Q1 2021 Advance Auto Parts Inc Earnings Call
[music].
Okay.
Welcome to the advance auto parts first quarter 2021 conference call.
Before we begin Elisabeth ice for their senior Vice President Communications and Investor Relations will make a brief statement concerning forward looking statements will be discussed on this call. Please go ahead.
Good morning, and thank you for joining us to discuss our Q1 'twenty 'twenty of results that we highlighted in our earnings release this morning.
Your line might Tom Greco, our President and Chief Executive Officer, and Jeff Shepherd, Our executive Vice President and Chief Financial Officer.
Following their prepared remarks, we will turn our attention to answering your questions.
Before we begin please be advised that our remarks today may contain forward looking statements.
All statements other than statements of historical facts are forward looking statements, including but not limited to statements regarding our initiatives plans projections guidance on 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 to 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.
Okay.
Thanks, Elizabeth and good morning for.
First I'd like to thank our independent partners and team members all over the world for their passion and commitment to serve our customers throughout the pandemic.
We also hope that you and your families are healthy and safe.
The health and safety of our team members and customers has been a top priority over the past year.
As you saw earlier this morning, our final Q1 financial performance exceeded the estimated results we provided on April 20th.
With strength across all channels, we delivered comparable store sales growth of $24.7 per cent and margin expansion of 478 basis points versus the prior year.
On a 2 year stack, our comp sales growth was $15.4 per cent.
Adjusted diluted EPS of $3.34 represented an all time quarterly high for a a P and improved more than 230 per cent compared to Q1.2020.
Free cash flow of $259 million was up significantly versus the prior year, and we returned over $203 million to our shareholders through a combination of share repurchases and our quarterly cash dividend.
In addition, we recently announced an updated capital allocation framework targeting top quartile total shareholder return highlighted by operating income growth share repurchases and an increase in our dividend.
This further reinforces our confidence in future cash generation and our commitment to returning excess cash to shareholders.
As outlined in April we're building an ownership culture as well as a differentiated operating model of advance.
Over the past few years, we've made substantial investments in our brands, our digital and physical assets and our team.
These investments along with external factors enabled us to post a strong start for 2021.
Clearly the federal stimulus package, along with our first real winter weather in 3 years' worth of benefit to our industry.
From a category perspective, net sales growth was led by batteries appearance chemicals and wipers.
Geographically all 8 regions posted over 20% growth.
Importantly over the past year, the northeast our largest region had been below our overall reported growth rate and well below that of our top performing regions.
In Q1, the GAAP narrowed and in recent weeks the northeast has been leading our growth.
This was in line with our expectations as mobility is increasing in large urban markets in the northeast, which were disproportionately impacted by COVID-19 last year.
Both DIY omni channel and professional performed well delivering double digit comp sales growth in the quarter.
We saw strong increases versus year ago with of double digit increase in transactions and high single digit increases in dollars per transaction in both channels.
In terms of the cadence DIY, let the way early in Q1.
As the country begins to reopen later in the quarter professional came on strong resulting in pro growth of over 20% in Q1 with continued momentum into Q2.
The changes in channel performance highlight the importance of flexibility in our operating model as we adapt to rapid shifts in consumer behavior relative to 2020.
Throughout AAP, our merchant supply chain and store operations teams have been extremely agile and adjusting for this evolving environment to ensure we take care of our customers.
Within the pro sales channel, our overarching focus remains to get the right part in the right place at the right time.
This enables us to compete on availability customer service and speed of fulfillment, which are the primary drivers of choice for probe rises.
To achieve these goals, we continue to strengthen our value proposition through improved availability as well as our advance pro of catalog featuring tools like modal logic and delivery estimates.
As vaccinations rollout across the country mobility, increasing across all income strata.
As discussed in April this is very good for AEP as our diverse set of assets within pro is uniquely positioned to capitalize on this trend.
Specifically World Pac led our professional growth in the quarter.
With a customer base that serves higher end of installers and more premium vehicles <unk> gained momentum throughout Q1.
This is because middle to high income motorists are becoming increasingly mobile and in some cases. They are now returning to a daily commute.
Stated simply they're driving more than they did a year ago.
Secondly, we're seeing benefits from the owned brand product operating expansion with the integration of Autopart International.
Further we believe our independent car quest stores are also well positioned.
We're leveraging our enterprise assortment and have excellent relationships with customers.
These relationships have been strengthened over the past year, given the support we provided to both independents and our pro customers during a difficult time.
We continue to grow our independent store base through a combination of greenfield locations and the conversion of existing independent locations.
Today, we're extremely excited to announce that we're adding 29, new independent locations to the Pacific northwest to the car Quest family.
The single largest conversion in our history.
Baxter auto parts announced that they will bring over 80 years of automotive aftermarket experience and strong customer relationships to the car Quest banner.
This is a testament to the strength of the car Quest independent program, including product availability differentiated brands technology platforms and robust marketing plan.
We also grew our tech net program across all pro channels.
Net enables independent service shops to create their own national network.
We now have over 13000 of North American members, and we will continue to leverage tech net to differentiate our pro offering and build loyalty and.
In summary, we expect that as our pro installers recover our industry, leading assortment customized pro solutions and dedicated pro banners will enable us to drive market share gains in a growing segment throughout the balance of the year.
Meanwhile, our DIY omni channel business led our growth for the fourth consecutive quarter.
Stepping back and as a reminder, there was a significant increase in DIY penetration across the industry beginning in Q2.2020.
According to syndicated data an estimated 4 million new DIY buyers were added.
Spend per buyer for 2020 grew close to 9% led by online spend per buyer.
DIY growth was led by project recreation and more discretionary categories as people work on their vehicles or even learned how to work on their vehicles.
These trends generally continued through Q1 and the industry is now beginning to lap the significant increase from prior year in Q2.
From an advance standpoint, we grew share of wallet and overall market share in Q1.
Led by Diehard batteries.
<unk> continues to have strong momentum in our advertising, it's clearly resonating with customers.
We plan to continue to invest behind this powerful brand in 2021 to further build awareness and association with advance.
Our loyalty program remains focused on attracting retaining and graduating speed perks members.
Our loyalty program enables us to provide personalized offers and increase share of wallet as we leverage our customer data platform.
In Q1, this helped drive growth in our VIP members by approximately 14% and our elite members by 30%.
Consistent with broader retail during Q1, we began to see a shift back to store sales from e-commerce, given the outsized growth of the online business during the onset of the pandemic in 2020.
Our investments in digital and E Commerce had been another differentiator for our DIY business.
We continue to strengthen our online experience on desktop mobile and with our App, which recently crossed nearly 1.3 million downloads.
The integration of our digital and physical assets as communicated through our advance same day suite of services.
This enables <unk> to find the right part from our industry, leading assortment order it online and either pick it up in 1 of our stores within 30 minutes or have it delivered and 3 hours or less.
Finally, we're very excited about our footprint expansion and new store opening plans for the year were targeting between 102 of 150 new stores in 2021.
This includes the Pep boys leases, we're executing in California.
The opening of the California locations will ramp up during the back half of the year and finish in 2022.
Now I'd like to transition to the unique opportunity we have to significantly expand our margins.
As we outlined in our strategic update there for broad initiatives leveraging category management streamlining our supply chain, improving sales and profit per store and reducing corporate SG&A.
Our largest merchant expansion initiative is leveraging category management to drive gross margin improvement.
This involves 3 components material cost optimization owned brand expansion and strategic pricing.
Material cost optimization and strategic sourcing has been an ongoing effort for us and we will continue to be of focus.
Given the current inflationary environment, we are leveraging these capabilities to push back on cost increases to keep our price to the customer of low.
We will continue to work collaboratively with our supplier partners on managing input costs.
Own brand expansion as a percent of our mix is an important contributor to margin rate improvement.
However, growing our diehard and conquest brands is not just about margin is.
It's also about differentiation armor.
Our merchant team is building out capabilities in sourcing to develop high quality products, leveraging our strong supplier relationships.
2 recent examples include our diehard robust enhanced flooded batteries and Markwest hub assemblies.
Once equipped with a differentiated product our marketing team is building the awareness and the reputation of our old brands as evidenced by our diehard is back advertising campaign.
Finally, we supplement innovative quality parts and breakthrough marketing with an improved online experience and extensive team member training.
This includes enhanced part product and brand training to ensure our store team members are well positioned to provide our customers with trusted advice and an excellent in store experience.
So we're not only on track what margin expansion behind on brands. We're also leveraging these brands to enhance differentiation and improved store traffic.
Our extensive research around customer journeys highlights for role that brands play in customer purchase decisions.
On a customer's car won't start we want them to think of diehard first such of this becomes a reason that they come to advance.
This is why collaborating with our supplier partners is so important to ensure high quality for our own brands.
We're confident as we continue to invest in product quality building, our brands and training our team members to drive owned brands as a percentage of mix, we will further deliver growth across AAP.
The final component of our category management initiatives of strategic pricing.
By investing in new tools, we're now able to competitively price on a market by market basis, using detailed analytics to improve right.
We're also realizing success in reducing discounts online through our rapid test and learn approach, which is driving significant margin expansion in key categories.
In total our category management initiatives are currently on track to deliver up to 200 basis points of margin expansion through 2023.
As we look beyond 2023, we plan to continue building out customer data and personalization platforms to further enhance the customer experience and expand margins.
Staying with gross margin, we once again leverage supply chain in Q1 versus both 2020 and 2019.
Despite the current environment.
We remain focused on executing our primary margin expansion initiatives, while working to mitigate the impact of global supply chain challenges.
We expect to complete our warehouse management system implementation in 2022 with the majority of our largest buildings converted this year.
In conjunction with WNS. We're also rolling out our labor management system, which allows us to implement common standard operating procedures across our DC network.
This will also enable us to incentivize hourly team members based on their performance.
In terms of cross banner replenishment of our CBR, we've converted over 70% of stores to date and expect to complete the remaining stores. We originally planned by the end of Q3.
CBR significantly reduces our miles driven which is even more important today, given rising fuel and labor costs.
More importantly, CBR will complete the integration of the advance and <unk> supply chain and enable us to service our approximately 4800 corporate advance stores and 1300 independent car quest stores from a single supply chain.
We also continued to integrate the dedicated professional supply chain within <unk> and Autopart International in.
In the quarter, we converted another 5 AI stores to the World Pac system and are on track to complete this integration by the end of Q1.2022.
In April we discuss 2 additional supply chain initiatives building on what will soon be a more streamline supply chain network.
This includes cheering, our supply chain and transforming in market delivery and customer fulfillment.
Our tiered supply chain calls the slowest moving skus into for strategically located regional Dcs.
This will allow us to make room for faster moving skus and ultimately improves the availability of our higher turnover of products.
Our second new initiative is transforming in market delivery and customer fulfillment to improve service and productivity.
The new delivery management system will select for multiple modes of transportation to move and deliver parts at lower costs.
Both of these initiatives are in their early stages and we are targeting completion of these in 2023 and 2024, respectively.
In terms of SG&A improvements our store operations team is executing initiatives to increase sales and profit per store week.
We've now increased sales per store for 3 straight years, and we're on track to get to our target of 1.8 million average sales per store by 2023.
In Q1 with strong top line growth and disciplined execution, we leverage store payroll versus both 2019 and 2020.
We've also made improvements in scheduling and task management to drive efficiency, which helps with our customer experience as it enables us to schedule, our most tenured and knowledgeable team members when we need them most.
We continue to invest in our store team members in terms of training technology and in compensation, including our unique fuel the frontline stock ownership program.
We believe these investments have enabled us to attract the very best parts people on the business and are enabling continued improvement in primary execution metrics like net promoter score units per transaction and ultimately sales and profit per store.
Finally, we took steps to reduce corporate and other SG&A costs in the quarter.
This includes 3 broad territories integration safety and new ways of working.
In terms of integration our finance ERP is near completion, and we continue to build proficiency and our global capability Center and Hydro <unk> India.
I'd like to take this opportunity to recognize our India team, who stood up an entirely new operation literally in the middle of a global pandemic last year.
We've been working hard to support them as COVID-19 infection rates have risen in India over the past few weeks the.
The GCC team, including it finance and HR team members today has certainly enabled us to reduce costs, both in terms of Capex and opex in.
In addition, the team brings new skills in the area of software engineering data analytics and artificial intelligence.
Of these critical capabilities will help enable the successful implementation of our many tech initiatives.
Secondly, our safety performance continues as field leaders across advance hold their teams accountable as we build our safety culture.
We delivered a 9% reduction in our total recordable injury rate compared to the previous year and reduced our lost time injury rate 2%.
By focusing on people behaviour and continuous improvement, we're reducing claims and overall cost.
Third we recently completed a thorough review on the ways, we work in our corporate offices and incorporated key learnings from working remotely for over a year.
The objective was to ensure our corporate team is focused on our highest value priorities, while eliminating less productive work.
From this work, we announced a restructure of our corporate functions and the reduction of our corporate office footprint.
This will result in savings of approximately $30 million in SG&A, which will be realized over the next 12 months.
We also believe the streamline approach will be more effective to supporting our field and supply chain teams.
While we're pleased with our Q1 performance where.
We're confident that there is so much more opportunity ahead.
To fully realize our potential we plan to continue to invest in our brands and the customer experience our team members and market expansion to drive top line growth above market.
Our entire team also remains focused on the execution of our margin expansion initiatives where.
We're energized and focused on building on the momentum we saw on Q1 to execute our long term strategy in the months to come.
Now, let me pass it over to Jeff who will go into more details on our financial results.
Thanks, Tom and good morning.
Thanks for everyone joining us today, especially our team members, who continue to work tirelessly, which has contributed to the results that we're reporting today.
In Q1, our net sales increased 23, 4% to $3.3 billion.
Adjusted gross profit margin expanded 91 basis points to 44, 8%.
As a result of improvements throughout gross margin.
Including supply chain.
Net pricing.
Channel mix on material cost optimization.
These improvements were slightly offset by unfavorable inventory related costs product mix and headwinds associated with shrink and effective.
Our Q1, adjusted SG&A expense was $1.2 billion.
On a rate basis. This represented a 35, 8% of net sales, which improved 387 basis points compared to 1 year ago.
The improvement was driven by sales leverage in both payroll and rent as well as lower claim related expenses from the company's emphasis on safety.
We discussed our labor management system previously, but we really saw the benefit of this quarter as we step of our stores based on customer needs.
Utilizing nights weekends, and an improved mix of full and part time schedules.
In addition, our ongoing focus on team member safety will always remain 1 of our highest priorities.
The savings were partially offset by an increase in field bonus costs related to our improved performance.
In addition, as Tom outlined earlier, we invested in marketing during Q1, primarily associated with diehard.
This led marketing cuts of the previous year, which were made at the onset of the pandemic.
We also saw an increase of third party and service contracts related to our transformational plans primarily within it.
Related to the increased COVID-19 cases, we saw late in 2020 and early 2020, 1 we incurred approximately $16 million on COVID-19 cost during the quarter, which is flat to the prior year.
While the future impact of COVID-19 remains unknown, we expect these cost of subside throughout the year, assuming infection rates continue to decline.
Our adjusted operating income increased from $113 million last year to $299 million.
On a rate basis, our adjusted Oi margin expanded by 478 basis points to 9 per site.
Finally, our adjusted diluted earnings per share was $3.34.
Up from $1 a year ago.
Our free cash flow for the quarter was $259 million, an increase of $330 million compared to last year.
The improvement was primarily driven by year over year operating income growth as.
As well as improvements we achieved from working capital initiatives, including higher utilization of our supply chain financing facilities that we began to see during the pandemic last year.
Our AP ratio improved by nearly 1000 basis points to 84% the.
The highest we've achieved since the GPI acquisition.
A portion of the improvement is attributable to the actions we took during the pandemic and the continued partnerships we have with our suppliers.
In the quarter, we spent $71 million on capital expenditures versus $83 million in the prior year quarter.
We expect to be within our guidance for capital expenditures as we continue to invest in our transformation initiatives.
During Q1, we returned more than $200 million to our shareholders through the repurchase of 1.1 million shares and our quarterly cash dividend.
We expect to be within our 2021 share repurchase guidance of $300 million to $500 million.
Additionally, as you saw during our Investor presentation in April our board approved our quarterly shareholder dividend of $1 payable on July <unk>.
As outlined in our press release. This morning, we've seen continued momentum in the first 4 weeks of Q2 with a 2 year comparable store sales growth rate in line with the 2 year stack, we reported in Q1.
Miles driven are beginning to grow for the first time in over a year.
And historically this has been an overall positive for our industry.
In addition.
Our professional business is accelerating and we expect pro to outperform DIY for the balance of the year for.
For these reasons, we're raising our comp sales guidance to up 4% to 6%.
We're also cognizant of several macroeconomic factors.
This includes inflationary costs in commodities.
Transportation and wages along with currency headwinds.
As a reminder, our industry has historically been very rational and successful in passing on inflationary costs in the form of price and that is our intention this year as well.
Also our pro business carries a lower margin rate than DIY.
Which may partially offset the gains we expect to see in sales.
As a result of our top line strength and current cost of assumptions were.
We're updating our adjusted Oi margin range to be between 9 and 9.2%.
Our guide for comp sales is now of 3 full points and on.
Our adjusted Oi margin rate is now of 30 basis points compared to our initial guidance provided in February.
We remain committed to delivering against the strategy, we laid out in April and are confident in our ability to execute our long term strategic plans to deliver strong and sustainable total shareholder return.
Now, let's open the call for your questions operator.
Thank you at this time, if you would like to ask a question. Please press star followed by the number 1 on you touched on film can withdraw your question press the pound or hash sign in the interest of time. Please limit yourself to 1 question kind of 1 follow up. Thank you. Your first question here comes from the line of Christopher.
<unk> from Jpmorgan. Please go ahead. Your line is now open.
Thanks, Good morning, everybody. So a couple of questions here on the top line.
Overall on <unk> did did pro outperformed DIY and can you talk about how that those 2 channels look on a quarter to date basis Ie is sort of DIY still still positive and then more broadly on a quarterly basis. How are you thinking about cadence of comps for the balance of the year.
Hey, good morning, Chris So first of all on the <unk>.
First quarter day.
<unk> performed pro and as we outlined in the prepared remarks it was.
Really early in the quarter continuation of what we've seen all of last year strong performance from from DIY Pro lagging and then obviously as we got towards the end of the quarter of that started to change and this is this is the.
Beginning to lap the unusual events of last year.
Clearly April and May was the low point for.
For professional sales last year, when the pandemic hit and work remote orders were put in place.
You really saw a difficult environment for the installer community and I'm really proud of what we did at that point I mean, we stayed with that we supported our pro installers.
We didn't have anybody furloughed or anything like that people are out on the street, helping them out and so thats really helped us through the year last year on into this year and so now as we start to lap those results.
Pro is significantly outperforming DIY and we expect that to continue.
For the balance of this year. So we're very excited about that obviously given that 60% of our business is pro and then in terms of the cadence.
Obviously early on in the year.
We know there was a huge surge on on DIY in 2020, we talked about that throughout the year last year.
Some trends that some of which could be stickier than we initially thought when we planned the year.
People of time on their hands their stimulus impact last year, there was a shift from big box.
How is it all going to unfold for the balance of the year is difficult to say, but <unk>.
Clearly we are off to a good start in Q2, and we will keep monitoring it as of year goes on.
Got it. Thank you and then as a follow up Jeff can you talk about what the unfavorable inventory costs are and do you expect that to continue and more broadly.
What are you seeing in the pricing environment for.
From your peers are our costs being passed through at this point or is there.
Sure.
On having to hold back thank you.
Sure.
Sure first on the.
Inventory related that's really the.
Capitalized supply chain costs, and we had a really interesting phenomenon. This quarter that we typically don't have in previous quarters, where our inventory was down substantially over $60 million in the first quarter and when we do that we recognize the capitalized supply chain costs, there associated with debt sitting on the balance sheet.
Contrast that to last year or even 2019, it's generally an inventory build we are building inventory in the first quarter as we prepare for the spring selling season in 2020 inventory was up over $90 million and if you want to go back to 2019, that's up over $70 million now the good news credit as that translates into very favorable free.
Cash flow with which you saw.
In terms of the.
The good operating cash over 300, almost $330 million on operating cash of $2.59 of free cash flow. So.
Realizing that it is very favorable for our cash balance.
In terms of pricing.
We took a number of pricing actions during the end of last year beginning of this year, we're seeing it flow through we haven't seen any resistance there from a pricing standpoint. So we feel really good about that we know there is some inflationary factors that are coming and we're planning to address those but for the quarter of <unk>.
Racing actions took hold and we were really pleased with the results.
Thanks, guys best of luck.
Thanks, Chris Thank you.
Your next question comes from the line of Michael Lasser from UBS. Please go ahead. Your line is now open.
Good morning.
For taking my question on the capitalized inventory cost have you been able to clean up some of your inventory.
This is going to be less of a factor of moving forward in could actually put the bias to the upside.
For some of your long term.
Gross margin expectations.
Yes over time, and we'll see improvement I wouldn't expect it this year I think we're going to continue to see this over the course of the year you know, it's an area that's going to be a little bit fluid.
As part of the reason, we didn't change guidance associated with free cash flow as our inventory levels are down significantly compared to the end of last year. So we wanted to make sure we have the in stock availability of the most important thing in this industry and making sure we get the right part of the right place at the right time.
And so we're looking at our in stocks across the organization, making sure that this inventory forward deployed.
So there is really going to be some puts and takes throughout the year, but over time Michael to your point, we do think those costs will come down as we take overall cost out of the supply chain.
Okay.
Low of pushing it.
Bad debt, we're going to see greater spread of your outperformance versus the industry in the back half of the year given your lean toward.
The <unk> segment in the northeast which of the underperformed.
It came out.
Outperformed for you in the back half of the year.
How is that going to impact your gross margin keeping the relative margin differential of those 2 segments.
For months.
Sure Good morning, Michael.
Comment first on your on your previous question I think the 1 thing I would add on the inventory as we're going to see a bit of of uneven recovery across the country. We're seeing it now geographically we're seeing it differently played out differently by category, we're seeing kind of differently. So.
We're obviously, making some bets on inventory to make sure that we're able to delight the customer.
When they need us in terms of the performance in the back half, yes. I mean, we are we are a professional.
Organization with 60% of our business in there.
Definitely would see us continuing to benefit from that trend in the back half of the year overall.
Geographically, absolutely we called out on our remarks that the northeast was leading the country quarter to date, we haven't seen that in over a year. So those are 2 big factors that.
Of that help us out and obviously, we're excited about both of those trends we've got multiple banners on the professional side that are all.
Cranking right now our installers are covered up we've got <unk>.
Cars waiting out there to be repaired people are getting back on the road miles driven are recovering so all of those things are very positive and we fully contemplated.
The impact on gross margin, we obviously recognize that the pro margins are lower than that of DIY and that.
It's fully contemplated in the guide so we will continue to focus on expanding our margins with the initiatives we outlined in April.
Okay. Thank you so much in number.
Your next question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead. Your line is now open.
Hi, everyone. Good morning. My first question is on the guidance raise can you talk about what you flow.
<unk> through it seems like there is the first quarter upside maybe some incremental on the second quarter and then did anything change with regard to the back half of the year.
Yeah, there's really 4 things that we were contemplating when we were taking another look at the guide obviously, it's a very fluid situation given that this is the second time, we've raised our guidance.
The last 45 days.
But the first is really what Tom mentioned, just really getting a better understanding of that shift from DIY to pro that's number 1 second and third is exactly what you just mentioned Simeon which is the.
Liquidity, we have on Q1 in terms of the B b coming in at 9 versus the 85 to 8.7 net modeled in and then the upside that we're seeing early on in Q2, we modeled some of that and then the last 1 that I would throw in there is our assessment around inflation, we're seeing inflation.
And a number of different categories, and so while that would benefit the top line in the form of higher comps.
We wouldn't see that flow through as much as we generally we and the industry price to maintain margin rate. So those are the for things that we contemplated that were quite frankly different 45 days ago.
Why do we thought it was prudent to update guidance now.
Okay. That's helpful and then different topic, maybe for Tom.
This is going back to margin opportunity over the next few years and it seems like a lot of these initiatives for these transformations are starting to take hold my question is the dependence on sales to drive margin is something we've talked about on the path do you feel better I don't think you'd be satisfied of sales arent growing and I think thats the ultimate essence of.
Of transforming the business, but can you talk about how dependent your margin goals are on sales is there. Some portion of margin that you think this business can achieve without seeing consistent sales growth and again I'm not saying that that's the goal, but curious if you can separate the 2.
Sure well the for territories that we talked about Simeon.
Really the 1 that is most sales dependent as obviously sales and profit per store.
There is of leverage component to that in our.
Our outlook I mean, we talked about 240 to 440 basis points of margin expansion.
And the range of of revenue growth that was contemplated was 3 on the low end and <unk> on the high end. If you remember so obviously the 1 that swings. The most is that particular, 1 now there are pure cost out initiatives in there.
Without question return shrink the fact of we've got ways of improving profit per store without sales, but that is the 1 that has a dependency there.
The supply chain.
Vast majority of this for our supply chain initiatives are are not sales dependent these are just.
Pure productivity opportunities.
You are familiar with the cross banner and warehouse management system implementation, but also the 2 new ones that Rubin outlined in the April presentation. Neither of those are sales dependent those or just.
Improving our current efficiency in how we get product from distribution centers to the stores on how we move product in market.
Category management is a pure rate play there is really no sales dependency on category management, and then obviously the SG&A moves.
The ERP implementation of new ways of working.
Those are all none of those of our sales dependent so the majority of the.
Initiatives, we have on.
Our non sales dependent obviously the more sales we have the more we get not just.
Leverage on on those that are that are of that are contemplated in the initial low end of the.
<unk> guide the $2.20, but we get we get leverage on other fixed costs, which takes us up to the 440 <unk>.
Hope that helps.
Thank you.
Your next question comes from the line of Kate Mcshane from Goldman Sachs. Please go ahead. Your line is now open.
Hi, Thanks. Good morning, Thanks for taking my question I was curious about the news with regards of the Pacific Northwest I Wonder if you could remind us of your exposure to the region before the new stores and what the opportunity is for expansion there and then on the same vein in terms of geography I know you are.
In the process with the Pep boys stores.
I mean, they're opening in 2022, but is there.
A timeframe in 2020, when they'll all be open.
Hey, good morning, Kate.
First of all.
Have limited exposure on the West Coast is the short answer and this is a huge opportunity for us.
Essentially we've been working at strengthening our core value proposition here for for several years now as you know.
And the investments we've made in that value proposition are now yielding comp sales performance at the kind of levels that we aspire to from the beginning.
We've had 3 straight years of comp sales growth and we would say we have earned the right to expand and take that proposition elsewhere do you think about bringing the.
The work we've done on availability.
Ensure that our industry, leading assortment of parts is available to people in Portland, just like it is in Boston, bringing diehard to the West coast is a huge opportunity for us our team was on the ground the week, we announced the.
The day Pep.
Pep boys leasing arrangement and the first thing people talked about in the stores. When we went out there with diehard. There. We're very excited to hear that they would be selling diehard batteries all of the digital investments that we've made in our in our online platform, whether that's the <unk> website that Bob Cushing leads with advance pro the <unk>.
<unk> C website that Jason leads.
And our App, we bring that to these markets we're able to.
Supplement.
Our pro customers, who are out there today, you know are large professional customers that we sell to nationally but cannot sell to in those geographies. Because we don't have the presence to do so so we're able to integrate the digital and physical asset piece. So.
We're very excited about.
The announcement with with Baxter there of terrific organization, they've got a tremendous track record and Theyre very excited about converting to the car Quest banner here soon.
And then in terms of southern California, as we as you heard we have of 109 locations, we're going to start converting those.
Soon and we expect to complete that in 2022.
So that's that's really a quick rundown of what we're doing out there and I got to tell you. Our team is so excited about being able to opened new stores. After a couple of years, where we were closing them and clearly that's something that brings in new energy to the organization overall.
Thank you.
Your next question comes from the line of Greg <unk> from Evercore ISI. Please go ahead. Your line is now open.
Thanks.
And I guess 2 follow ups.
1 was on the 2 year stack trend of 15.
Could you break that down to DIY and pro I assume that on a 2 year DIY is still outperforming pro and do you think thats going to.
Flip in the second quarter.
First of all yes, DIY is still outperforming pro on a 2 year.
The expectation is that that will start to moderate obviously, Greg as we go through it I mean, the peak of of the DIY.
Surge if you will was kind of right now.
Through the end of July and you know through the end of the year. It Didnt stay at these levels that we're about to see year over year June and July just to be clear the full year number through the syndicated data that we can see of 6.6%. So.
There is quite a variation in the categories within DIY.
Those categories that rely on on miles driven.
It didn't do that well even inside of DIY, I mean better than historical obviously, but not.
Nothing compared to batteries, where intermittent driving causes failure. So.
We expect pro to outperform I think as we get towards Q3, and Q4 Youll see those those 2 year stack start to come closer together, but in general.
DIY business tends to be a little bit more volatile as you know share, but the GAAP is still like 1000 basis points on a 2 year would that be fair.
We haven't broken it out it says it's.
Still a pretty significant to your yes, okay, great and then second was on inflation I know, we asked multiple ways, but I just want to make sure I got it right.
On the comp guide increase was a lot of inflation or at least that was a chunk of it for.
Versus a few months ago.
Is.
How should we think about that as a holistic number I think when we had that.
China tariffs gears back of got up to around 3 that maybe it was 1% last year or we are we back at sort of of 3% number are still more on between 1 and 3.
Yes, so when we put out of our original guidance in February we had contemplated.
Inflation range of call it 1% to 2%.
And as we're seeing some of the inflation coming in whether it's the product cost for 8 or labor.
For modeling an additional 1% to 2%. So you could take the 3 is the mid pointed in that that's sort of the way we're thinking about it right now.
And that's for calendar 'twenty 2 of run rate going for calendar 'twenty 1.
21, yeah, okay, great. Thanks, a lot and good luck guys.
Thanks, Greg.
Your next question comes from the line of Bret Jordan from Jefferies. Please go ahead. Your line is now open.
Hey, good morning, guys.
Good morning.
A question I guess on supply chain and it does sound like we've got some I guess disruption around availability, whether its shipping of materials or labor.
How are you seeing in stocks and when you think about the cadence of supply chain disruption are we on sort of an improving trend as far as availability of inventory or are we still sort of challenge there.
Yes.
Sure Brad we have seen some slippage on in stocks. Unfortunately.
The.
The peak of the let's say more of the more global impact of disruption was probably 2 months ago. So we're not necessarily seeing what we saw 2 months ago, but we're still seeing.
Some suppliers and it's not necessarily that.
They're not trying to get us the product they just can't they can't load container or something like that in their location they can't get people.
We're familiar with the shortage of labor. So it's things like that that are causing the disruption we're gradually picking it back up I think we're very we're very thankful our suppliers of really done everything they can to.
To keep us in stock we feel like we're well positioned competitively. We don't think this is a.
A competitive disadvantage at all if anything we've got an advantage relative to some of our peers in the or are there some of the key competitors in the in the <unk>.
Professional side of the business, but it is definitely improving and we're continuing to work closely with our suppliers of that close any gaps.
Okay, Great and then 1 question can't leave without mentioning price investment.
I guess when you think about the cadence or the performance of the pro business are you seeing any.
Outperformance versus of National accounts versus the independents and do you see any change.
Change in level of competition from peers relative to those pro accounts.
We are seeing.
A huge surge in pro in general Okay. So there there is.
Strength across all of the professional sales channels.
And some of the strategic accounts last year I would say it took a little bit more drastic actions at this point in time than.
Some of the independents in that.
Contributing to the lap being a little bit lighter I guess on that side of the house and so we are seeing a surge there, but we work really closely with our strategic Brad as you know, they're very important to us we continue to see that growing in importance and we make sure we're taking care of them and we're going to continue to do that but I.
Do think as we look to the balance of year.
Some of those strategic accounts that took some pretty significant actions last year could could outperform.
Okay, great. Thank you.
Your next question comes from the line of Zack <unk> from Wells Fargo. Please go ahead of your line is now open.
Hey, good morning, I, just wanted to clarify some of the moving parts on the outlook because it looks like the higher end of day, 4% comps on the prior outlook is now below the low end.
But if you look at.
The EBIT margin on the 4% comp down from 9.1% to 9 I'm, hoping you can walk through the change in flow through assumption here on a little net more detail in terms of.
Whether this is more of the pro mix of inflation factors.
You mentioned or is there any offsetting of SG&A component as well.
No. It's exactly what you just said, it's really given us some better color on the shift from DIY to professional which as you know carries an overall lower margin.
And in addition to that it really is a better understanding of what we were just talking about which is the inflation and we believe we know.
Through past experience that we've been able to.
Maintain rate, but we're not going to improve right through pricing. So we feel that those 2 items. While it gives you a good top line.
It doesn't necessarily translate to the bottom line, we just have better.
Insights into that in addition to that.
We are cognizant of the potential for consumers to shift into more value categories. So.
That was a factor we considered as well now all of those things go the other way, we're not going to be near the low end of me closer to the high on but those of the types of things that we considered when we took another look at the guidance.
Okay. So just to make sure I understand your sizing all of those factors as about 10 basis that's correct.
Yes, yes, okay, perfect and then in terms of debt restructuring costs can you talk a little bit more about what drove the step up here in Q1, and what you are now embedding going forward for the year.
Yes, the Q1 was simply a function of the voluntary retirement program that we talked about during our Investor day that actually our non-GAAP for below the line number would have been lower had it not been for that.
And then we expect it to be consistent with last year going forward.
Got it appreciate the time.
Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead. Your line is now open.
Good morning.
Good morning.
<unk> questions.
I've got a couple of question I'll kind of merge them together and then first.
First of all we know.
I know, we've talked about inflation ready for it.
Clearly inflation is becoming more of a factor within your business on your in your sector broadly.
As you look at the data as you understand your consumers there are plenty of which the consumer sort of say pushes back and in the ability of advance to pass these costs along as no longer is significant.
No longer as relevant and then the second question I have with regard to the updated outlook here and clearly it's extraordinarily fluid.
A lot of factors, but as you think about this what what could be the big the bigger surprise factors to the upside or downside for at the end of the year of and in the guidance and the results are different than what you expect for wood that variance you think likely come from.
Yes first of all in terms of.
Of what point could inflation of our pricing actions will start to impact consumption. I think is your question Brian.
Right.
Yes, I mean, we really measure of that buy.
Customer journey, if you will if you look at it.
Battery failure as an example, my car won't start as compared to my breaks are squeaking as compared to I would like to accessorize, my car or something like that.
There is obviously different.
Elements thereof.
Whether or not somebody is going to differ anything of the reality is on failure related items, it's unlikely that it's going to have a big impact. It has certainly hasn't had a big impact historically and as long as of our competitive.
We'll continue to see growth there.
May be some things that end up getting deferred.
Based on the job type but.
And in general this industry has been incredibly resilient at being able to pass on pricing and I think thats, what youre going to continue to see.
Your second question was on on the outlook I think I think the short answer is we.
We've obviously contemplated some level of pricing in the outlook.
And we've also kind of played it.
Much of that is going to flow through all of the variables there.
If the pricing flow through at what we.
Guided will obviously youre right there on the guide if it's better than that we'll we'll be better you know that's really the the.
The answer is.
That's probably the biggest variable thats out there all the rest of the stuff is fully within our control, but to your point on on the consumer Receptiveness to pricing we will see.
Got it I appreciate it thank you.
Your next question comes from the line of Daniel <unk> from Stephens, Inc. Please go ahead. Your line is now open.
Hey, good morning, guys. Thanks for taking my questions.
Tom I wanted to sort of on the gross margin line. You mentioned continued success, graduating royalty tiers moving customers up can you talk about the gross margin implications from that graduation will it be of headwind due to higher kind of earned customer rewards as we move through the year and is that potentially another headwind as we move through the year and think about the gross margin trajectory.
Great.
Sure well first of all of our speed Perks platform, which is our loyalty program is extremely important for US we think we've got tremendous runway.
Were still transacting in the mid <unk> range.
And best in class would say that number could be dramatically higher than that there are some retailers that are north of 80%.
So.
It's a platform that we're going to use to personalize our offer and use of first party data to get much more relevant with how we engage our customers on.
Obviously, we do have discounts in there, but we manage that holistically manage that across the broader portfolio and as people migrate up to these higher levels, that's fully contemplated and what discounts we use and how we how we offer.
Value to those customers. So we won't see any kind of degradation on gross margin.
As we migrate people talk to these higher tiers, but we will see is higher share of wallet, which is what the aspiration is so that we can move from like in the case of Vips Youre significantly underpenetrated.
With your most loyal customers. So you want to increase that share of loss of pretty significantly and that first party data that we get from them enables us to get.
Much more relevant.
We know their vehicle, we know the weather patterns in their geography, we know theyre driving patterns.
That allows us to personalize.
Helpful and then.
You mentioned auto marketing being a focus for your own brands on the growth. We've seen there obviously, it's been higher given the diehard rollout that should presumably moderate from here given diehard is getting more known I guess, 1 is that a correct assumption on marketing expense and then secondly, as industry demand does flow from these higher levels do you think.
Increased marketing will be needed or increased promotions will be needed to keep those sales rates up or how do you think the industry responds from a marketing and promotional expense or promotional outlook as comps low. Thanks.
Sure well, let me let me distinguish between those 2 V as I see them very differently.
Promotions or pricing is very easy to replicate right.
You know somebody drops their price somebody else dropped their price I mean, we measure we measure our competitive price index literally every day. So we're looking at what's going on inside of our industry and we have algorithms that help us determine how we're going to price with category and with geography, and those kinds of things.
Marketing is an investment I mean marketing as an investment in driving margin expansion.
When we invest behind a diehard marketing campaign as we did last fall and in the first quarter. The intention there is to build.
Loyalty to build equity and the diehard brand to build awareness of the fact that diehard is available at advance auto parts and when we do that well we find it.
As we actually are able to reduce our promotional discounting and build the strength of that brand because its trusted by the customer. So they are very different and 1 of them is relatively easy to replicate the other 1 is more difficult to replicate and that we will invest in marketing when we get a rig.
Turn that expands margins.
The focus of our marketing dollars.
That's helpful Best of luck on.
Your next question comes from the line of David Bellinger from Wolfe Research. Please go ahead of your line is now open.
Hey, great. Thanks for taking my question.
So you on your larger competitors of all gained significant amount of market share on the path.
The 18 months.
My question is what would really change that is there anything you're currently modern monitoring.
Marketplace or.
Is it simply just for new dynamic bran and the payoff from all of the investment spending over the past 2 years, maybe just talk about the sustaining sustainability of needs.
Elevated share gains as well.
Yes, I think it's a pretty unique time, David I mean, obviously, we talked about this in our April presentation that this is a very fragmented market.
Particularly on the professional side.
Right or wrong last year was of highly disruptive time for everything, but certainly our industry.
And on.
At the time, if you think back to the second quarter.
A lot of a lot of companies took some pretty drastic actions.
With their workforce and how they approach the pandemic.
We stayed with it we stayed with it we had people on the street as I mentioned earlier, we had our training programs.
Our people put on a mask every single day and went out there and served our customers and being an enduring time for the world I mean, I think those pro installers have remembered that and so I do think that it's conceivable that the larger players who behaved in that manner could.
See share gains outsized share performance of for a period of time.
As a result of that and when the larger players are a fairly small slice of the overall pie and and we have scale, we have parts availability, we've got great brands.
We think that we can continue to show outsized performance relative to the industry for a period of time.
Yes, it's a fair point.
I just wanted to follow up can you talk to all of that.
Private label.
Can you size of the potential for.
For your own brands and could be as a percentage of sales of what that could go to over time.
How do you balance that opportunity with.
Your core consumers on pro accounts, who placed a lot of value on branded OEM parts help us bridge that gap.
Well 2 things first of all let me start with the fact that our national brand suppliers are extremely important for us and they play a key role in our assortment and our availability.
Of the largest number of stock parts in market of any anyone in the industry.
Terrific relationships with our National brand partners terrific relationships with the OE.
Suppliers that we have out there so that gives us a competitive advantage and we are going to continue to offer those brands, where it makes sense for our business. This is about choice not necessarily about an either or it's a bit of an and so that said, where we have a category where we can bring.
On the car quest trademark into that category offer it to our customers with very very high quality and I want to really emphasize that our car quest parts are OE quality. It's got a tremendous reputation the car quest brand has been around for a very long time.
First of all installers lumber car Quest brand and our merchant team goes out and works very closely with our suppliers to make sure. When we put the car quest name on that box its going to be OE quality. So we offer that if the customer chooses you know on the look up that they want car quest they choose car quest great if they choose.
<unk> brand and that use of National brand now, having said that as we brought.
The strength to some of these categories with car Quest, we are seeing our customers choose car quest, which back to your initial question.
You know we are roughly we think we're about 10 points underpenetrated versus our potential and while we won't get there in the next 3 years 2023 is obviously the strategic plan timeline, we outlined in April.
It's a pretty significant number of in the 200 basis points of margin expansion, we expect from category management. So that's fully contemplated and as we rollout all of the Skus will be in great shape too.
Capture that margin opportunity.
Thank you Thomas much appreciate it.
Thank you.
Your next question comes from the line of Seth Basham from Wedbush Securities. Please go ahead. Your line is now open.
Thanks, a lot and good morning, Tom if you could remind us what you see as the biggest contributors to margin improving on underlying basis, this year, and which ones you had the most confidence in them.
That would be great.
Sure.
We've said previously that gross margin is going to be the bigger contributor on a full year basis.
My confidence in the category management initiatives will leverage supply chain.
Theres, obviously, some things with supply chain. This year, we are seeing some wage inflation.
On supply chain that we didn't plan. If you go back to last fall, but we still believe we've got an opportunity to leverage supply chain based on the initiatives that we have there.
As you go into SG&A I mean, we're going to execute the initiatives. We have set so we've already done the restructure and I think the restructure of just to be clear. It wasn't just a cost play we've been able to really organize our corporate team around the highest value priorities, we streamline and simplify the <unk>.
Work, we've given more responsibility to the top people in this company and yes, we say what we outlined in the April meeting of about $30 million, which will realize over the next 12 months. So that's a AAA bond, we'll get that there are some offsets though inside of SG&A. This year as you know that were debt will move.
Minimize that debt benefit I guess that we're getting out of SG&A, but.
That's a quick quick run through more from gross margin not as much from SG&A.
Got it. Thanks, so it seems like there's a high degree of visibility for the margin improvement this year and really over the next couple of years of course, depending on the sales outlook is that the appropriate assessment.
Yep Yep.
Yes, absolutely.
[laughter].
And there are no further questions I will turn the call back over to Tom Greco for closing comments.
Well, thanks to all of you for joining us this morning, and as you've heard we're incredibly proud of how the AAP team continues to execute against our long term priorities, while serving the customer every day.
With Karen speed, we're very confident in the strategic plan, we outlined in April and importantly in the team we have here at AAP to deliver growth above the market to capitalize on the unique margin expansion opportunity and to return a significant amount of cash to our shareholders, which over the next few years is going to enable us to achieve top quartile.
Total shareholder returns.
Before we let you go having just celebrated memorial day. This week I'd like to take a moment and recognize and honor all of the brave men and women, who paid the ultimate sacrifice defending our country on behalf of the entire advance family I'd like to express our sincere gratitude for their service and all of they've done defending our freedom I hope that.
You all continue to be healthy and safe and we look forward to speaking with you again in August.
And this concludes today's conference call. Thank you for participating and you may now disconnect.
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