Advance Auto Parts Reports Second Quarter 2022 Results

Net Sales Increased 0.6% to $2.7 Billion

Diluted Earnings Per Share Decreased 13.1%; Adjusted Diluted Earnings Per Share Increased 10.0%

Returned $291 Million to Shareholders

Advance Auto Parts, Inc. (NYSE: AAP), a leading automotive aftermarket parts provider in North America, that serves both professional installer and do-it-yourself customers, announced its financial results for the second quarter ended July 16, 2022.

"In Q2 we delivered another quarter of growth in net sales and adjusted operating income, underscored by adjusted operating income margin expansion," said Tom Greco, president and chief executive officer. "Our adjusted operating income margin rate of 11.7% was the highest-level AAP has achieved in seven years. This helped enable a quarterly record for adjusted diluted earnings per share of $3.74, which increased 10.0% compared with Q2 2021 and 72% compared with Q2 2019. Additionally, we returned $291 million dollars to our shareholders through a combination of share repurchases and our quarterly cash dividend. This was despite a more challenging quarter on the topline than we expected, with net sales growing 0.6% and comparable store sales declining 0.6%. Our deliberate move to increase owned brand penetration reduced both net and comp sales by approximately one full point. Our DIY omnichannel sales were particularly challenged in the quarter and we expect that high inflation and significant year over year increases in fuel prices will continue to pressure DIY consumers in the back half of the year. As a result, we are updating our 2022 full year guidance.

“While our industry is not immune to the inflationary pressures consumers and broader retail have been experiencing, we believe our industry is well positioned for the long-term within the broader retail space to withstand these headwinds. In addition, our team continues to make progress on our strategic initiatives to drive long-term shareholder value. We remain relentlessly focused on customer service, parts availability and reliability of delivery. We're confident this will help enable sustainable sales growth, margin expansion and strong cash returns."

Second Quarter 2022 Results ⁽¹⁾

• Net sales increased 0.6% to $2.7 billion
• Comparable store sales ⁽²⁾ decreased 0.6%
• Gross profit decreased 0.3% to $1.2 billion; Adjusted gross profit ⁽³⁾ increased 4.2% to $1.3 billion
• Gross profit margin decreased 40 basis points to 44.5% of Net sales; Adjusted gross profit margin ⁽³⁾ increased 166 basis points to 48.0% of Net sales
• SG&A increased 4.2% to $984.0 million; Adjusted SG&A ⁽³⁾ increased 4.4% to $967.2 million
• SG&A was 36.9% of Net sales compared with 35.6% of Net sales; Adjusted SG&A ⁽³⁾ was 36.3% of Net sales compared with 35.0% of Net sales
• Operating income decreased 17.7% to $201.7 million; Adjusted operating income ⁽³⁾ increased 3.6% to $312.8 million
• Operating income margin decreased by 168 basis points to 7.6%; Adjusted operating income margin ⁽³⁾ increased 34 basis points to 11.7%
• Diluted EPS decreased 13.1% to $2.38; Adjusted diluted EPS ⁽³⁾ increased 10.0% to $3.74
• Net cash provided by operating activities was $308.5 million; Free cash flow ⁽³⁾ was an inflow of $97.3 million
• Opened 43 new store and branch locations

Second quarter of 2022 Net sales totaled $2.7 billion, a 0.6% increase compared with the second quarter of the prior year. This was driven primarily by year over year growth in our professional business. Comparable store sales for the second quarter of 2022 decreased 0.6%. This was primarily driven by a decrease in consumer demand within DIY omnichannel and an increase in owned brands, partially offset by an increase in professional.

The company's GAAP Gross profit margin of 44.5% of Net sales decreased 40 basis points compared with the second quarter of the prior year. Adjusted gross profit increased 4.2% to $1.3 billion. Adjusted gross profit margin increased 166 basis points to 48.0% of Net sales, compared with 46.4% in the second quarter of 2021. This was primarily driven by improvements in strategic pricing and owned brand expansion. These improvements were partially offset by continued inflationary product costs, unfavorable channel and product mix as well as supply chain deleverage due to wage and transportation inflationary pressures.

The company's GAAP SG&A was 36.9% of Net sales compared with 35.6% in the second quarter of 2021. Adjusted SG&A increased to $967.2 million from $926.4 million in the second quarter of the prior year. As a percent of Net sales, Adjusted SG&A was 36.3% of Net sales, which deleveraged 132 basis points compared with the second quarter of 2021. This was primarily driven by inflation in store labor and fuel costs as well as costs related with new store openings. These costs were partially offset by a year over year decrease in incentive compensation and COVID-19 related expenses.

On a GAAP basis, the company's Operating income was $201.7 million, or 7.6% of Net sales, compared with 9.2% in the second quarter of 2021. The company's Adjusted operating income was $312.8 million, an increase of 3.6% versus the second quarter of the prior year. Adjusted operating income margin increased 34 basis points to 11.7% of Net sales compared with 11.4% of Net sales in the second quarter of the prior year.

The company's effective tax rate was 24.3%, compared with 24.8% in the second quarter of 2021. On a GAAP basis, the company's Diluted EPS was $2.38, a decrease of 13.1% from $2.74 in the second quarter of 2021. The company's Adjusted Diluted EPS was $3.74, an increase of 10.0% from $3.40 in the second quarter of the prior year.

Net cash provided by operating activities was $308.5 million through the second quarter of 2022 versus $776.2 million in the same period of the prior year. The decrease was primarily driven by lower Net income and working capital. Free cash flow through the second quarter of 2022 was $97.3 million compared with $646.6 million in the same period of the prior year.

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Capital Allocation

During the second quarter of 2022, the company repurchased 1.0 million shares of its common stock at an aggregate cost of $200.0 million, or an average price of $199.02 per share, in connection with its share repurchase program. At the end of the second quarter of 2022, the company had $1.1 billion remaining under the share repurchase program.

On August 16, 2022 the company declared a regular cash dividend of $1.50 per share to be paid on September 30, 2022 to all common stockholders of record as of September 16, 2022.

Full Year 2022 Guidance

Jeff Shepherd, executive vice president and chief financial officer said, "Although the external environment has changed significantly since our 2021 strategic update and volatility remains, we believe we are well positioned to create long-term value for shareholders, including delivering on the long-term goals shared in that strategic update. In consideration of how macroeconomic factors have developed in recent months and our expectations for the balance of year, we are providing updated guidance for full year 2022 as outlined below."

Investor Conference Call

The company will detail its results for the second quarter ended July 16, 2022 via a webcast scheduled to begin at 8 a.m. Eastern Time on Wednesday, August 24, 2022. The webcast will be accessible via the Investor Relations page of the company's website (ir.AdvanceAutoParts.com).

To join by phone, please pre-register online for dial-in and passcode information. Upon registering, participants will receive a confirmation with call details and a registrant ID. While registration is open through the live call, the company suggests registering a day in advance or at minimum 10 minutes before the start of the call. A replay of the conference call will be available on the company's Investor Relations website for one year.

 About Advance Auto Parts

Advance Auto Parts, Inc. is a leading automotive aftermarket parts provider that serves both professional installer and do-it-yourself customers. As of July 16, 2022 Advance operated 4,724 stores and 312 Worldpac branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. The company also served 1,329 independently owned Carquest branded stores across these locations in addition to Mexico and various Caribbean islands. Additional information about Advance, including employment opportunities, customer services, and online shopping for parts, accessories and other offerings can be found at www.AdvanceAutoParts.com.

Forward-Looking Statements

Certain statements herein are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "guidance," "intend," "likely," "may," "plan," "position," "possible," "potential," "probable," "project," "should," "strategy," "will" or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about the company's strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect the company's views based on historical results, current information and assumptions related to future developments. Except as may be required by law, the company undertakes no obligation to update any forward-looking statements made herein. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the timing and implementation of strategic initiatives, including with respect to labor shortages or disruptions and the impact on our ability to complete store openings, deterioration of general macroeconomic conditions, the highly competitive nature of the company's industry, demand for the company's products and services, complexities in its inventory and supply chain, challenges with transforming and growing its business and factors related to the current global COVID-19 pandemic. Please refer to "Item 1A. Risk Factors." of the company's most recent Annual Report on Form 10-K, as updated by other filings made by the company with the Securities and Exchange Commission, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

Reconciliation of Non-GAAP Financial Measures

The company's financial results include 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 the company's operating performance, financial position or cash flows. The company has presented these non-GAAP financial measures as it believes that the presentation of its financial results that exclude (1) LIFO impacts; (2) transformation expenses under the company's strategic business plan; (3) non-cash amortization related to the acquired General Parts International, Inc. (“GPI”) intangible assets; and (4) other non-recurring adjustments is useful and indicative of the company's base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to store closure and consolidation activity in excess of historical levels. These measures assist in comparing the company's current operating results with past periods and with the operational performance of other companies in its 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 that the company has determined are not normal, recurring cash operating expenses necessary to operate its business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.

LIFO impacts — To assist in comparing the company's current operating results with the operational performance of other companies in the industry, the impact of LIFO on the company's results of operations is a reconciling item to arrive at non-GAAP financial measures.

Transformation expenses — Costs incurred in connection with the company's business plan that focuses on specific transformative activities that relate to the integration and streamlining of its operating structure across the enterprise, that the company does not view to be normal cash operating expenses. These expenses include, but are not limited to the following:

• Restructuring costs - Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and team member severance in connection with our voluntary retirement program and continued optimization of our organization.
• Third-party professional services - Costs primarily relating to services rendered by vendors for assisting the company with the development of various information technology and supply chain projects in connection with the company's enterprise integration initiatives.
• Other significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with the company's enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of the company's operating structure across the enterprise.

GPI amortization of acquired intangible assets — As part of the company's acquisition of GPI, the company obtained various intangible assets, including customer relationships, non-compete contracts and favorable lease agreements, which they expect to be subject to amortization through 2025.

NOTE: Adjusted gross profit, Adjusted gross profit margin (calculated by dividing Adjusted gross profit by Net sales), Adjusted SG&A, Adjusted SG&A as a percentage of Net sales, Adjusted operating income and Adjusted operating income margin (calculated by dividing Adjusted operating income by Net sales) are non-GAAP measures. Management believes these non-GAAP measures are important metrics in assessing the overall performance of the business and utilizes these metrics in its ongoing reporting. On that basis, management believes it is useful to provide these metrics to investors and prospective investors to evaluate the company’s operating performance across periods adjusting for these items (refer to the reconciliations of non-GAAP adjustments above). These non-GAAP measures might not be calculated in the same manner as, and thus might not be comparable to, similarly titled measures reported by other companies. Non-GAAP measures should not be used by investors or third parties as the sole basis for formulating investment decisions, as they may exclude a number of important cash and non-cash recurring items.

NOTE: Management uses Free cash flow as a measure of its liquidity and believes it is a useful indicator to investors or potential investors of the company's ability to implement growth strategies and service debt. Free cash flow is a non-GAAP measure and should be considered in addition to, but not as a substitute for, information contained in the company's condensed consolidated statement of cash flows as a measure of liquidity.

NOTE: Management believes its Adjusted Debt to Adjusted EBITDAR ratio (“leverage ratio”) is a key financial metric for debt securities, as reviewed by rating agencies, and believes its debt levels are best analyzed using this measure. The company’s goal is to maintain an investment grade rating. The company's credit rating directly impacts the interest rates on borrowings under its existing credit facility and could impact the company's ability to obtain additional funding. If the company was unable to maintain its investment grade rating this could negatively impact future performance and limit growth opportunities. Similar measures are utilized in the calculation of the financial covenants and ratios contained in the company's financing arrangements. The leverage ratio calculated by the company is a non-GAAP measure and should not be considered a substitute for debt to net earnings, net earnings or debt as determined in accordance with GAAP. The company adjusts the calculation to remove rent expense and to add back the company’s existing operating lease liabilities related to their right-of-use assets to provide a more meaningful comparison with the company’s peers and to account for differences in debt structures and leasing arrangements. The company’s calculation of its leverage ratio might not be calculated in the same manner as, and thus might not be comparable to, similarly titled measures by other companies.

Store Information

During the twenty-eight weeks ended July 16, 2022, 78 stores and branches were opened and 14 were closed or consolidated, resulting in a total of 5,036 stores and branches as of July 16, 2022, compared with a total of 4,972 stores and branches as of January 1, 2022.

The below table summarizes the changes in the number of company-operated store and branch locations during the twelve and twenty-eight weeks ended July 16, 2022:

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