ADVANCE AUTO PARTS INC

Nature of Operations and Basis of Presentation

Description of Business

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 unaudited condensed consolidated financial statements 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 “the Company”).

As of October 10, 2026, the Company operated a total of 4,325 stores primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of October 10, 2026, the Company served 787 independently owned Carquest branded stores across the same geographic locations served by the Company’s stores, in addition to various locations in the Caribbean islands. The Company’s stores operate primarily under the trade names “Advance Auto Parts” and “Carquest”.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and unaudited notes to the condensed consolidated financial statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). 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 SEC interim reporting principles.

The accompanying condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. The accounting policies followed in the presentation of these condensed consolidated financial statements are consistent with those followed on an annual basis.

These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for fiscal year 2025 (“2025 Form 10-K”) as filed with the SEC on February 13, 2026. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Consistent with prior years, the Company’s first quarter of the year contained sixteen weeks. The Company’s remaining quarters each consist of twelve weeks.

The forty weeks ended October 10, 2026 included a payment to settle the customary final working capital amounts related to the Company's sale of Worldpac, which was reflected as a cash outflow for discontinued operations on the condensed consolidated statements of cash flows. The charge was recorded in the fourth quarter of fiscal 2025 and reflects a working capital adjustment recognized as an adjustment to the original estimated purchase price and a reduction in the gain on divestiture recorded as a component of discontinued operations in fiscal 2025 and 2024.

Recently Issued Accounting Pronouncements - Adopted

Targeted Improvements to the Accounting for Internal-Use Software

In September 2025, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2025-06, Intangibles - Goodwill and Other - Internal-Use Software: Targeted Improvements to the Accounting for Internal-Use Software (“ASU 2025-06”), which makes targeted improvements to the accounting for internal-use software by removing references to “development stages”. The update also clarifies the criteria for capitalization, which begins when both of the following occur: (1) management has authorized and committed to funding the software project and (2) it is probable that the project will be completed and the software will be used to perform the function intended. ASU 2025-06 is effective for annual reporting periods beginning after December 15, 2027, and for interim periods within those annual reporting periods, with early adoption permitted. The amendments in ASU 2025-06 can be applied prospectively, retrospectively, or via a modified prospective transition method. The Company adopted ASU 2025-06 on a prospective basis as of the beginning of fiscal 2026 for all projects, including in-process projects. The adoption did not have a material impact on the condensed consolidated financial statements and related disclosures.

Measurement of Credit Losses for Accounts Receivable and Contract Assets

In July 2025, the FASB issued ASU 2025-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets(“ASU 2025-05”), which provides a practical expedient permitting an entity to assume that conditions at the balance sheet date remain unchanged over the life of the asset when estimating expected credit losses for current accounts receivable and current contract assets. ASU 2025-05 is effective for annual reporting periods beginning after December 15, 2025, and for interim periods within those annual reporting periods, with early adoption permitted. The amendments in ASU 2025-05 should be applied prospectively. The Company adopted ASU 2025-05 on a prospective basis as of the beginning of fiscal 2026. The adoption did not have a material impact on the condensed consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements - Not Yet Adopted

Disaggregation of Income Statement Expenses

In November 2024, the FASB issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation (“ASU 2024-03”), which requires public entities to disclose more detailed information about certain costs and expenses presented in the income statement, including (among other items) the amount of inventory purchases, employee compensation, selling expenses and depreciation and amortization of intangible assets. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and for interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2024-03 on the consolidated financial statements and related disclosures.

Revenues

The following table summarizes disaggregated revenue from contracts with customers by product group:

There wereno major customers individually accounting for 10% or more of consolidated net revenues.

Inventories, net

The Company used the last in, first out (“LIFO”) method of accounting for approximately 92% of inventories as of October 10, 2026 and January 3, 2026. An actual valuation of inventory under the LIFO method is performed at the end of each fiscal year based on inventory levels and carrying costs at that time. Accordingly, interim LIFO calculations are based on the Company’s estimates of expected inventory levels and costs at the end of the year. The Company’s LIFO credit reserve balance was$133 million and$104 million as of October 10, 2026 and January 3, 2026, respectively, to state inventories at LIFO. Increases to the Company’s LIFO credit reserve balance are recorded as a non-cash charge to cost of sales and decreases are recorded as a non-cash benefit to cost of sales.

The non-cash expense recorded to cost of sales related to the change in the LIFO credit reserve for the periods presented was as follows:

Purchasing and warehousing costs included in inventories as of October 10, 2026 and January 3, 2026 were$441 million and$426 million, respectively.

Receivables, net

Receivables, net, consisted of the following:

Changes in the allowance for expected credit losses were as follows:

The Company regularly reviews accounts receivable, vendor and other balances and maintains allowances for credit losses estimated whenever events or circumstances indicate the carrying value may not be recoverable and updates its estimate of credit losses each reporting period based on new information that becomes available. The Company considers the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. The Company controls credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures.

In the third quarter of fiscal 2025, one of the Company’s vendors, a leading auto parts supplier for the automotive aftermarket industry, filed voluntary petitions for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court for the Southern District of Texas. On September 1, 2026, the bankruptcy cases were converted to Chapter 7 liquidation. As a resultof these events, the Company recorded a non-cash charge of $28 million to cost of sales in the third quarter of fiscal 2025, within the condensed consolidated statement of operations, reflecting estimated future credit losses on certain vendor receivables due from the vendor.

On February 20, 2026, the U.S. Supreme Court overturned certain U.S. tariffs imposed under the International Emergency Economic Powers Act ("IEEPA"). During fiscal 2025, the Company incurred product costs directly related to the IEEPA tariffs. Tariffs directly paid by the Company are subject to direct refund via the IEEPA tariff refund process. Given the significant uncertainty around the recoveryof tariffs that were previously paid, the Company recognizes IEEPA tariff refunds if and when received. In the second fiscal quarter of 2026, the Company recognized $26 million in IEEPA tariff refunds, recorded as a benefit to cost of sales on the condensed consolidated statement of operations. Subsequent to the second quarter of fiscal 2026, the Company has recognized an immaterial amount of IEEPA refunds. The Company will continue to assess the recoverability of these tariffs, and will recognize any future recoveries when realized or realizable, the magnitude of which in future periods is not expected to be material to the Company's condensed consolidated financial statements.

Long-term Debt and Fair Value of Financial Instruments

Long-term Debt

During the second quarter of fiscal 2026, the Company entered into a Rule 10b5-1 Repurchase Plan (the "Repurchase Plan") to effect repurchases of outstanding principal amounts of the Company's 1.75% Senior Unsecured Notes due October 1, 2027 (the "2027 Notes")and the 5.95% Senior Unsecured Notes due March 9, 2028 (the "2028 Notes"), subject to certain price and market conditions. During the second quarter ended July 18, 2026, the Company repurchased an aggregate$0.1 million and$29 million of outstanding principal related to the 2027 Notes and 2028 Notes under the Repurchase Plan, respectively, which was reflected in the carrying value of long-term debt on the condensed consolidated balance sheets. The plan was terminated upon completion of the repurchases. No new plans were entered into during the third quarter of fiscal 2026. During the third quarter ended October 10, 2026, the Company reclassified$349 million of long-term debt to current liabilities related to the 1.75% Senior Unsecured Notes due October 1, 2027.

Fair Value of Financial Assets and Liabilities

As of October 10, 2026 and January 3, 2026, the fair value of the Company’s long-term debt, which includes the current portion of long-term debt, was approximately$3.3 billion and$3.4 billion, respectively. The fair value of the Company’s long-term debt was determined using Level 2 inputs based on quoted market prices. The carrying amounts of the Company’s cash and cash equivalents, receivables, net, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.

Credit Facilities

As of October 10, 2026 and January 3, 2026, the Company hadno outstan ding borrowings under its asset-based loan revolving credit facility (the "ABL Facility"). As of October 10, 2026 and January 3, 2026 the Company had$894 million and$896 million of borrowing availability, respectively, and$106 million and$104 million letters of credit outstanding, respectively, under the ABL Facility.

In accordance with the ABL Facility, the Company is required to hold cash and cash equivalents in designated accounts with lenders, referred to as Qualified Cash Accounts (as defined in the ABL Facility). As of October 10, 2026 and January 3, 2026,$2.3 billion was designated as Qualified Cash. These amounts are unrestricted and the Company is able to direct, and have sole control over, the manner of disposition of funds in such accounts, subject to: 1) maintaining a minimum availability under the ABL Facility of at least the greater of (i)12.5% of the Line Cap (as defined in the ABL Facility) and (ii) $125 million; and 2) maintaining excess availability under the ABL Facility of at least $400 million. The Qualified Cash Accounts are subject to springing control agreements pursuant to which the cash deposited therein will become restricted in the event of default or a breach of such covenants. The Company was in compliance with its covenants related to the ABL Facility in all periods presented.

Debt Guarantees

The Company is a guarantor of loans made by banks to various independently-owned Carquest-branded stores that are or, prior to the Company’s restructuring and asset optimization plan approved in November 2024 ("2024 Restructuring Plan"), were customers of the Company, totaling$57 million and$69 million as of October 10, 2026 and January 3, 2026, respectively. This obligation represents a financial guarantee with two aspects: a contingent liability accounted for under ASC 326 related to our contingent obligation to purchase loans, and a non-contingent liability accounted for under ASC 460, Guarantees, related to our obligation to stand-ready to perform under the obligation. The Company continuously assesses the likelihood of performance under these guarantees and records liabilities established related to these financial guarantees within other current liabilities in the condensed consolidated balance sheets. 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 was$142 million and$152 million as of October 10, 2026 and January 3, 2026, respectively.

Leases

Substantially all of the Company’s leases are for facilities, vehicles, and equipment. The initial term for facilities is typically five toten years, with renewal options typically atfive-year intervals, with the exercise of lease renewal options at the Company’s sole discretion. The Company’s vehicle and equipment lease terms are typically three tosix years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Total lease cost is included in cost of sales and total selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income.

Total lease costs are comprised of the following:

Other information relating to the Company’s lease liabilities was as follows:

Earnings per Share

The computations of basic and diluted earnings per share were as follows:

(1)

For thetwelve weeks ended October 10, 2026 and October 4, 2025,0.4 million and 1.4 million, respectively, of share-based awards were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the forty weeks ended October 10, 2026 and October 4, 2025,0.5 million and 0.8 million respectively, of share-based awards were excluded from the diluted calculation as their inclusion would have been anti-dilutive.

Supplier Finance Programs

Certain of the Company’s suppliers enter into agreements with third-party financial institutions to obtain enhanced receivables options. These arrangements are commonly referred to and known in the industry as supply chain financing programs. Through these agreements, the Company’s suppliers, at their sole discretion, may elect to sell their receivables due from the Company to the third-party financial institutions at terms negotiated between the supplier and the third-party financial institutions. The Company’s obligations to suppliers, including amounts due and scheduled payment terms, are not impacted, and no assets are pledged under the agreements. All outstanding amounts due to third-party financial institutions related to suppliers participating in such financing arrangements are recorded within accounts payable and represent obligations outstanding under these supplier finance programs for invoices that were confirmed as valid and owed to the third-party financial institutions in the Company’s condensed consolidated balance sheets. As of October 10, 2026, and January 3, 2026, the confirmed obligations outstanding under these supplier finance programs to third-party financial institutions were$2.6 billion and$2.5 billion, respectively.

Commitments and Contingencies

Currently and from time to time, the Company is subject to litigation, claims and other disputes, including legal and regulatory proceedings, arising in the normal course of business. The Company records a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. Although the final outcome of pending legal matters cannot be determined, based on the facts presently known, it is management’s opinion that the final outcome of any pending matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Segment Reporting

The Company conducts its operations principally in the geographical areas of the U.S. and Canada through its Advance Auto Parts and Carquest trade brands. The products sold by the Company, across all geographic areas, have similar economic characteristics, are sourced from the Company’s suppliers in a similar manner, and are available for sale to all of the Company’s customers through the Company’s stores and self-service e-commerce sites. All of the Company’s stores have similar characteristics, including the nature of the products and services, the type and class of customers, and the methods used to distribute products and provide service to its customers. Due to these reasons, the Company hasone operating segment, referred to as Advance Auto Parts/Carquest andone reportable segment. As geographic information is not a key component of how the chief operating decision maker (“CODM”) reviews performance and allocates resources, such entity-wide information is not disclosed on a quarterly basis.

The Company’s CODM is the Chief Executive Officer, who regularly reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance for the Company’s single reportable segment. Discrete information is not regularly provided to and/or reviewed by the Company’s CODM at a lower level than the consolidated level, inclusive of segment asset level detail. The CODM primarily focuses on net income to evaluate its reportable segment. The CODM also uses net income for evaluating pricing strategy and to assess the performance for determining the compensation of certain employees. Significant segment expenses regularly provided to the CODM, which represent the difference between segment revenue and segment net income, consisted of the following:

(1)

Selling, general and administrative expenses, excludes restructuring and related expenses and depreciation and amortization.

(2)

Excludes depreciation and amortization included in restructuring and related expenses and cost of sales, respectively.

(3)

Other segment items relates primarily to interest income and, in fiscal 2025, income recognized from the transition services agreement with Worldpac that commenced in the fourth quarter of fiscal 2024, included in total other, net, in the accompanying condensed consolidated statements of operations.

Restructuring

2024 Restructuring Plan

On November 13, 2024, the Company’s Board of Directors approved the 2024 Restructuring Plan, a restructuring and asset optimization plan designed to improve the Company’s profitability and growth potential and streamline its operations. This plan contemplated the closure of approximately 500 stores, approximately 200 independent locations andfour distribution centers by mid-2025, as well as headcount reductions. The Company completed the closure of all of these locations during the first quarter of 2025.

Expenses associated with the 2024 Restructuring Plan included: (1) write down of inventory to net realizable value due to liquidation sales as a result of store closures and streamlining assortment associated with the 2024 Restructuring Plan, (2) non-cash asset impairment and accelerated amortization and depreciation of operating lease right-of-use (“ROU”) assets and property and equipment, (3) personnel expenses related to severance and transition expenses, which were offered to certain employees who would provide services through key dates to ensure completion of closure activities and (4) other location closure-related activity, including nonrecurring services rendered by third-party vendors assisting with the turnaround initiatives and other related expenses, including incremental revisions to receivable collectability due to termination of contracts with independents associated with the 2024 Restructuring Plan.

Other Restructuring Initiatives

In November 2023, the Company announced a strategic and operational plan with anticipated savings of $150 million of which $50 million would be reinvested into frontline team members. In addition to a reduction in workforce, this plan streamlines the Company’s supply chain by configuring a multi-echelon supply chain by leveraging current assets and operating fewer, more productive distribution centers that focus on replenishment and move more parts closer to the customer. In achieving this plan, the Company is in process of converting certain distribution centers and stores into market hubs. In addition to providing replenishment to near-by stores, market hubs support retail operations. In addition to the distribution network optimization costs, other restructuring expenses include certain other items as further detailed in the table below. The Company continues to incur charges associated with this plan and expects to incur additional charges through the end of fiscal 2026, primarily consisting of conversion costs associated with the conversion of certain distribution centers and severance and other personnel expenses.

The Company has recorded all restructuring and related expenses as a component of selling, general and administrative expenses in the condensed consolidated statement of operations, with the exception of inventory related expenses that are recorded as a component of cost of sales in the condensed consolidated statement of operations.

Restructuring and related expenses for the periods presented was as follows:

(1)

Other location closure related activity for thetwelve weeks ended October 10, 2026 consists of other related expenses associated with location closures, including the transfer of assets, and for the forty weeks ended October 10, 2026 includes$13 million for reserves on independent loans and the remaining amount relates to other related expenses associated with location closures, including the transfer of assets. Other location closure related activity for the twelve and forty weeks ended October 4, 2025 includes$2 million and$37 million, respectively, of nonrecurring services rendered by third-party vendors assisting with the 2024 Restructuring Plan. The forty weeks ended October 4, 2025 also includes$7 million for reserves on independent loans. The remaining other related expenses are associated with location closures, including the transfer of assets.

(2)

Other restructuring expenses primarily consists of nonrecurring services rendered by third-party vendors, severance and other personnel expenses.

Impairments and write-down of long-lived assets primarily relate to impairments recorded on ROU assets for Stores and Distribution Center locations impacted through the Company’s restructuring plans. Management continually assesses market conditions and assumptions for indicators of impairment related to the fair value of closed stores and distribution centers that are currently available for sublease. During the third quarter of fiscal 2026, management concluded that changes in market conditions and key assumptions related to certain closed locations had occurred, as they had not yet been subleased consistent with the Company’s expected use of the locations. These factors represented a triggering event requiring the Company to reassess the recoverability and measurement of certain asset groups, primarily consisting of ROU assets, that were previously impacted by the announced restructuring and distribution network optimization plans. As a result of the reassessment performed, the Company updated its estimates of future sublease income and other key assumptions using currently available market data (including market rents, broker indications, expected vacancy periods, and discounts to market rent based on remaining lease term) and recorded a non-cash impairment charge of$33 million related to ROU assets in the third quarter of fiscal 2026.

Restructuring liabilities were immaterial as of October 10, 2026 and January 3, 2026.

As of October 10, 2026, the cumulative amount incurred to date under active restructuring plans totaled$1.1 billion, consisting of write-down of inventory to net realizable value, lease termination impacts, other exit-related expenses related to ceased use buildings, professional service fees and certain employee termination benefits. Substantially all of the costs under the restructuring plans have been incurred as of October 10, 2026. The Company estimates that it will incur additional expenses of approximately$5 million to $10 million under active restructuring plans through fiscal 2026.

Income Taxes

The Company’s effective tax rate for the forty weeks ended October 10, 2026 was higher than the estimated annual effective tax rate, primarily due to a discrete charge for stock-based compensation and return-to-provision adjustments related to the filing of prior-year tax returns. The Company's effective tax rate for the forty weeks ended October 4, 2025 was lower than the estimated annual effective tax rate, primarily due to a net discrete tax benefit of $126 million realized in the first quarter of fiscal 2025 related to certain tax benefits associated with capital loss deductions.