Advance Auto Parts, Inc. — Q1 2022 Form 10-Q
Reporting period: Sixteen weeks ended April 23, 2022; comparative period ended April 24, 2021. Results are unaudited. Advance Auto Parts serves professional and do-it-yourself automotive aftermarket customers through company-operated stores and branches and independently owned Carquest locations.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net sales | $3.374 billion | $3.330 billion | Up 1.3%; comparable-store sales up 0.6% |
| Gross profit / margin | $1.507 billion / 44.6% | $1.485 billion / 44.6% | Margin flat |
| SG&A / sales | $1.303 billion / 38.6% | $1.233 billion / 37.0% | Up 161 basis points as a share of sales |
| Operating income / margin | $203.3 million / 6.0% | $252.1 million / 7.6% | Lower year over year |
| Net income | $139.8 million | $185.9 million | Lower year over year |
| Diluted EPS | $2.26 | $2.81 | Adjusted EPS, a non-GAAP measure, was $3.57 versus $3.34 |
| Operating cash flow | $(54.9) million | $329.9 million | Declined $384.9 million |
| Capital expenditures | $114.9 million | $70.9 million | Investments primarily included IT and supply-chain projects |
Cash and cash equivalents were $138.7 million at April 23, 2022, down from $601.4 million at January 1, 2022. Total debt was $1.187 billion. The company reported no borrowings and $1.2 billion of availability under its revolving credit facility at quarter-end, and said it was in compliance with debt covenants. After quarter-end, it borrowed $210 million and repaid $110 million under the facility; $100 million was outstanding as of the financial statements’ issuance date. Operating lease liabilities totaled $2.799 billion.
Material changes and management commentary
- Sales growth was primarily driven by professional and independent businesses; motor oil, batteries and brakes led category growth. The company reported strength in the West and Canada, and recovery in Florida and the Mid-Atlantic.
- Strategic pricing and owned-brand expansion supported gross profit, but were offset by higher LIFO expense, inflationary costs, and unfavorable channel and product mix. LIFO expense was $81.5 million, compared with $3.1 million a year earlier.
- Higher store labor, fuel and delivery costs and new-store start-up expenses contributed to increased SG&A; lower COVID-19-related expenses and incentive compensation partly offset them.
- Net income included a $7.4 million loss on early redemption of the 2023 notes. The company issued $350 million of 3.50% notes due 2032 and used proceeds to redeem the remaining $193.2 million principal amount of its 4.50% notes due 2023, with proceeds also supporting operations and capital expenditures.
- The company repurchased 1.1 million shares for $248.2 million under its program and had $1.3 billion remaining authorization. It declared a $1.50-per-share dividend for payment July 1, 2022.
- Management described initiatives in assortment planning, store and distribution-network optimization, supply-chain processes, digital and same-day services, new store openings, and vendor sourcing and pricing. It stated that cash from operations, available cash and facility borrowings should be sufficient to meet long-term obligations.
Outlook, risks and contingencies
The filing provides no specific quantitative earnings or sales guidance. Management cited inflation, labor and logistics costs, global supply-chain disruption, fuel costs, competition, consumer confidence, changes in new-car sales and miles driven, and economic and geopolitical uncertainty. Forward-looking results may also be affected by strategic-initiative execution, labor shortages, inventory and supply-chain complexity, macroeconomic deterioration, competition, and pandemic-related factors. Credit-rating declines could raise borrowing costs and increase working-capital needs; ratings were BBB- at S&P with a positive outlook and Baa2 at Moody’s with a stable outlook.
A securities class-action settlement of $49.3 million remains subject to final court approval; the company stated that insurance carriers will fully cover the amount. The filing also disclosed $44.5 million of guarantees on loans to independently owned Carquest stores and stated that performance under the guarantees was considered remote. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and comparable-store trends improve, and whether professional and independent businesses sustain growth.
- How much inflation, LIFO costs, product mix and operating expenses affect gross margin and earnings in subsequent periods.
- Whether working-capital investment normalizes after the quarter’s negative operating cash flow.
- Cash needs and capital allocation, including debt, dividends and the remaining share-repurchase authorization.
- Final court approval and insurance coverage of the securities settlement, and execution of the company’s strategic and supply-chain initiatives.