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 endedJanuary 1, 2022 (filed with theSEC onFebruary 15, 2022 ), which we refer to as our 2021 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Management Overview
Net sales increased 1.3% in the first quarter of 2022 compared with the same period in the prior year, primarily driven by growing consumer demand, namely in our professional and independent businesses. Our regional strength in comparable store sales was led by the West andCanada , along with a strong recovery inFlorida and the Mid-Atlantic. Category growth was led by motor oil, batteries and brakes. We generated Diluted earnings per share ("Diluted EPS") of$2.26 during our first quarter of 2022 compared with$2.81 for the comparable period of 2021. When adjusted for non-operational items outlined in the following table, our Adjusted diluted earnings per share ("Adjusted EPS") for the sixteen weeks endedApril 23, 2022 andApril 24, 2021 was$3.57 and$3.34 . Sixteen
Weeks Ended
April 23, 2022 April 24, 2021 Last-in, first-out ("LIFO") impacts $ 0.99 $ 0.03 Transformation expenses 0.13 0.40General Parts International, Inc. ("GPI") amortization of acquired intangible assets 0.10 0.10 Other adjustments 0.09 - Total adjustments, net of tax $ 1.31 $ 0.53 Refer to " Reconciliation of Non-GAAP Financial Measures " for a definition and reconciliation of Adjusted EPS and other non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
A high-level summary of our financial results for the first quarter of 2022 includes:
•Net sales during the first quarter of 2022 was$3.4 billion , an increase of 1.3% compared with the first quarter of 2021, primarily driven by our professional and independent businesses. Comparable store sales increased 0.6%. •Gross profit margin for the first quarter of 2022 was 44.6% of Net sales, flat compared with the first quarter of 2021. Gross profit was impacted favorably due to our ongoing category management initiatives, including strategic pricing and owned brand expansion. These were offset by LIFO expense, inflationary costs and unfavorable channel and product mix. •SG&A expenses for the first quarter of 2022 was 38.6% of Net sales, an increase of 161 basis points compared with the first quarter of 2021. This unfavorable impact was primarily driven by inflationary cost increases in store labor, fuel and delivery and start-up costs from new store openings compared with prior year, partially offset by a year over year decrease in COVID-19 related expenses and incentive compensation. 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 development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach. •Advancement towards optimizing our footprint by market, including consolidating ourWorldpac andAutopart International businesses, to drive share, repurpose our in-market store and asset base and streamline our distribution network. 12 -------------------------------------------------------------------------------- Table of Contents •Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the iconic DieHard® brand. •Progress in the implementation of a more efficient end-to-end supply chain process to deliver our broad assortment and to help lessen the impact of external constraints. •Enhancement of Advance Same Day® Curbside Pick Up, Advance Same Day® Home Delivery and our mobile application and e-commerce performance. •Actively pursuing new store openings, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets, as well as expansion of our independentCarquest network. •Continued negotiations with vendors on strategic sourcing and pricing to help mitigate inflationary pressures.
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 •Fuel costs •Unemployment rates •Consumer confidence •Competition •Changes in new car sales •Miles driven •Economic and geopolitical uncertainty
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 sixteen weeks endedApril 23, 2022 , 35 stores and branches were opened and nine were closed or consolidated, resulting in a total of 4,998 stores and branches compared with a total of 4,972 stores and branches as ofJanuary 1, 2022 . Results of Operations Sixteen Weeks Ended $ Favorable/ ($ in millions) April 23, 2022 April 24, 2021 (Unfavorable) Basis Points Net sales$ 3,374.2 100.0 %$ 3,330.4 100.0 % $ 43.8 - Cost of sales 1,867.7 55.4 1,845.4 55.4 (22.3) (6) Gross profit 1,506.5 44.6 1,484.9 44.6 21.5 6 SG&A 1,303.3 38.6 1,232.8 37.0 (70.5) (161) Operating income 203.3 6.0 252.1 7.6 (49.0) (155) Interest expense (12.9) (0.4) (11.2) (0.3) (1.7) (5) Loss on early redemptions of senior unsecured notes (7.4) (0.2) 0.0 - (7.4) (22) Other income, net 0.1 0.0 4.8 0.1 (4.7) (14) Provision for income taxes 43.3 1.3 59.8 1.8 16.5 51 Net income$ 139.8 4.1 %$ 185.9 5.6 % $ (46.3) (145)
Note: Table amounts may not foot due to rounding.
13 -------------------------------------------------------------------------------- Table of ContentsNet Sales Net sales for the sixteen weeks endedApril 23, 2022 increased 1.3% compared with the same period in 2021, primarily driven by growth in our professional and independent businesses. Comparable store sales increased 0.6% for the sixteen weeks endedApril 23, 2022 compared with the sixteen weeks endedApril 24, 2021 . Category growth was led by motor oil, batteries and brakes. 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 ownedCarquest 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 sixteen weeks endedApril 23, 2022 was$1.5 billion , or 44.6% of Net sales, and was flat compared with the sixteen weeks endedApril 24, 2021 . During the sixteen weeks endedApril 23, 2022 , improvements in strategic pricing and owned brand expansion were offset by LIFO expense, inflationary costs and unfavorable channel and product mix. As a result of changes in our LIFO reserve, an expense of$81.5 million and$3.1 million were included in the sixteen weeks endedApril 23, 2022 andApril 24, 2021 .
Selling, General and Administrative Expenses
SG&A expenses for the sixteen weeks endedApril 23, 2022 were$1.3 billion , or 38.6% of Net sales, compared with$1.2 billion , or 37.0% of Net sales, for the sixteen weeks endedApril 24, 2021 . This increase in SG&A as a percentage of Net sales was primarily driven by increased inflationary pressures in store labor as well as higher fuel and delivery expenses associated with the recovery of the professional business. Additionally, we incurred higher start-up costs from new store openings when compared with the prior year. These costs were partially offset by a year over year decrease in COVID-19 related expenses and incentive compensation.
Loss on Early Redemptions of Senior Unsecured Notes
During the sixteen weeks endedApril 23, 2022 , we incurred charges related to a make-whole provision and debt issuance costs of$7.0 million and$0.4 million in connection with the early redemption of our senior unsecured notes due 2023.
Provision for Income Taxes
Our Provision for income taxes for the sixteen weeks endedApril 23, 2022 was$43.3 million , compared with$59.8 million for the sixteen weeks endedApril 24, 2021 . Our effective tax rate was 23.7% and 24.3% for the sixteen weeks endedApril 23, 2022 andApril 24, 2021 . The decrease in tax expense resulted from lower Income before provision for income taxes compared with prior year, as well as a benefit relating to the vesting of share-based awards. 14 -------------------------------------------------------------------------------- Table of Contents Reconciliation of Non-GAAP Financial Measures " 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 inthe United States of America ("GAAP"). Non-GAAP financial measures, including Adjusted net income and Adjusted EPS, 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. We have presented these non-GAAP financial measures as we believe that the presentation of our financial results that exclude (1) LIFO impacts; (2) transformation expenses under our strategic business plan; (3) non-cash amortization related to the acquired GPI intangible assets; and (4) other non-recurring adjustments are useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to store closure and consolidation activity in excess of historical levels. These measures assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. The disclosure of these measures allows investors to evaluate our 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 we have determined are not normal, recurring cash operating expenses necessary to operate our business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures. LIFO Impacts - To assist in comparing our current operating results with the operational performance of other companies in our industry, the impact of LIFO on our results of operations is a reconciling item to arrive at non-GAAP financial measures. Transformation Expenses - Costs incurred in connection with our business plan that focuses on specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise, that we do not view to be normal cash operating expenses. These expenses include, but are not limited to the following: •Restructuring costs - Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and team member severance in connection with our voluntary retirement program and continued optimization of our organization.
•Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and supply chain projects in connection with our enterprise integration initiatives.
•Other significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with our enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise. GPI Amortization of Acquired Intangible Assets - As part of our acquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and favorable lease agreements, which we expect to be subject to amortization through 2025. 15 -------------------------------------------------------------------------------- Table of Contents We have included a reconciliation of this information to the most comparable GAAP measures in the following table: Sixteen Weeks
Ended
(in thousands, except per share data) April 23, 2022 April 24, 2021 Net income (GAAP)$ 139,791 $ 185,930 Cost of sales adjustments: LIFO impacts 81,475 3,147 Transformation expenses: Other significant costs 56 2,303 SG&A adjustments: GPI amortization of acquired intangible assets 8,439
8,547
Transformation expenses: Restructuring costs 1,491
20,742
Third-party professional services 6,924 8,034 Other significant costs 1,979 3,883 Other income adjustment (1) 7,408 (36) Provision for income taxes on adjustments (2) (26,943)
(11,655)
Adjusted net income (Non-GAAP)$ 220,620 $
220,895
Diluted earnings per share (GAAP) $ 2.26 $ 2.81 Adjustments, net of tax 1.31 0.53 Adjusted EPS (Non-GAAP) $ 3.57 $ 3.34 (1)During the sixteen weeks endedApril 23, 2022 , we incurred charges related to a make-whole provision and debt issuance costs of$7.0 million and$0.4 million , in connection with the early redemption of our 2023 Notes. (2)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments. 16 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources
Overview
Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under our strategic business plan and other operational priorities, including payment of interest on our long-term debt. Historically, we have used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program, to pay our quarterly cash dividends and for acquisitions; however, in consideration of ongoing uncertainties related to COVID-19 and general macroeconomic conditions, our future uses of cash may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity, change. Typically, we have funded our cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our results of operations, available cash and cash equivalents and available borrowings under our credit facility will be sufficient to fund our obligations for the long term. During the sixteen weeks endedApril 24, 2022 , we issued our 3.50% senior unsecured notes due 2032 (the "2032 Notes"). Refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein for further details. Proceeds from our 2032 Notes were utilized to fund the early redemption of our 2023 Notes and supplement operational and capital expenditures.
Share Repurchase Program
OnFebruary 8, 2022 , our Board of Directors authorized an additional$1 billion towards the existing share repurchase program. This authorization is incremental to the$1.7 billion that was previously authorized by our Board of Directors. 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 sixteen weeks endedApril 23, 2022 , we repurchased 1.1 million shares of our common stock at an aggregate cost of$248.2 million , or an average price of$231.41 per share, in connection with our share repurchase program. During the sixteen weeks endedApril 24, 2021 , we repurchased 1.1 million shares of our common stock at an aggregate cost of$170.4 million , or an average price of$157.84 per share, in connection with our share repurchase program. We had$1.3 billion remaining under our share repurchase program as ofApril 23, 2022 .
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