aap-20230715

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 15, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission file number 001-16797

_______________________________

ADVANCE AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

_________________________


Delaware			54-2049910
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

4200 Six Forks Road, Raleigh, North Carolina 27609

(Address of principal executive offices) (Zip Code)

(540) 362-4911

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.0001 par value

AAP

New York Stock Exchange

Not Applicable

(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 21, 2023, the number of shares of the registrant’s common stock outstanding was 59,470,261 shares.

Table of Contents


TABLE OF CONTENTS
			Page
NOTE REGARDING FORWARD LOOKING STATEMENTS			1
PART I.	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries (unaudited)	2
		Condensed Consolidated Balance Sheets	2
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statements of Changes in Stockholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	6
		Notes to the Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.	Controls and Procedures	21
PART II.	OTHER INFORMATION
	Item 1A.	Risk Factors	23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 5.	Other Information	23
	Item 6.	Exhibits	24
SIGNATURE			25

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this prospectus and any applicable prospectus supplement, including documents incorporated by reference herein or therein, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “should,” “strategy,” “will,” or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, information currently available as of the date of this prospectus and assumptions related to future developments. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the company’s leadership transition, abilities to hire, train and retain qualified employees, the timing and implementation of strategic initiatives, our ability to complete store openings, deterioration of general macroeconomic conditions, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain and challenges with transforming and growing our business. Except as may be required by law, we undertake no obligation to update any forward-looking statements made in this prospectus, including the documents incorporated by reference herein. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

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PART I. FINANCIAL INFORMATION

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Advance Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data) (Unaudited)


Assets	July 15, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	277,064	$	269,282
Receivables, net	793,772		698,613
Inventories, net	5,067,467		4,915,262
Other current assets	188,169		163,695
Total current assets	6,326,472		6,046,852
Property and equipment, net of accumulated depreciation of $2,735,674 and $2,590,382	1,688,891		1,690,139
Operating lease right-of-use assets	2,618,822		2,607,690
Goodwill	991,871		990,471
Other intangible assets, net	606,450		620,901
Other assets	71,870		62,429
Total assets	$	12,304,376	$	12,018,482
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,780,215	$	4,123,462
Accrued expenses	685,191		634,447
Current portion of long-term debt	95,000		185,000
Other current liabilities	465,972		427,480
Total current liabilities	5,026,378		5,370,389
Long-term debt	1,785,074		1,188,283
Noncurrent operating lease liabilities	2,249,994		2,278,318
Deferred income taxes	432,680		415,997
Other long-term liabilities	87,063		87,214
Total liabilities	9,581,189		9,340,201

Commitments and contingencies

Stockholders’ equity:
Preferred stock, nonvoting, $0.0001 par value	—		—
Common stock, voting, $0.0001 par value	8		8
Additional paid-in capital	925,411		897,560
Treasury stock, at cost	(2,932,576)		(2,918,768)
Accumulated other comprehensive loss	(36,824)		(45,143)
Retained earnings	4,767,168		4,744,624
Total stockholders’ equity	2,723,187		2,678,281
Total liabilities and stockholders’ equity	$	12,304,376	$	12,018,482

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data) (Unaudited)


	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 15, 2023		July 16, 2022		July 15, 2023		July 16, 2022
Net sales	$	2,686,066	$	2,665,426	$	6,103,659	$	6,039,636
Cost of sales, including purchasing and warehousing costs	1,537,997		1,479,707		3,484,927		3,347,397
Gross profit	1,148,069		1,185,719		2,618,732		2,692,239
Selling, general and administrative expenses	1,013,701		984,037		2,394,365		2,287,287
Operating income	134,368		201,682		224,367		404,952
Other, net:
Interest expense	(20,869)		(10,207)		(50,587)		(23,075)
Loss on early redemption of senior unsecured notes	—		—		—		(7,408)
Other income (expense), net	1,684		(711)		1,009		(575)
Total other, net	(19,185)		(10,918)		(49,578)		(31,058)
Income before provision for income taxes	115,183		190,764		174,789		373,894
Provision for income taxes	29,821		46,362		46,776		89,701
Net income	$	85,362	$	144,402	$	128,013	$	284,193

Basic earnings per common share	$	1.44	$	2.39	$	2.16	$	4.67
Weighted-average common shares outstanding	59,451		60,452		59,384		60,914
Diluted earnings per common share	$	1.43	$	2.38	$	2.15	$	4.63
Weighted-average common shares outstanding	59,604		60,782		59,570		61,328

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (Unaudited)


	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 15, 2023		July 16, 2022		July 15, 2023		July 16, 2022
Net income	$	85,362	$	144,402	$	128,013	$	284,193
Other comprehensive income:
Changes in net unrecognized other postretirement benefits, net of tax (benefit) expense of $(14), $25, $56 and $16	(38)		(70)		159		(46)
Currency translation adjustments	7,569		20,346		8,160		1,884
Total other comprehensive income	7,531		20,276		8,319		1,838
Comprehensive income	$	92,893	$	164,678	$	136,332	$	286,031

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except per share data) (Unaudited)

	Twelve Weeks Ended July 15, 2023
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at April 22, 2023	59,444	$	8	$	914,184	$	(2,931,373)	$	(44,355)	$	4,697,697	$	2,636,161
Net income	—	—		—		—		—		85,362		85,362
Total other comprehensive income	—	—		—		—		7,531		—		7,531
Issuance of shares upon the exercise of stock options	—	—		62		—		—		—		62
Restricted stock units and deferred stock units vested	20	—		—		—		—		—		—
Share-based compensation	—	—		10,267		—		—		—		10,267
Stock issued under employee stock purchase plan	—	—		898		—		—		—		898
Repurchases of common stock	(7)	—		—		(1,203)		—		—		(1,203)
Cash dividends declared ($0.25 per common share)	—	—		—		—		—		(15,891)		(15,891)
Balance at July 15, 2023	59,457	$	8	$	925,411	$	(2,932,576)	$	(36,824)	$	4,767,168	$	2,723,187

	Twelve Weeks Ended July 16, 2022
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at April 23, 2022	61,098	$	8	$	862,451	$	(2,564,757)	$	(41,065)	$	4,653,043	$	2,909,680
Net income	—	—		—		—		—		144,402		144,402
Total other comprehensive loss	—	—		—		—		20,276		—		20,276
Issuance of shares upon the exercise of stock options	1	—		121		—		—		—		121
Restricted stock units and deferred stock units vested	25	—		—		—		—		—		—
Share-based compensation	—	—		12,367		—		—		—		12,367
Stock issued under employee stock purchase plan	8	—		1,161		—		—		—		1,161
Repurchases of common stock	(1,014)	—		—		(201,700)		—		—		(201,700)
Cash dividends declared ($1.50 per common share)	—	—		—		—		—		(90,898)		(90,898)
Other	—	—		(600)		—		—		—		(600)
Balance at July 16, 2022	60,118	$	8	$	875,500	$	(2,766,457)	$	(20,789)	$	4,706,547	$	2,794,809

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except per share data) (Unaudited)

	Twenty-Eight Weeks Ended July 15, 2023
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2022	59,264	$	8	$	897,560	$	(2,918,768)	$	(45,143)	$	4,744,624	$	2,678,281
Net income	—	—		—		—		—		128,013		128,013
Total other comprehensive income	—	—		—		—		8,319		—		8,319
Issuance of shares upon the exercise of stock options	—	—		62		—		—		—		62
Restricted stock units and deferred stock units vested	276	—		—		—		—		—		—
Share-based compensation	—	—		26,791		—		—		—		26,791
Stock issued under employee stock purchase plan	18	—		1,998		—		—		—		1,998
Repurchases of common stock	(101)	—		—		(13,808)		—		—		(13,808)
Cash dividends declared ($1.75 per common share)	—	—		—		—		—		(105,469)		(105,469)
Other	—	—		(1,000)		—		—		—		(1,000)
Balance at July 15, 2023	59,457	$	8	$	925,411	$	(2,932,576)	$	(36,824)	$	4,767,168	$	2,723,187

	Twenty-Eight Weeks Ended July 16, 2022
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at January 1, 2022	62,009	$	8	$	845,407	$	(2,300,288)	$	(22,627)	$	4,605,791	$	3,128,291
Net income	—	—		—		—		—		284,193		284,193
Total other comprehensive loss	—	—		—		—		1,838		—		1,838
Issuance of shares upon the exercise of stock options	2	—		354		—		—		—		354
Restricted stock units and deferred stock units vested	259	—		—		—		—		—		—
Share-based compensation	—	—		29,345		—		—		—		29,345
Stock issued under employee stock purchase plan	18	—		2,094		—		—		—		2,094
Repurchases of common stock	(2,170)	—		—		(466,169)		—		—		(466,169)
Cash dividends declared ($3.00 per common share)	—	—		—		—		—		(183,437)		(183,437)
Other	—	—		(1,700)		—		—		—		(1,700)
Balance at July 16, 2022	60,118	$	8	$	875,500	$	(2,766,457)	$	(20,789)	$	4,706,547	$	2,794,809

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (Unaudited)


	Twenty-Eight Weeks Ended
	July 15, 2023		July 16, 2022
Cash flows from operating activities:
Net income	$	128,013	$	284,193
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	162,974		148,691
Share-based compensation	26,791		29,345
Loss and impairment of long-lived assets	859		2,970
Loss on early redemption of senior unsecured notes	—		7,408
Provision for deferred income taxes	16,249		8,779
Other, net	1,170		1,575
Net change in:
Receivables, net	(93,539)		(149,255)
Inventories, net	(145,148)		(176,300)
Accounts payable	(346,808)		168,219
Accrued expenses	120,888		(46,887)
Other assets and liabilities, net	(36,008)		29,805
Net cash (used in) provided by operating activities	(164,559)		308,543
Cash flows from investing activities:
Purchases of property and equipment	(144,874)		(211,212)

Proceeds from sales of property and equipment	1,532		830
Net cash used in investing activities	(143,342)		(210,382)
Cash flows from financing activities:
Borrowings under credit facilities	4,327,000		743,000
Payments on credit facilities	(4,417,000)		(643,000)
Borrowings on senior unsecured notes	599,571		348,618
Payments on senior unsecured notes	—		(201,081)
Dividends paid	(179,347)		(245,599)
Repurchases of common stock	(13,808)		(466,169)
Other, net	(2,013)		(1,329)
Net cash provided by (used in) financing activities	314,403		(465,560)
Effect of exchange rate changes on cash	1,280		6,522
Net increase (decrease) in cash and cash equivalents	7,782		(360,877)
Cash and cash equivalents, beginning of period	269,282		601,428
Cash and cash equivalents, end of period	$	277,064	$	240,551




Non-cash transactions:
Accrued purchases of property and equipment	$	10,177	$	19,628

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

1. Nature of Operations and Basis of Presentation

Description of Business

Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both professional installers (“professional”) and “do-it-yourself” (“DIY”) customers. The accompanying condensed consolidated financial statements have been prepared by us and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and their subsidiaries (collectively referred to as “Advance,” “we,” “us” or “our”).

As of July 15, 2023, we operated a total of 4,790 stores and 319 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of July 15, 2023, we served 1,307 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands. Our stores operate primarily under the trade names “Advance Auto Parts” and “Carquest” and our branches operate under the “Worldpac” and “Autopart International” trade names.

Basis of Presentation

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting principles. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for 2022 as filed with the SEC on February 28, 2023.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Our first quarter of the year contains sixteen weeks. Our remaining three quarters each consist of twelve weeks.

Out-of-Period Charge

The twenty-eight weeks ended July 15, 2023 included an out-of-period charge of $17.3 million, reflected in Selling, general and administrative (“SG&A”) expenses, and related tax benefit of $4.3 million in the Condensed Consolidated Statement of Operations, related to costs incurred in prior years but not previously expensed. The out-of-period charge, which was originally disclosed in our interim report on Form 10-Q for the period ended April 22, 2023, was not material to the current period or any previously issued financial statements.

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

2. Significant Accounting Policies

Revenues

The following table summarizes disaggregated revenue from contracts with customers by product group:


	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 15, 2023		July 16, 2022		July 15, 2023		July 16, 2022
Percentage of Sales:
Parts and Batteries	66	%	65	%	66	%	66	%
Accessories and Chemicals	20		21		20		21
Engine Maintenance	13		13		13		12
Other	1		1		1		1
Total	100	%	100	%	100	%	100	%

Recently Issued Accounting Pronouncements - Adopted

Supplier Finance Programs

In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”), which requires a buyer in a supplier finance program to disclose sufficient information about the program, enabling users of the financial statements to understand the nature of the program and activity and changes during the period. ASU 2022-04 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the requirement on rollforward information, which is effective for fiscal years beginning after December 15, 2023. During the first quarter 2023, we adopted ASU 2022-04, which did not have a material impact on our consolidated financial position, results of operations and cash flows. Refer to Note 11. Supplier Finance Programs for further details.

3. Inventories, net

Inventories, net, are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately 91.9% of inventories as of July 15, 2023 and 92.2% of inventories as of December 31, 2022. Under the LIFO method, our Cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in the twenty-eight weeks ended July 15, 2023 and prior years. As a result of changes in the LIFO reserve, we recorded a reduction to Cost of sales of $26.8 million for the twelve weeks ended July 15, 2023 and an increase to Cost of sales of $91.8 million for the twelve weeks ended July 16, 2022 to state inventories at LIFO. For the twenty-eight weeks ended July 15, 2023 and July 16, 2022, we recorded a reduction to Cost of Sales of $33.5 million and an increase to Cost of sales of $173.3 million to state inventories at LIFO.

An actual valuation of inventory under the LIFO method is performed at the end of each fiscal year based on inventory levels and carrying costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected inventory levels and costs at the end of the year.

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

Inventory balances were as follows:


	July 15, 2023		December 31, 2022
Inventories at first in, first out (“FIFO”), net	$	5,312,651	$	5,193,911
Adjustments to state inventories at LIFO	(245,184)		(278,649)
Inventories at LIFO, net	$	5,067,467	$	4,915,262

4. Intangible Assets

Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $6.8 million and $7.1 million for the twelve weeks ended July 15, 2023 and July 16, 2022 and $16.0 million and $16.6 million for the twenty-eight weeks ended July 15, 2023 and July 16, 2022.

5. Receivables, net

Receivables, net, consisted of the following:


	July 15, 2023		December 31, 2022
Trade	$	622,623	$	576,548
Vendor	175,336		126,640
Other	13,904		10,638
Total receivables	811,863		713,826
Less: allowance for credit losses	(18,091)		(15,213)
Receivables, net	$	793,772	$	698,613

6. Long-term Debt and Fair Value of Financial Instruments

Long-term debt consists of the following:


	July 15, 2023		December 31, 2022
5.90% Senior Unsecured Notes due March 9, 2026	$	298,028	$	—
1.75% Senior Unsecured Notes due October 1, 2027	347,252		346,947
5.95% Senior Unsecured Notes due March 9, 2028	297,906		—
3.90% Senior Unsecured Notes due April 15, 2030	495,878		495,562
3.50% Senior Unsecured Notes due March 15, 2032	346,010		345,774
Revolver credit facility	95,000		185,000
	$	1,880,074	$	1,373,283
Less: Current portion of long-term debt	(95,000)		(185,000)
Long-term debt, excluding the current portion	$	1,785,074	$	1,188,283
Fair value of long-term debt	$	1,706,403	$	1,021,396

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

Fair Value of Financial Assets and Liabilities

The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The carrying amounts of our Cash and cash equivalents, Receivables, net, Accounts payable and Accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.

Bank Debt

On February 27, 2023, we entered into Amendment No. 1 (the “Amendment No. 1”) to the Credit Agreement dated November 9, 2021, with Advance Auto Parts, Inc., as Borrower, Advance Stores Company, Incorporated, as a Guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent (the “2021 Credit Agreement”). Amendment No. 1 extended the maturity date of the 2021 Credit Agreement by one year from November 9, 2026, to November 9, 2027 and replaced an adjusted LIBOR benchmark rate with a term secured overnight financing rate benchmark rate, as adjusted by an increase of ten basis points, plus the applicable margin under the 2021 Credit Agreement. Amendment No.1 made no other material changes to the terms of the 2021 Credit Agreement. On August 21, 2023, we entered into Amendment No. 2 (“Amendment No. 2”) to the 2021 Credit Agreement in order to amend certain financial covenants related to the Consolidated Coverage Ratio (as defined therein). Pursuant to Amendment No. 2, we will not permit the Consolidated Coverage Ratio for each period of four fiscal quarters to be less than (a) 1.75 to 1.00 for quarters ending on October 7, 2023 and December 30, 2023, (b) 2.0 to 1.00 for quarters ending on April 20, 2024 through and including the quarters ending on October 4, 2025 and (c) 2.25 to 1.00 for quarters ending after October 4, 2025. Amendment No. 2 made no other material changes to the terms of the 2021 Credit Agreement.

As of July 15, 2023, we had $95.0 million of outstanding borrowings, $1.1 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility (the “Credit Agreement”). As of December 31, 2022, we had $185.0 million outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our Credit Agreement.

As of July 15, 2023 and December 31, 2022, we had $91.0 million and $90.2 million of bilateral letters of credit issued separately from the Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.

We were in compliance with financial covenants required by our debt arrangements as of July 15, 2023, and believe we will be in compliance for the next twelve months.

Senior Unsecured Notes

Our 3.90% senior unsecured notes due April 15, 2030 (the “Original Notes”) were issued April 16, 2020, at 99.65% of the principal amount of $500.0 million, and were not registered under the Securities Act of 1933, as amended (the “Securities Act”). The Original Notes bear interest, payable semi-annually in arrears on April 15 and October 15, at a rate of 3.90% per year. On July 28, 2020, we completed an exchange offer whereby the Original Notes in the aggregate principal amount of $500.0 million were exchanged for a like principal amount (the “Exchange Notes” or “2030 Notes”), and which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes.

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

Our 1.75% senior unsecured notes due October 1, 2027 (the “2027 Notes”) were issued September 29, 2020, at 99.67% of the principal amount of $350.0 million. The 2027 Notes bear interest, payable semi-annually in arrears on April 1 and October 1, at a rate of 1.75% per year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.

Our 3.50% senior unsecured notes due 2032 (the “2032 Notes”) were issued March 4, 2022, at 99.61% of the principal amount of $350.0 million. The 2032 Notes bear interest, payable semi-annually in arrears on March 15 and September 15, at a rate of 3.50% per year. In connection with the 2032 Notes offering, we incurred $3.2 million of debt issuance costs.

Our 5.90% senior unsecured notes due March 9, 2026 (the “2026 Notes”) were issued March 9, 2023, at 99.94% of the principal amount of $300.0 million. The 2026 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of 5.90% per year. In connection with the 2026 Notes offering, we incurred $1.6 million of debt issuance costs.

Our 5.95% senior unsecured notes due March 9, 2028 (the “2028 Notes”) were issued March 9, 2023, at 99.92% of the principal amount of $300.0 million. The 2028 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of 5.95% per year. In connection with the 2028 Notes offering, we incurred $1.7 million of debt issuance costs.

We may redeem some or all of our 2026 Notes and 2028 Notes (the “Notes”) at any time, or from time to time, prior to March 9, 2026 in the case of our 2026 Notes, or February 9, 2028 in the case of our 2028 Notes, at the redemption price described in the related indenture for the Notes (the “Indenture”). In the event of a change of control triggering event, as defined in the Indenture, we will be required to offer the repurchase of the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. Currently, the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsubordinated unsecured basis by guarantor and subsidiary guarantees, as defined by the Indenture.

Debt Guarantees

We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are customers of ours. These loans totaled $106.1 million and $96.9 million as of July 15, 2023 and December 31, 2022 and are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements was $219.4 million and $174.6 million as of July 15, 2023 and December 31, 2022. We believe that the likelihood of performance under these guarantees is remote.

7. Leases

Substantially all of our leases are for facilities and vehicles. The initial term for facilities is typically five to ten years, with renewal options typically at five-year intervals, and the exercise of lease renewal options at our sole discretion. Our vehicle and equipment lease terms are typically three to six years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

Total lease cost is included in Cost of sales and Selling, general and administrative expenses (“SG&A”) in the accompanying Condensed Consolidated Statements of Operations and is recorded net of immaterial sublease income. Total lease cost was comprised of the following:


	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 15, 2023		July 16, 2022		July 15, 2023		July 16, 2022
Operating lease cost	$	130,931	$	130,003	$	304,590	$	303,038
Variable lease cost	41,087		41,977		92,433		95,273
Total lease cost	$	172,018	$	171,980	$	397,023	$	398,311

Other information relating to our lease liabilities is as follows:


	Twenty-Eight Weeks Ended
	July 15, 2023		July 16, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	298,175	$	336,143
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	271,182	$	254,013

8. Share Repurchase Program

Our Board of Directors had previously authorized $2.7 billion to our share repurchase program. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.

During the twelve weeks ended and twenty-eight weeks ended July 15, 2023, we purchased no shares of our common stock under our share repurchase program. During the twelve weeks ended July 16, 2022, we repurchased 1.0 million shares at an aggregate cost of $200.0 million, or an average price of $199.02 per share. During the twenty-eight weeks ended July 16, 2022, we repurchased 2.1 million shares of our common stock under our share repurchase program at an aggregate cost of $448.2 million, or an average price of $215.74 per share. We had $947.3 million remaining under our share repurchase program as of July 15, 2023.

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

9. Earnings per Share

The computations of basic and diluted earnings per share were as follows:


	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 15, 2023		July 16, 2022		July 15, 2023		July 16, 2022
Numerator
Net income applicable to common shares	$	85,362	$	144,402	$	128,013	$	284,193
Denominator
Basic weighted-average common shares	59,451		60,452		59,384		60,914
Dilutive impact of share-based awards	153		330		186		414
Diluted weighted-average common shares (1)	59,604		60,782		59,570		61,328

Basic earnings per common share	$	1.44	$	2.39	$	2.16	$	4.67
Diluted earnings per common share	$	1.43	$	2.38	$	2.15	$	4.63

(1)For the twelve weeks ended July 15, 2023 and July 16, 2022, 402 thousand and 169 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the twenty-eight weeks ended July 15, 2023 and July 16, 2022, 289 thousand and 33 thousand RSUs were excluded from the diluted calculation as their inclusion would have been anti-dilutive.

10. Share-Based Compensation

During the twenty-eight weeks ended July 15, 2023, we granted 414 thousand time-based RSUs, 22 thousand performance-based RSUs, 73 thousand market-based RSUs and 148 thousand stock options. The general terms of the time-based and market-based RSUs are similar to awards previously granted by us. The performance-based RSUs granted may vest following a one-year period subject to the achievement of certain financial goals and employment service as specified in the grant agreement. We grant options to purchase common stock to certain employees under our 2014 Long-Term Incentive Plan. Our 2014 Long-Term Incentive Plan was recently replaced by our 2023 Omnibus Incentive Compensation Plan, and future option grants will be granted under the 2023 Omnibus Incentive Compensation Plan. The general terms of the stock options will be similar to awards previously granted by us. We record compensation expense for the grant date fair value of the option awards evenly over the vesting period.

The weighted-average fair values of the time-based, performance-based and market-based RSUs granted during the twenty-eight weeks ended July 15, 2023 were $105.95, $135.13 and $205.52 per share. The fair value of each market-based RSU was determined using a Monte Carlo simulation model. For time-based and performance-based RSUs, the fair value of each award was determined based on the market price of our stock on the date of grant adjusted for expected dividends during the vesting period, as applicable.

The total income tax benefit related to share-based compensation expense for the twenty-eight weeks ended July 15, 2023 was $6.5 million. As of July 15, 2023, there was $88.3 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted-average period of 1.6 years.

11. Supplier Finance Programs

We maintain supply chain financing agreements with third-party financial institutions to provide our suppliers

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Amounts presented in thousands, except per share data, unless otherwise stated)

(Unaudited)

with enhanced receivables options. Through these agreements, our suppliers, at their sole discretion, may elect to sell its receivables due from us to the third-party financial institution at terms negotiated between the supplier and the third-party financial institution. We do not provide any guarantees to any third party in connection with these financing arrangements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted, and no assets are pledged under the agreements. All outstanding amounts due to third-party financial institutions related to suppliers participating in such financing arrangements are recorded within Accounts payable and represent obligations outstanding under these supplier finance programs for invoices that were confirmed as valid and owed to the third-party financial institutions in our Condensed Consolidated Balance Sheets. As of July 15, 2023 and December 31, 2022, $3.1 billion and $3.2 billion of our Accounts payable were to suppliers participating in these financing arrangements.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 our Annual Report on Form 10-K for the year ended December 31, 2022 (filed with the SEC on February 28, 2023), which we refer to as our 2022 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.

Management Overview

A high-level summary of our financial results for the second quarter of 2023 included:

•Net sales during the second quarter of 2023 was $2.69 billion, an increase of 0.8% compared with the second quarter of 2022, driven predominately by new store openings, and partially offset by a decline in comparable store sales. Comparable store sales declined 0.6% compared with the second quarter of 2022, primarily driven by a decrease in demand within our professional business, and partially offset by an increase in our DIY omnichannel business.

•Gross profit margin for the second quarter of 2023 was 42.7% of Net sales, a decrease of 174 basis points compared with the second quarter of 2022. Gross profit margin was negatively impacted by higher product costs and supply chain deleverage that were not fully covered by pricing actions, partially offset by a reduction in LIFO-related expenses.

•Selling, General & Administrative (“SG&A”) expenses for the second quarter of 2023 were 37.7% of Net sales, an increase of 82 basis points compared with the second quarter of 2022. This increase as a percentage of Net sales was primarily driven by inflation in labor and benefit-related expenses as well as deleverage associated with new store openings, partially offset by a decrease in startup costs.

•We generated Diluted earnings per share (“Diluted EPS”) of $1.43 during the second quarter of 2023, compared with $2.38 in the second quarter of 2022.

Business and Risks Update

We continue to make progress on the various elements of our 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, we have undertaken planned strategic initiatives to help build a foundation for long-term success across the organization, which include:

•Continued refinement of a demand-based assortment, leveraging purchase and search history from our common catalog.

•Advancement towards optimizing our footprint by market to drive share, repurpose our in-market store and asset base and streamline our distribution network.

•Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and innovate to meet their needs, inclusive of the iconic DieHard® brand.

•Progress in the implementation of a more efficient and optimized end-to-end supply chain to deliver our broad assortment of inventory.

•Actively pursuing new store openings in 2023 in existing markets and new markets.

•Continued negotiations with vendors on strategic sourcing and pricing to help mitigate inflationary pressures.

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Industry Update

Operating within the automotive aftermarket industry, we are 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:

•Inflationary pressures, including logistics and labor

•Global supply chain disruptions

•Rising fuel costs

•Miles driven

•Unemployment rates

•Consumer confidence and purchasing power

•Competition

•Changes in new car sales

•Economic and geopolitical uncertainty

•Increased foreign currency exchange volatility

Stores and Branches

Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. During the twenty-eight weeks ended July 15, 2023, 39 stores and branches were opened and 16 were closed, resulting in a total of 5,109 stores and branches compared with a total of 5,086 stores and branches as of December 31, 2022. There were no consolidated, converted and relocated during the twenty-eight weeks ended July 15, 2023.

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Results of Operations


	Twelve Weeks Ended								$ Favorable/ (Unfavorable)		Basis Points
($ in millions)	July 15, 2023				July 16, 2022
Net sales	$	2,686.1	100.0	%	$	2,665.4	100.0	%	$	20.7	—
Cost of sales	1,538.0		57.3		1,479.7		55.5		(58.3)		(174)
Gross profit	1,148.1		42.7		1,185.7		44.5		(37.6)		(174)
SG&A	1,013.7		37.7		984.0		36.9		(29.7)		(82)
Operating income	134.4		5.0		201.7		7.6		(67.3)		(256)
Interest expense	(20.9)		(0.8)		(10.2)		(0.4)		(10.7)		(39)
Other income (expense), net	1.7		0.1		(0.7)		—		2.4		9
Provision for income taxes	29.8		1.1		46.4		1.7		16.6		63
Net income	$	85.4	3.2	%	$	144.4	5.4	%	$	(59.0)	(223)


	Twenty-Eight Weeks Ended								$ Favorable/ (Unfavorable)		Basis Points
($ in millions)	July 15, 2023				July 16, 2022
Net sales	$	6,103.7	100.0	%	$	6,039.6	100.0	%	$	64.1	—
Cost of sales	3,484.9		57.1		3,347.4		55.4		(137.5)		(167)
Gross profit	2,618.7		42.9		2,692.2		44.6		(73.4)		(167)
SG&A (1)	2,394.4		39.2		2,287.3		37.9		(107.1)		(136)
Operating income	224.4		3.7		405.0		6.7		(180.5)		(303)
Interest expense	(50.6)		(0.8)		(23.1)		(0.4)		(27.5)		(45)
Loss on early redemptions of senior unsecured notes	—		—		(7.4)		(0.1)		7.4		12
Other income (expense), net	1.0		0.0		(0.6)		—		1.6		3
Provision for income taxes	46.8		0.8		89.7		1.5		42.9		72
Net income	$	128.0	2.1	%	$	284.2	4.7	%	$	(156.1)	(261)

Note: Table amounts may not foot due to rounding.

(1) The twenty-eight weeks ended July 15, 2023 included an out-of-period charge of $17.3 million related to costs incurred in prior years but not expensed in the corresponding periods. The company determined the cumulative impact was not material to the current period or any previously issued financial statements.

Net Sales

Net sales for the twelve weeks ended July 15, 2023 increased 0.8% compared with the same period in 2022, driven predominately by new store openings. The increase from new store openings was partially offset by a decrease of comparable store sales of 0.6% for the twelve weeks ended July 15, 2023 compared with the twelve weeks ended July 16, 2022. Category growth was led by brakes, motor oil and batteries.

Net sales for the twenty-eight weeks ended July 15, 2023 increased 1.1% compared with the same period in 2022, driven predominately by new store openings. This was partially offset by a decrease of comparable store sales of 0.5% for the twenty-eight weeks ended July 15, 2023 compared with the twenty-eight weeks ended July 16, 2022. Category growth was led by motor oil and brakes.

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We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently owned Carquest stores are excluded from our comparable store sales. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date. We include sales from relocated stores in comparable store sales from the original date of opening.

Gross Profit

Gross profit for the twelve weeks ended July 15, 2023 was $1.15 billion, or 42.7% of Net sales, compared with $1.19 billion, or 44.5% of Net sales, for the twelve weeks ended July 16, 2022. For the twenty-eight weeks ended July 15, 2023 and July 16, 2022, Gross profit was $2.62 billion, or 42.9% of Net sales, and $2.69 billion, or 44.6% of Net sales.

During the twelve weeks ended and twenty-eight weeks ended July 15, 2023, Gross profit margin was negatively impacted by higher product costs and supply chain deleverage that were not fully covered by pricing actions. This was partially offset by a reduction in LIFO-related expenses.

Selling, General and Administrative Expenses

SG&A expenses for the twelve weeks ended July 15, 2023 were $1.01 billion, or 37.7% of Net sales, compared with $984.0 million, or 36.9% of Net sales, for the twelve weeks ended July 16, 2022. The increase in SG&A as a percentage of Net sales was primarily driven by inflation within labor and benefits, partially offset by a decrease in new store start-up costs.

SG&A expenses for the twenty-eight weeks ended July 15, 2023 were $2.39 billion, or 39.2% of Net sales, compared with $2.29 billion, or 37.9% of Net sales, for the twenty-eight weeks ended July 16, 2022. The increase in SG&A as a percentage of Net sales was primarily driven by inflation within labor and benefits, as well as an out-of-period charge as further described in Note 1. Basis of P r esentat ion, partially offset by a decrease in new store start-up costs.

Provision for Income Taxes

Our Provision for income taxes for the twelve weeks ended July 15, 2023 was $29.8 million compared with $46.4 million for the twelve weeks ended July 16, 2022. For the twenty-eight weeks ended July 15, 2023 and July 16, 2022, our Provision for income taxes was $46.8 million and $89.7 million. The decrease in tax expense primarily resulted from lower Income before provision for income taxes compared with prior year.

Our effective tax rate was 25.9% and 24.3% for the twelve weeks ended July 15, 2023 and July 16, 2022. Our effective tax rate was 26.8% and 24.0% for the twenty-eight weeks ended July 15, 2023 and July 16, 2022. The higher effective income tax rate f

SEC Form 10-Q filed by Advance Auto Parts Inc.