Advance Auto Parts, Inc. announced its financial results for the second quarter, which ended July 15. The company said it is steadily seeing an improvement in topline sales and transactions and also announced that it has initiated a comprehensive operational and strategic review.

“I want to thank the entire Advance family for their dedication and focus on serving our customers in the second quarter while we continued to execute against our priorities to improve operational performance,” said Tom Greco, president and CEO. “Profitability in the quarter was below expectations, primarily related to our inability to price to cover inflation. However, we began to see early signs that the strategic investments we are making are beginning to drive an improvement in topline sales and transactions. This is evidenced by positive comparable store sales growth in the final four weeks of the second quarter, which has continued into the third quarter.”

A few highlights from the results included:

• Second quarter net sales totaled $2.7 billion, a 0.8% increase compared with the second quarter of the prior year, primarily driven by new store openings. This was partially offset by a decline of comparable store sales of 0.6%.
• Gross profit decreased 3.2% to $1.1 billion. Gross profit margin was 42.7% of net sales compared with 44.5% of net sales in the second quarter of the prior year. This was primarily driven by higher product costs and supply chain deleverage that were not fully covered by pricing actions, partially offset by a reduction in LIFO-related expenses.
• SG&A expenses were $1 billion, which were 37.7% of net sales compared with 36.9% in the second quarter of the prior year. This was primarily driven by inflation within labor and benefit-related expenses.
• The company’s operating income was $134.4 million, or 5% of net sales, compared with 7.6% in the second quarter of the prior year.
• The company’s effective tax rate was 25.9%, compared with 24.3% in the second quarter of the prior year. The company’s diluted EPS was $1.43, compared with $2.38 in the second quarter of the prior year.

Gene Lee, interim executive chair, added, “Since expanding my role to serve as interim executive chair and partnering more closely with Tom and the leadership team, I have taken a deeper dive into the business and our strategy. As we look to the balance of 2023, we are updating our full-year guidance. We recognize that there is significant work to be done to improve execution across the business and are conducting a comprehensive operational and strategic review to position Advance for long-term success and increase shareholder value. Importantly, as announced separately today, we have identified Advance’s next CEO and look forward to welcoming Shane O’Kelly, an accomplished executive with extensive operational and supply chain experience. The board will work with Shane and the management team to ensure Advance is taking the right steps to build a stronger, more resilient business for the benefit of all stakeholders.”

IN its Q2 results, Advance reported that net cash used in operating activities was $164.6 million through the second quarter of 2023 versus $308.5 million provided by operating activities in the same period of the prior year. The decrease was primarily driven by lower net income and an increase in cash used in working capital, primarily in accounts payable. Free cash flow through the second quarter of 2023 was an outflow of $309.4 million compared with an inflow of $97.3 million in the same period of the prior year.

Advance said all comparisons in its Q2 earnings are based on the same time period in the prior year. Comparable store sales include locations open for 13 complete accounting periods and excludes sales to independently owned Carquest locations.

Full Year 2023 Guidance

Tony Iskander, interim chief financial officer, said, “We are updating our full-year guidance, which considers a modest step up in net and comparable store sales growth driven by strengthening of our professional business. However, we are reducing our outlook for operating income margin rate, diluted earnings per share and free cash flow. This reflects additional headwinds anticipated in the back half of the year driven by our ongoing commitment to maintain competitive price targets, impacts from a shift in channel mix and investments in our team to help retain top talent.”