Advance Auto Parts, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Advance Auto Parts is a North American automotive aftermarket parts retailer serving professional installers and do-it-yourself customers. The quarter comprised the 12 weeks ended October 9, 2021; year-to-date figures cover 40 weeks. At quarter-end, the company operated 4,727 stores and 234 branches and served 1,325 independently owned Carquest stores.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 40 weeks 2021 | 40 weeks 2020 |
|---|---|---|---|---|
| Net sales | $2.621 billion | $2.542 billion | $8.601 billion | $7.741 billion |
| Gross margin | 45.1% | 44.4% | 44.8% | 43.9% |
| SG&A as % of sales | 36.4% | 34.3% | 36.4% | 36.2% |
| Operating income | $229.2 million | $256.8 million | $726.3 million | $598.1 million |
| Net income | $169.8 million | $147.5 million | $534.4 million | $381.0 million |
| Diluted EPS | $2.68 | $2.13 | $8.22 | $5.50 |
| Adjusted diluted EPS (non-GAAP) | $3.21 | $2.64 | $9.93 | $6.59 |
Cash flow and liquidity. For the 40 weeks, operating cash flow was $924.9 million, versus $809.2 million a year earlier; investing cash outflow was $188.9 million, primarily reflecting $191.0 million of property and equipment purchases. Financing cash outflow was $968.7 million, largely reflecting $791.7 million of share repurchases and $160.9 million of dividends paid. Cash declined $230.3 million to $604.6 million from January 2, 2021. Current assets were $6.161 billion and current liabilities $4.955 billion.
Debt and obligations. Long-term debt was $1.034 billion, consisting of senior unsecured notes due in 2023, 2027 and 2030. The company reported no revolver borrowings and $1.0 billion of availability under its then-existing facility at October 9; it was in compliance with debt covenants. Operating lease liabilities totaled $2.610 billion. On November 9, the company entered a replacement unsecured revolving facility of $1.2 billion, with a possible commitment increase of up to $500 million.
Material changes and management commentary
- Q3 sales increased 3.1%, including a 3.1% increase in comparable store sales. Management cited a recovery in the professional channel, DIY customers returning to stores, and strength in brakes, motor oil and filters. Year-to-date sales rose 11.1%, with comparable sales up 11.4%; the prior-year comparison included pandemic-related demand effects.
- Q3 gross margin expanded 72 basis points, attributed to pricing, sourcing, owned-brand initiatives and favorable product mix, partly offset by inflation and channel mix. SG&A rose 208 basis points as a share of sales, reflecting labor inflation, delivery and fuel costs, incentive compensation and new-store startup costs. Operating income consequently fell 10.7% year over year despite higher sales.
- Year-to-date diluted EPS improved partly alongside a lower share count. The company repurchased 4.2 million shares for $791.7 million and had $640.5 million remaining under its repurchase authorization at quarter-end. The quarterly dividend declared November 9 was $1.00 per share.
- Management described ongoing work on customer experience, supply-chain integration, assortment, marketing, store footprint and same-day fulfillment. It said cash from operations, available cash and credit-facility borrowings should be sufficient for obligations over the next year; no specific earnings or sales guidance was provided.
Risks, contingencies and unusual items
- Management cited continuing uncertainty from COVID-19, supply-chain and inventory complexity, inflationary pressures, competition and execution of strategic initiatives. It also noted that professional-channel demand and DIY demand were shifting relative to one another.
- Q3 included a $29.4 million LIFO expense, compared with a $15.9 million benefit in the prior-year quarter. The filing’s adjusted EPS excludes LIFO impacts, transformation expenses and acquired-intangible amortization, among other adjustments; these non-GAAP measures are not substitutes for GAAP results.
- A securities class-action settlement term sheet was signed November 5, 2021. The amount is to be fully covered by insurance and remains subject to court approval.
- Management reported disclosure controls and procedures were effective as of October 9, 2021, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and professional-channel momentum persist, and how DIY demand develops.
- Whether pricing, sourcing and mix gains can offset LIFO, labor, delivery and other inflation-related costs.
- Cash generation, capital spending, liquidity and the terms and availability of the replacement $1.2 billion revolver.
- The pace and price of future share repurchases, dividend policy and resulting share-count effects on EPS.
- Resolution and court approval of the insured securities litigation settlement, and progress on supply-chain and other strategic initiatives.