
Except for the changes described above, there has been no change in the Company’s internal control over financial reporting during the first quarter ended April 20, 2024, 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.
PART II. OTHER INFORMATION
None.
ITEM 1. LEGAL PROCEEDINGS
On October 9, 2023 and October 27, 2023, two putative class actions on behalf of purchasers of the Company’s securities who purchased or otherwise acquired their securities between November 16, 2022 and May 30, 2023, inclusive (the “Class Period”), were commenced against the Company and certain of the Company’s former officers in the United States District Court for the Eastern District of North Carolina. The plaintiffs allege that the defendants made certain false and materially misleading statements during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. These cases were consolidated on February 9, 2024 and the court-appointed lead plaintiff filed a consolidated complaint on April 22, 2024. The consolidated complaint proposes a Class Period of November 16, 2022 to November 15, 2023 and alleges that defendants made false and misleading statements in connection with (a) the Company’s 2023 guidance and (b) certain accounting issues previously disclosed by the Company. The defendants’ response to the consolidated complaint is due on June 21, 2024. The Company strongly disputes the allegations and intends to defend the case vigorously.
On January 17, 2024, February 20, 2024 and February 26, 2024, derivative shareholder complaints were commenced against the Company’s directors and certain former officers alleging derivative liability for the allegations made in the securities class action complaints noted above. The court consolidated these actions and appointed co-lead counsel on April 9, 2024. The defendants’ response to the complaints is due on June 10, 2024.
In the normal course of business, the Company identified a potential discrepancy in trade compliance pertaining to customs transactions. The Company conducted a thorough review of transactions and identified an immaterial amount owed of less than $100,000 during the five-year lookback period.
ITEM 1A.RISK FACTORS
Please refer to “Item 1A. Risk Factors” found in the 2023 Form 10-K filed for the year ended December 30, 2023 for risks that, if they were to occur, could materially adversely affect the Company’s business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of the Company’s 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 the Company’s common stock for the quarter ended April 20, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2024 to January 26, 2024 | | — | | | $ | — | | | — | | | $ | 947,339 | |
| January 29, 2024 to February 24, 2024 | | 2,681 | | | $ | 61.20 | | | — | | | $ | 947,339 | |
| February 26, 2024 to March 25, 2024 | | 45,420 | | | $ | 71.07 | | | — | | | $ | 947,339 | |
| March 26, 2024 to April 22, 2024 | | 354 | | | $ | 85.21 | | | — | | | $ | 947,339 | |
| Total | | 48,455 | | | $ | 70.63 | | | — | | | |
(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 $3.4 million, or an average price of $70.63 per share, during the first quarter of 2024.
ITEM 5. OTHER INFORMATION
During the first quarter of 2024, Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by the Company’s officers or directors as each term is defined in Item 408 of Regulation S-K.
| | | | | | | | | | | | | | | | | |
| | EXHIBIT INDEX | 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 | 2/28/2024 | |
| | 8-K | 10.1 | 3/12/2024 | |
| | | | | X |
| | | | | X |
| | | | | X |
| | | | | X |
| | | | | X |
| | | | | X |
| | | | | X |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | X |
| 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 the Inline XBRL Documents and Included in Exhibit). | | | | X |
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: May 29, 2024 | | /s/ Ryan P. Grimsland |
| | Ryan P. Grimsland
Executive Vice President, Chief Financial Officer |
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