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 ongoing COVID-19 pandemic, we have continued prioritizing protecting the health and safety of our team members and customers; driving financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and ensuring 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 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 the first half 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 twenty-eight weeks endedJuly 17, 2021 , driven by external factors such as multiple rounds of government stimulus, consumers' increased use of personal vehicles and other factors that may have contributed to an increase in DIY automotive projects. In the second quarter of 2021, we began to see improvement in our professional business as well, partially driven by the macro economic factors mentioned prior and the continued reopening of businesses throughout theU.S. 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 twelve and twenty-eight weeks endedJuly 17, 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 5.9% in the second quarter of 2021 compared with the same period in the prior year, primarily driven by an increase in comparable store sales resulting from growth in our professional business. We experienced positive comparable store sales in every region, with the West, Northeast andFlorida regions having the strongest growth. We generated diluted earnings per share ("diluted EPS") of$2.74 during our second quarter of 2021 compared with$2.74 for the comparable period of 2020. When adjusted for the following non-operational items, our adjusted diluted earnings per share ("Adjusted EPS") for the twelve weeks endedJuly 17, 2021 andJuly 11, 2020 were$3.40 and$2.95 . Twelve Weeks Ended Twenty-Eight Weeks EndedJuly 17, 2021 July
11, 2020
$ 0.13 $ 0.11$ 0.53 $ 0.30General Parts International, Inc. ("GPI") amortization of acquired intangible assets$ 0.08 $ 0.07$ 0.17 $ 0.16 LIFO impacts$ 0.45 $ 0.03$ 0.48 $ 0.12
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 Second Quarter Financial Results
A high-level summary of our financial results for the second quarter of 2021 includes:
•Net sales during the second quarter of 2021 were$2.6 billion , an increase of 5.9% compared with the second quarter of 2020, primarily driven by an increase in comparable store sales of 5.8%, led by a strong recovery in our professional business. •Gross profit margin for the second quarter of 2021 was 44.9% of Net sales, an increase of 104 basis points compared with the second quarter of 2020. This increase was primarily due to improvements in category management initiatives, including strategic sourcing, strategic pricing and owned brand expansion, partially offset by increased LIFO related expenses, inflationary costs within supply chain and unfavorable channel mix. •SG&A expenses for the second quarter of 2021 were 35.6% of Net sales, an increase of 231 basis points compared with the second quarter of 2020. This unfavorable impact was primarily driven by higher incentive compensation within our professional business, wage inflation within store labor, higher delivery costs associated with professional delivery and normalized hours of operation compared to the prior year. These costs were partially offset by a year over year decrease in COVID-19 related expenses.
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.
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 twenty-eight weeks endedJuly 17, 2021 , 18 stores and branches were opened and 31 were closed or consolidated, resulting in a total of 4,963 stores and branches as ofJuly 17, 2021 , compared with a total of 4,976 stores and branches as ofJanuary 2, 2021 . 14 --------------------------------------------------------------------------------
Table of Contents
Results of Operations
Twelve Weeks Ended
($ in millions) July 17, 2021 July 11, 2020 $ Favorable/(Unfavorable) Basis Points
Net sales $ 2,649.4 100.0 % $ 2,501.4 100.0 % $ 148.0 -
Cost of sales 1,460.2 55.1 1,404.7 56.2 (55.5) (104)
Gross profit 1,189.3 44.9 1,096.7 43.8 92.6 104
SG&A 944.3 35.6 833.9 33.3 (110.4) (231)
Operating income 244.9 9.2 262.8 10.5 (17.9) (126)
Interest expense (8.3) (0.3) (13.4) (0.5) 5.1 22
Other income, net 1.1 0.0 3.1 0.1 (2.0) (8)
Provision for income taxes 59.1 2.2 62.6 2.5 3.5 27
Net income $ 178.7 6.7 % $ 190.0 7.6 % $ (11.3) (85)
Twenty-Eight Weeks Ended
($ in millions) July 17, 2021 July 11, 2020 $ Favorable/(Unfavorable) Basis Points
Net sales $ 5,979.8 100.0 % $ 5,199.3 100.0 % $ 780.5 -
Cost of sales 3,305.6 55.3 2,929.8 56.4 (375.8) (107)
Gross profit 2,674.2 44.7 2,269.4 43.6 404.8 107
SG&A 2,177.1 36.4 1,928.2 37.1 (248.9) 68
Operating income 497.1 8.3 341.3 6.6 155.8 175
Interest expense (19.5) (0.3) (25.7) (0.5) 6.2 17
Other income (expense), net 6.0 0.1 (2.9) (0.1) 8.9 16
Provision for income taxes 118.9 2.0 79.2 1.5 (39.7) (47) Net income$ 364.6 6.1 %$ 233.5 4.5 % $ 131.1 161
Note: Table amounts may not foot due to rounding.
Net sales for the twelve weeks endedJuly 17, 2021 increased 5.9% compared with the same period of 2020, primarily driven by an increase in comparable store sales resulting from strong recovery in our Professional business. We experienced positive comparable store sales in every region, with the West, Northeast andFlorida regions having the strongest growth. The Midwest, Central and Southeast regions had the lowest comparable store sales growth. For the twenty-eight weeks endedJuly 17, 2021 , Net sales increased 15.0% compared with the same period of 2020, primarily driven by a 15.6% increase in comparable store sales resulting from an increase in demand in our DIY business and a strong recovery of our professional business compared with prior year, which was significantly impacted by the COVID-19 pandemic. 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. 15 -------------------------------------------------------------------------------- Table of Contents Gross Profit Gross profit for the twelve weeks endedJuly 17, 2021 was$1,189.3 million , or 44.9% of Net sales, compared with$1,096.7 million , or 43.8% of Net sales, for the twelve weeks endedJuly 11, 2020 . This increase in Gross profit as a percentage of Net sales was primarily due to improvements in category management initiatives, including strategic sourcing, strategic pricing and owned brand expansion, partially offset by increased LIFO related expenses, inflationary costs within supply chain and unfavorable channel mix. Gross profit for the twenty-eight weeks endedJuly 17, 2021 was$2,674.2 million , or 44.7% of Net sales, compared with$2,269.4 million , or 43.6% of Net sales for the twenty-eight weeks endedJuly 11, 2020 . This increase in Gross profit as a percentage of Net sales was primarily due to improvements in net pricing, increases in vendor related funding and favorable channel mix, partially offset by increased LIFO related expenses. As a result of changes in our LIFO reserve, an expense of$39.0 million and$3.1 million were included in the twelve weeks endedJuly 17, 2021 andJuly 11, 2020 . An expense of$42.2 million and$11.9 million were included in the twenty-eight weeks endedJuly 17, 2021 andJuly 11, 2020 .
Selling, general and administrative expenses
SG&A expenses for the twelve weeks endedJuly 17, 2021 were$944.3 million , or 35.6% of Net sales, compared with$833.9 million , or 33.3% of Net sales, for the twelve weeks endedJuly 11, 2020 . This increase of 231 basis points compared with the second quarter of 2020 was primarily driven by higher incentive compensation within our professional business, wage inflation within store labor, higher delivery costs associated with professional delivery and normalized hours of operation compared to the prior year. These costs were partially offset by a year over year decrease in COVID-19 related expenses. SG&A for the twenty-eight weeks endedJuly 17, 2021 was$2,177.1 million , or 36.4% of Net sales, compared with$1,928.2 million , or 37.1% of Net sales, for the twenty-eight weeks endedJuly 11, 2020 . This decrease in SG&A as a percentage of Net sales was driven by fixed cost leverage, primarily related to payroll, lower insurance and claims related expenses attributable to our continued focus on safety and a year over year decrease in COVID-19 related expenses. The savings were partially offset by an increase in marketing expenses and third-party service contracts related to our information technology transformational plans.
Provision for income taxes
Our Provision for income taxes for the twelve weeks endedJuly 17, 2021 was$59.1 million , compared with$62.6 million for the twelve weeks endedJuly 11, 2020 . Our effective tax rate was 24.8% for the twelve weeks endedJuly 17, 2021 andJuly 11, 2020 . Our Provision for income taxes for the twenty-eight weeks endedJuly 17, 2021 was$118.9 million , compared with$79.2 million for the twenty-eight weeks endedJuly 11, 2020 . Our effective tax rate was 24.6% and 25.3% for the twenty-eight weeks endedJuly 17, 2021 andJuly 11, 2020 . 16
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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 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. 17 -------------------------------------------------------------------------------- Table of Contents We have included a reconciliation of this information to the most comparable GAAP measures in the following table: Twelve Weeks Ended Twenty-Eight Weeks Ended (in thousands, except per share data) July 17, 2021 July 11, 2020 July 17, 2021 July 11, 2020 Net income (GAAP)$ 178,696 $ 189,960 $ 364,626 $ 233,548 Cost of sales adjustments: Transformation expenses: Other significant costs 165 295 2,468 1,548 LIFO impacts (1) 39,042 3,111 42,189 11,948 SG&A adjustments: GPI amortization of acquired intangible assets 6,358 6,319 14,905 14,762 Transformation expenses: Restructuring costs 3,961 5,577 24,703 9,641 Third-party professional services 5,537 1,281 13,571 4,264 Other significant costs 2,032 2,962 5,914 12,122 Other income adjustment - - (36) - Provision for income taxes on adjustments (2) (14,274) (4,886) (25,928) (13,571)
Adjusted net income (Non-GAAP)
$ 274,262 Diluted earnings per share (GAAP) $ 2.74 $ 2.74$ 5.55 $ 3.37 Adjustments, net of tax 0.66 0.21 1.18 0.58 Adjusted EPS (Non-GAAP) $ 3.40 $ 2.95$ 6.73 $ 3.95
(1)The twelve and twenty-eight weeks ended
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 . 18
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Table of Contents During the twelve weeks endedJuly 17, 2021 , we repurchased 2.0 million shares of our common stock at an aggregate cost of$393.0 million , or an average price of$197.52 per share, in connection with our share repurchase program. During the twelve weeks endedJuly 11, 2020 , we purchased no shares of our common stock under the share repurchase program. During the twenty-eight weeks endedJuly 17, 2021 andJuly 11, 2020 , we repurchased 3.1 million and 0.2 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the twenty-eight weeks endedJuly 17, 2021 andJuly 11, 2020 were at an aggregate cost of$563.4 million and$29.0 million , or an average price of$183.57 and$128.36 per share. We had$868.8 million remaining under our share repurchase program as ofJuly 17, 2021 .
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