Advance Auto Parts, Inc. — Q2 2023 Form 10-Q
Reporting period: Second quarter was the 12 weeks ended July 15, 2023; year-to-date figures cover 28 weeks. Comparisons are with the corresponding 2022 periods. Advance operated 4,790 stores and 319 branches and served 1,307 independently owned Carquest stores at quarter-end.
Financial performance
| Metric | Q2 2023 | Q2 2022 | 28 weeks 2023 | 28 weeks 2022 |
|---|---|---|---|---|
| Net sales | $2.686 billion | $2.665 billion | $6.104 billion | $6.040 billion |
| Comparable-store sales | (0.6%) | — | (0.5%) | — |
| Gross margin | 42.7% | 44.5% | 42.9% | 44.6% |
| SG&A as % of sales | 37.7% | 36.9% | 39.2% | 37.9% |
| Operating income | $134.4 million | $201.7 million | $224.4 million | $405.0 million |
| Net income | $85.4 million | $144.4 million | $128.0 million | $284.2 million |
| Diluted EPS | $1.43 | $2.38 | $2.15 | $4.63 |
| Interest expense | $20.9 million | $10.2 million | $50.6 million | $23.1 million |
Quarterly sales increased 0.8%, primarily from new store openings, while comparable sales fell, reflecting weaker professional demand partly offset by DIY omnichannel growth. Gross margin was pressured by higher product costs and supply-chain deleverage not fully offset by pricing, partly offset by lower LIFO-related costs. SG&A rose as a share of sales, primarily due to labor and benefit inflation and, year to date, the out-of-period charge. Quarterly diluted EPS fell about 40% year over year.
Cash flow, debt and liquidity
- For the 28 weeks, operating cash flow was negative $164.6 million, versus positive $308.5 million in 2022. The filing attributes the deterioration to lower net income and greater working-capital cash use, especially accounts payable.
- Investing cash outflow was $143.3 million, compared with $210.4 million; financing provided $314.4 million, versus a $465.6 million outflow. Cash ended at $277.1 million, up $7.8 million from year-end.
- Total debt was $1.880 billion at July 15, 2023, compared with $1.373 billion at December 31, 2022; cash was $277.1 million. The company issued $300 million each of 5.90% notes due 2026 and 5.95% notes due 2028. Quarterly interest expense nearly doubled year over year.
- Revolver borrowings were $95 million, with $1.1 billion of availability and no letters of credit outstanding under the facility. Management said cash, expected operating cash generation and available borrowing capacity should fund obligations for the next year and ongoing needs.
- Supplier-finance-program payables were $3.1 billion, included in accounts payable. The company said these programs had no material liquidity impact in the periods presented, but warned that lower credit ratings could reduce supplier or bank participation, shorten payment terms and materially harm liquidity.
Outlook, developments and risks
- No quantitative earnings or sales guidance is provided in the supplied filing text. Management described initiatives focused on customer experience, margin expansion, execution, assortment, supply-chain optimization and store openings.
- Management plans to keep share repurchases paused for the rest of 2023 and evaluate possible resumption in 2024. No shares were repurchased under the program during the reported 2023 periods; $947.3 million remained authorized.
- Credit ratings were BBB- from S&P and Baa2 from Moody’s, both with negative outlooks. The company reported compliance with debt covenants at July 15 and expected compliance for the following 12 months. A subsequent August 21 credit-agreement amendment revised minimum consolidated coverage-ratio thresholds: 1.75x for specified 2023 quarters, 2.0x for quarters from April 2024 through October 2025, and 2.25x thereafter.
- A $17.3 million out-of-period charge for prior-year costs was recorded in year-to-date SG&A, with a related $4.3 million tax benefit. Management said it was not material to the current or previously issued financial statements.
- Disclosure controls were not effective at quarter-end solely because of a previously identified material weakness in internal control over financial reporting, arising from turnover in key accounting roles and insufficient accounting/control resources. Remediation was underway, with completion targeted on or before December 30, 2023; the weakness was not yet considered remediated.
- Risks highlighted include macroeconomic and inflationary pressures, labor costs, supply-chain complexity, competition, demand trends, leadership transition, execution of strategic initiatives, and potential effects of credit-rating deterioration.
Important facts for investors to verify
- Whether comparable sales, professional-customer demand and gross margins improve, and whether pricing and sourcing actions offset product and supply-chain costs.
- Whether operating cash flow and working capital recover, particularly given the scale of supplier-finance payables and the negative credit outlooks.
- Progress against revised credit covenants, borrowing costs and management’s liquidity expectations.
- Whether the accounting-control material weakness is remediated by the stated target and operates effectively for a sufficient period.
- The effects of the $17.3 million prior-period charge and interim LIFO estimates on reported margins and earnings.
- Any future guidance, changes to the repurchase pause, and the board’s decisions on dividends and capital allocation.