Advance Auto Parts, Inc. — Form 10-Q summary
Reporting period: Third quarter (12 weeks) ended October 3, 2020; year-to-date (40 weeks) compared with the periods ended October 5, 2019. Advance Auto Parts is a North American automotive aftermarket retailer serving professional installers and DIY customers.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Year to date 2020 | Year to date 2019 |
|---|---|---|---|---|
| Net sales | $2,541.9 million | $2,312.1 million | $7,741.2 million | $7,596.4 million |
| Comparable store sales growth | 10.2% | Not stated here | 1.8% | Not stated here |
| Gross margin | 44.4% | 43.8% | 43.9% | 43.8% |
| SG&A as a share of sales | 34.3% | 36.3% | 36.2% | 36.5% |
| Operating income | $256.8 million | $172.3 million | $598.1 million | $551.0 million |
| Net income | $147.5 million | $123.7 million | $381.0 million | $391.0 million |
| Diluted EPS | $2.13 | $1.75 | $5.50 | $5.46 |
| Adjusted diluted EPS (non-GAAP) | $2.81 | $2.10 | $6.64 | $6.55 |
Q3 sales grew 9.9%, driven mainly by DIY Omnichannel demand; comparable sales were positive across all regions. Gross-margin improvement reflected channel mix, supply-chain efficiencies and pricing, partly offset by product mix, shrink and defectives. SG&A leverage reflected payroll and rent, fewer incidents and claims, and suspended travel. Year-to-date net income fell despite higher sales and operating income, principally amid higher debt-redemption charges and other items.
Cash flow, liquidity and debt
- Year-to-date operating cash flow was $809.2 million, versus $708.5 million; investing cash use was $191.9 million, versus $160.5 million. Management attributed stronger operating cash flow mainly to working-capital improvements and deferred payroll taxes under the CARES Act.
- Cash and cash equivalents were $1,068.2 million at October 3, 2020, up from $418.7 million at year-end 2019. The company reported $1.0 billion available on its revolving credit facility and no outstanding facility borrowings.
- Long-term debt was $1,031.9 million, up from $747.3 million at year-end. The company issued $350 million of 1.75% notes due 2027, redeemed $300 million of 2022 notes, and tendered $256.3 million of 2023 notes. It recorded $48.0 million of early-redemption charges. The company was in compliance with its financial covenants.
- Operating lease liabilities totaled $2,458.6 million. Year-to-date capital expenditures were $192.6 million. The company repurchased $148.3 million of shares and paid $56.2 million in dividends.
Management commentary, outlook and risks
Management said demand weakened during the pandemic-related restrictions in the first quarter, then improved significantly in the second and third quarters. It attributed the rebound to external factors—including stimulus, unemployment benefits, preference for personal vehicles and DIY activity—as well as marketing and same-day shopping options. Strategic priorities include improving customer experience, supply-chain efficiency, assortment, e-commerce and store/network footprint.
No specific full-year financial guidance is provided in the filing. Management believes operating cash generation, cash on hand and available credit will fund obligations for the next year, but says the pandemic’s future effects on operations, liquidity, covenant compliance and results remain uncertain and could be material. A renewed demand decline could create impairment risk for goodwill, intangible assets and other assets. The company reported no material impairment during the periods presented.
Unusual items include $48.0 million of debt-redemption charges in Q3. Adjusted EPS is a non-GAAP measure and excludes specified transformation, acquired-intangible amortization and other adjustments; it should be considered alongside GAAP results. A securities class action received class certification on November 6, 2020; defendants intend to seek review, dispute the claims and plan to defend the cases. The filing also describes related derivative litigation.
Important facts for investors to verify
- Whether the strong Q3 DIY-driven demand and comparable-sales growth persisted after October 3, 2020.
- How much cash-flow improvement depended on working capital and CARES Act payroll-tax deferrals, and the timing of any deferred payments.
- The effects of debt refinancing and redemption costs on future interest expense, liquidity and capital allocation.
- Whether gross-margin and SG&A improvements are sustainable amid product-mix, shrink, defectives and pandemic-related cost risks.
- Developments in the securities and derivative litigation, and any material change in COVID-19-related operating or impairment risks.