0001158449false1/22020Q32,138,1942,037,8490.00010.00010.00010.0001263229400.250.060.750.18897.3no00011584492019-12-292020-10-03xbrli:shares00011584492020-11-06iso4217:USD00011584492020-10-0300011584492019-12-28iso4217:USDxbrli:shares00011584492020-07-122020-10-0300011584492019-07-142019-10-0500011584492018-12-302019-10-050001158449us-gaap:CommonStockMember2020-07-110001158449us-gaap:AdditionalPaidInCapitalMember2020-07-110001158449us-gaap:TreasuryStockMember2020-07-110001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-110001158449us-gaap:RetainedEarningsMember2020-07-1100011584492020-07-110001158449us-gaap:RetainedEarningsMember2020-07-122020-10-030001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-122020-10-030001158449us-gaap:CommonStockMember2020-07-122020-10-030001158449us-gaap:AdditionalPaidInCapitalMember2020-07-122020-10-030001158449us-gaap:TreasuryStockMember2020-07-122020-10-030001158449us-gaap:CommonStockMember2020-10-030001158449us-gaap:AdditionalPaidInCapitalMember2020-10-030001158449us-gaap:TreasuryStockMember2020-10-030001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-10-030001158449us-gaap:RetainedEarningsMember2020-10-030001158449us-gaap:CommonStockMember2019-07-130001158449us-gaap:AdditionalPaidInCapitalMember2019-07-130001158449us-gaap:TreasuryStockMember2019-07-130001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-130001158449us-gaap:RetainedEarningsMember2019-07-1300011584492019-07-130001158449us-gaap:RetainedEarningsMember2019-07-142019-10-050001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-142019-10-050001158449us-gaap:CommonStockMember2019-07-142019-10-050001158449us-gaap:AdditionalPaidInCapitalMember2019-07-142019-10-050001158449us-gaap:TreasuryStockMember2019-07-142019-10-050001158449us-gaap:CommonStockMember2019-10-050001158449us-gaap:AdditionalPaidInCapitalMember2019-10-050001158449us-gaap:TreasuryStockMember2019-10-050001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-10-050001158449us-gaap:RetainedEarningsMember2019-10-0500011584492019-10-050001158449us-gaap:CommonStockMember2019-12-280001158449us-gaap:AdditionalPaidInCapitalMember2019-12-280001158449us-gaap:TreasuryStockMember2019-12-280001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-280001158449us-gaap:RetainedEarningsMember2019-12-280001158449us-gaap:RetainedEarningsMember2019-12-292020-10-030001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-292020-10-030001158449us-gaap:CommonStockMember2019-12-292020-10-030001158449us-gaap:AdditionalPaidInCapitalMember2019-12-292020-10-030001158449us-gaap:TreasuryStockMember2019-12-292020-10-030001158449us-gaap:CommonStockMember2018-12-290001158449us-gaap:AdditionalPaidInCapitalMember2018-12-290001158449us-gaap:TreasuryStockMember2018-12-290001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-290001158449us-gaap:RetainedEarningsMember2018-12-2900011584492018-12-290001158449us-gaap:RetainedEarningsMember2018-12-302019-10-050001158449us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-302019-10-050001158449us-gaap:CommonStockMember2018-12-302019-10-050001158449us-gaap:AdditionalPaidInCapitalMember2018-12-302019-10-050001158449us-gaap:TreasuryStockMember2018-12-302019-10-05aap:store0001158449aap:StoresMember2020-10-030001158449aap:BranchesMember2020-10-030001158449aap:IndependentlyownedCarqueststorelocationsMember2020-10-03xbrli:pure0001158449aap:PartsAndBatteriesMember2020-07-122020-10-030001158449aap:PartsAndBatteriesMember2019-07-142019-10-050001158449aap:PartsAndBatteriesMember2019-12-292020-10-030001158449aap:PartsAndBatteriesMember2018-12-302019-10-050001158449aap:AccessoriesAndChemicalsMember2020-07-122020-10-030001158449aap:AccessoriesAndChemicalsMember2019-07-142019-10-050001158449aap:AccessoriesAndChemicalsMember2019-12-292020-10-030001158449aap:AccessoriesAndChemicalsMember2018-12-302019-10-050001158449aap:EnginemaintenanceDomain2020-07-122020-10-030001158449aap:EnginemaintenanceDomain2019-07-142019-10-050001158449aap:EnginemaintenanceDomain2019-12-292020-10-030001158449aap:EnginemaintenanceDomain2018-12-302019-10-050001158449aap:OtherMember2020-07-122020-10-030001158449aap:OtherMember2019-07-142019-10-050001158449aap:OtherMember2019-12-292020-10-030001158449aap:OtherMember2018-12-302019-10-050001158449us-gaap:TradeAccountsReceivableMember2020-10-030001158449us-gaap:TradeAccountsReceivableMember2019-12-280001158449aap:AccountsReceivableVendorMember2020-10-030001158449aap:AccountsReceivableVendorMember2019-12-280001158449aap:AccountsReceivableOtherMember2020-10-030001158449aap:AccountsReceivableOtherMember2019-12-280001158449aap:A450SeniorUnsecuredNotes2022NotesMemberus-gaap:SeniorNotesMember2020-10-030001158449aap:A450SeniorUnsecuredNotes2022NotesMemberus-gaap:SeniorNotesMember2019-12-280001158449us-gaap:SeniorNotesMemberaap:A450SeniorUnsecuredNotes2023NotesMember2020-10-030001158449us-gaap:SeniorNotesMemberaap:A450SeniorUnsecuredNotes2023NotesMember2019-12-280001158449aap:A175SeniorUnsecuredNotes2027NotesMemberus-gaap:SeniorNotesMember2020-10-030001158449aap:A175SeniorUnsecuredNotes2027NotesMemberus-gaap:SeniorNotesMember2019-12-280001158449aap:A390SeniorUnsecuredNotes2030NotesMemberus-gaap:SeniorNotesMember2020-10-030001158449aap:A390SeniorUnsecuredNotes2030NotesMemberus-gaap:SeniorNotesMember2019-12-280001158449aap:A450SeniorUnsecuredNotes2022NotesMember2012-01-110001158449aap:A450SeniorUnsecuredNotes2023NotesMember2013-12-030001158449aap:A390SeniorUnsecuredNotes2030NotesMember2020-04-160001158449aap:A450SeniorUnsecuredNotes2022NotesMember2020-09-1600011584492020-09-160001158449aap:A175SeniorUnsecuredNotes2027NotesMember2020-09-290001158449aap:A450SeniorUnsecuredNotes2023NotesMember2020-09-2900011584492020-09-2900011584492020-04-192020-07-110001158449us-gaap:RevolvingCreditFacilityMember2020-10-030001158449us-gaap:RevolvingCreditFacilityMember2019-12-280001158449aap:BilateralLetterofCreditFacilityMember2020-10-030001158449aap:BilateralLetterofCreditFacilityMember2019-12-280001158449srt:MinimumMemberus-gaap:RealEstateMember2020-10-030001158449srt:MaximumMemberus-gaap:RealEstateMember2020-10-030001158449us-gaap:RealEstateMember2020-10-030001158449srt:MinimumMemberus-gaap:EquipmentMember2020-10-030001158449srt:MaximumMemberus-gaap:EquipmentMember2020-10-0300011584492018-12-302019-12-280001158449aap:August2019ShareRepurchaseProgramMember2019-11-080001158449aap:August2018ShareRepurchaseProgramMember2019-08-070001158449us-gaap:RestrictedStockUnitsRSUMember2019-12-292020-10-030001158449us-gaap:PerformanceSharesMember2019-12-292020-10-030001158449aap:MarketBasedSharesMember2019-12-292020-10-03
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission file number 001-16797
________________________

aap-20201003_g1.jpg
ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________

Delaware54-2049910
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

2635 East Millbrook Road, Raleigh, North Carolina 27604
(Address of principal executive offices) (Zip Code)
 
(540) 362-4911
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common Stock, $0.0001 par valueAAPNew 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. Yes 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). Yes 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.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

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). Yes No

As of November 6, 2020, the number of shares of the registrant’s common stock outstanding was 67,854,539 shares.



Table of Contents



   
 
Page
    
    
 
    
  
   
  
   
  
   
  
   
 
   
 
   
 
    
 
   
 



Table of Contents


NOTE REGARDING 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,” “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 our strategic initiatives, operational plans and objectives, and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, current information and assumptions related to future developments. Except as may be required by law, we undertake 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, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business and factors related to the current global pandemic. Please refer to “Item 1A. Risk Factors.” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, as updated by our subsequent filings with the SEC, 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.
1

Table of Contents


PART I.  FINANCIAL INFORMATION
 
ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data) (Unaudited)
 October 3, 2020December 28, 2019
Assets
Current assets:  
Cash and cash equivalents$1,068,205 $418,665 
Receivables, net843,054 689,469 
Inventories4,367,272 4,432,168 
Other current assets158,819 155,241 
Total current assets6,437,350 5,695,543 
Property and equipment, net of accumulated depreciation of $2,138,194 and $2,037,8491,444,889 1,433,213 
Operating lease right-of-use assets2,362,437 2,365,325 
Goodwill991,398 992,240 
Intangible assets, net686,315 709,756 
Other assets50,374 52,448 
 $11,972,763 $11,248,525 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable$3,527,324 $3,421,987 
Accrued expenses632,670 535,863 
Other current liabilities488,894 519,852 
Total current liabilities4,648,888 4,477,702 
Long-term debt1,031,872 747,320 
Non-current operating lease liabilities2,014,898 2,017,159 
Deferred income taxes342,730 334,013 
Other long-term liabilities171,711 123,250 
Commitments and contingencies
Stockholders’ equity:  
Preferred stock, nonvoting, $0.0001 par value  
Common stock, voting, $0.0001 par value8 8 
Additional paid-in capital772,313 735,183 
Treasury stock, at cost(1,072,719)(924,389)
Accumulated other comprehensive loss(38,714)(34,569)
Retained earnings4,101,776 3,772,848 
Total stockholders’ equity3,762,664 3,549,081 
 $11,972,763 $11,248,525 



The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
2

Table of Contents


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
 Twelve Weeks EndedForty Weeks Ended
October 3, 2020October 5, 2019October 3, 2020October 5, 2019
Net sales$2,541,928 $2,312,106 $7,741,190 $7,596,389 
Cost of sales, including purchasing and warehousing costs
1,413,457 1,300,180 4,343,272 4,270,412 
Gross profit1,128,471 1,011,926 3,397,918 3,325,977 
Selling, general and administrative expenses
871,660 839,598 2,799,837 2,774,936 
Operating income256,811 172,328 598,081 551,041 
Other, net:
Interest expense(11,925)(8,443)(37,590)(32,062)
Loss on early redemptions of senior unsecured notes(48,022) (48,022)(10,756)
Other income (expense), net674 (3,145)(2,198)9,484 
Total other, net(59,273)(11,588)(87,810)(33,334)
Income before provision for income taxes197,538 160,740 510,271 517,707 
Provision for income taxes50,062 37,071 129,247 126,718 
Net income$147,476 $123,669 $381,024 $390,989 
Basic earnings per common share$2.14 $1.76 $5.51 $5.48 
Weighted average common shares outstanding68,965 70,381 69,097 71,351 
Diluted earnings per common share$2.13 $1.75 $5.50 $5.46 
Weighted average common shares outstanding69,267 70,664 69,325 71,643 


Condensed Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 Twelve Weeks EndedForty Weeks Ended
October 3, 2020October 5, 2019October 3, 2020October 5, 2019
Net income$147,476 $123,669 $381,024 $390,989 
Other comprehensive income (loss):
Changes in net unrecognized other postretirement benefit costs, net of tax of $26, $32, $29 and $40(73)(92)(80)(66)
Currency translation adjustments5,298 (5,289)(4,065)5,397 
Total other comprehensive income (loss)5,225 (5,381)(4,145)5,331 
Comprehensive income$152,701 $118,288 $376,879 $396,320 



The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
3

Table of Contents



Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except per share data) (Unaudited)
Twelve Weeks Ended October 3, 2020
Common StockAdditional
Paid-in Capital
Treasury Stock, at CostAccumulated Other
Comprehensive Loss
Retained EarningsTotal
Stockholders’ Equity
SharesAmount
Balance, July 11, 202069,139 $8 $760,535 $(961,592)$(43,939)$3,971,507 $3,726,519 
Net income
— — — — — 147,476 147,476 
Total other comprehensive income
— — — — 5,225 — 5,225 
Restricted stock units and deferred stock units vested
27 — — — — —  
Share-based compensation
— — 11,089 — — — 11,089 
Stock issued under employee stock purchase plan
5 — 693 — — — 693 
Repurchases of common stock
(726)— — (111,127)— — (111,127)
Cash dividends declared ($0.25 per common share)
— — — — — (17,207)(17,207)
Other— — (4)— — — (4)
Balance, October 3, 202068,445 $8 $772,313 $(1,072,719)$(38,714)$4,101,776 $3,762,664 
Twelve Weeks Ended October 5, 2019
Common StockAdditional
Paid-in Capital
Treasury Stock, at CostAccumulated Other
Comprehensive Loss
Retained EarningsTotal
Stockholders’ Equity
SharesAmount
Balance, July 13, 201971,697 $8 $715,747 $(572,592)$(33,481)3,561,620 $3,671,302 
Net income
— — — — — 123,669 123,669 
Total other comprehensive loss
— — — — (5,381)— (5,381)
Restricted stock units and deferred stock units vested
22— — — — —  
Share-based compensation
— — 8,613 — — — 8,613 
Stock issued under employee stock purchase plan
5— 710— — — 710 
Repurchases of common stock
(2,449)— — (339,743)— — (339,743)
Cash dividends declared ($0.06 per common share)
— — — — — (4,189)(4,189)
Other
— — (39)— — — (39)
Balance, October 5, 201969,275 $8 $725,031 $(912,335)$(38,862)3,681,100 $3,454,942 



4

Table of Contents


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except per share data) (Unaudited)
Forty Weeks Ended October 3, 2020
 Common StockAdditional
Paid-in Capital
Treasury Stock, at CostAccumulated Other
Comprehensive Loss
Retained EarningsTotal
Stockholders’ Equity
 SharesAmount
Balance, December 28, 201969,232 $8 $735,183 $(924,389)$(34,569)$3,772,848 $3,549,081 
Net income
— — — — — 381,024 381,024 
Total other comprehensive loss
— — — — (4,145)— (4,145)
Restricted stock units and deferred stock units vested
206 — — — — —  
Share-based compensation
— — 34,927 — — — 34,927 
Stock issued under employee stock purchase plan
20 — 2,211 — — — 2,211 
Repurchases of common stock
(1,013)— — (148,330)— — (148,330)
Cash dividends declared ($0.75 per common share)
— — — — — (52,096)(52,096)
Other
— — (8)— — — (8)
Balance, October 3, 202068,445 $8 $772,313 $(1,072,719)$(38,714)$4,101,776 $3,762,664 
Forty Weeks Ended October 5, 2019
 Common StockAdditional
Paid-in Capital
Treasury Stock, at CostAccumulated Other
Comprehensive Loss
Retained EarningsTotal
Stockholders’ Equity
 SharesAmount
Balance, December 29, 201872,460 $8 $694,797 $(425,954)$(44,193)$3,326,155 $3,550,813 
Net income
— — — — — 390,989 390,989 
Cumulative effect of accounting change from adoption of ASU 2016-02, net of tax— — — — — (23,165)(23,165)
Total other comprehensive loss
— — — — 5,331 — 5,331 
Restricted stock units and deferred stock units vested
167 — — — — —  
Share-based compensation
— — 28,038 — — — 28,038 
Stock issued under employee stock purchase plan
16 — 2,358 — — — 2,358 
Repurchases of common stock
(3,370)— — (486,381)— — (486,381)
Cash dividends declared ($0.18 per common share)
— — — — — (12,879)(12,879)
Other
2 — (162)— — — (162)
Balance, October 5, 201969,275 $8 $725,031 $(912,335)$(38,862)$3,681,100 $3,454,942 



The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

5

Table of Contents


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 Forty Weeks Ended
October 3, 2020October 5, 2019
Cash flows from operating activities:  
Net income$381,024 $390,989 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization192,911 179,565 
Share-based compensation34,927 28,038 
Loss and impairment of long-lived assets1,582 4,413 
Loss on early redemptions of senior unsecured notes48,022 10,756 
Provision for deferred income taxes8,975 7,653 
Other1,212 1,328 
Net change in:
Receivables, net(154,888)(95,280)
Inventories62,181 (24,985)
Accounts payable106,831 227,822 
Accrued expenses111,136 (29,672)
Other assets and liabilities, net15,305 7,919 
Net cash provided by operating activities809,218 708,546 
Cash flows from investing activities:  
Purchases of property and equipment(192,632)(169,224)
Purchase of an indefinite-lived intangible asset(230) 
Proceeds from sales of property and equipment914 8,714 
Net cash used in investing activities(191,948)(160,510)
Cash flows from financing activities:  
Decrease in bank overdrafts (59,351)
Proceeds from borrowing on revolving credit facility500,000  
Payment on revolving credit facility(500,000) 
Proceeds from issuances of senior unsecured notes, net847,092  
Early redemptions of senior unsecured notes(602,568)(310,047)
Dividends paid(56,210)(17,185)
Proceeds from the issuance of common stock
2,211 2,358 
Repurchases of common stock(148,330)(486,381)
Other, net(8,735)(258)
Net cash provided by (used in) financing activities33,460 (870,864)
Effect of exchange rate changes on cash(1,190)27 
Net increase (decrease) in cash and cash equivalents649,540 (322,801)
Cash and cash equivalents, beginning of period
418,665 896,527 
Cash and cash equivalents, end of period
$1,068,205 $573,726 
Non-cash transactions:
Accrued purchases of property and equipment$16,302 $30,331 


The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
6

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)


1.    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 condensed consolidated financial statements have been prepared by us and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and their subsidiaries (collectively referred to as “Advance,” “we,” “us” or “our”).

As of October 3, 2020, we operated a total of 4,811 stores and 168 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of October 3, 2020, we served 1,269 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands.

In March 2020, the World Health Organization categorized the COVID-19 outbreak as a pandemic. As a majority of our stores and facilities have remained open, we have taken additional measures to help protect the health and safety of our Team Members and customers. Such measures, among others, include the implementation of other labor-related benefits for Team Members and increased sanitation practices across Advance. Since the assumptions underpinning our long-term revenue and cash flow growth rates, operating models and business strategies have not been significantly impacted, there was no material impairment of our various assets during the twelve and forty weeks ended October 3, 2020.

The COVID-19 pandemic remains an evolving situation. If a period of decreased demand were to reoccur, it may lead to increased asset recovery and valuation risks in the future, such as impairment of goodwill, intangible assets and store and other assets. We will continue to assess the impact of the pandemic on our financial position. The extent to which the COVID-19 pandemic will impact our operations, liquidity, compliance with debt covenants or financial results in subsequent periods is uncertain, but such impact could be material.

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 2019 as filed with the SEC on February 18, 2020.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. 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 second and third quarter of 2020 consist of twelve weeks, while our fourth quarter of 2020 contains thirteen weeks due to the 53-week fiscal year in 2020.

7

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

2.    Significant Accounting Policies

Revenues

The following table summarizes disaggregated revenue from contracts with customers by product group:
Twelve Weeks EndedForty Weeks Ended
October 3, 2020October 5, 2019October 3, 2020October 5, 2019
Percentage of Net sales, by product group:
Parts and batteries67 %68 %66 %67 %
Accessories and chemicals20 20 21 21 
Engine maintenance12 11 12 11 
Other1 1 1 1 
Total100 %100 %100 %100 %

Recently Issued Accounting Pronouncements

During the first quarter of 2020, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which required us to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.

During the second quarter of 2020, we early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

3.    Inventories

Inventories are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately 89% of inventories as of October 3, 2020 and December 28, 2019. 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 3, 2020 and prior years. We recorded a reduction to Cost of sales of $15.9 million and an increase to Cost of sales of $33.8 million for the twelve weeks ended October 3, 2020 and October 5, 2019 and a reduction to Cost of sales of $3.9 million and an increase to Cost of sales of $76.7 million for the forty weeks ended October 3, 2020 and October 5, 2019 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.

Inventory balances were as follows:
(in thousands)October 3, 2020December 28, 2019
Inventories at first in, first out (“FIFO”)$4,221,760 $4,290,565 
Adjustments to state inventories at LIFO145,512 141,603 
Inventories at LIFO$4,367,272 $4,432,168 

8

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

4.    Intangible Assets

Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $7.3 million for the twelve weeks ended October 3, 2020 and October 5, 2019 and $24.3 million and $24.4 million for the forty weeks ended October 3, 2020 and October 5, 2019.

5.    Receivables, net

Receivables consist of the following:
(in thousands)October 3, 2020December 28, 2019
Trade$556,503 $422,403 
Vendor268,223 249,009 
Other28,890 32,306 
Total receivables853,616 703,718 
Less: allowance for doubtful accounts(10,562)(14,249)
Receivables, net$843,054 $689,469 

6.    Long-term Debt and Fair Value of Financial Instruments

Long-term debt consists of the following:
(in thousands)October 3, 2020December 28, 2019
4.50% Senior Unsecured Notes due January 15, 2022$ $299,441 
4.50% Senior Unsecured Notes due December 1, 2023192,849 447,879 
1.75% Senior Unsecured Notes due October 1, 2027345,909  
3.90% Senior Unsecured Notes due April 15, 2030493,114  
Total long-term debt$1,031,872 $747,320 
Fair value of long-term debt$1,128,000 $795,000 

Fair Value of Financial Assets and Liabilities

The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. 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.

Senior Unsecured Notes

Our 4.50% senior unsecured notes due January 15, 2022 (the “2022 Notes”) were issued in January 2012 at 99.97% of the principal amount of $300.0 million. The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. Our 4.50% senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69% of the principal amount of $450.0 million. The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year.

On April 16, 2020, we issued $500.0 million aggregate principal amount of senior unsecured notes (the “Original Notes”). The Original Notes were issued at 99.65% of the principal amount of $500.0 million, are due April 15, 2030 and bear interest at 3.90% per year payable semi-annually in arrears on April 15 and October 15 of each year (collectively with the 2023 Notes and 2027 Notes, referred to as our “senior unsecured notes”).

9

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

During the second quarter of 2020, we commenced an exchange offer to exchange the Original Notes in the aggregate principal amount of $500.0 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 3.90% senior unsecured notes due 2030 (the “Exchange Notes” or “2030 Notes”), which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes. On July 28, 2020, the Original Notes were successfully exchanged for the Exchange Notes.

On September 16, 2020, we redeemed all $300.0 million aggregate principal amount of our outstanding 2022 Notes. In connection with this early redemption, we incurred charges relating to a make-whole provision and debt issuance costs of $15.8 million and $0.3 million.

On September 29, 2020, we issued $350.0 million aggregate principal amount of senior unsecured notes (the “2027 Notes”). The 2027 Notes were issued at 99.67% of the principal amount of $350.0 million, are due October 1, 2027 and bear interest at 1.75% per year payable semi-annually in arrears on April 1 and October 1 of each year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.

Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of our 2023 Notes with the net proceeds from the 2027 Notes. In connection with this tender offer, we incurred charges relating to tender premiums and debt issuance costs of $30.5 million and $1.4 million.

Bank Debt

During the second quarter of 2020, we elected to repay the $500.0 million outstanding under our revolving credit facility that we borrowed during the first quarter of 2020. As of October 3, 2020, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under the unsecured revolving credit facility (the “2017 Credit Agreement”). As of December 28, 2019, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility.

As of October 3, 2020 and December 28, 2019, we had $99.9 million and $111.6 million of bilateral letters of credit issued separately from the 2017 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 our self-insurance policies.

We were in compliance with financial covenants required by our debt arrangements as of October 3, 2020.

Debt Guarantees

We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $53.6 million and $26.4 million as of October 3, 2020 and December 28, 2019. 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 $56.5 million and $50.3 million as of October 3, 2020 and December 28, 2019. We believe that the likelihood of performance under these guarantees is remote.

7.    Leases

Substantially all of our leases are for facilities and vehicles. The initial term for facilities are typically 5 years to 10 years, with renewal options at 5 year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically 3 years to 5 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

10

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Operating lease liabilities consist of the following:
(in thousands)October 3, 2020December 28, 2019
Total operating lease liabilities$2,458,607 $2,495,141 
Less: Current portion of operating lease liabilities(443,709)(477,982)
Noncurrent operating lease liabilities$2,014,898 $2,017,159 

The current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheets.

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. Total lease cost is comprised of the following:
Twelve Weeks EndedForty Weeks Ended
(in thousands)October 3, 2020October 5, 2019October 3, 2020October 5, 2019
Operating lease cost$121,869 $121,057 $403,381 $405,868 
Variable lease cost31,469 36,808 105,862 119,354 
Total lease cost$153,338 $157,865 $509,243 $525,222 

The future maturity of lease liabilities are as follows:
(in thousands)October 3, 2020
Remainder of 2020$132,419 
2021520,542 
2022440,081 
2023401,295 
2024322,254 
Thereafter1,011,763 
Total lease payments2,828,354 
Less: Imputed interest(369,747)
Total operating lease liabilities$2,458,607 

As of October 3, 2020, our operating lease payments include $54.4 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $45.7 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 7.0 years and 3.7% as of October 3, 2020. 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.

11

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Other information relating to our lease liabilities is as follows:
Forty Weeks Ended
(in thousands)October 3, 2020October 5, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$433,934 $417,262 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$305,930 $270,440 

8.    Warranty Liabilities

The following table presents changes in our warranty reserves:
Forty Weeks EndedFifty-Two Weeks Ended
(in thousands)October 3, 2020December 28, 2019
Warranty reserve, beginning of period$36,820 $45,280 
Additions to warranty reserves12,512 34,117 
Reduction and utilization of reserve(29,694)(42,577)
Warranty reserve, end of period$19,638 $36,820 
  
9.    Share Repurchase Program

On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.

During the twelve weeks ended October 3, 2020, we repurchased 0.7 million shares of our common stock at an aggregate cost of $109.6 million, or an average price of $153.06 per share, in connection with our share repurchase program. During the twelve weeks ended October 5, 2019, we purchased 2.4 million shares of our common stock under the share repurchase program at an aggregate cost of $338.6 million, or an average price of $138.71 per share. During the forty weeks ended October 3, 2020 and October 5, 2019, we repurchased 0.9 million and 3.3 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the forty weeks ended October 3, 2020 and October 5, 2019 were at an aggregate cost of $138.6 million and $476.7 million, or an average price of $147.13 and $144.03 per share. We had $752.2 million remaining under our share repurchase program as of October 3, 2020.

12

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

10.    Earnings per Share

The computation of basic and diluted earnings per share are as follows:  
 Twelve Weeks EndedForty Weeks Ended
(in thousands, except per share data)October 3, 2020October 5, 2019October 3, 2020October 5, 2019
Numerator
Net income applicable to common shares$147,476 $123,669 $381,024 $390,989 
Denominator
Basic weighted average common shares68,965 70,381 69,097 71,351 
Dilutive impact of share-based awards302 283 228 292 
Diluted weighted average common shares (1)
69,267 70,664 69,325 71,643 
Basic earnings per common share$2.14 $1.76 $5.51 $5.48 
Diluted earnings per common share$2.13 $1.75 $5.50 $5.46 

(1)For the twelve weeks and forty weeks ended October 3, 2020 101 thousand, and 134 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 5, 2019, 175 thousand and 115 thousand restricted stock units (“RSUs”) were excluded excluded from the diluted calculation as their inclusion would have been anti-dilutive.

11.    Share-Based Compensation

During the forty weeks ended October 3, 2020, we granted 312 thousand time-based RSUs, 74 thousand performance-based RSUs and 37 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 3, 2020 were $136.13, $130.03 and $145.04 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 3, 2020 was $2.8 million and $8.8 million. Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 5, 2019 was $1.7 million and $6.7 million. As of October 3, 2020, there was $76.3 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.6 years.

13

Table of Contents
ITEM 2.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 28, 2019 (filed with the SEC on February 18, 2020), which we refer to as our 2019 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.

Impact of COVID-19 on Our Business

During the COVID-19 pandemic we are prioritizing protecting the health and safety of our Team Members and customers; working to drive financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and working to help ensure that when the current period of crisis passes, our team will emerge even stronger.

In response to the COVID-19 pandemic, we have continued to take additional measures to help ensure the health and safety of our Team Members and customers. Such measures include retro-fitting our stores with plexiglass care shields, the continuation of certain labor-related benefits for Team Members, social distancing practices, sanitation practices, the use of health check screenings and offering contactless delivery.

Government imposed restrictions and stay at home orders related to the pandemic occurred during our first quarter of 2020. These contributed to negative impacts to demand, primarily during the last six weeks of the sixteen weeks ended April 18, 2020. However, as the second and third quarters of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY Omnichannel business, that we believe was largely attributable to higher overall industry demand driven by external factors such as government stimulus, an increase in unemployment benefits, consumers’ preference to use personal vehicles rather than public transportation and other factors that may have contributed to an increase in DIY automotive projects. In addition to these external factors, we believe the execution of prioritized internal initiatives, including our new marketing campaign and providing a variety of shopping choices for customers with our Advance Same Day options, contributed to the improvement in demand. We have also continued to make progress on the development of our key supply chain initiatives, including cross-banner replenishment and our single warehouse management system.

Despite the increase in Net sales during the twelve and forty weeks ended October 3, 2020, the COVID-19 pandemic remains an evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our Team Members, customers, suppliers and stockholders.

Management Overview

Net sales increased 9.9% in the third quarter of 2020 as compared to the same period in the prior year, primarily driven by an increase in comparable store sales resulting from growth in our DIY Omnichannel business. We experienced positive comparable store sales across every region, with the Gulf Coast, Central and Southeast regions having the strongest growth. While still positive, the Northeast Mid-Atlantic and West Coast regions had the lowest comparable store sales growth.

We generated diluted earnings per share (“diluted EPS”) of $2.13 during our third quarter of 2020 compared to $1.75 for the comparable period of 2019. When adjusted for the following non-operational items, our adjusted diluted earnings per share (“Adjusted EPS”) for the twelve weeks ended October 3, 2020 and October 5, 2019 were $2.81 and $2.10.

Twelve Weeks EndedForty Weeks Ended
October 3, 2020October 5, 2019October 3, 2020October 5, 2019
Transformation expenses$0.09 $0.28 $0.39 $0.63 
General Parts International, Inc. (“GPI”) amortization of acquired intangible assets0.07 0.07 0.23 0.21 
Other adjustments0.52 — 0.52 0.25 

Refer to “Reconciliation of Non-GAAP Financial Measures” for further details of our comparable adjustments and the usefulness of such measures to investors.
14

Table of Contents

Summary of Third Quarter Financial Results

A high-level summary of our financial results for the third quarter of 2020 includes:
 
Net sales during the third quarter of 2020 were $2.5 billion, an increase of 9.9% as compared to the third quarter of 2019, primarily driven by an increase in comparable store sales of 10.2%, led by growth in our DIY Omnichannel business.
Gross profit margin for the third quarter of 2020 was 44.4% of Net sales, an increase of 63 basis points as compared to the third quarter of 2019. This increase was primarily due to favorable channel mix, including growth in our DIY Omnichannel business, supply chain efficiencies and favorable pricing actions.
SG&A expenses for the third quarter of 2020 were 34.3% of Net sales, a favorable impact of 202 basis points as compared to the third quarter of 2019. This favorable impact was primarily due to our ability to leverage payroll and rent expenses and lower incident rate and claims that we attribute to continued focus on employee safety.

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 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:

Continued development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach.
Advancement towards optimizing our footprint by market, including consolidating our Worldpac and Autopart International businesses, to drive share, repurpose our in-market store and asset base and streamline our distribution network.
Continued development of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the launch of the iconic DieHard® brand.
Progress in the development of a more efficient end-to-end supply chain to deliver our broad assortment.
Enhancement of ‘Advance Same Day’ Curbside Pick Up, ‘Advance Same Day’ Home Delivery and our mobile application and eCommerce performance.

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. For a complete discussion of these factors, refer to our 2019 Form 10-K, as updated by our subsequent filings with the SEC, including our Form 10-Q filed for the quarterly period ended April 18, 2020, and the “Impact of COVID-19 on Our Business” section included within this Form 10-Q.

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 3, 2020, 10 stores and branches were opened and 68 were closed or consolidated, resulting in a total of 4,979 stores and branches as of October 3, 2020, compared to a total of 5,037 stores and branches as of December 28, 2019.

15

Table of Contents
Results of Operations

Twelve Weeks Ended$ Increase/(Decrease)Basis Points
(in millions)October 3, 2020October 5, 2019
Net sales$2,541.9 100.0 %$2,312.1 100.0 %$229.8 — 
Cost of sales
1,413.5 55.6 1,300.2 56.2 113.3 (63)
Gross profit1,128.5 44.4 1,011.9 43.8 116.5 63 
SG&A871.7 34.3 839.6 36.3 32.1 (202)
Operating income256.8 10.1 172.3 7.5 84.5 265 
Interest expense(11.9)(0.5)(8.4)(0.4)(3.5)(10)
Loss on early redemptions of senior unsecured notes(48.0)(1.9)0.0 0.0 (48.0)(189)
Other income (expense), net0.7 0.0 (3.1)(0.1)3.8 16 
Provision for income taxes50.1 2.0 37.1 1.6 13.0 37 
Net income$147.5 5.8 %$123.7 5.3 %$23.8 45 

Forty Weeks Ended$ Increase/(Decrease)Basis Points
(in millions)October 3, 2020October 5, 2019
Net sales$7,741.2 100.0 %$7,596.4 100.0 %$144.8 — 
Cost of sales
4,343.3 56.1 4,270.4 56.2 72.9 (11)
Gross profit3,397.9 43.9 3,326.0 43.8 71.9 11 
SG&A2,799.8 36.2 2,774.9 36.5 24.9 (36)
Operating income598.1 7.7 551.0 7.3 47.0 47 
Interest expense(37.6)(0.5)(32.1)(0.4)(5.5)(6)
Loss on early redemptions of senior unsecured notes(48.0)(0.6)(10.8)(0.1)(37.2)(48)
Other (expense) income, net(2.2)0.0 9.5 0.1 (11.7)(15)
Provision for income taxes129.2 1.7 126.7 1.7 2.5 — 
Net income$381.0 4.9 %$391.0 5.1 %$(10.0)(23)
Note: Table amounts may not foot due to rounding.

Net Sales

Net sales for the twelve weeks ended October 3, 2020 increased 9.9% as compared to the same period of 2019, primarily driven by an increase in comparable store sales resulting from growth in our DIY Omnichannel business. We experienced positive comparable store sales across every region, with the Gulf Coast, Florida and Southeast regions having the strongest growth. While still positive, the Northeast Mid-Atlantic and West Coast regions had the lowest comparable store sales growth.

For the forty weeks ended October 3, 2020, Net sales increased 1.9% compared to the same period of 2019, primarily driven by a 1.8% increase in comparable store sales resulting from an increase in demand in the second and third quarter of 2020, partially offset by less demand in the first quarter of 2020 caused principally by the COVID-19 pandemic, particularly in the six weeks ended April 18, 2020.

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.

16

Table of Contents
Gross Profit

Gross profit for the twelve weeks ended October 3, 2020 was $1,128.5 million, or 44.4%, of Net sales, as compared to $1,011.9 million, or 43.8%, of Net sales for the twelve weeks ended October 5, 2019. This increase in Gross profit as a percentage of Net sales was primarily due to favorable channel mix, including growth in our DIY Omnichannel business, supply chain efficiencies and favorable pricing actions. These improvements were partially offset by unfavorable product mix and headwinds associated with shrink and defectives.

Gross profit for the forty weeks ended October 3, 2020 was $3,397.9 million, or 43.9% of Net sales, as compared to $3,326.0 million, or 43.8%, of Net sales for the forty weeks ended October 5, 2019. This increase in Gross profit as a percentage of Net sales was primarily due to favorable channel mix, including growth in our DIY Omnichannel business, supply chain efficiencies and favorable pricing actions. These improvements were partially offset by unfavorable product mix.

As a result of changes in our LIFO reserve, a benefit of $15.9 million and an expense of $33.8 million was included in the twelve weeks ended October 3, 2020 and October 5, 2019. A benefit of $3.9 million and an expense of $76.7 million was included in the forty weeks ended October 3, 2020 and October 5, 2019.

Selling, general and administrative expenses

SG&A expenses for the twelve weeks ended October 3, 2020 were $871.7 million, or 34.3% of Net sales, as compared to $839.6 million, or 36.3% of Net sales, for the twelve weeks ended October 5, 2019. This decrease in SG&A expenses as a percentage of Net sales was primarily due to our ability to leverage payroll and rent expenses, lower incident rate and claims that we attribute to continued focus on employee safety and suspension of travel due to the COVID-19 pandemic. These improvements were partially offset by an increase in costs incurred in response to the COVID-19 pandemic and an increase in support contracts related to information technology solutions.

SG&A for the forty weeks ended October 3, 2020 was $2,799.8 million, or 36.2% of Net sales, as compared to $2,774.9 million, or 36.5% of Net sales, for the forty weeks ended October 5, 2019. This decrease in SG&A as a percentage of Net sales was primarily due to our ability to leverage payroll and rent expenses, lower incident rate and claims that we attribute to continued focus on employee safety and suspension of travel due to the COVID-19 pandemic. These improvements were partially offset by the factors discussed above.

Loss on early redemptions of senior unsecured notes

During the twelve weeks ended October 3, 2020, we incurred charges of $48.0 million related to the early redemption of our 2022 and 2023 senior unsecured notes. During the sixteen weeks ended April 20, 2019, we incurred charges of $10.8 million related to the early redemption of our 2020 senior unsecured notes.

Provision for income taxes

Our Provision for income taxes for the twelve weeks ended October 3, 2020 was $50.1 million, as compared to $37.1 million for the twelve weeks ended October 5, 2019. Our effective tax rate was 25.3% and 23.1% for the twelve weeks ended October 3, 2020 and October 5, 2019.

Our Provision for income taxes for the forty weeks ended October 3, 2020 was $129.2 million, as compared to $126.7 million for the forty weeks ended October 5, 2019. Our effective tax rate was 25.3% and 24.5% for the forty weeks ended October 3, 2020 and October 5, 2019.

17

Table of Contents
Reconciliation of Non-GAAP Financial Measures

“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, including Adjusted net income and Adjusted EPS, 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-cash amortization related to the acquired GPI intangible assets; and (3) other non-recurring adjustments are 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 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 — Costs incurred in connection with our business plan that focuses on specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise, that we do not view to be normal cash operating expenses. These expenses will include, but not be 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 2018 Store Rationalization plan and 2017 Store and Supply Chain Rationalization plan.
Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and supply chain projects in connection with our enterprise integration initiatives.
Other significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with our 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 our operating structure across the enterprise.

GPI Amortization of Acquired Intangible Assets — As part of our acquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and favorable leases agreements, which we expect to be subject to amortization through 2025.

18

Table of Contents
We have included a reconciliation of this information to the most comparable GAAP measures in the following table:

Twelve Weeks EndedForty Weeks Ended
(in thousands, except per share data)October 3, 2020October 5, 2019October 3, 2020October 5, 2019
Net income (GAAP)$147,476 $123,669 $381,024 $390,989 
Cost of sales adjustments:
Transformation expenses:
Restructuring costs— 2,991 — 3,272 
Other significant costs79 — 1,627 — 
Other adjustment (1)
— — — 13,010 
SG&A adjustments:
GPI amortization of acquired intangible assets
6,324 6,362 21,086 21,157 
Transformation expenses:
Restructuring costs2,581 4,082 12,221 14,595 
Third-party professional services4,660 11,966 8,924 31,282 
Other significant costs1,438 7,338 13,560 10,756 
Other income adjustment (2)
48,022 — 48,022 10,756 
Provision for income taxes on adjustments (3)
(15,776)(8,185)(26,360)(26,207)
Adjusted net income (Non-GAAP)$194,804 $148,223 $460,104 $469,610 
Diluted earnings per share (GAAP)$2.13 $1.75 $5.50 $5.46 
Adjustments, net of tax0.68 0.35 1.14 1.09 
Adjusted EPS (Non-GAAP)$2.81 $2.10 $6.64 $6.55 

(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 twelve weeks ended October 3, 2020, we incurred charges relating to a make-whole provision and tender premiums of $46.3 million and debt issuance costs of $1.7 million resulting from the early redemption of our 2022 and 2023 Notes. 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 senior unsecured notes.
(3)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.

19

Table of Contents
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, funding of initiatives under our strategic business plan and other operational priorities. Historically, we have used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program, to pay our quarterly cash dividends and for acquisitions; however, given uncertainties related to the COVID-19 pandemic, our future uses of cash may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity change. Typically, we have funded our cash 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 November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program as an addition to the previous $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019.

During the twelve weeks ended October 3, 2020, we repurchased 0.7 million shares of our common stock at an aggregate cost of $109.6 million, or an average price of $153.06 per share, in connection with our share repurchase program. During the twelve weeks ended October 5, 2019, we purchased 2.4 million shares of our common stock under the share repurchase program at an aggregate cost of $338.6 million, or an average price of $138.71 per share. During the forty weeks ended October 3, 2020 and October 5, 2019, we repurchased 0.9 million and 3.3 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the forty weeks ended October 3, 2020 and October 5, 2019 were at an aggregate cost of $138.6 million and $476.7 million, or an average price of $147.13 and $144.03 per share.

Analysis of Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities:
Forty Weeks Ended
(in thousands)October 3, 2020October 5, 2019
Cash flows provided by operating activities$809,218 $708,546 
Cash flows used in investing activities(191,948)(160,510)
Cash flows provided by (used in) financing activities33,460 (870,864)
Effect of exchange rate changes on cash(1,190)27 
Net increase (decrease) in Cash and cash equivalents
$649,540 $