Q4 2019 Earnings Call
Good morning, and welcome to the O'reilly automated fourth quarter and full year 2019 earnings Conference call. My name is an era.
I'll be the operator for today's call.
At this time all participants are not listen only mode. Later, we'll conduct a question and answer session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone I'll now turn the call over to Mr., Tom Mcfall, Tom you may be in.
Thank you Sarah good morning, everyone and thank you for joining us.
During today's conference call, we'll discuss our fourth quarter 2019 results.
Outlook for the first quarter full year 2020.
After our prepared comments well, it's a question and answer period.
Before we begin this morning, I'd like to remind everyone.
Our comments today contain forward looking statements and we intend to be covered by and we claim the protection on there.
Our provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995.
You can I have identified these statements by forward looking words, such as estimate me could.
I don't believe expect would consider should anticipate project plan intend or similar words.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest airport and form 10-K for the year ended December 31st 2018 and other recent.
SEC filings the company assumes no obligation to update any forward looking statements made during this call at this time I'd like to produce.
Thanks, Tom.
Good morning, everyone and welcome to the O'reilly Auto parts conference call.
Just paying on the call with me this morning our.
Shaw, our Chief operating officer, and co President and Tom Mcfall, Our Chief Financial Officer.
David O'reilly, our executive Chairman and Greg Henslee, our executive Vice Chairman are also present.
To begin todays call I would like to congratulate all of our team members on their solid results in two.
29 team.
As a result of your commitment to our dual market strategy.
Probably culture values, we generated full year comparable store sales growth of 4%.
A difficult macro environment of rising selling prices rising acquisition costs and rising expenses.
Your focus on profitable growth, while maintaining expense control resulted in full year sales growth of 6.4% had an increase in operating profit of 5.8%.
For 2019, we generated our 27th consecutive year of comparable store sales growth.
Record revenue and operating income every year since becoming a public company and 1993 and I'd like to think team O'reilly for many contributions to support our growth and success in 2019.
Before I get into the results I would like to call out our press release from August Twentyth.
Announcing we entered into an agreement to purchase my us autoparts headquartered in Guadalajara, Mexico.
For Q. The transaction is closed in May also became a part of team O'reilly at the end of November.
Massive amazing family around business found that over 65 years ago.
It has a very similar history and culture to O'reilly.
They currently operate 21 form a branded autopart stores and supply over 2000 jobbers through their six distribution centers.
Because of their current mix of business they run at a lower margins than the overall.
I'll use stores, so they are slightly dilutive.
To our operating metrics in the fourth quarter, but did not have a material impact on our earnings per share results for the year.
2020 will be a learning and planning year as we work with the experienced might also leadership team to develop our future expansion.
Plans and as a result, our Mexico operations will be dilutive to our operating metrics in 2020, but will not have a material impact on our earnings per share.
That said, we're very excited about the addition of the 11 of the 1100 plus my asset team members and we have a great opportunity for our.
Footprint in Mexico overtime.
Now, we will cover our fourth quarter results and key expectations supporting our 2020 guidance.
Our comparable store sales for the fourth quarter grew at 4.4 per se.
Which was inline with our expectations as both DIY and professional.
It is strongly to our comparable store sales growth with professional continuing to outperform DIY.
From a comp store sales progression standpoint sales of our key undercar categories remain strong all quarter in line with the trends we saw throughout 2019, however, the lack of.
Winter weather and most of our markets in December resulted in below expected levels of cells for cold weather categories.
This marks the second year in a row that December sales have been below our expectation.
Now, we'll move onto the impact of inflation on our 2019 results, how we anticipate it.
Affect 2020, and the other drivers themselves we expect in 2020.
For the fourth quarter same skew inflation was at 3.5% for the full year.
Sorry, it was 3.5% and for the full year inflation was 3%.
Which was above our beginning of the your estimate of 2%.
As additional rounds of tariff increases went into effect.
This higher than expected rate of inflation didnt affect our comparable traffic, which came in slightly above our expectations.
But it did have a marked effect on the composition of our average ticket.
Cost of the increasing complexity of replacement power.
So newer more advanced vehicles, we historically have seen robust growth in our base average ticket without the benefit of same skew inflection.
In 2019, we experienced meaningful same skew inflation and some consumers reacted by buying down the face value spectrum.
Consciously limits in a number of items per ticket, resulting in a lower than expected growth growth in the face average ticket.
The combination of higher than expected same skew inflation.
And lower base ticket growth resulted in total average ticket growth slightly below our expectations.
For 2020, we expect same skew inflation to be 1% as we annualize last year's price increases and are not planning for changes in the current tariff structure.
With the lower year over year, selling price increases, we expect traffic count to improve and average ticket.
It remains steady contributor to comps as the diminishing tailwind from same skew inflation is mitigated by a return of the face underlying growth and average ticket to a more historical growth rates.
Historically, we focused on growing our per store inventories slower than.
Parable store store sales we generate.
We're going to change that for 2020.
I am going skew proliferation, any inflation related to increases to acquisition costs. We feel we have an opportunity to improve our store level inventory position and build upon our industry leading parts availability.
In addition.
And to the growth in inventory, we normally see in 2020 from new stores of product additions.
We will be adding through the course of the year just over $100 million of additional inventory to our store and have network.
From past experience, we know this will enhance the service we provide to our customers and drive.
Sales.
From a macro perspective.
We anticipate that demand drivers for the automotive aftermarket industry remains solid as the robust sorry years, beginning after the great recession continue to roll into our more addressable market.
Miles driven continues to grow at a moderate pace so.
Quoted by continued record high levels of.
Employment and stable gas prices.
Based on our team's ability to provide industry, leading customer service and gain market share and the impact of inflation, our inventory initiatives and the overall outlook for the aftermarket.
We are establishing our full year comparable stores guidance.
Yes.
Source self guidance at 3% to 5%.
Our current business trends, thus far in the first quarter continue to reflect solid growth in our core undercar an underwritten categories. However, the lack of cold weather has been.
In a significant drag on seasonal sales. So at this point in the quarter were behind where we would like to be.
As a result, we're establishing our first quarter comparable sales guidance at 2% to 4%.
For the fourth quarter gross margin was 53.3% of sales.
Which was lower.
Lower than expected due to the acquisition of my Asa.
And lower than expected sales of cold weather categories.
For the full year gross margin came in at 53.1%, which was towards the top end of our guidance range.
As we discussed on last quarters conference call, our gross margin benefited.
Fell through on hand inventory that was purchased prior to tariff driven acquisition price increases, which have gone into effect in stages, starting in the second half 2018 and continuing throughout 2019.
A corresponding retail and wholesale price increases.
During the past month.
Several of our key categories have received parcel tariff exceptions.
This will reduce the level of benefit we had expected to see in the first half of the year as a sell through the own merchandise. However.
The reduction of replenishment acquisition costs will benefit us throughout the year as we anticipate current higher selling.
This is will remain in effect as we and others in our industry maintain rational pricing in the face of continued SGN a pressures.
In aggregate for 2020, we expect our gross margin to be in the range of 52.5% to 53% with year over year decrease due to dilution.
From my Asa and less tailwind for merchandise purchase before the tariff related acquisition cost increases.
Operating profit for the fourth quarter came in at 17.8% of sales, which is below expectations based on how we expect to gross margins from a week.
Cold weather.
Sales pressure on us DNA, which Jeff will discuss and dilution from my Asa.
For the full year operating profit was 18.9%.
Which was slightly below the midpoint of our guidance due to the shortfall in the fourth quarter.
2020, we expect operating.
Rating profit to be in the range of 18.4, 18.9%.
The decline from prior year is due to and lower gross margin as I discussed.
Pressure on us Gionee, which again, Jeff will discuss and the dilution from I also.
For the fourth quarter earnings per.
Share a $4 and 25, plus 25 cents represent an increase of 14% as the shortfall and operating profit was more than offset by lower tax rate, which Tom will cover in his comments.
For the full year earnings per share were $17, an 88 cents, which represents an 11.
1% increase over 29 team.
For the first quarter of 2020, we're establishing earnings per share guidance of $4 in 37 cents to $4, a 47 cents and for the year. Our guidance is $19 in three cents to $19 in 13 cents.
Quarterly and full year guidance includes an estimate for the excess benefit from stock options and the impact of shares.
Through this call, but does not include any additional share repurchases.
Before I turn the call over to Jeff I'd like to briefly discuss our recent leadership conference.
Two weeks ago and.
Alice we held our annual leadership conference attended by each of our store managers sales team members filled management and distribution management totaling over 7000 O'reilly team members at all.
Theme of this year's conference was every customer accounts and we spent a lot of time talking about focusing on.
The fundamentals, even more rolling up our sleeves and out hustling and out servicing the competition.
Team O'reilly left Dallas extremely motivated and I'm very confident in our team's ability to provide excellent customer service and gain market share in 2020 and beyond.
I'll now turn the call over to Jeff Schoen.
Yes.
Thanks, Greg and good morning, everyone.
I'd also like Atlanta, Raleigh for delivering another record breaking year.
Your hard work and commitment to excellent customer service.
Has always been the strength of our company and we'll continue to be our strength in the future.
As Greg mentioned earlier.
Our SGN eight for the fourth quarter came in higher than expected with average per store SGN a growing 4.7%.
The primary driver at these unexpectedly high results were medical costs with claims coming in much higher than expected.
Also contributing to the above expected SG nay with store.
Role, where we continue to see ongoing pressure from near full employment.
Statutory increases to minimum wages.
For the full year personal west DNA increased 3.4%, which exceeded our beginning at the year guidance at 2.5% to 3%.
The main drivers that.
Tickets above our guidance for wage pressures from near full employment.
Delays in new store openings earlier in the year.
Health benefit cost cost of insurance, primarily auto related.
Larger than expected charge for deferred compensation, all the ulta off the offsetting benefit for that item shows up.
Net income.
Looking forward to 2020.
We expect SGN eight per store to grow in the range of 2.3% to 2.8%.
Which is above our historic run rate of 1.5% to 2%.
We will be above our historic rate due.
Two continued pressure on wages continue.
Continued pressure on the cost to cover our large vehicle fleet and ongoing technology investments.
Offset in part by the expectation that we will return to a more normal run rate for health benefit costs.
Our capital expenditures for the year were 600.
$28 million, which was at the bottom end of our full year guidance of $625 million to $675 million, but substantially higher than the previous three years, which averaged 480 million.
We had a very busy year 2019.
Opening 200 net new.
Worse.
Inverting 20 acquired been an auto supply stores to O'reilly stores.
Opening a new distribution center in Twinsburg, Ohio during the fourth quarter.
And developing our other DC projects, including substantial progress on our new Nashville DC.
Which will open early second quarter of 2020.
And our Hornlike DC, just south of Memphis, which will open in the fourth.
20.
Also during the fourth quarter, we were able to acquire existing distribution space contiguous to our Springfield, DC and corporate campus.
With fewer distribution projects and lower net store.
Additions based on our target of 180 net new stores, we would normally expect our capital expenditures to come down.
But we are going to again set our capital expenditure guidance at $625 million to $675 million for 2020.
Part of the reason for the elevated level.
The 2019 projects that roll into 2020.
However, the more exciting reasons are the projects we have slated for this year.
We have a large number of exciting projects and initiatives, but let me add some color to the more capital intensive ones which include.
First.
Converting the hardware that runs our stores.
Currently our store systems around partially on Atlantic server and partially on our high the M. S 400.
Oh pieces of equipment or a single point of failure from our stores.
In 2020, we will convert all of our source systems to run on redundant Lennox servers, which will eliminate the times this for computers.
System is down and the store teams are forced to use paper catalogs and ride annual sales tickets.
This project also puts pressure on our SGN eight as we must fully appreciate all of the store Asfour hundred by the end of the year.
Second we will aggressively modernize our fleet of semi.
In 2020.
Enhance safety features improved fuel economy, and making say and maintenance savings on the project yields a great return on investment.
We're also planning to increase our spend on investments at driving energy savings in our stores.
Over the past few years.
As we have steadily converting our store lighting to led technology.
We've been so pleased with the savings from lower electricity usage and maintenance combined with the superior image in the stores that were accelerating this project.
Now one byproduct of this conversion is that the less shiny bride by on some of the.
Wear and tear in our high volume or core stores.
As a result.
We will be remodeling more store interiors this year than is typical capital plan.
As I mentioned earlier, ensuring our substantial vehicle fleet continues to put pressure on our SGN today.
We continue to have a very good.
You had rate however, the cost of each accident continues to grow significantly for all large fleet operators.
To better protect the safety of our team members and others, while working to minimize our losses were testing in a variety of crash avoidance and monitoring tools to improve the accident rate of our store base fleet.
And those projects or included in our Capex plan for 2020.
The last item ill mention as our Omnichannel anchors, we will continue to invest heavily in enhancing our omnichannel capabilities to meet our customers on their terms with solutions that meet their specific needs.
Whether they visit us for work call for click.
This initiative puts pressure on our expenses as well as our capital expenditures.
As Greg mentioned earlier 2020 will be a learn and planned year as it relates to milestone. So we don't expect a meaningful capital spend this year, but.
That will change in future years.
We have always year, our business model to generate long term sustainable growth that is solidly profitable.
We're very confident our SG and expand our additional inventory investment in our capital investments in 2020 will put us at a great position to continue our history of success.
However, we are an extremely proactive and detail oriented company and should situations change or a dip additional opportunities arise we will make changes to our investment strategy on a store by store project by project basis.
As I conclude my comments I'd like to again, thank the entire.
Erotic team for a solid year in 2019.
As we preach that the conference and talk about every day when we focus on the fundamentals of customer service and consistently execute our business model team O'reilly truly makes every customer count and I'm confident our team will be that again in 2000.
Now I'll turn the call.
Okay.
Thanks, Jeff.
Now I'll take a closer look at our quarterly results and our guidance for 2020.
For the quarter sales increased $168 million comprised of $100 billion increase comp store sales.
$58 million increase in non comp store sales and a $10 million increase in non comp non store sales.
For 2020, we expect our total revenues to be between 10.7 and $11 billion.
Our fourth quarter effective tax rate was 20.6.
As a percent of pre tax income, which was lower than expected based on a larger than expected benefit from share based compensation.
It was comprised of a base rate of 23.8% reduced by 3.2% benefit for share based compensation.
This compares to the fourth quarter of 2018.
Rate of 23.6% of pre tax income, which was comprised of base tax rate of 24% reduce by 0.4% benefit for share based compensation.
For the full year, our effective tax rate was 22.3% of pre tax income.
Private base rate of 20.
3.8% reduced by 1.5% benefit for share based compensation.
For the full year 2020, we expect an effective tax rate of 23.2% comprised of base rate of 23.6 reduced by a benefit 0.4% for share based compensation.
We expect the first and fourth quarter rates to be lower than the second and third due to solar tax credits in the first and tolling of certain tax periods in the fourth.
Also variations in a tax benefit from share based compensation will create fluctuations and our quarterly tax rate as a percent of pre tax income.
Now, let me add some color to our free cash flow and the components that drove our results for the year and our expectations for 2020.
Free cash flow for 2018 was $1 billion, which was $170 million decrease from the prior year.
The decrease was driven by higher net inventory investment.
Cash taxes and capital expenditures.
Set in part by increased operating profit.
In 2020, we expect free cash flow to be in the range of $1.1 billion to $1.2 billion.
With the year over year increase due to increased operating profit and lower cash taxes offset in part by higher.
Investments and capital expenditures.
Inventory per store for the USA stores only at the end of the quarter was 631000.
Which was a 3.1% increase from the end of 2018.
The increase above our expected range of 2% to 2.5%.
Due to acquisition price increases and slow December sales.
As Greg mentioned earlier, we're going to make additional inventory investments in 2020 and expect our per store inventory to grow 5%.
Our eightd inventory ratio for us based business at the end of the fourth quarter was 100.
4.6%, which was below our expectations and below the 105.7% where we ended 2018.
For 2020, we expect so slightly more and finished the year at 104% based on the inventory initiatives Greg discussed.
Moving on to debt, we finished the fourth quarter with an adjusted debt to EBITDA ratio of 2.34 times as compared to our ratio of 2.23 times at the end of 2018.
The increase in our leverage ratio reflects our may bond issuance and borrowings on our unsecured revolving credit facility.
Were below our stated.
Starting with 2.5 times, and we'll approach that number when appropriate.
We continue to execute our share repurchase program.
And for 2019, we repurchased 3.9 million shares at an average share price of $369.55 for a total investment of 1.4.
Billion dollars.
Subsequent to the end of the year through the date of our press release, we repurchased point 2 million shares at an average price of $428.29.
We remain very confident that the average repurchased price is supported by expected discounted future cash flows of our business.
And we continue to be our buyback program as an effective means of returning excess capital to our shareholders.
Finally, before I open up our call to your questions I'd like to thank deal Riley team for their dedication to the company.
And our customers.
This concludes our prepared comments.
And at this time I'd like to ask Zen era. The operator returned as line and we'll be happy to answer your questions.
Thank you we will now begin this 30 minute question answer session. If you have a question. Please press Star then one on your Touchtone phone, if you're using a speaker phone you may need to pick up the.
First before pressing the numbers.
Please limit your questions to one question and one follow up question. Once again, if you have a question. Please press Star then one on your Touchtone phone.
Our first question comes from Mike Baker from Nomura. Please go ahead, Sir your line is open.
Hi, Thanks, I just wanted to ask a follow up on the gross margin outlook. You said one of the reasons why it won't be is strong.
Due to some some power relief, which I guess.
Means that that won't be too as good of gross margin because you don't expect to be able to increase.
Retail prices as much.
Is that right.
And then as part of that you go on to say that you still expect a benefit from lower acquisition costs throughout the year. So I'm just trying to square those two is that you expect the benefit but it just might not be as big of a benefit as you had previously thought.
I'll start there.
Sure Mike this.
As Tom so.
Two pieces to that that question. So first we expect to see a LIFO benefit mainly in the first half of the year, our LIFO calculation as a total pool. So as these cost acquisitions come in they immediately reduce that total pool.
So thats the first part of the.
The second is.
These lower acquisition costs on knees specific product lines is at the sale prices remain high will generate more gross margin. So we'll gain that initial charge back over the turn of the good which is why we will see in the second half of the year more benefit and less benefit in the first half.
Okay, and and one quick follow up with the Mark if not for the May offer acquisition would be gross margins still be down I guess, we're trying I'm trying to figure out how much of an impact that is you said I think you said slight so.
Just on three or I guess how flight.
So we discussed this on last quarters conference.
Call that the lower benefit from products purchased before the tariffs.
Would.
Abate during 2020.
And we'll see that the second half, we didnt quantify the amount that thats. The main driver that are that combined with mass out of the drivers for a lower gross margin.
Okay. Thanks for the color.
Thank you our next question comes from.
Hi, Greg Badishkanian from Citi. Please go ahead your line is open.
Hey, guys. Good morning, David Dullum draw for Greg.
So I just want to follow up on that the improving traffic.
Actively can you give us some more color in terms of non the DIY side of the business was that still negative in Q4 in terms of traffic what are the underlying drivers here as you mentioned didnt.
Some improvement baked into the 2020 guidance in terms of traffic you expecting that to build throughout the year.
We think of.
Or should we see from you any any type of competitive pricing actions on your part to to try to help drive that improvement.
Yes. So the first part of your question what was the makeup of traffic what I would tell you is the traffic for the second quarter in a row overall was positive.
Cash.
Traffic was slightly negative which was more than offset by the charge traffic.
Tom do you want to take to get the second our expectation for 2000, Twentys that as we anniversary the pressure on the ally ticket count, which those customers are more susceptible to rising.
Prices as we annualize those price increases and annualize the pressure on the ticket count that we will.
See growth net ticket count.
Got it Okay, and then getting negative swinging to slightly positive and into your answer is yes. It should improve over the years, we anniversary more of the.
Care for related price increases.
Understood and then my follow up the did more nearer term in nature for for Q1 the guidance there you're up against your easiest comparison any year Theres still looking for comps and then two to four range. So is that all weather related Dan. How are you currently within that range now or is there some.
Acceleration embedded in the back half for the quarter.
What I would what I would tell you is obviously first quarter is always a volatile quarter for us.
That can be significantly impacted by weather.
We're very early in the quarter Theres a lot of the quarter remaining.
The primary.
The drivers the fundamental drivers of categories are performing well when you look at the Undercar Underhood categories. We're pleased with how we're performing there were really missing on the weather related categories, because the the atypical weather that we've had thus far in the quarter.
The thing that I would add.
That is we as we move through the quarter. It starts to warm up south to north Hot those drivers of our business historically, the weather related categories become less of a portion of our category of our total sales and January as a low volume month for us.
More than two thirds.
For the quarter still in front of us.
That's very helpful. Thanks, guys and good luck.
Thank you.
Thank you. Our next question comes from Liz Suzuki from D.A. Please go ahead, Sir your line is open.
Thank you.
I was just curious why.
Hi, Thank you won't be able to leverage SGN, a on a 3% to 5% same store sales growth number I just seems like the operating margin outlook is a bit later than what we are modeling and I get that there's going to be stem some dilution from Miami.
I guess, such a small business that I, maybe I'm surprised that it's been called out as such a margin.
Headwind and then we would have expected that some of your previous investments are starting to lap and there should be an opportunity to drive more dollar to the bottom line just hoping you could break out some of that that operating margin pressure.
Okay.
Let me this is Tom let me start now I'll turn it over to Jeff when we.
Look at our SGN, a we're continuing to see benefit as we lap these inflationary price increases, but our AR as the small units specialty retailer. Our number one expenses is payroll and that continues to be an area where.
Both low unemployment and statuary rates continue to.
Push that number up so.
Yes comments, we've talked about.
The fact that.
The next gen. It would be above our historic norms.
We continue to see efficiencies, but as being offset by those pressures and we continue to invest heavily in our.
Our technology.
And that continues to pressure SGN. It has over the last few years.
Well I would just added we always you have to pay what the market bears and there is there's a lot of theres a lot of pressure on wages and has been for a couple of years with also with the statutory minimum wage increases.
So we always do our best to leverage that by trying to increase team member productivity through additional team member training additional technology, which is why we're investing in the they technology initiatives.
Okay, Great and just on on my math.
I mean is there perhaps some conservatism in these.
Estimates just accounting for unknown factor and given that this is your first venture abroad and maybe.
You are trying to begin at certain levels.
I have conservatism there just to account for the fact that isn't isn't new venture for you.
So when we look at mass it.
Really small in comparison when we looked at this acquisition, it's really about developing a footprint that we can expand.
So we will be in they're working on buying synergies and cost synergies that you would expect but we will also be investing to build the team and the processes to build a much larger organization. So we're going to add.
This is.
Accelerate our ability to grow down there.
Great. Thank you.
Thank you. Our next question comes from Bret Jordan from Jefferies. Please go ahead. Your line is open.
Good morning, guys.
Morning.
Talk a little.
On a bit more about the tariff exceptions, you mentioned in some key categories. I guess is that something that you could expect to receive rebates from past tariffs paid.
Yes, so Brett we really got three primary categories that we've seen some some exception in and it's not across the board for.
Apple rotors has an exception, but the exception is only on a certain diameter or circumference rotor. So the larger rotors didnt get the exception the smaller rotors.
Most of the exceptions that.
That have been granted our retroactive and we would expect to get the tariffs.
Paid to date back as well.
Okay, any sort of sizing of those.
Now, we really don't have any a anything we want to disclose their breath.
And then a question on the inventory expansion, adding 100, plus is that existing coverage of same it of inventory you currently.
Gary or you're going to be expanding branded or private label skews to sort of new.
So the of the parts mix.
Yes, so its here's kind of what we're doing you know we've been successful for years with our inventory deployment strategy and the strength of our supply chain is one of our greatest earnings.
Markets continue to change the marketplace continues to change and we're trying to make sure that we're adapting accordingly, we're not changing anything related to depth or breadth of inventory in our distribution centers.
What we're looking at is as the consumer, especially the professional customer.
As their expectations continue to increase on prompt delivery time in stock position from all of our stores, even though we replenished our stores daily and they get multiple deliveries in markets, where we have a distribution center or through our hub store network, where we don't we're trying to push more.
Or individual skus down to the DS bookstore level and the hub store level. So what we're doing is adding not depth, but more so breadth of skus at our hub and spoke source and it's not specific to private label or national brands. It's just trying to get more inventory out there.
Valuable to drive sales.
Great. Thank you, yes, yeah, Brett this is Tom I'd like to add something to the first question on.
Exceptions.
I'd highlight to yourself and others on the call that we worked very hard at making sure that we didnt take the full tariff increases through.
Looking at the currency.
Through other sourcing through sharing those increases with our suppliers. So.
We did the aggregate price increases were quite a bit less than the actual headline tariffs number.
Right right Yep sure. Thank you.
Thank you. Our next question from Daniell Enbrel from Stephens. Please go ahead, Sir your line is open.
Thanks, Good morning, guys. Thanks for taking your questions.
When we start on the comp outlook understanding you guys talked about a few initiatives today, and obviously traffic getting better through the years seems to be implied but the full year.
It seems to imply an acceleration on the two year stack as move through the year comparisons get tougher could you maybe help us think through the buckets in more detail is that an assumed sales up lift from remodel is that just the traffic getting better you talk about what gives you confidence of the two year stack should improve as move through the year.
Yes ill start that and then let.
Add on.
I think it's a combination of of everything you said there I mean, I think I think the appearance will help the store appearance package changes will help I think the inventory availability initiatives. We have underway will help I think all the things that we're talking about from a capex perspective that would help drive.
Sales.
It is going to help our comps for the year in our two year stack as I said earlier, we're not overly disappointed with how we're performing in our key categories Undercar under the categories that you expect to sell throughout the year.
Softness in the first quarter is primarily.
Slated to those seasonal items that you know, it's the batteries for wiper blades, it's the categories and it frees washer fluid the things that you sell during the winter when you have extremely cold weather that causes breakage and wear and tear and we just haven't seen thus far in the year again, it's very early in the year and then there's still an.
I'd to have a lot of cold weather.
The remaining weeks of February and we certainly hope, we do and sales for those categories pick up but we're optimistic about the categories that drive our business stay in a day out from an under hit Undercar perspective.
To add to Greg's comments, we finished 20.
Many 19 with that 7.8% two year stack and at the midpoint of our guidance at the end of 2020, we would get 80%. So what we would say is that we expect the underlying dynamics of the automotive aftermarket and our execution of our business model, we will remain robust.
And we'll be consistent now we expect to see some improvement in traffic less inflation, but a different composition of our average ticket. So we would view our outlook for 2020 to continue to be solid based on those trends.
Thanks.
That's helpful and then as a follow up to an earlier question on the expense side I think we get that payroll is the pressure, but I thought your commentary in the prepared remarks with that the industry was remaining rational and that you were passing through some of that as DNA pressure through higher prices are you just seeing an ability to pass through that level of.
Inflation to offset the DNA pressure or can you help us understand the moving pieces, there a little bit more thanks.
Okay.
So we do continue to pass on prices, although we would tell you right now our view for 2020 is they'll remain static and the benefit will be from.
Pre anniversary.
Of price increases that went on.
When we look at those SDMA pressures.
Our opportunity I think is less on the pricing side more on returning.
Normal growth in our base average ticket and improving customer counts.
But.
We as Jeff talked about need to make sure that we're staffing our stores appropriately at market rates.
And we have a very technical workforce that makes all the difference at the store level.
Got it thanks best of luck.
Thank you our next question comes.
Some of the Zack Fadem the from Wells Fargo. Please go ahead. Your line is open.
Hey, good morning out with the warmer start to January we're hearing a lot of comparisons to 2017, hoping you can walk us through some of the differences today versus three years ago. Why you think the set up is it this time around could be different particularly.
From a non weather perspective.
Yep, Zack you think backs 2017, some of the things that we called out in 2017.
Our are not applicable or less applicable today than they were the 2017, we called out.
Tom.
Not only.
The weather, but we also called out.
Where we were with the Saar years of vehicle to vehicle populations that we're entering our market. The aftermarket post warranty we talked about Hispanic hibernation post election, some of those things.
And you know when you when you look back at the average age of vehicles today.
That are coming out of the great recession and year to year well into.
The years that are that are better for our industry even than they were two years ago. So I would I would say that those are some of the differences.
Got it that's helpful and then could we just to put them the Mexico piano.
Tourettes could you walk through.
Your expectation for topline impact and then just to confirm that the margin pressure sounds like is roughly half Mexico half core business can you just confirm that thats right and maybe walk us through the moving parts there.
As we have with other.
Smaller acquisitions, we're not going to break out the economics of that acquisition I think the key thing to.
No about the Mexican business is that the vast majority of their business. There only run at 21 stores most of their business is independent jabber business and that has a different.
Operating metric profiled in company.
Owned stores, what youre going to see if you're going to share the gross margin with the independent jobbers store, you're selling too so significantly lower gross margin, but you're also not bearing the expenses of the store level. So a lower.
Hey.
Okay got it appreciate the time.
Yes.
Thank you. Our next question comes from Kate Mcshane from Goldman Sachs. Please go ahead, Sir your line is open.
Hi, This is Tom you loose on behalf of Kate Mcshane. Thank you for taking my question I guess my.
First question ill see you guys.
Keith 81% seems to inflation.
Expectation for 2020, but how does that the from one Q way you've guided to two to four complex since you know say.
Into three Inphi fig team into the back half of that you're just trying to assess.
Where to seems completion.
In the first half of the out in our you know how does that day.
Definitely more in the first half year.
Very little are much less than the third quarter and virtually none in the fourth quarter in the fourth quarter of this year most of the.
We were slightly higher than.
We expected to be in that was on base commodities.
And I would say to guide was more so.
Based on weather related demands and the impact of inflation.
First quarter and the remaining three quarters.
Got it that's very helpful, then and if I could get a follow up.
On your supply chain. So obviously you know.
A lot of retailers have been talking about Corona line is just trying to assess are you seeing any impact on your supply chain.
Ill.
From from that part of the award.
Not yet we one of the differences and us.
And a lot of a lot of our competitors in the industry as we are bringing a lot of product and from China. That's no secret.
The timing of this corona virus kind of correlated with Chinese new year. So we had already all product in advance planning for the shutdown from Chinese new year, one of the advantages that we.
Is there is not a lot of product that has a demand cycle that warrants, bringing it from China directly into our individual Pcs.
So rather we negotiate with our suppliers to keep a number of days of inventory on hand in their distribution facilities within the us.
So we've got we've got built.
Inventory within the U.S., so that will keep us for probably two to three months that.
Before we would see the impact from product coming from China.
Great. Thank you.
Right.
Thank you. Our next question comes from Chris Leary from Wolfe Research.
Please go ahead your line is open.
Hey, guys. This take most in for Chris Thanks for taking the question.
Hum.
So so first could you just talk a little bit more about the health benefits expense in the quarter.
I think you said it would normalize as beer goes on so is this like a onetime true.
Or if not like what drove such a large onetime expense.
So we're fully self insured for health benefits and they have not very long time from.
Hi.
Initial claimed to when you know the full extended the claim typically about six months so.
What we saw was our third quarter.
Hi, mature in a way that was much higher than we thought and fourth quarter come in a lot higher.
Health benefits have.
Fluctuation and we've had good years and good quarters, and we've had referred years and refer quarters and it really.
Some of it is just.
Statistics and not.
What we looked at was a few really big claims and more medium to larger claims and we'd expect.
Impossible to predict fully but we would expect this to be more of an outlier.
And expect 2020 to follow more historical.
Medical trends for our population.
Got it and then secondly can you just talked about the timing of the 2020 DC openings.
Is there anything we should be thinking about in terms of cost pressures or complete since these are built out and opened.
Jeff I'll take that as far as timing.
The 11 in DC will grow land the in the second quarter and in the one lake or Memphis, DC will roll in in the last quarter the year.
From a cost perspective, we would expect to feel some cost pressures on distribution is included in our.
Gross margin that's not a huge number which is why we didnt call it out separately.
Alright, thank you.
Thank you. Our next question comes from Michael Laser some UBI. Yes. Please go ahead. Your line is open.
Good morning, Thanks, a lot for taking my question in the past the aftermarket has seen a prolong the impact from the lack of cold weather in.
Yes, it, particularly in the spring from the lack of corrosive material that's put on the road and from Potholes It seems like.
Looking at your guidance, you're you're assuming that that will be the case. This year why would this be year be different and as part of that question. As you do look at your full year comp guidance do you see more risk in the front half of the year from the whether we're in the back half of the year from the lack of tariff related inflation.
Yes, Mike I'll take the first part of that Tom talked about the first half versus back half of the year.
As I said earlier.
Our softness of the been more and weather related categories and the fact that ourselves have remained strong on those typical wear and tear categories such as.
Undercar steering chassis things like that.
Through the first few weeks of.
Of the year and the tail end of 29 team that gives us confidence that that those repairs and those hard parts categories, we will still.
Performed well for us.
So to take on.
The rest of the question Michael.
As we get near the end of the season people will differ true seasonal purchases.
Whether that's air conditioning season or in this case cold weather, we'd expect the rest of the winter to be normal precipitation is really what creates the rough road. So.
We'd expect that to be normal in that hasn't been as different remember last year, we had the polar vortex, which that cold weather really drive seasonal so between that and a better vehicle dynamic as opposed to 2017, where we're going against harder vehicle dynamic.
Gives us confidence and as Greg said, our underlying core category.
Good.
As far as the risk to comps throughout the year, what we would tell you is that we're not in an uncertain underserved markets.
We need to continue to go out and execute better than our competitors and grew our market share everyday whether it's the first quarter as a fourth quarter and it will be the same next year.
When we look at our comps.
We continued to perform very consistently lot of it driven by.
The vehicle dynamics by reasonable gas prices by high levels of employment and we expect that to continue throughout the year, So our expectations for comps will be.
Relatively consistent in the second third and fourth quarter first.
Quarter by January lack of cold weather categories.
Thanks for that and your gross margin guidance for this year has caused a lot a conversation to be sure.
Should we expect that once you get passed this inventory accounting dynamic your gross margin should be stable to growing over the.
Long term.
What we would tell you is that our focus is on comp gross margin dollars.
And as we saw this year with same screw inflation, we're able to generate more comp gross margin dollars at a similar rate. So we always try to improve our acquisition.
Yes.
Fission see of our distribution and squeeze out those costs to drive better gross margin. So our expectation is that it will be stable to slightly growing.
Thank you very much.
Thank you. Our next question comes from Simon Goodman from Morgan Stanley.
Please go ahead your line is open.
Hi, This is Josh chemical jumps, assuming and thanks for taking my questions. It sounds like a larger than usual number of storage technology, probably about projects are coming to fruition. This year combined with the increase in the DCF news and the recent minus acquisition. It looks like there's a great a sense of urgency around investing in the recent past.
Is that a fair assumption and if so can you talk about what might be driving that and potential areas of mis execution, you might be monitoring, especially closely.
Yes, I mean, there theres you break it down by categories in some categories, there's a greater sense of urgency some of just being going ongoing initiatives. An example of a greater sense of urgency.
We would be the replacement of our store point of sale systems.
Over the past year, we've been working on making our systems more stable in our stores. So that entails both making sure our communication networks are redundant and dependable as well as making sure the systems themselves.
Hi.
Availability and when you look at it data platform, Mike is 400, when those those machines fail. It takes some time back.
Jeff's comments in his prepared statements that creates downtime for the stores and creates manual processes, which doesn't.
Okay, and a very favorable customer experience, so thats, a big spend for us it's a big lift its something weve been working on for a few months now and we fully expect roll those out by the end of the year. Some of the other investments are just they just have the right return and the things we need to do we've seen we've seen savings in our.
Utility expense in 2019 as a result of of the led lighting initiatives in our stores and our Dcs and we're extending that both from an apparent standpoint, which should help with sales as well as the financial return. Another example of an initiative with a with a high ROI is our.
Livery fleet are easily we that's going to do several things for us. Our fleet is an aging fleet, we always depreciated our trucks over an extended period of time and over the years those those trucks have become much more efficient so by replacing a significant portion of our trucks. This year. It does several things.
For us when it reduces our maintenance cost because its new equipment.
Two it'll it should help with our driver hiring and retention.
Because its new equipment drivers likes drive new equipment. There are many drivers out there that are not certified to drive trucks with manual transmissions all of our new trucks will have automatic transmissions.
Which opens up the applicant pool significantly and also that allows us to have more collision avoidance on our trucks and more technology. Our trucks. So it's a combination of all the above some of it it's based on ROI. Some of its based on driving sales of some of it. It's just out of necessity like the computer system.
Replacements in our stores.
Thank you and then go Q4, Comsol, obviously pretty healthy and better than when we were expecting did you see evidence the gained significant share in the quarter, perhaps or was it more a function of maybe your store footprint and then just related to that can you talk about some specific factors you might have assessed and embedded in your 20.
20 Guide for example, the extra day because of the leap year potential sales risks ardent to h. around the election anything like that to be aware of.
So on the comp question.
On the kind of question for.
For Leap day.
We don't include that in our comps.
So that day, it just becomes a non comp that.
When we look at around the election, our expectation is that we will see significant disruption around the election.
As far as that Q4 comps I mean, we came out of that Q3 pretty strong that carried into Q4.
Bob.
The just as Greg mentioned in his prepared comments itself net pretty widespread in December as force taken market share I mean, it's always our goal will be the Dom inspired every market we operate in and Thats, what we focus on fundamentally in all of our stores across the country everyday it's just the fundamental fundamental execution and.
Top notch customer service trying to build relationships with all the customers in the market both retail and professional.
Understood. Thank you very much.
Thank you we have reached our allotted time for questions.
Now I'll turn the call back over to Mr., Greg Johnson for closing.
Remarks.
Thank you Sarah.
I'd like to conclude our call today about thinking the entire raleigh's team for our solid fourth quarter and full year 2019 results. We look forward to a strong year in 2020 I'd like to thank everyone for joining our call today, we look forward to reporting our 2021st quarter results.
In April thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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