ADVANCE AUTO PARTS INC
For the period ended Oct 5, 2024. Filed Nov 14, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Oct 5, 2024 · Filed Nov 14, 2024
AAP$45.50-5.4%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-07-13; filed 2024-08-22.
0001158449-24-000195
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-10-05; filed 2024-11-14.
0001158449-24-000238
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 68 previous paragraphs and 82 current paragraphs.
39 unchanged; 19 reworded; 24 added; 10 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 3 previous and 4 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (24)
Current report
•Gross profit margin for the third quarter of 2024 was 42.3% of net sales, an increase of 541 basis points compared with the third quarter of 2023. Gross profit margin was positively impacted due to lapping the one-time impact in the change for inventory reserves in the prior year coupled with stabilizing product costs in the current year. This was offset by strategic pricing investments.
Current report
•Selling, general and administrative (“SG&A”) expenses for the third quarter of 2024 were 42.2% of net sales, an increase of 185 basis points compared with the third quarter of 2023. This increase was primarily due to wage investments in frontline team members, implementation of the Company’s strategic plan and the expenses related to the remediation of the previously disclosed material weaknesses. This was partially offset by a reduction in marketing expenses.
Current report
In addition, the Company has outlined a restructuring and asset optimization plan designed to improve the Company’s profitability and growth potential and streamline its operations. The plan focuses on initiatives and actions in store operations, merchandising excellence and supply chain.
Current report
As discussed in Note 3. Discontinued Operations, on August 22, 2024, the Company entered into a definitive purchase agreement to sell Worldpac, which subsequently closed on November 1, 2024. Unless otherwise noted, the discussion below relates to the Company’s continuing operations.
Current report
Stores
Current report
For the third quarter of 2024, net sales decreased 3.2% and comparable store sales declined 2.3% compared with the third quarter of 2023. Net sales were negatively impacted by volume decline coupled with strategic pricing investments, partially offset by favorable channel mix. Category growth was led by batteries and filters, partially offset by discretionary categories.
Current report
Gross profit for the third quarter of 2024 was $907.9 million, or 42.3% of net sales, compared with $817.6 million, or 36.9% of net sales, for the third quarter of 2023. This increase was primarily due to lapping the one-time impact in the change for inventory reserves in the prior year coupled with stabilizing product costs. This was offset by strategic pricing investments.
Current report
Gross profit for the forty weeks ended October 5, 2024 and October 7, 2023 was $3.06 billion, or 43.1% of net sales, and $3.04 billion, or 42.3% of net sales. This increase was primarily due to lapping the one-time impact in the change for inventory reserves in the prior year. Gross profit margin expansion was partially offset by lower sales and strategic pricing investments.
Current report
The Company’s effective tax rate was 60.6% and 55.2% for the forty weeks ended October 5, 2024 and October 7, 2023. The increase in the effective tax rate was due to the $10 million charge incurred by the Company as a related to book to tax basis difference in the stock basis of Worldpac Canada as a result of the sale of Worldpac.
Current report
Discontinued Operations
Current report
On August 22, 2024, the Company entered into a definitive purchase agreement to sell its Worldpac business and on November 1, the Company completed the sale. As a result, the Company has classified the results and cash flows of the Worldpac business as discontinued operations in its Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows for all periods presented. The related assets and liabilities associated with the discontinued operations are classified as held for sale, in the Condensed Consolidated Balance Sheets. See Note 3. Discontinued Operations in the Company’s condensed consolidated financial statements included elsewhere in this report for additional information.
Current report
Reconciliation of Non-GAAP Financial Measures
Current report
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non-GAAP financial measures, including Adjusted Net income, Adjusted EPS, Adjusted SG&A Margin, and Adjusted Operating Income, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows.
Current report
The company has presented these non-GAAP financial measures as the company believes that the presentation of the financial results that exclude (1) transformation expenses under the company’s turnaround plan, (2) other significant costs and (3) nonrecurring tax expense are useful and indicative of the company's base operations because the expenses vary from period to period in terms of size, nature and significance. These measures assist in comparing the company’s current operating results with past periods and with the operational performance of other companies in the industry. The disclosure of these measures allows investors to evaluate the company’s performance using the same measures management uses in developing internal budgets and forecasts and in evaluating management’s compensation. Included below is a description of the expenses the company has determined are not normal, recurring cash operating expenses necessary to operate the company’s business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.
Current report
Transformation Expenses — Costs incurred in connection with the company's turnaround plan and specific transformative activities related to asset optimization that the company does not view to be normal cash operating expenses. These expenses primarily include:
Current report
•Distribution network optimization — Costs primarily relating to the conversion of the stores and DCs to market hubs, including temporary labor, team member severance, long-lived asset write off charges and incremental depreciation, as a result of accelerating depreciation of long-lived assets over a shorter useful life as a result of the optimization plans.
Current report
•Third-party professional services — Costs relating to non-recurring services rendered by third-party vendors assisting with the turnaround initiatives.
Current report
Other Expenses — Costs incurred by the company that are not viewed as normal cash operating expenses and vary from period to period in terms of size, nature, and significance, including but not limited to executive turnover and incremental costs associated with remediating the company's previously-disclosed material weaknesses in internal control over financial reporting.
Current report
Nonrecurring Tax Expense — Income tax incurred by the company from the book to tax basis difference in the Worldpac Canada stock directly resulting from the sale of Worldpac.
Current report
The following table includes a reconciliation of this information to the most comparable GAAP measures:
Current report
(1)During the twelve and forty weeks ended October 5, 2024, the Company recorded expense of $2.4 million and $3.5 million for costs incurred following a cybersecurity incident that occurred over these periods.
Current report
(2)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.
Current report
On November 13, 2024, the Company entered into Amendment No. 5 to the 2021 Credit Agreement. Amendment No. 5 (i) permitsup to $575 million of certain restructuring charges to be added back to Consolidated EBITDAR (as defined therein), (ii) permits up to$800 million of unrestricted cash to be netted out of debt in the calculation of the Leverage Ratio (as defined therein), and (iii) reduces the minimum Consolidated Coverage Ratio (as defined therein) to 1.50 to 1.00 through July 12, 2025 and 1.75 to 1.00 thereafter. Amendment No. 5 also reduced the unsecured revolving credit facility under the 2021 Credit Agreement from $1.2 billion to $1.0 billion, amended the pricing on the loans thereunder in connection with changes in the Company’s credit ratings and imposed certain other restrictions as described more fulsomely in Note 15. Subsequent Events.
Current report
Net (decrease) increase in cash and cash equivalents is presented on a continuing basis which varies from the Condensed Consolidated Statements of Cash Flows which is presented on a consolidated basis.
Removed paragraphs (10)
Previous report
•Gross profit margin for the second quarter of 2024 was 41.5% of net sales, a decrease of 93 basis points compared with the second quarter of 2023. Gross profit margin was negatively impacted by strategic pricing investments and higher product costs.
Previous report
•Selling, general and administrative (“SG&A”) expenses for the second quarter of 2024 were 38.9% of net sales, an increase of 109 basis points compared with the second quarter of 2023. This was primarily due to higher labor costs.
Previous report
The entry into the definitive agreement for the sale of Worldpac was part of the Company’s previously announced strategic and operational review. As part of this review, the Company also previously announced that it was evaluating whether to divest the Company’s Canadian business. The Company's Canadian business predominantly serves commercial customers and operates under the Carquest banner. The Company has determined to retain its Canadian business. The strategic and operational review is ongoing.
Previous report
Stores and Branches
Previous report
For thesecond quarter of 2024, net sales decreased 0.1% and comparable store sales increased 0.4%compared with the second quarter of 2023. Category growth was led by heating and cooling, fluids and chemicals and engine management.
Previous report
Gross profit for the second quarter of 2024 was $1.11 billion, or 41.5% of net sales, compared with $1.14 billion, or 42.5% of net sales, for the second quarter of 2023.
Previous report
Gross profit for the twenty-eight weeks ended July 13, 2024 and July 15, 2023 was $2.54 billion, or 41.8% of Net sales, and $2.60 billion, or 42.6% of Net sales.
Previous report
During the second quarter of 2024 and the twenty-eight weeks ended July 13, 2024, gross profit margin was negatively impacted by strategic pricing investments and higher product costs.
Previous report
SG&A expenses for the twenty-eight weeks ended July 13, 2024 were $2.39 billion, or 39.2% of Net sales, compared with $2.38 billion, or 39.0% of Net sales, for the twenty-eight weeks ended July 15, 2023.
Previous report
The Company’s effective tax rate was 30.3% and 27.2% for the twenty-eight weeks ended July 13, 2024 and July 15, 2023.
Reworded paragraphs (19)
Previous wording
A high-level summary of the Company’s financial results for the second quarter of 2024 includes:
Current wording
A high-level summary of the Company’s financial results for continuing operations for the third quarter of 2024 includes:
Previous wording
•Net sales during the second quarter of 2024 were $2.68 billion, a decrease of 0.1% compared with the second quarter of 2023. Comparable store sales increased 0.4%.
Current wording
•Net sales during the third quarter of 2024 were $2.15 billion, a decrease of 3.2% compared with the third quarter of 2023. Comparable store sales declined 2.3%.
Previous wording
•The Company generated diluted earnings per share (“Diluted EPS”) of $0.75 during the second quarter of 2024, compared with$1.32 for the comparable period of 2023.
Current wording
•The Company generated diluted loss per share of $0.42 during the third quarter of 2024, compared with diluted loss per share of $1.24 for the comparable period of 2023.
Previous wording
The Company continues to make progress on the various elements of the Company’s strategic business plan, which is focused on improving the customer experience, margin expansion, and driving consistent execution for both professional and DIY customers. To achieve these improvements, the Company has undertaken planned strategic actions to help build a foundation for long-term success across the organization, which include:
Current wording
The Company continues to make progress on the various elements of its business plan, which is focused on improving the customer experience, margin expansion, and driving consistent execution for both professional and DIY customers. To achieve these improvements, the Company has undertaken planned strategic actions to help build a foundation for long-term success across the organization, which include:
Previous wording
•Entering into a definitive purchase agreement on August 22, 2024 to sell Worldpac for $1.5 billion, with customary adjustments for working capital and other items. The transaction is expected to close in the fourth quarter of 2024;
Current wording
•The completion of the sale of Worldpac for $1.5 billion, with customary adjustments for working capital and other items. The transaction closed on November 1, 2024;
Previous wording
•Assessing the productivity of all assets, including company-owned stores and Carquest Independents; and
Current wording
•Completing an assessment of the productivity of all assets, including company-owned stores and Carquest Independents; and
Previous wording
Key factors in selecting sites and market locations in which the Company operates include population, demographics, traffic count, vehicle profile, competitive landscape, and the cost of real estate. During the twenty-eight weeks ended July 13, 2024, 16 stores and branches were opened and 26 were closed, resulting in a total of 5,097 stores and branches as of the end of the second fiscal quarter compared with a total of 5,107 stores and branches as of December 30, 2023.
Current wording
Key factors in selecting sites and market locations in which the Company operates include population, demographics, traffic count, vehicle profile, competitive landscape, and the cost of real estate. During the forty weeks ended October 5, 2024, 24 stores were opened/converted and 29 were closed, resulting in a total of 4,781 stores asof the end of the third fiscal quarter compared with a total of 4,786 stores as of December 30, 2023.
Previous wording
Net sales for the twenty-eight weeks ended July 13, 2024, decreased 0.2% compared with the same period in 2023. Comparable store sales increased 0.03% for the twenty-eight weeks ended July 13, 2024, compared with the twenty-eight weeks ended July 15, 2023. Category growth was led by batteries, filters and engine management.
Current wording
Net sales for the forty weeks ended October 5, 2024, decreased 1.3% compared with the same period in 2023. Comparable store sales decreased 0.62% for the forty weeks ended October 5, 2024, compared with the forty weeks ended October 7, 2023. Category growth was led by batteries, filters and engine management, partially offset by discretionary categories.
Previous wording
SG&A expenses for the second quarter of 2024 were $1.04 billion, or 38.9% of net sales, compared with $1.01 billion, or 37.8% of net sales, for the second quarter of 2023. The increase of SG&A as a percentage of net sales was due to wage investments in frontline team members as well as an increase in professional fees, including costs associated with the implementation of the Company’s strategic plan and the remediation of the previously disclosed material weaknesses. This was partially offset by a reduction in marketing program expenses.
Current wording
SG&A expenses for the third quarter of 2024 were $907.5 million, or 42.2% of net sales, compared with $896.1 million, or 40.4% of net sales, for the third quarterof 2023. SG&A expenses for the forty weeks ended October 5, 2024 were $2.95 billion, or 41.6% of Net sales, compared with $2.96 billion, or 41.1% of Net sales, for the forty weeks ended October 7, 2023. The increase of SG&A as a percentage of net sales was due to wage investments in frontline team members, implementation of the Company’s distribution optimization network and the remediation of the previously disclosed material weaknesses. This was partially offset by a reduction in marketing expenses.
Previous wording
The Company’s provision for income taxes for the second quarter of 2024 was$17.1 million compared with $28.2 million for the same period in 2023. The Company’s provision for income taxes for the twenty-eight weeks ended July 13, 2024 and July 15, 2023 was $36.9 million and $47.4 million. The decrease in tax expense for the second quarter of 2024 and the twenty-eight weeks ended July 13, 2024 resulted from lower income before provision for income taxes compared with prior year.
Current wording
The Company’s provision for income taxes for the third quarter of 2024 was an expense of$9.4 million compared with a benefit of $24.1 million for the same period in 2023. The Company’s provision for income taxes for the forty weeks ended October 5, 2024 and October 7, 2023 was $34.8 million and$6.4 million. Theincrease in tax expense for the third quarter of 2024 and the forty weeks ended October 5, 2024 was a result of higher income before taxes and $10 million in tax expense related to a book to tax difference in the stock basis of Worldpac Canada as a result of the sale of Worldpac.
Previous wording
The Company’s primary cash requirements necessary to maintain the Company’s current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives and other operational priorities, including payment of interest on the Company’s long-term debt. Historically, the Company has also used available funds to repay borrowings under the Company’s credit facility, to periodically repurchase shares of the Company’s common stock under the share repurchase program, to pay the Company’s quarterly cash dividend and for acquisitions. However, the Company’s future uses of cash may differ, including with respect to the weight the Company places on the preservation of cash and liquidity, degree of investment in the Company’s business and other capital allocation priorities.
Current wording
The Company’s primary cash requirements necessary to maintain the Company’s current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives and other operational priorities, including payment of interest on the Company’s long-term debt. Historically, the Company has also used available funds to repay borrowings under the Company’s credit facility, to periodically repurchase shares of the Company’s common stock under the share repurchase program, to pay the Company’s quarterly cash dividend and for acquisitions. The Company also anticipates using cash in connection with its restructuring and asset optimization plan, as more fulsomely described in Note 15. Subsequent Events. The Company’s future uses of cash may differ, including with respect to the weight the Company places on the preservation of cash and liquidity, degree of investment in the Company’s business and other capital allocation priorities.
Previous wording
Typically, the Company has funded its cash requirements primarily through cash generated from operations, supplemented by borrowings under the Company’s credit facilities and note offerings as needed. On August 22, 2024, the Company entered into a definitive purchase agreement to sell its Worldpac business for $1.5 billion, with customary adjustments for working capital and other items, as well as provision of a $200 million letter of credit for up to 12 months following the closing of the transaction, which letter of credit will reduce to zero no later than 24 months after the closing, to support supply chain financing for the buyer. The transaction is expected to close in the fourth quarter of 2024. The Company expects net proceeds from the transaction after paying expenses and taxes to be approximately $1.2 billion. The Company intends to use net proceeds from the transaction for general corporate purposes, which may include the provision of additional working capital, funding internal operational improvement initiatives and repayment or refinancing of outstanding indebtedness. The Company believes funds generated from its expected results of operations, available cash and cash equivalents, net proceeds from the Worldpac sale and available borrowings under credit facilities and note offerings as needed will be sufficient to fund its obligations for the next year and beyond.
Current wording
Typically, the Company has funded its cash requirements primarily through cash generated from operations, supplemented by borrowings under the Company’s credit facilities and note offerings as needed. On August 22, 2024, the Company entered into a definitive purchase agreement to sell its Worldpac business for $1.5 billion, with customary adjustments for working capital and other items, as well as provision of letters of credit in an aggregate amount of up to $200 million for up to 12 months following the closing of the transaction, which letter of credit exposure will reduce to zero no later than 24 months after the closing, to support supply chain financing for the buyer. The transaction closed on November 1, 2024. Net proceeds from the transaction after paying expenses and taxes was approximately $1.2 billion. The Company intends to use net proceeds from the transaction for general corporate purposes, which may include the provision of additional working capital, funding internal operational improvement initiatives and repayment or refinancing of outstanding indebtedness. The Company believes funds generated from its expected results of operations, available cash and cash equivalents, net proceeds from the Worldpac sale and available borrowings under credit facilities and note offerings as needed will be sufficient to fund its obligations for the next year and beyond.
Previous wording
The Company’s share repurchase program permits the repurchase of the Company’s common stock on the open market and in privately negotiated transactions from time to time. The Company expects to continue its temporary pause on repurchases under the existing share repurchase program and to continue to evaluate current and expected business conditions with respect to resumption of share repurchase activity.
Current wording
The Company’s share repurchase program permits the repurchase of the Company’s common stock on the open market and in privately negotiated transactions from time to time. The Company’s most recent amendment to the 2021 Credit Agreement generally prohibits open market share repurchases.
Previous wording
During the second quarter and twenty-eight weeks ended July 13, 2024 and July 15, 2023, the Company did not purchase any shares of its common stock under the share repurchase program. The Company had $947.3 million remaining under the share repurchase program as of July 13, 2024.
Current wording
During the third quarter and forty weeks ended October 5, 2024 and October 7, 2023, the Company did not purchase any shares of its common stock under the share repurchase program. The Company had $947.3 million remaining under the share repurchase program as of October 5, 2024.
Previous wording
For the twenty-eight weeks ended July 13, 2024, cash flows provided by operating activities increased by $254.9 million to $87.8 million compared with the same period of prior year. The net increase in cash flows provided by operating activities was primarily attributable to a decrease in cash utilized for working capital mainly due to accounts payable payments and inventory purchases.
Current wording
For the forty weeks ended October 5, 2024, cash flows provided by operating activities increased by $109.3 millionto $81.0 million compared with the same period of prior year. The net increase in cash flows provided byoperating activities was primarily attributable to a decrease in net working capital compared with prior year.
Previous wording
For the twenty-eight weeks ended July 13, 2024, cash flows used in investing activities decreased by $63.7 million to $79.6 million compared with the same period of prior year. The decrease in cash used in investing activities was attributable to lower capital spend due to fewer store openings and projects in the current year coupled with higher proceeds on asset sales (see Note 7. Leases for additional information).
Current wording
For the forty weeks ended October 5, 2024, cash flows used in investing activities decreased by$55.7 million to$116.5 million compared with the same period of prior year. The decrease in cash used in investing activi ties was attributable to lower capital spend due to fewer store openings and fewer IT projects partially offset by an increase in spend on distribution network optimizations.
Previous wording
For the twenty-eight weeks ended July 13, 2024, cash flows used in financing activities was$43.0 million, adecrease of$356.9 million compared with the same period of prior year. The decrease in cash provided by financing activities was due to the issuances of senior unsecured notes in the prior year and a decrease in dividends paid during thetwenty-eight weeks ended July 13, 2024 compared with the same period of prior year.
Current wording
For the forty weeks ended October 5, 2024, cash flows used in financing activitieswas $57.7 million, an increase of$261.8 million compared with the same period of prior year. The increase in cash used in financing activities was due to the issuances of senior unsecured notes in the prior year. This was partially offset by a decrease in dividends paid in the current year compared with the prior year.
Previous wording
The Company’s Board of Directors has declared a cash dividend every quarter since 2006. Any payments of dividends in the future will be at the discretion of the Company’s Board of Directors and will depend upon the Company’s results of operations, cash flows, capital requirements and other factors deemed relevant by the Board of Directors.
Current wording
The Company’s Board of Directors has declared a cash dividend every quarter since 2006. Any payments of dividends in the future will be at the discretion of the Company’s Board of Directors and will depend upon the Company’s results of operations, cash flows, capital requirements and other factors deemed relevant by the Board of Directors. In addition, Amendment No. 5 to the 2021 Credit Agreement prevents the Company from increasing the amount of our cash dividends.
Previous wording
As of July 13, 2024, the Company had a credit rating from Standard & Poor’s of BB+ and from Moody’s Investor Service of Baa3. As of July 13, 2024, the outlooks by Standard & Poor’s and Moody’s on the Company’s credit rating were stable and negative. The current pricing grid used to determine the Company’s borrowing rate under the Credit Agreement is based on the Company’s credit ratings. The Company anticipates that it may receive a future downgrade in its credit ratings dependent on the strengthening of its balance sheet and the success and timing of its efforts to improve business operations. If the Company’s credit ratings decline, the interest rate on outstanding balances may increase and the Company’s access to additional financing on favorable terms may be limited. In addition, declines could reduce the attractiveness of certain supplier finance programs whereby third-party institutions finance arrangements to the Company’s vendors based on the Company’s credit rating, which could result in increased working capital requirements. The Company expects that a future decline in its credit ratings would have a significant impact on bank participation in its supplier finance programs, resulting in increased working capital requirements. The Company believes that its sources of cash, together with its ability to generate cash through existing or new credit facilities and notes offerings as needed, will be sufficient to fund any increases in working capital requirements.
Current wording
As of October 5, 2024, the Company had a credit rating from S&P of BB+ and from Moody’s Investor Service of Baa3. As of October 5, 2024, the outlooks by Standard & Poor’s and Moody’s on the Company’s credit rating were stable and negative, respectively. The current pricing grid used to determine the Company’s borrowing rate under the Credit Agreement is based on the Company’s credit ratings. The Company anticipates that it may receive a future downgrade in its credit ratings dependent on the strength of its balance sheet and the success and timing of its efforts to improve business operations. If the Company’s credit ratings decline, the interest rate on outstanding balances may increase and the Company’s access to additional financing on favorable terms may be limited. The most recent amendment to the Company’s 2021 Credit Agreement provides for securitization of amounts outstanding under the facility in the event that the Company’s ratings decline to a certain level. In addition, declines could reduce the attractiveness of certain supplier finance programs whereby third-party institutions finance arrangements to the Company’s vendors based on the Company’s credit rating, which could result in increased working capital requirements. The Company expects that a future decline in its credit ratings would have a significant impact on bank participation in its supplier finance programs, resulting in increased working capital requirements. The Company believes that its sources of cash, together with its ability to generate cash through existing or new credit facilities and notes offerings as needed, will be sufficient to fund any increases in working capital requirements.