Q1 2020 Earnings Call
[music].
Welcome to the advance auto parts first quarter 2020 conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, they will be a question and answer session.
To ask a question during this session Amit you press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
Before we begin Elisabeth Eisleben senior Vice President Communications, and Investor Relations well make a brief statement concerning forward looking statements that will be discussed on this call.
Please go ahead Mr. Steven.
Good morning, and thank you for joining us to discuss our first quarter 2020 result.
I'm joined by Tom Greco, our President and Chief Executive Officer, Injectafer, 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 remarks today may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
All statements other than statements of historical are forward looking statements, including but not limited to.
It's about our strategic initiative operational plans and objectives.
Future business and financial performance.
Well its statements regarding underlying assumptions related there too.
Actual results could differ materially from those projected or implied by the forward looking statements.
Additional information about factors that could cause actual results could differ materially from the forward looking statements.
He found under the captions.
Forward looking statements and risk factors in our most recent annual report on form 10-K filed with the Securities Exchange Commission and under similar caption in subsequent filings made with the commission and our quarterly earnings press release.
Now, let me turn the call over to Tom Greco.
Thanks, Elizabeth and good morning, everyone joining.
I'd like to begin by taking a moment to acknowledge suncoke 19th.
And how it's affecting each of us.
No one else to this person.
Boardwalk are incredibly.
Most importantly, I sincerely hope you and your family's assays and doing well.
Well, there's no place, but we're navigating a crisis of this magnitude.
Our team members are doing extremely well, who just in this environment.
Over the last few weeks Weve urgently adopted to help their card or team members and their families our customer and our communities.
I'd like to say all our frontline team members independent Carquest partner, who are making tremendous sacrifices to keep our customer on the road.
I also want to affect the many a team members who turned on that gone to operationalize new ways of working and serving our customers. During this time.
Ross covert 19, we've been focused on three overarching priorities.
First prioritize the health and safety of our team members and customers.
I can preserve path and protect the female during the crisis.
And third for Kirk will be stronger following the crisis.
Allow me to provide a summary of how we approach these priorities.
First well not a new concept nothing is more important than the health and safety support team members and customers.
And we've got to greatly to help protect them.
In our stores. This includes the implementation of social system thing and enhance sanitation practices, along with the installation of plexiglas barriers to name just a few.
In our D.C., we made critical changes to how our team members offerings.
This also includes execution of social distancing increased cleaning and sanitation and implementing healthtech screens.
Each initiative in both stores Nvcs, what's supported with a robust training curriculum to help ensure safety procedures, where an active.
We also source much needed supplies for our team members, including more than 10 billion based coverage.
All of this reinforces the when we say nothing is more important than the health since they see of our people and customers, we're supporting them safe and with concrete action.
Secondly, we're laser focused on protecting the CNL and preserving cash during this crisis.
In a few minutes all offline how's the additional cost reduction actions. We've taken reflects the short term softness in the.
Awesome missed preexisting plans to expand margins.
We've worked hard reduced costs.
Great and our balance sheet and improved cash flow in recent years.
I was a result, we believe learned a great starting position to manage our way through them.
Jeff will talk about the important steps we've taken a further solidify our cash position and liquidity and not only weathered the storm, but to create an environment that positively recover.
Importantly, we remain committed to the strategic return cash to shareholders evidenced by the meaningful dividend increase earlier this year and recent dividend declaration by our board of this week.
Finally, our recovery passport, which includes experts both inside and outside the company is working to help ensure that we're in an even stronger position to concede following the crisis.
Weve reprioritized initiatives.
Updated goals improved collaboration and increase speed of decision, making in spite of the environment.
Well now more agile and responsive and deploying timely relevant and innovative solutions to help meet the rapidly evolving needs of our team members and customers.
Now that many states have begun to gradually lift prescriptions were helping pro customers ramp up and assisting yeah, one customer you get back to work and daily lives.
Our task force is looking at the very best way for us to serve our professional customers.
Based on developing die funds, while being mindful of the ongoing needs for safety and social distances.
For our store teams, we're adapting and updating our standard operating procedures for customer interaction curbside delivery and parking lot services.
Historically, we know this industry has been counter cyclical and we're beginning to see sizes as well.
We're working hard with you're ready to serve our customers better than ever regardless of the environment.
Shifting to our performance in Q1, our topline sales were significantly impacted by Provident magazine in the quarter.
Well I'm extremely warm winter led to a softer start for the quarter. We saw sales improvement in early March.
However, as Covance 18, their homework is were implemented broadly.
We experienced significant reductions in both professional markdowns and Seattle why retail traffic beginning in mid March and impacting the remaining six weeks of the core.
This led to fewer miles driven and as a result, our topline means they decline as we detailed in our early April pre release.
Overall in Q1, our net sales decreased 8.6% to $2.7 billion with comparable store sales down 9.3%.
I was hoping 19 began to impact.
We quickly took steps to reduce operating expenses.
However, the impact of these actions was not enough to offset the rapid decline in topline sales later in the quarter.
Our Q1, adjusted operating income declined by 57% to $104 million.
Sales during the weekend the April 4th were down 28%.
On a positive note. This represented at the low point of the pandemic impact for HP today.
And our sales have been improving sequentially each week.
Through the first four weeks of Q2, our comparable source to help or approximately in line with the prior year.
And our DIY omni channel business is growing double digits significantly outperforming professional.
Well there are a number of factors here from an industry perspective, the DIY business tends to performed well during economic downturns as unemployment increases new car sales declines the car Park ages and more customers do their own maintenance and repairs.
We also believe the combination of stimulant benefits and the strong execution of our DIY marketing and sales plans have been two additional drivers, helping our recent sales performance.
In terms of geographies, our Q1 performance was heavily impacted in cobot 19 hotspot.
The northeast mid Atlantic and Great Lakes region were all down double digits, and particularly challenged in major urban markets.
Puerto Rico, which is operating just six hours per week, and Canada also experienced large double digit declines.
Our strongest performance was in the southeast Carolinas, an apple lots of reasons would for much less impacted by totaling 19.
The difference between low performing and high performing reasons in Q1 was more than a thousand basis points.
Representing the largest differential we've seen in recent memory.
And this differential was well over 2000 basis points during the key impact of covert 19th.
In terms of our professional performance consistent with previous quarters, we delivered growth through mid March however, as the quarter progressed. This segment felt extreme pressure from seven workers.
As a reminder, our worldpac and Autopart international businesses are 100% professional and tends to be more urban area.
This is attributed to drastic reductions and customer car counts, what we believe customers were more likely to its easier to stay at home orders.
We took the rapid steps to beat the needs of our customers and supports them at this time of raising needs.
For example, our Carquest of Worldpac Technical Institute develop virtual instructor led training courses for repair shop owners and their employees.
We introduced Moto visuals, a best in class online platform mechanics in used to virtually explain compensated jobs to customers.
Throughout the Pandemics our professional team has stayed extremely close to our pro customer and we expect this level of support an adaptation will strengthen our relationship at stay at home orders are lifted and business for covers.
In Q1, our Deanne why omni channel business performed better than problems with significant growth in our ecommerce business.
Our team accelerated existing VI, why omni channel initiatives as instead of several new ones to better serve our customers both online and in store.
Consistent with our plan announced in February we lost our new mobile App that is getting great reviews and feedback from customers.
As an example of the teams agility in March we want us to suite of services reprinted advance sage.
This concludes in store pickup herbicide and it has the same day delivery.
Also offering contact free fulfillment options.
These initiatives, we're rapidly accelerate and include a fully integrated marketing plans to less customers know weird gear for that.
As we like the utility lines, we remain focused on four primary areas that build on current momentum within our DIY Omni channel business.
These are.
First launch Diehard second build awareness third drive loyalty and fourth execute with excellent.
Let's start with diehard throughout the crisis, we prioritize initiatives that we believe offer the potential for the best return.
One of those initiatives is the launch of the iconic diehard brand, which is on track for this summer.
We believe diehard it didnt differentiator for events and we already have customers asking for it.
As customers literally restart their engines in the coming month, many will find they need a new batteries.
As the most trusted brand in the category, we believe diehard will drive incremental growth across all channels.
Second we're committed to building awareness, but then our advertising highlights the way we help motorists advanced would care and wouldn't be and added features our very own team members.
We're pleased with the feedback from our customers and the response to it.
Third in terms of loyalty, we relaunched our speed perks program last year and continue to see improvement in the first transactions.
Through our new App speed perks members can quickly views, our point and available rewards and get exclusive deals and check out faster.
We're also excited to despite our lower sales volumes, we saw double digit increases in speed perks sign up year over year.
At the end of Q1, we had more than 13 million active members an increase of over 20% year over year.
Finally, our fourth area of focus in D. I like is beginning to deliver measurable growth as our execution continues to improve.
This includes increases in both new PC and sales per ticket and reductions in average fulfillment time in Q1.
In terms of ticket town, we saw extreme pressure on resale ticket count in the quarter due to coven 19, However, our ecommerce business was strong and we saw double digit sales improvement year over year in Q1.
As we indicated we've also seen a sharp uptick in DIY ticket count both online and in stores recently.
Now as we move on margin expansion for the overall isn't opened 19 has required us to Reprioritize our plan.
While there are still many unknowns surrounding the pandemic I want to give you a brief update on our key pillars of margin expansion.
First as we look to improve sales and profit per store, we continue to evaluate our footprint.
During Q1, we closed or consolidated 28 stores all of which were planned prior to the onset of coking 19, and we opened five net new independent location.
Additionally, we remain full execution mode of consolidating our Worldpac and Autopart international bands and expect to complete the consolidation by year end as previously communicated.
Once complete we believe we'll be able to offer a broader product assortment to our professional customers while reducing costs.
We expect to realize additional savings this year in store labor and professional fees as a result of actions we took over the past few weeks.
We expect that overtime will continue to improve our sales and profitability per store.
Our second margin expansion priority its supply chain.
We continue to execute prospect or replenishment, which was temporarily slowed in Q1, but not stopped.
We remain on track to complete this initiative by mid 2021.
In terms of our warehouse management system consolidation, we completed our first implementation in one of our largest Pcs to the new WMS systems earlier this year.
This facility is already showing improvement until rates on hand accuracy and other important service metrics.
Due to travel restrictions and prioritization of critical projects related to our cobot response, we temporarily delayed converting other bdcs for now.
Our team is focused on how we can further improved this process. When the time comes to ramp conversions backed up and complete that component of our transformation agenda.
Our next quarter of margin expansion in category management.
We increased our efforts even further throughout this pandemic to collaborate with our suppliers to help ensure consistent supply and optimized cost and terms.
In addition to material cost optimization, we continue to increase owned brand expansion, including Carquest branded parts and the upcoming launch of die hard.
I'm also excited to show that our new pricing optimization tool is on track to launch midyear.
Once completed we expect this to give us much greater flexibility and agility, resulting in more effective and efficient management of price.
As seen in productivity is our final pillar of margin expansion.
During the quarter, we reacted quickly to sales declines with cost reductions.
While these actions were insufficient to fully offset the sales declines in Q1.
They will help us going forward and we believe we'll see more significant benefit from them in Q2.
In the first quarter expense reductions included the continuation of our back office consolidations.
For plant prior to the outbreak as well as the suspension of all travel and deferral of certain marketing expenses.
Later in the year.
Related to the lower remaining capex, we reduced contractors and professional fees in Q1.
Further our safety focus continues and is delivering meaningful savings in our insurance and claims expense.
I'm proud to share that we once again reduced our recordable incident occlusion frequency rates during the quarter by 30% and 14% respectively.
Our team has done tremendous work to help keep our team members sake as part of our Covance 19 response.
Despite the additional cost we've incurred related to these efforts I know they are helping to protect our team members and customers and believe we will all come under this stronger.
As I've said when we begin today's call there's no playbook on how to respond to a global pandemics.
But in many ways, we've written a very good movement as we benchmark versus other companies.
This includes everything from new safety measures in our stores in distribution centers.
Two additional benefits for our team members, the new industry, leading solutions for our customers.
I'm incredibly proud of all of our team members.
Because of their hard work.
We believe we will emerge stronger more innovative and more agile than ever.
With that I'll turn it over to Jeff for details on our financial performance.
Thank you Tom and good morning, everyone before I begin I want to Echo Tom's comments and extend my personal well wishes to everyone. Joining us this morning.
Hope you and your families are safe and well.
I also want to think or approximately 67000 team members and all are independent partners for their relentless dedication and resilience wrote the past couple of months.
As expected, we experienced headwinds associated with the cobot 19 pandemics.
And our first quarter results were below our expectations.
In the first quarter or adjusted gross profit was approximately $1.2 billion, which was a decrease of nearly 11% compared to Q ones. The prior year, primarily driven by decreased sales.
Adjusted gross profit margin of 43.5% declined 113 basis points from the prior year quarter.
Due to supply chain de leverage.
Product mix and tariff related cost increases.
These were partially offset from pricing and lower LIFO headwinds.
Our adjusted as Chine, a was approximately $1.1 billion in Q1 and was relatively flat compared to Q1 2019.
As a percentage of net sales our adjusted SGN, a expenses increased by 326 basis points to 39.6%.
Well, we took several actions to reduce costs in response to the cold with 19 pandemic. The majority of the savings will be reflected in the balance of the year.
Given our commitment to provide a high level of service for our customers. We did not deliver the amount of SGN a productivity that we have seen in prior quarters.
In addition, as Tom said earlier when the impact of the Krona virus became apparent we took measures to help protect our team members and customers.
Including increase cleaning and standardization of our stores and distribution centers.
Personal protective equipment for frontline team members and changes to our sick time policies.
These actions resulted in approximately $16 million in operational costs.
Adjusted operating income in Q1 was $104 million, which declined 57% compared to the prior year quarter.
Our adjusted Oi margin rate decreased 439 basis points, the 3.9% in the quarter.
Adjusted diluted EPS for Q1 was 91 cents a decrease of 63%.
Moving to free cash flow in the first quarter of this year. This was an outflow of $72 million as compared to the inflow of $143 million in the same quarter last year.
This was directly related to decrease sales and increased working capital.
In addition, higher capital expenses were incurred prior to the pandemic in Q ones.
As we began the year, we planned higher capital expenditures and we're executing on our projects as expected.
Therefore, our capex increased 35% in Q1 to $83 million.
We will continue to prioritize projects that we believe will offer the greatest return on investments.
In addition, we've taken several other actions to improve free cash flow.
Including converting a greater percentage of our suppliers on the supply chain financing.
Given the current economic situation and uncertainty around the full impact of Coca 19th.
We do not believe there would be prudent to provide financial guidance at this time.
That said, we remain committed to our long term financial priorities to invest in the business.
Maintaining investment grade rating in return excess cash back to shareholders.
As previously mentioned, we're continuing to invest in our business and intend to prioritize projects that yield the greatest return.
Additionally, as Tom mentioned, we took steps in the first quarter to safeguard our balance sheet.
This includes borrowing $500 million against the previously unused 1 billion dollar revolver and issuing a new 500 million dollar 10 year note at 3.9%.
This strategic offering provides us with additional liquidity at a lower rate than our two outstanding notes due in 2022 in 2023, respectively.
I'm extremely proud of the speed and agility our team demonstrated through this process to bolster our cash position and provides flexibility.
At the end of the quarter, we had approximately 1.3 billion in cash on hand, including the impact of our financing actions in the quarter.
In Q1, we repurchased approximately $29 million common stock.
As announced previously we suspended our share repurchase program given the current environment.
Finally, as Tom mentioned, given the focus we have placed on our financial priorities in the work we've done to strengthen our balance sheet in recent years.
We were able to significantly increase our dividend earlier this year.
As you saw in our earnings press release, our board has approved our Q2 dividends from 25 cents per share.
As we continue to manage the business through the Cobot 19 pandemic, we remain committed to improving total shareholder returns overtime through a balanced approach of investing in our business and returning cash to our shareholders, while continuing to strengthen our liquidity positions.
I want to reiterate what Tom said earlier. This is an unprecedented situations in the uncertainty will no doubt continue for some time.
The good news is that our team is really stepping up to the challenge.
Across the company our people are as committed as ever going above and beyond the respond to this crisis.
I truly believe we have the best people in the industry that we will come out of this stronger than before.
With that let's open up the call to address your questions operator.
Thank you as a reminder, you don't hear timely question, you will need to press star one on your telephone.
I would try your question please press the pound or hash key.
Hi, My first question. This morning comes from Simeon Gutman from Morgan Stanley. Please go ahead.
Thanks, Good morning, everyone and thanks for the color. My question is look the industry. It looks like miles driven down a 20 to 30 across the country.
Your comps are flat quarter to date and in some states haven't reopened yet.
How do you assess how do you look at the sustainability of demand I know, there's a lot of factors at play and you mentioned some of them, but how do you assess that in the current period. Thanks.
Yeah sure. Good morning, Simeon Good question I mean, we're.
Obviously experiencing a pretty unprecedented times. So I can tell you what we're seeing so far obviously, it's very difficult to predict what's going to happen in the future, but so far I think there's some industry related factors that are helping a DIY why as you know a b industry in terms of.
Yeah, why particularly has benefited in economic downturns.
Any kind of unemployment pressure means you know more people are going to be doing work on their own vehicles. So I think that helps.
The stay at home and social distancing mandates are a factor you know when we benchmark China, we talk about some of the trends that are going on in China. We do here about you know in aversion to a mass transportation people more likely to using their personal vehicle.
Until we got is gonna be a factor.
We've also seen because the social dispensing and shelter in place and an increase in demand for items would degrade when they're not views such as batteries. So.
A couple of important industry factors there people at home more time on their hands doing do it yourself projects. So those are some things for the industry at large.
In terms of advance you know, we did a tremendous amount of work to ensure that our stores were safe.
And and kept our team members and customers a healthy during this crisis, we've been on a multi year safety journey is you know and.
The enhanced practices, we put in place we think benefited us.
We had the highest NPS scores we've had in the while during the middle of the pandemic. So that obviously, we did a good job preparing our stores.
I think also the omni channel capabilities that we've been able to bring to life of help you know in terms of advance same day. The app that we spoke about and then finally, we just launched our marketing campaign, which early returns are good. So you know when you look forward are they going to continue the DIY trends I know, it's obviously dip.
Gulf to say, but no two things to consider for sure the miles driven as the big unknown right. I mean, you could make the case for reduced miles driven you can make the case for more miles driven.
We do know it's likely that the fleet is going to age because new vehicle sales are going to be down. This year I do think the mass Prince Rupert gas transportation point is going to continue.
And there's a whole question around vacations you know this weekend, we expect to see a record number of cars on the road people are not flying but they're going to be driving to where they're going.
So there are some very positive.
The things going on from an industry standpoint, a bit of a silver lining I suppose for the DIY business through all this unbelievably difficult time, and then we're I'm very optimistic about our marketing plans you get the full impact of our 2020 advertising you know we're watching die hard, but you know I've to temper that would be unknowns.
Got you reference, which as you know where they're going to be sure commuting miles driven is or additional cold it impact balance of year, you know the degree to which unemployment affects people. Those are all those are all on the on the call inside so.
That's that's kind of the led the way I'm from our standpoint.
That's helpful and my just one follow up there is a little bit technical can you share and supply chain cost within gross margin what percentage are they have cost of goods.
Yeah, we didn't breakout the the individual components of supply chain or you know gross margin in particular, but we tend to give you. Some color around just sort of the gross margin rate, which I think is probably the question you're driving at the you know specifically we had no cost increases.
Which he said previously we're going to continue to see the headwinds from the full impact of the tariffs.
Let's go to subside in the back half.
2020, but Q1 and likely into Q2 will continue to see that.
Our cold weather related categories were down significantly year over year and that impacted our product mix.
And then you know supply team did de leverage shield and that directly associated with the $250 million revenue declined.
On a dollar basis, the supply chain cost were actually improved on a year over year bases as we continue to take out costs.
Okay. Thanks, Jim Thanks, Tom picture.
Thank you.
Our next question comes from Michael Lasser from <unk>. Please go ahead.
Good morning, Thanks for taking my in my question.
Do you think within your markets that that you've been able to maintain your share the DIFM business, particularly as you consolidated some of your your stewards enclosures stores in how is your your time to feel threeds trended over the last eight weeks during the core of the crisis.
Well good morning, my thoughts, obviously difficult to sell those measure the share inside of professional as you know we don't get anything on that I do we do get DIY share, which we actually feel really good about but on the pro side I I do know, though we had a record a membership increases on techniques.
In the quarter, Bob has stayed extremely close to the largest customers on the professional side either by you know I've I've been calling you know the Ceos of key large customers and trying to stay connected in this difficult time and what we're launching now with this err on the pro side, which is.
Really a fully integrated solutions package for our customers more the logic one of the visuals to see T.I. platform.
We actually feel very good about it I mean, it's gonna be an interesting couple of months to your point on the professional side.
You know obviously the large strategic accounts the big TACNAV shops for US you know, we think are going to do well.
You know, it's gonna be probably a little more challenging for some of the smaller players. So in terms of share it's difficult to say you know I do know that geography by geography, you know we're measuring the sales per account in the number of accounts and all of those things you'd expect that pro businesses, improving every week in them.
Last week was the best we've seen so you know one shelter in place comes off you know I think we will see a recovery on the professional side of the business to the degree.
Of which is still still unknown, but you know we do expect it to improve from here.
[laughter] Intel My follow up is do you think it's really stick for auto aftermarket to plan for positive group.
Second half of the year.
Yeah again, it's the is similar to two Simeons question is it's tough to say I mean, there's a there's a lot of things that are I play probably more than ever as as I kind of rattled through the factors that we've looked at Michael I think you know on that on the DIY side, obviously, we're probably more often.
Mystic, Yes, just based on the way. That's you know the pandemic has played out in the consumer behavior changes that are out there I mean I figure you're seeing.
Customers are really up for grabs you know across broader retail and whether its lucky or timely I mean, our advertising hit it right at the right time for US I think we've got a lot of good initiatives on the DIY side I think the industry should perform well there I think on on pro it really becomes a function of.
Miles driven and you know what happens from here with.
Shelter in place orders and some of these key geographies.
[laughter], it's more next.
Our next question comes from Matt Mcclintock from Raymond James. Please go ahead.
Yes, good morning, everyone I hope you all well.
Families Tia Maria.
[noise]. So so Tom I guess two questions. The first one is just you know when do you think about the longer term transformation that was underway acquired two covance on immediate just be helpful. If you could kind of give us an idea of what initiatives you've actually accelerated during this timeframe what initiatives have actually been pushed off.
Due to uncertainty or just.
Prioritization needs. Thanks, Yeah sure I mean, it's been an interesting a case study I think for every company, Matt could be borne I mean, when this thing had you know we immediately you know all hot huddled in a in a virtual room and went through our list of priorities and obviously.
We we establish the three things that we talked about on the note, which was to certainly prioritize the health and safety of our people and our customers number one number two.
Preserve cash and protect the PML during the crisis and then we wanted to have a few people that were thinking about okay, what's going to happen post the crisis and how do we come out of this stronger than ever once the crisis is over so those were the platforms that we established and then we took every big initiative that we had we put it through the <unk>.
Wins, and we determined whether we were going to accelerate it.
Continue at the forever and or stop it altogether.
And you know everything that we had was put through that lens and you know we put a decision around it. So the examples of the accelerates clearly the advanced same day was and accelerate you know we.
We saw that the consumer was going to need parts urgently, we were not going to have necessarily people get leaving their home. There was shelter in place orders happening. So we stood up advance same day, which had been in test in in a market in the fourth quarter and what was a you know protracted timeline to roll it out.
Became a you know me a week about or weeks and you know now we're pretty much you know where I think we're up to about 70% of national with that capability. So that's an example of them accelerate.
Differ a would be something like the warehouse management system implementation on supply chain and this is a great project for US We love the project. Unfortunately to stand up with a distribution center in velocity all of that the tech platforms in that distribution center and get it get get the.
The building operational Unita a team of experts that has to go into that building and help them organize things and set the building up and set up the new warehouse management system. So we had to defer that no rubin and his team or our thinking through how do we do that in a virtual environment because we're definitely.
I'm not going to stop doing that we're going to do that.
But it's it's delayed by a couple of months. So that's that's really the process that we went through and you know the narrowing of the priorities. The simplification of what we're trying to accomplish enable us to move very quickly on things like advanced same day or supply chain financing or the bond offering, which which obviously helps us get secure.
And on our balance sheet liquidity those are the things that we accelerated and then the things that get deferred we're evaluating you know startup timing from here.
Thanks, That's that's hugely helpful. And then a quick one just you kind of implied this but I wanted to make it more explicit on consumer behavior changes regarding E. Commerce. Historically this is maybe but want to be lesser penetrated resell sub industries from from E Commerce from ecommerce perspective.
Is that now changed completely is on the back into this are we likely going to see much more accelerated accepted by the broader consumer other channels. Thank you.
Sure Yeah, I mean, I think we've been we've been studying this said lengths are not just inside of auto parts, but but more broadly across all of retail I made a lot of experts out there would say that we just we just kind of moved three years at once a in terms of omni channel.
You know the people, who perhaps have never order online groceries in their lives has to have now done so and become comfortable with it so.
You know yeah again somewhat fortuitous, we launched our app right in the middle of that we we've been working very hard at our functionality on our mobile site.
Inside of our desktop site.
Obviously, the fulfillment options that we had ready to go helped us. So yes, I think that you know consumers are going to be more predisposed to.
To order online and the investments that we've been making over the last several years candidly in our technology platform in our catalog functionality in our online experience I think are gonna help US you know going forward. So I do think that it's a kind of a an acceleration of a trend that we saw coming.
You know we had a a pace of change that was outlined in our five year plan and I think those that I've just got accelerated.
[noise] hugely helpful. Thanks, a lot a bus book.
Thank you.
Our next question comes from can't Mccain from Goldman Sachs. Please go ahead.
Hi, This is John mainland China on behalf of Kate Mcshane. Thank you for teaching.
A question I guess, what they wanted to understand Lynch internships, you know when you talk about chassis can take can't especially in more recently Symcom incidents you know improved significantly well not be fine you talked about that means what downstairs incidents you know being no catch some Tim.
You know thesis basket standpoint.
Yeah, I think we are in the first quarter as we highlighted our ticket was tickets were down significantly dollar per ticket was up you know I think as we've moved through the pandemic and start to see the changes in consumer behavior. You you are seeing some of those.
Failure related categories, you know come to light because people's cars are sitting in their garage and they're not being used and suddenly they go out and they try to started and they find they need a new battery. So for sure. We're seeing that I I think down the road you can see other break fix categories.
We will come to light you know as people start to drive them.
You know to some degree we've seen some increase in project related work, whether that's something as simple as washing your car I mean your people whoever wants their car in 30 years that have decided to go go out and wash their vehicle with their son and teach them how to watch a car those are things that I think you RC.
Being a little bit more broadly across the consumer landscape, where you've got people sitting in their homes and you can only watch so much Netflix and you decide what to do and you go outside maybe you fix something in your yard or maybe work on your car. So those are some in the things were seeing.
Okay. That's helpful. Thank you and if you could teach us in light on you know how tough independence.
What are you seeing Dan income since you know you got 1500 independent businesses [noise].
What do you see unbalanced lines. Thank you so much.
Sure you know, we feel great about our independent.
Program, we've made tremendous enhancements in our technology platforms in our availability.
We've really worked hard on our catalog to improve it for our independents are so important for us.
The merchant team under Mike broader its leadership has really helped the inventory situation for our independence and Ah Theres a robust marketing plan. This year for for them that we haven't had in the past you know so honestly I think the interest in our Carquest Independent program is at an all time high.
And the person leading it is a great executive junior worries got tremendous experience inside the company.
I think we've provided an extraordinary level of support and we've helped them with with safety a during this crisis, which has helped us. So we feel very good about it you know they are these are these are generational businesses people, who know the auto parts, just ER business cold and we value them greatly.
Keith Thank you so much.
Our next question comes from Bret Jordan from Jefferies. Please go ahead.
Hi, good morning, guys.
Myrna bright.
You mentioned in the prepared remarks that you continue to evaluate footprint could you talk about sort of how you see that evolving.
Store closures and is there anything in particular I guess are the stores, you're closing ex carquest stores that might be physically smaller any any regional markets, you're sort of neighboring versus others.
Yeah, I mean, we're definitely you know going to put this through the cold with lens to your point Brad.
We had a plan as you know a certain number of closures.
If we close 20 odd stores in the first quarter that as we've said previously you've got that that was sort of winding down.
As we go forward, we're definitely looking at opportunities for just to refresh our fleet and strengthen the you know the brand itself and the appearance of our stores and the customer experience inside of the store and once again, we you know given the changes with coal bed and whats.
Happening and it has significant implications for real estate prices and construction costs and all of those things down the road.
You know, we've got to put that through that lens because the world has changed a little bit in that regard so more to come on that we're not in any position to comment on that yet, but theres a lot of new information I suppose that's come to light in the last two months that how is different than you know our original thoughts going into it.
Okay, and then I guess follow up when you think about recent trends and whether it was stimulus check driven or whether that the unemployment bonus checks are helping do you see anything that would say that through improvement demand is sort of a sugar high on when government subsidies or is this real demand that you see continuing into the summer months.
Yeah again did difficult to say, obviously the stimulus helped all of retail, but you know we can see proportionately auto parts versus more broad retail.
At least yeah why that is right.
So I I think some of the factors I mentioned earlier, whether it's you know aversion to mass transportation or you know higher unemployment rates, causing people to need to work on their own car do some leased from the projects on their own car.
You know until this thing is resolved with a with a vaccine you know I think that theres, probably some temporary benefits for the industry.
Great. Thank you.
Okay.
Our next question comes from Liz Suzuki from Bank of America.
Please go ahead.
Great. Thank you.
Second any noticeable acceleration in the percentage of their sales that are taking place on line item buy online pick up in store or ship to home. Since Kobe. Then you know any numbers you can put around that if that's been okay.
Yeah, we've definitely seen an acceleration in DIY broadly Liz.
You know I think that he has proportionately.
More in ecommerce, but much of the ecommerce in fact has been buy online pick up in store, which is the majority of our sales and I.
I think you know, we're very pleased with the improvement that we've seen there.
So it's definitely not just a complete ship to ship to home, which which you know might surprise you, but we we have seen a significant uptick I think the fact that we have the parking lot services and will install a battery for free and it will install a wiper blade for free helps us in that regard and and when we.
Started our advertising the week of April the Twentyth, we wanted to make it very clear to customers that that was a service that we had and I think if you watch the advertising you'll you'll see that.
We may get very clear the we have that free parking lot services, which I did I think helps us with buy online pickup in store given the speed convenience with which a customer can get their problems solved and obviously that the advice they get from our employees.
Great. Thank you I know, it's any update on that partnership with that with Walmart that you can share.
I would continue to work with them on a on the things that we've spoken about in the past you know they are great partner you you saw their performance this morning integrate organization.
The word continued to add parts to their website, we said before that we're only going to do that when the experience is is really really strong and differentiated versus other.
Alternatives people have online, but nothing particularly new to report there, but we're continuing to work very closely with them and you know grow. This business. This is a long term partnerships that we believe overtime can really you know give customers a differentiated experience versus you know the alternatives that some.
Many have.
Great. Thank you.
Thank you.
Our next question comes from Scot Ciccarelli from RBC capital markets. Please go ahead.
Hi, Good morning, guys hope everyone's well there given your comments previously regarding this significant sequential improvement every week in the quarter. So far and now that comps were about flat I guess, we can't assume that comps had turned positive probably in the last week or two so I. Just a question is can you help us better understand the slope of the curves in other words, where you.
You down 2% to 3% now you're up to the three or was it a.
A much greater magnitude than that.
Yeah, well good morning, So I hope you're safe and healthy also I think that you. We did report weakening March 28 weakening here before the enterprise, which of course includes you know all of our business professionals the ally Canada everything.
Was down 28% for those two weeks in a row and not proved to be the absolute peak impact. If you will have the pandemic. It was a of the low point for us in terms of you know decline and then from there and improved each week literally sequentially, including last week.
So you know I think yeah to the earlier question I think Brett maybe that you know we did see a an increase on the week of the stimulus, but the week. After the seamless was better than you know the we have the stimulus and then two weeks after it was better than the one week. After so we are seeing that sequential improvement and I think it's more to do with big.
Gradual relaxing of shelter in place orders I mean, obviously.
You know I have gone to stores I mean at least here in Raleigh, and you know I see more cars on the road down here I know it she is a very different across the country I'm happy to talk about that geographically, but.
Generally speaking as more people start to get back on the road and get their life back to you know some semblance are normal see I think you aren't you are seeing us they benefit from that.
I appreciate that Tony I guess the that the question. It's like you know you would going from down 20% and then you commented that you've had that sequential improvements. So far this quarter. It's comes overall flat that means to last quarter or to just had to be positive and I guess I'm just trying to figure out how positive that might be.
The last couple of yes. The last couple of weeks had a mathematically have to be positive you're right.
Okay. That's all right. Thanks, guys.
Our next question comes from Seth Sigman from Credit Suisse. Please go ahead.
Hi, guys doesn't care in the ground for SAP as two questions from us so firstly as lot of initiatives ongoing.
Given your diehard launch and loyalty program down Assortments and obviously the wall my passion as well I'm curious to claim lines. These have changed versus your initial plan on what is your ability to keep them on track and it's all these moving piece of this thing.
Well I mean as to the earlier question you know we did put every single initiatives through the the Kobin lands and we made a determination you know accelerates keep differ a stop you know kind of categorizing them, so as to to some of that.
Things that you raise diehard you know we're moving rapidly okay. Our team members cannot stop talking about diehard there so fired up about this iconic brand.
That we're going to launch here, we believe it will drive people everything that we see says it will drive people to advance auto parts. So you know we there was no slowing down whatsoever with die hard and we do plan to watch that brand.
With that with a fully integrated marketing plan. This summer you know the equity that it has a is reliable as powerful as high quality. It does a lot a really good things for advance.
So you know the majority of the bigger value driving initiatives. We have were either you know accelerated four or were in line with the timeline the things that we deferred.
Our more longer term things you know we spoke about.
You know the warehouse management system implementation, which which we know it's going to take time now that said.
We talked about in the prepared remarks, the cross banner replenishment initiative, which is simply taking stem miles out of our supply chain in rerouting stores are pointing stores out of distribution center. That's closer you know that slowed a little bit, but we still feel we're on track to deliver that by the middle of 2021.
So it doesn't vary by project area, but we we put a through this prioritization process to determine what got accelerated what got deferred and what was continue.
Thank you and then second days spud more tactical.
On the expense side. So you discussed is more opportunity to reduce cost in Q2, especially on that is docking <unk> loans during the quarter. How should we think about these cost reductions going into two age and then on the $60 million P.P. any cost again I assume that doesn't go into Q2.
How should we think about these costs going into the back half. Thank you.
Yeah sure call you know as we think both the Q2 margins or even the balance of the year. It you know obviously too early provided any guidance I'm just given the amount of the uncertainty we have in the current environment.
But I can give you some color on we see no quarter to date.
You know based on the sales trends that we've talked about in our prepared remarks in Tom's commented on earlier questions and we've seen the sequential improvement every week.
And the overall top sales were in line with the first four weeks of our last year's quarter.
So we do expect that the actions that we took in the first quarter to provide cost benefits through the balance to the year.
In the second quarter in particular, who's gonna be some offsetting headwind or at least cost savings.
In two to the actions that we had in Q1 that are going to give us the savings in Q2, we're going to continue to prioritize the health and safety or team members and customers. You know so we do anticipate those Toby costs to continue you know this includes cleaning or stores, our distribution centers, providing you know the personal protective equipment.
Frontline team members.
And you know as I said, we expect that to too.
Continue throughout the year. The question to becomes a force you know how much will that be a lot of it it will vary state by state in terms of what the restrictions are will continue to be or sort of what does the new normal retails is sort of way to think about it.
And then in addition, we deferred conserving marketing expenses in the first quarter.
And we expect to invest in our advertising campaign as well as diehard in Q2.
We expect the marketing diehards, if they're going to drive topline benefits in the back half 20, pointing beyond but these factors will offset some of those benefits in the second quarter.
Okay. Thank you very much.
Our next question comes from Michael Montani from Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking the question I just wanted to ask a two things first was just on the topline front I'm just curious to know at this stage.
So how many of your stores or maybe what percentage of your markets are still operating with kind of shelter in place restrictions.
And then secondly related to that was on.
DIFM side, you mentioned that overall comps it turned positive does that mean that the commercial side is now positive as well.
Sure Michael first of all on shelter in place as you know it's it does vary by state in the phases are varied and then different companies have different policies surrounding you know whether you can return to work. So I think you know we can safely say that you know the is.
Leased the professional or you know.
Lack of a better term the white color workforce across the country.
It's still largely you know are working remotely there are some geographies that are much more impacted by cobot, though as we called out in our prepared remarks.
The northeast and mid Atlantic the Great Lakes, where it's so much more real Oh for those who you're up there our hearts go out to you because it just you know you can just feel it when you're speaking to people that are up there. They know people that have been infected or they may have been no someone who is passed away to just very very different there than it is in.
Mississippi and Alabama in other parts of country that are less impacted so you know from from our standpoint.
Those are big geography for us. So we're looking forward to a relaxing of those measures. Obviously, you saw even governor Cuomo and on the CNN on the weekend talk about it and what's happening in New York. So when those things come back you know, we're really excited that our teams up there, we'll we'll start to see some of the banner.
That's we're seeing and other parts of the country.
So that's the that's kind of where it is on on shelter in place what was your second question again.
Second part was just to see if the commercial side had turned positive as well thinking why might be up double digits, but didn't know if commercial was up.
Yeah, a d., we're still down on on pro.
Okay.
And then the last thing I had was on the expense side, you know as Sinead dollars have been down for three quarters in a row. It sounds like even though covert expense it was going to persist that the second quarter S. Gen $8 could be down more than the first quarter year over year <unk>.
I guess is that kind of a fair way to think about it and from a gross margin front.
You know can those start to actually stabilize and turned positive in to Q or is it really more of a back half you know just given the tariffs.
Yeah sure. So yeah on the F. G and eight you know we do think we can continue to.
Take costs out as I said, there are gonna be some investments.
In particular, the he'll marketing and die hard and then to your point the cold that related expenses will continue to be a headwind.
Throughout the year.
Obviously, the question becomes how much that one's a little bit more.
Challenging to predict but again you know we took significant accidents very late in the first quarter. Unfortunately, we didnt feel lot of benefit who we absolutely expect to get that a you know in in the back half of the year specific the G M rate or.
Improvement there you know like we said we in dollars, we improved year over year and our supply chain, we had less dollars.
He was just the $250 million revenue decline.
Yeah, we were de leveraging and then some of it isn't mix.
As we set the cold cold weather related categories were down in the quarter, which had a pretty significant impact on product mix.
We start to see those friends changing.
We could get some leveraging gross margin as well.
And then we will then ill add we will add we will lap the tariff increases in the back half.
Okay.
Thank you.
<unk>.
Our next question comes from gave it down just from Wolfe Research. Please go ahead.
Hey, good morning, Thanks for taking my questions and hope everyone staying safe.
Given that the volatility volatility a sales trends and maybe some disruptions throughout the supply chain had there been any difficulties around parts availability and how you're managing delivery frequency is now have you been able to flex that quickly given the changes in demand.
Yeah, I'd been amazed at how well our team has collaborated together David.
During this pandemic the supply chain team the inventory team and the field. They reacted just so quickly.
You know, it's really galvanized that group and in many ways and as you know we've we had a lot of new people come into a dance over the last couple of years in some ways. This is this is you know really.
And brought them together as a team so [noise].
Pardon me [laughter] the the overall in stocks and on our primary skews have been terrific and to your point as as we flex hours of operation down and adjusted replenishment frequency down you know, we moved quickly to do that and as its gone back.
Back up we obviously use.
You know the data to make decisions on how to change that going back the other way and an extended hours of operation and then you know increased replenishment frequency or are in market deliveries continue to help us the availability of parts that we have across you know all of our banners including world.
Pack Autopart International Carquest advance you know, we're leveraging better than ever. So I think we'd look closely I just met with the team yesterday in our assortment work and how we're doing on stock rates and those things given dynamic assortment and we feel pretty good so I think.
Again speed and agility is kind of important right now to react to these ever changing circumstances and I I think overall, we've managed it well.
Yeah. That's that's very helpful and maybe just following up on some earlier question can you elaborate on the trends you're seeing any online channel anything surprising makeup of sales that had shifted online and could you talk about how big you know maybe as a percentage of sales digital business has become in recent weeks.
Yeah, Yeah, we were not going to break that out David but I think you know from a trend standpoint.
You know, we definitely have seen a we mentioned batteries surging.
You know, we're we're seeing that inside of online I think to some extent.
You know given to be prioritization that sure online read it retailers have to put on.
The food and beverages, and staples and things like that if you go order something that's it let's let's call. It part of the proverbial long tail you know those timelines for fulfillment are pushed out which I think helps US you know as a pure play autoparts retail are very focused.
With our expertise and what were lifting up so you know so it's been pretty much across the board, but you know that I think the general trends that we mentioned earlier be that you know batteries or you know washing whack. Some of those things that are project related where we're seeing the similar less but I don't think I've seen.
Anything disproportionate to online, which I think is your question I need to you know all boats have risen here and we're seeing it in our retail operations. We're seeing on in our same day pickup in store same day curbside same day delivery.
Got it thank you very much.
Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.
Hi, Good morning, Thank you for taking my question.
So the first question I want to ask is she was that we look at the recent sales trajectory, particularly the.
Pickup we pick up in sales late lately in the DIY side given the data. Your loyalty program are you seeing indications of any benefits for channel shift.
Looking out there as you know clearly advance in your your specific category has been a designated as essential but has there been other where the other gan use that maybe have not been and then those customers are transcripts your tranche they got pushed into your stores.
Yeah. That's a great question, Brian It is obviously difficult to say, but I do think.
Bed retailers, who have prioritized safety broadly.
And again, we've been on a multi year safety journey, we've got a world class expert that we hired two years ago to help us with health and safety across the enterprise and when this happened he stood up a pandemic team across the enterprise that is on a call daily with our entire field organization seven.
Days, a week managing all of the things that are going on making sure. The plexiglas fields are going up making sure. The masks are getting to our people, making sure. The independents have soap in hand to hand, Sanitizers and all of those things that are necessary in this in this world and I think that Oh, you know we communicated that Bob.
Widely across our website you know weekly with with you know written communication in some cases video communication. So I I think anybody that's doing that is going to benefit from it in the short term I think separately to that maybe underneath your question. The fact that we have a 7000 square foot format with two to three expert.
It's working in the store might be more appealing then you know another box at this stage of the game for auto parts, but that's purely speculation we've done some analysis on that I can't tell you I've seen anything that says that's actually true, but that's somewhat speculative, but I think that's kind of where are you.
We're headed.
No. It's very helpful. So the follow up question I have.
I mean, clearly as we should we think about Peter Q2 words. The backup. She goes 20, there's a lot of moving pieces here given.
The the Cobrand energy crisis, but.
You'd mentioned in your prepared comments, we discussed before the impact of.
Proved to be a decidedly warm winter on sales switch, but as you look through the balance of the year do you expect that we will continue to see.
The impacts of the warmer winter was that really isolated to give it backs isolate the beginning the year.
Well for sure it impacts you Didnt heavy heavy impact in January February I mean, cold weather categories are much obviously more relevance in in those months that will that is winter itself.
You know there are some residual thing with you know if there's not a lot of snow, we don't get plows on the road. They don't care the rose up there's no not as many potholes.
And then that that affects undercar in some of those categories.
At the moment, a you know we do see some softness in some of those categories, but that's not a long term thing I mean, we would have experienced the most of that by now and as you get into June and July that'll that'll subside and you know next year, we'll see what happens.
So much appreciate it thank you.
Thank you.
This concludes securing a portion of our call on I'd like to trying to back to Tom Greco for closing remarks.
Well, thanks to everyone to join us today, and as you've heard Weve tackled the challenges the quarter had on you know we believe we're in a very good physician to move to the next phase of this pandemic and eventual recovery no matter how challenging the last few months have been worst steadfast in our vision of advancing over.
World in motion and our vision is highlighted in our second annual corporate sustainability and social report that we published this morning, we're very proud of it it's all about driving financial performance as we develop our people reduce our environmental impact and get back to our communities and then finally as we head into Memorial day weekend I want to pick up.
Turning to recognize an express ours, our sincere gratitude for all our nation's heroes, especially those who pay the ultimate sacrifice defending our country. We're proud to be an employer of choice for so many military veterans and we look forward to increasing representation of veterans for years to come. We're also committed to our long standing.
Relationship with building homes for heroes in 2020 were celebrating 10 years of support to this where are the organization, whose mission is to gift mortgage free homes to veterans injured, while serving our country. We look forward to sharing more with you on a recovery efforts and the status of our business in August. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].