Advance Auto Parts, Inc. — Q2 2022 Form 10-Q
Business context and period: Automotive aftermarket parts retailer serving professional installers and DIY customers. The quarter ended July 16, 2022 and covered 12 weeks; year-to-date results cover 28 weeks. At quarter-end, the company operated 4,724 stores and 312 branches and served 1,329 independently owned Carquest stores.
Financial results
| Metric | Q2 2022 | Q2 2021 | 28 weeks 2022 | 28 weeks 2021 |
|---|---|---|---|---|
| Net sales | $2.665 billion | $2.649 billion | $6.040 billion | $5.980 billion |
| Gross margin | 44.5% | 44.9% | 44.6% | 44.7% |
| Operating income | $201.7 million | $244.9 million | $405.0 million | $497.1 million |
| Net income | $144.4 million | $178.7 million | $284.2 million | $364.6 million |
| Diluted EPS | $2.38 | $2.74 | $4.63 | $5.55 |
Q2 comparable store sales fell 0.6%; 28-week comparable sales were flat. Management cited professional-business growth, pricing, and new stores as sales supports, offset by weaker DIY demand. Adjusted diluted EPS, a non-GAAP measure, was $3.74 for Q2 and $7.32 year to date, versus $3.40 and $6.73, respectively.
Cash flow and liquidity: Year-to-date operating cash flow was $308.5 million, down from $776.2 million; investing cash outflow was $210.4 million, including $211.2 million of property and equipment purchases. Financing cash outflow was $465.6 million. Cash declined to $240.6 million from $601.4 million at fiscal year-end. Current assets were $6.18 billion and current liabilities $5.34 billion.
Debt: Total reported debt was approximately $1.29 billion, including $100.1 million outstanding on the revolving credit facility. The company had $1.1 billion of available revolver capacity and was in compliance with debt covenants. It issued $350 million of 3.50% notes due 2032 and redeemed the remaining 2023 notes, recording a $7.4 million early-redemption loss. Operating lease liabilities totaled $2.76 billion.
Material changes and management commentary
- Q2 sales grew 0.6%, but operating income fell 17.7% and net income fell 19.2% year over year. Year-to-date net income declined to $284.2 million from $364.6 million.
- Q2 gross margin decreased 40 basis points; SG&A rose to 36.9% of sales from 35.6%. Management attributed pressure to product-cost inflation, LIFO expense, unfavorable channel and product mix, and higher labor, fuel, transportation, and new-store costs. Pricing and owned-brand expansion partly offset these pressures.
- LIFO expense was $91.8 million in Q2 and $173.3 million year to date, compared with $39.0 million and $42.2 million in the prior-year periods.
- Year-to-date operating cash flow was lower, primarily due to lower earnings and working-capital use, including higher inventory costs and receivables associated with professional-business growth. Capital spending increased, including investment in information technology and new stores.
- The company repurchased $448.2 million of shares year to date and paid $245.6 million in dividends. Approximately $1.1 billion remained under the repurchase authorization at quarter-end.
Outlook, risks, and unusual items
The filing provides no specific forward earnings or sales guidance. Management stated that cash from operations, cash on hand, and available credit were expected to fund obligations for the long term, while noting that cash priorities could change with economic and pandemic-related uncertainty. Strategic priorities include supply-chain and back-office improvements, assortment and footprint optimization, digital and delivery capabilities, and store and Carquest network expansion.
Risks highlighted include inflation, labor and fuel costs, supply-chain disruption, consumer spending and confidence, competition, miles driven, and economic and geopolitical uncertainty. The 2022 interim LIFO estimate is based on expected year-end inventory levels and costs. A securities class-action settlement received final court approval in June 2022; its $49.3 million settlement amount was paid by insurance carriers.
Important facts for investors to verify
- Whether professional-business growth and pricing can offset continued softness in DIY demand.
- Whether margin pressure eases as inflation, LIFO costs, labor, transportation, and supply constraints evolve.
- Whether working-capital requirements and capital spending continue to weigh on operating cash flow and liquidity.
- Execution and costs of strategic, supply-chain, technology, and store-expansion initiatives.
- Future capital allocation, including dividends, buybacks, and debt levels; the filing’s liquidity assessment is management’s expectation, not a guarantee.