Advance Auto Parts, Inc. — FY2021 Form 10-K
Business context and reporting period. Advance Auto Parts is a North American automotive aftermarket parts retailer and distributor serving professional installers, DIY customers and independently owned stores. The fiscal year ended January 1, 2022 and comprised 52 weeks; FY2020 comprised 53 weeks, including $158.5 million of sales in its extra week. The filing is annual, not a standalone fourth-quarter report.
Financial performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Net sales | $10.998 billion | $10.106 billion | Up 8.8%; comparable sales increased 10.7% (excludes FY2020’s extra week) |
| Gross profit / margin | $4.929 billion / 44.8% | $4.482 billion / 44.3% | Margin increased 47 basis points |
| Operating income / margin | $838.7 million / 7.6% | $749.9 million / 7.4% | Up $88.8 million; margin increased 21 basis points |
| Net income | $616.1 million | $493.0 million | Up $123.1 million |
| Diluted EPS | $9.55 | $7.14 | Adjusted diluted EPS, a non-GAAP measure, was $12.02 versus $8.36 |
| Operating cash flow | $1.112 billion | $969.7 million | Up 14.7%, supported by earnings and working-capital improvements |
| Capital expenditures | $289.6 million | $267.6 million | Primarily IT, supply-chain and store investments |
Gross margin benefited from category management, strategic pricing and sourcing, and owned-brand expansion. Inflationary costs and unfavorable channel mix were offsets. GAAP cost of sales included a $122.3 million LIFO reserve increase in FY2021, compared with a $13.8 million benefit in FY2020; LIFO was a significant factor in the difference between GAAP and adjusted results. SG&A rose to 37.2% of sales from 36.9%, reflecting labor and wage pressure, higher incentive compensation and new-store start-up costs, partly offset by lower COVID-related costs. FY2020 included a $48.0 million loss on early debt redemptions; FY2021 had none.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $601.4 million at year-end, down from $835.0 million. Operating cash flow was more than offset by financing outflows, including $906.2 million of share repurchases and $160.9 million of dividends paid.
- Long-term debt was $1.034 billion, consisting of unsecured notes maturing in 2023, 2027 and 2030. The company had no revolver borrowings and reported $1.2 billion available under its revolving credit facility. It was in compliance with credit-agreement financial covenants.
- Operating lease liabilities were $2.803 billion; these are separate from reported long-term debt. Interest payable on long-term debt was $219.9 million.
- FY2021 repurchases totaled 4.6 million shares for $886.7 million. The company had $545.5 million remaining under its repurchase authorization at year-end; the board authorized an additional $1.0 billion in February 2022.
- Management expected 2022 capital expenditures of $300 million to $350 million. It stated available cash, expected operating cash generation and borrowing capacity should fund obligations for the next year and longer term.
Outlook, commentary and risks
- Management cited recovery in professional sales and growth in DIY omnichannel sales, with positive comparable-sales trends across all regions. It expressed confidence in the industry’s long-term growth prospects but provided no specific revenue or earnings guidance in the supplied filing text.
- Strategic priorities include demand-based assortment, integrating Worldpac and Autopart International, supply-chain improvements, stronger same-day and e-commerce services, and pursuing new store openings and independent Carquest network expansion.
- Key operating pressures included pandemic-related staffing challenges, labor-market competition, supply-chain disruption, inflation, port and carrier constraints, and product availability. Management said these factors could raise costs and impair margins or service.
- Other material risks include execution of strategic and IT/ERP initiatives, intense competition, cyber and system disruptions, changing vehicle technology and demand, and potential effects of weaker economic conditions, fuel costs and weather.
- A securities class-action settlement of $49.3 million received preliminary court approval after year-end and remained subject to final approval. The company recorded the amount in receivables and accrued expenses and stated insurance carriers would cover it. Asbestos-related litigation also remained outstanding; management did not expect pending matters to materially affect financial position, results or cash flows.
- The filing reports an unqualified audit opinion on the financial statements and effective internal control over financial reporting. Vendor incentives were identified as a critical audit matter; $82.4 million of deferred vendor incentives reduced inventory at year-end.
Important facts for investors to verify
- How sustainable sales growth and margin improvement are after accounting for the prior year’s extra week, LIFO effects and inflationary pressures.
- Whether labor availability, freight and supplier constraints, and inventory levels improve or continue to weigh on costs and customer service.
- Progress, spending and realized benefits from supply-chain, ERP, omnichannel and footprint-integration initiatives, alongside the stated 2022 capital-spending range.
- Cash generation relative to ongoing buybacks, dividends, lease commitments and debt service; review the full debt maturities and covenant terms.
- Final court approval and insurance coverage of the $49.3 million settlement, plus developments in asbestos claims and other contingencies.
- Vendor-incentive accounting and LIFO estimates, both of which affect reported inventory and earnings; compare GAAP results with non-GAAP adjustments.