ADVANCE AUTO PARTS INC

Previous wording

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2023 (filed with the SEC on March 12, 2024, and the amended Annual Report on Form 10-K/A filed with the SEC on May 30, 2024 (collectively the “2023 Form 10-K”)), and the Company’s condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. The Company’s first quarter of the year contains sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.

Current wording

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2024 (filed with the SEC on February 26, 2025) which the Company refers to as the “2024 Form 10-K”), and the Company’s unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Consistent with the previous fiscal year, the Company’s first quarter of the year contains sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.

Previous wording

A high-level summary of the Company’s financial results for continuing operations for the third quarter of 2024 includes:

Current wording

The Company’s financial results for continuing operations for the first quarter of 2025 includes:

Previous 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%.

Current wording

•Net sales during the first quarter of fiscal 2025 were $2.6 billion, a decrease of 6.8% compared with the first quarter of fiscal 2024. Comparable store sales declined 0.6%.

Previous 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.

Current wording

•The Company generated diluted earnings per share of $0.40 during the first quarter of fiscal 2025, compared with diluted earnings per share of $0.29 for the comparable period of 2024.

Previous 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:

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. Key updates for the first quarter of fiscal 2025 include:

Previous wording

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 wording

•Completed all store location closures under the 2024 Restructuring Plan designed to improve the Company’s profitability and growth potential, and streamline its operations; and

Previous wording

Operating within the automotive aftermarket industry, the Company is influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry, and include but are not limited to:

Current wording

Operating within the automotive aftermarket industry, the Company is influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry. In addition to the “Business and Risk Update” section included within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, these factors include, but are not limited to:

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 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.

Current wording

The key factors used in selecting sites and market locations in which the Company operates include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. During the sixteen weeks ended April 19, 2025, 10 stores were opened and 513 were closed, resulting in a total of 4,285 stores as of the end of the first fiscal quarter compared with a total of 4,788 stores as of December 28, 2024. The significant reduction in stores in the first quarter of fiscal 2025 relates to actions taken under the Company’s restructuring and related activities. See Note 3. Restructuring, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Previous wording

The Company calculates comparable store sales based on the change in store or branch sales starting once a location has been open for approximately one year and by including e-commerce sales and excluding sales fulfilled by distribution centers to independently owned Carquest locations. Acquired stores are included in the Company’s comparable store sales one year after acquisition. The Company includes sales from relocated stores in comparable store sales from the original date of opening.

Current wording

The Company calculates comparable store sales based on the change in store or branch sales starting once a location has been open for approximately one year and by including e-commerce sales and excluding sales fulfilled by distribution centers to independently owned Carquest locations. The Company includes sales from relocated stores in comparable store sales from the original date of opening. Comparable store sales is intended only as supplemental information and is not a substitute for Net sales presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Previous 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.

Current wording

The Company’s provision for income taxes for the first quarter of 2025 was a benefit of $155 million compared with a expense of $12 million for the same period in 2024. The decrease in tax expense for the first quarter of 2025 was a result of lower income before taxes and a net discrete tax benefit of $126 million related to certain tax benefits associated with capital loss deductions.

Previous wording

“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 wording

The Company uses certain non-GAAP financial measures described below to supplement the Company’s unaudited condensed consolidated financial statements prepared and presented in accordance with GAAP and to understand and evaluate the Company’s core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented as the Company believes that such non-GAAP financial measures provide useful information about the Company’s financial performance, enhance the overall understanding of the Company’s past performance and future prospects, and allow for greater transparency with respect to important metrics used by the Company’s management for financial and operational decision-making. The Company is presenting these non-GAAP metrics to provide investors insight to the information used by the Company’s management to evaluate its business and financial performance. The Company believes that these measures provide investors increased comparability of the Company’s core financial performance over multiple periods with other companies in the Company’s industry. The Company may make reference tocertain financial measures not derived in accordance with GAAP within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report. Non-GAAP financial measures, including Adjusted Net (loss) income, Adjusted diluted (loss) Earnings Per Share (“Adjusted Diluted EPS”), Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Sales, General and Administrative expense (“Adjusted SG&A”), Adjusted SG&A Margin, Adjusted Operating (loss) Income and Adjusted Operating (loss) Income Margin, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing the Company’s operating performance, financial position or cash flows.

Previous wording

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 wording

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, inclusive of the Worldpac divestiture and (2) other significant expenses, 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. The income tax impact of these non-GAAP adjustments is also adjusted for using the estimated tax rate in effect for the respective non-GAAP adjustments. 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.

Previous wording

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 wording

Expenses 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:

Previous wording

•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 wording

•Distribution network optimization: Expenses primarily relating to the conversion of the stores and distribution centers to market hubs, including temporary labor, incremental depreciation, as a result of accelerating long-lived assets over a shorter useful life, nonrecurring professional service fees and team member severance.

Previous wording

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 wording

Expenses 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. These expenses primarily include:

Previous wording

The following table includes a reconciliation of this information to the most comparable GAAP measures:

Current wording

The following table includes a reconciliation of this information to the most comparable GAAP measures (in millions):

Previous wording

(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 wording

(3) The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.

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. 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.

Current wording

The Company’s principal sources of liquidity are cash and cash equivalents. 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, such as restructuring and asset optimization plans. In addition, cash is required to pay the Company’s dividend and to pay interest and principle on the Company’s long-term debt when due. The following tables present selected financial information related to the Company’s liquidity (in millions):

Previous wording

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 wording

In the fourth quarter of fiscal 2024, the Company completed the sale of Worldpac. As a result, the Company classified the results of operations and cash flows of Worldpac as discontinued operations in its condensed consolidated statements of operations and condensed consolidated statements of cash flows for prior periods presented. The Company’s cash flows from operating, investing and financing activities were as follows (in millions):

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. In addition, Amendment No. 5 to the 2021 Credit Agreement prevents the Company from increasing the amount of our cash dividends.

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 the Company’s cash dividends.

Previous wording

For additional information, refer to Note 7. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein.

Current wording

For further details, see Note 6. Long-term Debt and Fair Value of Financial Instruments, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Previous 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.

Current wording

As of April 19, 2025, the Company had a credit rating from S&P of BB+ and from Moody’s Investor Service of Ba1. As of April 19, 2025, the outlooks by Standard & Poor’s and Moody’s on the Company’s credit rating were negative and stable, 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. A downgrade in the Company’s credit ratings could occur if its business operations deteriorate, its leverage increases or if available liquidity becomes insufficient to maintain operations. If the Company’s credit ratings decline, the interest rate on outstanding balances may increase, the 2021 Credit Agreement would become securitized pursuant to its terms and the Company’s access to additional financing on favorable terms may be limited. A decline in credit ratings or perceived creditworthiness, among other factors, may impact participation in supplier finance programs, which in turn could shorten payable terms, result in an increase in working capital requirements or otherwise negatively impact capital resources, potentially materially. See Note 9. Supplier Finance Programs, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.