Advance Auto Parts, Inc. — Q1 2023 Form 10-Q
Reporting period: Sixteen weeks ended April 22, 2023; unaudited. Comparisons are with the sixteen weeks ended April 23, 2022, unless otherwise noted. Amounts below are in U.S. dollars.
Business context and results
Advance Auto Parts supplies automotive aftermarket parts to professional installers and DIY customers. At quarter-end, it operated 4,778 stores and 318 branches and served 1,315 independently owned Carquest stores.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $3.418 billion | $3.374 billion |
| Gross profit / margin | $1.471 billion / 43.0% | $1.507 billion / 44.6% |
| SG&A / share of sales | $1.381 billion / 40.4% | $1.303 billion / 38.6% |
| Operating income / margin | $90.0 million / 2.6% | $203.3 million / 6.0% |
| Net income | $42.7 million | $139.8 million |
| Diluted EPS | $0.72 | $2.26 |
| Operating cash flow | $(378.9) million | $(54.9) million |
| Capital expenditures, net | $(89.7) million | $(114.0) million |
Financial position and liquidity
- Cash was $226.5 million at April 22, 2023, down from $269.3 million at December 31, 2022. Total debt was $1.901 billion, up from $1.373 billion; current debt was $116.0 million.
- Current assets were $6.202 billion and current liabilities $4.983 billion. The company reported $1.1 billion of availability under its revolving credit facility, with $116.0 million drawn, and said it was in compliance with debt covenants.
- Operating cash use increased primarily due to lower net income and working-capital outflows, particularly a $441.0 million decrease in accounts payable. Cash from financing was $425.7 million, chiefly reflecting proceeds from new notes.
- Accounts payable included $3.1 billion owed to suppliers participating in supplier finance programs. The company said these programs had not materially affected liquidity.
- The company declared dividends of $1.50 per share. It made no purchases under its share repurchase program; reported share purchases were net settlements related to vested restricted stock units.
Material changes and management commentary
- Sales rose 1.3%, primarily from new store openings, while comparable-store sales declined 0.4%. Management attributed the comparable-sales decline mainly to weaker professional demand, partly offset by growth in the DIY omnichannel business.
- Gross margin fell 162 basis points, as inflationary product costs were not fully offset by pricing, with unfavorable product mix and supply-chain headwinds also contributing.
- SG&A rose 177 basis points as a share of sales, reflecting labor and benefit cost inflation and new-store costs. The quarter included a $17.3 million out-of-period charge for costs incurred in prior years; management said it was not material to the current or previously issued financial statements.
- On March 9, 2023, the company issued $300 million of 5.90% notes due 2026 and $300 million of 5.95% notes due 2028. Proceeds were used to repay revolving borrowings and support operations and capital expenditures. The credit facility maturity was extended to November 9, 2027.
- Management said expected operating cash generation, cash, and available credit should fund obligations for the next year. The filing provides no numeric full-year financial guidance.
- On June 5, 2023, S&P and Moody’s changed their credit-rating outlooks to negative. Management cautioned that a downgrade could raise borrowing costs, constrain financing access, and affect vendor financing arrangements.
Risks, controls, and contingencies
- Disclosure controls were deemed ineffective as of April 22, 2023, solely because of a material weakness in internal control over financial reporting. Turnover in key accounting roles left the company without a sufficient complement of experienced personnel. The company was using temporary outside resources and developing a remediation plan; the weakness was not yet remediated.
- Management cited risks including leadership transition, execution of strategic initiatives, labor shortages, macroeconomic deterioration, competition, demand, and inventory and supply-chain complexity.
- The company guaranteed $104.0 million of loans to independently owned Carquest stores and said the likelihood of having to perform under the guarantees was remote.
Most important facts for investors to verify
- Whether comparable-sales trends and professional-customer demand improve, and whether pricing can offset product-cost inflation.
- Whether gross margin, SG&A leverage, and earnings recover after the sharp year-over-year declines.
- How working-capital movements, particularly accounts payable and supplier-finance balances, affect cash generation and liquidity.
- Progress and effectiveness of the internal-control remediation plan, including staffing of accounting and control functions.
- Credit-rating developments, borrowing costs, and the company’s capacity to maintain dividends and fund operations and planned investments.