Q2 2020 Advance Auto Parts Inc Earnings Call
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Yes.
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My Dad, Senior Vice President Communications, and Investor Relations well make a brief.
Concerning forward looking statements.
He discussed on this call. Please go ahead.
Good morning, and thank you for joining after the second quarter 2020 result.
I'm joined by Tom Greco, President and Chief Executive Officer, and Jeff Shepherd, Our executive Vice President and Chief Financial Officer.
Following their prepared remarks, we'll turn our attention to answering your question.
Before we begin please be advised the our remarks today may contain forward looking statements.
All statements other than statements of historical are forward looking statements, including but not limited to favorites regarding our initiatives.
Projection and future performance.
Actual results could differ materially from those projected for implied by the forward looking statements.
Additional information about factors that could cause actual results to differ can be found under the captions forward looking statements and risk factors in our most recent annual report on form 10-K, and subsequent filings made with the commission.
Now, let me turn the call over to Tom Greco.
Good morning to everyone joining us today.
Before we get to the specifics of our quarter.
I want to start with an acknowledgment to our advanced team members and independent partners.
They've shown incredible perseverance and support for each other and for our customers over the past few months.
Never has the term essential businessmen so much to us.
Throughout Q2, our team members responded to the pandemic within exemplary level of customer care.
At the same time, our entire organization responded with a remarkable level of speed and agility.
Every week, we hear stories from both customers and team members on how advanced has helped keep a miracle on the road during this crisis.
Along with Commendation on the safeguards, we put in place for protect them well in our stores.
Our sincere thanks and appreciation goes out every single APC member and Carquest independent partner, who delivered a strong performance we're about to review.
Since the onset of Cobot 19, we established three overarching priorities.
First prioritize the health and safety of our team members and customers.
Second preserve cash and protect the PML during the crisis.
And third prepare to be stronger following the crisis.
At the beginning of the pandemic, we stood up a team dedicated to the health and safety of our team members and customers.
This cross functional team organized daily standup calls throughout our organization, which allowed us to respond with a tremendous sense of urgency to help keep people safe and healthy.
As examples we installed plexiglas care shields in our stores in a matter of weeks.
We institutionalized entirely new standard operating procedures across our stores and DC network.
Our technology team enabled work promote capabilities for corporate functions and for our field team.
We significantly increased communication through virtual town halls, and regular video updates.
And importantly, we provide enhanced compensation and benefits on top of our industry, leading fuel the frontline stock compensation program to help our team members. During this time.
Health and safety has been a top priority for the leadership team here at advance over the past few years, we'll none of US warranted covert 19, the foundational processes that were put in place prior to co that were instrumental in enabling us to notably respond to the global crisis.
To provide outstanding customer support within it.
As a result of our health and safety focus we're very pleased that HP has been well below the national average infection rate for cobot 19.
We remain laser focused on taking the necessary steps to enable our team members to feel safe coming to work and to ensure our customers feel safe shopping in our stores, which is more important than ever right now.
When we provided our quarter to date results during our Q1 call. We indicated that our sales results at sequentially improved every week during the first four weeks of Q2.
As you saw in our results. This morning, our sales momentum continued for the remainder of the quarter.
Our sales grew 7.3% to $2.5 billion compared to the prior year.
Comparable store sales increased by 7.5% the highest quarterly growth rate in close to 10 years.
Our adjusted operating income increased by 42% to $279 million and our adjusted operating income margin rate increased 274 basis points to 11.2%, while free cash flow in the quarter was up 60%.
Nearly all regions had positive comparable store sales with the Gulf coast Central Appalachia regions, posting strong double digit growth.
The northeast mid Atlantic and West Coast regions, which were more impacted by the pandemic significantly trails are other regions.
In fact, we had an extremely wide distribution and performance geographically.
With the over 2000 basis points separating the highest and lowest growth regions.
As you've heard from others are professional business was more negatively impacted by cobot 19 than DIY in the quarter.
This was primarily due to the temporary closure of garage as across North America.
In addition, we have a disproportionate amount of our professional business in the northeast mid Atlantic in West Coast.
These regions represent over 30% of our pro sales and they were all well behind the rest of the country in terms of their professional growth rate.
However, as the quarter progressed and stay at home orders began to lift we saw sequential improvement in our professional business each period.
In the final four weeks of Q2 pro sales were up mid single digits.
During the quarter, we continue to support our professional customers, including the rollout of our enhanced modal logic platform.
This repair and diagnostic tool was built from the ground up by industry and technology experts and provides access to complete unedited OEM information.
Since 2018, 3700, new vehicles, and 14 million plus articles have been added.
Our most recent upgrade includes enhancing modal visuals, which allows technicians to share repair animation.
This helps them explained services to customers in person by text or email.
Also in Q2, we signed up a record number of new Technet customers as we crossed a 11500 technics in total.
Our independent Carquest, Worldpac and Carquest, Canada businesses also recovered nicely as the quarter progressed.
Throughout the quarter, we responded quickly to the needs of our professional customers and put new tools in place for our sales team to be successful regardless of current challenges.
This includes contact pre delivery.
Instructor led virtual training for shop owners.
And expansion of selling capabilities, enabling our sales team to better meet the needs of our professional customers.
We believe the work we've done to be there for our professional customers at a time of great need has set us apart.
Our DIY Omnichannel performance was meaningfully stronger than our DIFM business throughout the second quarter.
This was driven by both external and internal factors.
And overarching macroeconomic factor is whether consumers are repairing or maintain their vehicles. They are much more focused on saving money during challenging times.
This generally means fewer new vehicle sales and aging fleet and more VII jobs.
In addition, the stimulus checks from the carriers act as well as extended unemployment benefits in Q2 provided incremental discretionary income, which we believe contributed to our DIY sales performance.
Since our DIY momentum has continued into Q3, we believe there are other external factors driving DIY beyond stimulus.
First many consumers were continuing to spend more time at home and had more time to work on their vehicles.
Secondly, we believe the due to covert 19 people are less apt to use public transportation.
This includes ride sharing buses trains and subways.
It also includes air travel, which was down significantly in the quarter.
Airline leisure travel was at times replaced by a road trip in a personal vehicle.
In total mass transportation indices were well below year ago full quarter.
Meanwhile, personal vehicle miles driven climb throughout Q2, according to Apple and Google mobility.
Finally, according to our research many of the large box retailers, including online retailers prioritize staples, along with food and beverages in Q2.
This resulted in long tail items, such as auto parts to be de prioritize.
Which temporarily opened the door.
We believe external factors represented the majority of the surge we experienced in DIY.
While we cannot speculate on the longer term impacted these macroeconomic or cold related variables. We do believe from past experience. The DIY typically performs better during recessionary environments as consumers try to save money and keep their vehicles longer.
Additionally, as our economy continues to reopen we believe there's still an understandable concern surrounding public transportation and gathering.
We remain committed to providing a safe shopping experience through our suite of advance same day options.
As more and more consumers are relying on personal vehicles. They are choosing contact free options like advanced same day curbside or advance same day delivery.
While we clearly have strong momentum in DIY, it's important to reiterate that they are still many unknowns surrounding coven 19.
In addition to external factors, our internal initiatives for DIY gain traction in Q2.
First we successfully launched die hard on July 2nd nationwide.
Although it's not a meaningful growth driver in the quarter.
The first week of selling diehard was a momentous celebration and galvanizing event for our team.
The launch involved coordination across every aspect of our business.
Normally the advance executive team would be doing store tours during a launch like this.
While we would've preferred to do in person store tours. This was simply not possible during this time.
Therefore, we adapted and conducted a combination of in person and virtual tours across the country.
The good news is we got to a lot of stores very quickly.
And every general manager, we spoke to was incredibly excited about the potential of diehard.
While it's too early to quantified the impact of Diehard. We believe this iconic brand will be a long term differentiator for us.
Secondly, we made a decision in the early stages the pandemic to prioritize advance same day messaging in our advertising over previously planned brand awareness campaigns.
The advanced same day advertising was both timely and relevant.
Going forward, we'll continue to build the awareness of the advanced Bran heartening team Penske NASCAR and what the Indy 500 this upcoming weekend.
Third our speed perks loyalty program sustain continue momentum as the number of active members through to more than 13.5 billion, an increase of nearly 30% year over year.
We're also seeing growth on customers graduate into higher tiers within the program along with improved and retention rates.
Finally, our DIY execution continues to improve in addition to the national launch of advanced same day delivery, we strengthen the front end user experience of our online platform, which led to improved traffic and higher conversion rates.
Our in store execution also improved with strong ticket count growth along with notable gains in units per transaction and sales per ticket.
As a result of both external and internal factors, we delivered double digit growth in DIY omnichannel throughout Q2.
To close out the topline and as we said in our press release, we've continued to see strong sales through the first five weeks of Q3.
As we turn to profitability, we made progress on each of the four pillars of margin expansion in the quarter.
In terms of sales and profit per store, we had very strong sales per store in the quarter.
On a rate basis, our SGN eight per store was down materially.
Certainly we benefited from top line growth. However, our productivity tools are also helping.
Utilizing our new scheduling and task management tool our field team has done an excellent job managing hours, despite a challenging and evolving environment.
With that said, we took several actions in the quarter reflective of the unique operating environment, such as a reduction of certain labor and costs related to the softer professional business.
As our business continues to normalize including the mix, we expect to add certain expenses back.
In terms of supply chain improved execution and standardization in our distribution centers enabled us to leverage supply chain in the quarter.
As we called out in our Q1 earnings release, we did need to delay or pause some important initiatives due to cope with 19.
As an update and given the strength of our business. Several of these key initiatives are now back up and running.
For us than a replenishment, which will integrate the supply chains within advance and Carquest is on track to deliver the original savings we planned in Q3 2021.
This is slightly delayed from our original timeline, primarily due to factors related to covert 19.
Our single warehouse management system or WMS initiative was officially pause during the quarter.
We have restarted this work and revise the timelines for WMS, which includes prioritizing our largest dcs.
We expect to complete our WMS implementation in these large Pcs by the end of 2021.
We believe this will enable us to realize the vast majority of the plan savings in 2022.
In terms of category management, we continue to work with suppliers on material cost optimization and owned brand expansion.
We also began the implementation of a new pricing platform and expect over time this new tool will enhance our price management capabilities.
Our next step is to begin the implementation of market based or local pricing strategies, which is something we cannot do efficiently today.
Finally in addition to leveraging store labor in the quarter, we continued to execute our SGN a productivity agenda. This includes the integration of back office accounting as we consolidate for ERP systems to one.
We also saw significant savings and travel expenses after pausing travel across the company.
While we believe there will likely be some savings associated with reduced travel longer term it will not be at the level. We saw in Q2.
Our focus on health and safety also continues to drive cost savings in SGN a.
In Q2, we once again reduced our recordable incident rate, which has resulted in a 27% reduction for the first half of 2020.
Our collision frequency rate has also improved with the year to date reduction of 13%.
Before I turn it over to Jeff and based on current events happening across the U.S I want to reinforce our commitment to inclusion and diversity.
We are witnessing immense civil unrest across the country in recent months.
These events or reinforcing the importance of our cultural belief that advance.
Our culture beliefs are part of how we think and how we acted advance regardless of level or title.
Our champion inclusion cultural belief as highlighted by the statement I embraced diversity of people dots skills and styles to deliver results.
It's never been more apparent to my leadership team that we need to step up on our commitment to champion inclusion even more.
This includes standing up against in tolerance, and racism conducting business with integrity and interacting with all people in a respectful manner.
We recently launched an initiative, we call at dancing Black pathways.
This is focused on creating real change in three primary areas culture careers and communities.
We look forward to seeing further progress in this important element of our culture as the initiative develops.
In summary, Q2 was a strong quarter and we could not be proud of how our field team members took care of our customers during a difficult time.
In spite of the challenges we face from Cowen 19, our advance leadership team also stepped up as evidenced by a significant increases in our communication and employee engagement scores in our most recent pulse survey.
Well, we're pleased with our second quarter results uncertainty remains in terms of how the pandemic will impact consumer behavior and our business.
Regardless, we remain focused on executing our strategy, while updating the value and prioritization of our long term projects in this new environment.
Most importantly, we will continue to prioritize the health and safety of our customers and team members for the balance of year, while leveraging our industry, leading portfolio, which now proudly includes diehard.
With that I'll turn it over to Jeff for details on our financial performance.
Thank you Tom and good morning, everyone.
We're certainly in an unprecedented time right now and I truly hope that you and your families have stayed wells during the past several months.
Before diving into our Q2 results I want to thank our team members for all we have accomplished over the last several months.
It's a result of their dedication that we're extremely pleased with what we delivered in the second quarter.
In Q2, our adjusted gross profit was approximately $1.1 billion.
Which was an increase of nearly 9% compared to Q2 of the prior year.
Adjusted gross profit margin improved 57 basis points year over year to 43.9%.
Driven by favorable channel mix and supply chain efficiencies.
These were partially offset by inventory related costs due to a significant decrease in inventory driven by an increase in customer demand.
Our adjusted EPS DNA was approximately $818 million in Q2.
Nearly flat compared to Q2 2019.
Adjusted SDMA as a percent of net sales improved 217 basis points compared to the prior year.
Primarily driven by cost controls we implemented in response to the pandemic in late Q1.
These include reductions in labor cost as we leverage store labor, while reducing medical claims.
Further we saw savings from lower delivery expenses to pro customers in the front half of the quarter before professional sales began to recover.
Additionally, we saw favorability in travel and a reduction in insurance expenses.
These cost savings were partially offset by an investment in marketing expenses associated with the loan.
Launch of our advanced same day campaign, and the diehard brand in the quarter.
Before contracts related to IP solutions, we have implemented since Q2 29 $15 million in cobot 19 expenses in the quarter, which partially offset the cost savings we delivered in the quarter.
Our coated 19 expenses were combination with two things.
First we are encouraged.
And with Pfizer to our stores.
In addition, such as installing plexiglas barriers.
In our stores.
Secondly, we continued to investment team member compensation and benefits in the quarter.
Okay.
Adjusted operating income in Q2 $279 million.
Compared to the prior year quarter.
Our adjusted Oi margin.
Four basis points to 11.2% in the quarter.
Adjusted diluted EPS was $2 and.
Feast of 46%.
Was $380 million of 60% increase compared to $237 million team.
Year to date.
And $8 million compared to $381 million during the same period in 2019.
As a reminder of our capital allocation priorities, we remain committed to maintain our investment grade rating.
Yes.
Return excess cash to shareholders.
Taking several actions.
First we repaid the $500 million previously borrowed under our revolving credit facility.
In addition, yesterday, we provided notice to the trustee of our intention to redeem the 300 million dollar 4.5% notes due in 2022.
These actions will help us return our leverage ratio to pre coated levels.
Secondly.
Tom mentioned, we started several projects that we expect to enable margin expansion has been pause or delayed due to colder 19th.
As a result, we now expect our full year 2020 capital spending will be a minimum of $250 million.
In Q2, our capital expenditures were $57 million.
Which was an increase of $7 million compared to prior year.
Third with respect to our priority.
We're pleased to maintain or 25 cents dividend per share for Q3.
In addition, we've lifted the temporary suspension of our share repurchase program and will remain opportunistic and our balanced approach to returning excess cash to shareholders.
We delivered strong operating results.
This quarter, we remain diligent sit in managing our liquidity and executing our plan to win in the marketplace, while expanding margins.
With that let's open the call to address your questions operator.
Thank you Bill Stein, if you'd like to ask the question from Taiwan.
To make giant question plastic Thompson, please limit yourself to one question and one follow up.
And your first question comes online Michael listen I think TV.
Great.
Good morning.
As you look and how would you market here in both.
And why Indiaia soon.
I'm trying to just for business mix and geographic exposure in that quarter that Tom.
I think that customers in the deal.
I have been segment you are labor to new marquee.
Hey, good morning, Michael.
Gained share in the quarter.
We can see from the syndicated data that inside of de out why.
So we just look at what's been reported and we compared to what we delivered and we feel very calm.
For that that we gained share in DIFM also means that this is a pretty fragmented industry.
You know hundred $50 billion segment, you know the big four players have 40 to 45.
Also roughly a third of the business.
Bill in the middle of the global pandemic large scale players that have about a third of the business can take share from.
The smaller scale players are two thirds and.
I think we just showed that that's the case.
Obviously, we've got players just don't have you know.
Omnichannel capability.
Do curbside delivery or contact free delivery our supply.
We're confident that we gained share in the quarter and it.
I think the larger players are going to be doing well in a quarter like this.
Good question is you outlined some delays in the initiatives that we're going to drive the margin inflection in 2021, but there's also some pakistan.
Better than what you anticipated who as you net build out are you do you believe that the magnitude and the timing of the margin expansion.
In that you previously outlined for 2021 will be consistent with what we previously.
Start to recalibrate lower our expectations for next year. Thank you very much.
Well, obviously there is.
Now whether it's the shoe.
On the impact of coal the we've done an election coming up so we're still working through our.
Pete if you will have our strategic.
When we when we discuss it.
The 21.
Yeah.
Back to each one of the margin.
Expansion initiatives that we have comment specifically on where are we going to be in 20 to 21 is obviously very early at this stage, but we feel very good about the progress being made whether it's in.
For where we had a very strong quarter.
The team determine.
So in the quarter ruling.
Our fleet if you will.
As we go forward given the changes in the real estate environment in construction costs.
Supply chain, we referenced.
I feel very good about our ability to.
To expand margins through supply chain.
We are role.
Portfolio, which will drive margins and NSG any we had a very strong quarter those initiatives or are moving.
In fact, the ahead of our expectations. So you know there's puts and takes in there, but I think it's a little are believed to says spec.
Kelly on 2021.
And your next question comes on line.
No credit.
Please go ahead.
Good morning. This is Karen Brown for SAP segments. Congrats on the great quarter two questions from me Firstly, you discussed Eli strength continuing quite today.
Does that tell me that stim. This was a smaller piece at the end of any delay demand in the first half as any added Tina. Thanks.
And it is a nine more enjoyable than you initially expectations.
I'm sorry, Gary can you repeat the first question I'm not sure I understood. There again, just regarding the the strong quarter the days Dealerized trends.
Thanks, Justin that expired.
Before we knew that the stimulus will be smaller piece of the end of eight to nine in the first half and then related.
The demand now more durable in your opinion and your initial expectations.
Well I think the.
But a lot of factors in there I.
We obviously benefited from stimulus in unemployment benefits that we know that in the back half were going to get less benefit from.
That said.
You know the strength is continues as we indicated.
You know when you've got.
Got a challenge the economy and when you have cohmad and Theres, a number of things that that work in our favor on you know we know we're going to less new vehicle sales that means and aging fleet that means more repairs.
A lot about.
The car as a safe place for people right now.
So they are choosing to.
You know use a personal via <unk>.
Cars because of that that have not used and.
They're buying a used vehicle to get around when they had been doing something that ride sharing so thats going to help us and the fact that people have time of their hand to do projects and our spending less on travel entertainment in those types of things.
Also benefits us so I think there are some macroeconomic factors.
Related to the environment into coal that benefit us.
And then we do have a.
Drivers I mean, I heard is launching our field team is very very excited about at our marketing plans are kicking in we're into our second year City. Bert. So we believe regardless of the environment will have strengthened the line the back half.
Great. Thank you and then secondly regarding.
Regarding your category performance was outlet recipe broad based on wasn't led by maintenance and appearance and then what do you see in Sandra category on the back of the miles driven trends that you discussed.
Yeah sure. Good question I mean, if there is you know some impact on on that and the categories that really rely on rely on miles driven if you talk about things like breaks.
To a lesser extent undercar chassis.
As the economy started to open back up I mean in the early part of the quarter we were.
The professional side.
So we gain momentum throughout the quarter and now we're in the mid single digit land.
Growth rate in those categories. So neither the categories that are very reliant on miles driven we've seen a and improvement in the last couple of months.
On failure. This this intermittent driving that's going on.
Obviously benefits certain categories for us be that batteries or fuel pumps, theres, others, where we're seeing very very strong growth.
AC bounced back nicely in recent weeks it was obviously quite warm in our geography, so that that came on very strong.
And as you've heard from others appearance, Washington wax very very strong performance in that also sustained so you've got.
The normal dynamics around you know miles driven and its relationship to the category I don't think is.
As relevant it doesn't correlate as highly as we're seeing strong strength in certain categories and really aren't depending on miles driven.
Thank you.
Okay.
Your next question comes from Atlanta alphabet Soup, Vicky and Bank of America.
Great. Thank you can't just following up on a previous question I guess looking at the cost reduction.
I mean, it sounds like a lot of it is labor expense that will likely come back on.
Sales in line with placebo, but at the same time, you had longer term cost savings initiatives that were delayed as we think about Birmingham here, we expect labor costs come back, but then longer term.
Okay National Selinexor, Yeah, two three years.
Yeah sure loses the Jeff So we had obviously a number of.
Cost initiatives that we put in place at the end of the first quarter. They did start manifest themselves obviously in the second quarter and you hit on the main thing. It was a payroll was a big driver professional delivery is that segment was.
Slower in recovering we were able to see benefits there and we saw benefits associated with cost we can control like travel.
And then you saw benefits in areas like medical because a lot of our team members are deferring elective procedures and even checked up so because we look to the back half of the year <unk>.
Central headwinds there are some continued tailwinds.
And then there is some that could go either way so as professional recoveries, new we are going to have additional professional labor.
We've got to deliver that that part to the customer and that just requires additional labor hours driving and costs associated with that.
We are going to continue to invest in our marketing in the back half we've launched at both for die hard as well as our same day and it's something we believe in which should obviously drive revenue, but that's something we want to invest in and then the capex. The projects that were starting that were restarting that were pause there is obviously opex related to that.
And we're going to continue to make those investments and then obviously to kill the cost and we're going to continue to prioritize people over profit having said that we think there are some tailwinds as well we're going to continue to.
Control things like travel.
And in store payroll is another area. We believe that we can continue to leverage and we've got our.
Labour tool that's been put in place and we're seeing a lot of benefit from that so while we think there's going to be some additional labor associated professional side. We think we continued to control store payroll and then there's a question mark with medical medical could continue to be a tailwind, but it could also be a headwind is back half you'll team members who are going to be.
More comfortable going into the Doctor's office begin checkups would start to do elective procedures. So those are sort of the cost that were looking at in the back half.
Lastly, we're still in the pandemic, there's still a lot of uncertainties, which is part of the reason why we don't have any guidance out there right now.
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Okay, great. Thank you.
And your next question comes online.
GAAP net net Morgan Stanley. Please go ahead.
Thanks, Good morning, everyone I wanted to start with question on some of the Dcs that you've begun to standardize on can you talk about the sales and margin performance around those de season in the areas in which they serve I think some of that may have been impacted just because of of Coleman and some of the northeast, but curious since it's a building block of.
And how it's progressing in are you seeing real change as a stepping stone to margin.
Hey, good morning Simeon.
For sure out of that gave we were really happy with what we were we were getting from the implementation of the new warehouse management system.
To fill rates improved the DC that we did was much more organized the people there were trained and very excited about what was what was done it was a material difference I think between what was there before obviously the impact of coal that has been significant.
And you know throughout the throughout all of our Dcs and in our stores.
It's made it difficult to hire people.
It's a challenging environment right now if you have an infection in the DC Theres, obviously things that we have to go through we have to quarantine people. So I think it's a difficult.
Time to really benchmark the success of the warehouse management system at this point.
As we are starting to ramp back up and get people hired in our buildings. We just went through this yesterday.
We are seeing progress an improvement on fill rates in.
Quickly put things away in all of the things that go with.
You know running a DC successfully so.
The short answer is we're highly optimistic that the warehouse management system implementation will enable a much more structured labor management system for our buildings and standardized our buildings and allow us to drive productivity.
You know during the last several months it was difficult to realize some of those benefits.
Okay. Thanks for that and then my follow up is related to a couple initiatives in the do it yourself side I think marketing wins was on the cost of changing and being enhanced and then the diehard battery and apologize if some of this was asked already but curious where are you on these two initiatives and how you manage in this environment.
Sure I mean, you the marketing we re purpose to from essentially a branded campaign to really lift up advance. The name advance we've talked a lot about the low relative awareness of the advance brand and we remain committed to that that.
That said you know as cobot head and speed and urgency of of getting parts became Paramount. We re purpose that advertising to lead to the rally Cry campaign that we've been running which is advanced same day and not has worked extremely well it really drives home the.
Speed and convenience and trusted advice that we can provide to our customers.
It allows us to lift up advance same day curbside. So if somebody wants to come into our store in and just wait in their car. We can walk the battery out install it and they don't even have to get out of their car.
Advanced same day delivery I think we're the only people in the industry doing that at this point has been very successful for us and it's driven our pickup in store business as well. So we're happy with way that campaign. When that said, we're will remain committed to driving awareness of the advance brand.
In terms of die hard.
You know were we couldn't be more excited about diehard I mean, we had.
We mentioned in our prepared remarks that we went out and did virtual market tours. We were in a lot of stores very quickly we saw our execution against our.
Our team members are so excited about this brand.
You know they are they've they've lived with that their whole lives in some cases in some cases a team member remembers when they are five years old and they went on and they buy their first battery was a diehard battery. So we've got a tremendous amount of energy and enthusiasm around it the marketing plans are comedy content coming together for the fall.
But we dial the execution on this early credit our field team we need one is a lunch at that on July 4th weekend, and we start the landing on that the execution looks fantastic coast to coast on diehard, so more to come there Simeon but.
Off to a great start and we executed it well and now we've got to really get the pull going so we can drive people into our stores.
Okay. Thanks, Tom.
Your next question comes online as Scott CRM RBC capital markets. Please go ahead.
Good morning, guys. So based on the flat comp that you had in the first.
Four weeks in the quarter Thats, a top titles in the last eight weeks in the core so that when you talk about strong sales continuing so far in Threeq you does that mean, we're still running at double digit rate.
Yes, we're not going to give specific.
The numbers Scott for it but I mean, we obviously, we did end up running.
In double digits those last couple of period in the third quarter, which we feel good about so.
The category remains strong for some of the reasons I mentioned earlier, so we feel good about.
Got it okay, and and when you talked about the 2008 basis point gap, okay across some of the geographies.
Turning that was kind of full quarter commentary, but should we assume there's been a fairly meaningful naphthalene in that performance gap and kind of in July and August so far just as consumer mobility has continued to improve or you still seeing that the gap that life.
Yes. Good question, we are seeing it narrow.
And we commented on the northeast in mid Atlantic, specifically, where we've seen the most significant impact of Cowen.
In particularly on the on the pro side by the way DIY, we're doing better there, but even there.
You've got that differential that we're talking about but it has narrowed as times going on and we are optimistic that we'll continue to narrow it just.
People up in the northeast and mid Atlantic had been just less.
Overall performance up there has lagged.
[noise] was very very strong throughout the entire quarter, both on pro and DIY Hi.
Mid Atlantic in the northeast.
Challenged West Coast, we did well on on the Iwai Pro was more challenge on the West coast for Us So thats kind of the geographic performance, but we are seeing and narrowing was.
That's very helpful. Thanks, guys.
Next question comes from the line as Michael.
And one time with Evercore. Please hey, good morning, Thanks for taking the.
The question just wanted to focus on two things one was topline and then a margin follow up so just specifically as it.
The pro side was that.
And then anything you can share.
Traffic count versus ticket size, you know for DIY and DIFM and then I just had them.
Yes first of all on pro we were down.
Slightly in the quarter.
You know overall.
Very very strong ticket performance on on.
The ally dollars per ticket up very strong.
In terms of pro we were.
We measure accounts right Michael Enpro like how many accounts are we servicing.
In April and into early May that number drops significantly it was down 30% for a couple of weeks there was a girl.
Yes were shelter in place and very very shutdown as the quarter progress the number of accounts we were.
Servicing came back back backend right as a quarter or we started to approach year ago levels were still slightly Nate.
Most but our dollars per account.
Surged so.
There are a little bit on but overall, our pro business has recovered weekend week out since this thing.
But that.
Okay, Great and then just on the margin front kind of a two parter, but one is on SGN any dollars, Jeff had some significant puts and takes there but.
If you think about the back half can you kind of continue SGN $8 to be more or less flattish with last year, even if the volumes remained strong.
Yeah, and then secondly on the gross margin front, just wanted to see what kind of inflation you all.
Experiencing and if you feel you can get it through.
Because if I recall, there's significant tailwinds from cycling the speed perks 2.0 launch.
As well as a supply chain leverage into Threeq, you that should be good for gross margin.
Yeah sure, let me start with the us DNA as like wins, we have some tailwinds and if you kind of tick back through though controllable we have marketing, but if we need to scale of that we can scale it back.
Total it and what we're going to is we're going to spend what it takes to protect our people and protect their customers.
Pro Labor doesn't.
Continue to trend the way it has been we're not going to have drivers in the stores there's no.
The tailwind side, obviously, the travel in payroll in the store.
I feel really confident we continue to leverage that.
Not to mention the sitting in the impact that we're going to get from die hard in the second quarter.
And then you'll medical again could go.
Go either way.
In terms of gross margin you inflation.
I think we were right around 2%.
Maybe slightly under and you're right in the back half, there's two things were going to.
As of speed Perks and then.
The tariff so on.
Year over year.
Hey says, we should be able to see from benefit that anything in the back half.
So suited with elections or anything else. So, yes, certainly and thank you and good luck.
Thanks.
Hi.
Now embedded Stephens Inc. Please go ahead.
Hey, good morning, guys.
I'm wondering when it Tom Ti on the status.
Just of the independent Carquest locations, obviously, they're levered towards the DIFM market, which it underperformed I know you additive.
The few but just any material change in the health of the independent landscape, you're seeing especially maybe August.
Year to date as we've seen the PV piece I mean kind of run out in late July any change you're seeing out there that landscape.
Well first of all.
I'd like to commend them I mean they.
Did a phenomenal job a mid tremendous challenges I think the team you really banded together the the independents themselves our field team you know our pro team that supported them.
We acted really fast.
And a lot of our independent partners were able to just take all of the things we were doing inside of advanced to keep their team members safe.
Levers that TPP loans, they were able to rollout for HCP stores, which allowed them to provide essential parts and services to their community. So you know I think more and more you know, we're able to move faster to enable our independence too.
To do the things that they need to Mike. So we feel very good about.
Both the progress it's been made there and they had a strong quarter actually so we feel good about a daniel.
It's great is helpful. And then definitely one on gross losses as a follow up you know we're hearing from.
Transportation companies.
Especially truckload and LTL rates are beginning to move a lot higher just due to limited capacity.
It was to third party freight rates.
Looking that so maybe impact grows more.
And the back half maybe as a follow up yeah, and we haven't broken out.
Our third party.
Trend.
Rotation, but we certainly do have some of it is third party a portion of that we do have.
Terminals.
We haven't seen a significant amount.
Owners inflation here in the second quarter doesn't mean, you won't get in in the back half.
But what we've seen here in Q2 has been.
Basically immaterial.
Yes. Thanks.
Your next question comes on the line asking Sac sat Fi then like Wells Fargo. Please go ahead.
Hey, good morning, I did it would for me you mentioned performance was down slightly in quarter Q.
Curious if this was consistent across all the bearing professional customer or commercial customer types sat and when the signing disparities across town mom and pop garage is or regional chains.
Well the word strategic customers, we have our technet customers, we have had the all other.
We are winning.
So I can tell you is is all of them have been bouncing back.
As we mentioned in our most recent four week period, which kind of is mid June to mid July you know we were up very nicely.
In our professional business overall and that.
Not really was across the board you know our strategic accounts or are coming back.
You know our Technet Technip, probably led the way did did lead the way in the quarter, we added additional technip and our base Technet customers performed very well in the quarter and even the all other segment in the last four weeks. We grew so it was really a function of that that first big change.
And cobot impacted.
The country in April when there was just people to the people close down and it was.
Pretty uniform across our channels within professional and.
And then as the country began to open back up.
We saw improve and Dave's experienced similar things to us we looked at the geographic performance and I I talked to the Ceos are these companies. We do the benchmarking everybody has struggled in the mid Atlantic in the northeast everybody had a huge.
Now a growth rate in the center of the country. So that's really what was going on and I do think overtime as we said before the large strategic accounts are going to continue to grow at a and accelerated growth rate and you know where they have the scale of theyre going to levers that scale.
Got it.
So basically in rank order you know there were two major.
The drivers to the gross margin expansion.
The first actually being supply chain, we leverage both in rate in dollars on year over year basis, and then the second item would be youre the mix that you're referring to.
And then that was offset by what we call inventory related which was largely you'd think that in terms of volume because we took the inventory down so substantially those capitalized supply chain cost work their way through the piano.
The LIFO impact for the quarter was a little over $3 million so year over year, we we actually saw that as a tailwind.
But it was a 3 million dollar hit in the second quarter.
I Am guide.
Exactly.
And your next question comes from the line up Thats in China with Jefferies. Please go ahead.
Hi, good morning, guys.
Good morning, Brent.
As you look at.
During the last us at the sorry to die hard with.
Just weeks I guess sort of history.
How has the performance the batteries to compare it to what you're doing mid two of auto craft in the prior year.
But you can sort of measures of success with.
And I guess as you think about the diehard brand.
For product extension or you're going to keep that in battery is that rolling out said broader categories.
Well first of all the you've heard from others that batteries.
Performed very well in the second quarter period.
For some of the reasons that we mentioned earlier and that was you know fortuitous for us because obviously we were in.
Sell through all of those autograft batteries, but that was a massive undertaking but for us. So I mean it enabled.
Very smooth transition as I mentioned every store in that.
Country was full with die.
We can see.
There's a lot.
In bad.
Varies and you know we're optimistic that Guy I think it's early to comment on the perform.
Most of it.
But.
There's no question that a bullish on our ability to drive market share gains in batteries.
In the back half of the year and in terms of what we're going to do with the brand more to come there I mean, we want to be very thoughtful and deliberate.
The about die hard so you think about the big things that we're focused on there we have to win in batteries, that's kind of there and not kind of moving on to something else before we've we've established ourselves within batteries.
Beyond that there's theres a lot.
A lot of extension opportunities that we're discussing but you're not going to see a lot there.
Over the next couple of months I mean, right now we're focused on dialing the execution of the battery launch.
And our.
Launching there as well and our team.
Those are really really clear on.
Benefits in the features associated with diehard, so thats kind of the current focus.
Launch in the back half of the year.
Okay and then a quick question you mentioned that you gain market share in the quarter I guess do you have a feeling for where the shake his shares.
They're gains may have come from I mean, you did comment some other online and non traditional auto retailers deemphasize the category or was it from smaller independents, who were just sort of stressed with.
Free care PPP funding.
Yeah, I think it's a combination of both from a we can see Brad you can see the true on the line.
Share of buyers or some of the growth rates, but.
You know surrounding pardon me the online players we can see those gains and you know when we see our performance versus rest the market.
I have to assume that so some of those gains came from some smaller players.
Right you can't see specifics varies.
But I think it's a combination of both of those two.
And your next question comes from the line of SEC Bhatia with Wedbush Securities. Please go ahead.
Thanks, a lot and good morning I. My first question is just around is that does this pressure on miles driven.
And whether or not you're seeing exploring it directly tied to miles driven.
Okay and have remained a weekend such as the mid Atlantic in northeast I can you provide a little bit more color there.
Yeah honestly staff on the it's impacted.
You know more the brakes.
Under car chassis categories, and again I mentioned earlier that was.
We saw as miles driven dropped a minus 40 and minus.
First.
And in particular in the geographies you mentioned.
Same breaks and to a lesser extent under.
The car chassis, but that that gain momentum as the quarter one of the quarter in into the third quarter.
And this is largely a professional comment by the way.
You know we were able to see that number come up and you were now growing mid single digits in those categories.
In the failure related particularly batteries.
When you're doing you got intermittent driving you know you're basically.
Increasing the likelihood of failure. So that is actually helped us and sales are up very strong and.
In those categories, and we mentioned you know appearance and accessories, which you know people just on time on their hands there washing their own cars. There are detailed in their own cars, they're not buying a new car they have buying.
I used car that they want to work on and do some things so they're doing the things that you know people who have time on their hands are doing right now so DIY. It's a great time for deal why because people uptime in their hands and they're going to youre going to do things at that time other than just sit around the house.
And get get get get outside and do the things that people love to do so you know it miles driven is normally a very high correlation of performance in the category, but we're not seeing that same relationship that we've historically seen.
That's really helpful. And then secondly on cross banner distribution I know youve delayed some of that expected changes and benefit but for DT, where you had implemented itself our teams divide a little bit an update as two types of the impact improved margin improved performance that you're seeing.
Yeah, We're we're right on the number in terms of the productivity. We expect in the buildings that we've made the changes that so we feel very good about that.
You know, we're continuing to roll it out we delayed it I mean, there was a difficult quarter you're running through.
All the challenges that we were facing our ecommerce business surge significantly in the quarter.
We had cold incidents in our distribution centers, which caused us to have to slow that down which we didn't want to do but we had too. So we're not going to realize the full benefits until the third quarter of 2021, as we indicated in our prepared remarks, which moved to back about a quarter, but in the buildings and the stores where.
We've made the change you're just taking stem miles sprayed out so it just it just rate stem miles savings you know as as fuel cost fluctuate that's going to fluctuate but.
Overall, we're will it's on track with the plant productivity we expect.
Thanks, a lot and good luck.
And your next question comes online next Kate Mcshane like Goldman Sachs. Please go ahead.
Hi, Thank you for taking my question, Sean each on behalf of key chain.
Tom intentionally shut US you know thinking about school, we can make its costing you guys mentioned that you encourage $15 million at call. It popped into Q and Pago St Wise, one time expenses like Mexico et cetera, how should we think about this expense going forward.
Yeah, it's a tough one obviously two to predict we're going to continue to pay whatever we need to to keep our people say, yes, we had 16 million in the first quarter, we had 15 million in the second quarter. So one could say that is a run rate. We did have some one time cost. So we had.
That in the first quarter as well. So the question really becomes is there a third quarter onetime costs or is there a fourth quarter onetime cost.
Remains to be seen you know you look like we said in that some of our comments we put in the plexiglas, we continue with sanitation masks temperature taking.
And then we did some support directly to our team members in the form of.
Some onetime compensation. So it was that sort of the dynamics of the first half of the year, a little bit difficult to predict what's going to happen in the second half of the year.
But we're certainly going to make sure we keep our people safe.
Hi, Thanks helpful. Thank him if I could get a quick follow up intensive youre in when she down slightly in the quarter. How should we think about the back half hour coupon and wed see and are there any issues you know in sort of sourcing and supply chain locally at this point just our everything.
Pretty seamless right now.
Yeah in terms of sourcing we've been very successful in working with our supplier partners across the globe.
In terms of getting the skews that we need deal where we have some in stocks that are a little bit lower in some of our lower slower velocity skews, but we intend to get that back in trip back on track.
In the second half of the year. So we're not anticipating any significant investments or any significant decreases in the back half as we sit here today.
You know again, if we get another surge it could drive down our inventory, but right now we're well stocked we're well prepared and we're going to keep working through that through the back half the year to ensure we can get the customers personally need.
Hi, Thank you.
Your next question comes from the line as David done I know that Wolfe Research. Please go ahead.
Hey, good morning, Thanks for taking my questions. Maybe this is somewhat of a follow up on the last question given the volatility in sales trends in the strong pick up off the lows in late April have you sort of come across any supply constraints, especially within the world pack business, that's something we could see come into play more towards the later stages of the year.
No we haven't David I mean, it's a we've obviously are managing this daily you know we.
Yet.
You know an update that's comprehensive you know every Monday and every Friday.
Let us know where we are.
It has been you know challenging because there has been a significant surge in demand and you've got.
You know suppliers and manufacturers out there that are are scrambling to source, but we were well positioned our worldpac team does a terrific job sourcing the parts that they get a that are somewhat unique. The you know a very long tail of of OE parts and private label parts that they.
I have branded parts that they have so we haven't had anything specific that we would say were in any way disadvantage I think we're in we're actually very well positioned versus rest of market.
Got it.
I just follow up front in terms of online online growth has been significantly land that do you have why channel.
What are you seeing from a competitive standpoint, now that its category seems to be gaining more traction online have you seen any other players get more aggressive in the spacing how are you addressing asked.
Yeah, I mean as it is a big key here David is to make sure I mean, obviously, we've had some new customers come to advance in the last several months, we've talked a lot about that over the last few few months. How you know how do we make sure if somebody walks into our store for the first time or goes to our online portal for the first time that we keep that customer.
And obviously speed perks is the vehicle to do that we're very happy with the loyalty program that we have we were very focused on that in the past 12 month, we indicated that the number of people on year on year was up 30%.
We also know that we are graduating people that were in speed perks to the higher tiers, we had a 24% increase in graduation rates in the quarter. So somebody who was a club members now a VIP or an elite. So that tells us that that person is increasing their share of wallet with advance which is very bad.
Very important in this timeframe you can you you don't want us to be a one and done you wanted to make it sticky right and we know that our average.
Dollars per member is up significantly so that tells US we're driving share of wallet. So that's kind of how we look at it to make sure that these online you know purchases as they are making with us are translated into a great customer experience, whether that's online on our app by the way, which we launched in the quarter.
Or in our store and I feel that we're making good progress there there's a tremendous amount of runway. There. We've now got that first party data. We've got an email we're able to personalize. Our offers so you know obviously other online players are going to do what they do.
But our ability to know the category and provide the subject matter expertise and content knowledge that we have along with the trusted advice and the speed and convenience of our stores, we feel we're well positioned to compete in that world.
Very good thank you very much appreciate it.
And there are no fair question at this time I will take on site over to Tom for closing remarks.
Well, thanks again for joining us today and as you heard we delivered strong results in Q2, and we're very optimistic about the second half a 2020.
During this unprecedented time Raul enduring I'm incredibly proud of how our team has come together to serve our customers with Karen speed, while protecting the health and safety of all of our team members I'm confident that the actions. We're taking will allow continue building on this positive momentum for advance and enable meaningful top.
Line growth margin expansion and significant cash flow generation.
We look forward to talking to again in November. Thanks, again for your continued support and please stay safe.
This concludes today's conference call you may now disconnect.
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