Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.20M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 24K
60: R1 Document and Entity Information Document Document HTML 73K
40: R2 Condensed Consolidated Balance Sheets HTML 105K
16: R3 Condensed Consolidated Balance Sheets HTML 27K
(Parenthetical)
53: R4 Condensed Consolidated Statements of Operations HTML 68K
62: R5 Condensed Consolidated Statements of Comprehensive HTML 39K
Income
41: R6 Condensed Consolidated Statements of Comprehensive HTML 22K
Income (Parenthetical)
17: R7 Consolidated Statements of Changes in Stockholdes' HTML 22K
Equity (Parenthetical)
51: R8 Consolidated Statements of Changes in Stockholdes' HTML 100K
Equity
63: R9 Condensed Consolidated Statements of Cash Flows HTML 100K
58: R10 Nature of Operations and Basis of Presentation HTML 27K
48: R11 Significant Acounting Policies HTML 46K
10: R12 Inventories HTML 32K
34: R13 Exit Activities HTML 23K
59: R14 Intangible Assets HTML 23K
49: R15 Receivables, net HTML 32K
11: R16 Long-term Debt and Fair Value of Financial HTML 40K
Instruments
35: R17 Leases HTML 56K
57: R18 Warranty Liabilities HTML 31K
50: R19 Share Repurchase Program HTML 27K
23: R20 Earnings per Share HTML 51K
31: R21 Share-Based Compensation HTML 26K
66: R22 Condensed Consolidating Financial Statements HTML 636K
44: R23 Significant Acounting Policies (Policies) HTML 48K
24: R24 Inventories (Policies) HTML 23K
33: R25 Exit Activities (Policies) HTML 23K
67: R26 Long-term Debt and Fair Value of Financial HTML 21K
Instruments (Policies)
45: R27 Leases (Policies) HTML 23K
25: R28 Share-Based Compensation (Policies) HTML 21K
30: R29 Significant Acounting Policies (Tables) HTML 41K
37: R30 Inventories (Tables) HTML 30K
14: R31 Receivables, net (Tables) HTML 32K
47: R32 Long-term Debt and Fair Value of Financial HTML 31K
Instruments (Tables)
56: R33 Leases (Tables) HTML 61K
36: R34 Warranty Liabilities (Tables) HTML 31K
13: R35 Earnings per Share (Tables) HTML 51K
46: R36 Condensed Consolidating Financial Statements HTML 638K
(Tables)
54: R37 Nature of Operations and Basis of Presentation HTML 31K
(Details)
38: R38 Significant Acounting Policies (Details) HTML 31K
12: R39 Significant Acounting Policies Adoption of ASU HTML 26K
2016-02 (Leases) (Details)
27: R40 Inventories (Details) HTML 32K
20: R41 Exit Activities (Details) HTML 22K
43: R42 Intangible Asset (Details) HTML 23K
65: R43 Receivables, net (Details) HTML 36K
26: R44 Long-term Debt and Fair Value of Financial HTML 59K
Instruments (Details)
19: R45 Leases (Details) HTML 103K
42: R46 Warranty Liabilities (Details) HTML 27K
64: R47 Share Repurchase Program (Details) HTML 41K
28: R48 Earnings per Share (Details) HTML 47K
18: R49 Share-Based Compensation (Details) HTML 41K
15: R50 Condensed Consolidating Balance Sheet (Details) HTML 172K
39: R51 Condensed Consolidated Income Statement (Details) HTML 90K
61: R52 Condensed Consolidating Comprehensive Income HTML 45K
Statement (Details)
52: R53 Condensed Consolidating Statement of Cash Flows HTML 95K
(Details)
22: XML IDEA XML File -- Filing Summary XML 118K
32: XML XBRL Instance -- aap10q10519secreport_htm XML 2.69M
21: EXCEL IDEA Workbook of Financial Reports XLSX 63K
6: EX-101.CAL XBRL Calculations -- aap-20191005_cal XML 208K
7: EX-101.DEF XBRL Definitions -- aap-20191005_def XML 470K
8: EX-101.LAB XBRL Labels -- aap-20191005_lab XML 1.22M
9: EX-101.PRE XBRL Presentations -- aap-20191005_pre XML 716K
5: EX-101.SCH XBRL Schema -- aap-20191005 XSD 127K
55: JSON XBRL Instance as JSON Data -- MetaLinks 268± 391K
29: ZIP XBRL Zipped Folder -- 0001158449-19-000199-xbrl Zip 385K
(Exact name of registrant as specified in its charter)
________________________
iDelaware
i54-2049910
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i2635 East Millbrook Road, iRaleigh,
iNorth Carolinai27604
(Address of principal executive offices) (Zip Code)
(i540)
i362-4911
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading
symbol
Name of each exchange on which registered
iCommon Stock, $0.0001 par value
iAAP
iNew
York Stock Exchange
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).
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. iYes☒ 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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1.
i
Nature
of Operations and Basis of Presentation:
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 subsidiary, Advance Stores Company, Incorporated (“Advance Stores”), and its subsidiaries (collectively referred to as “Advance,”“we,”“us” or “our”).
As
of October 5, 2019, we operated a total of i4,891 stores and i152
branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of October 5, 2019, we served i1,260 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico, the Bahamas, Turks and Caicos and the British Virgin Islands.
The
accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting guidance. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for 2018 as filed with the SEC on February 19, 2019.
During the sixteen weeks ended April
20, 2019, we made an out-of-period correction, which increased Cost of sales by $i13.0 million, related to received not invoiced inventory.
The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Our first quarter of the year contains
sixteen weeks. Our remaining three quarters consist of twelve weeks.
2.
i
Significant Accounting Policies:
i
Revenues
i
The
following table summarizes disaggregated revenue from contracts with customers by product group:
We adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), as of December 30, 2018, using the alternative transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Using the alternative transition method, we applied the transition requirements at the effective date of ASU 2016-02 with the impact of initially applying ASU 2016-02 recognized as a cumulative-effect adjustment to retained earnings in the first quarter of 2019. Consequently, the comparative periods presented continue to be in accordance with ASC 840, Leases (Topic 840) (“ASC 840”), including the disclosure requirements
of ASC 840.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
We elected the package of practical expedients permitted under the transition guidance within the new standard. In addition, as a practical expedient relating to our facility and vehicle leases,
we elected not to separate lease components from nonlease components.
The adoption of ASU 2016-02 resulted in the recording of lease assets and lease liabilities of $i2.4 billion as of December 30, 2018. At the date of adoption, there was a difference between the operating lease right-of-use assets and lease liabilities recorded that included an adjustment to retained earnings, net of
a $i7.9 million deferred tax impact, which primarily resulted from the impairment of operating lease right-of-use assets. For the forty weeks ended October 5, 2019, the adoption of the new standard did not have a material impact on our condensed consolidated statements of operations and condensed consolidated statements of
cash flows as substantially all of our leases remained operating in nature.
3.
i
Inventories
i
Inventories
are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately i89% of inventories as of October 5, 2019 and December 29, 2018. 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 for
inventories purchased in the forty weeks ended October 5, 2019 and prior years. We recorded an increase to Cost of sales of $i33.8 million for the twelve weeks ended October 5, 2019, a reduction to Cost of sales of $i22.0
million for the twelve weeks ended October 6, 2018, an increase to Cost of sales of $i76.7 million for the forty weeks ended October 5, 2019 and a reduction to Cost of sales of $i54.3
million for the forty weeks ended October 6, 2018 to state inventories at LIFO.
An actual valuation of inventory under the LIFO method is performed by us at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected inventory levels and costs at the end of the year.
As of December 29, 2018, and in accordance with ASC 420, Exit or Disposal Cost Obligations, the closed facility lease obligation, which comprised of sublease assets and lease liabilities for closed facilities, was $i42.3 million recorded in connection with the initiatives and liabilities associated
with facility closures that occurred as part of our normal market evaluation process as described in our 2018 Form 10-K. iAs a result of our transition to ASU 2016-02, our lease liabilities for closed facilities are included within the lease liability recorded in Other current liabilities and Noncurrent operating lease liabilities, and the operating lease right-of-use assets recorded upon transition was recorded net of the previously recorded closed facility lease obligation.
5.
i
Intangible
Assets
Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $i7.3 million and $i9.4
million for the twelve weeks ended October 5, 2019 and October 6, 2018 and $i24.4 million and $i31.3
million for the forty weeks ended October 5, 2019 and October 6, 2018.
The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. We believe the carrying value of our other long-term debt approximates fair value. The carrying amounts of our cash and cash equivalents, receivables, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Bank
Debt
As of October 5, 2019 and December 29, 2018, we had ino outstanding borrowings under the unsecured revolving credit facility (the “2017 Credit Agreement”) and borrowing
availability was $i1.0 billion and $i998.0
million. Under the 2017 Credit Agreement, we had ino letters of credit and $i2.0
million of letters of credit outstanding as of October 5, 2019 and December 29, 2018.
In connection with our bilateral credit facility, we had outstanding letters of credit of $i113.1
million and $i100.5 million as of October 5, 2019 and December 29, 2018, which generally have a term of one year or less and primarily serve as collateral for our self-insurance policies. We were in compliance with all financial covenants required
by our debt arrangements as of October 5, 2019.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Senior Unsecured Notes
On
February 28, 2019, we redeemed all $i300.0 million aggregate principal amount of our outstanding i5.75%
senior unsecured notes that were issued in April 2010 at i99.587% of the principal amount (the “2020 Notes”). During the sixteen weeks ended April 20, 2019, we incurred charges relating to a make-whole provision and debt issuance costs of $i10.1
million and $i0.7 million resulting from the early redemption of our 2020 Notes, which are included in Other (expense) income, net in the accompanying condensed consolidated statements of operations.
Debt Guarantees
We
are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $i27.6 million and $i24.3
million as of October 5, 2019 and December 29, 2018. 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 is $i58.5 million and $i53.9
million as of October 5, 2019 and December 29, 2018. We believe that the likelihood of performance under these guarantees is remote.
8.
i
Leases
i
Substantially
all of our leases are for facilities and vehicles. The initial term for facilities are typically i5 years to i10
years, with renewal options at i5 year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically i3
years to i5 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
/
i
Operating
lease liabilities consist of the following:
Less:
Current portion of operating lease liabilities
(i443,500
)
Noncurrent operating lease liabilities
$
i1,997,721
/
The
current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheet.
Total lease cost is included in Cost of sales and selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. iTotal lease cost is comprised of the following:
Operating lease payments include $i147.4
million related to options to extend lease terms that are reasonably certain of being exercised and exclude $i142.7 million of legally binding minimum lease payments for leases signed, but not yet commenced.
The weighted-average remaining lease term and weighted-average discount rate for our operating leases are i7.13
years and i4.1% as of October 5, 2019. 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.
i
Other
information relating to our lease liabilities is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i417,262
Right-of-use
assets obtained in exchange for lease obligations:
Operating leases
$
i270,440
/
i
As
previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments due under non-cancelable operating leases were as follows:
Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time. On August 7, 2019, our Board of Directors authorized a $i400.0 million share repurchase program to replace
the previous $i600.0 million share repurchase program that was authorized by our Board of Directors in August 2018, which had $i49.1
million remaining at the time of its replacement.
During the twelve and forty weeks ended October 5, 2019, we repurchased i2.4 million and i3.3
million shares of our common stock under the share repurchase program. The shares repurchased during the twelve and forty weeks ended October 5, 2019 were at an aggregate cost of $i338.6 million and $i476.7
million, or an average price of $i138.71 and $i144.03
per share. During the twelve and forty weeks ended October 6, 2018, we repurchased i0.7 million shares of our common stock at an aggregate cost of $i119.9
million, or an average price of $i166.57 per share, in connection with our share repurchase program. As of October 5, 2019, we had $i201.4
million remaining under our share repurchase program that was authorized by our Board of Directors on August 7, 2019.
On November 8, 2019, our Board of Directors authorized $i700.0
million as an addition to the existing share repurchase program.
11.
i
Earnings per Share
i
The
computation of basic and diluted earnings per share are as follows:
For
the twelve and forty weeks ended October 5, 2019, i175 thousand and i115
thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the twelve and forty weeks ended October 6, 2018, these anti-dilutive RSUs were insignificant.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
12.
i
Share-Based
Compensation
During the forty weeks ended October 5, 2019, we granted i254
thousand time-based RSUs, i55 thousand performance-based RSUs and i28
thousand market-based RSUs. The general terms of the time-based, performance-based and market-based RSUs are similar to awards previously granted by us.
The weighted average fair values of the time-based, performance-based and market-based RSUs granted during the forty weeks ended October 5, 2019 were $i156.71,
$i159.80 and $i165.70
per share. For time-based and performance-based RSUs, the fair value of each award was determined based on the market price of our stock on the date of grant adjusted for expected dividends during the vesting period, as applicable. The fair value of each market-based RSU was determined using a Monte Carlo simulation model.
Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 5, 2019 was $i1.7
million and $i6.7 million. Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 6, 2018 was $i1.7
million and $i4.7 million. As of October 5, 2019, there was $i69.0
million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of i1.6 years.
13.
i
Condensed Consolidating Financial Statements
Certain 100% wholly owned domestic subsidiaries of Advance, including our Material Subsidiaries (as defined in the 2017 Credit Agreement) serve as guarantors (“Guarantor Subsidiaries”)
of our senior unsecured notes. 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 Advance to obtain funds from its Guarantor Subsidiaries. Certain of our wholly owned subsidiaries, including all of our foreign subsidiaries and captive insurance subsidiary, do not serve as guarantors of our senior unsecured notes (“Non-Guarantor Subsidiaries”).
Set forth below are condensed consolidating financial
statements presenting the financial position, results of operations, and cash flows of (i) Advance, (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries, and (iv) the eliminations necessary to arrive at consolidated information for Advance. Investments in subsidiaries of Advance are presented under the equity method. The statement of operations eliminations relate primarily to the sale of inventory from a Non-Guarantor Subsidiary to a Guarantor Subsidiary. The balance sheet eliminations relate primarily to the elimination of intercompany receivables and payables and subsidiary investment accounts.
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 the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year
ended December 29, 2018 (filed with the SEC on February 19, 2019), which we refer to as our 2018 Form 10-K, and our unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Certain statements in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements are usually identified by the use of words such as “anticipate,”“believe,”“could,”“estimate,”“expect,”“forecast,”“intend,”“likely,”“may,”“plan,”“position,”“possible,”“potential,”“probable,”“project,”“projection,”“should,”“strategy,”“will,” or similar expressions. These statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available as of the date of this release. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Please refer to the risk factors discussed in "Item 1a. Risk Factors" in the
Company's most recent Annual Report on Form 10-K, as updated by our Quarterly Reports on Form 10-Q and other filings made by the Company with the SEC, for additional factors that could materially affect the Company’s actual results. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not place undue reliance on those statements.
Management Overview
Net
sales increased 1.6% in the third quarter of 2019 as compared to the same period of prior year, primarily driven by an increase in comparable store sales, as well as improvement in our independent Carquest network and the opening of additional branches. We experienced our strongest sales growth in our Midwest, Appalachian, Carolinas and Central regions, as well as increased sales in several product categories.
We generated diluted earnings per share (“diluted EPS”) of $1.75 during our third quarter of 2019 compared to $1.56 for the comparable period of
2018. When adjusted for the following non-operational items, our adjusted diluted earnings per share (“Adjusted EPS”) for the twelve weeks ended October 5, 2019 and October 6, 2018 were $2.10 and $1.89.
Refer to “Reconciliation of Non-GAAP Financial Measures”for further details of our comparable adjustments and the usefulness of such measures to investors.
A high-level summary of our financial results for the third quarter of 2019 includes:
•
Net sales during the third quarter of 2019 were $2.3 billion, an increase of 1.6% as compared to the third
quarter of 2018, primarily driven by an increase in comparable store sales of 1.2%.
•
Gross profit margin for the third quarter of 2019 was 43.8%, a decrease of 49 basis points as compared to the third quarter of 2018. This decrease was primarily driven by the impact of the launch of our enhanced loyalty program initiatives during the third
quarter of 2019. These decreases were partially offset by improvements in operational productivity relating to our ability to leverage our supply chain.
•
Selling, general and administrative expenses (“SG&A”) for the third quarter of 2019 were 36.3% of Net sales, a decrease of 117 basis points as compared to the third quarter of 2018. This decrease was primarily due to our lower incident rate
and claims that we attribute to continued focus on employee safety and by improvements in labor-related and occupancy costs. These improvements were partially offset by our investment in information technology (“IT”) projects.
Business and Risks Update
We continue to make progress on the various elements of our strategic business plan, which is focused on improving the customer experience and driving consistent execution for both Professional and “do-it-yourself” (“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:
•
Development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach. This technology is a first step in moving from a supply-driven to a demand-driven assortment.
•
Continued movement towards optimizing our footprint by market to drive share, repurposing our in-market store and asset base and optimizing our distribution centers.
•
Progress
in the development of a more efficient end-to-end supply chain to deliver our broad assortment.
•
Enhancement of our DIY omni-channel business, including our eCommerce performance and continued success of the roll-out of our partnership with Walmart.com.
•
Continued roll-out of our new Speed Perks 2.0 program to improve customer loyalty and traffic.
•
Launched
a new program that focuses on our fleet safety by educating our drivers of various safety issues.
•
Continued focus on branch openings in 2019 to drive Professional growth while investing in online and digital to drive DIY improvements.
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. During the forty weeks ended October 5,
2019, there were no changes to the factors discussed in our 2018 Form 10-K. For a complete discussion of these factors, refer to the 2018 Form 10-K.
Stores and Branches
Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. During the forty weeks ended October 5, 2019,
16 stores and branches were opened and 82 were closed or consolidated, resulting in a total of 5,043 stores and branches as of October 5, 2019, compared to a total of 5,109 stores and branches as of December 29, 2018.
Net sales increased 1.6% during the third quarter of 2019 compared to the same period of 2018, primarily driven by an increase in comparable store sales of 1.2% due to delivery of Net sales growth across all product categories, with the strongest growth in parts and batteries and accessories and chemicals. 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. Additionally, we saw growth in Net sales due to improvement in our independent Carquest network and the opening of additional branches.
For the forty weeks ended October 5, 2019, Net sales increased 1.6% compared to the same period of 2018,
primarily driven by a 1.4% increase in comparable stores sales due to improved performance of certain product categories, specifically parts and batteries and accessories and chemicals. These improvements were partially offset by a decline in engine maintenance related products.
The increase in gross profit for the twelve weeks
endedOctober 5, 2019 was primarily driven by improvements in operational productivity relating to our ability to leverage our supply chain. These improvements were partially offset by the impact of the launch of our enhanced loyalty program initiatives during the third quarter of 2019.
The increase in gross profit for the forty weeks ended October 5, 2019 was primarily driven by an increase in comparable store sales and continued improvements in inventory management. These improvements were partially offset by factors discussed
above. In addition, we made an out-of-period correction in the sixteen weeks ended April 20, 2019, which increased Cost of sales by $13.0 million, related to received not invoiced inventory.
Selling, general and administrative expenses
The decrease in SG&A for the twelve weeks ended October 5, 2019 was primarily driven by expense reductions due to our lower incident rate and claims that we attribute to continued focus on employee safety and by improvements in labor-related and occupancy costs. These improvements were partially offset by our investment
in IT projects.
The increase in SG&A for the forty weeks ended October 5, 2019 was primarily driven by our investment in IT projects, increases in minimum wages and planned merit increases. These increases were partially offset by factors discussed above.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non-GAAP financial measures 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) transformation expenses under our strategic business plan; (2) non-operational expenses associated with the integration of General Parts International, Inc. (“GPI”) and store closure and consolidation; (3) non-cash charges related to the acquired GPI intangible assets; (4) other
non-recurring adjustments; and (5) nonrecurring impact of the U.S. Tax Cuts and Jobs Act (the “Act”), is 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 the integration of GPI and 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.
Transformation Expenses—We expect to recognize a significant amount of transformation expenses over the next several years as we transition from integration of our Advance Auto Parts/Carquest businesses to a plan that involves a more holistic and integrated transformation of the entire Company, including Worldpac and Autopart International. These expenses will include, but not be limited to, restructuring costs, store closure costs and third-party professional services and other significant costs to integrate and streamline our operating structure across the enterprise. We are focused on several areas throughout Advance, such as supply chain and information technology.
GPI Integration and Store Closure and Consolidation Expenses—
Our multi-year plan to integrate the operations of GPI that we acquired in 2014 with AAP substantially ended in 2018. Due to the size of this acquisition, we considered these expenses to be outside of our base business. We believed providing additional information in the form of non-GAAP measures that excluded these costs was beneficial to the users of our financial statements in evaluating the operating performance of our base business and our sustainability once the integration was complete. In addition to integration expenses, we incurred store closure and consolidation expenses that consisted of expenses associated with our plans to convert and consolidate the Carquest stores acquired from GPI. While periodic store closures are common, these closures represented a significant program outside of our typical market evaluation process. We believe it was useful to provide additional non-GAAP measures that excluded these costs to provide investors greater comparability
of our base business and core operating performance.
U.S. Tax Reform— On December 22, 2017, the Act was signed into law. The Act amends the Internal Revenue Code of 1986 by, among other things, permanently lowering the corporate tax rate to 21% from the existing maximum rate of 35%, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. During the third quarter of 2018, and in conjunction with the completion of our 2017 U.S. income tax return, we identified a change in estimate, in accordance with Staff Accounting Bulletin No. 118, to amounts previously estimated for the remeasurement of the net deferred tax liability and nonrecurring
repatriation tax on accumulated earnings foreign subsidiaries.
GPI
integration and store closure and consolidation expenses
—
1,768
—
4,706
GPI
amortization of acquired intangible assets
6,362
8,802
21,157
29,268
Other
income adjustment (2)
—
—
10,756
—
Provision
for income taxes on adjustments (3)
(8,185
)
(9,664
)
(26,207
)
(25,242
)
Impact
of the Act
—
(5,665
)
—
(5,665
)
Adjusted net income (Non-GAAP)
$
148,223
$
139,957
$
469,610
$
442,525
Diluted
earnings per share (GAAP)
$
1.75
$
1.56
$
5.46
$
4.99
Adjustments,
net of tax
0.35
0.33
1.09
0.97
Adjusted EPS (Non-GAAP)
$
2.10
$
1.89
$
6.55
$
5.96
(1)
During
the sixteen weeks ended April 20, 2019, we made an out-of-period correction, which increased Cost of sales by $13.0 million, related to received not invoiced inventory.
(2)
During the sixteen weeks ended April 20, 2019, we incurred charges relating to a make-whole provision and debt issuance costs of $10.1 million and $0.7 million resulting from the early redemption of our 2020 Notes. For further information, see Note 7, Long-term Debt and Fair Value of Financial
Instruments, included in our condensed consolidated financial statements.
(3)
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 and funding of initiatives under our strategic business plan. In addition, we may use available funds for acquisitions, to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program and for the payment of quarterly cash dividends. Historically, we have funded these requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our obligations for the next year.
Share Repurchase
Program
On August 7, 2019, our Board of Directors authorized a $400.0 million share repurchase program to replace the previous $600.0 million share repurchase program that was authorized by our Board of Directors in August 2018, which had $49.1 million remaining at the time of its replacement.
During the twelve
and forty weeks ended October 5, 2019, we repurchased 2.4 million and 3.3 million shares of our common stock under the share repurchase program. The shares repurchased during the twelve and forty weeks ended October 5, 2019 were at an aggregate cost of $338.6 million and $476.7 million, or an average price of $138.71 and $144.03 per share. During the twelve
and forty weeks ended October 6, 2018, we repurchased 0.7 million shares of our common stock at an aggregate cost of $119.9 million, or an average price of $166.57 per share, in connection with our share repurchase program. As of October 5, 2019, we had $201.4 million remaining under our share repurchase program that was authorized by our Board of Directors on August 7, 2019.
On November 8,
2019, our Board of Directors authorized $700.0 million as an addition to the existing share repurchase program.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
Net (decrease) increase in Cash and cash equivalents
$
(322,801
)
$
423,069
Operating
Activities
For the forty weeks ended October 5, 2019, net cash provided by operating activities increased by $27.0 million to $708.5 million compared to the comparable period of 2018. The net increase in operating cash flows compared to the prior year was primarily driven by an increase in net income and our focus on managing and improving our working capital.
Investing Activities
For
the forty weeks ended October 5, 2019, net cash used in investing activities increased by $56.9 million to $160.5 million compared to the comparable period of 2018. Cash used in investing activities for the forty weeks ended October 5, 2019 consisted primarily of purchases of property and equipment, which was $64.1 million higher than the comparable period of 2018, primarily driven by investments made in supply chain,
e-commerce and store improvements, as well as information technology as we remain focused on the complete back office integration throughout the enterprise.
Our primary capital requirements relate to the funding of our investments in our supply chain network, information technology and new store developments. In 2019, we anticipate that our capital expenditures related to such investments will range from $250 million to $300 million, but our future capital requirements may vary based on business conditions.
Financing Activities
For the forty
weeks ended October 5, 2019, net cash used in financing activities was $870.9 million, an increase of $717.2 million as compared to the forty weeks ended October 6, 2018. This increase was primarily a result of returning cash to shareholders in the form of share repurchases and dividends, as well as on February 28, 2019, we redeemed all $300.0 million aggregate principal amount of our outstanding 2020 Notes. We incurred charges relating to a make-whole provision
and debt issuance costs of $10.1 million and $0.7 million resulting from the early redemption of our 2020 Notes.
Our Board of Directors has declared a $0.06 per share 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. On November 8, 2019, our Board of Directors declared a regular quarterly cash dividend of $0.06 per share to be paid on January 3,
2020 to all common shareholders of record as of December 20, 2019.
As of October 5, 2019, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s
Investor Service of Baa2. The current outlooks by Standard & Poor’s 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.
Critical Accounting Policies and Estimates
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.
During the forty weeks ended October 5, 2019, there were no changes to the critical accounting policies discussed in our 2018 Form 10-K. For a complete
discussion of our critical accounting policies, refer to the 2018 Form 10-K.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposure to market risk since December 29, 2018. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our 2018
Form 10-K.
ITEM 4.
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.
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 October 5, 2019. 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.
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 October 5,
2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On February 6, 2018, a putative class action on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 14, 2016 and August 15, 2017, inclusive (the “Class Period”), was commenced against us and certain of our current and former officers and directors in the United States District Court, District of Delaware. The plaintiff alleges that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The case is still in its early stages, with
a motion to dismiss pending before the court. We strongly dispute the allegations of the complaint and intend to defend the case vigorously.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the information with respect to repurchases of our common stock for the quarter ended October 5, 2019:
Total
Number of Shares Purchased (1)
Average Price Paid per Share (1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) (in thousands)
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 $1.1 million, or an average price of $138.63 per share, during the twelve weeks ended October 5, 2019.
(2)
On August 7, 2019, our Board of Directors authorized a $400.0 million share repurchase program. This new authorization was announced on August
13, 2019 and replaced the previous $600.0 million share repurchase program that was authorized by our Board of Directors in August 2018.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.