Q3 Net Sales Increased 2.9% to $2.7 Billion;
Comparable Store Sales Increased 1.2%
Executing on New $150 Million Cost Reduction
Program
Initiates Sale Processes for Worldpac and
Canadian Business
Advance Auto Parts, Inc. (NYSE: AAP), a leading automotive
aftermarket parts provider in North America, that serves both
professional installer and do-it-yourself customers, announced its
financial results for the third quarter ended October 7, 2023.
“Since joining Advance, I have partnered with the board and
management team to move with speed in conducting a comprehensive
review of the business,” said Shane O'Kelly, president and chief
executive officer. “We are taking decisive actions to position
Advance for long-term success and create meaningful value for our
shareholders. Today we are announcing initial actions from our
review process that will allow us to capitalize on significant
opportunities ahead. First, we are launching a new cost reduction
program that we expect will generate at least $150 million in
savings on an annualized basis. We expect to reinvest up to $50
million of these savings in our team members with a clear focus on
improving the retention of our frontline team members. At the same
time, we have made a strategic decision to focus on our blended box
business model and are therefore initiating separate sale processes
for Worldpac as well as our Canadian business.
“We are committed to stabilizing the company and returning
Advance to profitable growth, and our frontline team’s passion and
extensive knowledge is integral to how we succeed. Seeing our
frontline team members in action delivering for customers, coupled
with robust industry fundamentals and strong vendor relationships,
has reaffirmed my optimism that by making rigorous strategic and
operational decisions now, Advance will be well positioned to
capitalize on the opportunities ahead and deliver value for
shareholders.”
Third Quarter 2023 Results (1)
Third quarter 2023 Net sales totaled $2.7 billion, a 2.9%
increase compared with the third quarter of the prior year.
Comparable store sales increased to 1.2%.
Gross profit decreased 16.3% to $1.0 billion. Gross profit
margin was 36.3% of Net sales compared with 44.6% of Net sales in
the third quarter of the prior year. This was primarily driven by a
change in estimate for inventory reserves that resulted in a
one-time impact of approximately $119 million. In addition, the
company incurred higher product costs that were not fully covered
by pricing actions and elevated supply chain costs. This was
partially offset by a reduction in LIFO-related expenses.
SG&A expenses were $1.0 billion, which were 37.9% of Net
sales compared with 38.2% in the third quarter of the prior
year.
The company's Operating loss was $43.7 million, or (1.6)% of Net
sales, compared with 6.5% in the third quarter of the prior
year.
The company's effective tax rate was 24.4%, compared with 24.7%
in the third quarter of the prior year. The company's Diluted loss
per share was $(0.82), compared with Diluted earnings per share of
$1.92 in the third quarter of the prior year.
Net cash provided by operating activities was $30.4 million
through the third quarter of 2023 versus $483.1 million in the same
period of the prior year. This was primarily driven by lower Net
income and an increase in cash used in working capital. Through the
third quarter of 2023, Free cash flow was an outflow of $156.8
million compared with an inflow of $149.5 million in the same
period of the prior year.
All comparisons are based on the corrected results of the same
time period in the prior year as depicted in the financial tables
herein, which include the correction of non-material errors the
company discovered in previously reported results.
Strategic Review Update
The company has initiated separate sale processes for the
potential divestiture of Worldpac and the company’s Canada
business. Worldpac, a leading automotive wholesale distributor of
original equipment and aftermarket parts for all makes/all models,
is highly recognized for its world class technology, catalog,
product brand assortment and training. The company's Canadian
business, which predominantly serves commercial customers, goes to
market under the Carquest banner.
The company has engaged Centerview Partners to assist in the
sale processes. The company has not set a timetable for the
conclusion of the sale processes and does not intend to comment on
or provide updates regarding these matters unless and until the
processes are concluded or it determines that further disclosure is
appropriate or required.
(1) Comparable store sales include locations open for 13
complete accounting periods and excludes sales to independently
owned Carquest locations.
Capital Allocation
On October 31, 2023, the company declared a regular cash
dividend of $0.25 per share to be paid on January 26, 2024 to all
common stockholders of record as of January 12, 2024.
Full Year 2023 Guidance
Tony Iskander, interim chief financial officer, said, “Based on
our year-to-date results and current business trends, we are
adjusting our previously provided full year outlook ranges. Our
updates include the impact of non-recurring expenses in Q3 as well
as continued pressure in Q4 from higher product costs that we do
not expect to offset with price. We are taking significant steps to
improve our cost structure and remain focused on returning the
business to profitable growth.”
Prior FY 2023 Outlook
Updated FY 2023
Outlook
As of August 23, 2023
As of November 15,
2023
($ in millions, except per share data)
Low
High
Low
High
Net sales
11,250
$
11,350
$
11,250
$
11,300
Comparable store sales (1)
(0.5
)%
0.5
%
(0.5
)%
0.0
%
Operating income margin
4.0
%
4.3
%
1.8
%
2.0
%
Income tax rate
25.0
%
25.0
%
25.0
%
25.0
%
Diluted EPS
4.50
$
5.10
$
1.40
$
1.80
Capital expenditures
200
$
250
$
200
$
250
Free cash flow (2)
150
$
250
$
50
$
100
New store and branch openings
40
60
55
65
(1)
Comparable store sales include locations
open for 13 complete accounting periods and excludes sales to
independently owned Carquest locations.
(2)
Free cash flow is a non-GAAP measure. For
a better understanding of the company's non-GAAP adjustments, refer
to the reconciliation of non-GAAP financial measures in the
accompanying financial tables included herein.
Investor Conference Call
The company will detail its results for the third quarter ended
October 7, 2023 via a webcast scheduled to begin at 8 a.m. Eastern
Time on Wednesday, November 15, 2023. The webcast will be
accessible via the Investor Relations page of the company's website
(ir.AdvanceAutoParts.com).
To join by phone, please pre-register online for dial-in and
passcode information. Upon registering, participants will receive a
confirmation with call details and a registrant ID. While
registration is open through the live call, the company suggests
registering a day in advance or at minimum 10 minutes before the
start of the call. A replay of the conference call will be
available on the company's Investor Relations website for one
year.
About Advance Auto Parts
Advance Auto Parts, Inc. is a leading automotive aftermarket
parts provider that serves both professional installer and
do-it-yourself customers. As of October 7, 2023 Advance operated
4,785 stores and 320 Worldpac branches primarily within the United
States, with additional locations in Canada, Puerto Rico and the
U.S. Virgin Islands. The company also served 1,307 independently
owned Carquest branded stores across these locations in addition to
Mexico and various Caribbean islands. Additional information about
Advance, including employment opportunities, customer services, and
online shopping for parts, accessories and other offerings can be
found at www.AdvanceAutoParts.com.
Forward-Looking Statements
Certain statements herein 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, including
cost reduction initiatives, our ability to complete the potential
divestiture of Worldpac and the company’s Canada business and
expectations for economic conditions, future business results and
future financial performance, as well as statements regarding
underlying assumptions related thereto. Forward-looking statements
reflect our views based on historical results, current information
and assumptions related to future developments. Except as may be
required by law, the company undertakes no obligation to update any
forward-looking statements made herein. 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, the timing
and implementation of strategic initiatives, our ability to hire,
train and retain qualified employees, 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. 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.
Advance Auto Parts, Inc. and
Subsidiaries
Condensed Consolidated Balance
Sheets
(In thousands) (unaudited)
October 7, 2023(1)
December 31, 2022
(2,3)
Assets
Current assets:
Cash and cash equivalents
$
317,528
$
269,282
Receivables, net
868,305
698,613
Inventories, net
4,940,037
4,911,053
Other current assets
185,249
163,695
Total current assets
6,311,119
6,042,643
Property and equipment, net
1,663,080
1,690,139
Operating lease right-of-use assets
2,600,946
2,607,690
Goodwill
989,934
990,471
Other intangible assets, net
598,699
620,901
Other assets
75,809
62,429
Total assets
$
12,239,587
$
12,014,273
Liabilities and
Stockholders' Equity
Current liabilities:
Accounts payable
$
3,942,591
$
4,136,415
Accrued expenses
712,112
641,099
Current portion of long-term debt
—
185,000
Other current liabilities
478,603
427,480
Total current liabilities
5,133,306
5,389,994
Long-term debt
1,785,717
1,188,283
Noncurrent operating lease liabilities
2,209,899
2,278,318
Deferred income taxes
382,840
415,997
Other long-term liabilities
87,669
87,214
Total stockholders' equity
2,640,156
2,654,467
Total liabilities and stockholders’
equity
$
12,239,587
$
12,014,273
(1)
This preliminary condensed consolidated
balance sheet has been prepared on a basis consistent with the
company's previously prepared consolidated balance sheets filed
with the Securities and Exchange Commission (“SEC”), but does not
include the footnotes required by accounting principles generally
accepted in the United States of America (“GAAP”).
(2)
The balance sheet at December 31, 2022 has
been derived from the audited consolidated financial statements at
that date, but does not include the footnotes required by GAAP.
(3)
The balance sheet at December 31, 2022
reflects the corrected results as depicted in the financial tables
herein, which include the correction of non-material errors the
company discovered in previously reported results.
Advance Auto Parts, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Operations
(In thousands, except per share
data) (unaudited)
Twelve Weeks Ended
Forty Weeks Ended
October 7, 2023 (1)
October 8, 2022 (1,2)
October 7, 2023 (1)
October 8, 2022 (1,2)
Net sales
$
2,719,079
$
2,641,341
$
8,822,738
$
8,680,977
Cost of sales, including purchasing and
warehousing costs
1,732,420
1,462,094
5,220,200
4,821,037
Gross profit
986,659
1,179,247
3,602,538
3,859,940
Selling, general and administrative
expenses (2)
1,030,355
1,008,226
3,407,445
3,301,959
Operating (loss) income
(43,696
)
171,021
195,093
557,981
Other expense, net:
Interest expense
(19,407
)
(12,039
)
(69,993
)
(35,114
)
Loss on early redemption of senior
unsecured notes
—
—
—
(7,408
)
Other income (expense), net
(1,216
)
(5,054
)
(206
)
(5,282
)
Total other, net
(20,623
)
(17,093
)
(70,199
)
(47,804
)
(Loss) Income before provision for income
taxes
(64,319
)
153,928
124,894
510,177
Provision for income taxes
(15,686
)
38,047
34,649
123,383
Net (loss) income
$
(48,633
)
$
115,881
$
90,245
$
386,794
Basic (loss) earnings per common share
$
(0.82
)
$
1.93
$
1.52
$
6.38
Weighted-average common shares
outstanding
59,474
60,053
59,411
60,656
Diluted (loss) earnings per common
share
$
(0.82
)
$
1.92
$
1.51
$
6.34
Weighted-average common shares
outstanding
59,630
60,384
59,588
61,045
(1)
These preliminary condensed consolidated
statements of operations have been prepared on a basis consistent
with the company's previously prepared consolidated statements of
operations filed with the SEC, but do not include the footnotes
required by GAAP.
(2)
The twelve and forty weeks ended October
8, 2022 reflect the corrected results as depicted in the financial
tables herein, which include the correction of the non-material
errors the company discovered in previously reported results.
Advance Auto Parts, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Cash Flows
(In thousands) (unaudited)
Forty Weeks Ended
October 7, 2023 (1)
October 8, 2022 (1,2)
Cash flows from operating
activities:
Net income
$
90,245
$
386,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
234,976
215,224
Share-based compensation
37,435
40,291
Loss and impairment on property and
equipment, net
1,886
2,858
Loss on early redemption of senior
unsecured notes
—
7,408
Provision for deferred income taxes
(33,059
)
24,144
Other, net
1,499
2,064
Net change in:
Receivables, net
(170,371
)
(64,107
)
Inventories, net
(41,025
)
(274,926
)
Accounts payable
(191,871
)
177,103
Accrued expenses
145,704
(27,576
)
Other assets and liabilities, net
(45,015
)
(6,183
)
Net cash provided by operating
activities
30,404
483,094
Cash flows from investing
activities:
Purchases of property and equipment
(187,201
)
(333,639
)
Proceeds from sales of property and
equipment
2,001
1,821
Net cash used in investing activities
(185,200
)
(331,818
)
Cash flows from financing
activities:
Borrowings under credit facilities
4,805,000
1,123,000
Payments on credit facilities
(4,990,000
)
(938,000
)
Borrowings on senior unsecured notes
599,571
348,618
Payments on senior unsecured notes
—
(201,081
)
Dividends paid
(194,322
)
(336,230
)
Repurchases of common stock
(14,237
)
(542,608
)
Other, net
(1,028
)
463
Net cash provided by (used in) financing
activities
204,984
(545,838
)
Effect of exchange rate changes on
cash
(1,942
)
(15,662
)
Net increase (decrease) in cash and
cash equivalents
48,246
(410,224
)
Cash and cash equivalents,
beginning of period
269,282
601,428
Cash and cash equivalents, end of
period
$
317,528
$
191,204
(1)
These preliminary condensed consolidated
statements of cash flows have been prepared on a consistent basis
with the company's previously prepared statements of cash flows
filed with the SEC, but do not include the footnotes required by
GAAP.
(2)
The forty weeks ended October 8, 2022
reflect the corrected results as depicted in the financial tables
herein, which include the correction of the non-material error the
company discovered in previously reported results.
Restatement of Previously Issued Financial Statements
In connection with the preparation of the financial statements
for the third quarter of 2023, the company identified additional
errors impacting cost of sales and selling, general and
administrative costs. The company evaluated the errors and
determined that the related impacts were not material to the
previously issued consolidated financial statements for any prior
period. A summary of the corrections to the impacted financial
statement line items in our previously issued Consolidated Balance
Sheets, Consolidated Statements of Operations, Consolidated
Statements of Comprehensive Income, Consolidated Statements of
Changes in Stockholders’ Equity and Consolidated Statement of Cash
Flows for the year ended December 31, 2022 included in previously
filed Annual Reports on Form 10-K and Condensed Consolidated
Balance Sheets, Condensed Consolidated Statements of Operations,
Condensed Consolidated Statements of Comprehensive Income,
Condensed Consolidated Statements of Changes in Stockholders’
Equity and Condensed Consolidated Statements of Cash Flows for
periods presented below, which were presented in previously filed
Quarterly Reports on Form 10-Q, are as follows:
Corrected Condensed
Consolidated Balance Sheet
October 8, 2022
As Previously Reported
Adjustments
As Corrected
Assets
Receivables, net
$
845,667
$
(2,795
)
$
842,872
Total current assets
6,162,520
(2,795
)
6,159,725
Total assets
$
12,132,079
$
(2,795
)
$
12,129,284
Liabilities and
Stockholders’ Equity
Accounts payable
$
4,097,412
$
(16,579
)
$
4,080,833
Accrued expenses
681,216
10,312
691,528
Total current liabilities
5,442,901
(6,267
)
5,436,634
Total liabilities
9,416,004
(6,267
)
9,409,737
Accumulated other comprehensive loss
(54,298
)
6,364
(47,934
)
Retained earnings
4,726,823
(2,892
)
4,723,931
Total stockholders’ equity
2,716,075
3,472
2,719,547
Total liabilities and stockholders’
equity
$
12,132,079
$
(2,795
)
$
12,129,284
Corrected Condensed
Consolidated Balance Sheet
December 31, 2022
As Previously Reported
Adjustments
As Corrected
Assets
Inventories, net
$
4,915,262
$
(4,209
)
$
4,911,0523
Total current assets
6,046,852
(4,209
)
6,042,643
Total assets
12,018,482
(4,209
)
12,014,273
Liabilities and
Stockholders’ Equity
Accounts payable
4,123,462
12,953
4,136,415
Accrued expenses
634,447
6,652
641,099
Total current liabilities
5,370,389
19,605
5,389,994
Total liabilities
9,340,201
19,605
9,359,806
Retained earnings
4,744,624
(23,814
)
4,720,810
Total stockholders’ equity
2,678,281
(23,814
)
2,654,467
Total liabilities and stockholders’
equity
$
12,018,482
$
(4,209
)
$
12,014,273
Corrected Condensed
Consolidated Statement of Operations
October 8, 2022
Twelve Weeks Ended
Forty Weeks Ended
As Previously Reported
Adjustments
As Corrected
As Previously Reported
Adjustments
As Corrected
Cost of sales
$
1,461,490
$
604
$
1,462,094
$
4,808,888
$
12,149
$
4,821,037
Gross profit
1,179,851
(604
)
1,179,247
3,872,089
(12,149
)
3,859,940
Selling, general and administrative
expenses
1,002,653
5,573
1,008,226
3,289,940
12,019
3,301,959
Operating income
177,198
(6,177
)
171,021
582,149
(24,168
)
557,981
Other income (expense), net
(17,741
)
12,687
(5,054
)
(18,314
)
13,032
(5,282
)
Total other, net
(29,780
)
12,687
(17,093
)
(60,836
)
13,032
(47,804
)
Income before provision for income
taxes
147,418
6,510
153,928
521,313
(11,136
)
510,177
Provision for income taxes
36,436
1,611
38,047
126,137
(2,754
)
123,383
Net income
$
110,982
$
4,899
$
115,881
$
395,176
$
(8,382
)
$
386,794
Basic earnings per share
$
1.85
$
0.08
$
1.93
$
6.52
$
(0.14
)
$
6.38
Basic weighted average shares
60,053
60,053
60,656
60,656
Diluted earnings per common share
$
1.84
$
0.08
1.92
$
6.47
$
(0.13
)
6.34
Diluted weighted average shares
60,384
60,384
61,045
61,045
Corrected Statement of Cash
Flows (unaudited)
Forty Weeks Ended October 8,
2022
As Previously Reported
Adjustments
As Corrected
Net income
$
395,176
$
(8,382
)
$
386,794
Net change in:
Receivables, net
(66,902
)
(22,402
)
(89,304
)
Inventories
(284,271
)
34,542
(249,729
)
Accounts payable
187,331
(10,228
)
177,103
Accrued expenses
(34,046
)
6,470
(27,576
)
Net cash provided by operating
activities
$
483,094
$
—
$
483,094
Reconciliation of Non-GAAP Financial
Measure
The company's financial results include certain financial
measures not derived in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
Management uses Free cash flow as a measure of its liquidity and
believes it is a useful indicator to investors or potential
investors of the company's ability to implement growth strategies
and service debt. Free cash flow is a non-GAAP measure and should
be considered in addition to, but not as a substitute for,
information contained in the company's condensed consolidated
statement of cash flows as a measure of liquidity.
Reconciliation of
Free Cash Flow: (1)
Forty Weeks Ended
(in thousands)
October 7, 2023
October 8, 2022
Cash flows provided by operating
activities
$
30,404
$
483,094
Purchases of property and equipment
(187,201
)
(333,639
)
Free cash flow
$
(156,797
)
$
149,455
Adjusted Debt to
Adjusted EBITDAR: (1,2)
Four Quarters Ended
(In thousands, except adjusted debt to
adjusted EBITDAR ratio)
October 7, 2023
December 31, 2022
Total GAAP debt
$
1,785,717
$
1,373,283
Add: Operating lease liabilities
2,675,921
2,692,861
Adjusted debt
$
4,461,638
$
4,066,144
GAAP Net income
$
176,664
$
473,213
Depreciation and amortization
302,670
283,800
Interest expense
85,938
51,060
Other (income) expense, net
2,348
7,242
Provision for income taxes
48,445
137,180
Rent expense
600,261
594,838
Share-based compensation
48,122
50,978
Other noncash charges
59,975
7,408
Transformation related charges
26,367
—
Adjusted EBITDAR
$
1,350,148
$
1,605,259
Adjusted Debt to Adjusted
EBITDAR
3.3
2.5
(1)
The forty weeks ended October 8, 2022 and
four quarters ended December 31, 2022 reflect the corrected results
as depicted in the financial tables herein, which include the
correction of non-material errors the company discovered in
previously reported results.
(2)
Beginning in first quarter 2023, the
company no longer excludes transformation-related activities in
non-GAAP measures. Prior period has been recast to conform to
current year presentation.
NOTE: Management believes its Adjusted Debt to Adjusted EBITDAR
ratio (“leverage ratio”) is a key financial metric for debt
securities, as reviewed by rating agencies, and believes its debt
levels are best analyzed using this measure. The company’s goal is
to maintain an investment grade rating. The company's credit rating
directly impacts the interest rates on borrowings under its
existing credit facility and could impact the company's ability to
obtain additional funding. If the company was unable to maintain
its investment grade rating this could negatively impact future
performance and limit growth opportunities. Similar measures are
utilized in the calculation of the financial covenants and ratios
contained in the company's financing arrangements. The leverage
ratio calculated by the company is a non-GAAP measure and should
not be considered a substitute for debt to net earnings, net
earnings or debt as determined in accordance with GAAP. The company
adjusts the calculation to remove rent expense and to add back the
company’s existing operating lease liabilities related to their
right-of-use assets to provide a more meaningful comparison with
the company’s peers and to account for differences in debt
structures and leasing arrangements. The company’s calculation of
its leverage ratio might not be calculated in the same manner as,
and thus might not be comparable to, similarly titled measures by
other companies.
Store Information
During the forty weeks ended October 7, 2023, 51 stores and
branches were opened and 32 were closed, resulting in a total of
5,105 stores and branches as of October 7, 2023, compared with a
total of 5,086 stores and branches as of December 31, 2022.
The below table summarizes the changes in the number of
company-operated store and branch locations during the twelve and
forty weeks ended October 7, 2023:
Twelve Weeks Ended
AAP
CARQUEST
WORLDPAC (1)
Total
July 15, 2023
4,471
319
319
5,109
New
10
1
1
12
Closed
(5
)
(11
)
—
(16
)
Relocated
1
(1
)
—
—
October 7, 2023
4,477
308
320
5,105
Forty Weeks Ended
AAP
CARQUEST
WORLDPAC (1)
Total
December 31, 2022
4,440
330
316
5,086
New
46
1
4
51
Closed
(10
)
(22
)
—
(32
)
Relocated
1
(1
)
—
—
October 7, 2023
4,477
308
320
5,105
(1) Certain converted Autopart
International ("AI") locations will remain branded as AI going
forward.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231114437879/en/
Investor Relations Contact: Elisabeth Eisleben T: (919)
227-5466 E: invrelations@advanceautoparts.com
Media Contact: Darryl Carr T: (984) 389-7207 E:
AAPCommunications@advance-auto.com
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