Business context and reporting period
Advance Auto Parts, Inc. (NYSE: AAP) is a North American automotive aftermarket parts retailer and distributor serving professional installers and do-it-yourself customers. This Form 10-K covers the 52-week fiscal year ended December 30, 2023; comparisons are with fiscal 2022, also 52 weeks. At year-end, the company operated 4,786 stores and 321 branches and served 1,245 independently owned Carquest stores.
Financial and operating performance
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Net sales | $11.288 billion | $11.155 billion | +1.2% |
| Comparable store sales | -0.3% | Not stated here | Decline, driven by DIY |
| Gross profit / margin | $4.524 billion / 40.1% | $4.932 billion / 44.2% | Margin -414 bps |
| Operating income / margin | $114.4 million / 1.0% | $670.3 million / 6.0% | Down $555.9 million / 500 bps |
| Net income | $29.7 million | $464.4 million | Down $434.7 million |
| Diluted EPS | $0.50 | $7.65 | Down $7.15 |
| Cash from operations | $287.4 million | $736.6 million | Down 61.0% |
Gross margin pressure reflected $180.9 million of higher product costs not fully offset by pricing, a $143.5 million change in estimate and other inventory-related charges, and elevated supply-chain costs; favorable mix partly offset these factors. The inventory review specifically added a $116 million excess-inventory reserve charge. SG&A rose to $4.409 billion, or 39.1% of sales, from $4.262 billion, or 38.2%, primarily due to labor and occupancy costs. Interest expense increased to $88.1 million from $51.1 million, mainly from higher revolver borrowings earlier in the year and new notes. The 6.6% effective tax rate (23.2% in 2022) benefited from state tax statute expirations and tax-credit utilization.
Cash, debt and liquidity
Year-end cash was $503.5 million, compared with $270.8 million a year earlier. Current assets were $6.377 billion and current liabilities $5.307 billion. Long-term debt was $1.786 billion; the company had no revolver borrowings and reported $1.2 billion of revolver availability. It issued $300 million of 5.90% notes due 2026 and $300 million of 5.95% notes due 2028 during 2023. Operating lease obligations were $2.661 billion. Capital expenditures were $242.4 million; management expects $200–$250 million in 2024.
Accounts payable included $3.4 billion owed to suppliers participating in supply-chain finance programs. The company reported compliance with amended credit covenants at year-end and expected to remain compliant for 12 months, while warning that weaker performance or increased borrowing could raise noncompliance risk. Credit ratings were S&P BB+ (stable outlook) and Moody’s Baa3 (negative outlook), as of March 12, 2024.
Material changes and management plans
- Sales growth was modest and supported by new stores and favorable product mix; comparable sales declined 0.3% as DIY sales weakened.
- Profitability deteriorated sharply, with gross margin down 414 basis points and diluted EPS falling from $7.65 to $0.50.
- Operating cash flow declined by $449.2 million, primarily due to lower net income and higher receivables. Capital spending fell by $181.7 million year over year.
- Management’s strategic review targets at least $150 million in annualized savings, with approximately $50 million intended for frontline compensation and training. A separate initiative targets an additional $50 million in annualized indirect-spend cost reductions.
- The company is exploring separate sales of Worldpac and Carquest Canada; completion and timing are uncertain. It paused share repurchases and expected the pause to continue in 2024. The 2023 dividend declared was $2.25 per share, versus $6.00 in 2022.
Risks, contingencies and unusual items
- Management and the auditor identified a material weakness in internal control over financial reporting, attributed to insufficient accounting and controls staffing following turnover. Management reported remediation actions, but the weakness was not considered fully remediated; the auditor issued an adverse opinion on internal controls. The auditor separately gave an unqualified opinion on the financial statements.
- The company corrected immaterial errors in prior-period financial statements, primarily involving product costs, returns and vendor credits. The filing states these did not materially misstate previously issued statements; corrected comparisons are presented in the 10-K.
- Two securities class actions and a derivative shareholder action concerning prior disclosures were in preliminary stages; the company disputes the allegations. A customs-trade compliance review and voluntary initial disclosure to U.S. Customs were ongoing; the possible loss could not yet be reasonably estimated and no accrual was recorded.
- Asbestos-related claims are pending; management does not expect currently pending cases to have a material adverse effect. Other key risks include execution of the turnaround and divestitures, inventory and supply-chain performance, competition, labor costs, macroeconomic conditions, cybersecurity, and access to supplier financing and credit.
Investor verification points
- Track gross margin recovery, comparable sales—particularly DIY—and whether pricing and mix offset product, labor and supply-chain costs.
- Assess the timing, realized savings and implementation costs of the operational review, including frontline investment and indirect-spend reductions.
- Verify progress and terms, if any, for Worldpac and Carquest Canada divestitures.
- Monitor covenant headroom, credit ratings, debt-service costs, revolver access and supplier-finance participation given the large payable balance.
- Follow remediation and testing of the material weakness, and review future filings for any further corrections or control deficiencies.
- Monitor cash generation, working capital, planned capital spending, dividends and the company’s decision on resuming repurchases.
- Watch developments in securities litigation and the customs review, for which any potential loss remains unestimated.