I hope each of you are safe and healthy as we start 2021 under the unique circumstances the world has faced over the past year. As I write this letter, I am reminded that it was at this time just one year ago that we were in the final stages of planning the launch of our newly acquired DieHard® brand. At that time, we certainly had no idea of what was to come in 2020. I found a quote recently that I feel summarizes my personal experience over this timeframe – “Nothing in life is to be feared; it is only to be understood. Now is the time to understand more, so that we may fear less.” This quote came from the great scientist Marie Curie.

Without a doubt, it has been a year in which understanding more about something took on a whole new meaning. Before 2020, I believed global pandemics that could threaten every man, woman and child on Earth for months on end were a part of our history books. Such threats seemed to belong more in the days of Madame Curie herself when cholera and the flu gripped the world at different times in her life. We certainly had no playbook for COVID-19. It had to be built from understanding how the virus would impact our DIY consumers, professional customers, independent partners, suppliers and AAP team members. It has been a valuable reminder of the tremendous importance of deeply understanding trends that are impacting consumer and employee behavior. Working diligently to improve their respective experiences has been and always will be the best response to any challenging environment we face.

Indeed, we witnessed abrupt changes in consumer behavior that required rapid adjustments to our standard operating procedures in response to COVID-19. Our response was swift, focused and ultimately led to improved results. Our entire organization rose to the occasion as we remained focused on three overarching priorities to address the rapidly evolving situation.

FIRST, we have prioritized the health, safety and wellbeing of our team members and customers. This was not a new concept at AAP, but it has taken on new meaning in the face of the crisis. From the onset of the pandemic, we responded quickly in our stores and distribution centers to implement social distancing, enhance sanitation practices, require mandatory employee face coverings and install plexiglass barriers. We also made critical changes to how our team members operated and mandated health check screenings. For our customers, we brought innovative solutions to market to ensure personal safety like our Advance Same Day™ suite of fulfillment options for our DIY omnichannel customers. For our professional customers, we introduced contactless services to deliver parts in a way that reduced human interaction and adhered to unique protocols individual repair shops put in place. As a result of our actions and investments, our infection rates across the company have been significantly below the national average.

SECOND, during the crisis, we’ve stayed laserfocused on delivering sales, operating earnings and protecting the financials of the company. Initially, as we faced many unknowns, this included preserving cash. Late in the first quarter, we launched a series of initiatives to achieve these goals and made ongoing refinements to strengthen our plans as the pandemic unfolded. Shortly after the pandemic hit, we added $1 billion in liquidity to the balance sheet and temporarily suspended our share repurchase activity. These important steps solidified our cash position and helped us weather the initial storm while creating an environment for positive recovery. Our rapid actions drove results. From the second quarter through the end of 2020, we delivered 9.6% in net sales growth, 44 weeks of consecutive DIY market share gains, 160 basis points in adjusted operating income margin expansion and 32.4% adjusted earnings per share growth. As the year progressed and our sales began to rebound from trough levels, we resumed our share repurchase program. In fact, we ended 2020 by returning approximately $515 million to shareholders through a combination of these repurchases and the company’s quarterly cash dividend payments.

THIRD, we prepared Advance to be stronger over the long term following this crisis. We spent several months last summer reviewing our strategic plan initiatives through a “Post COVID-19 Lens.” This resulted in the reprioritization of certain projects and updated targets for others in order to respond and thrive in the new environment we are competing in. The challenges of the pandemic also resulted in an intensification of our focus on communication, innovation and training. I believe this is building a stronger culture and execution mindset overall. The goal of our updated strategic plan is to drive top quartile shareholder returns over the next three years through top-line growth at or above the market, an acceleration of margin expansion and a capital allocation strategy focused on returning cash to shareholders.

Our commitment to these priorities has been mirrored at all levels of the company as our team members worked tirelessly to adapt to our evolving pandemic protocols. They too continued to be innovative and resourceful, accommodating new ways of serving our customers safely and efficiently. It is their efforts which have allowed Advance to effectively respond to the increased demand, while also executing on our strategic objectives.

Before taking a closer look at the financial highlights of the year, I want to thank each of our team members and Independent partners for their hard work throughout the past twelve months. I am particularly humbled by how the company has come together throughout this challenging time. We have continued to do our part to keep motorists, including essential frontline workers, on the road and without them, we certainly would not have been able to deliver the performance described below.

FINANCIAL HIGHLIGHTS

While 2020 was a highly volatile year, in the end, we grew sales, operating income and DIY market share resulting in record earnings per share. Following a sharp decline in sales early in the year, demand for auto parts, particularly within our DIY omnichannel business, rebounded significantly in the last three quarters of the year. This was largely driven by the impact COVID-19 had on the economy and changes in consumer behavior. For the first time in our history, Advance surpassed $10 billion in net sales, which was a 4.1% increase from 2019 results. Adjusted operating income of $827 million increased 4.1% versus the prior year in spite of approximately $60 million of unplanned expense attributable to COVID-19. Our continued focus on cash has led to a 302-basis point improvement in our Accounts Payable Ratio, leading us to set a new record for free cash flow of $702 million, up 18% versus 2019. Throughout this uncertain period, we remained committed to both investing in our business and returning value directly to shareholders through our quarterly cash dividend and share repurchase program.

From a channel perspective, our industry clearly benefitted in 2020 from accelerated DIY growth. That said, our results would not have been possible without our successful launch of the iconic DieHard brand, which we purchased at the end of 2019 and officially launched in our stores in July 2020. I believe our DIY market share gains were the result of our DieHard launch and relentless focus on improved store execution, enhanced brand awareness and increased customer loyalty. In addition, the launch of our Advance Same Day suite of services and mobile app contributed to increased differentiation. Meanwhile, our Speed Perks loyalty program and improved digital platforms, contributed to double digit year-over-year sales growth in e-commerce.

Our professional business experienced more challenges from a demand perspective from COVID-19 as much of the country was subject to stay at home orders throughout the year, which dramatically reduced miles driven. Throughout the pandemic, we continued to elevate our support for our pro customers. As a result, we also believe that our professional customers now have an increased appreciation for the broad set of tools we offer to help make their businesses successful. This extends beyond our industry leading product assortment and now includes virtual instructor led trainings for repair shop owners and their technicians, contact free delivery of parts and new tools like MotoLogic®. As the economy began to open in the back half of the year, we saw a gradual recovery in both miles driven and our professional business.

Throughout 2020, we also continued to drive our four pillars of margin expansion. This resulted in gross margin improvement of 38 basis points for the year as a result of supply chain leverage, increased owned brand penetration and strategic pricing actions. In terms of SG&A, we increased sales and profit per store, leveraged store payroll, consolidated our field structure and continued to drive our integration agenda, including back-office consolidation. We believe we have a particularly strong opportunity within broader retail to expand operating margins and expect to accelerate the rate of our margin expansion in 2021.

ADVANCING OUR CULTURE

In all of this, we have taken a long-term view of what is needed for continued success. We fully recognize that the culture we build is not only crucial for dealing with the global pandemic, it is also foundational to delivering future growth. That means we must remain steadfast in our commitment to building a premier workplace where “diversity, equity and inclusion” is not just a catch phrase. Our team members are a differentiator for Advance and they must know they are heard, valued and respected through both recognition and enhanced training. Part of our cultural evolution involves building a company that is known for giving back to the communities we serve and being good stewards of the environment. Despite our continued focus on the pandemic in 2020, we made progress in each of these areas. Among our accomplishments are the following:

• Appointed our first Chief Diversity, Equity and Inclusion Officer whose mandate it is to create meaningful and substantive change and who reports directly to me
• Granted over 3,000 Advance stock awards valued at almost $11 million to frontline team members through our industry-leading Fuel the Frontline recognition program, helping to significantly reduce turnover in the field. Since its inception in 2016, we have granted over 22,000 awards and in excess of $60 million to frontline team members
• Launched a learning series called “Leading with Care,” covering topics like caring for yourself and others, crisis leadership, virtual leadership and inspirational leadership, to help leaders implement new skillsets needed to adapt in the current environment while building for our future needs
• Completed the year as one of the largest corporate contributors to the American Heart Association and Building Homes for Heroes
• Improved our score from “B” to “A-” in our second submission to the CDP’s climate change report

The strength of our culture is evidenced by the 76% of our team members reporting a favorable opinion of the company in our latest organizational health survey. This is our highest score to date and four points higher than in 2019. More details on our efforts to support our people, planet and community are available in our Corporate Sustainability and Social Report, which we published in March 2021. This was our first report using the framework established by the Sustainability Accounting Standards Board (SASB), further demonstrating our commitment to transparency.

The resiliency we have demonstrated this past year has put Advance in a strong position to weather the current crisis and build long-term value for all stakeholders. I am so grateful to our team members for all their hard work in 2020, and I have never been so optimistic for the future. Thank you for your continued support.

TOM GRECO
President and Chief Executive Officer