ADVANCE AUTO PARTS, INC. 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 2, 2021 (filed with theSEC onFebruary 22, 2021 ), which we refer to as our 2020 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Impact of COVID-19 on Our Business
During the COVID-19 pandemic we are prioritizing protecting the health and safety of our Team Members and customers; working to drive financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and working to help ensure that our team will emerge even stronger following the completion of the pandemic. We have continued to take additional measures to help ensure the health and safety of our Team Members and customers, including the continuation of certain labor-related benefits for Team Members, social distancing practices, sanitation practices, the use of health check screenings and offering contactless delivery. Government imposed restrictions and stay at home orders related to the pandemic occurred during our first quarter of 2020. These contributed to negative impacts to demand, primarily during the last six weeks of the sixteen weeks endedApril 18, 2020 . However, as the remainder of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY omnichannel business. This has continued in the first quarter of 2021, driven by external factors such as a second round of government stimulus, consumers' increased use of personal vehicles and other factors that may have contributed to an increase in DIY automotive projects. In addition, we believe the execution of prioritized internal initiatives, including our new marketing campaign and providing a variety of shopping choices for customers with our Advance Same Day® options, as well as improved store execution, all contributed to the improvement in demand. We have also continued to make progress on the development of our key supply chain initiatives, including cross-banner replenishment and our single warehouse management system. Despite the increase in Net sales during the sixteen weeks endedApril 24, 2021 , the COVID-19 pandemic remains an evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our Team Members, customers, suppliers and stockholders.
Management Overview
Net sales increased 23.4% in the first quarter of 2021 as compared to the same
period in the prior year, primarily driven by an increase in comparable store
sales resulting from growth in our DIY omnichannel and Professional business. We
experienced over 20% comparable store sales growth across every region, with the
Midwest, Northeast and Southwest regions having the strongest growth. While all
product categories showed solid performance, batteries were again one of the
strongest.
We generated Diluted earnings per share ("Diluted EPS") of $2.81 during our
first quarter of 2021 compared to $0.63 for the comparable period of 2020. When
adjusted for the non-operational items included in the table below, our Adjusted
diluted earnings per share ("Adjusted EPS") for the sixteen weeks ended
April 24, 2021 and April 18, 2020 were $3.34 and $1.00 .
Sixteen Weeks Ended
April 24, 2021 April 18, 2020
Transformation expenses $ 0.40 $ 0.19
General Parts International, Inc. ("GPI")
amortization of acquired intangible assets 0.10 0.09
LIFO impacts 0.03 0.09
Refer to "Reconciliation of Non-GAAP Financial Measures" for further details of our comparable adjustments and the usefulness of such measures to investors.
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Summary of First Quarter Financial Results
A high-level summary of our financial results for the first quarter of 2021 includes:
•Net sales during the first quarter of 2021 were$3.3 billion , an increase of 23.4% as compared to the first quarter of 2020, primarily driven by an increase in comparable store sales of 24.7%, led by growth in both our DIY omnichannel and Professional business. •Gross profit margin for the first quarter of 2021 was 44.6% of Net sales, an increase of 112 basis points as compared to the first quarter of 2020. This increase was primarily driven by an increase in net sales, as well as due to improvements in material costs, supply chain leverage, channel mix and favorable pricing actions. These improvements were slightly offset by unfavorable product mix and headwinds associated with shrink and defectives. •SG&A expenses for the first quarter of 2021 were 37.0% of Net sales, a favorable impact of 354 basis points as compared to the first quarter of 2020. This favorable impact was driven by fixed cost leverage, primarily related to payroll, as well as lower insurance and claims related expenses attributable to our continued focus on safety. The savings were partially offset by an increase in field bonus, marketing investments and an increase in third-party and service contracts related to our information technology transformational plans.
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 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. •Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the launch of the iconic DieHard® brand. •Progress in the implementation of a more efficient end-to-end supply chain to deliver our broad assortment. •Ongoing 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 in 2021, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets, as well as expansion of our independentCarquest network.
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. Refer to our 2020 Form 10-K, as updated by our subsequent filings with theSEC , and the "Impact of COVID-19 on Our Business" section included within this Form 10-Q for further discussion of these factors. Stores and Branches Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, number and strength of competitors' stores and the cost of real estate. During the sixteen weeks endedApril 24, 2021 , 9 stores and branches were opened and 14 were closed or consolidated, resulting in a total of 4,971 stores and branches as ofApril 24, 2021 , compared to a total of 4,976 stores and branches as ofJanuary 2, 2021 . 14 -------------------------------------------------------------------------------- Table of Contents Results of Operations Sixteen Weeks Ended ($ in millions) April 24, 2021 April 18, 2020 $ Increase/(Decrease) Basis Points Net sales$ 3,330.4 100.0 %$ 2,697.9 100.0 % $ 632.5 - Cost of sales 1,845.4 55.4 1,525.1 56.5 320.3 (112) Gross profit 1,484.9 44.6 1,172.7 43.5 312.2 112 SG&A 1,232.8 37.0 1,094.3 40.6 138.5 (354) Operating income 252.1 7.6 78.4 2.9 173.7 466 Interest expense (11.2) (0.3) (12.2) (0.5) 1.0 12 Other income (expense), net 4.8 0.1 (6.0) (0.2) 10.8
37
Provision for income taxes 59.8 1.8 16.6 0.6 43.2 118 Net income$ 185.9 5.6 % $ 43.6 1.6 % $ 142.3 397
Note: Table amounts may not foot due to rounding.
Net sales for the sixteen weeks endedApril 24, 2021 increased 23.4% as compared to the same period of 2020, primarily driven by an increase in comparable store sales resulting from growth in both our DIY omnichannel and Professional business. We experienced over 20% comparable store sales growth across every region, with the Midwest, Northeast and Southwest regions having the strongest growth. While all product categories showed solid performance, batteries were again one of the strongest. 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 24, 2021 was$1.5 billion , or 44.6%, of Net sales, as compared to$1.2 billion , or 43.5%, of Net sales for the sixteen weeks endedApril 18, 2020 . This increase in Gross profit as a percentage of Net sales was primarily driven by an increase in net sales, as well as due to improvements in material costs, supply chain leverage, channel mix and favorable pricing actions. These improvements were slightly offset by unfavorable product mix and headwinds associated with shrink and defectives. As a result of changes in our LIFO reserve, an expense of$3.1 million and$8.8 million was included in the sixteen weeks endedApril 24, 2021 andApril 18, 2020 .
Selling, general and administrative expenses
SG&A expenses for the sixteen weeks endedApril 24, 2021 were$1.2 billion , or 37.0% of Net sales, as compared to$1.1 billion , or 40.6% of Net sales, for the sixteen weeks endedApril 18, 2020 . This decrease in SG&A expenses as a percentage of Net sales was driven by fixed cost leverage, primarily related to payroll, as well as lower insurance and claims related expenses attributable to our continued focus on safety. The savings were partially offset by an increase in field bonus, marketing investments and an increase in third-party and service contracts related to our information technology transformational plans.
Provision for income taxes
Our Provision for income taxes for the sixteen weeks endedApril 24, 2021 was$59.8 million , as compared to$16.6 million for the sixteen weeks endedApril 18, 2020 . Our effective tax rate was 24.3% and 27.6% for the sixteen weeks endedApril 24, 2021 andApril 18, 2020 . 15
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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 - Beginning the first quarter of 2021, 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 not be 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. 16 -------------------------------------------------------------------------------- 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 24, 2021 April 18, 2020 Net income (GAAP)$ 185,930 $ 43,588 Cost of sales adjustments: Transformation expenses: LIFO impacts (1) 3,147 8,837 Other significant costs 2,303 1,253 SG&A adjustments: GPI amortization of acquired intangible assets 8,547
8,443
Transformation expenses: Restructuring costs 20,742
4,064
Third-party professional services 8,034 2,983 Other significant costs 3,883 9,160 Other income adjustment (36) - Provision for income taxes on adjustments (2) (11,655)
(8,685)
Adjusted net income (Non-GAAP)$ 220,895
Diluted earnings per share (GAAP) $ 2.81 $ 0.63 Adjustments, net of tax 0.53 0.37 Adjusted EPS (Non-GAAP) $ 3.34 $ 1.00 (1)The sixteen weeks endedApril 18, 2020 non-GAAP expenses have been adjusted for the$8.8 million LIFO reserve to be comparable with our 2021 presentation. (2)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments. 17 -------------------------------------------------------------------------------- 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. 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, given uncertainties related to the COVID-19 pandemic, 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 expected results of operations, available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our obligations for the next year.
Share Repurchase Program
OnApril 19, 2021 , our Board of Directors authorized an additional$1.0 billion to our current share repurchase program. This authorization was incremental to the$700.0 million that was authorized previously by our Board of Directors inNovember 2019 . 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. During the sixteen weeks endedApril 18, 2020 , we repurchased 0.2 million shares of our common stock under the share repurchase program at an aggregate cost of$29.0 million , or an average price of$128.36 per share. We had$1.3 billion remaining under our share repurchase program as ofApril 24, 2021 .
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