10-Q 1 aap-20211009.htm 10-Q aap-20211009
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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 9, 2021

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-20211009_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 12, 2021, the number of shares of the registrant’s common stock outstanding was 62,355,177 shares.



   
 
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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 (“SEC”), 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

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 9, 2021January 2, 2021
Assets
Current assets:  
Cash and cash equivalents$604,645 $834,992 
Receivables, net931,758 749,999 
Inventories4,450,452 4,538,199 
Other current assets174,406 146,811 
Total current assets6,161,261 6,270,001 
Property and equipment, net of accumulated depreciation of $2,349,872 and $2,189,165
1,483,246 1,462,602 
Operating lease right-of-use assets2,514,375 2,379,987 
Goodwill994,562 993,590 
Intangible assets, net658,545 681,127 
Other assets52,182 52,329 
$11,864,171 $11,839,636 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable$3,750,835 $3,640,639 
Accrued expenses731,786 606,804 
Other current liabilities472,608 496,472 
Total current liabilities4,955,229 4,743,915 
Long-term debt1,034,002 1,032,984 
Non-current operating lease liabilities2,154,364 2,014,499 
Deferred income taxes375,069 342,445 
Other long-term liabilities148,972 146,281 
Commitments and contingencies
Stockholders’ equity:  
Preferred stock, nonvoting, $0.0001 par value
  
Common stock, voting, $0.0001 par value
8 8 
Additional paid-in capital835,033 783,709 
Treasury stock, at cost(2,203,584)(1,394,080)
Accumulated other comprehensive loss(21,826)(26,759)
Retained earnings4,586,904 4,196,634 
Total stockholders’ equity3,196,535 3,559,512 
$11,864,171 $11,839,636 


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

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
 Twelve Weeks EndedForty Weeks Ended
October 9, 2021October 3, 2020October 9, 2021October 3, 2020
Net sales$2,621,229 $2,541,928 $8,601,014 $7,741,190 
Cost of sales, including purchasing and warehousing costs
1,438,775 1,413,457 4,744,383 4,343,272 
Gross profit1,182,454 1,128,471 3,856,631 3,397,918 
Selling, general and administrative expenses
953,256 871,660 3,130,376 2,799,837 
Operating income229,198 256,811 726,255 598,081 
Other, net:
Interest expense(8,587)(11,925)(28,085)(37,590)
Loss on early redemptions of senior unsecured notes (48,022) (48,022)
Other income (expense), net1,810 674 7,790 (2,198)
Total other, net(6,777)(59,273)(20,295)(87,810)
Income before provision for income taxes222,421 197,538 705,960 510,271 
Provision for income taxes52,608 50,062 171,521 129,247 
Net income$169,813 $147,476 $534,439 $381,024 
Basic earnings per common share$2.70 $2.14 $8.28 $5.51 
Weighted-average common shares outstanding62,854 68,965 64,555 69,097 
Diluted earnings per common share$2.68 $2.13 $8.22 $5.50 
Weighted-average common shares outstanding63,348 69,267 65,008 69,325 


Condensed Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 Twelve Weeks EndedForty Weeks Ended
October 9, 2021October 3, 2020October 9, 2021October 3, 2020
Net income$169,813 $147,476 $534,439 $381,024 
Other comprehensive income (loss):
Changes in net unrecognized other postretirement costs, net of tax of $25, $26, $69 and $29
(70)(73)(194)(80)
Currency translation adjustments1,527 5,298 5,127 (4,065)
Total other comprehensive income (loss)1,457 5,225 4,933 (4,145)
Comprehensive income$171,270 $152,701 $539,372 $376,879 



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

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 9, 2021
Common StockAdditional
Paid-in Capital
Treasury Stock, at CostAccumulated Other
Comprehensive Loss
Retained EarningsTotal
Stockholders’ Equity
SharesAmount
Balance, July 17, 202163,499 $8 $818,126 $(1,973,371)$(23,283)$4,480,085 $3,301,565 
Net income
— — — — — 169,813 169,813 
Total other comprehensive income— — — — 1,457 — 1,457 
Restricted stock units and deferred stock units vested
29 — — — — —  
Share-based compensation
— — 16,040 — — — 16,040 
Stock issued under employee stock purchase plan
4 — 868 — — — 868 
Repurchases of common stock
(1,119)— — (230,213)— — (230,213)
Cash dividends declared ($1.00 per common share)
— — — — — (62,994)(62,994)
Other — (1)— — — (1)
Balance, October 9, 202162,413 $8 $835,033 $(2,203,584)$(21,826)$4,586,904 $3,196,535 
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 



The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4

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 9, 2021
 Common StockAdditional
Paid-in Capital
Treasury Stock, at CostAccumulated Other
Comprehensive Loss
Retained EarningsTotal
Stockholders’ Equity
 SharesAmount
Balance, January 2, 202166,361 $8 $783,709 $(1,394,080)$(26,759)$4,196,634 $3,559,512 
Net income
— — — — — 534,439 534,439 
Total other comprehensive income— — — — 4,933 — 4,933 
Restricted stock units and deferred stock units vested277 — — — — —  
Share-based compensation
— — 49,631 — — — 49,631 
Stock issued under employee stock purchase plan
23 — 1,737 — — — 1,737 
Repurchases of common stock
(4,285)— — (809,504)— — (809,504)
Cash dividends declared ($2.25 per common share)
— — — — — (144,169)(144,169)
Other
37 — (44)— — — (44)
Balance, October 9, 202162,413 $8 $835,033 $(2,203,584)$(21,826)$4,586,904 $3,196,535 
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 vested206 — — — — —  
Share-based compensation— — 34,927 — — — 34,927 
Stock issued under employee stock purchase plan20 — 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 



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

5

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 Forty Weeks Ended
October 9, 2021October 3, 2020
Cash flows from operating activities:  
Net income$534,439 $381,024 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization194,737 192,911 
Share-based compensation49,631 34,927 
Loss and impairment of long-lived assets7,570 1,582 
Loss on early redemption of senior unsecured notes  48,022 
Provision for deferred income taxes32,425 8,975 
Other, net1,388 1,212 
Net change in:
Receivables, net(180,605)(154,888)
Inventories90,993 62,181 
Accounts payable108,393 106,831 
Accrued expenses137,395 111,136 
Other assets and liabilities, net(51,430)15,305 
Net cash provided by operating activities924,936 809,218 
Cash flows from investing activities:  
Purchases of property and equipment(190,983)(192,632)
Purchase of an indefinite-lived intangible asset (230)
Proceeds from sales of property and equipment2,102 914 
Net cash used in investing activities(188,881)(191,948)
Cash flows from financing activities:  
Proceeds from borrowing on revolving credit facility 500,000 
Payment on revolving credit facility (500,000)
Proceeds from issuances of senior unsecured notes, net 847,092 
Early redemptions of senior unsecured notes, net (602,568)
Dividends paid(160,925)(56,210)
Proceeds from the issuance of common stock
1,737 2,211 
Repurchases of common stock(809,504)(148,330)
Other, net(46)(8,735)
Net cash (used in) provided by financing activities(968,738)33,460 
Effect of exchange rate changes on cash2,336 (1,190)
Net (decrease) increase in cash and cash equivalents(230,347)649,540 
Cash and cash equivalents, beginning of period
834,992 418,665 
Cash and cash equivalents, end of period
$604,645 $1,068,205 
Non-cash transactions:
Accrued purchases of property and equipment$8,632 $16,302 

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

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 9, 2021, we operated a total of 4,727 stores and 234 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of October 9, 2021, we served 1,325 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands. Our stores operate primarily under the trade names “Advance Auto Parts,” “Carquest” and “Autopart International,” and our branches operate under the “Worldpac” trade name.

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 principles. 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 2020 as filed with the SEC on February 22, 2021.

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 remaining three quarters consist of twelve weeks.

2.    Significant Accounting Policies

Revenues

The following table summarizes disaggregated revenue from contracts with customers by product group:
Twelve Weeks EndedForty Weeks Ended
October 9, 2021October 3, 2020October 9, 2021October 3, 2020
Percentage of Net sales, by product group:
Parts and batteries68 %67 %66 %66 %
Accessories and chemicals19 20 21 21 
Engine maintenance12 12 12 12 
Other1 1 1 1 
Total100 %100 %100 %100 %

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 9, 2021 and 88% of inventories as of January 2, 2021. 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 9, 2021 and prior years. We recorded an increase to Cost of sales of $29.4 million and a reduction to Cost of sales of $15.9 million for the twelve weeks ended October 9, 2021 and October 3, 2020 and an increase to Cost of sales of $71.6 million and a reduction to Cost of sales of $3.9 million for the forty weeks ended October 9, 2021 and October 3, 2020 to state inventories at LIFO.

7

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


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 9, 2021January 2, 2021
Inventories at first in, first out (“FIFO”)$4,366,631 $4,382,779 
Adjustments to state inventories at LIFO83,821 155,420 
Inventories at LIFO$4,450,452 $4,538,199 

4.    Intangible Assets

Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $7.2 million and $7.3 million for the twelve weeks ended October 9, 2021 and October 3, 2020 and $24.1 million and $24.3 million for the forty weeks ended October 9, 2021 and October 3, 2020.

5.    Receivables, net

Receivables, net consists of the following:
(in thousands)October 9, 2021January 2, 2021
Trade$585,174 $449,403 
Vendor282,377 278,180 
Other74,528 34,345 
Total receivables942,079 761,928 
Less: Allowance for doubtful accounts(10,321)(11,929)
Receivables, net$931,758 $749,999 

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

Long-term debt consists of the following:
(in thousands)October 9, 2021January 2, 2021
4.50% Senior Unsecured Notes due December 1, 2023$193,167 $192,990 
1.75% Senior Unsecured Notes due October 1, 2027346,251 345,854 
3.90% Senior Unsecured Notes due April 15, 2030494,584 494,140 
Total long-term debt$1,034,002 $1,032,984 
Fair value of long-term debt$1,103,627 $1,145,000 

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.

8

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


Bank Debt

As of October 9, 2021 and January 2, 2021, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility (the “Credit Agreement”).

As of October 9, 2021 and January 2, 2021, we had $92.6 million and $100.0 million of bilateral letters of credit issued separately from the 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 9, 2021.

Senior Unsecured Notes

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.

On July 28, 2020, we completed an exchange offer whereby 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”), were exchanged 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 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. Our 2023 Notes, 2027 Notes and 2030 Notes are collectively referred to herein as our “senior unsecured notes.”

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.

Debt Guarantees

We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $27.7 million and $23.6 million as of October 9, 2021 and January 2, 2021. 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 $69.6 million and $57.5 million as of October 9, 2021 and January 2, 2021. 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 is 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.

9

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


Operating lease liabilities consist of the following:
(in thousands)October 9, 2021January 2, 2021
Total operating lease liabilities$2,610,491 $2,477,087 
Less: Current portion of operating lease liabilities(456,127)(462,588)
Noncurrent operating lease liabilities$2,154,364 $2,014,499 

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 9, 2021October 3, 2020October 9, 2021October 3, 2020
Operating lease cost$124,084 $121,869 $410,253 $403,381 
Variable lease cost35,144 31,469 112,864 105,862 
Total lease cost$159,228 $153,338 $523,117 $509,243 

The future maturity of lease liabilities are as follows:
(in thousands)October 9, 2021
Remainder of 2021$141,957 
2022503,001 
2023481,738 
2024415,170 
2025368,761 
Thereafter1,063,114 
Total lease payments2,973,741 
Less: Imputed interest(363,250)
Total operating lease liabilities$2,610,491 

As of October 9, 2021, our operating lease payments include $66.9 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $183.8 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 7.2 years and 3.3% as of October 9, 2021. 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.

10

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 9, 2021October 3, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$418,596 $433,934 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$460,351 $305,930 

8.    Warranty Liabilities

The following table presents changes in our warranty reserves:
Forty Weeks EndedFifty-Three Weeks Ended
(in thousands)October 9, 2021January 2, 2021
Warranty reserve, beginning of period$14,120 $36,820 
Additions to warranty reserves8,112 14,907 
Reduction and utilization of reserve(19,077)(37,607)
Warranty reserve, end of period$3,155 $14,120 

9.    Share Repurchase Program

On April 19, 2021, our Board of Directors authorized an additional $1.0 billion share repurchase program. This new authorization was incremental to the $700.0 million share repurchase program that was authorized by our Board of Directors in November 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 9, 2021, we repurchased 1.1 million shares of our common stock at an aggregate cost of $228.3 million, or an average price of $205.65 per share, in connection with our share repurchase program. 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 forty weeks ended October 9, 2021 and October 3, 2020, we repurchased 4.2 million and 0.9 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 9, 2021 and October 3, 2020 were at an aggregate cost of $791.7 million and $138.6 million, or an average price of $189.43 and $147.13 per share. We had $640.5 million remaining under our share repurchase program as of October 9, 2021.

11

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


10.    Earnings per Share

The computations of basic and diluted earnings per share are as follows:
 Twelve Weeks EndedForty Weeks Ended
(in thousands, except per share data)October 9, 2021October 3, 2020October 9, 2021October 3, 2020
Numerator
Net income applicable to common shares$169,813 $147,476 $534,439 $381,024 
Denominator
Basic weighted-average common shares62,854 68,965 64,555 69,097 
Dilutive impact of share-based awards494 302 453 228 
Diluted weighted-average common shares (1)
63,348 69,267 65,008 69,325 
Basic earnings per common share$2.70 $2.14 $8.28 $5.51 
Diluted earnings per common share$2.68 $2.13 $8.22 $5.50 

(1)For the twelve weeks ended October 9, 2021, there were no restricted stock units (“RSUs”) that were anti-dilutive. For the forty weeks ended October 9, 2021, 10,974 RSUs were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the twelve and forty weeks ended October 3, 2020, 101 thousand and 134 thousand RSUs were excluded from the diluted calculation as their inclusion would have been anti-dilutive.

11.    Share-Based Compensation

During the forty weeks ended October 9, 2021, we granted 234 thousand time-based RSUs, 63 thousand market-based RSUs and 124 thousand Stock Options. The general terms of the time-based, performance-based and market-based RSUs are similar to awards previously granted by us. We grant options to purchase common stock to certain employees under our 2014 Long-Term Incentive Plan. The options are granted at an exercise price equal to the closing market price of Advance's common stock on the date of the grant, expire after 10 years and vest one-third annually over three years. We record compensation expense for the grant date fair value of the option awards evenly over the vesting period.

The weighted-average fair values of the time-based and market-based RSUs granted during the forty weeks ended October 9, 2021 were $181.10 and $204.97 per share. For time-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.

The weighted-average fair values of stock options granted during the forty weeks ended October 9, 2021 was $47.19 per share. No stock options were granted in the twelve weeks ended October 9, 2021. The fair value was estimated on the date of grant by applying the Black-Scholes option-pricing valuation model.

Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 9, 2021 was $4.1 million and $12.3 million. 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. As of October 9, 2021, there was $82.4 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.

12

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


12.    Subsequent Events

On February 6, 2018, a putative class action on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 14, 2016 and August 15, 2017, inclusive (the “Class Period”), was commenced against us and certain of our current and former officers in the U.S. District Court for the District of Delaware. The plaintiff alleged that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 7, 2020, the court granted in part and denied in part our motion to dismiss. On November 6, 2020, the court granted the plaintiff’s motion for class certification. On March 15, 2021, we moved for reconsideration of the order denying in part our motion to dismiss, and on October 15, 2021, we filed a motion for summary judgment, seeking full dismissal of the case. On November 5, 2021, the parties executed a confidential binding term sheet to settle all claims. The settlement amount will be fully covered by our insurance carriers, and the settlement is subject to court approval.

On November 9, 2021, we entered into a new credit agreement that provides a $1.2 billion unsecured revolving credit facility (the “2021 Credit Agreement”) with Advance Auto Parts, Inc. as Borrower, the lenders party thereto, and Bank of America, N.A., Administrative Agent. This new revolver under the 2021 Credit Agreement replaced the revolver under the Credit Agreement. The new revolver provides for the issuance of letters of credit with a sublimit of $200.0 million. We may request that the total revolving commitment be increased by an amount not exceeding $500.0 million during the term of the 2021 Credit Agreement.
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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 January 2, 2021 (filed with the SEC on February 22, 2021), which we refer to as our 2020 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 ongoing COVID-19 pandemic, we have continued prioritizing protecting the health and safety of our team members and customers; driving financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and ensuring that our team will emerge even stronger following the pandemic. We have continued to take additional measures to help ensure the health and safety of our team members and customers, including the continuation of 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 the first half 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 remainder of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY omnichannel business. This has continued in the forty weeks ended October 9, 2021, though demand in the professional business is now outpacing the DIY channel, particularly in the second and third quarters, driven partially by multiple rounds of government stimulus, consumers’ increased use of personal vehicles and the continued reopening of businesses throughout the United States. In addition, 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, as well as improved store execution, all 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 9, 2021, 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 3.1% in the third quarter of 2021 compared with the same period in the prior year, primarily driven by an overall channel shift back to professional and a return to stores for DIY customers. Within professional we’re seeing increasing strength in certain geographies that lagged the country last year as the gradual return to work of professional workers in large urban markets catches up with the rest of the country. Our regional strength was led by the Southwest and West, along with a strong recovery in the MidAtlantic and Northeast. Category growth was led by brakes, motor oil and filters as miles driven reliant categories improved.

We generated diluted earnings per share (“diluted EPS”) of $2.68 during our third quarter of 2021 compared with $2.13 for the comparable period of 2020. When adjusted for non-operational items in the following table, our adjusted diluted earnings per share (“Adjusted EPS”) for the twelve weeks ended October 9, 2021 and October 3, 2020 was $3.21 and $2.64.
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For the forty weeks ended October 9, 2021 and October 3, 2020, diluted EPS was $8.22 and $5.50. When adjusted for non-operational items in the following table, our Adjusted EPS for the forty weeks ended October 9, 2021 and October 3, 2020 was $9.93 and $6.59.

Twelve Weeks EndedForty Weeks Ended
October 9, 2021October 3, 2020October 9, 2021October 3, 2020
LIFO impacts$0.35 $(0.17)$0.82 $(0.05)
Transformation expenses$0.10 $0.09 $0.64 $0.39 
General Parts International, Inc. (“GPI”) amortization of acquired intangible assets$0.08 $0.07 $0.25 $0.23 
Other adjustments$— $0.52 $— $0.52 

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

Summary of Third Quarter Financial Results

A high-level summary of our financial results for the third quarter of 2021 includes:
 
Net sales during the third quarter of 2021 were $2.6 billion, an increase of 3.1% compared with the third quarter of 2020, primarily driven by an increase in comparable store sales resulting from a strong recovery in our professional business.
Gross profit margin for the third quarter of 2021 was 45.1% of Net sales, an increase of 72 basis points compared with the third quarter of 2020. This increase was primarily due to our ongoing category management initiatives, including strategic pricing, strategic sourcing and owned brand expansion as well as favorable product mix.
SG&A expenses for the third quarter of 2021 were 36.4% of Net sales, an increase of 208 basis points compared with the third quarter of 2020.

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, margin expansion 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 evolution 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 implementation of a more efficient end-to-end supply chain process to deliver our broad assortment and to help lessen the impact of external constraints.
Ongoing enhancement of Advance Same Day® Curbside Pick Up, Advance Same Day Home Delivery and our mobile application and e-commerce performance.
Actively pursuing new store openings, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets, as well as expansion of our independent Carquest network.
Continued negotiations with vendors on strategic sourcing and pricing to help mitigate inflationary pressures.

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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. Refer to our 2020 Form 10-K, as updated by our subsequent filings with the SEC, 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 9, 2021, 25 stores and branches were opened and 40 were closed or consolidated, resulting in a total of 4,961 stores and branches as of October 9, 2021, compared with a total of 4,976 stores and branches as of January 2, 2021.

Results of Operations
Twelve Weeks Ended$ Favorable/ (Unfavorable)Basis Points
($ in millions)October 9, 2021October 3, 2020
Net sales$2,621.2 100.0 %$2,541.9 100.0 %$79.3 — 
Cost of sales
1,438.8 54.9 1,413.5 55.6 (25.3)(72)
Gross profit1,182.5 45.1 1,128.5 44.4 54.0 72 
SG&A953.3 36.4 871.7 34.3 (81.6)(208)
Operating income229.2 8.7 256.8 10.1 (27.6)(136)
Interest expense(8.6)(0.3)(11.9)(0.5)3.3 14 
Loss on early redemptions of senior unsecured notes— — (48.0)(1.9)48.0 189 
Other income, net1.8 0.1 0.7 — 1.1 
Provision for income taxes52.6 2.0 50.1 2.0 (2.5)(4)
Net income$169.8 6.5 %$147.5 5.8 %$22.3 68 

Forty Weeks Ended$ Favorable/ (Unfavorable)Basis Points
($ in millions)October 9, 2021October 3, 2020
Net sales$8,601.0 100.0 %$7,741.2 100.0 %$859.8 — 
Cost of sales
4,744.4 55.2 4,343.3 56.1 (401.1)(95)
Gross profit3,856.6 44.8 3,397.9 43.9 458.7 95 
SG&A3,130.4 36.4 2,799.8 36.2 (330.6)(23)
Operating income726.3 8.4 598.1 7.7 128.2 72 
Interest expense(28.1)(0.3)(37.6)(0.5)9.5 16 
Loss on early redemptions of senior unsecured notes— — (48.0)(0.6)48.0 62 
Other income (expense), net7.8 0.1 (2.2)— 10.0 12 
Provision for income taxes171.5 2.0 129.2 1.7 (42.3)(32)
Net income$534.4 6.2 %$381.0 4.9 %$153.4 129 
Note: Table amounts may not foot due to rounding.

Net Sales

Net sales for the twelve weeks ended October 9, 2021 increased 3.1% compared with the same period of 2020, primarily driven by a 3.1% increase in comparable store sales resulting from a strong recovery in our professional business. Our regional strength was led by the Southwest and West, along with a strong recovery in the MidAtlantic and Northeast. Category growth was led by brakes, motor oil and filters as miles driven reliant categories improved.

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For the forty weeks ended October 9, 2021, Net sales increased 11.1% compared with the same period of 2020, primarily driven by an 11.4% increase in comparable store sales resulting from a strong recovery of our professional business and an increase in demand in our DIY business compared with the same period in the prior year, which was significantly impacted by the COVID-19 pandemic.

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.

Gross Profit

Gross profit for the twelve weeks ended October 9, 2021 was $1,182.5 million, or 45.1% of Net sales, compared with $1,128.5 million, or 44.4% of Net sales, for the twelve weeks ended October 3, 2020. This increase in Gross profit as a percentage of Net sales was primarily driven by improvements in category management, including strategic pricing, strategic sourcing and owned brand expansion as well as favorable product mix offset by inflationary costs and unfavorable channel mix.

Gross profit for the forty weeks ended October 9, 2021 was $3,856.6 million, or 44.8% of Net sales, compared with $3,397.9 million, or 43.9% of Net sales, for the forty weeks ended October 3, 2020. This increase in Gross profit as a percentage of Net sales was primarily due to improvements in net pricing, increases in vendor related funding and favorable product mix, partially offset by increased LIFO related expenses and unfavorable channel mix.

As a result of changes in our LIFO reserve, an expense of $29.4 million and a benefit of $15.9 million were included in the twelve weeks ended October 9, 2021 and October 3, 2020. An expense of $71.6 million and a benefit of $3.9 million were included in the forty weeks ended October 9, 2021 and October 3, 2020.

Selling, general and administrative expenses

SG&A expenses for the twelve weeks ended October 9, 2021 were $953.3 million, or 36.4% of Net sales, compared with $871.7 million, or 34.3% of Net sales, for the twelve weeks ended October 3, 2020. This increase of 208 basis points compared with the third quarter of 2020 was primarily driven by increased inflationary headwinds in store labor as well as higher delivery and fuel expenses associated with the recovery of the professional business. We incurred higher incentive compensation and incremental startup costs for new store openings when compared with the prior year.

SG&A expenses for the forty weeks ended October 9, 2021 were $3,130.4 million, or 36.4% of Net sales, compared with $2,799.8 million, or 36.2% of Net sales, for the forty weeks ended October 3, 2020. The increase in SG&A expenses was driven by higher labor and benefit costs, marketing initiatives and contract services.

Provision for income taxes

Our Provision for income taxes for the twelve weeks ended October 9, 2021 was $52.6 million, compared with $50.1 million for the twelve weeks ended October 3, 2020. Our effective tax rate was 23.7% and 25.3% for the twelve weeks ended October 9, 2021 and October 3, 2020.

Our Provision for income taxes for the forty weeks ended October 9, 2021 was $171.5 million, compared with $129.2 million for the forty weeks ended October 3, 2020. Our effective tax rate was 24.3% and 25.3% for the forty weeks ended October 9, 2021 and October 3, 2020.

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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) LIFO impacts; (2) transformation expenses under our strategic business plan; (3) non-cash amortization related to the acquired GPI intangible assets; and (4) 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.

LIFO impacts — Beginning the first quarter of 2021, to assist in comparing our current operating results with the operational performance of other companies in our industry, the impact of LIFO on our results of operations is a reconciling item to arrive at non-GAAP financial 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 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 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 lease agreements, which we expect to be subject to amortization through 2025.

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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 9, 2021October 3, 2020October 9, 2021October 3, 2020
Net income (GAAP)$169,813 $147,476 $534,439 $381,024 
Cost of sales adjustments:
LIFO impacts (1)
29,410 (15,855)71,599 (3,908)
Transformation expenses:
Other significant costs143 79 2,611 1,627 
SG&A adjustments:
GPI amortization of acquired intangible assets
6,341 6,324 21,246 21,086 
Transformation expenses:
Restructuring costs2,360 2,581 27,063 12,221 
Third-party professional services4,823 4,660 18,394 8,924 
Other significant costs1,492 1,438 7,406 13,560 
Other income adjustment (2)
36 48,022 — 48,022 
Provision for income taxes on adjustments (3)
(11,151)(11,812)(37,080)(25,383)
Adjusted net income (Non-GAAP)$203,267 $182,913 $645,678 $457,173 
Diluted earnings per share (GAAP)$2.68 $2.13 $8.22 $5.50 
Adjustments, net of tax0.53 0.51 1.71 1.09 
Adjusted EPS (Non-GAAP)$3.21 $2.64 $9.93 $6.59 

(1)The twelve and forty weeks ended October 3, 2020 non-GAAP expenses have been adjusted to be comparable with our 2021 presentation.
(2)During the twelve and forty 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.
(3)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.

Liquidity and Capital Resources

Overview

Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, 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.

19

Share Repurchase Program

On April 19, 2021, our Board of Directors authorized an additional $1.0 billion to our current share repurchase program. This authorization was incremental to the $700.0 million that was authorized previously by our Board of Directors in November 2019.

During the twelve weeks ended October 9, 2021, we repurchased 1.1 million shares of our common stock at an aggregate cost of $228.3 million, or an average price of $205.65 per share, in connection with our share repurchase program. 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 forty weeks ended October 9, 2021 and October 3, 2020, we repurchased 4.2 million and 0.9 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 9, 2021 and October 3, 2020 were at an aggregate cost of $791.7 million and $138.6 million, or an average price of $189.43 and $147.13 per share. We had $640.5 million remaining under our share repurchase program as of October 9, 2021.

Analysis of Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities:
Forty Weeks Ended
(in thousands)October 9, 2021October 3, 2020
Cash flows provided by operating activities$924,936 $809,218 
Cash flows used in investing activities(188,881)