Advance Auto Parts, Inc. — Q2 2021 Form 10-Q
Reporting period: Twelve weeks ended July 17, 2021; year-to-date figures cover the twenty-eight weeks ended that date. Comparisons are with the corresponding periods ended July 11, 2020. The company is a North American automotive aftermarket parts retailer serving professional and DIY customers.
Financial performance
| Metric | Q2 2021 | Q2 2020 | 28 weeks 2021 | 28 weeks 2020 |
|---|---|---|---|---|
| Net sales | $2.649 billion | $2.501 billion | $5.980 billion | $5.199 billion |
| Gross margin | 44.9% | 43.8% | 44.7% | 43.6% |
| SG&A as % of sales | 35.6% | 33.3% | 36.4% | 37.1% |
| Operating income | $244.9 million | $262.8 million | $497.1 million | $341.3 million |
| Net income | $178.7 million | $190.0 million | $364.6 million | $233.5 million |
| Diluted EPS | $2.74 | $2.74 | $5.55 | $3.37 |
Quarterly sales increased 5.9%, including comparable-store sales growth of 5.8%, led by a recovery in the professional business. Year-to-date sales rose 15.0%; comparable-store sales rose 15.6%. Quarterly gross margin expanded 104 basis points, while SG&A rose 231 basis points as a share of sales. Accordingly, quarterly operating income and net income declined despite higher sales. Management reported quarterly adjusted EPS of $3.40 versus $2.95, a non-GAAP measure that excludes specified items including LIFO impacts, transformation expenses and acquired-intangible amortization.
Cash flow, balance sheet and capital allocation
- Year-to-date operating cash flow: $776.2 million, up from $448.2 million. Investing cash outflow was $127.7 million, principally $129.6 million of property and equipment purchases. Financing cash outflow was $676.4 million, including $563.4 million of share repurchases and $98.0 million of dividends paid.
- Cash: $809.3 million at July 17, 2021, down from $835.0 million at January 2, 2021. Current assets were $6.222 billion and current liabilities were $4.899 billion.
- Debt and credit: Long-term debt was $1.034 billion. The company had no revolver borrowings, with $1.0 billion of borrowing availability, and reported compliance with debt covenants. Ratings were BBB- from S&P and Baa2 from Moody’s, both with stable outlooks.
- Leases: Operating lease liabilities totaled $2.554 billion, including $2.091 billion non-current.
- Buybacks and dividend: The company repurchased 3.1 million shares for $563.4 million year to date; $868.8 million remained authorized. On August 10, 2021, it declared a $1.00-per-share dividend payable October 1, subject to the stated record date.
Management commentary, outlook and risks
Management attributed margin improvement to category-management actions such as sourcing, pricing and owned-brand expansion; year-to-date results also benefited from vendor funding and favorable channel mix. Quarterly margin gains were partly offset by higher LIFO expense, supply-chain inflation and unfavorable channel mix. Higher professional-business incentives, store wage inflation, delivery costs and normalized operating hours increased quarterly SG&A; lower COVID-related costs partially offset those pressures.
Management described ongoing work on supply-chain integration, demand-based assortment, store and distribution-network optimization, marketing, digital and same-day services, and store and independent-network growth. The filing provides no numerical full-year financial guidance. Management said expected operating cash generation, cash on hand and available credit should fund obligations for the next year, while noting the pandemic and related business uncertainties remain under active monitoring.
Risks highlighted include changing COVID-19 conditions, competitive pressures, demand, inventory and supply-chain complexity, inflation, and execution of strategic initiatives. A securities class action alleging disclosure violations remained in discovery; the company disputed the claims and said it would defend the case. A motion for reconsideration was pending. The filing states the likelihood of performance under guarantees of certain customer loans was remote.
Most important facts for investors to verify
- Whether professional-business recovery and comparable-store sales growth persist as pandemic-related comparisons and demand drivers change.
- Whether sourcing, pricing and owned-brand gains can offset LIFO expense, inflation and supply-chain pressures.
- Whether quarterly SG&A pressures continue, particularly labor, incentives and delivery costs.
- Cash generation and liquidity after substantial share repurchases, dividends and planned technology and supply-chain investment.
- Progress and costs of strategic transformation, store consolidation, and supply-chain and information-technology initiatives.
- Developments in the securities litigation and any material changes to debt ratings, covenant compliance or credit availability.