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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
________________________________________________
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
☐ 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)
________________________
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Delaware |
54-2049910 |
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(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:
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Title of each class |
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Trading symbol |
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Name of each exchange on which registered |
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Common Stock, $0.0001 par value |
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AAP |
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
☒
No
☐
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐
No
☒
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.
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Large accelerated filer |
☒ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☐ |
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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.
o
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the
registered public accounting firm that prepared or issued its audit
report.
☒
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error to previously issued financial statements.
☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to
§240.10D-1(b).
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
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No
☒
As of the last business day of the registrant’s most recently
completed second fiscal quarter, July 16, 2022, the aggregate
market value of common stock held by non-affiliates of the
registrant was
$11,302,276,702,
based on the last sales price on July 16, 2022, as reported by
the New York Stock Exchange.
As of February 24, 2023, the number of shares of the
registrant’s common stock outstanding was
59,273,781
shares.
Documents Incorporated by Reference:
Portions of the registrant’s definitive proxy statement for its
2023 Annual Meeting of Stockholders, to be held on May 24,
2023, are incorporated by reference into Part III of this Form
10-K.
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,” “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 recovery 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, current information and assumptions related
to future developments. Except as may be required by law, we
undertake 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, including with respect to labor shortages or
disruptions and the impact on 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. Please refer
to “Item
1A.
Risk
Factors”
included in this report and other filings made by us with the
Securities and Exchange Commission (“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.
PART I
Item 1. Business.
Unless the context otherwise requires, “Advance,” “we,” “us,”
“our,” and similar terms refer to Advance Auto Parts, Inc., its
subsidiaries and their respective operations on a consolidated
basis. Our fiscal year consists of 52 or 53 weeks ending on the
Saturday closest to December 31st
of each year.
Our fiscal years ended December 31, 2022 (“2022”) and
January 1, 2022 (“2021”) included fifty-two weeks of
operations. Our fiscal year ended January 2, 2021 (“2020”)
included fifty-three weeks of operations.
Overview
We are a leading automotive aftermarket parts provider in North
America, serving both professional installers (“professional”) and
“do-it-yourself” (“DIY”) customers, as well as independently owned
operators. Our stores and branches offer a broad selection of brand
names, original equipment manufacturer (“OEM”) and owned brand
automotive replacement parts, accessories, batteries and
maintenance items for domestic and imported cars, vans, sport
utility vehicles and light and heavy duty trucks. As of
December 31, 2022, we operated 4,770 total stores and 316
branches primarily under the trade names “Advance Auto Parts,”
“Carquest” and “Worldpac.”
We were founded in 1929 as Advance Stores Company, Incorporated,
and operated as a retailer of general merchandise until the 1980s.
During the 1980s, we began targeting the sale of automotive parts
and accessories to DIY customers. We initiated our professional
delivery program in 1996 and have steadily increased our sales to
professional customers since 2000. We have grown significantly as a
result of strategic acquisitions, new store openings and comparable
store sales growth. Advance Auto Parts, Inc., a Delaware
corporation, was incorporated in 2001 in conjunction with the
acquisition of Discount Auto Parts, Inc. In 2014, we acquired
General Parts International, Inc. (“GPI”), a privately held company
that was a leading distributor and supplier of original equipment
and aftermarket automotive replacement products for professional
markets operating under the Carquest and Worldpac trade
names.
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
2022,
144 stores and branches were opened and 30 were closed or
consolidated, resulting in a total of 5,086 stores and branches as
of December 31, 2022 compared with a total of 4,972 stores and
branches as of January 1, 2022.
Through our integrated operating approach, we serve our
professional and DIY customers through a variety of channels
ranging from traditional “brick and mortar” store locations to
self-service e-commerce sites. We believe we are better able to
meet our customers’ needs by operating under several trade names,
which are as follows:
Advance Auto Parts
— Our 4,440 stores, inclusive of 328 hubs, as of December 31,
2022 are generally located in freestanding buildings with a focus
on both professional and DIY customers. The average size of an
Advance Auto Parts store is approximately 7,800 square feet. These
stores carry a wide variety of products serving aftermarket auto
part needs for both domestic and import vehicles. Our Advance Auto
Parts stores carry a product offering of approximately 23,000 stock
keeping units (“SKUs”), consisting of a custom mix of products
based on each store’s unique market. Supplementing our stores’
inventory on-hand, less common SKUs are also available on a
same-day or next-day basis from any of our larger hub
stores.
Carquest
— Our 330 stores as of December 31, 2022, including 148 stores
in Canada, are generally located in freestanding buildings with a
primary focus on professional customers, but also serve DIY
customers. The average size of a Carquest store is approximately
7,300 square feet. These stores carry a wide variety of products
serving the aftermarket auto part needs for both domestic and
import vehicles with a product offering of approximately 25,000
SKUs. As of December 31, 2022, Carquest also serves 1,311
independently owned stores that operate under the Carquest
name.
Worldpac
— Our 316 branches, of which 135 are branded Autopart International
(“AI”), as of December 31, 2022 principally serve professional
customers utilizing an efficient and sophisticated online ordering
and fulfillment system. Worldpac’s branches are generally larger
than our other store locations, averaging approximately 18,400
square feet. Worldpac’s complete product offering includes
over
285,000
SKUs for domestic and import vehicles and specializes in imported
OEM parts. As part of our transformation efforts through
December 31, 2022, we have converted all AI stores into the
Worldpac technology format.
Store Development
The key factors used 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. As of December 31, 2022, 4,915 stores
and branches were located in 48 U.S. states and two U.S.
territories, and 171 stores and branches were located in nine
Canadian provinces.
We serve our stores and branches primarily from our principal
corporate offices in Raleigh, NC and Roanoke, VA. We also maintain
store support centers in Newark, CA and Norton, MA.
Our Products
The following table shows some of the types of products that we
sell by major category:
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Parts & Batteries |
Accessories & Chemicals |
Engine Maintenance |
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Batteries and battery accessories |
Air conditioning chemicals and accessories |
Air filters |
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Belts and hoses |
Air fresheners |
Fuel and oil additives |
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Brakes and brake pads |
Antifreeze and washer fluid |
Fuel filters |
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Chassis parts |
Electrical wire and fuses |
Grease and lubricants |
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Climate control parts |
Electronics |
Motor oil |
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Clutches and drive shafts |
Floor mats, seat covers and interior accessories |
Oil filters |
|
Engines and engine parts |
Hand and specialty tools |
Part cleaners and treatments |
|
Exhaust systems and parts |
Lighting |
Transmission fluid |
|
Hub assemblies |
Performance parts |
|
|
Ignition components and wire |
Sealants, adhesives and compounds |
|
|
Radiators and cooling parts |
Tire repair accessories |
|
|
Starters and alternators |
Vent shades, mirrors and exterior accessories |
|
|
Steering and alignment parts |
Washes, waxes and cleaning supplies |
|
|
|
Wiper blades |
|
We provide our customers with quality products that are often
offered at a good, better or best recommendation differentiated by
price and quality. We accept customer returns for many new, core
and warranty products. Customer returns have historically been
immaterial.
Our Customers
Our professional customers consist primarily of customers for whom
we deliver products from our store or branch locations to their
places of business, including garages, service stations and auto
dealers. Our professional sales represented approximately 59%, 58%
and 57% of our sales in 2022, 2021 and 2020. We also serve 1,311
independently owned Carquest stores with shipments directly from
our distribution centers. Our DIY customers are primarily served
through our stores, but can also order online to pick up
merchandise at a conveniently located store or have their purchases
shipped directly to them. Except where prohibited, we also provide
a variety of services at our stores free of charge to our
customers, including:
•Battery
and wiper installation;
•Check
engine light scanning;
•Electrical
system testing, including batteries, starters and
alternators;
•Oil
and battery recycling; and
•Loaner
tool programs.
We also serve our customers online at www.AdvanceAutoParts.com or
on our Advance Mobile App. Our professional customers can
conveniently place their orders electronically, including through
MyAdvance.com and Technet, by phone or in-store, and we deliver
products from our stores or branch locations to their places of
business.
Supply Chain
Our supply chain consists of a network of distribution centers,
hubs, stores, and branches that enable us to provide same-day or
next-day availability to our customers. As of December 31,
2022, we operated 50 distribution centers, ranging in size from
approximately 57,000 to 943,000 square feet with total square
footage of approximately 12.6 million, including one distribution
center dedicated to reclamations. In 2022, we closed distribution
centers in Riverside, California and Anchorage,
Alaska.
Merchandise, Marketing and Advertising
In 2022, we purchased merchandise from over 1,400 vendors, with no
single vendor accounting for more than 10% of purchases. Our
purchasing strategy involves negotiating agreements to purchase
merchandise over a specified period of time along with other
provisions, including pricing, rebates, volume and payment
terms.
Our merchandising strategy is to carry a broad selection of high
quality and reputable brand name automotive parts and accessories
that we believe will appeal to our professional customers and also
generate DIY customer traffic. Some of our brands include
Bosch®,
Castrol®,
Dayco®,
Denso®,
Fram®,
Gates®,
Meguiar’sTM,
Mobil 1TM,
Moog®,
Monroe®,
NGK®,
Prestone®,
Purolator®,
Trico®
and Wagner®.
In addition to these branded products, we stock a wide selection of
high-quality owned brand products with a goal of appealing to
value-conscious customers. These categories of merchandise include
chemicals, interior automotive accessories, batteries and parts
under various owned brand names such as Autopart
International®,
Carquest®,
DieHard®,
Driveworks®
and Wearever®.
For the DieHard®
brand, we own the right to sell batteries and to extend the
DieHard®
brand into other automotive and vehicular categories. We granted
the seller an exclusive royalty-free, perpetual license to develop,
market and sell DieHard®
branded products in certain non-automotive categories.
Our marketing and advertising program is designed to drive brand
awareness, consideration by consumers and omnichannel traffic by
position in the aftermarket auto parts category. We strive to
exceed our customers’ expectations end-to-end through a
comprehensive online and in-store pick up experience, extensive
parts assortment, quality brands, experienced parts professionals,
professional programs that are designed to build loyalty with our
customers and our DIY customer loyalty program. Our DIY campaign
was developed around a multi-channel communications plan that
brings together radio, television, digital marketing, social media,
sponsorships, store execution, public relations and Speed Perks
(our customer loyalty program).
Seasonality
Our business is somewhat seasonal in nature, with the highest sales
usually occurring in the spring and summer months. In addition, our
business can be affected by weather conditions. While unusually
heavy precipitation tends to soften sales as elective maintenance
is deferred during such periods, extremely hot or cold weather
tends to enhance sales by causing automotive parts to fail at an
accelerated rate. Our fourth quarter is generally our most volatile
as weather and spending trade-offs typically influence our
professional and DIY sales.
Human Capital Management
We believe our People are Our Best Part, and we have adopted six
Cultural Beliefs to help us foster a culture that fully engages our
team members with our business: Speak Up, Be Accountable, Take
Action, Move Forward, Grow Talent and Champion Inclusion. Our
Cultural Belief of Grow Talent highlights the importance to us of
developing our team members in their careers, and we seek to not
only recruit the best talent, but also retain and promote the best
talent. Through another Cultural Belief, Champion Inclusion, we
seek to fully leverage the ideas and talents of all our team
members in caring for our customers and each other. We encourage
our team members to Speak Up and promote their engagement through a
variety of programs and networks within our
organization.
As of December 31, 2022, we employed approximately 40,000
full-time team members and approximately 27,000 part-time team
members. Our workforce consisted of 82% of our team members
employed in store-level operations, 13% in distribution and 5% in
our corporate offices. As of December 31, 2022, approximately
2% of our team members were represented by labor
unions.
Additional information about our human capital resources can be
found in our Corporate Sustainability and Social Report, which is
available on our website. Our Corporate Sustainability and Social
Report is not, and will not be deemed to be, a part of this Annual
Report on Form 10-K or incorporated by reference into any of our
other filings with the Securities and Exchange Commission
(“SEC”).
Intellectual Property
We own a number of trade names, service marks and trademarks,
including “Advance Auto Parts®,”
“Advance Same Day®,”
“Autopart International®,”
“Carquest®,”
“CARQUEST Technical Institute®,”
“DieHard®,”
“DriverSide®,”
“MotoLogic®,”
“MotoShop®,”
“speedDIAL®,”
“TECH-NET Professional Auto Service®”
and “Worldpac®”
for use in connection with the automotive parts business. In
addition, we own and have registered a number of trademarks for our
owned brands. We believe that these trade names, service marks and
trademarks are important to our merchandising strategy. We do not
know of any infringing uses that would materially affect the use of
these trade names and trademarks and we actively defend and enforce
them.
Competition
We operate in both the professional and DIY markets of the
automotive aftermarket industry. Our primary competitors are (i)
both national and regional chains of automotive parts stores,
including AutoZone, Inc., NAPA, O’Reilly Automotive, Inc., The Pep
Boys-Manny, Moe & Jack and Auto Plus (formerly Uni-Select USA,
Inc.), (ii) internet-based retailers, (iii) discount stores and
mass merchandisers that carry automotive products, (iv) wholesalers
or jobbers stores, including those associated with national parts
distributors or associations, (v) independently owned stores and
(vi) automobile dealers that supply parts. We believe that chains
of automotive parts stores that, like us, have multiple locations
in one or more markets, have competitive advantages in customer
service, marketing, inventory selection, purchasing and
distribution compared with independent retailers and jobbers that
are not part of a chain or associated with other retailers or
jobbers. The principal methods of competition in our business
include brand recognition, customer service, product offerings,
availability, quality, service with speed, price and store
location.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local laws and
governmental regulations relating to the operation of our business,
including those governing collection, transportation and recycling
of automotive lead-acid batteries, used motor oil and other
recyclable items and ownership and operation of real property. We
sell products containing hazardous materials as part of our
business. In addition, our customers may bring automotive lead-acid
batteries, used motor oil or other recyclable items onto our
properties. We currently provide collection and recycling programs
for used lead-acid batteries, used oil and other recyclable items
at a majority of our stores as a service to our customers. Pursuant
to agreements with third-party vendors, lead-acid batteries, used
motor oil and other recyclable items are collected by our team
members, deposited onto pallets or into vendor supplied containers
and stored by us until collected by the third-party vendors for
recycling or proper disposal. The terms of our contracts with
third-party vendors require that they are in compliance with all
applicable laws and regulations. Our third-party vendors who
arrange for the removal, disposal, treatment or other handling of
hazardous or toxic substances may be liable for the costs of
removal or remediation at any affected disposal, treatment or other
site affected by such substances. Based on our experience, we do
not believe that there are any material environmental costs
associated with the current business practice of accepting
lead-acid batteries, used oil and other recyclable items as these
costs are borne by the respective third-party vendors.
We own and lease real property. Under various environmental laws
and regulations, a current or previous owner or operator of real
property may be liable for the cost of removal or remediation of
hazardous or toxic substances on, under or in such property. These
laws often impose joint and several liability and may be imposed
without regard to whether the owner or operator knew of, or was
responsible for, the release of such hazardous or toxic substances.
Other environmental laws and common law principles also could be
used to impose liability for releases of hazardous materials into
the environment or work place, and third parties may seek recovery
from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous
substances. From time to time, we receive notices from the U.S.
Environmental Protection Agency and state environmental authorities
indicating that there may be contamination on properties we own,
lease or operate or may have owned, leased or operated in the past
or on adjacent properties for which we may be responsible.
Compliance with these laws and regulations and clean-up of released
hazardous substances have not had, and do not anticipate to have, a
material impact on our operations.
We are also subject to numerous regulations including those related
to labor and employment, discrimination,
anti-bribery/anti-corruption, product quality and safety standards,
data privacy and taxes. Compliance with any such laws and
regulations has not had a material adverse effect on our operations
to date. For more information, see the following disclosures in
“Part
I. Item 1A.
Risk
Factors”
elsewhere in this report.
Available Information
Our Internet address is www.AdvanceAutoParts.com. Our website and
the information contained therein or linked thereto are not part of
this Annual Report on Form 10-K for 2022. We make available free of
charge through our Investor Relations website, located at
ir.advanceautoparts.com, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy
statements, registration statements and amendments to those reports
filed or furnished pursuant to the Securities Exchange Act of 1934
(“Exchange Act”) as soon as reasonably practicable after we
electronically file such materials with, or furnish them to the
SEC. The SEC maintains a website that contains reports, proxy
statements and other information regarding issuers that file
electronically with the SEC. These materials may be obtained
electronically by accessing the SEC’s website at
www.sec.gov.
Item 1A. Risk Factors.
You should consider carefully the risks and uncertainties described
below together with the other information included in this Annual
Report on Form 10-K, including without limitation our consolidated
financial statements and related notes thereto and
“Item
7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies”.
The occurrence of any of the following risks could materially
adversely affect our business, financial condition, results of
operations, cash flows and future prospects, which could in turn
materially affect the price of our common stock.
Risks Related to Our Operations and Growth Strategy
If we are unable to successfully implement our business strategy,
our business, financial condition, results of operations and cash
flows could be adversely affected.
We have identified several initiatives as part of our business
strategy to increase sales, expand margins, drive accelerated
growth and deliver top quartile results relative total shareholder
return. We are currently making and expect to continue to make
significant investments to pursue our strategic initiatives. If we
are unable to implement our strategic initiatives efficiently and
effectively, our business, financial condition, results of
operations and cash flows could be adversely affected. We could
also be adversely affected if we have not appropriately prioritized
and balanced our initiatives or if we are unable to effectively
manage change throughout our organization. Implementing strategic
initiatives could disrupt or reduce the efficiency of our
operations and may not provide the anticipated benefits, or may
provide them on a delayed schedule or at a higher cost. These risks
increase when significant changes are undertaken.
If we are unable to successfully implement our growth strategy,
keep existing store locations or open new locations in desirable
places on favorable terms, it could adversely affect our business,
financial condition, results of operations and cash
flows.
We intend to continue to expand the markets we serve as part of our
growth strategy, which may include opening new stores or branches,
as well as expansion of our online business. We may also grow our
business through strategic acquisitions. As we expand our market
presence, it becomes more critical that we have consistent and
effective execution across all of our locations and brands. There
is uncertainty about the profitability of newly opened locations,
including whether newly opened stores will harm the profitability
or comparable store sales of existing locations. The newly opened
and existing locations’ profitability will depend on the
competition we face as well as our ability to properly stock,
market and price the products desired by customers in these
markets. The actual number and format of any new locations to be
opened and the success of our growth strategy will depend on a
number of factors, including, among other things:
•the
availability of desirable locations;
•the
negotiation of acceptable lease or purchase terms for new
locations;
•the
availability of financial resources, including access to capital at
cost-effective interest rates;
•our
ability to expand our online offerings and sales; and
•our
ability to manage the expansion and to hire, train and retain
qualified team members.
We compete with other retailers and businesses for suitable
locations for our stores. Local land use and zoning regulations,
environmental regulations and other regulatory requirements may
impact our ability to find suitable locations and influence the
cost of constructing, renovating and operating our stores. In
addition, real estate, zoning, construction and other delays may
adversely affect store openings and renovations and increase our
costs. For example, during 2021 through 2022 we experienced
significant delays associated with our planned opening of new
locations in California, primarily as a result of permitting
challenges, and such delays increased our costs and resulted in
significant lost sales opportunities. Further, changing local
demographics at existing store locations may adversely affect
revenue and profitability levels at those stores. The termination
or expiration of leases at existing store locations may adversely
affect us if the renewal terms of those leases are unacceptable to
us and we are forced to close or relocate stores. If we determine
to close or relocate a store subject to a lease, we may remain
obligated under the applicable lease for the balance of the lease
term. In addition to potentially incurring costs related to lease
obligations, we may also incur employee-related severance or other
facility closure costs for stores that are closed or
relocated.
Omnichannel growth in our business is complex and if we are unable
to successfully maintain a relevant omnichannel experience for our
customers, our sales and results of operations could be adversely
impacted.
Our business has become increasingly omnichannel as we strive to
deliver a seamless shopping experience to our customers through
both online and in-store shopping experiences. Operating an
e-commerce platform is a complex undertaking and exposes us to
risks and difficulties frequently experienced by internet-based
businesses, including risks related to our ability to attract and
retain customers on a cost-effective basis and our ability to
operate, support, expand and develop our internet operations,
website, mobile applications and software and other related
operational systems. Continuing to improve our e-commerce
platform involves substantial investment of capital and resources,
increasing supply chain and distribution capabilities, attracting,
developing and retaining qualified personnel with relevant subject
matter expertise and effectively managing and improving the
customer experience. Omnichannel and e-commerce retail are
competitive and evolving environments. Insufficient, untimely or
inadequately prioritized or ineffectively implemented investments
could significantly impact our profitability and growth and affect
our ability to attract new customers, as well as maintain our
existing ones.
Enhancing the customer experience through omnichannel programs such
as buy-online-pickup-in-store, new or expanded delivery options,
the ability to shop through a mobile application or other similar
programs depends in part on the effectiveness of our inventory
management processes and systems, the effectiveness of our
merchandising strategy and mix, our supply chain and distribution
capabilities, and the timing and effectiveness of our marketing
activities, particularly our promotions. Costs associated with
implementing omnichannel initiatives may be higher than expected,
and the initiatives may not result in increased sales, including
same store sales, customer traffic, customer loyalty or other
anticipated results. Website downtime and other technology
disruptions in our e-commerce platform, including interruptions due
to cyber-related issues or natural disasters, as well as supply and
distribution delays and other related issues may affect the
successful operation of our e-commerce platform. If we are not able
to successfully operate or improve our e-commerce platform and
omnichannel business, we may not be able to provide a relevant
shopping experience or improve customer traffic, sales or margins,
and our reputation, operations, financial condition, results of
operations and cash flows could be materially adversely
affected.
If we are unable to successfully integrate future acquisitions into
our existing operations or implement joint ventures or other
strategic relationships, it could adversely affect our business,
financial condition, results of operations and cash
flows.
We expect to continue to make strategic acquisitions and enter into
strategic relationships as an element of our growth strategy.
Acquisitions, joint ventures and other strategic relationships
involve certain risks that could cause our growth and profitability
to differ from our expectations. The success of these acquisitions
and relationships depends on a number of factors, including but not
limited to:
•our
ability to continue to identify and acquire suitable targets or
strategic partners, or to acquire additional companies or enter
into strategic relationships, at favorable prices and/or with
favorable terms;
•our
ability to obtain the full benefits envisioned by strategic
transactions or relationships;
•the
risk that management’s attention may be distracted;
•our
ability to attract and retain key personnel;
•our
ability to successfully integrate the operations and systems of the
acquired companies, and to achieve the strategic, operational,
financial or other anticipated synergies of the acquisition or
other transaction or relationship;
•the
performance of our strategic partners;
•significant
transaction or integration costs that may not be offset by the
synergies or other benefits achieved in the near term or at
all;
•additional
operational risks, such as those associated with doing business
internationally or expanding operations into new territories,
geographies or channels, that may become applicable to us;
and
•loss
contingencies that we may assume or become subject to, whether
known or unknown, of acquired companies, which could relate to
past, present or future facts, events, circumstances or
occurrences.
If we experience difficulties implementing various information
systems, our ability to conduct our business could be negatively
impacted.
We are dependent on information systems to facilitate the
day-to-day operations of the business and to produce timely,
accurate and reliable information on financial and operational
results. We are in the process of implementing and updating various
information systems. These implementations will require significant
investment of human and financial resources, and we may experience
significant delays, increased costs and other difficulties with
these projects. Any significant disruption or deficiency in the
design and implementation of these information systems could
adversely affect our ability to process orders, ship products, send
invoices and track payments, fulfill contractual obligations or
otherwise operate our business. While we have invested meaningful
resources in planning, project management and training, additional
and significant implementation issues may arise as we integrate
onto these new information systems that may disrupt our operations
and negatively impact our business, financial condition, results of
operations, cash flows and internal controls
structure.
If we are unable to maintain adequate supply chain capacity and
improve supply chain efficiency, we will not be able to expand our
business, which could adversely affect our business, financial
condition, results of operations and cash flows.
Our store inventories are primarily replenished by shipments from
our network of distribution centers, warehouses and hub stores. As
we expand our market presence, we will need to increase efficiency
and maintain adequate capacity of our supply chain network in order
to achieve the business goal of reducing inventory costs while
improving availability and movement of goods throughout our supply
chain to meet consumer product needs and channel preferences. We
continue to streamline and optimize our supply chain network and
systems. If our investments in our supply chain do not provide the
anticipated benefits, we could experience sub-optimal inventory
levels, inventory availability or increases in our costs, which
could adversely affect our business, financial condition, results
of operations and cash flows.
We are dependent on our suppliers to supply us with products that
comply with safety and quality standards at competitive
prices.
We are dependent on our vendors continuing to supply us with
quality products on payment terms that are favorable to us. If our
merchandise offerings do not meet our customers’ expectations
regarding safety, innovation and quality, we could experience lost
sales, increased costs and exposure to legal and reputational risk.
Our suppliers are subject to applicable product safety laws, and we
are dependent on them to ensure that the products we buy comply
with all safety and quality standards. We have also established
standards for product safety and quality and workplace standards
that we require all our suppliers to meet. We do not condone human
trafficking, forced labor, child labor, harassment or abuse of any
kind, and we expect our suppliers to operate within these same
principles. Our ability to find qualified suppliers who can supply
products in a timely and efficient manner that meet our standards
can be challenging. Events that give rise to actual, potential or
perceived product safety concerns could expose us to government
enforcement action and private litigation and result in costly
product recalls and other liabilities. Suppliers may also fail to
invest adequately in design, production or distribution facilities,
may reduce their customer incentives, advertising and promotional
activities or change their pricing policies. To the extent our
suppliers are subject to additional government regulation of their
product design and/or manufacturing processes, the cost of the
merchandise we purchase may rise. In addition, negative customer
perceptions regarding the safety or quality of the products we sell
could cause our customers to seek alternative sources for their
needs, resulting in lost sales. In those circumstances, it may be
difficult and costly for us to regain the confidence of our
customers.
Our reliance on suppliers, including freight carriers and other
third parties in our global supply chain, subjects us to various
risks and uncertainties which could adversely affect our financial
results.
We source the products we sell from a wide variety of domestic and
international suppliers, and place significant reliance upon
various third parties to transport, store and distribute those
products to our distribution centers, stores and customers. Our
financial results depend on us securing acceptable terms with our
suppliers for, among other things, the price of merchandise we
purchase from them, funding for various forms of promotional
programs, payment terms and provisions covering returns and factory
warranties. To varying degrees, our suppliers may be able to
leverage their competitive advantages - for example, their
financial strength, the strength of their brand with customers,
their own stores or online channels or their relationships with
other retailers - to our commercial disadvantage. Generally, our
ability to negotiate favorable terms with our suppliers is more
difficult with suppliers for whom our purchases represent a smaller
proportion of their total revenues, consequently impacting our
profitability from such vendor relationships. If we encounter any
of these issues with our suppliers, our business, financial
condition, results of operations and cash flows could be adversely
impacted.
In addition, our suppliers, including those within our global
supply chain, are impacted by global conditions that in turn may
impact our ability to source merchandise at competitive prices or
timely supply product at levels adequate to meet consumer demand.
For example, the recent surges in consumer demand, shortages of raw
materials and disruptions to the global supply chain resulting from
lack of carrier capacity, labor shortages, port congestion and/or
closures, amongst other factors, have negatively impacted costs and
inventory availability and may continue to have a negative impact
on future results and profitability. As suppliers increase prices
charged to us for products, including transportation and
distribution, as a result of these or other factors, it may
negatively impact our results. If we experience transitions or
changeover with any of our significant vendors, or if they
experience financial difficulties or otherwise are unable to
deliver merchandise to us on a timely basis, or at all, we could
have product shortages in our stores that could adversely affect
customers’ perceptions of us and cause us to lose customers and
sales.
We depend on the services of many qualified executives and other
team members, whom we may not be able to attract, develop and
retain.
Our success, to a significant extent, depends on the continued
engagement, services and experience of our executives and other
team members. We may not be able to retain our current executives
and other key team members or attract and retain additional
qualified executives and team members who may be needed in the
future. Our ability to attract, develop and retain an adequate
number of qualified team members depends on factors such as
employee morale, our reputation, competition from other employers,
availability of qualified personnel, our ability to offer
competitive compensation and benefit packages and our ability to
maintain a safe working environment. For example, during 2021 and
2022, we experienced unusually low availability of workers, which
we believe was primarily attributable to COVID-19-pandemic-related
factors, and in turn has created increased competition in labor
markets. Disruptions and heightened competition may increase our
costs, impact our ability to serve customers and otherwise affect
our business operations. We also believe our future success will
depend in part upon our ability to attract and retain highly
skilled personnel for whom the market is highly competitive,
particularly for individuals with certain types of technical
skills. Failure to recruit or retain qualified employees may impair
our efficiency and effectiveness and our ability to pursue growth
opportunities. Additionally, turnover in executive or other key
positions can disrupt progress in implementing business strategies,
result in a loss of institutional knowledge, cause other team
members to take on substantially more responsibility which results
in greater workload demands and diverting attention away from key
areas of the business, or otherwise negatively impact our growth
prospects or future operating results. In February 2023, our
President and Chief Executive Officer informed our Board of his
intention to retire from his position at the end of the year.
Leadership transitions can be inherently difficult to manage, and
uncertainty regarding future leadership at our organization or
inadequate transition of our Chief Executive Officer may increase
the risk of turnover in executive or other key positions,
negatively impact our ability to recruit and retain talent, cause
disruption to our business or hinder our planning, execution and
future performance.
We operate in a competitive labor market and there is a risk that
market increases in compensation could have an adverse effect on
our profitability. Market or government regulated increases to
employee hourly wage rates, along with our ability to implement
corresponding adjustments within our labor model and wage rates,
could have a significant impact to the profitability of our
business. In addition, approximately 2% of our team members are
represented by unions. If these team members were to engage in
a strike, work stoppage, or other slowdown, or if the terms and
conditions in labor agreements were renegotiated, we could
experience a disruption in our operations and higher ongoing labor
costs. If we fail or are unable to maintain competitive
compensation, our customer service and execution levels could
suffer by reason of a declining quality of our workforce, which
could adversely affect our business, financial condition, results
of operations and cash flows.
Because we are involved in litigation from time to time, and are
subject to numerous laws and governmental regulations, we could
incur substantial judgments, fines, legal fees and other
costs.
We are sometimes the subject of complaints or litigation, which may
include class action litigation from customers, team members or
others for various actions. From time to time, we are involved in
litigation involving claims related to, among other things, breach
of contract, tortious conduct, employment, discrimination, breach
of laws or regulations (including The Americans With Disabilities
Act), payment of wages, exposure to asbestos or potentially
hazardous product, real estate and product defects. The damages
sought against us in some of these litigation proceedings are
substantial. Although we maintain liability insurance for some
litigation claims, if one or more of the claims were to greatly
exceed our insurance coverage limits or if our insurance policies
do not cover a claim, this could have a material adverse effect on
our business, financial condition, results of operations and cash
flows. For instance, we are subject to numerous lawsuits alleging
injury as a result of exposure to asbestos-containing products
(see
Note
13.
Contingencies,
of the Notes to the Consolidated Financial Statements included
herein).
We are subject to numerous federal, state and local laws and
governmental regulations relating to, among other things,
environmental protection, product quality and safety standards,
building and zoning requirements, labor and employment,
discrimination, anti-bribery/anti-corruption, data privacy and
income taxes. Compliance with existing and future laws and
regulations could increase the cost of doing business and adversely
affect our results of operations. If we fail to comply with
existing or future laws or regulations, we may be subject to
governmental or judicial fines or sanctions while incurring
substantial legal fees and costs as well as reputational risk. In
addition, our capital and operating expenses could increase due to
remediation measures that may be required if we are found to be
noncompliant with any existing or future laws or
regulations.
We work diligently to maintain the privacy and security of our
customers, suppliers, team members and business information and the
functioning of our computer systems, website and other online
offerings. In the event of a security breach or other cyber
security incident, we could experience adverse operational effects
or interruptions and/or become subject to legal or regulatory
proceedings, any of which could lead to damage to our reputation in
the marketplace and substantial costs.
The nature of our business requires us to receive, retain and
transmit certain personally identifiable information about our
customers, suppliers and team members, some of which is entrusted
to third-party service providers. While we have taken and
continue to undertake significant steps to protect such personally
identifiable information and other confidential information and to
protect the functioning of our computer systems, website and other
online offerings, a compromise of our data security systems or
those of businesses we interact with could result in information
related to our customers, suppliers, team members or business being
obtained by unauthorized persons or adverse operational effects or
interruptions, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. We develop, maintain and update processes and systems in an
effort to try to prevent this from occurring, but these actions are
costly and require constant, ongoing attention as technologies
change, privacy and information security regulations change, and
efforts to overcome security measures by bad actors continue to
become ever more sophisticated. The cost of complying with stricter
and more complex data privacy (such as the California Consumer
Privacy Act, which grants expanded rights to access and delete
personal information and opt out of certain personal information
sharing), data collection and information security laws and
standards could also be significant to us. Such laws and standards
may also increase our responsibility and liability in relation to
personal data that we process, and we may be required to put in
place additional mechanisms ensuring compliance with privacy laws
and regulations.
Despite our efforts, our security measures may be breached in the
future due to a cyber attack, computer malware viruses,
exploitation of hardware and software vulnerabilities, team member
error, malfeasance, fraudulent inducement (including so-called
“social engineering” attacks and “phishing” scams) or other acts.
While we have experienced threats to our data and systems,
including phishing attacks, to date we are not aware that we have
experienced a material cyber-security breach that has in any manner
hindered our operational capabilities or resulted in a known data
breach. Unauthorized parties may in the future obtain access to our
data or the data of our customers, suppliers or team members or may
otherwise cause damage to or interfere with our equipment, our data
and/or our network including our supply chain. While we maintain
insurance coverage that may, subject to policy terms and
conditions, cover certain aspects of cyber risks, such insurance
coverage may be insufficient to cover losses in any particular
situation. Any breach, damage to or interference with our equipment
or our network, or unauthorized access in the future could result
in significant operational difficulties including legal and
financial exposure and damage to our reputation that could
potentially have an adverse effect on our business. While we also
seek to obtain assurances that others we interact with will protect
confidential information, there is always the risk that the
confidentiality or accessibility of data held or utilized by others
may be compromised. If a compromise of our data security or
function of our computer systems or website were to occur, it could
have a material adverse effect on our operating results and
financial condition and possibly subject us to additional legal,
regulatory and operating costs and damage our reputation in the
marketplace.
Business interruptions may negatively impact our store hours,
operability of our computer systems and the availability and cost
of merchandise, which may adversely impact our sales and
profitability.
Hurricanes, tornadoes, earthquakes or other natural disasters, war
or acts of terrorism, public health issues or pandemics or the
threat of any of these incidents or others, may have a negative
impact on our ability to obtain merchandise to sell in our stores,
result in certain of our stores being closed for an extended period
of time, negatively affect the lives of our customers or team
members, or otherwise negatively impact our operations. Some of our
merchandise is imported from other countries. If imported goods
become difficult or impossible to import into the United States due
to business interruption (including regulation of exporting or
importing), and if we cannot obtain such merchandise from other
sources at similar costs and without an adverse delay, our sales
and profit margins may be negatively affected.
In the event that commercial transportation, including the global
shipping industry, is curtailed or substantially delayed, our
business may be adversely impacted as we may have difficulty
receiving merchandise from our suppliers and/or transporting it to
our stores.
Terrorist attacks, warfare, geopolitical unrest, or uncertainty or
insurrection involving any oil producing country could result in an
abrupt increase in the price of crude oil, gasoline and diesel
fuel. Such price increases would increase the cost of doing
business for us and our suppliers, and also negatively impact our
customers’ disposable income, causing an adverse impact on our
business, sales, profit margins and results of
operations.
We rely extensively on our computer systems and the systems of our
business partners to manage inventory, process transactions and
report results. These systems are subject to damage or interruption
due to various reasons such as power outages, telecommunication
failures, computer viruses, security breaches, malicious cyber
attacks and catastrophic events or occasional system breakdowns
related to ordinary use or wear and tear. If our computer systems
or those of our business partners fail, we may experience loss of
critical data and interruptions or delays in our ability to process
transactions and manage inventory. Any significant business
interruptions may make it difficult or impossible to continue
operations, and any disaster recovery or crisis management plans we
may employ may not suffice in any particular situation to avoid a
significant adverse impact to our business, financial condition and
our results of operations.
Risks Related to Our Industry and the Business
Environment
If overall demand for the products we sell declines, our business,
financial condition, results of operations and cash flows will
suffer. Decreased demand could also negatively impact our stock
price.
Overall demand for products we sell depends on many factors and may
decrease due to any number of reasons, including:
•a
decrease in the total number of vehicles on the road or in the
number of annual miles driven or significant increase in the use of
ride sharing services,
because fewer vehicles means less maintenance and repairs, and
lower vehicle mileage, which decreases the need for maintenance and
repair;
•the
economy,
because as consumers reduce their discretionary spending by
deferring vehicle maintenance or repair, sales may decline and as
new car purchases increase, the number of cars requiring
maintenance and repair may decrease;
•the
weather,
because milder weather conditions may lower the failure rates of
automobile parts while extended periods of rain and winter
precipitation may cause our customers to defer elective maintenance
and repair of their vehicles; additionally, overall climate changes
could create greater variability in weather events, which may
result in greater volatility for our business, or lead to other
significant weather conditions that could impact our
business;
•the
average duration of vehicle manufacturer warranties and average age
of vehicles driven,
because newer cars typically require fewer repairs and will be
repaired by the manufacturers’ dealer networks using dealer parts
pursuant to warranties (which have gradually increased in duration
and/or mileage expiration over the recent past), while vehicles
that are seven years old and older are generally no longer covered
under manufacturers’ warranties and tend to need more maintenance
and repair;
•an
increase in internet-based retailers,
because potentially favorable prices and ease of use of purchasing
parts via other websites on the internet may decrease the need for
customers to visit and purchase their aftermarket parts from our
physical stores and may cause fewer customers to order aftermarket
parts on our website;
•technological
advances, including the rate of adoption of electric vehicles,
hybrid vehicles, ride sharing services, alternative modes of
transportation, autonomously driven vehicles and future legislation
related thereto, and the increase in the quality of vehicles
manufactured,
because vehicles that need less frequent maintenance or have lower
part failure rates will require less frequent repairs using
aftermarket parts and, in the case of electric and hybrid vehicles,
do not require or require less frequent oil changes;
and
•the
refusal of vehicle manufacturers to make available diagnostic,
repair and maintenance information
to
the automotive aftermarket industry that our professional and DIY
customers require to diagnose, repair and maintain their
vehicles,
because this may force consumers to have a majority of diagnostic
work, repairs and maintenance performed by the vehicle
manufacturers’ dealer networks.
We may be adversely affected by legal, regulatory or market
responses regarding technological adaptation in the automotive
industry.
Policy makers in the U.S. may enact legislative or regulatory
proposals that would impose mandatory requirements on greenhouse
gas emissions and encourage more rapid adoption of vehicles that
minimize emissions. Such laws, if enacted, are likely to impact our
business in a number of ways. For example, significant increases in
fuel economy requirements, new federal or state restrictions on
emissions of carbon dioxide or new federal or state incentive
programs that may be imposed on vehicles and automobile fuels could
adversely affect annual miles driven, purchases of used vehicles
that are likely to have a higher need for maintenance and repair,
or the relevancy of the products we sell to new vehicles coming
into production. We
may not be able to accurately predict, prepare for and respond to
new kinds of technological innovations with respect to electric
vehicles and other technologies that minimize emissions.
Additionally, compliance with any new or more stringent laws or
regulations, or stricter interpretations of existing laws, could
require additional expenditures by us or our suppliers. Our
inability to appropriately respond to such changes, adapt our
business to meet evolving demands or innovate to remain competitive
could adversely impact our business, financial condition, results
of operations or cash flows.
If we are unable to compete successfully against other companies in
the automotive aftermarket industry, we may lose customers and
market share and our revenues may decline.
The sale of automotive parts, accessories and maintenance items is
highly competitive and influenced by a number of factors, including
name recognition, location, price, quality, product availability
and customer service. We compete in both the professional and DIY
categories of the automotive aftermarket industry, primarily with:
(i) national and regional chains of automotive parts stores, (ii)
internet-based retailers, (iii) discount stores and mass
merchandisers that carry automotive products, (iv) wholesalers or
jobbers stores, including those associated with national parts
distributors or associations, (v) independently owned stores and
(vi) automobile dealers that supply parts. These competitors and
the level of competition vary by market. Some of our competitors
may possess advantages over us in certain markets we share,
including with respect to the level of marketing activities, number
of stores, store locations, store layouts, operating histories,
name recognition, established customer bases, vendor relationships,
prices and product warranties. Internet-based retailers may possess
cost advantages over us due to lower overhead costs, time and
travel savings and ability to price competitively. In order to
compete favorably, we may need to increase delivery speeds and
incur higher shipping costs or lower prices, which would adversely
impact our financial results. Consolidation among our competitors
could enhance their market share and financial position, provide
them with the ability to achieve better purchasing terms and allow
them to provide more competitive prices to customers for whom we
compete.
In addition, our reputation is critical to our continued success.
Customers are increasingly shopping, reading reviews and comparing
products and prices online. If we fail to maintain high standards
for, or receive negative publicity (whether through social media or
traditional media channels) relating to, product safety and
quality, as well as our integrity and reputation, we could lose
customers to our competition. The products we sell are brands of
our vendors and our owned brands. If the perceived quality or value
of the brands we sell declines in the perception of our customers,
our results of operations could be negatively
affected.
Competition may require us to reduce our prices below our normal
selling prices or increase our promotional spending, which could
lower our revenue and profitability. Competitive disadvantages may
also prevent us from introducing new product lines, require us to
discontinue current product offerings, or change some of our
current operating strategies. If we do not have the resources,
expertise and consistent execution, or otherwise fail to develop
successful strategies, to address these potential competitive
disadvantages, we may lose customers and market share, our revenues
and profit margins may decline and we may be less profitable or
potentially unprofitable.
Our inventory and ability to meet customer expectations may be
adversely impacted by factors out of our control.
For the portion of our inventory manufactured and/or sourced
outside the United States, geopolitical changes, changes in trade
regulations or tariff rates, currency fluctuations, work stoppages,
labor strikes, port delays, civil unrest, natural disasters,
pandemics and other factors beyond our control may increase the
cost of items we purchase or create shortages that could have a
material adverse effect on our sales and profitability. In
addition, unanticipated changes in consumer preferences or any
unforeseen hurdles in meeting our customers’ needs for automotive
products (particularly parts availability) in a timely manner could
undermine our business strategy.
Deterioration of general macroeconomic conditions, including
unemployment, inflation or deflation, consumer debt levels, and/or
high fuel and energy costs, could have a negative impact on our
business, financial condition, results of operations and cash flows
due to impacts on our suppliers, customers and operating
results.
Our business depends on developing and maintaining close
relationships with our suppliers and on our suppliers’ ability and
willingness to sell quality products to us at favorable prices and
terms. Many factors outside our control may harm these
relationships and the ability or willingness of these suppliers to
sell us products on favorable terms. Such factors include a general
decline in the economy and economic conditions and prolonged
recessionary conditions. These events could negatively affect our
suppliers’ operations and make it difficult for them to obtain the
credit lines or loans necessary to finance their operations in the
short-term or long-term and meet our product requirements.
Financial or operational difficulties that some of our suppliers
may face could also increase the cost of the products we purchase
from them or our ability to source products from them. We might not
be able to pass our increased costs onto our customers. If our
suppliers fail to develop new products, we may not be able to meet
the demands of our customers and our results of operations could be
negatively affected.
In addition, the trend towards consolidation among automotive parts
suppliers as well as the off-shoring of manufacturing capacity to
foreign countries may disrupt or end our relationship with certain
suppliers, and could lead to less competition and result in higher
prices. We could also be negatively impacted by suppliers who might
experience bankruptcies, work stoppages, labor strikes, changes in
foreign or domestic trade policies, changes in tariff rates or
other interruptions to or difficulties in the manufacture or supply
of the products we purchase from them.
Deterioration in macroeconomic conditions or an increase in fuel
costs or proposed or additional tariffs may have a negative impact
on our customers’ net worth, financial resources, disposable income
or willingness or ability to pay for accessories, maintenance or
repairs for their vehicles, resulting in lower sales. An increase
in fuel costs may also reduce the overall number of miles driven by
our customers resulting in fewer parts failures and a reduced need
for elective maintenance.
Rising energy prices also directly impact our operating and product
costs, including our store, supply chain, professional delivery,
utility and product acquisition costs.
Risks Related to Our Common Stock and Financial
Condition
The market price of our common stock may be volatile and could
expose us to securities class action litigation.
The stock market and the price of our common stock may be subject
to wide fluctuations based upon general economic and market
conditions. Downturns in the stock market may cause the price of
our common stock to decline. The market price of our stock may also
be affected by our ability to meet analysts’ expectations. Failure
to meet such expectations, even slightly, could have an adverse
effect on the price of our common stock. In the past, following
periods of volatility in the market price of a company’s
securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in
substantial costs and a diversion of our attention and resources,
which could have an adverse effect on our business. For example, in
February 2018, following a significant decline in the price of our
common stock, a putative class action was commenced against us. The
settlement agreement received final approval by the court in June
2022 and was fully paid by our insurance carriers (see
“Note
13.
Contingencies”
of this Annual Report on Form 10-K).
The amount and frequency of our share repurchases and dividend
payments may fluctuate.
The amount, timing and execution of our share repurchase program
may fluctuate based on our priorities for the use of cash for other
purposes such as operational spending, capital spending,
acquisitions or repayment of debt. Changes in operational results,
cash flows, tax laws and our share price could also impact our
share repurchase program and other capital activities. For example,
in August 2022, Congress enacted the Inflation Reduction Act of
2022, which instituted, among other things, a 1% excise tax on
certain corporate share repurchases beginning on January 1, 2023.
Additionally, decisions to return capital to stockholders,
including through our repurchase program or the issuance of
dividends on our common stock, remain subject to determination of
our Board of Directors that any such activity is in the best
interests of our stockholders and is in compliance with all
applicable laws and contractual obligations.
Our level of indebtedness, a downgrade in our credit ratings or a
deterioration in global credit markets could limit the cash flow
available for operations and could adversely affect our ability to
service our debt or obtain additional financing.
Our level of indebtedness could restrict our operations and make it
more difficult for us to satisfy our debt obligations. For example,
our level of indebtedness could, among other things:
•affect
our liquidity by limiting our ability to obtain additional
financing for working capital;
•limit
our ability to obtain financing for capital expenditures and
acquisitions or make any available financing more
costly;
•require
us to dedicate all or a substantial portion of our cash flow to
service our debt, which would reduce funds available for other
business purposes, such as capital expenditures, dividends or
acquisitions;
•limit
our flexibility in planning for or reacting to changes in the
markets in which we compete;
•place
us at a competitive disadvantage relative to our competitors who
may have less indebtedness;
•render
us more vulnerable to general adverse economic and industry
conditions; and
•make
it more difficult for us to satisfy our financial
obligations.
The indentures governing our senior unsecured notes and credit
agreement governing our credit facilities contain financial and
other restrictive covenants. Our failure to comply with those
covenants could result in an event of default which, if not cured
or waived, could result in the acceleration of all of our debt,
including such notes.
In addition, our overall credit rating may be negatively impacted
by deteriorating and uncertain credit markets or other factors that
may or may not be within our control. The interest rates on our
revolving credit facility are linked directly to our credit ratings
and the interest rates on future debt we issue or incur likely
would be affected by our credit ratings in effect at the time such
debt is issued or incurred. Accordingly, any negative impact on our
credit ratings would likely result in higher interest rates and
interest expense on any borrowings under our revolving credit
facility and less favorable terms on our other operating and
financing arrangements, including additional debt we may issue or
incur in the future. In addition, it could reduce the
attractiveness of certain vendor payment programs
whereby third-party institutions finance arrangements to our
vendors based on our credit rating, which could result
in increased working capital requirements.
Conditions and events in the global credit market could have a
material adverse effect on our access to short- and long-term
borrowings to finance our operations and the terms and cost of that
debt. It is possible that one or more of the banks that provide us
with financing under our revolving credit facility may fail to
honor the terms of our existing credit facility or be financially
unable to provide the unused credit as a result of significant
deterioration in such bank’s financial condition. An inability to
obtain sufficient financing at cost-effective rates could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes the location, ownership status and
total square footage of space utilized for distribution centers,
principal corporate offices and retail stores and branches as of
December 31, 2022:
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|
|
|
|
|
|
|
|
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|
Square Footage
(in thousands)
|
|
|
Location |
|
Leased |
|
Owned |
|
Distribution centers |
|
50 locations in 31 U.S. states and four Canadian
provinces
|
|
7,951 |
|
|
4,648 |
|
|
Principal corporate offices: |
|
|
|
|
|
|
|
Raleigh, NC |
|
Raleigh, NC |
|
245 |
|
|
— |
|
|
Roanoke, VA |
|
Roanoke, VA |
|
265 |
|
|
— |
|
|
Stores and branches |
|
4,915 stores and branches in 48 U.S. states and two U.S.
territories and 171 stores and branches in nine Canadian
provinces
|
|
36,302 |
|
|
6,289 |
|
Item 3. Legal Proceedings.
Refer to discussion in
Note
13.
Contingencies,
of the Notes to the Consolidated Financial Statements included
herein for information relating to legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock is listed on the New York Stock Exchange under the
symbol “AAP.”
As of February 24, 2023, there were
375
holders of record of our common stock, which does not include the
number of beneficial owners whose shares were
represented
by security position listings.
The
following table sets forth information with respect to repurchases
of our common stock for the fourth quarter ended December 31,
2022:
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|
|
|
|
|
|
|
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|
|
|
|
|
|
Period |
|
Total Number of Shares Purchased
(1)
|
|
Average Price Paid per Share
(1)
|
|
Total Number of Shares Purchased as Part of Publicly Announced
Programs |
|
Maximum Dollar Value that May Yet Be Purchased Under the Programs
(in
thousands)
(2)
|
|
October 9, 2022 to November 5, 2022 |
|
441,926 |
|
|
$ |
169.71 |
|
|
441,762 |
|
|
$ |
947,339 |
|
|
November 6, 2022 to December 3, 2022 |
|
5,741 |
|
|
$ |
151.79 |
|
|
— |
|
|
$ |
947,339 |
|
|
December 4, 2022 to December 31, 2022 |
|
2 |
|
|
$ |
140.90 |
|
|
— |
|
|
$ |
947,339 |
|
|
Total |
|
447,669 |
|
|
$ |
169.54 |
|
|
441,762 |
|
|
|
(1)The
aggregate cost of repurchasing shares in connection with the net
settlement of shares issued as a result of the vesting of
restricted stock units was $0.9 million, or an average price of
$151.78 per share, during the twelve weeks ended December 31,
2022.
(2)On
February 8, 2022, our Board of Directors authorized an additional
$1 billion to the existing share repurchase program. This
authorization is incremental to the $1.7 billion that was
previously authorized by our Board of Directors.
Stock Price Performance
The following graph shows a comparison of the cumulative total
return on our common stock, the Standard & Poor’s (“S&P”)
500 Index and the S&P’s Retail Index. The graph assumes that
the value of an investment in our common stock and in each such
index was $100 on December 30, 2017, and that any dividends have
been reinvested. The comparison in the graph below is based solely
on historical data and is not intended to forecast the possible
future performance of our common stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE AUTO PARTS, INC., S&P 500 INDEX
AND S&P RETAIL INDEX
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|
|
Company/Index |
|
December 30, 2017 |
|
December 29, 2018 |
|
December 28, 2019 |
|
January 2, 2021 |
|
January 1, 2022 |
|
December 31, 2022 |
|
Advance Auto Parts |
|
$ |
100.00 |
|
|
$ |
151.06 |
|
|
$ |
154.32 |
|
|
$ |
155.68 |
|
|
$ |
243.72 |
|
|
$ |
159.22 |
|
|
S&P 500 Index |
|
$ |
100.00 |
|
|
$ |
94.80 |
|
|
$ |
126.06 |
|
|
$ |
148.85 |
|
|
$ |
191.58 |
|
|
$ |
156.88 |
|
|
S&P Retail Index |
|
$ |
100.00 |
|
|
$ |
112.04 |
|
|
$ |
144.71 |
|
|
$ |
210.44 |
|
|
$ |
251.08 |
|
|
$ |
165.00 |
|
Item 6. [Reserved]
Item 7. 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 our
consolidated historical financial statements and the notes to those
statements that appear elsewhere in this report. Our discussion
contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the
timing of events could differ materially from those anticipated in
these forward-looking statements as a result of a number of
factors, including those set forth under the section titled
“Part
1. Item 1A. Risk Factors”
elsewhere in this report. The discussion of our financial condition
and changes in our results of operations, liquidity and capital
resources for the fiscal year ended January 1, 2022 (“2021”)
compared with the fiscal year ended January 2, 2021 (“2020”) has
been omitted from this Form 10-K, but are included in
“Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations”
of our Form 10-K for 2021, filed with the Securities and Exchange
Commission (“SEC”) on February 15, 2022.
Amounts are presented in thousands, except per share data, unless
otherwise stated.
Management Overview
Net sales increased 1.4% during the fifty-two weeks ended December
31, 2022 (“2022”) compared with 2021, driven by improvements in
strategic pricing and growth in both new store openings and sales
to professional customers, partially offset by declines in DIY
customer sales and units sold. Category growth was led by
batteries, fluids and chemicals and motor oil.
We generated Diluted earnings per share (“Diluted EPS”) of $8.27
during 2022 compared with $9.55 in 2021. When adjusted for the
following non-operational items, our Adjusted diluted earnings per
share (“Adjusted EPS”) in 2022 was $13.04 compared with $12.02 in
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
Last-in, first-out (“LIFO”) impacts
|
$ |
3.85 |
|
|
$ |
1.42 |
|
|
Transformation expenses |
$ |
0.49 |
|
|
$ |
0.73 |
|
|
General Parts International, Inc. (“GPI”) amortization of acquired
intangible assets |
$ |
0.34 |
|
|
$ |
0.32 |
|
|
Other adjustments |
$ |
0.09 |
|
|
$ |
— |
|
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 U.S.
GAAP.
A high-level summary of our financial results and other highlights
from 2022 includes:
•Net
sales during 2022 were $11.2 billion, an increase of 1.4% compared
with 2021, driven by improvements in strategic pricing and growth
in both new stores openings and sales to our professional
customers, partially offset by declines in DIY customer sales and
units sold.
•Gross
profit margin for 2022 was 44.5% of Net sales, a decrease of 33
basis points compared with 2021. This decrease was primarily due to
inflationary product costs, including the impact of LIFO related
expenses, and unfavorable channel mix, primarily offset by
improvements in strategic pricing and product mix.
•Operating
income for 2022 was $714.2 million, a decrease of $124.6 million
from 2021. As a percentage of Net sales, operating income was 6.4%,
a decrease of 122 basis points compared with 2021. The increase in
Selling, general and administrative (“SG&A”) costs was
primarily driven by increases in labor-related inflation and
transportation and fuel costs, partially offset by decreases in
incentive compensation and COVID-19 related expenses.
•Cash
flow from operations was $722.2 million during 2022, a decrease of
35.1% compared with 2021, primarily due to a decrease in Net
income, as well as a decrease related to working capital primarily
driven by an increase in cash used by Accrued Expenses and
Inventories, partially offset by an increase in cash provided by
Receivables, net.
Business and Risk 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
refinement 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 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 end-to-end supply chain
to deliver our broad assortment of inventory.
•Actively
pursuing new store openings in 2023, including through lease
acquisition opportunities as available and appropriate, in existing
markets and new markets.
•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.
In addition to the “Business
and Risk Update”
section included within Management’s Discussion and Analysis of
Financial Condition and Results of Operations, these factors
include, but are not limited to:
•Inflationary
pressures, including product costs, logistics and
labor
•Global
supply chain disruptions
•Fuel
costs
•Unemployment
rates
•Consumer
confidence and purchasing power
•Competition
•Changes
in new car sales
•Miles
driven
•Vehicle
manufacturer warranties
•Average
age of vehicles in operation
•Economic
and political uncertainty
•Deferral
of elective automotive maintenance and improvements in new car
quality
While these factors tend to fluctuate, we remain confident in the
long-term growth prospects for the automotive parts
industry.
Results of Operations
The following table sets forth certain of our operating data
expressed as a percentage of net sales for the periods
indicated.
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Year Ended |
|
2022 vs. 2021
$ Change |
|
Basis Points |
|
2021 vs. 2020
$ Change |
|
Basis Points |
|
(in millions) |
December 31, 2022 |
|
January 1, 2022 |
|
January 2, 2021 |
|
|
|
|
|
Net sales |
$ |
11,154.7 |
|
100.0 |
% |
|
$ |
10,998.0 |
|
100.0 |
% |
|
$ |
10,106.3 |
|
100.0 |
% |
|
$ |
156.7 |
|
|
— |
|
|
$ |
891.7 |
|
|
— |
|
|
Cost of sales
|
6,192.6 |
|
55.5 |
|
|
6,069.2 |
|
55.2 |
|
|
5,624.7 |
|
55.7 |
|
|
123.4 |
|
|
33 |
|
|
444.5 |
|
|
(47) |
|
|
Gross profit |
4,962.1 |
|
44.5 |
|
|
4,928.7 |
|
44.8 |
|
|
4,481.6 |
|
44.3 |
|
|
33.3 |
|
|
(33) |
|
|
447.2 |
|
|
47 |
|
|
SG&A |
4,247.9 |
|
38.1 |
|
|
4,090.0 |
|
37.2 |
|
|
3,731.7 |
|
36.9 |
|
|
157.9 |
|
|
89 |
|
|
358.3 |
|
|
26 |
|
|
Operating income |
714.2 |
|
6.4 |
|
|
838.7 |
|
7.6 |
|
|
749.9 |
|
7.4 |
|
|
(124.6) |
|
|
(122) |
|
|
88.9 |
|
|
21 |
|
|
Interest expense |
(51.1) |
|
(0.5) |
|
|
(37.8) |
|
(0.3) |
|
|
(46.9) |
|
(0.5) |
|
|
(13.3) |
|
|
(11) |
|
|
9.1 |
|
|
12 |
|
|
Loss on debt extinguishment |
(7.4) |
|
(0.1) |
|
|
— |
|
— |
|
|
(48.0) |
|
(0.5) |
|
|
(7.4) |
|
|
(7) |
|
|
48.0 |
|
|
48 |
|
|
Other (expense) income, net |
(7.0) |
|
(0.1) |
|
|
5.0 |
|
0.0 |
|
|
(4.0) |
|
0.0 |
|
|
(12.0) |
|
|
(11) |
|
|
9.0 |
|
|
8 |
|
|
Provision for income taxes |
(146.8) |
|
(1.3) |
|
|
(189.8) |
|
(1.7) |
|
|
(158.0) |
|
(1.6) |
|
|
43.0 |
|
|
41 |
|
|
(31.8) |
|
|
(16) |
|
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Net income |
$ |
501.9 |
|
4.5 |
% |
|
$ |
616.1 |
|
5.6 |
% |
|
$ |
493.0 |
|
4.9 |
% |
|
$ |
(114.3) |
|
|
(110) |
|
|
$ |
123.2 |
|
|
72 |
|
Note 1: Table amounts may not foot due to rounding.
Note 2: Fiscal years 2022 and 2021 included 52 weeks. Fiscal year
2020 included 53 weeks.
Net Sales
Net sales for 2022 were $11.2 billion, an increase of $156.7
million, or 1.4%, compared with 2021, and was primarily driven by
an improvement in strategic pricing and growth in both new store
openings and professional sales, partially offset by declines in
DIY customer sales and units sold. Comparable store sales increased
0.3% led primarily by the professional business. Category growth
was led by batteries, fluids and chemicals and motor
oil.
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. Comparable sales is
intended only as supplemental information and is not a substitute
for Net sales presented in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”).
Gross Profit
Gross profit in 2022 was $5.0 billion, or 44.5% of Net sales,
compared with $4.9 billion, or 44.8% of Net sales, in 2021, a
decrease of 33 basis points. Gross profit as a percentage of Net
sales was negatively impacted by inflationary product costs,
including an increase in LIFO related expenses, of $189.5 million
and unfavorable channel mix, primarily offset by improvements in
strategic pricing and product mix.
Selling, General and Administrative Expenses
SG&A for 2022 was $4.2 billion, or 38.1% of Net sales, compared
with $4.1 billion, or 37.2% of Net sales, for 2021, an increase of
89 basis points. This increase as a percentage of Net sales was
primarily driven by increases in labor-related inflation and
transportation and fuel costs partially offset by decreases in
incentive compensation and COVID-19 related expenses.
Interest Expense
Interest expense for 2022 was $51.1 million, an increase of $13.3
million compared with 2021. This increase was primarily due to
incremental borrowings on our unsecured revolving credit facility,
partially offset by a 100-basis-point rate differential between our
issued versus retired senior unsecured notes in 2022. Refer
to
Note
6.
Long-term
Debt and Fair Value of Financial Instruments
of the Notes to the Consolidated Financial Statements included
herein for further details.
Loss on Early Redemptions of Senior Unsecured Notes
During the fifty-two weeks ended December 31, 2022, we
incurred charges related to a make-whole provision and debt
issuance costs of $7.0 million and $0.4 million related
to the early redemption of our 4.50% senior unsecured notes due
December 1, 2023 ("2023 Notes"). Refer to
Note
6.
Long-term
Debt and Fair Value of Financial Instruments
of the Notes to the Consolidated Financial Statements included
herein for further details.
Provision for Income Taxes
Our Provision for income taxes for 2022 was $146.8 million compared
with $189.8 million for 2021, a decrease of $43.0 million primarily
due to a decrease in taxable income. Our effective tax rate was
22.6% for 2022 and 23.6% for 2021. In 2022, the rate decreased
compared with prior year primarily due to a tax benefit resulting
from the expiration of statute of limitations for certain tax years
in multiple states as well as enhanced utilization of tax credits
in the current year.
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
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 nonrecurring
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 will 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 are subject to amortization
through 2025.
We have included a reconciliation of this information to the most
comparable GAAP measures in the following table:
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Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
Net income (GAAP) |
$ |
501,872 |
|
|
$ |
616,108 |
|
|
Cost of sales adjustments: |
|
|
|
|
LIFO impacts |
311,766 |
|
|
122,303 |
|
|
Transformation expenses: |
|
|
|
|
|
|
|
|
Other significant costs |
2,572 |
|
|
2,608 |
|
|
|
|
|
|
SG&A adjustments: |
|
|
|
|
GPI amortization of acquired intangible assets |
27,407 |
|
|
27,587 |
|
|
Transformation expenses: |
|
|
|
|
Restructuring costs |
4,657 |
|
|
27,307 |
|
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Third-party professional services |
27,074 |
|
|
24,099 |
|
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Other significant costs |
5,351 |
|
|
8,796 |
|
|
Other income adjustment
(1)
|
7,408 |
|
|
— |
|
|
Provision for income taxes on adjustments
(2)
|
(96,559) |
|
|
(53,175) |
|
|
|
|
|
|
Adjusted net income (Non-GAAP) |
$ |
791,548 |
|
|
$ |
775,633 |
|
|
|
|
|
|
|
Diluted earnings per share (GAAP) |
$ |
8.27 |
|
|
$ |
9.55 |
|
|
Adjustments, net of tax |
4.77 |
|
|
2.47 |
|
|
Adjusted diluted earnings per share (Non-GAAP) |
$ |
13.04 |
|
|
$ |
12.02 |
|
(1)During
2022, we incurred charges relating to a make-whole provision and
debt issuance cost of $7.0 million and $0.4 million
resulting from 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.
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 also used available funds to
repay borrowings under our credit facility, to periodically
repurchase shares of our common stock under our share repurchase
program, to pay our quarterly cash dividend and for acquisitions;
however, depending on the priorities of our business and in
consideration of ongoing uncertainties related to general global
macroeconomic conditions, our future uses of cash may differ,
including with respect to the weight we place on the preservation
of cash and liquidity, degree of investment in our business and
other capital allocation factors. Given macroeconomic uncertainties
and our planned focus on improved working capital, we expect to
temporarily pause share repurchases in 2023.
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. We also believe such funds, cash and available
borrowings, together with our ability to generate cash through
credit facilities and notes offerings as needed, will be sufficient
to fund our obligations long-term. Cash requirements for
obligations next year and beyond are discussed in the
“Contractual
and Off Balance Sheet Obligations”
section below.
On March 4, 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 Repurchases
In August of 2019, our Board of Directors approved a share
repurchase program. Under the program, we may periodically
repurchase shares of our common stock at market prices through open
market purchases effected through a broker dealer and in privately
negotiated transactions. The Board of Directors may increase or
otherwise modify, renew, suspend or terminate the share repurchase
program without prior notice. On February 8, 2022, our Board of
Directors authorized an additional $1.0 billion toward our share
repurchase program. Previously, in April 2021 and November 2019,
our Board of Directors authorized $1.0 billion and $700.0 million
for our share repurchase program.
During 2022, we repurchased 3.0 million shares of our common stock
at an aggregate cost of $598.2 million, or an average price of
$201.88 per share, in connection with our share repurchase program.
During 2021, we repurchased 4.6 million shares of our common stock
at an aggregate cost of $886.7 million, or an average price of
$192.92 per share, under our share repurchase program.
Capital Expenditures
Our primary capital requirements
have been the funding of our investments in information technology
and supply chain, e-commerce and maintenance of existing stores and
branches. We lease approximately 84% of our stores and
branches.
Our capital expenditures were $424.1 million in 2022, an increase
of $134.4 million from 2021, and were primarily related to
investments in new store openings, inclusive of leasehold
improvements, as well as investments in information technology and
supply chain.
Our future capital requirements will depend in large part on the
timing or number of the investments we make in information
technology and supply chain network initiatives and existing stores
and new store development (leased and owned locations) within a
given year. In 2023, we anticipate that our capital expenditures
related to such investments will range from $300 million to $350
million but may vary with business conditions.
Analysis of Cash Flows
The following table summarizes our cash flows from operating,
investing and financing activities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
January 2, 2021 |
|
Cash flows provided by operating activities |
$ |
722,222 |
|
|
$ |
1,112,262 |
|
|
$ |
969,688 |
|
|
Cash flows used in investing activities |
(424,448) |
|
|
(287,314) |
|
|
(266,897) |
|
|
Cash flows used in financing activities |
(620,704) |
|
|
(1,064,112) |
|
|
(285,997) |
|
|
Effect of exchange rate changes on cash |
(9,216) |
|
|
5,600 |
|
|
(467) |
|
|
Net (decrease) increase in cash and cash equivalents |
$ |
(332,146) |
|
|
$ |
(233,564) |
|
|
$ |
416,327 |
|
Operating Activities
In 2022, Net cash provided by operating activities decreased $390.0
million to $722.2 million. The net decrease in cash flows provided
by operating activities compared with the prior year was primarily
driven by lower Net income, higher incentive compensation expense
payout and a decrease in overall working capital. The decrease in
working capital was primarily driven by an increase in cash used by
Accrued expenses and Inventories, partially offset by an increase
in cash provided by Receivables, net. Refer to
“Results of
Operations”
for further details on our results.
Investing Activities
In 2022, Net cash used in investing activities increased $137.1
million to $424.4 million compared with 2021. Cash used in
investing activities for 2022 consisted primarily of purchases of
property and equipment attributable to investments in new store
openings, including leasehold improvements, as well as information
technology and supply chain.
Financing Activities
In 2022, Net cash used in financing activities decreased by $443.4
million to $620.7 million compared with 2021. The net decrease in
cash used in financing activities was attributable to net proceeds
of $348.6 million received from the issuance of the 2032 Notes, a
decrease in share repurchases of our common stock of $287.7 million
and proceeds from net borrowings under our unsecured revolving
credit facility of $185.0 million during the fifty-two weeks ended
December 31, 2022. The decrease was partially offset by a net
payment of $201.1 million for the early redemption of our 2023
Notes and an increase in dividends paid of $175.3 million during
2022 compared with 2021.
Our Board of Directors has declared a quarterly cash dividend since
2006. Any payments of dividends in the future will be at the
discretion of our Board of Directors and will depend upon our
results of operations, cash flows, capital requirements and other
factors deemed relevant by our Board of Directors.
Long-Term Debt
On March 4, 2022, we issued $350.0 million aggregate principal
amount of our 2032 Notes. The 2032 Notes were issued at 99.61% of
the principal amount of $350.0 million, are due March 15, 2032
and bear interest at 3.50% per year payable semi-annually in
arrears on March 15 and September 15 of each year.
On April 3, 2022, we redeemed the remaining $193.2 million
principal amount of our outstanding 2023 Notes. In connection with
this early redemption, we incurred charges related to the
make-whole provision and debt issuance costs of $7.0 million
and $0.4 million.
As of February 28, 2023, we had a credit rating from S&P
of BBB- and from Moody’s Investor Service of Baa2. The current
outlooks by S&P and Moody’s are both stable. The current
pricing grid used to determine our borrowing rate under our
revolving credit facility is based on our credit ratings. If these
credit ratings decline, our interest rate on outstanding balances
may increase and our access to additional financing on favorable
terms may be limited. In addition, it could reduce the
attractiveness of certain vendor payment programs
whereby third-party institutions finance arrangements to our
vendors based on our credit rating, which could result
in increased working capital requirements. Conversely, if
these credit ratings improve, our interest rate may
decrease.
With respect to all senior unsecured notes for which Advance Auto
Parts, Inc. (“Issuer”) is an issuer or provides a full and
unconditional guarantee, Advance Stores, a wholly-owned subsidiary
of the Issuer, serves as the guarantor (“Guarantor Subsidiary”).
The subsidiary guarantees related to our senior unsecured notes are
full and unconditional and joint and several, and there are no
restrictions on the ability of the Issuer to obtain funds from its
Guarantor Subsidiary. Our captive insurance subsidiary, an
insignificant wholly-owned subsidiary of the Issuer, does not serve
as guarantor of our senior unsecured notes.
Contractual and Off Balance Sheet Obligations
We enter into operating leases for certain store locations,
distribution centers, office spaces, equipment and vehicles. Our
property leases generally contain renewal and escalation clauses
and other concessions. These provisions are considered in our
calculation of our minimum lease payments that are recognized as
expense on a straight-line basis over the applicable lease term.
Any lease payments that are based upon an existing index or rate
are included in our minimum lease payment calculations. As of
December 31, 2022, our operating lease obligations were $2.69
billion. As of December 31, 2022, our long-term debt,
consisting of senior unsecured notes with varying maturities
through 2032, was $1.20 billion and our credit revolver outstanding
balance was $185.0 million. Future interest payable related to
long-term debt was $293.3 million as of December 31, 2022. As
part of our normal operations, we enter into purchase commitments
primarily for the purchase of goods or services that are
enforceable, legally binding and specify all significant terms,
including fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of
the transaction. As of December 31, 2022, our purchase
commitments were $121.0 million.
On February 27, 2023, we entered into Amendment No. 1 (the
“Amendment”) 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”). The Amendment extends the maturity date of the 2021
Credit Agreement by one year from November 9, 2026, to November 9,
2027. The Amendment also replaces an adjusted LIBOR benchmark rate
with a Term Secured Overnight Financing Rate (“Term SOFR”)
benchmark rate, as adjusted by an increase of ten basis points,
plus the applicable margin under 2021 Credit Agreement. The
Amendment made no other material changes to the terms of the 2021
Credit Agreement. The foregoing description of the Amendment does
not purport to be complete and is qualified in its entirety by the
full text of the Amendment, which is attached hereto as
Exhibit 10.29
and is incorporated by reference herein. Subsequent to December 31,
2022 and through the date of this filing, we had additional net
borrowings on our revolving credit facility of $469
million.
Critical Accounting Policies
Our financial statements have been prepared in accordance with
GAAP. Our discussion and analysis of the financial condition and
results of operations are based on these financial statements. The
preparation of these financial statements requires the application
of accounting policies in addition to certain estimates and
judgments by our management. Our estimates and judgments are based
on currently available information, historical results and other
assumptions we believe are reasonable. Actual results could differ
materially from these estimates.
The preparation of our financial statements included the following
significant estimates and exercise of judgment.
Vendor Incentives
We receive incentives in the form of reductions to amounts owed
and/or payments from vendors related to volume rebates and other
promotional considerations. Many of these incentives are under
agreements with terms in excess of one year, while others are
negotiated on an annual basis or less. Advertising allowances
provided as a reimbursement of specific, incremental and
identifiable costs incurred to promote a vendor’s products are
included as an offset to SG&A when the cost is incurred. Volume
rebates and vendor promotional allowances that do not meet the
requirements for offsetting in SG&A and that are earned based
on inventory purchases are initially recorded as a reduction to
inventory. These deferred amounts are recorded as a reduction to
Cost of sales as the inventory is sold.
Vendor promotional allowances provided as a reimbursement of
specific, incremental and identifiable costs incurred to promote a
vendor’s products are included as an offset to SG&A when the
cost is incurred if the fair value of that benefit can be
reasonably estimated. Certain of our vendor agreements contain
purchase volume incentives that provide for increased funding when
graduated purchase volumes are met. Amounts accrued throughout the
year could be impacted if actual purchase volumes differ from
projected annual purchase volumes. Periodic assessments of the
accruals are performed to determine the appropriateness of the
estimate and are adjusted accordingly.
Amounts received or receivable from vendors that are not yet earned
are reflected initially as a reduction to inventory, which
subsequently is recorded to Cost of sales. Our estimate of the
portion of deferred revenue that will be realized within one year
of the balance sheet date is included in Other current liabilities.
Earned amounts that are receivable from vendors are included in
Receivables, net, except for that portion expected to be received
after one year, which is included in Other assets, net. We
regularly review the receivables from vendors to ensure they are
able to meet their obligations. Historically, the change in our
reserve for receivables related to vendor funding has not been
significant.
Self-Insurance Reserves
Our self-insurance reserves consist of the estimated exposure for
claims filed, claims incurred but not yet reported and projected
future claims, and are established using actuarial methods followed
in the insurance industry and our historical claims experience.
Specific factors include, but are not limited to, assumptions about
health care costs, the severity of accidents and the incidence of
illness and the average size of claims. Generally, claims for
automobile and general liability and workers’ compensation take
several years to settle. We classify the portion of our
self-insurance reserves that is not expected to be settled within
one year in Other long-term liabilities.
While we do not expect the amounts ultimately paid to differ
significantly from our estimates, our self-insurance reserves and
corresponding Cost of sales and SG&A could be affected if
future claim experience differs significantly from historical
trends and actuarial assumptions. A 10% change in our
self-insurance liabilities at December 31, 2022 would result
in a change in expense of approximately $14.5 million for
2022.
New Accounting Pronouncements
For a description of recently adopted and issued accounting
standards, including the expected dates of adoption and estimated
effects, if any, on our consolidated financial statements, see
“Recently
Issued Accounting Pronouncements”
in
Note
2.
Significant
Accounting Policies,
of the Notes to the Consolidated Financial Statements included
herein.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risks.
We are subject to interest rate risk to the extent we borrow
against our revolving credit facility as it is based, at our
option, on adjusted Term SOFR, plus a margin, or an alternate base
rate, plus a margin. As of December 31, 2022, we had $185.0
million borrowings outstanding under our revolving credit facility.
As of January 1, 2022, we had no borrowings outstanding under
our revolving credit facility.
Our financial assets that are exposed to
credit risk consist primarily of trade accounts
receivable and vendor receivables. We are exposed to normal
credit risk from customers. Our concentration of credit
risk is limited because our customer base consists of a large
number of customers with relatively small balances, which allows
the credit risk to be spread across a broad base. We have not
historically had significant credit losses.
We are exposed to foreign currency exchange rate fluctuations for
the portion of our inventory purchases denominated in foreign
currencies. We believe that the price volatility relating to
foreign currency exchange rates is partially mitigated by our
ability to adjust selling prices. During 2022 and 2021, foreign
currency transactions did not materially impact Net
income.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Disclosure controls and procedures (as that term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)), are our controls and other
procedures that are designed to ensure that information required to
be disclosed by us in our reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management,
including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
required disclosure. Internal controls over financial reporting, no
matter how well designed, have inherent limitations, including the
possibility of human error and the override of controls. Therefore,
even those systems determined to be effective can provide only
“reasonable assurance” with respect to the reliability of financial
reporting and financial statement preparation and presentation.
Further, because of changes in conditions, the effectiveness may
vary over time.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our principal
executive officer and principal financial officer, the
effectiveness of our disclosure controls and procedures as of
December 31, 2022. Based on this evaluation, our principal
executive officer and our principal financial officer have
concluded that, as of the end of the period covered by this report,
our disclosure controls and procedures were effective to accomplish
their objectives at the reasonable assurance level.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13(a) - 15(f) under the Exchange Act. Our internal control
over financial reporting is a process designed under the
supervision of our principal executive officer and principal
financial officer, and effected by our Board of Directors,
management and other personnel, to provide “reasonable assurance”
regarding the reliability of financial reporting and the
preparation of our financial statements for external purposes in
accordance with GAAP. Our internal control over financial reporting
includes policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management
and directors; and (3) provide “reasonable assurance” regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the
financial statements.
As of December 31, 2022, management, including our principal
executive officer and principal financial officer, assessed the
effectiveness of our internal control over financial reporting
based on the criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this assessment, management has
determined that our internal control over financial reporting as of
December 31, 2022 is effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the quarter ended
December 31, 2022 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
Attestation Report of Registered Public Accounting
Firm
Our internal control over financial reporting as of
December 31, 2022 has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, who also
audited our consolidated financial statements for the year ended
December 31, 2022, as stated in their report included herein,
which expresses an unqualified opinion on the effectiveness of our
internal control over financial reporting as of December 31,
2022.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections.
Not applicable.
PART III
Item 10.
Directors, Executive Officers and Corporate
Governance.
For a discussion of our directors, executive officers and corporate
governance, see the information set forth in the sections and
subsections entitled “Proposal No. 1 - Election of Directors,”
“Corporate Governance,” “Additional Information Regarding Executive
Compensation - Information Concerning our Executive Officers,”
“Audit Committee Report,” and “Additional Information Regarding
Executive Compensation - Delinquent Section 16(a) Reports,” “Code
of Ethics and Business Conduct” and “Code of Ethics for Finance
Professionals” in our proxy statement for the 2023 annual meeting
of stockholders to be filed with the SEC within 120 days after the
close of our fiscal year ended December 31, 2022 (the “2023
Proxy Statement”), which is incorporated herein by
reference.
Item 11. Executive Compensation.
See the information set forth in the sections entitled
“Compensation Committee Report,” “Compensation Discussion and
Analysis,” “Compensation Program Risk Assessment,”
“Additional Information Regarding Executive Compensation” and
“Director Compensation” in the 2023 Proxy Statement, which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
See the information set forth in the subsections entitled “Equity
Compensation Plan Information” and “Security Ownership of Certain
Beneficial Owners and Management” in the 2023 Proxy Statement,
which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
See the information set forth in the subsections entitled
“Corporate Governance - Related Party Transactions” and “Board
Independence and Structure” in the 2023 Proxy Statement, which is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
See the information set forth in the subsection entitled “2022 and
2021 Audit Fees” in the 2023 Proxy Statement, which is incorporated
herein by reference.
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
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(1) Financial Statements |
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Audited Consolidated Financial Statements of Advance Auto Parts,
Inc. and Subsidiaries for the years ended December 31, 2022,
January 1, 2022 and January 2, 2021:
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(2) Financial Statement Schedule |
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(3) Exhibits |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the stockholders and the Board of Directors of Advance Auto
Parts, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
Advance Auto Parts, Inc. and subsidiaries (the "Company") as of
December 31, 2022 and January 1, 2022, the related
consolidated statements of operations, comprehensive income,
changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2022, and the
related notes and the schedule listed in the Index at Item 15
(collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of
December 31, 2022 and January 1, 2022, and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2022, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB),
the Company's internal control over financial reporting as of
December 31, 2022, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2023, expressed
an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Vendor Incentives — Refer to Note 2 to the Consolidated Financial
Statements
Critical Audit Matter Description
The Company receives incentives in the form of reductions in
amounts owed to and/or payments due from vendors related to volume
rebates and other promotions. Volume rebates and vendor promotional
allowances are earned based on inventory purchases and initially
recorded as a reduction to inventory, except for allowances
provided as reimbursement of specific, incremental and identifiable
costs incurred to promote a vendor’s products that are offset in
selling, general and administrative expenses. The deferred amounts
are recorded as a reduction in cost of sales as the inventory is
sold. Total deferred vendor incentives included as a reduction of
inventories were $77.5 million as of December 31,
2022.
The Company purchases inventory from a significant number of
vendors, with no single vendor accounting for more than 10% of
purchases. While many of these incentives are under long-term
agreements in excess of one year, others are negotiated on an
annual basis or shorter. Accordingly, auditing vendor incentives
was challenging due to the extent of audit effort required to
evaluate whether the vendor incentives were recorded in accordance
with the terms of the vendor agreements.
How the Critical Audit Matter Was Addressed in the
Audit
Our audit procedures related to whether the vendor incentives were
recorded in accordance with the terms of the vendor agreements
included the following, among others:
•We
tested the effectiveness of controls over the process that ensures
that all vendor agreements are communicated to
accounting.
•We
tested the effectiveness of controls over the recording of vendor
incentives as a reduction in inventories, and subsequently as a
reduction in cost of sales as the related inventory was
sold.
•We
selected a sample of vendor incentives from the income recognized
as a reduction to cost of sales during the year and from incentive
income that was deferred at year-end, and recalculated, using the
terms of the vendor agreement, both the amount recorded as deferred
vendor incentives as a reduction in inventories and the amount
recognized in earnings as a reduction in cost of
sales.
•We
selected a sample of vendors from the Company’s inventory purchases
made during the year and confirmed directly with the vendor that
the agreement obtained from the Company and used in the
determination of recording vendor incentives as a reduction in cost
of sales was the most recent for the applicable period between the
parties.
•We
tested the amount of the income by developing an expectation based
on the historical amounts recorded as a percentage of total cost of
sales and compared our expectation to the amount
recorded.
/s/Deloitte & Touche LLP
Charlotte, North Carolina
February 28, 2023
We have served as the Company’s auditor since 2002.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the stockholders and the Board of Directors of Advance Auto
Parts, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of
Advance Auto Parts, Inc. and subsidiaries (the “Company”) as of
December 31, 2022, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2022, based on criteria
established in
Internal Control — Integrated Framework (2013)
issued by COSO.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2022, of
the Company and our report dated February 28, 2023, expressed
an unqualified opinion on those consolidated financial statements
and financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/Deloitte & Touche LLP
Charlotte, North Carolina
February 28, 2023
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
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December 31, 2022 |
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January 1, 2022 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
269,282 |
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$ |
601,428 |
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Receivables, net |
698,613 |
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782,785 |
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Inventories, net |
4,915,262 |
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4,659,018 |
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Other current assets |
163,695 |
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232,245 |
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Total current assets |
6,046,852 |
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6,275,476 |
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Property and equipment, net of accumulated depreciation of
$2,590,382 and $2,403,567
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1,690,139 |
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1,528,311 |
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Operating lease right-of-use assets |
2,607,690 |
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2,671,810 |
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Goodwill |
990,471 |
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993,744 |
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Other intangible assets, net |
620,901 |
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651,217 |
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Other assets |
62,429 |
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73,651 |
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Total assets |
$ |
12,018,482 |
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$ |
12,194,209 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
$ |
4,123,462 |
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$ |
3,922,007 |
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Accrued expenses |
634,447 |
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777,051 |
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Current portion of long-term debt |
185,000 |
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— |
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Other current liabilities |
427,480 |
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481,249 |
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Total current liabilities |
5,370,389 |
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5,180,307 |
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Long-term debt |
1,188,283 |
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1,034,320 |
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Non-current operating lease liabilities |
2,278,318 |
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2,337,651 |
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Deferred income taxes |
415,997 |
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410,606 |
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Other long-term liabilities |
87,214 |
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103,034 |
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Total liabilities |
9,340,201 |
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9,065,918 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, nonvoting, $0.0001 par value,
10,000 shares authorized; no shares issued or
outstanding
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— |
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— |
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Common stock, voting, $0.0001 par value, 200,000 shares
authorized;
76,989 shares issued and 59,264 outstanding at December 31,
2022
76,663 shares issued and 62,009 outstanding at January 1,
2022
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8 |
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8 |
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Additional paid-in capital |
897,560 |
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845,407 |
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Treasury stock, at cost, 17,724 and 14,654 shares
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(2,918,768) |
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(2,300,288) |
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Accumulated other comprehensive loss |
(45,143) |
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(22,627) |
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Retained earnings |
4,744,624 |
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4,605,791 |
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Total stockholders’ equity |
2,678,281 |
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3,128,291 |
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Total liabilities and stockholders’ equity |
$ |
12,018,482 |
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$ |
12,194,209 |
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The accompanying notes to the consolidated financial statements are
an integral part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
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Year Ended |
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December 31, 2022 |
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January 1, 2022 |
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January 2, 2021 |
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Net sales |
$ |
11,154,722 |
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$ |
10,997,989 |
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$ |
10,106,321 |
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Cost of sales |
6,192,622 |
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6,069,241 |
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5,624,707 |
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Gross profit |
4,962,100 |
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4,928,748 |
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4,481,614 |
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Selling, general and administrative expenses
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4,247,949 |
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4,090,031 |
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3,731,707 |
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Operating income |
714,151 |
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838,717 |
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749,907 |
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Other, net: |
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Interest expense |
(51,060) |
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(37,791) |
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(46,886) |
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Loss on early redemptions of senior unsecured notes |
(7,408) |
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— |
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(48,022) |
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Other (expense) income, net |
(6,996) |
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|
4,999 |
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(3,984) |
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Total other, net |
(65,464) |
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(32,792) |
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(98,892) |
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Income before provision for income taxes |
648,687 |
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|
805,925 |
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|
651,015 |
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Provision for income taxes |
(146,815) |
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(189,817) |
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|
(157,994) |
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Net income |
$ |
501,872 |
|
|
$ |
616,108 |
|
|
$ |
493,021 |
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|
Basic earnings per common share |
$ |
8.32 |
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$ |
9.62 |
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$ |
7.17 |
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Weighted average common shares outstanding |
60,351 |
|
|
64,028 |
|
|
68,748 |
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|
Diluted earnings per common share |
$ |
8.27 |
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$ |
9.55 |
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$ |
7.14 |
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Weighted average common shares outstanding |
60,717 |
|
|
64,509 |
|
|
69,003 |
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|
|
|
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|
|
Fiscal years 2022 and 2021 included 52 weeks. Fiscal year 2020
included 53 weeks.
Consolidated Statements of Comprehensive Income
(in thousands)
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|
Year Ended |
|
December 31, 2022 |
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January 1, 2022 |
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January 2, 2021 |
|
Net income |
$ |
501,872 |
|
|
$ |
616,108 |
|
|
$ |
493,021 |
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Other comprehensive income: |
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|
|
|
Changes in net unrecognized other postretirement benefit
costs,
net of tax of $66, $93 and $54
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(186) |
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(264) |
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(152) |
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Currency translation adjustments |
(22,330) |
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|
4,396 |
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|
7,962 |
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Total other comprehensive income |
(22,516) |
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|
4,132 |
|
|
7,810 |
|
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Comprehensive income |
$ |
479,356 |
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$ |
620,240 |
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$ |
500,831 |
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Fiscal years 2022 and 2021 included 52 weeks. Fiscal year 2020
included 53 weeks.
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
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Advance Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’
Equity
(in thousands, except per share data)
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Common Stock |
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Additional Paid-in Capital |
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Treasury Stock, at cost |
|
Accumulated Other
Comprehensive
Loss
|
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Retained Earnings |
|
Total Stockholders’ Equity |
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Shares |
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Amount |
|
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|
|
Balance, December 28, 2019 |
69,232 |
|
|
$ |
8 |
|
|
$ |
735,183 |
|
|
$ |
(924,389) |
|
|
$ |
(34,569) |
|
|
$ |
3,772,848 |
|
|
$ |
3,549,081 |
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Net income |
— |
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|
— |
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— |
|
|
— |
|
|
— |
|
|
493,021 |
|
|
493,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
7,810 |
|
|
— |
|
|
7,810 |
|
|
Restricted stock units and deferred stock units vested |
234 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Share-based compensation |
— |
|
|
— |
|
|
45,271 |
|
|
— |
|
|
— |
|
|
— |
|
|
45,271 |
|
|
Stock issued under employee stock purchase plan |
20 |
|
|
— |
|
|
3,270 |
|
|
— |
|
|
— |
|
|
— |
|
|
3,270 |
|
|
Repurchases of common stock |
(3,125) |
|
|
— |
|
|
— |
|
|
(469,691) |
|
|
— |
|
|
— |
|
|
(469,691) |
|
|
Cash dividends declared ($1.00 per common share)
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(69,235) |
|
|
(69,235) |
|
|
Other |
— |
|
|
— |
|
|
(15) |
|
|
— |
|
|
— |
|
|
— |
|
|
(15) |
|
|
Balance, January 2, 2021 |
66,361 |
|
|
8 |
|
|
783,709 |
|
|
(1,394,080) |
|
|
(26,759) |
|
|
4,196,634 |
|
|
3,559,512 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
616,108 |
|
|
616,108 |
|
|
Total other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,132 |
|
|
— |
|
|
4,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units and deferred stock units vested |
331 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Share-based compensation |
— |
|
|
— |
|
|
63,067 |
|
|
— |
|
|
— |
|
|
— |
|
|
63,067 |
|
|
Stock issued under employee stock purchase plan |
23 |
|
|
— |
|
|
3,074 |
|
|
— |
|
|
— |
|
|
— |
|
|
3,074 |
|
|
Repurchases of common stock |
(4,710) |
|
|
— |
|
|
— |
|
|
(906,208) |
|
|
— |
|
|
— |
|
|
(906,208) |
|
|
Cash dividends declared ($3.25 per common share)
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(206,951) |
|
|
(206,951) |
|
|
Other |
4 |
|
|
— |
|
|
(4,443) |
|
|
— |
|
|
— |
|
|
— |
|
|
(4,443) |
|
|
Balance, January 1, 2022 |
62,009 |
|
|
8 |
|
|
845,407 |
|
|
(2,300,288) |
|
|
(22,627) |
|
|
4,605,791 |
|
|
3,128,291 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
501,872 |
|
|
501,872 |
|
|
Total other comprehensive loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(22,516) |
|
|
— |
|
|
(22,516) |
|
|
Issuance of shares upon the exercise of stock options |
3 |
|
|
— |
|
|
535 |
|
|
— |
|
|
— |
|
|
— |
|
|
535 |
|
|
Restricted stock units and deferred stock units vested |
297 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Share-based compensation |
— |
|
|
— |
|
|
50,978 |
|
|
— |
|
|
— |
|
|
— |
|
|
50,978 |
|
|
Stock issued under employee stock purchase plan |
25 |
|
|
— |
|
|
4,140 |
|
|
— |
|
|
— |
|
|
— |
|
|
4,140 |
|
|
Repurchases of common stock |
(3,070) |
|
|
— |
|
|
— |
|
|
(618,480) |
|
|
— |
|
|
— |
|
|
(618,480) |
|
|
Cash dividends declared ($6.00 per common share)
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(363,039) |
|
|
(363,039) |
|
|
Other |
— |
|
|
— |
|
|
(3,500) |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,500) |
|
|
Balance, December 31, 2022 |
59,264 |
|
|
$ |
8 |
|
|
$ |
897,560 |
|
|
$ |
(2,918,768) |
|
|
$ |
(45,143) |
|
|
$ |
4,744,624 |
|
|
$ |
2,678,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
January 2, 2021 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
$ |
501,872 |
|
|
$ |
616,108 |
|
|
$ |
493,021 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
283,800 |
|
|
259,933 |
|
|
250,081 |
|
|
Share-based compensation |
50,978 |
|
|
63,067 |
|
|
45,271 |
|
|
Loss and impairment of long-lived assets |
3,581 |
|
|
8,949 |
|
|
4,727 |
|
|
Loss on early redemption of senior unsecured notes |
7,408 |
|
|
— |
|
|
48,022 |
|
|
Provision for deferred income taxes |
6,338 |
|
|
68,202 |
|
|
8,136 |
|
|
Other, net |
2,587 |
|
|
(7,985) |
|
|
1,467 |
|
|
Net change in: |
|
|
|
|
|
|
Receivables, net |
81,254 |
|
|
(32,652) |
|
|
(59,014) |
|
|
Inventories |
(272,253) |
|
|
(120,272) |
|
|
(101,449) |
|
|
Accounts payable |
212,568 |
|
|
281,064 |
|
|
216,488 |
|
|
Accrued expenses |
(165,643) |
|
|
109,983 |
|
|
78,507 |
|
|
Other assets and liabilities, net |
9,732 |
|
|
(134,135) |
|
|
(15,569) |
|
|
Net cash provided by operating activities |
722,222 |
|
|
1,112,262 |
|
|
969,688 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property and equipment |
(424,061) |
|
|
(289,639) |
|
|
(267,576) |
|
|
Purchase of intangible asset |
(1,900) |
|
|
— |
|
|
(230) |
|
|
Proceeds from sales of property and equipment |
1,513 |
|
|
2,325 |
|
|
909 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
(424,448) |
|
|
(287,314) |
|
|
(266,897) |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on senior unsecured notes |
(201,081) |
|
|
— |
|
|
(602,568) |
|
|
Borrowings under credit facilities |
2,035,000 |
|
|
— |
|
|
500,000 |
|
|
Payments on credit facilities |
(1,850,000) |
|
|
— |
|
|
(500,000) |
|
|
Proceeds from issuance of senior unsecured notes, net |
348,618 |
|
|
— |
|
|
847,092 |
|
|
Dividends paid |
(336,230) |
|
|
(160,925) |
|
|
(56,347) |
|
|
Repurchases of common stock |
(618,480) |
|
|
(906,208) |
|
|
(469,691) |
|
|
Other, net |
1,469 |
|
|
3,021 |
|
|
(4,483) |
|
|
Net cash used in financing activities |
(620,704) |
|
|
(1,064,112) |
|
|
(285,997) |
|
|
Effect of exchange rate changes on cash |
(9,216) |
|
|
5,600 |
|
|
(467) |
|
|
Net (decrease) increase in cash and cash equivalents |
(332,146) |
|
|
(233,564) |
|
|
416,327 |
|
|
Cash and cash equivalents,
beginning of period
|
601,428 |
|
|
834,992 |
|
|
418,665 |
|
|
Cash and cash equivalents,
end of period
|
$ |
269,282 |
|
|
$ |
601,428 |
|
|
$ |
834,992 |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
Interest paid |
$ |
46,159 |
|
|
$ |
36,372 |
|
|
$ |
34,011 |
|
|
Income tax payments |
$ |
94,605 |
|
|
$ |
177,317 |
|
|
$ |
146,073 |
|
|
Non-cash transactions: |
|
|
|
|
|
|
Accrued purchases of property and equipment |
$ |
8,927 |
|
|
$ |
14,369 |
|
|
$ |
4,963 |
|
|
|
|
|
|
|
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless
otherwise stated)
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 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 December 31, 2022, we operated a total of 4,770 stores
and 316 branches primarily within the United States, with
additional locations in Canada, Puerto Rico and the U.S. Virgin
Islands. In addition, as of December 31, 2022, we served 1,311
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” trade
names.
Accounting Period
Our fiscal year ends on the Saturday closest to December
31st.
All references herein for the years “2022,” “2021” and “2020”
represent the fiscal years ended December 31, 2022 and
January 1, 2022, which consisted of fifty-two weeks, and
fiscal year ended January 2, 2021, which consisted of
fifty-three weeks.
Basis of Presentation
The consolidated financial statements include the accounts of
Advance prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). All intercompany
balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ materially from
those estimates.
2. Significant Accounting
Policies:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and
highly-liquid instruments with original maturities of three months
or less. Additionally, credit card and debit card receivables from
banks, which generally settle in less than four business days, are
included in cash equivalents.
Inventory
Our inventory consists primarily of parts, batteries, accessories
and other products used on vehicles that have reasonably long shelf
lives and is stated at the lower of cost or market. The cost of our
merchandise inventory is primarily determined using the last-in,
first-out (“LIFO”) method. 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 relating
to prices paid in 2022 and prior years. We regularly review
inventory quantities on-hand, consider whether we may have excess
inventory based on our current approach for managing slower moving
inventory and adjust the carrying value as necessary.
Vendor Incentives
We receive incentives in the form of reductions to amounts owed to
and/or payments from vendors related to volume rebates and other
promotional considerations. Many of these incentives are under
long-term agreements in excess of one year, while others are
negotiated on an annual or more frequent basis. Advertising
allowances provided as a reimbursement of specific, incremental and
identifiable costs incurred to promote a vendor’s products are
included as an offset to Selling, general and administrative
expenses (“SG&A”) when the cost is incurred. Volume rebates and
allowances that do not meet the requirements for offsetting in
SG&A are recorded as a reduction to inventory as they are
earned based on inventory purchases. Total deferred vendor
incentives recorded as a reduction of Inventories were $77.5
million and $82.4 million as of December 31, 2022 and
January 1, 2022.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged
directly to expense when incurred; major improvements are
capitalized. When items are sold or retired, the related cost and
accumulated depreciation are removed from the account balances,
with any gain or loss reflected in the Consolidated Statements of
Operations.
Depreciation of land improvements, buildings, furniture, fixtures
and equipment and vehicles is provided over the estimated useful
lives of the respective assets using the straight-line method.
Depreciation of building and leasehold improvements is provided
over the shorter of the original useful lives of the respective
assets or the term of the lease using the straight-line
method.
Goodwill and Other Indefinite-Lived Intangible Assets
We perform our evaluation for the impairment of goodwill and other
indefinite-lived intangible assets for our reporting units annually
as of the first day of the fourth quarter, or when indications of
potential impairment exist. These indicators would include a
significant change in operating performance, the business climate,
legal factors, competition, or a planned sale or disposition of a
significant portion of the business, among other factors. Our
evaluation of goodwill and other indefinite-lived intangibles may
be a Step-0 analysis, which consists of a qualitative assessment,
or a Step-1 analysis, which includes a quantitative assessment. In
a Step-0 analysis, we assess qualitative factors such as current
company performance and overall economic factors to determine if it
is more-likely-than-not that the goodwill might be impaired and
whether it is necessary to perform a quantitative goodwill
impairment test. In the quantitative goodwill impairment test, we
compare the carrying value of a reporting unit to its fair value.
In performing a Step-1 analysis, we have historically used an
income approach which requires many assumptions including forecast,
discount rate, long-term growth rate, among other items. We have
also utilized the market approach which derives metrics from
comparable publicly-traded companies. We have generally engaged a
third-party valuation firm to assist in the fair value assessment
of goodwill. If the fair value of the reporting unit is lower than
its carrying amount, goodwill is written down for the amount by
which the carrying amount exceeds the reporting unit's fair
value.
Our other indefinite-lived intangible assets are tested for
impairment at the asset group level. Other indefinite-lived
intangible assets are evaluated by comparing the carrying amount of
the asset to the future discounted cash flows that the asset is
expected to generate. If the fair value based on the future
discounted cash flows exceeds the carrying value, we conclude that
no intangible asset impairment has occurred. If the carrying value
of the indefinite-lived intangible asset exceeds the fair value, we
recognize an impairment loss.
We have four operating segments, defined as “Advance Auto
Parts/Carquest U.S.,” “Carquest Canada,” “Worldpac” and
“Independents.” As each operating segment represents a reporting
unit, goodwill is assigned to each reporting unit.
Valuation of Long-Lived Assets
We evaluate the recoverability of our long-lived assets, including
finite-lived intangible assets, whenever events or changes in
circumstances indicate that the carrying amount of an asset might
not be recoverable and exceeds its fair value. When such an event
occurs, we estimate the undiscounted future cash flows expected to
result from the use of the long-lived asset or asset group and its
eventual disposition. These impairment evaluations involve
estimates of asset useful lives and future cash flows. If the
undiscounted expected future cash flows are less than the carrying
amount of the asset and the carrying amount of the asset exceeds
its fair value, an impairment loss is recognized. When an
impairment loss is recognized, the carrying amount of the asset is
reduced to its estimated fair value based on quoted market prices
or other valuation techniques (e.g., discounted cash flow
analysis).
Self-Insurance
We are self-insured for general and automobile liability, workers’
compensation and health care claims of our team members, while
maintaining stop-loss coverage with third-party insurers to limit
our total liability exposure. Expenses associated with these
liabilities are calculated for (i) claims filed, (ii) claims
incurred but not yet reported and (iii) projected future claims
using actuarial methods followed in the insurance industry as well
as our historical claims experience. We include the current and
long-term portions of self-insurance reserves in Accrued expenses
and Other long-term liabilities in the accompanying Consolidated
Balance Sheets.
Leases
We lease certain store locations, distribution centers, office
spaces, equipment and vehicles. We recognize lease expense on a
straight-line basis over the initial term of the lease unless
external economic factors exist such that renewals are reasonably
certain. In those instances, the renewal period would be included
in the lease term to determine the period in which to recognize the
lease expense. Most leases require us to pay non-lease components,
such as taxes, maintenance, insurance and other certain costs
applicable to the leased asset. For leases related to our store
locations, distribution centers, office spaces and vehicles, we
account for lease and non-lease components as a single
amount.
Fair Value Measurements
A three-level valuation hierarchy, based upon observable and
unobservable inputs, is used for fair value measurements.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect market assumptions based
on the best evidence available. These two types of inputs create
the following fair value hierarchy: Level 1 - Quoted prices for
identical instruments in active markets; Level 2 - Quoted prices
for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and
model-derived valuations whose significant inputs are observable;
and Level 3 - Instruments whose significant inputs are
unobservable. Financial instruments are transferred in and/or out
of Level 1, 2 or 3 at the beginning of the accounting period in
which there is a change in valuation inputs.
Share-Based Payments
We provide share-based compensation to our eligible team members
and Board of Directors. We are required to exercise judgment and
make estimates when determining the (i) fair value of each award
granted and (ii) projected number of awards expected to vest. We
calculate the fair value of all share-based awards at the date of
grant and use the straight-line method to amortize this fair value
as compensation cost over the requisite service
period.
Revenues
Accounting Standards Codification 606,
Revenue From Contracts With Customers (Topic 606)
(“ASC 606”) defines a performance obligation as a promise in a
contract to transfer a distinct good or service to the customer and
is considered the unit of account. The majority of our contracts
have one single performance obligation as the promise to transfer
the individual goods is not separately identifiable from other
promises in the contracts and is, therefore, not distinct.
Discounts and incentives are treated as separate performance
obligations. We allocate the contract’s transaction price to each
of these performance obligations separately using explicitly stated
amounts or our best estimate using historical data.
In accordance with ASC 606, revenue is recognized at the time the
sale is made at which time our walk-in customers take immediate
possession of the merchandise or same-day delivery is made to our
professional delivery customers, which include certain
independently owned store locations. Payment terms are established
for our professional delivery customers based on pre-established
credit requirements. Payment terms vary depending on the customer
and generally range from one to 30 days. Based on the nature of
receivables, no significant financing components exist. For
e-commerce sales, revenue is recognized either at the time of
pick-up at one of our store locations or at the time of shipment
depending on the customer's order designation. Sales are recorded
net of discounts, sales incentives and rebates, sales taxes, and
estimated returns and allowances. We estimate the reduction to Net
sales and Cost of sales for returns based on current sales levels
and our historical return experience.
We provide assurance-type warranty coverage primarily on batteries,
brakes and struts whereby we are required to provide replacement
product at no cost or a reduced cost for a set period of time. We
estimate our warranty obligation at the time of sale based on the
historical return experience, sales level and cost of the
respective product sold. To the extent vendors provide upfront
allowances in lieu of accepting the obligation for warranty claims
and the allowance is in excess of the related warranty expense, the
excess is recorded as a reduction to cost of sales.
Some of our products include a core component, which represents a
recyclable piece of the auto part. If a customer purchases an auto
part that includes a core component, the customer is charged for
the core unless a used core is returned at the time of sale.
Customers that return a core subsequent to the sale date will be
refunded.
The following table summarizes financial information for each of
our product groups:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
January 2, 2021 |
|
Percentage of Sales, by Product Group |
|
|
|
|
|
|
Parts and Batteries |
66 |
% |
|
67 |
% |
|
66 |
% |
|
Accessories and Chemicals |
20 |
|
|
20 |
|
|
21 |
|
|
Engine Maintenance |
13 |
|
|
12 |
|
|
12 |
|
|
Other |
1 |
|
|
1 |
|
|
1 |
|
|
Total |
100 |
% |
|
100 |
% |
|
100 |
% |
Receivables, net, consists primarily of receivables from
professional customers and is stated at net realizable value. We
grant credit to certain professional customers who meet our
pre-established credit requirements. We regularly review
accounts receivable balances and maintain allowances for credit
losses estimated whenever events or circumstances indicate the
carrying value may not be recoverable. We consider the following
factors when determining if collection is reasonably assured:
customer creditworthiness, past transaction history with the
customer, current economic and industry trends and changes in
customer payment terms. We control credit risk through credit
approvals, credit limits and accounts receivable and credit
monitoring procedures.
Cost of Sales
Cost of sales includes actual product cost, warranty costs, vendor
incentives, cash discounts on payments to vendors, costs associated
with operating our distribution network, including payroll and
benefits costs, occupancy costs and depreciation, in-bound
freight-related costs from our vendors, impairment of inventory
resulting from store closures and inventory-related reserves and
costs associated with moving merchandise inventories from our
distribution centers to stores, branch locations and
customers.
Selling, General and Administrative Expenses
SG&A includes payroll and benefits costs for store and
corporate team members; occupancy costs of store and corporate
facilities; depreciation and amortization related to store and
corporate assets; share-based compensation expense; advertising;
self-insurance; costs of consolidating, converting or closing
facilities, including early termination of lease obligations;
severance and impairment charges; professional services and costs
associated with our professional delivery program,
including
payroll and benefits costs; and transportation expenses associated
with moving merchandise inventories from stores and branches to
customer locations.
Preopening Expenses
Preopening expenses, which consist primarily of payroll and
occupancy costs related to the opening of new stores, are expensed
as incurred.
Advertising Costs
We expense advertising costs as incurred. Advertising expense, net
of qualifying vendor promotional funds, was $164.0 million, $178.0
million and $132.3 million in 2022, 2021 and 2020.
Foreign Currency Translation
The assets and liabilities of our foreign operations are translated
into U.S. dollars at current exchange rates. Revenues, expenses,
and cash flows are translated at average exchange rates for the
year. Resulting translation adjustments are reflected as a separate
component in the Consolidated Statements of Comprehensive Income.
Foreign currency transactions, which are included in Other
(expense) income, net, was a loss of $4.4 million in 2022, income
of $1.7 million in 2021 and a loss of $6.9 million in
2020.
Income Taxes
We account for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under the asset and
liability method, deferred tax assets and liabilities are
determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse. Deferred income taxes reflect the net
income tax effect of temporary differences between the basis of
assets and liabilities for financial reporting purposes and for
income tax reporting purposes. The effect of a change in tax rates
on deferred tax assets and liabilities is recognized in income in
the period of the enactment date.
We recognize tax benefits and/or tax liabilities for uncertain
income tax positions based on a two-step process. The first step is
to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is
more-likely-than-not that the position will be sustained in an
audit, including resolution of related appeals or litigation
processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently
difficult and subjective to estimate such amounts as we must
determine the probability of various possible
outcomes.
We reevaluate these uncertain tax positions on a quarterly basis or
when new information becomes available to management. The
reevaluations are based on many factors, including but not limited
to, changes in facts or circumstances, changes in tax law,
successfully settled issues under audit, expirations due to
statutes of limitations and new federal or state audit activity.
Any change in either our recognition or measurement could result in
the recognition of a tax benefit or an increase to the tax
accrual.
Earnings per Share
Basic earnings per share of common stock has been computed based on
the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by including the
effect of dilutive securities. Diluted earnings per share of common
stock reflects the weighted average number of shares of common
stock outstanding, outstanding deferred stock units and the impact
of outstanding stock awards (collectively “share-based awards”) if
the conversion of these awards are dilutive. Share-based awards
containing performance conditions are included in the dilution
impact as those conditions are met.
Segment Information
Operating segments are defined as components of an enterprise for
which discrete financial information is available that is evaluated
regularly by the chief operating decision maker (“CODM”) for
purposes of allocating resources and evaluating financial
performance. Our CODM, the Chief Executive Officer, reviews
financial information presented on a consolidated basis,
accompanied by information about our four operating segments, for
the purpose of allocating resources and evaluating financial
performance.
We have one reportable segment as the four operating segments are
aggregated primarily due to the economic and operational
similarities of each operating segment as the stores and branches
have similar characteristics, including the nature of the products
and services offered, customer base and the methods used to
distribute products and provide services to its
customers.
Recently Issued Accounting Pronouncements - Not Yet
Adopted
Reference Rate Reform
In March 2021, the FASB issued ASU 2022-06,
Reference Rate Reform (Topic 848): Deferral of the Sunset Date of
Topic 848
(“ASU 2022-06”), which defers when companies will be required to
find an alternative rate to LIBOR to December 31, 2024. ASU 2022-06
applies to all entities subject to meeting certain criteria that
have contracts, hedging relationships or other transactions that
include the London Interbank Offered Rate (“LIBOR”) or another
reference rate expected to be discontinued because of reference
rate reform. We have modified current agreements to reference an
alternative rate other than LIBOR, and do not believe it will have
a material impact on our consolidated financial
statements.
Supplier Finance Programs
In September 2022, the FASB issued ASU 2022-04,
Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure
of Supplier Finance Program Obligations
(“ASU 2022-04”), which requires a company to disclose sufficient
qualitative and quantitative information about any supplier finance
program in which it participates as a buyer. In each annual
reporting period, the company should disclose the key terms of the
program, including a rollforward of those obligations outstanding
at the beginning of the period. ASU 2022-04 is 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. We are currently evaluating the
impact of adopting ASU 2022-04 on our consolidated financial
statements and related disclosures, and do not believe it will have
a material impact on our consolidated financial
statements.
Recently Issued Accounting Pronouncements - Adopted
Credit Losses
During the first quarter of 2020, we adopted ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments
(“ASU 2016-13”), which required us to measure all expected credit
losses for financial instruments held at the reporting date based
on historical experience, current conditions and reasonable
supportable forecasts. This replaced the existing incurred loss
model and is applicable to the measurement of credit losses on
financial assets, including trade receivables. The adoption of ASU
2016-13 did not have a material impact on our consolidated
financial statements.
Income Taxes
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes
(“ASU 2019-12”), which simplifies the accounting for income taxes.
ASU 2019-12 was effective for fiscal years, and interim periods
within those years, beginning after December 15, 2020. The adoption
of this new standard did not have a material impact on our
consolidated financial condition, results of operations or cash
flows."
3.Inventories:
We used the LIFO method of accounting for approximately 92.2% of
Inventories at December 31, 2022 and 89.8% of Inventories at
January 1, 2022. As a result of changes in the LIFO
reserve, we recorded an increase to Cost of sales of $311.8 million
and $122.3 million in 2022 and 2021 and a decrease to Cost of sales
of $13.8 million in 2020.
Purchasing and warehousing costs included in Inventories as of
December 31, 2022 and January 1, 2022 were $637.1 million
and $515.3 million.
Inventory balances were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
January 1, 2022 |
|
Inventories at first-in, first-out (“FIFO”) |
$ |
5,193,911 |
|
|
$ |
4,625,900 |
|
|
Adjustments to state inventories at LIFO |
(278,649) |
|
|
33,118 |
|
|
Inventories at LIFO |
$ |
4,915,262 |
|
|
$ |
4,659,018 |
|
4.Goodwill
and Other Intangible Assets, Net:
Goodwill
At December 31, 2022 and January 1, 2022, the carrying
amount of Goodwill in the accompanying Consolidated Balance Sheets
was $990.5 million and $993.7 million. The change in
Goodwill during 2022 and 2021 was $3.3 million and $0.2 million,
and related to foreign currency translation.
Other Intangible Assets, Net
Amortization expense was $31.0 million, $31.1 million and $31.6
million for 2022, 2021 and 2020. A summary of the composition of
the gross carrying amounts and accumulated amortization of acquired
other intangible assets are presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
January 1, 2022 |
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Net |
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Net |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
$ |
349,428 |
|
|
$ |
(267,806) |
|
|
$ |
81,622 |
|
|
$ |
351,136 |
|
|
$ |
(239,302) |
|
|
$ |
111,834 |
|
|
Non-compete and other |
40,157 |
|
|
(38,051) |
|
|
2,106 |
|
|
38,257 |
|
|
(37,844) |
|
|
413 |
|
|
|
389,585 |
|
|
(305,857) |
|
|
83,728 |
|
|
389,393 |
|
|
(277,146) |
|
|
112,247 |
|
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Brands, trademark and trade names |
537,173 |
|
|
— |
|
|
537,173 |
|
|
538,970 |
|
|
— |
|
|
538,970 |
|
|
Total intangible assets |
$ |
926,758 |
|
|
$ |
(305,857) |
|
|
$ |
620,901 |
|
|
$ |
928,363 |
|
|
$ |
(277,146) |
|
|
$ |
651,217 |
|
Future Amortization Expense
The expected amortization expense for the next five years and
thereafter for acquired intangible assets recorded as of
December 31, 2022 was as follows:
|
|
|
|
|
|
|
|
|
|
Year |
|
Amount |
|
2023 |
|
$ |
28,357 |
|
|
2024 |
|
28,097 |
|
|
2025 |
|
26,602 |
|
|
2026 |
|
380 |
|
|
2027 |
|
292 |
|
|
Thereafter |
|
— |
|
|
|
|
$ |
83,728 |
|
5. Receivables, net:
Receivables, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
January 1, 2022 |
|
Trade |
$ |
576,548 |
|
|
$ |
506,725 |
|
|
Vendor |
126,640 |
|
|
201,933 |
|
|
Other |
10,638 |
|
|
84,289 |
|
|
Total receivables |
713,826 |
|
|
792,947 |
|
|
Less: allowance for credit losses |
(15,213) |
|
|
(10,162) |
|
|
Receivables, net |
$ |
698,613 |
|
|
$ |
782,785 |
|
6.Long-term
Debt and Fair Value of Financial Instruments:
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
January 1, 2022 |
|
4.50% Senior Unsecured Notes (net of unamortized discount and debt
issuance costs of $453 at January 1, 2022) due December 1,
2023
|
$ |
— |
|
|
$ |
193,220 |
|
|
1.75% Senior Unsecured Notes (net of unamortized discount and debt
issuance costs of $3,053 and $3,618 at December 31, 2022 and
January 1, 2022) due October 1, 2027
|
346,947 |
|
|
346,382 |
|
|
3.90% Senior Unsecured Notes (net of unamortized discount and debt
issuance costs of $4,438 and $5,022 at December 31, 2022 and
January 1, 2022) due April 15, 2030
|
495,562 |
|
|
494,718 |
|
|
3.50% Senior Unsecured Notes (net of unamortized discount and debt
issuance costs of $4,226 at December 31, 2022 ) due March 15,
2032
|
345,774 |
|
|
— |
|
|
Revolver credit facility (interest rate of 7.5% as of December 31,
2022)
|
185,000 |
|
|
— |
|
|
|
1,373,283 |
|
|
1,034,320 |
|
|
Less: Current portion of long-term debt |
(185,000) |
|
|
— |
|
|
Long-term debt, excluding the current portion |
$ |
1,188,283 |
|
|
$ |
1,034,320 |
|
|
|
|
|
|
|
Fair value of long-term debt |
$ |
1,021,396 |
|
|
$ |
1,092,000 |
|
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 November 9, 2021, we entered into a credit agreement that
provides a $1.2 billion unsecured revolving credit facility
(the “2021 Credit Agreement”) with Advance Auto Parts, Inc., as
Borrower, Advance Stores, as a Guarantor, the lenders party
thereto, and Bank of America, N.A., as the Administrative Agent,
and replaced the previous credit agreement. The revolver under the
2021 Credit Agreement replaced the revolver under the previous
credit agreement. The revolver under the 2021 Credit Agreement
provides for the issuance of letters of credit with a sublimit of
$200.0 million. We may request that the total revolving
commitment be increased by an amount not exceeding
$500.0 million during the term of the 2021 Credit
Agreement.
As of December 31, 2022, we had $185.0 million
outstanding borrowings under the 2021 Credit Agreement and
borrowing availability was $1.0 billion. Under the 2021 Credit
Agreement, we had no letters of credit outstanding as of
December 31, 2022. As of January 1, 2022, we had no
outstanding borrowings under the 2021 Credit Agreement and
borrowing availability was $1.2 billion. Under the 2021 Credit
Agreement, we had no letters of credit outstanding as of
January 1, 2022.
Interest on any borrowings on the 2021 Credit Agreement is based,
at our option, on an adjusted LIBOR, plus a margin, or an alternate
base rate, plus a margin. After an initial interest period, we may
elect to convert a particular borrowing to a different type. The
initial margins per annum for the revolving loan are 1.00% for the
adjusted LIBOR and 0.00% for alternate base rate borrowings. A
facility fee of 0.125% per annum is charged on the total revolving
facility commitment, payable quarterly in arrears. Under the terms
of the 2021 Credit Agreement, the interest rate spread and facility
fee are based on our credit rating. The interest rate spread ranges
from 0.795% to 1.30% for adjusted LIBOR borrowings and 0.00% to
0.30% for alternate base rate borrowings. The facility fee ranges
from 0.08% to 0.20%.
On February 27, 2023, we entered into Amendment No. 1 (the
“Amendment”) to the 2021 Credit Agreement. The Amendment extends
the maturity date of the 2021 Credit Agreement by one year from
November 9, 2026, to November 9, 2027. The Amendment also replaces
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 2021 Credit
Agreement. The Amendment made no other material changes to the
terms of the 2021 Credit Agreement. Subsequent to December 31, 2022
and through the date of this filing, we had additional net
borrowings on our revolving credit facility of $469
million.
The 2021 Credit Agreement contains customary covenants restricting
the ability of: (a) Advance Auto Parts, Inc. and its subsidiaries
to, among other things, (i) create, incur or assume additional debt
(only with respect to subsidiaries of Advance Auto Parts, Inc.),
(ii) incur liens, (iii) guarantee obligations, and (iv) change the
nature of their business; (b) Advance Auto Parts, Inc., Advance
Stores and their subsidiaries to, among other things (i) enter into
certain hedging arrangements, (ii) enter into restrictive
agreements limiting their ability to incur liens on any of their
property or assets, pay distributions, repay loans, or guarantee
indebtedness of their subsidiaries; and (c) Advance Auto Parts,
Inc., among other things, to change its holding company status.
Advance is also required to comply with financial covenants with
respect to a maximum leverage ratio and a minimum coverage ratio.
The 2021 Credit Agreement also provides for customary events of
default, including non-payment defaults, covenant defaults and
cross-defaults of Advance’s other material indebtedness. We were in
compliance with our financial covenants with respect to the 2021
Credit Agreement as of December 31, 2022.
As of December 31, 2022 and January 1, 2022, we had $90.2
million and $92.0 million of bilateral letters of credit issued
separately from the 2021 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.
Senior Unsecured Notes
Our 4.50% senior unsecured notes due December 1, 2023 (the “2023
Notes”) were issued in December 2013 at 99.69% of the principal
amount of $450.0 million. The 2023 Notes bear interest,
payable semi-annually in arrears on June 1 and December 1, at a
rate of 4.50% per year.
Pursuant to a cash tender offer that was completed on September 29,
2020, we repurchased $256.3 million of our 2023 Notes with the
net proceeds from the 2027 Notes. In connection with this tender
offer, we incurred charges relating to tender premiums and debt
issuance costs of $30.5 million and $1.4 million. On
April 4, 2022, we redeemed the remaining $193.2 million
principal amount of our outstanding 2023 Notes with the net
proceeds from the issuance of the 3.50% senior unsecured notes due
March 15, 2032 (the “2032 Notes”). In connection with this early
redemption, we incurred charges related to the make-whole provision
and debt issuance costs of $7.0 million and
$0.4 million.
On April 16, 2020, we issued $500.0 million aggregate
principal amount of senior unsecured notes (the “Original Notes”).
The Original Notes were issued at 99.65% of the principal amount
and mature April 15, 2030. 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, which were not registered
under the Securities Act of 1933, as amended (the “Securities
Act”), were exchanged for a like principal amount of 3.90% senior
unsecured notes due 2030 (the “Exchange Notes” or “2030 Notes”),
which have been registered under the Securities Act. The Original
Notes were substantially identical to the Exchange Notes, except
that 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.
On September 16, 2020, we redeemed all $300.0 million
aggregate principal amount of our outstanding 2022 Notes. In
connection with this early redemption, we incurred charges relating
to a make-whole provision and debt issuance costs of
$15.8 million and $0.3 million.
On September 29, 2020, we issued $350.0 million aggregate
principal amount of senior unsecured notes (the “2027 Notes”). The
2027 Notes were issued at 99.67% of the principal amount, and are
due October 1, 2027 and bear interest at 1.75% per year, payable
semi-annually in arrears on April 1 and October 1 of each year. In
connection with the 2027 Notes offering, we incurred
$2.9 million of debt issuance costs.
On March 4, 2022, we issued $350.0 million aggregate principal
amount of senior unsecured notes. The 2032 Notes were issued at
99.61% of the principal amount and are due on March 15, 2032. 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 2023 Notes, 2027 Notes, 2030 Notes and 2032 Notes are
collectively referred to herein as our “senior unsecured notes” or
the “Notes.” The terms of the 2023 Notes, 2027 Notes and 2032 notes
are governed by an indenture dated as of April 29, 2010 (as
amended, supplemented, waived or otherwise modified, the “2010
Indenture”) among Advance Auto Parts, Inc., the subsidiary
guarantors from time to time party thereto and Wells Fargo Bank,
National Association, as Trustee. The terms of the 2030 Notes are
governed by an indenture dated as of April 16, 2020 (as amended,
supplemented, waived or otherwise modified, the “2020 Indenture”
and together with the 2010 Indenture, the “Indentures”) among
Advance Auto Parts, Inc., the subsidiary guarantors from time to
time party thereto and Wells Fargo Bank, National Association, as
Trustee.
We may redeem some or all of the senior unsecured notes at any time
or from time to time, at the redemption prices described in the
Indentures. In addition, in the event of a Change of Control
Triggering Event (as defined in the Indentures), we will be
required to offer to repurchase 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 and unsecured basis by guarantor and subsidiary
guarantees, as defined by the Indenture.
The Indentures contain customary provisions for events of default
including for: (i) failure to pay principal or interest when due
and payable; (ii) failure to comply with covenants or agreements in
the Indentures or the Notes and failure to cure or obtain a waiver
of such default upon notice; (iii) a default under any debt for
money borrowed by us or any of our subsidiaries that results in
acceleration of the maturity of such debt, or failure to pay any
such debt within any applicable grace period after final stated
maturity, in an aggregate amount greater than $25.0 million
without such debt having been discharged or acceleration having
been rescinded or annulled within ten days after receipt by us of
notice of the default by the Trustee or holders of not less than
25% in aggregate principal amount of the Notes then outstanding;
and (iv) events of bankruptcy, insolvency or reorganization
affecting us and certain of its subsidiaries. In the case of an
event of default, the principal amount of the Notes plus accrued
and unpaid interest may be accelerated. The Indentures also contain
covenants limiting our ability to incur debt secured by liens and
to enter into certain sale and lease-back
transactions.
Future Payments
As of December 31, 2022, the aggregate future annual
maturities of long-term debt instruments were as
follows:
|
|
|
|
|
|
|
|
|
|
Year |
|
Amount |
|
2023 |
|
|
$ |
— |
|
|
2024 |
|
|
— |
|
|
2025 |
|
|
— |
|
|
2026 |
|
|
— |
|
|
2027 |
|
|
350,000 |
|
|
Thereafter |
|
850,000 |
|
|
|
|
$ |
1,200,000 |
|
Debt Guarantees
We are a guarantor of loans made by banks to various independently
owned Carquest-branded stores that are customers of ours totaling
$96.9 million as of December 31, 2022. These loans 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 $174.6 million as
of December 31, 2022. We believe that the likelihood of
performance under these guarantees is remote.
7. Property and Equipment:
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
Lives |
|
December 31, 2022 |
|
January 1, 2022 |
|
Land and land improvements
(1)
|
10 years
|
|
$ |
471,349 |
|
|
$ |
471,101 |
|
|
Buildings |
30 - 40 years
|
|
535,884 |
|
|
528,558 |
|
|
Building and leasehold improvements |
3 - 15 years
|
|
722,006 |
|
|
602,515 |
|
|
Furniture, fixtures and equipment |
3 - 20 years
|
|
2,398,818 |
|
|
2,196,099 |
|
|
Vehicles |
3 years
|
|
14,549 |
|
|
14,593 |
|
|
Construction in progress |
|
|
137,915 |
|
|
119,012 |
|
|
|
|
|
4,280,521 |
|
|
3,931,878 |
|
|
Less: Accumulated depreciation |
|
|
(2,590,382) |
|
|
(2,403,567) |
|
|
Property and equipment, net |
|
|
$ |
1,690,139 |
|
|
$ |
1,528,311 |
|
(1)
Land is deemed to have an indefinite life.
Depreciation expense relating to Property and equipment was $252.8
million, $228.8 million and $218.5 million for 2022, 2021 and 2020.
We capitalized $41.5 million, $63.2 million and $58.4 million
incurred for the development of internal use computer software
during 2022, 2021 and 2020. These costs were classified in the
Construction in progress category, but once
placed into service is removed from Construction in progress and
classified within the Furniture, fixtures and equipment category
and is depreciated on the straight-line method over
three to ten years.
8. Leases and Other
Commitments:
Leases
Substantially all of our leases are for facilities and vehicles.
The initial term for facilities are typically
five to ten years, with renewal options at five-year
intervals, with the exercise of lease renewal options at our sole
discretion. Our vehicle and equipment leases are typically
three to six years. Our lease agreements do not contain any
material residual value guarantees or material restrictive
covenants.
Operating lease liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
January 1, 2022 |
|
Total operating lease liabilities |
$ |
2,692,861 |
|
|
$ |
2,802,772 |
|
|
Less: Current portion of operating lease
liabilities |
(414,543) |
|
|
(465,121) |
|
|
Non-current operating lease liabilities |
$ |
2,278,318 |
|
|
$ |
2,337,651 |
|
The current portion of operating lease liabilities was included in
Other current liabilities in the accompanying Consolidated Balance
Sheets.
Total lease cost was included in Cost of sales and SG&A in the
accompanying Consolidated Statements of Operations and is recorded
net of immaterial sublease income. Total lease cost comprised the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
Operating lease cost |
$ |
563,959 |
|
|
$ |
538,323 |
|
|
Variable lease cost |
171,621 |
|
|
148,130 |
|
|
Total lease cost |
$ |
735,580 |
|
|
$ |
686,453 |
|
The future maturity of lease liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
Year |
|
Amount |
|
2023 |
|
$ |
501,276 |
|
|
2024 |
|
523,097 |
|
|
2025 |
|
491,055 |
|
|
2026 |
|
381,295 |
|
|
2027 |
|
312,518 |
|
|
Thereafter |
|
840,306 |
|
|
Total lease payments |
|
3,049,547 |
|
|
Less: Imputed interest |
|
(356,686) |
|
|
Total operating lease liabilities |
|
$ |
2,692,861 |
|
Operating lease liabilities included
$45.2 million
related to options to extend lease terms that are reasonably
certain of being exercised and excluded $98.6 million of legally
binding lease obligations for leases signed, but not yet
commenced.
The weighted average remaining lease term and weighted average
discount rate for our operating leases were 6.9 years and 3.4% as
of December 31, 2022. We calculated the weighted average
discount rates using incremental borrowing rates, which equal the
rates of interest that we would pay to borrow funds on a fully
collateralized basis over a similar term.
Other information relating to our lease liabilities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
Cash paid for amounts included in the measurement of lease
liabilities: |
|
|
|
|
Operating cash flows from operating leases |
$ |
624,484 |
|
|
$ |
514,053 |
|
|
Right-of-use assets obtained in exchange for lease
obligations: |
|
|
|
|
Operating leases |
$ |
432,497 |
|
|
$ |
726,326 |
|
Other Commitments
We have entered into certain arrangements which require the future
purchase of goods or services. Our obligations primarily consist of
payments for the purchase of hardware, software and maintenance. As
of December 31, 2022, future payments of these arrangements
were $121.0 million and were not accrued in our Consolidated
Balance Sheet.
9. Accrued Expenses:
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
January 1, 2022 |
|
Payroll and related benefits |
$ |
155,441 |
|
|
$ |
207,984 |
|
|
Taxes payable |
106,712 |
|
|
111,380 |
|
|
Self-insurance reserves |
72,337 |
|
|
53,424 |
|
|
Inventory related accruals |
43,025 |
|
|
113,439 |
|
|
Accrued rebates |
42,415 |
|
|
35,611 |
|
|
Accrued professional services/legal |
22,317 |
|
|
18,448 |
|
|
Capital expenditures |
8,927 |
|
|
14,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
183,273 |
|
|
222,396 |
|
|
Total accrued expenses |
$ |
634,447 |
|
|
$ |
777,051 |
|
10. Share Repurchase Program:
In February 2022, our Board of Directors authorized an additional
$1.0 billion toward the existing share repurchase program.
Previously in April 2021 and November 2019, our Board of Directors
authorized $1.0 billion and $700.0 million for 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. The Board of Directors may increase
or otherwise modify, renew, suspend or terminate the share
repurchase program without prior notice.
During 2022, we repurchased 3.0 million shares of our common stock
at an aggregate cost of $598.2 million, or an average price of
$201.88 per share, in connection with our share repurchase program.
We had $947.3 million remaining under our share repurchase program
as of December 31, 2022. During 2021, we repurchased 4.6
million shares of our common stock at an aggregate cost of $886.7
million or an average price of $192.92 per share, under our share
repurchase program.
11. Earnings per Share:
The computations of basic and diluted earnings per share were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
December 31, 2022 |
|
January 1, 2022 |
|
January 2, 2021 |
|
Numerator |
|
|
|
|
|
|
Net income applicable to common shares |
$ |
501,872 |
|
|
$ |
616,108 |
|
|
$ |
493,021 |
|
|
Denominator |
|
|
|
|
|
|
Basic weighted average common shares |
60,351 |
|
|
64,028 |
|
|
68,748 |
|
|
Dilutive impact of share-based awards |
366 |
|
|
481 |
|
|
255 |
|
|
Diluted weighted average common shares
(1)
|
60,717 |
|
|
64,509 |
|
|
69,003 |
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
$ |
8.32 |
|
|
$ |
9.62 |
|
|
$ |
7.17 |
|
|
Diluted earnings per common share |
$ |
8.27 |
|
|
$ |
9.55 |
|
|
$ |
7.14 |
|
(1)For
2022, 2021 and 2020, restricted stock units (“RSUs”) excluded from
the diluted calculation as their inclusion would have been
anti-dilutive were 115 thousand,
9 thousand and 119 thousand.
12. Income Taxes:
Provision for Income Taxes
Provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
Deferred |
|
Total |
|
2022 |
|
|
|
|
|
|
Federal |
$ |
95,784 |
|
|
$ |
4,046 |
|
|
$ |
99,830 |
|
|
State |
17,531 |
|
|
3,919 |
|
|
21,450 |
|
|
Foreign |
27,162 |
|
|
(1,627) |
|
|
25,535 |
|
|
|
$ |
140,477 |
|
|
$ |
6,338 |
|
|
$ |
146,815 |
|
|
2021 |
|
|
|
|
|
|
Federal |
$ |
78,814 |
|
|
$ |
55,467 |
|
|
$ |
134,281 |
|
|
State |
21,420 |
|
|
11,747 |
|
|
33,167 |
|
|
Foreign |
21,381 |
|
|
988 |
|
|
22,369 |
|
|
|
$ |
121,615 |