Advance Auto Parts Inc: Form 10-Q for the period ended Apr 19, 2025

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 28, 2024 (filed with the SEC on February 26, 2025) which the Company refers to as the “2024 Form 10-K”), and the Company’s unaudited 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. Consistent with the previous fiscal year, the Company’s first quarter of the year contains sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.

First Quarter Fiscal 2025 Management Overview

The Company’s financial results for continuing operations for the first quarter of 2025 includes:

• Net sales during the first quarter of fiscal 2025 were $2.6 billion, a decrease of 6.8% compared with the first quarter of fiscal 2024. Comparable store sales declined 0.6%.
• Gross profit margin for the first quarter of 2025 was 42.9% of net sales, a decrease of (50) basis points compared with the first quarter of fiscal 2024.
• Selling, general and administrative expenses for the first quarter of fiscal 2025 were 48.0% of net sales, an increase of 648 basis points compared with the first quarter of fiscal 2024.
• The Company generated diluted earnings per share of $0.40 during the first quarter of fiscal 2025, compared with diluted earnings per share of $0.29 for the comparable period of 2024.

Business and Risks Update

The Company continues to make progress on the various elements of its business plan, which is focused on improving the customer experience, margin expansion, and driving consistent execution for both professional and DIY customers. Key updates for the first quarter of fiscal 2025 include:

• Completed all store location closures under the 2024 Restructuring Plan designed to improve the Company’s profitability and growth potential, and streamline its operations; and
• Continued focus on cost and supply chain optimization.

For further information related to restructuring and related activities, see Note 3. Restructuring of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

During the first quarter of fiscal 2025, new global trade tariffs were announced on imports to the U.S., including additional tariffs on various countries from which the Company directly or indirectly imports and/or sources merchandise, including Canada, China and Mexico, among others. Various modifications and delays to the U.S. tariffs have been announced and further changes are expected to be made in the future, which may include additional sector-based tariffs or other measures. The ultimate impact of tariffs on the Company’s business remains uncertain. See Part II, Item 1A, “Risk Factors” of this Quarterly Report.

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. In addition to the “Business and Risk Update” section included within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, these factors include, but are not limited to:

• Significant changes in U.S trade policies, including the recently enacted and/or proposed new global trade tariffs
• Inflationary pressures, including logistics and labor
• Global supply chain disruptions
• Cost of fuel
• Miles driven
• Unemployment rates
• Interest rates
• Consumer confidence and purchasing power
• Competition
• Changes in new car sales
• Economic and geopolitical uncertainty
• Foreign currency exchange volatility

While these factors tend to fluctuate, the Company remains confident in the long-term growth prospects for the automotive parts industry.

Stores

The key factors used in selecting sites and market locations in which the Company operates include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. During the sixteen weeks ended April 19, 2025, 10 stores were opened and 513 were closed, resulting in a total of 4,285 stores as of the end of the first fiscal quarter compared with a total of 4,788 stores as of December 28, 2024. The significant reduction in stores in the first quarter of fiscal 2025 relates to actions taken under the Company’s restructuring and related activities. See Note 3. Restructuring, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Results of Operations

($ in millions)

(1) Represents favorable (unfavorable) year over year change

Note: Sums may not equal totals due to rounding.

Net Sales

For the first quarter of fiscal 2025, net sales decreased 6.8% and comparable store sales declined 0.6% compared with the first quarter of fiscal 2024. The decline was driven by lower sales as a result of store closures executed under the 2024 Restructuring Plan during the first quarter of fiscal 2025.

The Company calculates comparable store sales based on the change in store or branch sales starting once a location has been open for approximately one year and by including e-commerce sales and excluding sales fulfilled by distribution centers to independently owned Carquest locations. The Company includes sales from relocated stores in comparable store sales from the original date of opening. Comparable store 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 for the first quarter of fiscal 2025 was $1,109 million, or 42.9% of net sales, compared with $1,204 million, or 43.4% of net sales, for the first quarter of fiscal 2024. The decrease in gross profit margin was due to lower margin liquidation sales associated with the 2024 Restructuring Plan. Total gross profit also decreased as a result of lower net sales driven by store closures executed under the 2024 Restructuring Plan.

Selling, General and Administrative Expenses, Exclusive of Restructuring and Related Expenses

Selling, general and administrative (SG&A) expenses, exclusive of restructuring and related expenses for the first quarter of fiscal 2025 were $1,122 million, or 43.4% of net sales, compared with $1,151 million, or 41.5% of net sales, for the first quarter of fiscal 2024. Overall SG&A expenses decreased year over year as a result of store closures executed under the 2024 Restructuring Plan. SG&A expenses as a percentage of net sales in the first quarter of fiscal 2024 benefited from a net gain on asset sales, see Note 7. Leases, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item1.

Restructuring and Related Expenses

Restructuring and related expenses for the first quarter of 2025 were $118 million, or 4.6% of net sales. The increase in expenses as compared to the same period in fiscal 2024, relates to the Company’s 2024 Restructuring Plan which was announced during the fourth quarter of fiscal 2024. The Company estimates that it will incur additional expenses of approximately $75 million to $100 million. These expenses primarily relate to lease terminations, professional services, and other exit costs to be incurred by the end of fiscal year 2025. See Note 3. Restructuring, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1.

Other Income, Net

Other income, net increased as compared to the same period in fiscal 2024 due to higher interest income earned resulting from higher cash and cash equivalent balances held, driven by the proceeds received from the sale of the Worldpac business in the fourth quarter of fiscal 2024. Other income, net in the first quarter of fiscal 2025 also includes income recognized from the transition services (“TSA Services”) agreement with Worldpac that commenced in the fourth quarter of fiscal 2024.

Income Tax (Benefit) Expense

The Company’s provision for income taxes for the first quarter of 2025 was a benefit of $155 million compared with a expense of $12 million for the same period in 2024. The decrease in tax expense for the first quarter of 2025 was a result of lower income before taxes and a net discrete tax benefit of $126 million related to certain tax benefits associated with capital loss deductions.

The Company’s effective tax rate was a benefit of (118.3)% and an expense of 41.4% for the sixteen weeks ended April 19, 2025 and April 20, 2024, respectively. The reduction in the effective tax rate compared to the same period in fiscal 2024 was due to a net discrete tax benefit of $126 million related to certain tax benefits associated with capital loss deductions.

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures described below to supplement the Company’s unaudited condensed consolidated financial statements prepared and presented in accordance with GAAP and to understand and evaluate the Company’s core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented as the Company believes that such non-GAAP financial measures provide useful information about the Company’s financial performance, enhance the overall understanding of the Company’s past performance and future prospects, and allow for greater transparency with respect to important metrics used by the Company’s management for financial and operational decision-making. The Company is presenting these non-GAAP metrics to provide investors insight to the information used by the Company’s management to evaluate its business and financial performance. The Company believes that these measures provide investors increased comparability of the Company’s core financial performance over multiple periods with other companies in the Company’s industry. The Company may make reference to certain financial measures not derived in accordance with GAAP within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report. Non-GAAP financial measures, including Adjusted Net (loss) income, Adjusted diluted (loss) Earnings Per Share (“Adjusted Diluted EPS”), Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Sales, General and Administrative expense (“Adjusted SG&A”), Adjusted SG&A Margin, Adjusted Operating (loss) Income and Adjusted Operating (loss) Income Margin, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing the Company’s operating performance, financial position or cash flows.

The Company has presented these non-GAAP financial measures as the company believes that the presentation of the financial results that exclude (1) transformation expenses under the Company’s turnaround plan, inclusive of the Worldpac divestiture and (2) other significant expenses, are useful and indicative of the Company's base operations because the expenses vary from period to period in terms of size, nature and significance. The income tax impact of these non-GAAP adjustments is also adjusted for using the estimated tax rate in effect for the respective non-GAAP adjustments. These measures assist in comparing the Company’s current operating results with past periods and with the operational performance of other companies in the industry. The disclosure of these measures allows investors to evaluate the Company’s 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 the Company has determined are not normal, recurring cash operating expenses necessary to operate the Company’s business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.

Transformation Expenses

Expenses incurred in connection with the Company's turnaround plan and specific transformative activities related to asset optimization that the Company does not view to be normal cash operating expenses. These expenses primarily include:

• Restructuring and other related expenses: Expenses relating to strategic initiatives, including severance expense, retention bonuses offered to store-level employees to help facilitate the closing of stores, incremental reserves related to the collectibility of receivables resulting from contract terminations with certain independents associated with the 2024 Restructuring Plan and third-party professionals assisting in the development and execution of the strategic initiatives.
• Impairment and write-down of long-lived assets: Expenses relating to the impairment of operating lease ROU assets and property and equipment, incremental depreciation as a result of accelerating long-lived assets over a shorter useful life, depreciation of long-lived assets and ROU asset amortization after store closure, and incremental lease abandonment expenses as a result of accelerating ROU asset amortization for leases the Company expects to exit before the end of the contractual term, net of gains on lease terminations, in connection with the 2024 Restructuring Plan and Other Restructuring Plan.
• Distribution network optimization: Expenses primarily relating to the conversion of the stores and distribution centers to market hubs, including temporary labor, incremental depreciation, as a result of accelerating long-lived assets over a shorter useful life, nonrecurring professional service fees and team member severance.

Other Expenses

Expenses incurred by the Company that are not viewed as normal cash operating expenses and vary from period to period in terms of size, nature, and significance. These expenses primarily include:

• Other professional service fees: Expenses relating to nonrecurring services rendered by third-party vendors engaged to perform a strategic business review, including the Company’s transformation initiatives.
• Worldpac post transaction-related expenses: Expenses primarily relating to non-recurring separation activities provided by third-party professionals subsequent to the sale of Worldpac.
• Executive turnover: Expenses associated with executive level reorganization, including expenses for executive severance, the hiring search for leadership positions and certain compensation benefits.
• Material weakness remediation: Incremental expenses associated with the remediation of the Company’s previously disclosed material weaknesses in internal control over financial reporting.
• Cybersecurity incident: Expenses related to the response and remediation of a cybersecurity incident.
• Other tax adjustments: Certain tax items that are unrelated to the fiscal year in which they are recorded are excluded in order to provide a clearer understanding of the Company’s ongoing Non-GAAP tax rate and after-tax earnings.

The following table includes a reconciliation of this information to the most comparable GAAP measures (in millions):

(1) Restructuring and other related expenses included $30 million of nonrecurring services rendered by third-party vendors assisting with the 2024 Restructuring Plan, $15 million of severance and other labor related costs, $7 million related to incremental reserves on loan guarantees and $11 million of other related expenses associated with closures, including the transfer of assets.

(2) The Company recorded impairment charges for ROU assets and property and equipment of $9 million, net of gains on sale, and incremental accelerated depreciation and amortization for property and equipment and ROU assets of $36 million.

(3) The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.

(4) Income tax (benefit) expenses included a discrete non-recurring tax benefit associated with capital loss deductions effectuated in the first quarter of fiscal 2025. The benefit has been excluded from Non-GAAP results in order to provide a clearer understanding of ongoing Non-GAAP tax rate and after-tax earnings.

(5) Other professional service fees in fiscal 2024 were classified as restructuring and related expenses based on the underlying activity to which they related.

(6) Refer to the reconciliation of diluted weighted-average common shares outstanding (GAAP) to adjusted diluted weighted-average common shares outstanding (Non-GAAP) which is the denominator utilized to calculate adjusted diluted (loss) earnings per share (Non-GAAP). Adjusted diluted weighted-average common shares outstanding (Non-GAAP) excludes the dilutive impact of share-based awards as such shares are considered anti-dilutive in consideration of the Company’s Non-GAAP loss for the period.

Reconciliation of Adjusted Diluted Weighted-Average Common Shares Outstanding

(shares in millions)

24

Liquidity and Capital Resources

Overview

The Company’s principal sources of liquidity are cash and cash equivalents. 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 and other operational priorities, such as restructuring and asset optimization plans. In addition, cash is required to pay the Company’s dividend and to pay interest and principle on the Company’s long-term debt when due. The following tables present selected financial information related to the Company’s liquidity (in millions):

In addition to cash and cash equivalents presented above, as of April 19, 2025, the Company also maintained access to $885 million in undrawn capacity through the Company’s revolving credit facility (the “2021 Credit Agreement”) as further described below. The Company also maintains certain supplier finance programs. See Note 9. Supplier Finance Programs, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

The decrease in cash and cash equivalents was primarily due to net cash used in operating activities of $156 million, primarily as a result of a decrease in net working capital, inclusive of cash payments made in the period related to the Company’s 2024 Restructuring Plan, $27 million used for purchases of property and equipment, net of proceeds from sales, and the payment of $15 million in dividends.

The Company believes that its cash and cash equivalents and sources of liquidity will satisfy its working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future.

Analysis of Cash Flows

In the fourth quarter of fiscal 2024, the Company completed the sale of Worldpac. As a result, the Company classified the results of operations and cash flows of Worldpac as discontinued operations in its condensed consolidated statements of operations and condensed consolidated statements of cash flows for prior periods presented. The Company’s cash flows from operating, investing and financing activities were as follows (in millions):

(in millions)

Operating Activities

For the sixteen weeks ended April 19, 2025, cash used in operating activities decreased by $153 million compared with the same period of prior year. The decrease as compared to the comparative period was primarily driven by a decrease in net working capital, inclusive of cash payments made in the period related to the Company’s 2024 Restructuring Plan.

Investing Activities

For the sixteen weeks ended April 19, 2025, cash flows used in investing activities decreased by $9 million to $27 million as compared with the first quarter of fiscal 2024. The decrease in cash used in investing activities was attributable to lower spend on property and equipment and higher proceeds from the sale of property and equipment.

Financing Activities

For the sixteen weeks ended April 19, 2025, cash flows used in financing activities was $17 million, a decrease of $8 million as compared with the first quarter of fiscal 2024. The decrease in cash used in financing activities was due to the noncontrolling interest purchase payments in the first quarter of fiscal 2024 with no such payments made in the first quarter of fiscal 2025.

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. In addition, Amendment No. 5 to the 2021 Credit Agreement prevents the Company from increasing the amount of the Company’s cash dividends.

Restructuring Activities

On November 13, 2024, the Company’s Board of Directors approved the 2024 Restructuring Plan, which was designed to improve the Company’s profitability and growth potential and streamline its operations. In fiscal 2023, the Company also announced a strategic and operational plan to streamline the Company’s supply chain by configuring a multi-echelon supply chain by leveraging current asset and operating fewer, more productive distribution centers that focus on replenishment and move more parts closer to the customer. The Company estimates that it will incur additional expenses of approximately $75 million to $100 million including $50 million to $75 million of cash expenses primarily composed of lease terminations and other exit expenses and professional services, by the end of fiscal year 2025. For further information, see Note 3. Restructuring, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Long-Term Debt

As of April 19, 2025 the Company had outstanding long-term debt totaling $1,790 million, of which $299 million is classified as short-term related to the 5.90% Senior Unsecured Notes due March 9, 2026. For further details, see Note 6. Long-term Debt and Fair Value of Financial Instruments, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Credit Facilities

As of April 19, 2025 and December 28, 2024, the Company had no outstanding borrowings under the 2021 Credit Agreement. As of April 19, 2025 the Company had $885 million of borrowing availability and $115 million letters of credit outstanding under the 2021 Credit Agreement. As of December 28, 2024, the Company had $1 billion of borrowing availability and no letters of credit outstanding under the 2021 Credit Agreement. The Company is required to maintain certain financial covenants related to the 2021 Credit Agreement and as of April 19, 2025, the Company was in compliance with such financial covenants. On February 25, 2025, the Company entered into Amendment No. 6 (“Amendment No. 6”) to the 2021 Credit Agreement.

As of April 19, 2025 and December 28, 2024, the Company also had $90 million and $91 million, respectively, 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 the Company’s self-insurance policies.

For further details, see Note 6. Long-term Debt and Fair Value of Financial Instruments, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

As of April 19, 2025, the Company had a credit rating from S&P of BB+ and from Moody’s Investor Service of Ba1. As of April 19, 2025, the outlooks by Standard & Poor’s and Moody’s on the Company’s credit rating were negative and stable, respectively. The current pricing grid used to determine the Company’s borrowing rate under the Credit Agreement is based on the Company’s credit ratings. A downgrade in the Company’s credit ratings could occur if its business operations deteriorate, its leverage increases or if available liquidity becomes insufficient to maintain operations. If the Company’s credit ratings decline, the interest rate on outstanding balances may increase, the 2021 Credit Agreement would become securitized pursuant to its terms and the Company’s access to additional financing on favorable terms may be limited. A decline in credit ratings or perceived creditworthiness, among other factors, may impact participation in supplier finance programs, which in turn could shorten payable terms, result in an increase in working capital requirements or otherwise negatively impact capital resources, potentially materially. See Note 9. Supplier Finance Programs, of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Additional Capital Requirements

Expected working and other capital requirements, including Contractual and Off-Balance Sheet Obligations are described in the Company’s 2024 Annual Report on Form 10-K in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of April 19, 2025, other than for the changes disclosed in the “Notes to Condensed Consolidated Financial Statements”, and “Liquidity and Capital Resources” in this Quarterly Report, there have been no other material changes to the Company’s expected working and other capital requirements described in the Company’s 2024 Annual Report on Form 10-K.

There have been no significant changes in the Company’s exposure to market risk since December 28, 2024. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2024 Form 10-K.

Disclosure Controls and Procedures

Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are management’s controls and other procedures that are designed to ensure that information required to be disclosed by management in the Company’s reports that are filed or submitted 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 management, including the Company’s 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.

Management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures as of April 19, 2025. Based on this evaluation, the principal executive officer and the principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the first quarter ended April 19, 2025, 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.

The Company’s future business, operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 28, 2024, which could 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. Except for the risk factor set forth below, there have been no material changes to the Company’s risk factors since the 2024 Form 10-K.

An unstable global economic and geopolitical landscape increases uncertainty about key areas of doing business internationally and may have a negative impact on our business.

During the first quarter of fiscal 2025, new global trade tariffs were announced on imports to the U.S., including additional tariffs on various countries from which the Company directly or indirectly imports and/or sources merchandise, including Canada, China and Mexico, among others. In response, several countries have imposed, or threatened to impose, reciprocal tariffs on imports from the U.S. and other measures. Various modifications and delays to the U.S. tariffs have been announced and further changes are expected to be made in the future, which may include additional sector-based tariffs or other measures. Additionally, the current administration has directed various federal agencies to further evaluate key aspects of U.S. trade policy and there has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies, enforcement priorities, sanctions, treaties and tariffs. Significant uncertainty continues to exist about the future economic and political relationship between the U.S. and other countries. The ultimate impact of tariffs on the Company’s business will depend on several factors, including whether additional or incremental U.S. tariffs or other measures are announced, revised, or rescinded, to what extent other countries implement tariffs or other measures in response, and the overall magnitude and duration of these items. These developments, or the perception that any of them could occur, may have a material effect on global economic conditions, the stability of global financial markets, or global trade, and may impact the Company’s product cost, pricing, or competitive conditions, disrupt supply chains, impact the broader macroeconomic environment and consumer sentiment or otherwise negatively impact the Company’s business, financial condition and results of operations.