Q3 2020 Advance Auto Parts Inc Earnings Call
Welcome to the advance auto parts third quarter 2020 conference call before we begin Elisabeth Eisleben Senior Vice President Communications and Investor Relations make a brief statement concerning forward looking statements that will be discussed on this call.
Good morning, and thank you for joining us to discuss our third quarter 2020 result.
I'm joined by Tom Brugger, our President and Chief Executive Officer, and Jeff Shepherd, Our executive Vice President and Chief Financial Officer following.
Following their prepared remarks, we will turn our attention to answering your question.
Before we begin please be advised that our remarks today may contain forward looking statements.
All statements other than statements of historical fact are forward looking statements, including but not limited to statements regarding our initiative plan projections and future performance.
Actual results could differ materially from those projected or implied by the forward looking statements.
Additional information about factors that could cause actual results could differ can be found under the caption 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, everyone let.
And allow me to start taking each of our team members and Carquest independent partners for their tireless efforts to delight and serve our customers.
Our entire team faced challenges every single week throughout Q3.
I'm reminded daily and our role in supporting essential workers has never been more important to our success.
We've been operating with three overarching priorities during the COVID-19 pandemic.
First prioritize the health safety and well being of our team members and customers.
Second preserve cash and protect you know during the crisis and third prepare to be even stronger following the crisis.
We made progress on each of these objectives in the quarter.
Our dedicated leadership team remains focused on the health and safety of our team members and customers regularly cascading safety protocols and updating our playbooks the pandemic.
This concludes old trucks for all team members Institute a companywide in Q3.
We also provided cooling fabric now in the summer to address concerns while ensuring our team members whose production.
Our communications team keeps visibility through virtual town halls, and regular video updates tricks for team member engagement.
We're also benchmarking and working collaboratively with industry and professional organizations to continuously improve our response to this rapidly changing environment.
Meanwhile, we remain vigilant to protect our team members and to ensure that our customers have a safe and positive experience in our stores.
Turning to Q3 results, our net sales grew 9.9% to two and a half billion dollars.
Her to the prior year, and we delivered comparable sales growth of 10.2%.
This was our strongest quarterly performance in 15 years.
Adjusted operating income increased by approximately 33% to $272 million and our adjusted operating income margin rate increased 183 basis points to 10.7%.
As you'll hear from Joe we also strengthened our cash and liquidity position throughout the quarter highlighted by our quarterly free cash flow improvement of 95%.
Recently, we saw a positive comp sales and across every region.
The Gulf Coast, Central and southeast posting strong double digit comp growth.
Our northeast mid Atlantic and West regions, well still positive about mid to high single digits were below our overall comp growth in the quarter.
As we noted in Q2, there remains a wide gap between our highest and lowest performing regions. Although this narrowed in Q3 to approximately 900 basis points on average between districts reasons I just mentioned.
The good news is that the northeast, which is our largest region had the most improvement of any region in the quarter versus Q2.
As we examine the broader all parts industry and total retail data the performance of these lower growth geographies has been more impacted by COVID-19 and is consistent with our internal results.
On a category basis, we still feel strife in batteries as well as continued growth in appearance at optics that began in Q2 when stay at home workers were implemented.
Well there are many puts and takes in Q3, we believed the net benefit to the industry was driven by three primary external demand drivers.
First there are economic drivers you.
Sure Didnt uncertainty in the macroeconomic climate and increased unemployment there bill.
Fewer new vehicle sales and more used vehicle sales.
This resulted in an aging fleet, which is good for both yeah, why and ultimately grow.
Secondly, your corporate related factors as we've discussed before we believe consumers have an understandable fear of using mass transportation, creating a heightened emphasis and reliance on personal vehicles.
In some cases people are working from home and have time on that has to do their own d. I y. maintenance and repairs.
Finally, it's our belief that when motorists have yeah why needs in this environment they prefer to shop at smaller boxes in our stores.
You will see that the trusted advice, they need and get back on the road quickly. So they can do the job well.
Of course, some of the benefit from these external factors is offset by the reduction in miles driven.
Which is an important demand driver for our industry.
When this begins to recover we expect it will provide a tailwind for the industry.
We believe the majority of our accelerated top line growth in the quarter and in particular, the strong DIY performance is due to these external factors.
Our industry has historically performed well during challenging economic times.
Considering prior periods when the economy was challenged yeah. Why is generally an early beneficiary followed relatively quickly by pro recovery.
Looking more closely at our pro business, we delivered mid single digit net sales growth in Q3. Following me a decline in Q2 due to the temporary closure of garages across North America.
In Q3, our machine learning platform dynamics assortment enable us to have the right part in the right place and improve availability.
This enable both assortment and close rate improvements as lookups and demand surged.
We also deployed new customer delivery software for Woolcock advance and Carquest, which includes real time updates and notifications for all users.
In addition, our pro customers were very appreciative of the continued interactive virtual classroom training, we provided through our Carquest Technical Institute.
This included the ability for pro customers to extend their training content, so old technicians within their repair shops.
On our mortal logic platform, we continue to enhance our technical service bulletins and also deployed this valuable tool in Carquest, Canada.
These tools in addition to our sustained focus on improving overall experience for pro customers enable us to further grow our technet base during Q3 as we crossed the 12000 customer Mark.
In addition, our Carquest independent team had another strong quarter and has now converted 36, new stores to the Carquest family year to date.
Once again, we know this has been a difficult time for professional shops, and we believe the work we've done to be there for professional customers when they need US most has set us apart.
Moving onto D. I Y. omni channel, we delivered another quarter of double digit net sales growth in Q3.
These results were driven by the external drivers discussed earlier, coupled with our DIY growth initiatives.
Or both initiatives are primarily focused on increasing share of wallet with existing Lars well, attracting new DIY customers.
Based on the syndicated data available to us we drove meaningful share gains throughout the quarter.
Our D.R.Y. initiatives start with diehard.
Well, we believe diehard is benefiting our performance in all channels, we can clearly see improvements in our D. I Y battery share behind our launch.
In October we introduced our die hard is back campaign.
This advertising launch with a two minute film on October 18 during the Fox NFL game of the week.
This integrated campaign, featuring Bruce Willis has already generated over 2 billion impressions and more than 1200 earned media placements.
We believe our marketing plans will drive continued support during the winter months.
Batteries fail and customers need a reliable solution.
We think we have significant room to grow diehard the battery segment.
Secondly, we continue to focus on building awareness for the best brand to attract new customers and drive proper.
In addition to leveraging more effective advertising, including diehard, we're strengthening our digital engagement with the outliers when they visit our website or download our app.
Q3 highlights include the continued growth of our dads same date suite of services and strong momentum and consumer response to the launch of our mobile App earlier this year.
These and other initiatives helped drive strong double digit sales growth in E commerce for the quarter.
Third we continue to see year over year growth in active speed perks members since the rollout of our new program in the summer of 2019.
Importantly, we're seeing a steady increase in members, graduating to the elite and VIP levels.
Our graduation rates improved by more than 20% year over year, reflecting important share of wallet gains, but have you got worse.
We are leveraging first party data gathered through this program to deliver personalized experience for our customers.
Finally, we remain focused on execution across the board, we did an excellent job with the die hard launch overall and saw a year over year net promoter score improvement across all channels.
In summary, our topline performed well in the third quarter driven by the factors just discussed.
So far in Q4 to the first four weeks comp sales remain positive across all channels in the mid single digit range.
As a reminder, Q4 tends to be our most volatile quarter each year, primarily due to fluctuations in weather.
In addition, we remain sensitive to potential volatility from other external factors in the current environment, particularly those related to the future spread of cobot and the possibility of heightened stay at home orders in the near term.
Much more within our control is the execution of our four pillars of margin expansion as we demonstrated in Q3.
Starting with our first pillar our topline growth during Q3 contributed towards sales per store improvement versus the previous year.
Additionally, on a rate basis, our SGN a per store improved year over year.
We're managing store payroll with greater effectiveness as a result of our myday scheduling tool.
Our team continues to planned payroll conservatively in the current environment balancing customer service and cost very closely.
In terms of supply chain, we're making progress with our cross meant a replenishment for CBR initiative.
We've completed nearly one third of our original plan.
Let's redirect stores to a more freight logical distribution center and reduces stem miles across our network.
We're already beginning to see savings from the stores that have been completed as a result of reduced miles.
We're on track to complete approximately 40% of our identified stores by the end of the year.
Completion, and full run rate expected to be realized by Q4 2021.
Importantly, our team of spam further opportunities for improvement than initially model, which includes additional stores that can be included following the completion of the first phase.
In addition to CBR or single warehouse management system implementation or WMS is also well underway after a temporary pause due to the pandemic art.
Our team mobilized to adjust our plans, which now includes virtual implementation capabilities.
We're installing the new WMS, starting with our 11th largest Dcs.
Which we expect for it to be completed this year.
Based on what we know today, we expect to finish the entire WMS implementation by the end of 2022.
With that said, we will realize savings as each additional DC is completed.
In terms of category management, we made progress in Q3, our own brand expansion.
We expect the finished 2020 with a significant increase in own brand skews and to further enhance our skill mix next year.
Our margin rate on owned brand skews is meaningfully higher than comparable applications in their respective categories.
This will enable further growth in margin rate in the years to come.
Separately, our new strategic pricing tool is beginning to enable both profit dollar and margin rate improvement through pricing initiatives rolled out in the quarter.
Finally, as DNA productivity continues to be a source of margin expansion.
First we made progress on the consolidation of disparate back office systems, which is our largest area of opportunity within Us Tonight.
In Q3 this was highlighted by progress on our finance ERP implementation.
In addition, we continued with the integration of Worldpac and Autopart International.
We also continue to address opportunities to optimize our organizational structure, including support contract and professional fees.
Consistent with this we made the decision to consolidate our field structure from two divisions. So one in may.
In early October we further streamlined our field structure from 12 to eight regions.
We believe that these moves enable us to serve our customers with even greater effectiveness efficiency and flexibility.
The recent field changes also enabled us to bolster certain areas and our corporate support with seasoned field operators.
As an example, we frequently discuss the importance of diversity and inclusion and its inextricable link to our business strategy as part of this we welcomed Dino Lamar having served as our RVP the great Lakes region for the past three years to our leadership team as our new VP and chief inclusion and diversity officer.
Dino has a deep field leadership background in retail both inside and outside of the das and her leadership and enthusiasm for building a high performing diverse workforce made her an ideal candidate for this role.
The second area of opportunity within next January is rent.
Based on the current environment, we're thoughtfully evaluating our real estate footprint, including office space.
This involves negotiating with landlords for concessions on lower turn properties and in some cases exiting a property altogether.
We have engaged a third party to help with this an expected may result in some short term cost headwinds in Q4.
Specifically buying out leases that are unproductive, where we determine the building is no longer necessary.
Sure we have a dedicated team reviewing existing plans we have for every single line item within us today.
They're assessing the productivity, we had planned pretty called <unk> and also capturing key learnings we've had during 12 it.
His team is recommending areas of refinements and further opportunity as we move forward.
For example, during the call that we limited companywide travel, which will continue for the balance of the year.
Going forward, we intend to leverage virtual options and do not plan to return to pre cold at levels of problem.
Another area of opportunity is further reduction in our insurance and claims expenses.
Here, we continue to make progress on our lost time injury rate held.
LCR represents our most severe accidents and was 33% lower than the prior year.
In addition, our sustained focus in Q3 resulted in a reduction in collision frequency rates up 13% versus the prior year.
Our advanced driver program and Smart driver event based video coaching is also being rolled out which we believe will help us further reduce our collision frequency rate.
In summary, we continue to believe that margin expansion is a significant opportunity for advance to drive total shareholder return and we remain focused on munis since we haven't placed pretty cold but.
For the four pillars of margin expansion.
Well executing these previously established plans. We're also closely monitoring the current and future environments to identify new productivity opportunities to drive total shareholder return.
Before I turn it over to Jeff I'd like to recognize the impressive results our team members and generous customers the Liberty and American Heart Association campaign.
Following a successful campaign last year I could not be prouder of our teams efforts this year to raise $1.4 million, which was a 38% increase compared to last year.
We delivered this record setting campaign, while providing exceptional customer service and remaining relentless on the execution of our long term plans.
In closing our third quarter results were another step in the right direction.
Despite uncertainty that remains in the current environment, we remain focused on executing our long term strategy.
With that I'll turn it over to Jeff for details on our financial performance.
Thank you Tom and good morning, everyone.
I want to reiterate comp thanks to our team members for their dedication and hard work.
Not only this past quarter, but since the pandemic began.
We have been extremely diligent in ensuring safety measures are in place throughout the enterprise.
At the same time, our team members have risen to the challenge but.
The positive print, we released today would not have been possible without them.
In Q3 or just the gross profit was approximately $1.1 billion.
Was an increase of 11% compared to Q3 of the prior year.
Adjusted gross profit margin rate improved 50 basis points year over year to 44.4%.
Driven by favorable pricing actions and supply chain efficiencies.
These improvements coupled with channel mix were slightly offset by unfavorable product mix.
And headwinds associated with shrink and effective.
It's also important to note that while we experience tailwinds associated with white oak lease.
These tailwinds were offset by capitalized for pricing cost.
Resulting in no net impact from the inventory related costs and benefits.
In the quarter and compared to the prior year.
Our adjusted EPS, you name with approximately $857 million in Q3.
An increase of 5.8% compared to Q3 2019.
Adjusted EBITDA as a percent of net sales improved by 133 basis points compared to the prior year.
Primarily driven by improved payroll and rent leverage.
Production in travel.
Our continued focus on safety, leading to a reduction in insurance claims as Tom had mentioned.
These cost savings were partially offset by an increase in support contracts related to our transformation initiatives.
In addition, our corporate expenses for the quarter were approximately $9 million.
The majority of these expenses are related to ongoing cost such as cleaning supplies.
Well, it's a mess.
And then have sick pay benefits during the pandemic.
We expect to incur these costs for the foreseeable future.
Adjusted operating income in Q3 was $272 million, which.
Which improved 32.6% compared to the prior year quarter.
Our adjusted operating margin rate improved 183 basis points to 10.7% in the quarter.
Adjusted diluted EPS was $2.81 an increase of 34%.
Year to date free cash flow was $616.6 million.
Compared to $539.3 million during the same period in 2019.
Driven by strong topline results.
Improved working capital and the deferral of federal payroll tax.
In Q3, our capital expenditures were $52.5 million.
Which was a decrease of $5.3 million compared to the prior year.
In line with our financial priorities during the quarter. We completed the early redemption of our 2022 notes and tender at approximately 57% of our 2023 notes both.
Both of which carry a 4.5% coupon rate.
This was completed using both cash on hand as.
As well as proceeds from the $350 million, 1.75% notes issued during the quarter.
Our disciplined approach to managing our balance sheet has allowed us to take advantage of the current low interest rate environment.
Resulting in a stronger debt maturity profile.
And improved leverage ratio.
We believe our debt financing initiatives to further safeguard as the business for the future.
Our disciplined approach to managing cash resulted in 80 ratio of 80.8%.
Which is the highest we've achieved since the GP I acquisition.
We remain confident in our ability to generate meaningful cash from the business and to Opportunistically return cash to shareholders.
As we discussed last quarter, we lifted the temporary suspension of our share repurchase program.
During the quarter, we repurchased nearly $110 billion advanced stuff.
At an average price of approximately $153 per share.
This combined with the continued payment of the 25 cents quarterly cash dividend per share approved by our board.
Further demonstrates our confidence in the long term strength of our business.
Given the continued uncertainty around the impact to COVID-19, and the current economic situation, we will not be providing guidance for the balance of the year.
Traditionally Q4 has been our most volatile quarter with.
Whether having a meaningful impact on results.
In addition, there are a couple of factors impacting that's you need to consider in Q4.
First we have known incremental costs compared to the prior year related to Copa nights and expenses.
Secondly, as Tom mentioned, there will be costs associated with buying out unproductive leases.
Third we are investing in the die hard as back marketing campaign.
We also want to remind you that our fourth quarter. This year include the 50 Threerd week.
With the exception of comparable store sales.
We encourage you to include the impact of these factors in your modeling.
Finally, we are updating our strategic business plan informed by our best estimates and assumptions of the environment.
Our plan is to finalize this in early 2021.
Provide you with an update after our Q4 earnings release we've.
We expect to finalize the day in the near future and look forward to sharing additional details with you.
In conclusion, we are pleased with the results of the quarter and believe that we have positioned ourselves positively for the remainder of 2020.
We know that we cannot predict with this winter will break, but we remain committed to top line growth.
Margin expansion and managing our liquidity.
With that let's open the call to address your questions operator.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Again that is star and the number one.
Your first question is from C.
I mean gutman with Morgan Stanley.
Thanks, Good morning, everyone I realized youre not ready to talk about guidance going forward or 21 can you talk about the transformation overall and you said that you've restarted some elements of the supply chain overall.
Can you can we get to I guess operating margin expansion.
That's a little bit higher than what we saw this corner went on hire sorry, and you know 50.
50 to 75 basis point range going forward and more of a normalized environment or have some of the elements of the.
The supply chain being delayed this year will cause us to be prolonged.
Hey, good morning Simeon.
Definitely has taken a lot of time over the last couple of months to look forward and really understand what we think is going to happen over the next several years and put all of our initiatives through what we call them most golden lands and feel very excited about the TSR opportunity I had for sure.
Expansion of margins is a big part of that and as we said consistently we.
We do believe we can expand at a greater rate than we certainly did last year. So that's the plan you know we're going to continue to drive the key areas of margin expansion that we've spoken about.
Sales and profit per store or the supply chain initiatives or see a dry.
Driving the category management initiatives, and then and then further opportunities within ask in a in that combined with.
Continued topline growth will drive some strong cash flow for the company and be able to return excess cash to shareholders. So the plan is is continuing on and.
We look forward to executing against it next year.
So I am a two follow ups to that Tom I think Jeff mentioned, some marketing accelerated in the fourth quarter spending on diehard cause you to like slow some of that expansion to invest a little bit faster and marketing in the near term and then you said using cash it seems like you know the cashes grow.
Following are you going to deploy quicker or are you waiting to get through this environment before deploying it.
Yeah, well I'm die hard it was really a comment on the quarter or the fourth quarter in terms of an investment behind marketing in the fourth quarter as we said all year.
We launched die hard as you know, we I'm not sure on July the fourth and the marketing broke on October the 18, three weeks ago, and you're going to see a heavy advertising on diavik. Starting again next week, obviously, we pulled it off sitting in for the election weeks, we knew that that was going to be pretty cluttered.
And people here you, obviously focused on the election, but starting next week, you'll see our advertising come back and that we're really going to head diehard hard you know for us for several weeks as we head into the to the winter season. So Jeff can respond to the cash question. Yeah in terms of cash you know still at an elevated.
Level and you know, we did repurchase about $110 million worth of our stock in the third quarter and so I mean, we're going to continue to be opportunistic there you got to be a.
Somewhat prudent in terms of the uncertainty of the environment.
We're pleased with what we were able to do in the third quarter and the fourth quarter is going to present, new challenges. So we are going to try to be opportunistic in terms of repurchasing. We continue with the dividend at 25 cents a share. So we're pleased with that and you know as we close out the balance of the year, we're going to.
Maintain that trajectory.
Okay. Thank you both.
Thank you.
Your next question is from Christopher Horvers with JP Morgan.
Thanks, Good morning, everybody.
So wanted to ask about the topline you seem to be narrowing the gap versus your competitors I <unk> and but then you also mentioned you know mid single digit quarter to date, which is a strong trend others had talked about a moderation in October as well. So can you may be diagnosed what is changing from that.
Tend to the mid single digit is it is it d. I y. slowing but commercial relatively constant and overall is that how is that playing out regionally is the gap between the northeast and the mid Atlantic versus the other areas continuing to narrow.
Well first of all Chris the than the gap did narrow meaningfully in the third quarter.
You know we were around 2000 basis points in the second quarter and we narrowed that to 900, you know those particular coal bed areas are heavier areas for coal, but are much more challenged with miles driven and across broader retail you're seeing that.
You know that those lower numbers, but we are seeing it narrow and we're excited about you know the future. There I mean, eventually that's going to come back at the northeast mid Atlantic regions are big for Us and we want them to come back in terms of the fourth quarter, a we've seen a moderation it's been really more winter related categories. It's still are.
Really there's lots of time left in the quarter. So you know as you know there can be volatility in the fourth quarter, but overall, we're pleased with our performance quarter to date, and we're going to continue to execute our plan.
Understood and and then as a follow up to that when you talk about winter related categories is that is that more d. I y. like batteries slowing ahead of the winter and and is that impacting the commercial side of the business that's more DIY.
Got it.
Understood and then you know Jeff you gave us some good commentary around SG and aim for the fourth quarter. So at any any comments on gross margin factors that we should consider there and then as you think about you know 2021, you know based on all the initiatives you know holding com constant.
It would seem like is.
Is it fair to say you would see sort of increasing margin expansion over the cadence of 2021, you know clearly have to a impact for the comparisons on the cobot front, but just you know on an underlying basis.
Yeah couple of things there, Chris I think Bert you know Q4, you know first of all as you saw in Q3 were lapping the coupons, we're lapping the tariff.
Yes, we're going to consider we're going to continue to see that in the fourth quarter. A you know our supply chain efforts is that something that you know as we take off was somewhat seven miles were going to continue to see those savings that will continue into the fourth quarter and that will certainly continue into 21.
Well, we're obviously not going to give me any guidance around 21, but I think those are some of the factors that we can be looking at.
And then just in terms of overall inflation I think would be the other thing that we've been working closely that's been relatively low.
Certainly in the third quarter.
Yeah, we don't have any reason to believe we're going to be any significant or inflationary factors and lease in the fourth quarter little bit early to speculate on 21.
Instead, just last question. So does that mean from like a a light filling a capitalized inventory cost perspective that should that remain at this point you think relatively neutral in fourq you.
Yes.
Understood. Thanks best of luck.
Thanks.
Your next question is from Michael Lasser with <unk>.
Good morning, Thanks, a lot for taking my question, Tom It seems like.
Some of your operating cost right now are little bit higher than what you had previously expected based on the US you need performance this quarter and next quarter.
Some of the gross margin driving initiatives are taking a little bit longer than what you had previously thought due in part to cool the heat.
The overall margin opportunity that.
Long talked about the scene equal to or not is greed.
Even better than what you had thought previously.
Yeah. It's in very much in line. Michael you know, we are continuing to execute the initiatives that we've spoken about and as we said at the beginning of the year before and this year you know last year and this year were expected to be lower versus 2021, and we continue to expect that debt.
Overall 2021 will be greater than we delivered in these two years. So there's really no change in how we're approaching the margin expansion initiatives. Some of them have been delayed as you said the only major ones are the cross banner replenishment initiative on supply chain and the warehouse management initiative, but other than that you know working.
We need to execute each one of the initiatives that we have.
The achieved this quarter and next quarter, we should view that as a one off for the temporary not not any indication.
More longer lasting trend.
Oh really more than this quarter last year fourth quarter as we called out there are some unique things in the quarter and investment to launch a new brand, which we're very excited about and im very important investment to drive awareness of die hard to make sure that consumers know that the the place. The only autopart started that you can get a diehard.
Batteries advance or Carquest, and that's a very important message for us to land and it's got a very the early returns on what we're doing there are really really strong in terms of market share.
We also talked about rent there some onetime things with rent that we need to go do and then Cove. It obviously were ongoing dealing with people that at some point you know if there's a vaccine some of those those costs will go away, but those are the things that we called out for the fourth quarter.
And just to clarify that Tom on your on the return that you're getting on the die hard investments, presumably the slowdown that you experienced quarter to date has largely been dbi wide threatening and it's also quoted eight coincided with the time that you launched the new Cam team. So how do you.
The timing and the impact of the return on the diehard invest into play out with when we when you expect to see if the better sales and your DIY business.
Well, we just reported very strong sales our DIY business that continues to perform well and just relative to the third quarter. There has been a softening there, but overall I mean, a marketing investment that we're making to launch a brand that we expect to be a billion dollar brand is not a you know you.
You launched the advertising on October 18th and you look for a sales increase on the 19th.
We're going to we're going to continue to invest behind this brand its going to be a multi year.
Platform for us, it's not just something that we want to watch in batteries its going to be in other categories. So we're going to continue to measure every discrete investment against diehard, but it's overall designed to drive differentiation for the company and ensure that people come to our stores to buy diehard. So you know we feel very good.
About where it is the advertising has resonated we've had a significant number of views impressions chairs you know overtime, that's going to be very powerful for us.
Thank you very much and good luck.
Your next question is from Elizabeth Suzuki with Bank of America.
Great. Thank you I guess, just continuing on the margin topic, you compared to last quarter. There was a little less gionee leverage even though the comp growth was higher and we've we've heard from some others in the industry that there's a sweet spot for operating leverage in sort of the mid to high single digits, where you can deliver sales growth comfortably without.
During the limits of what your associates and supply chain can manage have you found that to be the case is well aware.
When growth exceeds a certain level, it's harder to get that leverage or do you feel like you know stronger sales interest always better.
Well stronger sales are always better deal, there's certainly the sweet spot. It varies you've got to think about the category mix as well you know if you did professional sales recover that requires more labor. So it's not as simple as saying no revenue was actually our leverage point becomes why you really.
Got to look closely category mix, we saw the benefit in the second quarter, we saw the benefit in the third quarter.
As professional sales continue to recover.
We anticipate it will.
That requires more labor so you know.
That is a little bit more art than science from that standpoint, you know some of the others are more straightforward in terms of the leverage you get on more traditionally six categories, such as rent, but you know certainly the higher sales levels level do help us.
And can you break out and help us quantify some of the puts and takes here first margin in the third quarter. I mean, you mentioned pricing actions and supply chain, especially efficiencies, partially offset by the unfavorable product mix were there. Some other factors like handle lapping a speed perks lapping in Paris and channel mix. If you can help us quantify.
Hi, Tim this that's okay.
Yeah, Oh, yeah.
Got it right you know pricing and supply chain, both equally benefited the quarter in terms of pricing is a little bit of everything we saw slight increases in three of our pls pricing, we've got a little bit of a benefit in sort of that coupons and rebates to thinking about fee per none of them individually meaningful they're all going your way.
Way and then the other categories, what we call a placement to override so just controlling the price that we're giving the customer in the store we saw improvements there. So in the pricing category, we saw a little bit improvement across all of those categories that they gave us a larger benefit supply chain as you know we've talked about.
In terms of.
Getting leverage from the elevated sales and in addition to that the work that we're doing to drive both the stem miles I'm. The one we did call out because we talk about this a little bit in the second quarter. It was a mix in that overall was flat. So we saw improvements in our channel mix.
It was offset by our product mix and then the only other one I'd call out is we did see some headwinds associated with strength in defectives, and that's really timing I don't expect that to be an ongoing headwind into the fourth quarter going forward.
There was a little bit of favorability that we saw last year, nothing meaningful and we had a little bit of a headwind. This year. So you know when you compare the two exacerbated a little bit but nothing significant in terms of ongoing problems are ongoing headwinds that we expect to see going forward.
Great. Thank you.
Your next question.
With Evercore ISI.
Hi, Thanks.
I had two questions one or both follow ups I believe so if if comps slowed in the fourth quarter is it fair to say that it's been more on the DIY side than the do it for me given your comments. So there were just do it for me sort of stayed stable.
And then the second question is what sort of savings do you get.
From a each DC when when WMS is implemented.
Well I'd say good morning, Greg first of all you know its epic takes clarify here is we're talking weeks here in the fourth quarter. So you know you can you can see volatility India why in weeks frequently as you know yeah why tends to be a more you know.
Volatile business as it pertains to weather and things like that so we have seen more softening India why that Enpro pro is generally more consistent Kobe change that a little bit in the second quarter. When things are completely shut down but you know over the long term you know the pro business tends to be more stable.
So I I would attribute it far more to that than anything else. You know I think you're going to continue to see.
Yeah, why perform well a balance of year into the next year.
And the pro business as as we began to recover and miles driven can starts to come back you will see the pro business come back in particular categories like brakes, I mean, our our hard parts business has been very solid on that on the pro side of the business engine management a ride control you know, we're very happy with our overall performance there so.
So overall you know continued performance on on pro a more consistent but you know do yeah. Why is also performing well.
Your second question remind me.
It's really about learning more about the supply chain savings. So I think you you mentioned your four by the end of the year four of 11.
Dcs would be converted onto W.M.S.
So just trying to if it's a frame you know how much or how much of that help when you eat.
Every time, you get one converted to either a dollar amount or bips of margin how do we think about it.
Yeah, well first of all we've called out supply chain is one of the largest areas of margin expansion that we have right. So you've got a couple of territories. There you got cross banner you got warehouse management systems, you've got execution and we're also integrating the worldpac and Autopart international supply chain. So.
Those four initiatives ladder up to a significant number as it pertains to margin expansion, we havent broken out specifics on WMS, but when we get there is savings through improved processes across our system and much more rigorous late labor management standards.
Rubin Sloan, who heads up our supply chain has done a terrific job really driving that agenda. We were in one of our distribution centers yesterday.
The performance is improving we've leveraged it again in the most recent quarter, we're going to leverage again next year and the year. After so we're excited about those supply chain initiatives. They build over time and you're going to start to see the benefit of that as we get into 21 and 22 on a full year basis.
Got it and so when you said one third.
Along the way on that that was talking about the four initiatives together. Some some a little had some a little behind is that a fair way to think of it.
Yeah. The one third was related to cross banner no condos that that's a separate initiative is just really that just really pointing stores at a different DC and that one you know we're accounting. They these savings now I mean, we're starting to see savings, we're seeing out yet and we'll finish that job in the third quarter.
Up next year, so you'd be getting the full benefit of that Greg in the fourth quarter of 2021.
Got it all.
All right. Thanks, a lot and good luck.
Thank you.
Your next question is from Seth Sigman with credit Suisse.
Hey, guys. Good morning, Thanks for taking the question you.
You mentioned some regional differences I'm curious has that been more pronounced than either the DIY or pro side and then just focusing in here on the pro yeah I realize the market share is more difficult to see but if you could just update us on the progress in terms of gaining share of wallet with your customers in any sort of wins on on the new customer front I guess how.
Cross banner another initiatives may actually be helping from an execution perspective.
Yeah, well first of all if we've got a pretty concentrated business on pro and the northeast rights out I mean, it's not just advance.
Concentrated with our Carquest business, our Worldpac business, our Autopart International business. So you know as as the early stages of the northeast a reaction to coal that happened that was a pretty significant impact in <unk>, obviously represents an opportunity for us next year.
That has moderated as we said we're gradually starting to see that come back when I phone, our top professional customers, which I do frequently.
I do hear that they're starting to see the same thing is is that you're starting to see things come back certainly in places like upstate New York and rural, Massachusetts, and as the city starts to come back in a D.C. starts to come back you know, we'll see that that miles driven benefit into.
In terms of you know what we've been doing on the pro side I think Bob Cushing has done a great job, leading the big initiatives, there, which is to really leverage the assortment of the enterprise.
Our dynamic assortment initiative is rolled up pretty much across all backroom categories now, we're seeing improvement in our assortment rate and our close rate we're.
We're definitely seeing improvement in our Technet business, our tech that's really led the way in the quarter.
Our strategic accounts are starting to come back. So we're we're seeing you know gradual progress on the pro business and we expect that to continue as we go into next year and candidly lapped some pretty difficult a time on.
On the professional side of the house.
Okay. That's helpful. Thank you and then I think you spoke to more margin expansion expected in flight 21, just curious is that more gross margin Irish DNA and then just another clarification, Jeff the costs you talked about in the fourth quarter. The incremental less you know are you able to quantify that for us.
Yeah on the fourth quarter, you know, we haven't quantified it but the combination of all those we anticipate it's going to be meaningful.
Coal that you can probably start to model, we had $9 million here in the third quarter, we had $15 million to $16 million in the first and second quarter. So you know it's going to be somewhere in that range that we're not seeing you know I don't know when this vaccine coming out, but we certainly don't expect a meaningful impact in the fourth quarter. So that's.
One of them you can certainly model.
In terms of longer term margin expansion you know, we're going to come back in March with some some more details, but what I would tell you is we expect to see a.
Margin opportunities both in gross margin in this unit.
Okay. Thanks, a lot.
Your next question is some Scot ciccarelli with RBC capital markets.
Good morning, guys Scot Ciccarelli. So we've heard there is some stress in the supply chain and with product availability for the industry can you clarify kind of what you guys are seeing on your own inventory availability and have shortages of being a challenge or if you feel like.
You pretty much had said the supply chain, where you need at this point.
Sure Scott is there are some isolated categories at home.
You know specify them, because where we've got calls with those particular suppliers coming up but there are some isolated categories, where we see that in general we've done pretty well through this thing I mean, our you know we we review it every Monday every Friday I'm you know we go through you know what.
Our fill rates are you know, where we are versus you know each stratification of skews a b C. D. Generally speaking our team has done a great job managing through and I think it's been to our advantage and I think that's why you saw us run double digit comps in the quarter relative.
Relative to others, you know I think that that's a very respectable number. So you know we're going to continue to to monitor it but its overall, we've done pretty well managing it and those isolated situations. Obviously, we have to stay on top of that.
Thanks, Tom and then you did mention private brand penetration increasing is that just the addition of diehard or is it kind of go beyond that thanks.
It's it's primarily I mean really if you think about it we had a and own brand in auto craft before so diehard is not a change in our in our our our own.
Owned brand penetration would be except for the fact that we expect to sell a whole lot more than we sold a lot of crop now carquest is a different story carquest is a great brand. It's a love brand by our professional customers literally over you know $2 billion in sales. So you know, we're going to continue to drive that brand and and it's.
Very very popular with our pro customers. They love it so you'll see us continue to drive that so look for carquest.
Got it thanks guys.
Your next question is from Michael Baker with Davidson.
Yeah.
Hi, guys. So maybe this is a tough one to answer but I wanted to just ask about cove. It in general and I guess the conundrum is well. The question is is it.
Oh, good or bad for business I understand into human cost of course, but you know clearly and won the spaces comping better than they ever have yet I think it sounds like in the fourth quarter as covered is starting to come back a little bit more you're seeing a slowdown in your business. So just trying to understand how you think about.
Covert in general on and what's important about that is I guess, how you how you lap against it next year.
Well first of all I think on the professional side, which is 60% of our business I I believe we've got a big opportunity next year, let's just say that.
Clearly when a garage is shut down and when you've got people staying home working remote.
You know that's going to have a negative a net negative impact on the professional business.
You know obviously with the announcement of a vaccine, we and we don't know the timing or anything you know pertaining to how quickly were going to get back in the office and back to work, but ultimately that's going to happen and when it does people are going to get back on their cars are going to commute to work, they're going to go to where they need to go they're going to get back up and.
Got a football games, and they're going to restaurants, and things like that and that will be good for our business. Overall, you know miles driven is a positive for this industry for decades. So when you've got miles driven that are down I think that's clearly something that has a drag on the business now in the case of a you know some of the larger players I think.
We benefited a little debt based on our scale.
You know Weve got to scale supply chain, we've got to an online portal, we've been able to gain share during this timeframe and obviously the trick for mirrors to hold on to those people that we picked up and that's what we're focused on right now and we do that through our loyalty program and through other personalization engagements. So that's how it I've explained it Scott.
Ah interesting, it's it's Mike.
And so do you think it's as much a bad thing of Ace <unk> a.
Share gain rather than the overall industry trends benefited from Cove. It one follow up on a in the fourth quarter, you talked about a slowing down a little bit in more in the north East I guess he want to confuse was that is that more because cobot has come back and the northeast more because the northeast is impacted by the weather.
Or is it a little bit of both.
Yeah, No I I spoke about the northeast recovering I mean, there's really no regional trends that we spoke to in the fourth quarter.
So yeah it okay overall yeah.
Okay. Thanks for that clarification, that's helpful. I appreciate that.
But just to make sure Mike I think I think your point is right that you know [laughter] bid to gain the share gains that we've experienced a I would say the larger players have not necessarily reflected the overall industry. If you look at the industry numbers. The industry is not calling for that business to be up this year over.
Overall, I mean, it's calling for it to be slightly down. So you know I do think the scale players benefited during this but I'm not sure. The autopart aftermarket was an overall beneficiary like other sectors.
Okay I appreciate those comments thank you.
Your next question is from Bret Jordan with Jefferies.
Hey, good morning, guys.
Good morning.
Talking about sort of evaluating the real estate footprint than maybe seeing some SGN expense on lease terminations in the fourth quarter. How many stores are you looking at as far as closures going I guess into the end of this year and beginning of next year.
Yeah.
First of all what we're looking at our entire profile a real estate, so it's not necessarily stores.
We're also looking at you know some of our back office, we have field offices or through.
Throughout the country.
So we're really looking at the entire real estate portfolio kind of the CFC corporate support we're looking at that we are looking at a number of stores, we haven't broken that out.
Obviously it impacts our team members. So you know we haven't given any any more specificity around that but we're really just looking across our portfolio and anything that's underperforming and it does again it doesn't have to be a store. We're just looking at that and tell your portfolio to say, okay. Do we really need this one of the things that we've.
And during this had done it is the amount of corporate real estate you needed prior to covert is much different in a cold environment. We can work remotely and so as Tom had mentioned youre, putting everything through a post cold and wet and that's what we're doing with our real estate.
Okay, and then a question on Diehard I guess could you give us more I guess granularity as far as the share gain you've seen since the launch in July and then maybe the product extensions as you lever some of the spending around the brand.
You know, what's the timing that we should expect as far as seeing incremental product available water that label.
Well first of all on the on the share gains we've had something like 30 consecutive weeks here now of overall share gains inside of yeah, why omni channel, which as you know we can see right through the syndicated data.
It definitely accelerated or beyond the launch of die or we're not going to break it out specifically, but you know we got we can see the absolute market share and the <unk> the year over year share gain behind the launch obviously, we can't see anything from you know the most recent period so were not clear on that on the benefit on the advertising.
Yet, but you will see that at some point and we'll continue to iterate, but this is a this is a terrific brand. Our organization is so excited about it I think we you know our field team and the entire merchants supply chain, you're talking about a change that was close to a million store skewed combination.
And said you know we executed flawlessly heading into the July 4th weekend on July 4th week, we were in distribution everywhere and we were able to drive that over the last several months and into the.
The October 18th launch of the advertising, which all hit exactly when we expected it to in terms of extensions of right. Now we're focused on battery is very focused on driving.
Market share and batteries battery accessories.
We we have ideas around other things that we can do there, but we want to do the job really well on batteries for a period of time and more to come on on extensions.
Okay, and I guess to that question you commented on building out your own brand exposure could you talk about sort of where you are and where you think you can get as a percentage of your revenues coming from owned brands.
Yeah, it's it's a pretty big number.
Obviously, we've got we believe we've got a couple of thousand skews out there now.
That had been launched in the last year and we have a plan to increase that substantially over the next three years. So you know that that's really the plan and its gradual I mean, you're you're talking about you know exiting certain products in certain categories and transitioning them through the supply chain.
So once we do that well see the full benefit of that but you know early early performance in terms of when we get the Carquest skew in there. It's it's often at a more attractive price. It's at a higher margin our customers are choosing that brand and they like that brand as I said earlier, our professional customers are very.
Comfortable at the Carquest brand, we've had a strong brake program for a number of years and it just a matter of extending that into some other categories.
Okay. Thank you.
Your next question is from Chris Bottiglieri with Exane BNP Paribas.
Hi, guys. Thanks for taking the questions.
I guess the first question I had was on this DNA, obviously like very good overall rate improvement, but just wondering the sense for the U.S.J. per square foot or or dollar growth.
Like what we like some of the discrete items that drove that you know six.
6% or so increase was it just labor matching up with the higher sales productivity was more than just a diehard is more of a Q4. It had but was there like diehard startup cost anything you can frame pricing on the street items that you know it does discreet items continue into Q4 and into trying to have 2021.
Yeah, if you actually got it right, it's really payroll a in terms of the dollar investment that we had.
Just.
Getting excuse me in terms of some of the professional payroll dollars and just getting some of the needed payroll back into the stores. You know we were running very soon in the second quarter and it just wasn't going to be sustainable. So some of that was just.
Payroll that was needed to get back in there to do the normal cleaning forgetful it for a second but the normal cleaning and restocking and everything else you need to do in the stores. So it was primarily table.
Got you, Okay, and then did I heard seems really cool what's the like what do you think about that any you mentioned earlier, it's like years not months. So like typically for this type of this type of marketing campaign, what's the payback period that you would expect to realize the investment of this type.
Talking bugs quarters weeks like what's typically the sales cadence of.
A big launch like this that youve seen historically, if you've ever done nothing to the scale, obviously, but any kind of anyway, you could frame would be helpful. Thank you.
Sure Yeah, I mean first of all we will measure the performance of each discrete elements of the campaign and measure that against our cost for an incremental dollar metrics that we have and our marketing investment. This year have proven to be very effective in that regard and much better than our historical rates.
So we'll continue to measure that and when we obviously have that the enough time crystal to measure the performance against this particular advertising, we'll we'll look at that very clearly.
The reference to years is you know we're talking about you know building up a brand that's over $1 billion. So that that takes you know a sustained investment over time, we're not talking about year on year increases necessarily in marketing in 2021, and 22 were talking about you know a quarterly increase in the fourth quarter to get the Brad.
And launched and being smart about how we spend our marketing dollars next year. So overall you know that the profile of this is to create differentiation for our brand to drive traffic to our stores you know to really make sure that people know that we're a destination for diehard batteries.
That requires an investment in a sustained investment.
Yeah. That's helpful. And then just one final clarification question.
The Big picture for Diehard is essentially that you're going to just replace your old brand and the autograft or whatever it's called so like for every skew that there was a lot of.
The autocrat brand you're going to have a diehard skew now and then do you foresee like higher pricing power with diehard like for the seams skew would you charge more for diehard of either at the same price is it more like a traffic players are also margin play.
Yeah, It's really both you know I mean, we're looking very carefully at that and have already taken some actions to strengthen the margin profile of our batteries.
Already so there was a couple of things that we're doing there that we're pretty excited about that can drive margin and already have.
So you're going to continue to see it to see not only top line benefit that gross margin benefit there.
Okay, great. Thanks for the questions I appreciate it.
Yes.
Your next question is from Sam Basham with Wedbush.
Thanks, a lot and good morning.
My first question is just diving a little deeper into cross parents. Punch. Then you guys are seeing some benefit to gross margin from that now on a net basis as we look forward should we be thinking that that net benefit growing as you convert more to Crossamerica flashman.
Absolutely you know obviously you the more stores you have the better it is.
The good thing SAP, but this is we were able to identify a new buildings now that can potentially accommodate some of these changes are based on capacity moves and some of the additional analysis. We've done. So we've got the initial savings that we modeled I'm pretty confident we will.
Be able to put that in the bank by the end of the third quarter as we said earlier and now there's some additional stores that were going to add beyond that but you know every time, we you know convert a store we take miles out Anderson, where literally the plan is for for millions of miles to come out of the system and that obviously saves you.
On a rate basis per mile.
Got it that's helpful. And then secondly, thinking about your store portfolio you guys are reevaluating likely to negotiate some rent for stories about on a real estate next quarter, but as we think about the portfolio that large do you think there's going to be material reduction in the number of stores. You are operating or are you just saying the day or whatever Jim gorilla.
Yes, we're not anticipating a material reduction we you know we closed about 50 stores in the first half of the year you know in the third quarter was a handful 10 or 12, we've taken out.
Most of our nearly all of our structural issues in terms of stores stores across the street from each other less than a mile. Apart just in the wrong geographic location within a market. That's what we've been doing the last several years and so you know the again the real estate is a much broader initiative, we do have some.
The stores that we've recently closed.
That are are close, but we're still paying the rent and called dark stores and we're getting out of those and really what that does is it sets us up for 21, and what you know once you stop paying that rent, it's an immediate benefit.
And so we're looking at that we're looking at the field offices were looking at our corporate location and just making sure. We have the correct footprint. So I don't anticipate that have a meaningful impact on our stores, we're always going to be closing a few stores here and there. So we're done with that.
And we're going to be looking strategically at stores that we can start to open.
So that's that's sort of the plan going forward and the 21.
Understood just to put some numbers around it Jeff I know, you're not providing guidance, but if you are able to maintain mid single digit comps would you expect to still be able to leverage yesterday. Despite some of these headwinds associated with the advertising as well as the yeah at lease buyouts.
Are you talking specifically in the fourth quarter, yes.
Yeah, I think we could.
Excellent. Thank you very much.
There are no further questions at this time I will now turn the call back to Tom Greco for closing remarks.
Well, thanks to everyone for joining us as you've heard today, we continue to improve execution across advance and we're proud of how our team has responded throughout.
Throughout this unprecedented time.
We believe the next few months for our country will continue to have its challenges, but we're confident that we're taking the necessary steps towards the health safety and well being of our team members and customers well, helping to make a p. even stronger before we conclude the call I want to take a moment to thank all of our veterans from each branch of the military for their service.
Including that thousands of advance team members, who previously served.
We're honored to continue partnering with several organizations to recruit and support current and former service members, including building homes for heroes I personally see any impact that this organization has had on families and I'm proud of the impact and our commitment to continue supporting these important initiatives in the years to come once again, thanks for joining us.
Today, and we look forward to sharing our Q4 results with you in February.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].