Advance Auto Parts, Inc. — Q3 2022 Form 10-Q
Business context and period: North American automotive aftermarket parts retailer serving professional installers and DIY customers. The quarter was the 12 weeks ended October 8, 2022; year-to-date figures cover 40 weeks. The company operated 4,747 stores and 313 branches and served 1,335 independently owned Carquest stores.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 40 weeks 2022 | 40 weeks 2021 |
|---|---|---|---|---|
| Net sales | $2,641.3 million | $2,621.2 million | $8,681.0 million | $8,601.0 million |
| Gross profit / margin | $1,179.9 million / 44.7% | $1,182.5 million / 45.1% | $3,872.1 million / 44.6% | $3,856.6 million / 44.8% |
| SG&A / % of sales | $1,002.7 million / 38.0% | $953.3 million / 36.4% | $3,289.9 million / 37.9% | $3,130.4 million / 36.4% |
| Operating income / margin | $177.2 million / 6.7% | $229.2 million / 8.7% | $582.1 million / 6.7% | $726.3 million / 8.4% |
| Net income | $111.0 million | $169.8 million | $395.2 million | $534.4 million |
| Diluted EPS | $1.84 | $2.68 | $6.47 | $8.22 |
Cash flow and liquidity: For the 40 weeks, operating cash flow was $483.1 million, versus $924.9 million a year earlier; capital expenditures were $333.6 million, versus $191.0 million. Cash used in investing was $331.8 million and cash used in financing was $545.8 million. Cash declined $410.2 million from the start of the year to $191.2 million. At October 8, current assets were $6.16 billion and current liabilities were $5.44 billion.
Debt: Total debt was $1.37 billion, compared with $1.03 billion at January 1, 2022; $185 million was outstanding under the revolver, with $1.0 billion of availability. The company reported covenant compliance. It issued $350 million of 3.50% notes due 2032 and redeemed its remaining 2023 notes, recording a $7.4 million early-redemption loss.
Material changes and management commentary
- Q3 sales increased 0.8%, while comparable-store sales declined 0.7%; management cited strategic pricing and new-store growth, partly offset by owned-brand penetration. Batteries, fluids and chemicals, and brakes led category growth. Year-to-date sales rose 0.9%, with softness in DIY omnichannel sales noted as a partial offset.
- Q3 gross margin fell 44 basis points and SG&A rose 159 basis points as a share of sales. Management cited inflation in product, labor, medical and fuel costs; higher transportation costs, unfavorable channel mix and supply-chain headwinds also pressured gross margin. Pricing and owned-brand expansion provided offsets.
- Q3 GAAP diluted EPS was $1.84; adjusted diluted EPS, a non-GAAP measure, was $2.84 versus $3.21. Adjustments included LIFO impacts, transformation expenses and acquired-intangible amortization. Q3 LIFO expense was $67.5 million, versus $29.4 million a year earlier; year-to-date LIFO expense was $240.8 million, versus $71.6 million.
- Management described strategic initiatives in assortment planning, supply-chain efficiency, business integration and footprint optimization, digital and same-day services, and store and Carquest network growth. It said cash from operations, cash on hand and credit availability should fund long-term obligations, while noting cash priorities could change with macroeconomic uncertainty. No specific financial guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
Highlighted exposures include inflation in labor, logistics and product costs; supply-chain disruption; fuel prices; miles driven; consumer confidence and purchasing power; competition; geopolitical and economic uncertainty; and foreign-exchange volatility. The filing also identifies execution risks around strategic initiatives, labor availability and store openings. A securities class-action settlement received final court approval in June 2022; its $49.3 million settlement was paid by insurance carriers. The company guaranteed $66.5 million of loans to independent Carquest stores and stated that performance under these guarantees was considered remote.
Investor facts to verify
- Whether sales and comparable-store trends improve, especially in DIY omnichannel and owned-brand-related comparisons.
- Whether pricing and operational initiatives can offset inflation, LIFO costs, labor and transportation pressures, and unfavorable channel mix.
- Inventory and working-capital trends: inventory was $4.93 billion at October 8, versus $4.66 billion at January 1, and inventory-related cash use contributed to lower operating cash flow.
- Liquidity and leverage, including revolver utilization, debt maturities, and the impact of credit-rating changes on borrowing and vendor financing.
- Capital allocation and returns: the company repurchased $523.2 million of shares year to date, declared $4.50 per share in dividends year to date, and had $1.0 billion remaining under its repurchase authorization.