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Advance Auto Parts Reports Q2 2022 Results

Advance returned $291 million to shareholders through a combination of share repurchases and a quarterly cash dividend.

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Advance Auto Parts Inc. has announced its financial results for the second quarter ended July 16, 2022.

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“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 CEO. “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% 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.

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“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 of 2022 net sales totaled $2.7 billion, a 0.6% increase compared with the second quarter of the prior year. The company said this was driven primarily by year-over-year growth in its 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.

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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% 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.

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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.

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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.

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.

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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 CFO 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.”

 Prior Outlook Updated Outlook
 As of May 23, 2022 As of August 24, 2022
 Full Year 2022 Full Year 2022
($ in millions, except per share data)Low High Low High
Net sales$ 11,200  $ 11,500  $ 11,000  $ 11,200 
Comparable store sales  1.0%   3.0%   (1.0)%   0.0%
Adjusted operating income margin (1)  10.0%   10.2%   9.8%   10.0%
Income tax rate  24.0%   26.0%   24.0%   26.0%
Adjusted diluted EPS (1, 2)$ 13.30  $ 13.85  $ 12.75  $ 13.25 
Capital expenditures$ 300  $ 350  $ 300  $ 350 
Free cash flow (1)Minimum $775 Minimum $700
Share repurchases$ 500  $ 700  $ 500  $ 600 
New store and branch openings  125    150    125    150 
(1)For a better understanding of the company’s adjusted results, refer to the reconciliation of non-GAAP adjustments in the accompanying financial tables included herein. Because of the forward-looking nature of the 2022 non-GAAP financial measures, specific quantification of the amounts that would be required to reconcile these non-GAAP financial measures to their most directly comparable GAAP financial measures are not available at this time.
(2)Assumes weighted-average shares outstanding as of July 16, 2022.

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