Q4 2019 Earnings Call
Ladies and gentlemen, this is the operator your lines will remain on musicals until the conference speaking.
The conference will begin momentarily, we thank you for your patience.
[music].
Senior Vice President Communications, and Investor Relations well make a brief statements concerning forward looking statements that will be discussed on this call.
[music]. Good morning, Thank you for joining us to discuss our fourth quarter and full year 2019 result.
Joining by phone Bracco, <unk>, President and Chief Executive Officer, and John Sheppard, Our executive Vice President and Chief Financial Officer.
Following their prepared remarks, we will turn our attention to answering your question.
Before we begin please be advised that our comments today include forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected in such statements you do a number of risks and uncertainties, but you're describing the risk factor section in the company's filings with the Securities and Exchange Commission, we may take no duty to update forward looking statements made.
Additionally, our comments today includes certain non-GAAP financial measures, we believe providing these measures helps investors gain a more complete understanding of our results.
And it's consistent with how management views our financial results.
Please refer to our quarterly press release.
An accompanying financial statement issued today for additional details regarding the forward looking statements.
Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures referenced in today's call.
The conference this call will be governed by the information contained in our earnings release unrelated financial statement.
Now, let me turn the call over to Tom Greco.
Thanks, Elizabeth and good morning, and.
And thank all of you for joining us to discuss our Q4 and for your 2019 results.
I want to begin by recognizing attacking every single 18 number in our network of Carquest independence for their dedication throughout the year.
With an unrelenting focus on delivering against our strategic priority.
We made progress on many initiatives throughout 2019.
And we plan to continue strengthening the company as we begin twentytwenty.
In Q4, we delivered our seven consecutive quarter of top line girl.
With an increase in net sales to $2.1 billion and comparable store sales up slightly compared to the prior year.
We also expanded our adjusted operating income margin rate by 106 basis points in the quarter.
This focused effort to deliver margin expansion with lower than anticipated sales growth.
Translated to adjusted diluted earnings per share of $1.64 cents, an increase of 40.2% in Q4.
In the quarter. We also completed our acquisition of the iconic die hard Brennan.
It's worksite to add to our industry, leading assortment of national brands, Oh eat parts and own brands.
For the full year 2019, our net sales increased.
1.3% to $9.7 billion with comparable store sales growth of 1.1%.
We delivered adjusted operating margin expansion of 36 basis points year over year.
Adjusted diluted earnings per share growth of 14.9% and generated $597 million in free cash flow.
Following our second consecutive year of sales gross margin expansion and strong cash generation as well as our confidence in ongoing improvements in 2020 and beyond.
Our board approved the first increase to our quarterly cash dividend since the 2014 acquisition.
And Uh huh.
This was the first increase since it be introduced its quarterly dividend in 2006.
Before I turn the call over to Jeff for more details on our financial performance I want to highlight the operational performance improvements we implemented in 2019 as well as several exciting new initiatives planned for this year.
Yes, we're stuck to enable ongoing topline growth in adjusted Oelwein margin expansion and 2020 and beyond.
In Q4, our professional business led our growth rate highlighted by World Park, Canada, and our Carquest independent businesses.
As we continue to bring all our professional assets under one roof.
We remain focused on providing best in class parts availability, improving order to delivery speed and consistency and strengthening our overall value proposition to our customers.
This includes ongoing enhancements to our one stop shop professional online platform my advance.
Well its improvements to our best in class online B to B catalog advanced pro.
Hi, advancing proves the customer experience a fully integrated access to promotions product information our rewards program credit reconciliation and key performance indicators.
This enables us to leverage customer data to drive engagement, while improving visibility to enroll promotions and customer involvement.
Additionally, we expanded the categories included in the rollout of dynamic assortment with 50 categories now rolled out across nearly 4000 stores representing over 50% of our backroom sales.
Dynamic assortment is continuing to improve stock and close rates in key categories.
Once fully implemented which struck dynamic assortment to drive top line improvements through a better understanding of customer demand and utilizing multiple data points to improve availability and help ensure that we have the right part in the right place at the right time.
In terms of part D. I want to omni channel business, we've had a challenging Q4, particularly in the north.
That said the heavy lifting we did in the back half of 2019.
This resulted in a much stronger DIY plan for 2020, which we believe we'll build momentum throughout the year.
There are four primary areas of focus here.
One launch die hard to build awareness three drive loyalty and for execute with excellent.
So first we're very excited about watching the iconic diehard brand throughout the advanced network and 21.
Diehard is the number one battery brown, among all customers and presents us with several ways. We believe we can differentiate offering and drive increased customer traffic to our retail stores.
Our goal of diehard is to build on its strong reputation, creating a differentiated value proposition.
Well, we're confident the addition of die hard to our industry, leading assortment will drive incremental growth for DIY Omni channel.
We also see the potential to leverage diehard with our professional customers and independent Carquest partners.
In the future. We also believe there's a significant opportunity for brand extension into other categories and geographic expansion of diehard.
Without question, both the advance team and our Carquest independents are very excited about diehard.
Second we're focused on significantly improving awareness of advance.
Our unaided awareness improved in 2019, but still lags our primary competitors by a wide margin.
2020 plans are highlighted by a new marketing campaign, including a significant increase in media, which we've sourced from preexisting lower performing marketing spend.
We're confident this new advertising will differentiate the advance brand overtime.
Additionally, we're very excited to leverage our recently announced partnership with Penske racing and our new driver Ryan Blaine.
Well also continue to drive awareness by improving our digital experience as we know that most transactions start online.
Our DIY online business continued to grow traffic and transactions, resulting in double digit ecommerce growth in both Q4 and the full year.
Our team is also making progress on the expansion of product offerings on Walmart Dot com, including the addition of product reviews to facilitate a frictionless experience for our customers.
Third we continue to make progress on our loyalty program speed perks and we're excited about the launch of our new mobile app or D. I wires in Q1.
Our app will make speed perks, and our mobile experience, even more accessible to our loyal customers.
When we relaunched deeper shoot auto mid year under 25% of our DIY transactions were speed perks transactions at that point.
We finished the year at close to 36%.
This enables us to leverage first party data to personalize our offerings.
In Q4, we added close to 1 million new speed perks members.
Finishing Q4, I close to 12 million active members.
In addition, we saw increasing graduation rates from one spending tier to the next.
Well continue to build loyalty behind speed first by leveraging personalization and communicating directly with our customers.
For our field team continues to improve on key execution metrics, including units per transaction.
Weekend coverage and net promoter score.
In 2020 replenishment crude book, the quality and execution of our automotive train for our team members, while improving the customer experience for buy online pick up in store.
The fact that our turnover in frontline customer facing rolls decline in both 2018 and 29 team has helped us improve execution overall.
In terms of category performance, our Q4 growth was led by breaks batteries and filters.
Due to a week December we underperformed on winter related products, such as starters and alternators as well as radiators.
Geographically our regional performance was highly Barry with our Midwest West and central regions, delivering mid single digit growth in Q4, and the largest sales increases on both a one and two year stack compared to prior years.
These geography significantly outperform our weakest geographies in the quarter with our great Lakes northeast and mid Atlantic regions trailing the top performing regions by over 600 basis points on average.
To summarize our growth initiatives, we've elevated our focus on differentiating and improving the customer experience for both our pro and DIY Omnichannel business.
We remain relentlessly focused on delighting the customer across all of our businesses.
Our pro business continues to build momentum across all banners and we continue to integrate keep platform to simplify and improved customer experience across events pro and my bear.
In terms of DIY omnichannel well it remains a work in progress.
We have the strongest marketing calendar of activity on VII omni channel in years with a plans to launch diehard build awareness increase loyalty and improve execution.
Moving onto our key sellers of margin expansion for 2020 and beyond our first priority is to improve sales and profit per store.
This includes optimizing our existing footprint, expanding wherever underpenetrated and closing unproductive or underperforming assets where appropriate.
Starting with our largest business on the professional side our team continues to expand our professional footprint to drive share growth.
In 2019, we opened 17, new Worldpac branches and continue to add new Carquest independent locations.
In addition to the growth of our existing locations and sourcing new opportunities. Our team has also started the consolidation of our Worldpac and autopart international banners to deliver improved productivity and product assortment across our professional business.
This effort will continue throughout 2020.
In addition, behind consistent gradual improvements and execution across our advance and Carquest stores.
Average sales per store has increased from $1.5 million at the end of 2017 to roughly $1.6 million per store at the end of 2019.
We're confident we will continue this growth and are on track to achieve our goal of $1.8 million per store overtime.
Separately, we continued to address more structural opportunities within our retail stores, which includes a strengthened store refresh program and the ongoing optimization of our store footprint.
We expect the actions, we're taking to improve sales and profit per store will benefit both DIY airing pro.
Our second margin expansion priority is within our supply chain and I'm pleased to say, we're now in full execution mode. On this critical area of our transformation.
Our supply chain team has done a thorough review our entire footprint and we're now executing plans that we believe will significantly enhance our enterprise wide supply chain.
With 50 distribution centers today, we have a clear opportunity to further rationalize our footprint over the coming years.
Importantly, we'll work to optimize the network, while improving our service to customers.
It's imperative that Rpcs have the right part and the right place at the right time, So we win more often.
One of our major supply chain productivity initiatives, It's cross banner replenishment, which we began to deploy in late 2019.
Following the successful lead markets. We're now beginning to scale this capability throughout our DC and expect to be completed by mid 2021.
Once fully implemented we expect we will improve product availability drive turns and deliver significant cost productivity.
In addition.
We're continuing to invest in the consolidation of several warehouse management systems or W. And that's for sure. So one system across our advance and Carquest network, which as you can imagine is a significant undertaking.
When we began our supply chain transformation, we were dealing with multiple WMS systems, along with extensive manual processes and high turnover in R&D fees.
Not only as our turnover down significantly in our DC, our safety performance and engagement scores are now trending in a positive direction.
Well it took time to build the right team and stabilize operations before we introduced a new WMS system I'm confident we now have the right team in place to help us further our transformation progress.
Importantly, our team recently completed the first conversion to our new WMS platform and one of our largest DC and not DC is off to a terrific start.
We expect this initiative coupled with the implementation of a new Labour management system will allow us to run common across our Dcs. So we can provide better product availability at more optimal inventory turns and cost.
We're currently on track with our supply chain agenda, and I'm excited for what this will deliver and 2020 and beyond.
Our third pillar of margin expansion focuses on category management.
Here, we've implemented a standardized approach across key categories to facilitate material cost optimization owned brand expansion and unit and profit growth through strategic pricing.
This has been a highly collaborative effort with our supplier partners.
In terms of material cost optimization, while unplanned tariffs reduced the benefit of our performance in 2019, we made good progress on mcl, both in Q4 and for the full year.
For own brand expansion, we began to roll out additional carquest branded products in the back half of 2019.
We're working to ensure the highest quality in our Carquest brand rollout at this brand resonates so strongly with our professional garages.
In parallel we have been exploring own brand opportunities for D. I lie with our suppliers with diehard being the Best example of this today.
Finally, we expect to deploy our new pricing platform by mid year. This will enable single price execution across all channels to provide consistent and more efficient management of our pricing.
A big benefited this new capability will be the ability that central is priced right down to store level if needed.
Finally, SGN any productivity rounds out the fourth pillar of our margin expansion.
SGN It was a highlight of our 2019 performance as our team continued to made excellent progress in managing our costs.
In the fourth quarter, we were able to leverage our labor related costs, including store labor as a percent of sales in spite of wage inflation and lower than expected sale.
This was largely driven by the improvements from our new store level Labor management system, which we rolled out in Q3.
Additionally, our diligent efforts to build a culture of safety is becoming ingrained in how our team members were leading to a reduction in our liabilities and claims expenses across the organization, which benefited the quarter end the year.
In fact, we lowered our total recordable injury rate by 8% in 2019, and our LCR or lost time injury rate, which represents the worst safety incident was reduced by an impressive 17% compared to 2018.
Finally, we continue to make progress on rent in the quarter and in the year for the full year, we leveraged our occupancy in base rent by roughly 20 basis points.
To wrap up our SGN a performance we made good progress across multiple lines, enabling us to leverage SDMA to drive margin expansion. While at the same time, we made significant investments in technology ecommerce and supply chain and 29 team.
In summary, 29 team was a Europe continued progress for HP as we registered another year of topline growth and margin expansion, while making important long term investments.
In terms of our outlook for 2020, we've previously discussed that this year would be similar to 2019 in terms of investment requirements.
With that said some additional items for you to keep in mind.
First as you probably know we've just experienced the warmest January in history.
Which is expected to impact demand in the front half of the year.
From an 80 standpoint, we also expect the elevated coupon investment, we're making in our legacy platform to continue in the front half of 2020.
On the positive side of the equation.
Industry dynamics remain very attractive.
This includes continued increases in the car park miles driven.
As well as an increase in vehicles greater than seven years old.
All of these are projected to have a favorable impact on demand throughout 2020.
Further we also expect our pro and DIY initiatives to build topline momentum through the year.
Finally, I'm confident in our team's ability to continue our margin expansion trajectory and deliver further progress against our strategic objectives in 2020.
All of these factors are contemplated in the full year guidance, we introduced in our press release this morning.
In summary, we remain very excited about the tremendous opportunity ahead to fully unlock the potential of a peak and we're committed to driving consistent improvement across the enterprise over the next several years with that I'll turn it over to Jeff for details on our financial performance.
Thank you Tom and good morning, everyone.
In the fourth quarter or adjusted gross profit was approximately $929 million, which was essentially flat compared to the prior year quarter.
Adjusted gross profit margin of 44% declined 19 basis points from the prior year quarter, primarily driven by LIFO headwind as well as the expected headwinds from continued investment in our enhanced loyalty program speed perks to data.
These headwinds were partially offset by pricing actions taken in the quarter.
Our adjusted EPS DNA was approximately $779 million in Q4 2019.
Compared to approximately $802 million in Q4 2018.
As a percentage of net sales our adjusted EPS DNA expenses improved by 125 basis points to 36.9%.
I'm pleased with our team members dedication to control costs throughout 2019.
Which enabled us to leverage expenses every quarter.
In Q4, we leveraged labor related costs and once again reduced our insurance and claims expense at key training programs and focused on safety drove improvements across the organization.
Adjusted operating income in Q4 was $150 million, which improved nearly 18% compared to the prior year quarter.
Our adjusted Oi margin rate increased 106 basis points to 7.1% in the quarter.
Adjusted diluted EPS for Q4 was one dollar and 64 cents an increase of 40.2%.
For the full year net sales were $9.7 billion, an increase of 1.3% compared to 2018 comp sales improved 1.1 person.
Adjusted gross profit for the year increased 1.1% to $4.3 billion, an adjusted gross profit margin decreased 12 basis points to 44%.
Adjusted EPS DNA for the year was flat compared to 2018 at three and a half billion dollars.
On a rate basis, our full year adjusted EPS DNA with 35.8%.
Which was an improvement of 48 basis points compared to the previous year.
Adjusted operating income for the year with $795 million, an increase of 6% compared to the end of 2018.
Our adjusted operating margin was 8.2% for 2019, which increased 36 basis points compared to the full year 2018.
Adjusted diluted EPS increased 14.9% to $8 in 19 cents compared to $7.13 at the end of 2018.
Moving to free cash flow, we delivered $597 million in 2019, which was lower than our expectations.
Factors negatively impacting working capital include higher than expected increases in both our receivables and inventory.
We also realized an unfavorable payment term mix within vendor payables.
This was driven by an increase in worldpac inventory associated with the opening of Worldpac branches, which carry shorter payment terms as well as an unfavorable mix impact within advance and carquest vendor payables.
These factors resulted in higher cash outflows at year end than we previously model.
Consistent with increasing capital spend throughout 2019, our Capex in Q4 was $101 million, bringing the full year $7 million to $270 million, an increase of 39.4% year over year.
As we have previously discussed our investments have primarily focused on information technology and supply chain project.
In the 2019 more than 60% of our capital spend was concentrated on these two critical areas.
Alright key initiatives continue to address longstanding lack of investment in critical systems and back office integration.
Which we expect to continue in 2020 and beyond.
Nearly one third of our IP spend and 29 team focused on customer facing systems and I'm pleased with the near completion of our next Gen store system upgrade across our footprint.
In addition throughout 2019, our team worked diligently on our finance ERP project, which integrates our back office financed systems.
We went live with our first release in this new system at the start of our fiscal 2020.
Good I'm confident the continued rollout of this initiative will create significant efficiencies across our organization.
In addition, our supply chain team worked relentlessly throughout the year to stabilize existing operations.
We invested in DC improvements in 2019 with additional plans for 2020, including network upgrades and continued rollout of our single warehouse management system across our legacy advance and Carquest network to enable improved accuracy and efficiencies within the distribution centers.
Inline with our financial priorities to maintain an investment grade rating.
Best in the business and Opportunistically returned capital to shareholders.
Under our current share repurchase program, we repurchased nearly $11 million advanced stock during the fourth quarter.
And a total of approximately $487 million for the year.
Importantly, we remain confident in our ability to generate meaningful cash from the business.
As you saw yesterday, we're pleased to announce our board has approved a meaningful improvement to our quarterly dividend, which was increased from six cents to 25 cents.
We're committed to a balanced approach and returning capital to our shareholders will making important investments to drive our transformation.
As we begin 2020, we remain focused on our strategic objectives and discipline in our execution to deliver against our financial priorities.
With that said this morning, we introduced our 53 week full year 2020 guidance for several key metrics.
Including net sales of $9.88 billion to $10.1 billion.
Comparable store sales growth of flat to 2%.
Adjusted operating income margin expansion of 20 to 50 basis points.
Capital expenditures of $275 million to $325 million, focusing on continued IP and supply chain investments.
A 2020 tax rate is expected to be 24% to 26%.
And as we continue our disciplined approach to cash management, we expect to deliver a minimum free cash flow of $600 million.
As a reminder, 2020 include the 50 Threerd week.
Our financial outlook provided today includes an estimated $125 million to $150 million in net sales.
An approximately 10 to 20 basis points of margin expansion from the 50 Threerd week contribution.
In summary, I want to reiterate our gratitude the time began with today all our team members and independent partners for their effort throughout 2019.
Which enabled our continue progress toward our transformation objectives.
We remain committed to further improvements in 2023 remain disciplined in our approach to capitalize on the significant opportunity still ahead for HCP.
With that let's open the call to address your questions operator.
Certainly if you'd like to ask a question. Please press star one withdraw your question press the pound key limit yourself to one question and one follow up please.
Matt Mcclintock with Raymond James Your line is open.
Yes, good morning, everyone.
Tom I was wondering about the initial guidance for from 2020, just the comp expectation zero to 2% can you kind of give us an idea of how you factored in the warm weather from December into that expectation.
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Sure. Good morning, not so let me let me provide some color on that first of all.
We're very dedicated to the long term strategic objectives, we've laid out before and that includes some investments this year that we're making as we as we communicated in the passport 19, and 20 being somewhat similar in that regard and those investments are designed to enable topline growth and additional margin expansion down the road. So.
As we looked at the sales guide.
We did a lot of work on the December January timeframe, and we factored in the impact of what at least at this point is an extremely mild winter.
Compared it to other years you guys are written about some of this 2017 2012.
It was one of the warmest in history for North America. This year December January and given our northern footprint.
We valued the impact that's gonna have on topline sales really in the front half of the year.
Considering this and the fact that it's very early in the year were being prudent on the sales guidance.
That said Theres a lot we're very excited about for 2020 in longer term and sales front.
As you've heard from others. The industry drivers of demand are very positive. The car park is continuing to grow are going across 280 million this year.
Miles driven continues to increase and the vehicles in the sweet spot.
In addition to that the vehicles about seven years and greater is growing so those are all positive impacts and that'll benefit the whole year.
Separately, obviously, we've got a number of topline initiatives across pro and DIY why that will build throughout the year, including pardon me our launch of diehard. So in terms of of margin expansion and cash flow. Our plans are very robust and we're continuing to execute against them. So that was kind of the thinking that went into.
Sales.
That building blocks of our plan are continuing to work nicely together, we've got a great team that is poised to deliver against the guidance a we've delivered sales growth and margin expansion two years in a room, we intend to do that again in 2020.
And then just as a follow up on diehard, specifically could you could you talk through how to how how we should conceptualize the launch of how you. How you plan about going about once you get how how we should think about the the benefit from that launch. Thanks.
Sure well as we've talked when we issued the original press release, there's a tremendous amount of strategic and financial rationale for us behind diehard. It gives us the opportunity to really differentiate within particularly inside of de out why.
As you know DIY traffic is our number one customer and business issue.
And all the work that we've done a says that diehard can really help us with that.
Enables us to differentiate with DIY customers brands matter to the allied customers and we'd be able to differentiate there.
We also plan to build out a unique position on pro with Diehard capital and so we're excited about that also but as you think about the launch we're not communicating any specific timing or anything like that right now, but we're obviously working very diligently to build out the launch plan for diehard and needless to say it will benefit us more in the back half of the year than the.
Yeah.
I appreciate the color vessel.
Thank you.
Seth Sigman with credit Suisse. Your line is open.
Hey, guys. Good morning, Thanks for taking the question just I've been asked a couple upfront just the Q4 cadence. Obviously December was very challenging I'd love to just to your observations. What you guys were seeing prior to that because it seems like seasonally it should have been in a better place. So just any color on how the quarter was performing prior to the December slowdown and then just.
Second as you think about the guidance the margin guidance for 2020.
10 to 30 basis points, excluding the extra week can you just break this break that down a little bit more between gross margin in SGN, a and just that SNA piece related to the fourth quarter. The sustainability of some of the benefits that you saw this past quarter any color on that that'd be helpful. Thank you.
Yeah. Good morning, Sam I'll take the first and I'll flip it to the second question over to Jeff.
In terms of December.
Moreover November December I mean, it wasn't that different at the national level, we did see a slowdown in December but it was a market difference geographically as we called out in our script and a first of all in the in the west in the Midwest in Central.
There it was very cold in October we had a very strong October November in those geographies.
We didn't get that benefit necessarily in the northeast mid Atlantic from Great Lakes and as we got into December when it was much warmer in those geographies that really pulled down our business in December overall, so I think that the headline there as the difference in the distribution was quite wide geographically for us in the quarter as we.
Sad over 600 basis points between the top three and bottom three Jeff you want to cover off the other yes sure I'll start with the fourth quarter, South and then work into the guidance for 2024th quarter. You saw SGN. They improved 125 basis 0.3 broad categories labor labor related we do.
Good leverage store labor in the fourth quarter.
We saw some improvements in our marketing program is a chase Mcdonald comes in and looked at some of the underperforming spend we pulled back on some of that and then for the.
Fourth quarter in a row, we've seen improvement in insurance and claims and this was really some favorability around some of our actuarial assessment. So throughout the year. What we've seen is improvements in both the volume of claims in the severity of claims and those are two key contributors to it you know what actuarial valuation too.
To meet out into the future. What you think your costs are going to be those are going to come down, albeit slow so that sort of gets into 2020.
We think we're going to continue to see improvements in the areas of labor of supply sorry of safety.
Safety would I just discussed labor, we're going to continue to leverage Myday. We believe we can continue to see improvements there we have immigrations going on the back office, we've talked about the ERP, we're going to see second half savings there and we're also integrating AI and worldpac. So as we continue to get synergies around that will.
These savings in us DNA.
Stepping back to 2020, as we think about where we're going to see the expansion. We do think we're going to see savings, but we also have a significant amount of investment.
Similar to what we guided last year, we're going to continue that opex investment this year.
In marketing.
In people in supply chain in IP.
We at this point, we think we're going to see more of the improvement in our margins in gross margin and that's largely driven by two factors first is the supply chain and we've been working on this for a couple of years now we've said it was going to take more time, we're going to start to see those improvements in supply chain in 2020 and then the.
Second is category management, which is a combination of MTO material cost optimization private label and pricing and the combination of those items. We really think we're going to see the benefit as we sit here today more in gross margin in less than us DNA as we take on some of those opex investments within SGN.
Okay, great. Thank you for all the color appreciate it.
Michael Lasser with yes. Your line is open.
Good morning. This is just one last Friday on for Michael Lasser, Thanks for taking my questions.
First question is on the weather.
Whether commentary as to why have you factored into weather impacting only the front half of the here. It's back in 2017, when we kind of had a similar mild winter I believe it led to subdued sales for the industry trial. There. So why would this be any different.
Yeah, we didnt actually find that we did the work category by category geography by geography, we compared the differences we did see it in the second quarter.
Well, we did not see an impact in the back half of those years at least for ourselves.
Got it and it's very helpful and as my follow up question can you talk about the current trends into first quarter basically where are you tracking compared to your flat because you don't flat to 2% comp guidance for the full year.
Basic and.
Better trying to understand the degree of acceleration needed in the back half the cheapest guidance.
Yeah, we're not going to comment on on in quarter performance, but obviously you. We did say that January was very warm.
So you know our implied in our guide as acceleration in the back half of the year.
Thank you.
Simeon Goodman with Morgan Stanley Your line is open.
Hi, guys. This is Michael Kass went on for cement. Thanks for taking the questions on first just wanted to ask about the comp relative to the operating margin growth expectation for for 2020. It seems like comp is it fair Fair guide given the backdrop and still guiding to two solid margin expansion on one asking how cool.
Soften argue that you can achieve that given the potentially and lower comp with the weather headwinds and how much of the margin expansion fish on gross margin is that it's really not even dependent on sales rather than you think you can get it regardless of the topline.
Sure well first of all we're excited about the fact that in the fourth quarter, we delivered margin expansion amid a quarter, where we have our sales were lower than we expected. So we've always known we've got a tremendous opportunity to expand margins. We've been working on our agenda for a couple of years now in the four big territory.
Worries that we have for margin expansion. The majority of that upside is not sales dependent. So if you think about supply chain you know we're going to essentially.
Rollout across banner replenishment is which is nothing more than re pointing a store added distribution center, that's closer to the store than the previous ones. So that's in full rollout right now we're standing up a warehouse management system platform that will enable us to standardize our labor management throughout the.
The supply chain that is not sales dependent we're integrating worldpac and AI as Jeff just mentioned.
Big opportunity there for us to not only.
It's save money, but also to improve our assortment offering and availability to our customers, but for most of the supply chain agenda has nothing to do with any sales dependency separately, we're rolling out inside of category management, our own brand platform.
Jeff has stood up a pricing function, we've got a new pricing platform that were software tool that we're standing up in the middle of 2020 that will enable us to price that right down to store level and price regionally, which we can't do today, so again not necessarily sales dependent and then SGN A. J.
Just covered but really nothing inside of their sales dependent.
Whether that's the integration of our back office platforms improves safety performance indirect procurement improving our performance on medical all of those things are going to happen independent of sale. So I think I think the key point is obviously, we want our sales to grow as rapidly as possible.
We remain focused on building on our plans there, but our opportunity to expand margins is is not as sales dependent as it might be and other companies.
Great. Thanks, appreciate that color and just as a follow up so we've been hearing that and some suppliers are.
Hi thing and get some of the major or DIY out of distributors that the parts supply out of China. It could be constrained by what we're seeing with front of Iris I know you guys are a little less exposed to DIY than some of your competitors, but could you comment on what you're seeing or hearing thus far and whether there's any contingency you're building in.
Your guidance for any disruptions.
Yeah, well first of all from a business standpoint to be clear our guide does not contemplate any impact.
From the Corona virus as you said.
You know I'd say is pretty much a level playing field, while all of a major players in our industry sourced from China, but even compared to other industries. You know auto parts is relatively low I think we've communicated in the past at least at advance you know we're in the teens roughly in terms of products sourced from China.
We have several months of inventory depending on the product. We've got a you know obviously our own infrastructure here in the U.S.. We've also got a distribution center.
That has additional inventory in Shanghai, So we're going to continue to monitor closely but at the moment, we don't see any impact in supply disruption from us.
For us in 2020, I'd say, it's obviously, a very you know dynamic situation and we've got to continue to monitor very closely.
Great. Thank you.
Seth Basham with Wedbush Securities. Your line is open.
And good morning on my question around your supply chain progress clearly you, making a lot of progress integrating your supply chain could you give us some perspective on types of financial benefits and other things that you're realizing from that.
So you can vary thus far that would be really helpful.
Sure Scott I mean first of all the I'm I'm really excited about what ribbons phone and his team are doing inside of supply chain again, it's taken us longer than we might have like but you know we're not only improving the effectiveness of the efficiency of the supply chain the effectiveness is going up as well.
And it's as you know, it's one of our biggest opportunities to not only expand margins, but to improve availability. So I think he has really three big chapters that they're focused on the first is driving execution, where theres been a number of leadership upgrades and a focus on reducing turnover in those DC.
These which yeah, we made a lot of progress on in 2019, I believe we'll continue to make progress on in 2020.
The second is we call invest to make it better I covered those a minute ago, but again, that's you know really changing the physics, if you will have our supply chain.
DC optimization cross banner replenishment.
Driving execution through the WMS system and I actually was at our first and distribution center that we've stood up the new WMS system.
Very exciting I mean, we as we.
Indicated in our prepared remarks, we've had multiple warehouse management systems, a lot of manual processes and to go to a single warehouse management system across the entire advance Carquest network has fuge upside for us it'll help us improve our availability and obviously standardized.
The actions are going on in those Dcs we.
We talked about Worldpac and AI separately, which is also part of this invest to make it better chapter and then third Oh, we talk about innovation in in there we've got things like our DC automation projects that were working on so the value of the supply chain productivity agenda is significant I think we've indicated.
It's right there at the top of our or opportunities to expand margins and I'm very confident in our ability to improve within supply chain and not only expand margins are they said much improved availability and drive topline growth or is as a result.
That's really helpful and just as a follow up as you think about the financial benefits from the supply chain initiatives do you expect them to ramp through the year 2020, and seemingly would that mean that gross margin improvement.
Over the year should also ramp.
Yeah, I mean, we're now at a point, where we should expect to leverage supply chain through the year and I think it's pretty evenly distributed throughout the year indicates a supply chain and in other areas I mean, Jeff mentioned, the the coupon investment that we've made inside of speed perks, that's mostly a front half.
Investment on the gross margin side of the house, so that'll improve in the back half, but supply chains relatively uniform through the year.
Thank you very much.
Scott This early with RBC Your line is open.
Hi, good morning, I'd, especially the settlement that was on for Scott. Thanks for taking my question. So just quick one on just wanted to know if you can sort of quantify the gross margin impact during the quarter from the on redemption.
Yeah, what we've said is that it was similar to what we experienced in the third quarter, we're not going to break it out specifically, but think about a comparable number on a rate basis and you know so it had a comparable impact on our net sales gross margin then than we saw in the third quarter.
Got it and then that's helpful. And then anything on just sort of on a go forward basis, just kind of mentioned it's going to impact then you know the first half year is going be similar kind of decelerating or to what degree that would be helpful. Yeah, well. What we said was that you know it we did.
Obviously, the coupons associated with the original speed perks platform are no longer available. So they're they're expired. So we're seeing less redemption than we did in the back half of the or it's still greater than we saw at the beginning of 2019.
But it's less as a on a rate basis, but you know we think this is an important investment for us to be making it gives us a we were able to add new members. As we said we added about a million members to speed perks. We also are seeing a less if you think about attraction retention and.
Maturation, so we're attracting new members and about a million in the quarter, we're losing less people. So our our Bennett are our net number is continuing to grow and them or graduate people up to tiers and that allows us to personalize and leverage first party data. So very excited about speed perks and its ability to improve our loyalty.
Our most loyal customers.
Got it thanks guys.
Daniel Stephens, Inc.
Ladies open.
Hey, good morning, guys. Thanks for taking my question.
Just one for you started on and CEO. It was a big success. It sounds like in the fourth quarter help kind of limited gross margin degradation I think about a year ago, you guys said, you're about 80% through capturing the material cost optimization savings how far along our we today in terms of capturing those savings and should that tailwind.
You know diminished do 2020 or do you have you guys among more opportunity there.
Yeah sure the of the material cost optimization is really an iterative process. So we have been through all of our categories. So we're in the process now going back through certain categories that maybe a year ago, we've already been through but we're looking at all of the various aspects whether it be cost whether it be packaging.
Other be supply chain financing, we still think we have a significant opportunity there and so we're going to continue to do that on an ongoing basis.
And we're also looking at it as an enterprise level because when we first started kind of the first round a pea CQ is our focus we're now going back as an enterprise focus.
To.
Bring in AI and Worldpac, so again really going to iterative one that we believe we're going to continue to see benefits to that in 2020 and beyond.
And then maybe follow up to an earlier question. Tom I think you mentioned and talk to the cadence to gross margin expansion in 2020, but if you take a step back and thing for it or when should we see the full run rate savings from the multiple warehouse system and the new systems. There is that a first half a 2021 timeframe or kind of when should that be full run.
Read in the Gulf.
Yeah, I think in inside of I mean, the different initiatives right have different timelines. Daniel So you know in terms of DC optimization, that's going to spread out over a couple of years. Okay. That's in two to three years in terms of crossing banner replenishment, we expect to complete that by the middle of 2020.
The one okay. So that's essentially 18 months out you know we're in the process of appointing.
Stores at a more freight logical location right now and we're just kind of going through that market by market and we will realize the full benefit by that time frame in terms of the warehouse management system, that's going to take a little bit longer than that.
We've obviously got a mixture that we've got everything ready, we're going through that market by market as well we stood up one building.
So that's more like a you know 20 to 23 timeframe. We haven't you know landed on the final date there depends on how quickly we're able to make the transition with these dcs and the training and everything needs to go there a world part Worldpac Autopart International integration early 2021, So you know you've got.
A combination of things there, but as I said, we will we should levered. So we will leverage supply chain. This year and next year, we expect to leverage supply chain and then get the full benefit I think you'll see into 22022, you're going to see the full benefit of up most of the big initiatives.
Got it that's helpful. Thanks, guys.
Michael Montani with Evercore ISI your line is open.
Hi, This is actually Antonio filling in for Mike I, just wanted to shift gears, a little bit to talk about multi channel. So also can you give a breakdown before that can you give a breakdown of how the DIY why consumers before me because I know earlier you mentioned commercial is strong but also from the Walmart Dot com partnerships are you seeing image.
Meaningful impact to DIY segment. Thanks.
Yeah first of all in terms of deal while in isolation I would take DIY intermodal, we did improve in the back half of plenty 19 versus where we were in the front have you know we do attribute at least part of that to the launch of speed perks. There's so much upside there yet for us that we're going to rate tap into.
This year based on all the big initiatives that we've put in place.
That we're still very focused on me improvements there, but we did improve in the back half of the year Walmart is not a meaningful number yet and we're continuing to work with the Walmart team they've been a great partner on this what we're very focused on is making sure. The customer experience is best in class and as we go through each.
Initiative with them, we've got to ensure that the online experience is working for RDR wire and obviously the fulfillment experience is working well. So we're adding those categories those views, where we feel comfortable with that and they feel comfortable that and when we're ready to launch.
We've got to make sure that as the customer experiences right before we'll be launch these different categories. I guess is the key point.
All right and just a quick follow up today is it fair to say that some of that benefit you're seeing there will be realized in 2020 or is this more long term initiative that you'll see in 2021 for example.
We will definitely see some benefit in 2020, but to your point. It's a is it. This is very much a multi year long term partnership with Walmart and with all the initiatives that we have going on and they have going on we're making sure. The customer experience is best in class. We've got that's kind of at the center of everything we do when we meet together.
With that team, we're very focused on making sure that the customer experiences where it needs to be.
Got it thanks guys.
That Jordan with Jefferies. Your line is open.
Good morning, guys.
Learning Bradley.
Could you talk about what you saw from inflation in the fourth quarter, and what you're expecting inflation impact on 20 to be.
Yeah sure.
In terms of pricing in place and you know we saw rate around on that on a like for like skew about 2.8%.
And we're modeling for 2020 about 2% from up from a pricing inflation standpoint.
And that 2% will be skewed to the first half before you lap the tariffs or is that sort of evenly weighted yes, yeah.
Okay tariff to sort of the same.
Okay, and then a question on not DC optimization as you start rolling off some of the cross batter what do you see the right number of Dcs being if you've got 50, you know in three years, what's that that counts and how many of the DC is you see in the future do you currently owner or kind of DC Buildout might you require.
Yes, so first of all where we're not.
Going to provide specific a specific number there Brad obviously, we've announced these DC closures, a very thoughtfully and where we've got our own people in those buildings, we want to make sure that we do it the right way et cetera. So we're not going to break any of that out, but obviously there is a big opportunity for us to further rationalized.
Side of our network and we do that you know by looking at the sales in the out years and geographically how can we ensure that we don't have a service. The challenge we did close armonk in New York and replayed stores at relevant Dcs and that's gone very smoothly. So we've now.
I think we're up to four in total that we've closed to date and we've got it down. So it's just a matter of outpacing that over time, so you'll you'll hear more about that when we.
When we have something to say and we've had a chance to speak to our people first.
In terms of volume own bird, Yeah, I don't know food and Jeff on Yeah, we'll want to get back to you on that on on owned versus leased I mean, we've got about 10 that we have we have we have a question was more what's in the portfolio are there are if you see a 30 DC network in three years are there DC is that you're going to need to build out.
Or do do you have most of what you need to rationalize your distribution.
We do feel we have what most we need keep in mind, we all sub worldpac out there in places like California, So as as Bob starts to integrate the assortment across all the banners. We look at all of the assets of the company. So it's not just red and Blue if you will.
Thank you.
There are no further questions at this time I would now like to turn the call back over to the presenters for closing remarks.
Well, thanks to everyone for joining us. This morning, 29 team was an important year in our journey and as you heard this morning, we're making progress toward our long term objectives, including consistent gradual improvements enabled meaningful topline growth margin expansion and strong cash generation I'm confident in our team's ability to delay.
For further progress in 2020 beyond thanks for joining.
This concludes todays conference call. We thank you for your participation you may now disconnect.