# Advance Auto Parts Inc: Form 10-Q for the period ended Apr 20, 2024

- Company: [Advance Auto Parts Inc](/companies/aap.md) (CIK 1158449)
- Form: 10-Q
- Filed: 2024-05-30
- Accepted by EDGAR: May 29, 2024, 21:37 ET
- Period: 2024-04-20
- Accession: 0001158449-24-000132
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1158449/000115844924000132/aap-20240420.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1158449/000115844924000132/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-04-20.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cash and equivalents | at 2024-04-20 | $451.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-04-20 | $6.34bn | us-gaap:AssetsCurrent |
| Total assets | at 2024-04-20 | $12.20bn | us-gaap:Assets |
| Current liabilities | at 2024-04-20 | $5.21bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-04-20 | $9.64bn | us-gaap:Liabilities |
| Long-term debt | at 2024-04-20 | $1.79bn | us-gaap:LongTermDebt |
| Current portion of debt | at 2024-04-20 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-04-20 | $2.56bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 14,062 characters.

*The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2023 (filed with the SEC on March 12, 2024), which the Company refers to as the 2023 Form 10-K, and the Company’s condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. The Company’s first quarter of the year contains sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.*

### Management Overview

A high-level summary of the Company’s financial results for the first quarter of 2024 includes:

- Net sales during the first quarter of 2024 were $3.41 billion, a decrease of 0.3% compared with the first quarter of 2023. Comparable store sales declined 0.2%.
- Gross profit margin for the first quarter of 2024 was 42.0% of net sales, a decrease of 82 basis points compared with the first quarter of 2023. Gross profit margin was negatively impacted by increased costs not fully covered by pricing actions, partially offset by supply chain productivity.
- Selling, general & administrative (“SG&A”) expenses for the first quarter of 2024 were 39.4% of net sales, an improvement of 48 basis points compared with the first quarter of 2023. This was primarily driven by cost control efforts initiated at the end of 2023 and a net gain on sale of assets, partially offset by increased field wages and training and ongoing expense inflationary pressure.
- The Company generated diluted earnings per share (“Diluted EPS”) of $0.67 during the first quarter of 2024, compared with $0.81 for the comparable period of 2023.

### Business and Risks Update

The Company continues to make progress on the various elements of the Company’s strategic business plan, which is focused on improving the customer experience, margin expansion and driving consistent execution for both professional and DIY customers. To achieve these improvements, the Company has undertaken planned strategic actions to help build a foundation for long-term success across the organization, which include:

- Conducting sales process for the potential disposition of Worldpac;
- Reducing costs to remain competitive while reinvesting in the frontline;
- Making organizational changes to position the Company for success;
- Assessing the productivity of all assets, including company-owned stores and Carquest Independents; and
- Consolidating the Company’s supply chain.

### Industry Update

Operating within the automotive aftermarket industry, the Company is influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry, and include but are not limited to:

- Inflationary pressures, including logistics and labor
- Global supply chain disruptions
- Rising fuel costs
- Miles driven
- Unemployment rates
- Consumer confidence and purchasing power
- Competition
- Changes in new car sales
- Economic and geopolitical uncertainty
- Increased foreign currency exchange volatility

### Stores and Branches

Key factors in selecting sites and market locations in which the Company operates include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. During the sixteen weeks ended April 20, 2024, seven stores and branches were opened and 17 were closed, resulting in a total of 5,097 stores and branches compared with a total of 5,107 stores and branches as of December 30, 2023.

### Results of Operations

*($ in millions)*

|  | Sixteen Weeks Ended April 20, 2024 |  | April 22, 2023 |  | $ Favorable/ (Unfavorable) | Basis Points |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $3,406.3 | 100.0% | $3,417.6 | 100.0% | $(11.3) | — |
| Cost of sales | 1,977.2 | 58.0 | 1,955.7 | 57.2 | (21.5) | (83) |
| Gross profit | 1,429.1 | 42.0 | 1,461.9 | 42.8 | (32.8) | (82) |
| SG&A | 1,343.1 | 39.4 | 1,364.0 | 39.9 | 20.9 | 48 |
| Operating income | 86.0 | 2.5 | 97.9 | 2.9 | (11.9) | (34) |
| Interest expense | (24.9) | (0.7) | (29.7) | (0.9) | 4.8 | 14 |
| Other expense, net | (1.3) | — | (0.7) | — | (0.6) | (2) |
| Provision for income taxes | 19.8 | 0.6 | 19.2 | 0.6 | (0.6) | (2) |
| Net income | $40.0 | 1.2% | $48.3 | 1.4% | $(8.3) | (24) |

#### Note: Table amounts may not foot due to rounding.

### Net Sales

For the first quarter of 2024, net sales decreased 0.3% and comparable store sales declined 0.2% compared with the first quarter of 2023.

The Company calculates 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 and exclude sales fulfilled by distribution centers to independently owned Carquest locations. Acquired stores are included in the Company’s comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date. The Company includes sales from relocated stores in comparable store sales from the original date of opening.

### Gross Profit

Gross profit for the first quarter of 2024 was $1.43 billion, or 42.0% of net sales, compared with $1.46 billion, or 42.8% of net sales, for the first quarter of 2023. During the first quarter of 2024, gross profit margin was negatively impacted by increased costs that were not fully covered by pricing actions. These were partially offset by supply chain productivity.

### Selling, General and Administrative Expenses

SG&A expenses for the first quarter of 2024 were $1.34 billion, or 39.4% of net sales, compared with $1.36 billion, or 39.9% of net sales, for the first quarter of 2023. The improvement in SG&A as a percentage of net sales was driven by cost control efforts initiated at the end of 2023, including reduced corporate expenditures from the decrease in headcount and significant reduction of marketing expenses, as well as a net gain on asset sales (see *Note 7. Leases* for additional information). These were partially offset by increased field wages and training and ongoing expense inflationary pressure.

### Provision for Income Taxes

The Company’s provision for income taxes for the first quarter of 2024 was $19.8 million compared with $19.2 million for the same period in 2023. The Company’s effective tax rate was 33.2% for the first quarter of 2024 and 28.5% for the first quarter of 2023. The higher effective income tax rate for the first quarter of 2024 compared with the same period in the prior year was due to a discrete charge for stock-based compensation in the first quarter of 2024.

### Liquidity and Capital Resources

### Overview

The Company’s primary cash requirements necessary to maintain the Company’s current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under the Company’s strategic business plan and other operational priorities, including payment of interest on the Company’s long-term debt. Historically, the Company has also used available funds to repay borrowings under the Company’s credit facility, to periodically repurchase shares of the Company’s common stock under the share repurchase program, to pay the Company’s quarterly cash dividend and for acquisitions. However, the Company’s future uses of cash may differ, including with respect to the weight the Company places on the preservation of cash and liquidity, degree of investment in the Company’s business and other capital allocation factors.

Typically, the Company has funded its cash requirements primarily through cash generated from operations, supplemented by borrowings under the Company’s credit facilities and notes offerings as needed. The Company believes funds generated from its expected results of operations, available cash and cash equivalents, and available borrowings under the Company’s credit facility will be sufficient to fund its obligations for the next year. The Company also believes such funds, cash and available borrowings, together with the Company’s ability to generate cash through credit facilities and notes offerings as needed, will be sufficient to fund its ongoing obligations.

The Company’s supplier finance programs did not have a material impact on its liquidity or capital resources in the periods presented nor does the Company expect such arrangements to have a material impact on its liquidity or capital resources for the foreseeable future. See *Note 11. Supplier Finance Programs* of the Company’s condensed consolidated financial statements for further discussion.

On February 26, 2024, the Company entered into Amendment No. 4 (“Amendment No. 4”) to the 2021 Credit Agreement to enable certain addbacks to the definition of Consolidated EBITDA contained therein for specific write-downs of inventory and vendor receivables. Amendment No. 4 also updated certain limitations on future incurrences of other indebtedness and liens, replacing the cap thereon of 10% of consolidated net tangible assets with $400 million, and eliminated the $250 million basket for accounts receivable securitization transactions. Amendment No. 4 made no other material changes to the terms of the 2021 Credit Agreement.

### Share Repurchase Program

The Company’s share repurchase program permits the repurchase of the Company’s common stock on the open market and in privately negotiated transactions from time to time. The Company expects to continue its temporary pause on repurchases under the existing share repurchase program and to continue to evaluate current and expected business conditions with respect to resumption of share repurchase activity.

During the first quarter of 2024 and 2023, the Company did not purchase any shares of its common stock under the share repurchase program. The Company had $947.3 million remaining under the share repurchase program as of April 20, 2024.

### Analysis of Cash Flows

The following table summarizes the Company’s cash flows from operating, investing and financing activities:

*(in thousands)*

|  | Sixteen Weeks Ended April 20, 2024 | April 22, 2023 |
| --- | ---: | ---: |
| Cash flows provided by (used in) operating activities | $2,688 | $(382,524) |
| Cash flows used in investing activities | (38,929) | (89,671) |
| Cash flows (used in) provided by financing activities | (25,644) | 425,202 |
| Effect of exchange rate changes on cash | 9,417 | 68 |
| Net decrease in cash and cash equivalents | $(52,468) | $(46,925) |

#### Operating Activities

For the first quarter of 2024, cash flows provided by operating activities increased by $385.2 million to $2.7 million compared with the same period of prior year. The net increase in cash flows provided by operating activities was driven by an increase in working capital, namely accounts payable, inventories and accrued expenses.

#### Investing Activities

For the first quarter of 2024, cash flows used in investing activities decreased by $50.7 million to $38.9 million compared with the same period of prior year. The decrease in cash used in investing activities was due to lower capital spend in the current year coupled with higher proceeds on asset sales (see *Note 7. Leases* for additional information).

#### Financing Activities

For the first quarter of 2024, cash flows used in financing activities was $25.6 million, a decrease of $450.8 million compared with the same period of prior year. The decrease in cash provided by financing activities was due to no issuances of senior unsecured notes offset by a decrease in dividends paid during the first quarter of 2024 compared with the same period of prior year.

The Company’s Board of Directors has declared a cash dividend every quarter since 2006. Any payments of dividends in the future will be at the discretion of the Company’s Board of Directors and will depend upon the Company’s results of operations, cash flows, capital requirements and other factors deemed relevant by the Board of Directors.

### Long-Term Debt

With respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee, Advance Stores, a wholly owned subsidiary of the Issuer, serves as the guarantor (“Guarantor Subsidiary”). The subsidiary guarantees related to the Issuer’s 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. The Company’s captive insurance subsidiary, an insignificant wholly owned subsidiary of the Issuer, does not serve as guarantor of its senior unsecured notes.

For additional information, refer to *Note 6. Long-term Debt and Fair Value of Financial Instruments* of the Notes to the Condensed Consolidated Financial Statements included herein.

As of April 20, 2024, the Company had a credit rating from Standard & Poor’s of BB+ and from Moody’s Investor Service of Baa3. As of April 20, 2024, the outlooks by Standard & Poor’s and Moody’s on the Company’s credit rating were stable and negative. The current pricing grid used to determine the Company’s borrowing rate under the Credit Agreement is based on the Company’s credit ratings. If the Company’s credit ratings decline, the interest rate on outstanding balances may increase and the Company’s access to additional financing on favorable terms may be limited. In addition, declines could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to the Company’s vendors based on the Company’s credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, the Company’s interest rate may decrease.

## Market risk

As filed, 218 characters.

There have been no significant changes in the Company’s exposure to market risk since December 30, 2023. Refer to “*Item 7A. Quantitative and Qualitative Disclosures about Market Risk”* in the Company’s 2023 Form 10-K.

## Controls and procedures

As filed, 7,561 characters.

### 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 of our internal controls may vary over time.

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 April 20, 2024. 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 not effective to accomplish their objectives at the reasonable assurance level solely due to the material weaknesses described below.

### Material Weaknesses in Internal Control over Financial Reporting

In our Form 10-Q for the period ended April 22, 2023, management identified a material weakness in our internal control over financial reporting that existed due to turnover of key accounting positions during the first quarter of 2023. The Company was unable to attract, develop and retain sufficient resources to fulfill internal control responsibilities during the first quarter 2023. Additionally, we did not design and implement effective control activities including account reconciliations. This relates to account reconciliations of cash and a small number of other miscellaneous accounts.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Management believes that the Condensed Consolidated Financial Statements and related financial information included in this Form 10-Q present fairly, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as of and for the periods presented.

### Details on Account Reconciliation Material Weakness

As discussed above, subsequent to December 30, 2023, in connection with the preparation of the quarterly financial statements contained in this Form 10-Q, management identified certain cash account reconciliations whereby a former employee in the Company’s Indian Shared Service Center circumvented a cash reconciliation controls policy and concealed unreconciled items. This individual did not follow the Company’s policy to display all reconciling items in the reconciliation process. Management determined that the adjustments necessary to correct identified errors are immaterial.

The Audit Committee was informed of a significant deficiency regarding cash reconciliations in March 2024 by management and discussed the deficiency with the Company’s independent registered accounting firm. This significant deficiency has now been elevated to a material weakness due to noncompliance with policy. The Company believes the cash reconciliation policy noncompliance primarily related to inadequately trained and supervised personnel and is closely linked to the material weakness disclosed in the Form 10-Q for the period ended April 22, 2023.

As a result, the Company is concurrently amending its Form 10-K for the fiscal year ended December 30, 2023 to amend (1) management’s annual report on internal control over financial reporting and (2) Deloitte & Touche LLP’s report on the Company’s internal control over financial reporting, in each case, to reflect the additional material weakness.

#### Remediation Efforts to Address the Material Weaknesses

The Company has devoted, significant time and resources to complete its remediation of the material weaknesses. The following components of the remediation plan, among others, have been executed:

- Backfilled open roles and hired approximately 30 experienced personnel (both permanent employees and contract labor) with the requisite accounting and internal controls knowledge and experience to sufficiently complement the existing global controllership organization;
- Completed the review of the organizational structure of the global controllership function by a third-party consultant and implemented recommended changes;
- Assessed our methodologies, policies, and procedures to ensure adequate design and effectiveness of processes supporting internal control over financial reporting;
- Added redundant and compensating internal controls to enhance our internal control structure;
- Assessed the specific training needs for newly hired and existing personnel and developed and delivered training programs designed to uphold our internal controls standards;
- Following the departure of the Company’s Chief Financial Officer during the third fiscal quarter of 2023, hired a new Chief Financial Officer who began employment with the Company on November 27, 2023;
- Following the departure of the Company’s Chief Accounting Officer during the fourth fiscal quarter of 2023, hired a new Chief Accounting Officer who began employment with the Company on January 9, 2024; and
- Reperformed cash reconciliations for 2023 year end and will continue to execute the same comprehensive testing until this matter is considered fully remediated.

The Company considers that the actions described above are comprehensive and will remediate the material weaknesses and strengthen the Company’s internal control over financial reporting. Given the limited time that the open roles have been filled, the Company believes that additional time will be beneficial to demonstrate that personnel have the ability to consistently perform their responsibilities to ensure that the material weaknesses have been fully remediated. Therefore, the Company has concluded that these material weaknesses will not be considered fully remediated until the remediation actions, including those above, have operated effectively for a sufficient period of time and have been sufficiently tested. The Company is targeting completion of the remediation and testing of these material weaknesses in the second half of fiscal 2024.

### Changes in Internal Control Over Financial Reporting

Except for the changes described above, there has been no change in the Company’s internal control over financial reporting during the first quarter ended April 20, 2024, that has materially affected or is reasonably likely to materially affect its internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

### PART II. OTHER INFORMATION

None.

## Risk factors

As filed, 365 characters.

Please refer to “*Item 1A. Risk Factors”* found in the 2023 Form 10-K filed for the year ended December 30, 2023 for risks that, if they were to occur, could materially adversely affect the Company’s business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of the Company’s common stock.

Filed May 30, 2024.
Source: SEC EDGAR, the filing index for accession 0001158449-24-000132. Last ingested by Listed: Nov 5, 2026, 16:27 ET. No prices; not investment advice.