Advance Auto Parts, Inc. — FY2020 Form 10-K
Business and reporting period. Advance Auto Parts is a North American automotive aftermarket parts retailer and distributor serving professional installers and do-it-yourself customers. Fiscal 2020 ended January 2, 2021 and included 53 weeks, compared with 52 weeks in fiscal 2019. The company operated 4,806 stores and 170 Worldpac branches and served 1,277 independently owned Carquest stores.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $10.106 billion | $9.709 billion |
| Gross profit / margin | $4.482 billion / 44.3% | $4.255 billion / 43.8% |
| Operating income / margin | $749.9 million / 7.4% | $677.2 million / 7.0% |
| Net income / diluted EPS | $493.0 million / $7.14 | $486.9 million / $6.84 |
| Cash from operations | $969.7 million | $866.9 million |
| Capital expenditures | $267.6 million | $270.1 million |
| Cash and cash equivalents, year-end | $835.0 million | $418.7 million |
| Total debt, year-end | $1.033 billion | $747.3 million |
FY2020 comparable-store sales increased 2.4%; reported sales grew 4.1%. Management attributed approximately $158.5 million of sales and $15.7 million of net income to the additional 53rd week. Professional sales represented approximately 57% of revenue, down from 60% in 2019.
Fourth quarter: Net sales were $2.365 billion, gross profit was $1.084 billion, net income was $112.0 million and diluted EPS was $1.65. The quarter had 13 weeks versus 12 weeks in Q4 2019; the filing does not provide a directly comparable, week-adjusted Q4 result.
Changes and notable items
- Gross margin improved 52 basis points, attributed to favorable channel mix, DIY omnichannel growth, supply-chain leverage, lower inventory shrink and pricing actions. A $13.8 million LIFO reserve benefit also reduced 2020 cost of sales; 2019 had a $101.3 million LIFO expense.
- Operating income rose $72.7 million. Higher advertising, real-estate lease termination costs and COVID-related cleaning and supply expenses partly offset gross-profit improvement.
- GAAP diluted EPS increased from $6.84 to $7.14. Adjusted diluted EPS, a non-GAAP measure, was $8.51 versus $8.19; adjustments include transformation costs, acquired-intangible amortization and other items.
- Operating cash flow increased 11.9%, supported by higher net income, working-capital changes and deferred payroll taxes under the CARES Act. Cash used in financing was $286.0 million; the company repurchased $458.5 million of shares during the year.
- The company issued $500 million of 3.90% notes due 2030 and $350 million of 1.75% notes due 2027, redeemed its $300 million 2022 notes and tendered for part of its 2023 notes. Early redemptions generated a $48.0 million loss. It reported no revolver borrowings and $1.0 billion of revolver availability at year-end.
Outlook, risks and contingencies
Management expects FY2021 capital expenditures of $275 million to $325 million, subject to business conditions. It described the automotive aftermarket’s long-term growth prospects as favorable but gave no specific revenue or earnings guidance in the provided filing text. Strategic priorities include improving customer experience, omnichannel and same-day delivery, supply-chain efficiency, store-footprint optimization and continued integration of Autopart International and Worldpac.
COVID-19 initially disrupted demand and operations; demand improved in the second and third quarters, particularly in DIY omnichannel, and remained increased in Q4. The pandemic’s future effects on demand, staffing, supply, costs, liquidity and financial results remain uncertain and could be material. Other disclosed risks include intense competition, execution of strategic initiatives and the ERP rollout, supplier and inventory disruptions, cyber incidents, labor costs, changing vehicle technology, and debt and credit-rating exposure.
A putative securities class action concerning past disclosures was certified as a class in November 2020; surviving claims were in discovery. The company disputes the allegations. It also faces asbestos-related lawsuits and other ordinary-course matters; management stated that pending matters were not expected to have a material adverse effect based on currently known facts. The filing reports an unqualified audit opinion and effective internal controls over financial reporting.
Key facts for investors to verify
- How much of reported growth and Q4 performance reflects the extra fiscal week, and how comparable sales trend after adjusting for it.
- Whether improved gross margins and DIY demand persist, and whether operating expenses and transformation costs are controlled.
- Debt maturities, interest costs and the effect of refinancing; also distinguish financial debt from substantial operating lease obligations.
- Cash-flow sustainability, including the effects of working capital and temporary CARES Act payroll-tax deferrals, alongside share repurchases and dividends.
- Developments in the securities litigation, COVID-19 impacts, supply-chain and ERP execution, and other disclosed contingencies.