Q2 2020 O'Reilly Automotive Inc Earnings Call
20, <unk> earnings conference call.
My name is Bridger I'll be your operator for today's call.
At this time, all participants are in listen only mode.
Leader, we will conduct a 30 minute question answer session.
During the question answer session. If you have a question. Please press Star then one of your touched on telecom.
Well now turn the call over to Tom Mcfall.
Mcfall you may begin.
[music].
Good morning, everyone and thank you for joining us.
Today's conference call will discuss our second quarter 2020 or so.
After our prepared comments what was the question and answer period.
Before we begin this morning, I'd like to remind everyone that our comments today contain forward looking statement and we tend to be covered by any claim the protection under the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act is 1995.
You can identify these statements by board looking words, such as estimate they could will believe expect wouldn't consider should anticipate project plan intend or similar words.
The companys actual results could differ materially from any forward looking statement due to several important factors described and companies like US and report on form 10-K for the year ended December 31st.
20, Nike and other recent.
The company assumes no obligation to update any forward looking statements made during this call.
At this time I'd like to introduce great John.
Thanks, Tom.
Good morning, everyone and welcome to the earlier reports second quarter Conference call.
Participating on the call with me this morning for Jeff Show, our Chief operating Officer think co president.
Tom Mcfall, our Chief Financial Officer.
Thank you know Riley, our executive Chairman and Greg Henslee, Our executive Vice Chairman for also present on the call.
The vital goods on the conference call today have a combined over 170 years experience in the automotive aftermarket.
We have collectively experienced many many ups and downs in our industry.
63 year history of our company I can safely say, we've never seen a quarter like this year second quarter.
As we begin our prepared comments today I'd like to start with the most important comment first which is to think team O'reilly for your amazing dedication and performance during one of them most difficult challenging periods in our company's history.
The communities, we serve continue to face significant ongoing challenges from a koby my team and then.
Our team has remained steadfast in executing our protocols to protect the health and safety of our team and our customers, while providing outstanding customer service.
It has never been more evident just how central our role isn't providing our customers the critical parts they need and the service things, but keep it really comes in.
This quarter, we experienced the most dramatic swing in demand.
Business, we've ever seen.
And we're extremely proud of how our team stepped up to the challenge and delivered record a record breaking quarter highlighted by a comparable store sales increase of 16.2%.
57% increase in earnings per share.
Buying with a year to date increase in operating cash flows of over $700 million.
The numbers are a reflection of the tireless dedication and hard work of our team and older congratulate all team O'reilly on your incredible performance in the second quarter.
Before we dig further into the results for the quarter I would like to provide a brief update on how our teams are responding to cope with 19 to ensure their continued health and safety of our team members at our customers.
As we discussed on last quarter's call what the onset to cope with my team, we very quickly implemented numerous safety protocols across our company based on recommendations by the CDC W.H. show and state and local governmental agencies.
These measurements. These measures include significantly increasing cleaning and sanitation that hurt the implementation of social dispensing practices and the utilization of appropriate personal protective equipment.
Our teams did a great job working through the initial period of rapidly evolving recommendations.
And it remain diligent on their execution as the pace of change in requirements and slowed and breast best practices have numbers.
We remain committed to constantly evaluating and revising our safety protocols and currently all team members companywide are worrying face covers.
Throughout the course of the crisis, our dedicated team members and stored at our shores distribution centers like corporate offices have demonstrated extraordinary flexibility and resilience in the face of extremely difficult circumstances.
I don't like to provide some details on our robust performance in the second quarter.
We're extremely pleased with our top was filled himself in the quarter and even more pleased with incredible execution of T. Murali delivered these results.
We announced our first quarter press release, the beginning of our second quarter was marked by significant Cobiz 19 headwinds.
Which was a continuation of the pressure we saw in our business starting in the middle of March.
Coinciding with the implementation of stay at home recommendations and orders.
As we discussed on last quarters conference call. This trend continues through the middle of April sales in the third week of April improved as our customers begin to receive economic impact payments under the Cures Act.
At that time, we had no way of forecasting the magnitude in the duration of the benefits from these stimulus payments nor could we anticipate what other factors would impact our customers and our business moving forward.
As a result, we look we took a cautious stance on how we plan for our business and maintain ample flexibility to respond to further headwinds.
Simply put ourselves performance from the third week in April through the remainder of the quarter exceeded all expectations.
During this timeframe are yeah, why business was much stronger contributor coming up quickly in the middle April improving in May and staying very strong in June.
We're also very pleased with the performance of our professional business.
Okay. That's all the business also began to see improvements in the middle April but at a more gradual pace than the immediate turned around and be a wide.
However, as we progressed through the quarter professional sales continue to strengthen.
Generating robust comps above our expectations and lay in June and stay home orders began lifting and the broader economy began reopening.
As a result of the cadence on both sides of our business total comparable store sales were somewhere for May and June and it remains strong thus far in July.
Next I would like to provide a little color on the drivers over a record setting cells result.
For us to be able to produce a 16.2% comp increase in the second quarter. We obviously have a brief favorable industry environment.
However, just as it would've been tough to predict the cells results, where you're saying, it's also very difficult to quantify the magnitude of each of the positive macro macro factors.
I will discuss in general terms, what we've seen as the positive supporting demand what end markets.
So again, it's evident from a sharp turn that yeah, why business that the receipt of governmental stimulus payments under the carriers like X was the first catalyst supporting our so growth in the quarter.
However, given the degree of which robust sales trends have persisted.
Clear to us that enhance unemployment benefits have also been a tailwind in the business and we're likely more prominent and driving demand as we moved to the quarter.
We also believe that reopening of the economy and the partial recovery of miles driven with a positive factor, especially in our professional business as our customer service demographic that is more likely to work from home during March and April.
Although the impact of weather gets a little lost in the world a double digit comps.
And any other here, we'd be talking about the hot weather, we've had and its likely has been another positive for our industry.
[noise] there are other beneficial industry dynamics, we believe that contributed to the strong demand in the quarter.
But are also difficult to measure of were short period of time.
We have long held the times of economic uncertainty motivate consumers to make more cautious financial have more cautious financial outlook, often leading them to postpone the purchase of a new vehicle and invest in maintaining their existing vehicle.
Consumers with safety concerns about other modes of transportation either for a daily commute or vacation travel could also be focusing more on maintaining and repairing and existing vehicle.
It's difficult to have a clear picture.
Yeah, the magnitude of benefit we could be seen from an increased vehicle age or catch up of underperforming maintenance, but we're seeing some benefit.
Finally, we could be things shifts in customer demand benefiting our business.
Neither in share gains from smaller competitors, a big box stores.
And for general shift in demand dollars into the automotive aftermarket and away from discretionary expenditures for activity is not possible at togut environment.
From a ticket perspective, we saw robust ticket count increases during the second quarter.
But average ticket size also increased significantly.
With average ticket thanks screen inflation was inline with our expectations. So the increase in ticket size is being driven primarily by larger jobs or more items on the ticket.
On a category performance basis, we saw strong performance throughout our product offerings, including especially good results in a parents accessory categories.
These ticket and category dynamics suggest some of the strong demand we realized in the second quarter as a result of our customers, having the ability and desire to work a lot larger projects as they have more time to spend repairing and maintaining their vehicles.
As you look forward to the balance of the year, we remain very cautious and ourselves outlook and recognize the significant uncertainty they still exists concerning the duration of the current positive market backdrop.
In particular, we can't predict it we can't project the potential impact and exploration of the enhancement and point of benefits would have you can't speculate as to whether there'll be additional government stimulus or the degree to which argument would benefit.
We also remain concerned.
Continued pressure to miles driven from a difficult economic conditions and increased work from home arrangements. Good could be a headwind if other positive catalyst proved to be temporary.
Ultimately, we expect to see a moderation of a record setting self pay at some point in the back half 2020, but feel very confident our company continued to grow delivers solid sales growth.
Even if the broader economic conditions deteriorate.
As important as general market factors, where the catalyst for growth in second quarter, we could not have delivered such outstanding topline results without the incredible incredible execution by our team.
It's one thing to have strong demand, it's another to live up to the challenge of having the right part at the right kind of to take care of customers. While the business is on fire and we're allocating additional time to safety precautions.
It takes a tremendous amount of hard work to handle the extra volume we saw this quarter and the outstanding contributions of our team was reflected in the strongest talk strong profit margins in the history of our company.
For the quarter, our gross margin 53%.
Well basis point improvement over the second quarter 2019 margin.
And above our expectations.
Our gross margin benefited from the heavier de iwai mix in our business, which carries a higher gross margin that our professional business as well as strong leverage on DC expenses on the robot sales volumes and incremental cost improvements.
Partially offsetting these positive gross margin factors was a small LIFO headwind driven by acquisition cost decreases during the quarter, which Tom will discuss in more detail in his prepared comments.
For the second quarter, our team generated an operating profit margin of 23.8%, which exceeds our previous best single quarter performance by well over 300 basis points.
As we reported in our press release yesterday, we don't view these levels of SGN, they leverage to be sustainable over the long term, Jeff will more fully covered these dynamics, where I'll turn the call over to him in a moment.
Before I do that however, I just want to congratulate team O'reilly only just great results and your ability to provide excellent customer service, even while tightly controlling expenses.
Your extraordinary contributions to our company success have never been warfare.
I feel comfortable speaking for all of our shareholders in saying that you.
And saying thank you for an incredible performance in the second quarter and your unwavering commitment to serve our customers.
I'll now turn the call over who just show Jeff.
Thanks, Greg Good morning, everyone I'd like to begin my comments inside joining Greg expressing my extreme gratitude to team O'reilly, where there are amazing performance in the second quarter.
The results you were able to generate validate both the strength of our model and the deep quality of more team in culture.
Your ability to capitalize on the positive market why catalyst and generate comparable store sales growth of 16.2% and operating profit dollar growth of 48% is truly incredible.
And I continue to be extremely proud at what our team working together can accomplish.
Now I'd like to provide some color on retsina expenses for the quarter and further described the remarkable performance of arty.
As we discussed that late first quarter conference call. We undertook several steps in March and April in response to the impact Cobot die team was having our business.
Throughout our company's history, we've been active and detailed managers of the variable expenses of our business with our store payroll span representing the largest driver.
As we analyzed the trends we were seen in our business beginning in the middle of March we make adjustments, we felt where appropriate to rightsize our model for the existing had expected environment caused by the pandemic.
As we progressed through the month of April and began to see the stark sales improvement Greg discussed in his prepared comments, we remain very cautious in our forward looking sales outlook.
At the time, we Didnt know how long the positive sales trends would persist, especially since the initial sales tailwinds or so closely aligned with the initial wave of the $1200 stimulus payments under the carriers that.
We've had a lot of experience with similar spikes in demand jury tax refunds season, and since we know the searches tend to be short term and nature. We were prepared for the positive trends to revert to the pressured sales environment, we encountered from mid March to mid April.
The positive trends didnt reverse, but instead strength in May and June and we began to slowly increase our as she and I stand as we progress during the quarter to more closely match our service levels to the demand that we were seeing.
As a result, we exited June at a higher rate that's G and H band that we saw in April and May.
The net result of this cadence and that she and I spend during the quarter resulted in a decrease in average SGN a per store of approximately 1% compared to the second quarter of 2019.
This exceptional expense control discipline combined with the immediate drastic sales rebound drove that truly remarkable profitability in the second quarter highlighted by reduction in F. G and H expense as a percentage of sales of 447 basis points.
While our team deserves all the credit for the great performance in the second quarter. We also recognize that the impressive numbers will driven in part by the timing and unique circumstances of how're quarter played out.
As Greg previously mentioned, we know to provide the consistent level of customer service required to build our business over the long term this level of SGN a productivity is not sustainable.
Oh, probably for the past pretty much has been to do everything in our power just to take care of the next customer, but we have enough experienced throughout all levels of our company to understand that we can't the glass the other fundamentals of our business.
As we move through the back half of the year, we will refocus on the important details of our business that get deferred when we're running double digit comps such as the image appeared superstores and store team member training and development.
However, we will leverage the lessons learned through this process.
Well, we expect to Crs DNA dollar spend and navigate back towards historical levels, we will be diligently focused on driving strong leverage and robust topline growth.
Next I'd like to touch briefly on our capital expenditure and expansion plans.
Through the first six months a 2020, we opened 123 net new stores in line with our original plan to open a 180 stores in 2020 in we successfully opened our newest distribution facility in Lebanon, Tennessee.
These new properties, we're well underway prior to the onset of Coca died team and the disruption from the state holders. So we were able to complete development pretty much on schedule.
However, we've seen delays in the development schedules for planned new store openings in the back half a year, especially as the required approvals for design and permitting have slowed as local city implemented health and safety measures.
At the same time, we were very judicious in how we move forward with both our store expansion plan as well as or other capital project priority.
A lot as the significant economic uncertainty we were facing.
As market conditions improved we began to see our local communities open up in May and June we were able to resume the pace of already store development.
However, given the delays we experienced in the first half of the year. It was prudent to withdraw our original 2020 external guidance and we would now expect open between 150 and a 165 new stores this year.
We've been pleased with our ability to open great new store locations in 2020, but where we ultimately fall within that range will be somewhat out of our control as we anticipate seeing further localized delays in final permitting approvals.
Outside of our new store and distribution growth, we have restarted the exciting projects and initiatives that we identified coming into 2020 to enhance the service we provide to our customers and to drive strong returns.
Well, we haven't spent the plan level of Capex for these initiatives in the first six months of the year, we will begin to close that gap as these projects games theme in the remainder of 2020.
We continue to make great progress converting the hardware that runs our store and we're continuing to invest in projects to modernize our distribution vehicle fleet improve the image and apparently more stores.
Implement enhance safety measures in our store vehicle fleet aimed to enhance our omni channel capabilities.
None of our high expectations on the opportunities presented by these projects has diminish late summer experienced so far 2020, and we're excited to reap the benefits from these initiatives moving forward.
Finally, before I turn the call over to Tom I want to once again they team O'reilly for their tremendous efforts in the second quarter.
For a number of different reasons 2020 has been a very challenging year.
But archena stepped up in that every challenge and really prove their that cream of the crop in our industry.
Im, especially proud of the commitment that our team has shown to our customers their diligence and executing best practices protect to protect the health and safety of everyone in our stores Dcs and offices, while keeping our business running efficiently to provide our customers with the essential parts. They need is truly.
Class.
Now I'll turn the call to Tom.
Thanks, Jeff I.
I would also like to thank all team O'reilly for their hard work and dedication taking care of our customers and driving a phenomenal performance in the second quarter.
Now I'll take a closer look at our quarterly results.
For the quarter sales increased $502 million comprised of a $412 million increase in comp store sales 70 million dollar increase in non comp store sales, a 21 million dollar increase in non com non store sale and a $1 million decrease from stores permanently close.
In line with our 2020 player.
Clarification. These store closures were plan and are broken up consistent with our past reporting practices.
As a reminder, and previously was true or 2020 guidance and given the ongoing uncertainty related to covert 19, we're not resuming guidance at this time.
As Greg previously mentioned gross margin for the second quarter increased 12 basis points to 53.0%.
Which includes the benefit from Nick.
See leverage in acquisition cost benefits.
Partially offset by a LIFO charge headwind of $4 million.
As a reminder, coming into 2020, we anticipated we would continue to see a gross margin benefit from the sell through of on hand inventory that was purchased prior to the tariff driven price increases during 2019.
However, this benefit was reduced as we saw acquisition cost decreases in the second quarter.
Which although they represent a short term headwind to gross margin will benefit benefit us throughout the remainder of a year and higher Pos margins.
At this point, we're realizing the full benefit of the pre tariff inventory and any further net acquisition cost reductions is moving for result in a LIFO charge, but again, we'll benefit.
Excuse me benefit our future Pos margins.
This is similar to our LIFO situation prior to the cost increases in 2018 and 29.
The pricing environment remains rational and we expect that to continue.
Our second quarter effective tax rate was 24.1% of pretax income.
Tied to a base rate of 24.5% reduced by a 0.4% benefit from share based compensation.
Both of which were in line with their expectations.
This compares to the second quarter 2019 rate of 23.9% a pre tax income.
Which was comprised of base tax rate of 24.4% reduced by 8.5% benefit from share based compensation.
Changes in the tax benefit from share based compensation can fluctuate.
Fourth quarter, and we continue to expect I rate for the remainder of 2020 to be lower in the fourth quarter as a result of the tolling of certain tax period.
Now, we'll move on to free cash flow in the components that drove our results for the quarter.
Free cash flow for the first six months of 2020 was $1.2 billion versus 539 billion in the first six months of 2019.
With the increase driven by an increase in net income.
Reduction in that inventory an increase in taxes payable as result of the deferral tax payments that are correct.
And a reduction in capex, partially offset by assessments and solar project.
These investments in solar project generate investment tax credits, which will benefit cash taxes paid and the remainder of 2020, but the timing of these investments concrete unevenness in our quarterly cash flow.
Inventory per store at the end of the quarter with 632000.
Which was even with the beginning of the year and up 3.5% from this time last year.
The increase reflects additional inventory investments made in the per square 2020, partially offset by reduction in inventory balances in the second quarter as a result of the strong sales volumes.
Our APDN maturity show at the end of second quarter was 112%, which has the highest ratio in our history and heavily influenced by the extremely strong sales volumes and inventory turns in the second quarter.
We still anticipate growth and per store inventory and the remainder of 2020 as resume our inventory enhancement initiatives and this will moderate increase our E P percentage overtime.
Finally capital expenditures for this first six months of the year were $244 million, which was a 51 million dollar.
Decrease from the same period of 2019.
Driven by the prior and level of investment New distribution project versus the first six months of 2020.
As Jeff previously discussed we resumed deferred Capex project, which Rob caused you to the impact of Copel 19, and we'll continue to adjust our capex plans as appropriate given the current environment.
Moving on to liquidity and capital structure.
We continue to have ample liquidity as a result, the measures we took earlier in your preserve capital and liquidity coupled with the extremely strong cash flow performance in the second quarter.
As a result, we finished the second quarter with an adjusted debt to EBITDA ratio of 2.24 times as compared to first quarter ratio of 2.59 times and our end of 2019 ratio of 2.34 times.
This calculation excludes $872 million of cash we held as at the end of the quarter.
As one of the measures to preserve liquidity at the onset of cope with 19, we temporarily suspended our share buyback program in the middle.
In the middle of March we continue to evaluate business conditions and liquidity and as a result, this evaluation resumed our share repurchase program on May 29 2020.
To date, we've repurchased 1.7 million shares at an average share price of $390 in 14 cents.
Total investment of $651 million.
Subsequent to the ended the second quarter and through the date of our press release, we repurchased point 1 million shares at an average price of $423 and nine.
As a result of the strong performance in our second quarter.
We finished the quarter with $2 billion of total liquidity and cash available borrowings under our $1.2 billion revolving credit facility.
And we feel we have ample liquidity under this existing facility.
As we evaluate our liquidity leverage use of capital and share repurchase program moving forward, we will continue to prioritize maintaining our strong financial position, including Investor grade rating on our public debt.
We have a long history of conservatively managing our balance sheet and we'll continue to pick prudent steps to ensure the long term health and stability the company.
Before I open up the call for your questions I'd like to think Riley team further towards resilience they've shown for the last several months and for their continued dedication for a company and our customers.
This concludes our prepared comments at this time I'd like to ask Chris the operator their trends in line and we'll be happy to answer your question.
[noise] [noise]. Thank you we will now begin the question and answer session.
If you have a question. Please press Star then one and your Touchtone phone.
If you wish to remove from the Q. Please press the pound sign or the husky.
If you are using a speaker phone you may need to pick up the handset first before pressing the numbers.
Please limit your questions to one question and one follow up question.
Once again, if you have a question. Please press Star then one and your Touchtone phone.
My first question comes from the line of Matt Mcclintock with Raymond James Your line is open.
Hi, Yes, good morning, everyone I have to say outstanding results and congrats on the excuse execution.
Regarding that.
I'm trying to conceptualize or at least trying to figure out how such streets could occur with miles driven still being a little bit pressure right and clearly over history. That's that's been the main driver of this industry. So.
When you talked about streak in apparel or appearance and accessories was that was that a large dr. and the outperformance and can you kind of help us trying to think through our parse through what might be one time or or versus sustainable growth spending in any industry. Thank you.
Sure. So I'll start the hasn't Akcea, Jeff or total into it and along so first on on appearances accessories that was yeah. That's not typically a real strong category for us.
When you think about car click car care cleanup waxes I'm, you know the accessories and trinkets, but you can buy in our stores are frankly online those are typically not real strong sellers for us and what we found this quarter is those type.
Items as well as you know performance related items poppy related items items. You know people are trending up you know there there are hot rod there's three broad the cars that may have been covered up in the backyard room, a garage for a number of years and we've seen.
Spike in sales and some of those categories that are typical typically maybe average performing categories and and we know we think part of the reason for that is just you know consumers are they have more time and a lot of cases, they have more discretionary money to spend because they're not doing.
A lot of peripheral family activities that there might have done in prior years because of closures you know sporting events not taking place things like that sounds as you want to have met what I'd add to that is.
We saw strength across all our categories.
Look to that.
Particular set of categories because it acted unusually for what we usually see in downturns as Greg talked about.
When we look at downturns, we look at People's deferring, new vehicle purchases and when we look historically, what we see as people catching up on underperformed are under perform maintenance and that was the biggest driver we feel like in the performance for the quarter.
Thanks, Thanks for that commentary, but it's try to take this to a step further and like I don't want to take away from the outstanding performance you did this quarter, but as you look the next year.
I'm not trying to get ahead of ourselves, but how do you think about gross on top of the growth that you've seen this year, just because we've never seen anything really liked this and history. So just anything you can say to people who were trying to think about next year in what the growth to compare this year means for next year. Thanks.
You know, Matt I think it nail on had there. This is an unprecedented time add the results are are quite dramatic how they they turned around.
We've got a lot of water to go under the bridge and.
We're still in the middle of this pandemic so for us to speculate on next year I think would not be appropriate at this time.
Thanks, I really appreciate the color congrats guys great job.
Thanks, Matt.
Our next question is on the line of Liz Suzuki with Bank of America. Your line is open.
Great. Thank you I could you just go through some of the puts and takes on on where you expect SGN a dollar growth to Ron year over year I in the next a in the next two quarters than just whether any of the reductions that were made in March and April can be maintained a as you kind of get back to the normal run rate of STM that person.
Have a of sale.
Yes.
We we know that we ran a very skinny has taken a and for some of the work we need to do in the stores in the second quarter just to take care of customers.
So we anticipate that you will ramp up our staffing to couldn't meet the demand obviously, we pared back our staffing significantly.
Based on the negative 13% comps that.
But thankfully did didnt persist. So we know we're going to have a higher SGN ate spend we're going to continue to detail manage that on a day to day basis.
Yeah.
The biggest discretionary item for US is this store payroll and I'll, let Jeff speak to that.
Well there again I mean, we've always managed our payroll one stored at times and we always really try try to do our best to tie our staffing levels to what our businesses.
And when the pandemic, yet and we had the drastic drop in volume in mid March that persisted for a few weeks, we obviously had to react to that and adjust our payroll accordingly, we.
As we always want and seasonal downturns are things like that I mean this this was more dramatic than we normally see so we feel we obviously implemented the procedures that we have in place to manage our payroll starting with our inquiries and just not not hiring in and then adjusted hours based.
On the yields there's demand in the store adjusting part time hours reducing overtime.
Transfer people between stores me all the things that we would normally do to manage our payroll appropriately.
For the volume with the business.
We have to add a little bit more color with what you're saying I think we've we've run our stores just on a very very tight budgets in over the last several weeks and and we just got to get back as Jeff said in his prepared comments to some of the fundamentals on store appearance and some of the things that frankly have.
Suffered over the past few weeks. So we're going to we're gonna have to put some worst unite dollars back into the stores. We've already started that you know to make sure that our stores appearance and the customer experiences as high as ever as though.
[noise] right and just just one follow up on you know investments and labor and in the stores I mean, it's still early in the election season, but there are some quality is getting more air time than others, one of which has the potential increase in the corporate tax rate. So you're back in 2017 18, when tax cuts and jobs Act when I say, Oh Riley invested a lot.
Yeah, those tax savings into wages and technology that has no tax rate. That's up do you think there are areas, where the company can make some reduction circuits to mitigate this effect.
[noise] lives without we would tell you is that a year over year basis, we do our best.
Created an environment and the.
Model in a company that can increase operating profit dollars year after year, which is what we've done.
To the extent that these tax.
System changes.
Yeah, that's out of our control.
And we need to be focused on how we continue to generate increasing operating profit dollars.
Thanks very much.
Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Your line is open.
Hey, good morning, guys.
Morning.
Share gain I guess, you talked about potentially having taken some share from big box retailers or other smaller competitors could you maybe bucket, which you think who you think the bigger donors were and.
Obviously, a lot of stress for smaller parts distributors during the quarter do you think we've seen any real change and in the population of some of those smaller players.
No I don't I don't think we've seen a lot of change yet on the parts store side or the the professional installer side of our business, we've seen a little bit, but but nothing nothing material as far as market share gain.
You know Brett it's really hard to say until the next few weeks when we see what what all of our competitors report it's hard to tell you know what their sales look like window ourselves were strong we're very very pleased with the performance of our store in DC teams to drive the results that that we drove this quarter.
We feel like we've taken some market share, but we won't know for sure until we see the earnings releases.
You look at Big box, specifically, you know that comment is centered around you know myself and others have seen a lot of product outages not not necessarily only in the auto parts sector, but just the big box and the pure ecommerce players have have struggled somewhat over.
The past several weeks to the systemic.
And and and they've had they've had challenges staying at an in stock position and we're very very proud of you know our supply chain goals, we've we've been able to maintain and in stock position.
Both for our brick and mortar at our online customers and we've seen we've seen some shift it's no secret that.
Our ecommerce business online business has has improved through this pandemic as it has for most retailers.
But the trend has continued that the majority of that volume continues to end up in our store either in a pickup in store.
Ship to store or curbside pickup that we've implemented so I think I think that a lot of consumers have had regain confidence and some of the brick and mortar players, especially those that have strengthened their supply chain and have performed really well three dependent.
Okay, well my second question was online CRT answered. It. So my second question is going to be reasonable performance I guess could you give us a feeling for the spread between the weakest markets and the strongest markets and where they were.
Yes.
So yeah, I mean really the yelled at the co with pandemic has has impacted us in every market across the country and ER.
We as we talked about in the prepared comments I mean, we saw pressure.
Across the entire change starting in mid March and if persisted for several weeks.
But then when the when the the stimulus checks already isn't there in the third week of April I mean, we've seen that dramatic uptick in our business really all across the country and in all market.
And.
It really exceeded our expectations on both sides of the business.
And as we've mentioned several times on prepared comments I mean, the May is one thing, but we're extremely proud of the way. Our team members have that have really stepped up to the to the plate and taking care of our customers satisfying their needs.
Through these challenging times.
Great. Thank you very much.
Correct.
Thank you and our next question comes from the line, Chris Horvers, Let's keep P. Morgan Your line is open.
Thanks. Good morning, guys. So my question has to do as commercial versus D. I why you talk about robust trends in May and June in.
And the commercial side of business can you maybe defined what exactly [laughter] robust is and can you also talk about how the gap between DIY Y and do it for me evolved over the months for the quarter and if you could into July. Thank you.
Yeah, we're not going to break out you know the numbers between DIY and DIFM, what I would tell you as we said with our prepared comments and all our prior call. Thank you everyone realizes that.
April started out really slow and the as the government subsidies kicked in and I would say that the yeah why side of our business rent ramped up much more quickly than the DIFM side of our business I would tell you that so for April may and June overall, we comped positive at all three months.
With May and June being stronger of the three months and those are those trends have continued into July.
But presumably the did the gap between commercial and de Iwai narrow into June.
It doesn't sound like Guy why.
And commercial SRX <unk> exceeded DIY over the quarter.
So.
Yes, good yeah why side of the business.
What's the bigger contributor to our comp the DIY business really took off as soon as the stimulus Chuck.
Started.
The professional business really didnt start to.
Turnaround in dramatic fashion until the stay at home orders started to lift so inherently there was eight near we know goes to throughout the quarter, but both remain very strong.
Understood.
And then a follow up on on the gross margins. He mentioned some some some comments around you know the benefits of the parent price increases being fully baked in through Twoq you win.
Had potential headwinds I had a on LIFO. So you know ex the potential leverage from very strong comp trends in the cost of goods line. How are you thinking about do you have those other components will they do you expect them to be a net headwind in the back half a year.
Well that will depend on what happens with with pricing, we're always trying to reduce our acquisition costs through scale and insourcing and to some extent private label. So that will be I mean, when we look at the second quarter itself. When we looked at our plan, we were anticipating continuing to get a.
LIFO benefit in.
The second quarter, but because of negotiated price decreases we actually offset that and had a headwind. So that was up there was a headwind to come margin for the quarter, coupled with an annuity attached to it as we have lower acquisition cost otherwise, we would have had a higher year over year improvement in gross margin.
And.
Driven by the higher got why mix and the leverage.
The distribution costs, when we look forward.
We would anticipate pricing acquisition prices to be relatively.
They both are the ended the year in our expected playing on benefit was less is is we theoretically so through the pre care. Good so we'd expect to be relatively neutral for the remainder of the year.
Thanks, guys best of luck.
Thank you.
Your next question from the line of Simeon Gutman with Morgan Stanley. Your line is open.
Hey, good morning, everyone I wanted to them ask on the DIFM side.
Sounds like and I'm going to put words out there it sounds like you're running double digit do you have a sense, where the markets running and how much marketshare, you're taking in that in that channel.
That's difficult to say as Greg mentioned earlier, our our competitors haven't reported although I guess ones reporting now.
Yes.
Well down the street, calling on customers trying to take care of our customers.
When the market is difficult and so as Greg talked about the strength, our supply chain and we're able to provide parks that than shops normal supplier can't come up with that benefit for us and ability to get our foot the door and build long term strength.
We're happy with how our business is trending we continued to the call in our shops in a very safe way with its safety protocols and try to help them through this which has been a difficult environment for them also.
I would just might just yet I would just to echo Tom's comments on on really the strength of supply chains availability as as you know availability is key to a.
To grow in the professional business and you know we've always prided ourselves.
You don't want our service levels, a big part of that being availability and when you had the part on the shelf and they.
Maybe somebody else doesn't that maybe was a primary supplier you could you could move up in the in the call lift in that shop.
Though.
Yeah, No makes sense I think it's it's important in that right miles driven has done a lot and understanding, let's say, where you're running versus the industry.
Maybe you can tell you how sustainable things, maybe and that leads into my next question, which is you mentioned you're cautious for the rest of the year and it does seem like you're you exited about the same level. It seems like double digits in both sides of your business and so I'm curious if the cautiousness is look we just don't know what we're going to get in terms of stimulus 'cause it.
In theory, if we do that that should continue some of the momentum.
And maybe the pent up demand side, which is harder to to understand how that flows through so I just want to connect the dots on the cautious comments despite exiting on your on strength.
Yes, I mean, you know one thing that that is for sure is the trends we're seeing won't last forever. We know this is this is not typical it's a unique time you know for for the World right now and it's not going to last forever. You know if you look at this phone you talk about miles driven and will it persists.
If you break that down to the short term and long term.
Opinion on that is long term I think miles driven will come back I think people will will drive their cars more miles again as they as they've done in the past I think theres a lot of consumers that are still concerned about mess trends transit systems from a from a health and safety perspective you.
Read about more and more people moving to the suburbs and out of the major cities, which are which is better for miles driven more we're automobile traffic less mass transit. So I think all those things long term will support growth in miles driven.
The caveat to that is for short term perspective, none of US know, what's gonna have to list and none of US know if there will be another round of shelter at home orders and some of these markets all of those things would potentially negatively impact miles driven for the short term so because of the the degree of uncertainty with all.
But that's the reason for our cautiousness and called that out in our prepared comments.
Okay. Thanks, Greg Good luck.
Our next question is from Seth Sigman with Credit Suisse. Your line is open.
Hey, guys. Good morning, I wanted to follow up on commercial and wondering if you talk about what you're seeing across your commercial commercial customer base. So I think many of them were essential but I'm sure. There was some disruption over the last few months as well some cases furloughs and in some cases now labor shortages. So I'm just curious.
What are you seeing is that a limiting factor at all on the commercial side, just love to get your thoughts on that.
Yes, Jeff I'll speak to that one yes, no doubt it it was early on when that when the pandemic broke out at all the yelled at the shelf in place orders were in place I mean, there there were shops that that reduced hours there were some shops in several markets that actually closed.
During that period, and obviously, there's there's been a shortage of text in some shops, but it seems like Oh I guess is just kind of across statement that that that has that you. All that has rebounded coming into may and June.
Now you know what these with these these new outbreaks cobot outbreaks in several states. We are here and you know some comments about they maybe some shops has that you'll have slowed that down just a little bit brought from where they were or when it when it kinda back up.
And on the essential you know we worked with a lot of industry organizations early on.
To ensure the most if not all markets would.
Make sure the auto auto parts supply and repair remains essential.
Got it and then just a follow up on that point around the shops on what's happening now are there are signs of moderating growth in markets, where coal is picking up now.
It seems like its body I mean, we're here for a few places where it seems like maybe the did the shops have slowed down just a little bit.
And again it goes at the comment I said before I've heard this multiple times from from our sales teams as some of these shops are saying in those markets I think theres still some degree of concern for safety with taking your color to a shop, perhaps for some of the task that you might want to tackle at home.
Oil changes breaks things like that where you may have traditionally taken that card of a shop for those those jobs now you've got more time to.
Form those tasks and you're just not totally comfortable yet dropping that car often having someone you don't know you know inside your car from a safety perspective, I think theres still some some degree of concern there.
Got it alright, thanks, guys. Good luck.
Thank you.
Thank you enter next question, so Michael Lasser with DBS and let us open.
Good morning, Thanks for taking my questions. So based on those comments has your DIFM business in July load relative to where it was running in June.
Yes.
We're not going to comment on three weeks within the quarter cycle.
Okay.
Tom If you were to take what you've seen from a category perspective it overly it.
With 2008 2009 does it look identical suggesting that that period is the food parallel for how to think about demand through the aftermarket from here or there any major differences.
Well Greg commented in the prepared comments you in the reason we brought out up here and then and.
Parents type products is that's very unusual compared to 2008 2009.
Appearance and performance and all of those.
More discretionary categories in 2000, and they took a big hit and.
Maintenance can't failure parts went up quite a bit.
So that that different this time I think it has to do with the stimulus and that people staying at home right. I mean, if you look back at eight nine.
We saw consumers extending service at a little interval delaying some of these these repairs that they could you know we haven't seen the same thing this time around.
So.
Based on those comments would you would you consider this to be more temporary where you'll either one nine we go longer lasting tailwind that the sector experience.
I hope that that's a great question and I wish we had a great Aston for that we just with the uncertainty of of where this pandemic goes from here, it's really difficult to answer that Michael.
What we would point you to though is didn't magnitude at the pickup in.
Particular, economic downturn in a significantly more and more immediate than 2008 pickup.
Understood. Thank you very much a good luck.
Thank you. Thank you.
Next question comes from the line of Scot Ciccarelli with RBC capital markets. Your line is open.
Good morning, guys.
See you talked about adding you've seen a back into the stores and obviously headcount is down quite a bit. So first do you guys have a a target you're thinking about from maintenance you need per store growth.
Perspective, and then kind of related to that do you plan on bringing back some of those employees weren't worrying and furloughed, where do you kind of have to start fresh and go out you hire and train people and obviously that takes a while to kind of ramp them up on a productivity basis.
Yeah, Scott I'll start, let Tom I want to chime in but.
You know obviously on the average SGN, a personal where I would think that we as we talked about prepared comments, we woodmac move back towards what we what we stated as our goal.
Early in the year.
We've already I mean, there again, we're talking about something that happened 90 days ago, and when you know when that pandemic hit in the business took a dramatic downturn, we had to react to that.
And we had to adjust our staffing by store to what the sales demand was and we've been cautious yours businesses ramp back up we had no idea how long this with less.
It is really uncertain times and as we've seen a week by week as we've seen the business or the demand continue to to just stay in place. We we've we've we've ramped back up our staffing accordingly.
No no doubt maybe not as much head count as we normally put in knowing that this is unsustainable as Greg mentioned and we feel we've leveraged over time things like that to maybe compensate for headcount.
We will always we've always management business for the all run and stat.
To provide that the customer service is going to grow our business and build those relationships and we'll we'll continue to do that.
You know it's got the other thing this is Greg I think sometimes we tend to underestimate the task at hand here. When you look at our stores that are operating shorthanded and delivering the sales volumes. They are just speak to the to professionalism in our stores and that's what we've built our success on it but we've got.
Same situation or distribution centers, our distribution centers are operating short handed they're working long hours.
The worked at weekends and a lot of cases to keep up with demand in our stores and you know that's just not sustainable long term, we got to put some more some more labor dollars back into our stores Idcs.
And Scott I think to address the other part of your question.
10 is too.
Focused on professional parts people that are full time and bring back the right people.
If we look at the employment environment pretty Cove it.
On a plant was extremely low.
Higher much higher now and we're going to be very selective in and.
We bring back or we hired make sure that we're building the core full time professional parts people, we need to have wind business.
Got it very helpful. Thanks, guys.
Yeah.
We have reached a lot in time for questions I'll now turn the call back over to Mr., Greg Johnson for closing remarks.
Thank you Bridget.
We'd like to conclude our call today by thanking the entire Raleigh team for their continued selfless dedication to our customers I'd like to thank everyone for joining the call today and we look forward to reporting our third quarter results in October. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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