Advance Auto Parts, Inc. — Q3 2023 Form 10-Q
Reporting period: Twelve weeks ended October 7, 2023; year-to-date figures cover forty weeks. Unaudited. Advance serves professional and DIY automotive aftermarket customers through company-operated stores and branches and independently owned Carquest locations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Forty weeks 2023 | Forty weeks 2022 |
|---|---|---|---|---|
| Net sales | $2.719B | $2.641B | $8.823B | $8.681B |
| Gross profit | $986.7M | $1.179B | $3.603B | $3.860B |
| Gross margin | 36.3% | 44.6% | 40.8% | 44.5% |
| SG&A | $1.030B | $1.008B | $3.407B | $3.302B |
| Operating income (loss) | $(43.7)M | $171.0M | $195.1M | $558.0M |
| Net income (loss) | $(48.6)M | $115.9M | $90.2M | $386.8M |
| Diluted EPS | $(0.82) | $1.92 | $1.51 | $6.34 |
Q3 comparable-store sales rose 1.2%; forty-week comparable-store sales were flat. Q3 SG&A was 37.9% of sales, versus 38.2% a year earlier; year-to-date SG&A was 38.6%, versus 38.0%. Q3 interest expense was $19.4M, compared with $12.0M.
Cash flow, debt and liquidity
- For the forty weeks, operating cash flow was $30.4M, down from $483.1M; capital spending was $187.2M, versus $333.6M, and investing cash outflow was $185.2M.
- Financing provided $205.0M, compared with $545.8M used in the prior-year period. Cash increased $48.2M to $317.5M.
- At October 7, debt was $1.786B, compared with $1.373B at year-end 2022. There were no revolver borrowings and $1.2B of revolver availability. The company had issued $300M each of 5.90% notes due 2026 and 5.95% notes due 2028.
- Current assets were $6.320B and current liabilities $5.136B. Accounts payable included $3.2B owed to suppliers participating in supplier-finance programs.
Material changes, outlook and risks
- Q3 sales increased 2.9%, supported by professional-customer demand and product mix; DIY omnichannel sales declined. Management cited strength in filters, engine management, motor oil and batteries.
- Gross margin fell 836 basis points year over year. Factors included higher product costs not fully offset by pricing, supply-chain deleverage and a $119M increase in excess-inventory reserves following a product-assortment review. Lower LIFO expense partly offset these pressures.
- Management’s operational and strategic review targets at least $150M in annualized cost savings, with approximately $50M intended for employee compensation and training. Separate sale processes were initiated for Worldpac and the Canadian Carquest business; completion and timing are uncertain.
- The company paused share repurchases for the remainder of 2023 and said it would assess possible resumption in 2024. It stated that available cash, expected operating cash and borrowing capacity should fund obligations, while noting covenant compliance depends on financial performance. Management expected compliance for the next 12 months based on current projections.
- Credit-agreement amendments reset minimum consolidated coverage-ratio thresholds, including 1.75x through the period ending October 5, 2024, then 2.00x through October 4, 2025, and 2.25x thereafter. A maximum leverage ratio of 3.75x also applies. The company reported covenant compliance at quarter-end.
- Two securities class actions filed in October allege misleading statements during November 2022–May 2023; the company disputes the allegations. A customs-trade-compliance review is ongoing; potential duties, fees or interest, if any, could not be estimated and no loss contingency was recorded.
- Management identified a material weakness in internal control over financial reporting tied to turnover in key accounting roles. Disclosure controls were not effective as of quarter-end; remediation was ongoing. The CFO had departed, a successor was due to start November 27, 2023, and the Chief Accounting Officer resigned effective October 18.
- The company corrected immaterial prior-period errors, including a previously disclosed $17.3M out-of-period SG&A charge and additional cost-of-sales errors. It concluded prior financial statements were not materially misstated, but corrected comparative figures in this filing.
Key facts for investors to verify
- Whether margin recovery and the $119M inventory-reserve impact are consistent with subsequent results.
- Progress and realized savings from the operational review, and any terms or timing for the proposed divestitures.
- Cash generation, working-capital trends, supplier-finance participation and compliance with amended debt covenants.
- Status of internal-control remediation and accounting leadership appointments.
- Developments in the securities litigation and customs review, including any estimate or accrual of potential exposure.