Q2 2021 Advance Auto Parts Inc Earnings Call
Well I can't get advice audio advance auto parts second quarter 2021 conference call.
Before we begin Ms. Elizabeth Ice may been senior Vice President Communications, and Investor Relations, who will make a brief statement concerning forward looking statements will be discussed on this call.
I'll now turn the call over to MS. Elizabeth I Steven go.
Go ahead.
Yeah.
Good morning, and thank you for joining us to discuss our Q2 2021 results that we highlighted in our earnings release this morning.
I'm joined by Tom Greco, our President and Chief Executive Officer.
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 those of historical fact are forward looking statements, including but not limited to.
Statements regarding our initiatives plans projections guidance 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 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 Securities and Exchange Commission.
Now, let me turn the call over to Tom Greco.
Thanks, Elizabeth and good morning, we hope you're all healthy and safe amid the ongoing pandemic and recent surge of adult ovarian I'd like to start by thanking the entire advance in car Quest independent family for your hard work to serve our customers throughout the quarter.
It's because of the view that we're reporting a positive growth in sales profit and earnings per share we're reviewing today.
In Q2, we continued to deliver strong financial performance on both the one and two year stack.
We began lapping more difficult comparisons.
In the quarter, we delivered comparable store sales growth of five 8% and adjusted operating income margin of 11, 4% an increase of 11 basis points versus 2020.
As a reminder, we locked a highly unusual quarter from 2020.
Where we significantly reduced hours of operation and professional delivery expenses reflective of the channel shift from pro to DIY.
As we anticipated the professional business accelerated in Q2, 2021 and between our ongoing strategic initiatives and additional actions we expanded margins.
Our actions offset known headwinds within SG&A.
In an extremely competitive environment for talent.
On a two year stack, our comp sales improved 13, 3% and margins expanded 227 basis points compared to Q2 2019.
Adjusted diluted EPS of $3.40 increased 15, 3% compared to Q2, 2020, and 56, 7% compared to 2019.
Year to date free cash flow more than doubled which led to a higher than anticipated return of cash to shareholders. In the first half of the year, returning $661.4 million through a combination of share repurchases and quarterly cash dividends.
Our sales growth and margin expansion were driven by a combination of industry related factors as well as internal operational improvements on.
On the industry side, the macroeconomic backdrop remained positive in the quarter as consumers benefited from the impact of government stimulus.
Meanwhile, long term industry drivers of demand continue to improve.
This includes a gradual recovery in miles driven along with an increase in used car sales.
Each contributes to an aging fleet.
While we delivered positive comp sales in all three periods of Q2, our year over year growth slowed late in the quarter as we lap some of our highest growth weeks of 2020.
Our category growth was led by strength in brakes motor oil and filters with continued momentum in key hard part professional categories.
Regionally the west led our growth benefiting from an unusually hot summer followed by the South West Northeast and Florida.
To summarize channel performance, we saw double digit growth in our professional business and a slight decline in our DIY omnichannel business.
So I understand the shift in our channel mix, it's important to look back at 2020 to provide context.
Beginning in Q2, we saw abrupt shifts in consumer behavior across our industry due to the pandemic, resulting from the implementation of stay at home orders.
This led to more consumers repairing their own vehicles, which drove DIY growth.
In addition, our DIY online business surged as many consumers chose to shop from home and leverage digital services.
Finally, as we discussed last year, our research indicated that large box retailers temporarily deep prioritize long tail items, such as auto parts in response to the pandemic.
These and other factors resulted in robust sales growth and market share gains for our DIY business in 2020.
Contrary to historical trends the confluence of these factors also led to a slight decline in our professional business in Q2 2020.
As we begin to lap this highly unusual time, we leveraged our extensive research on customer decision journeys.
This enable us to move quickly as customers shifted how they repaired and maintain their vehicles.
Our sales growth and margin expansion in Q2 demonstrates the flexibility of our diversified asset base as we adapted to a very different environment in 2021.
Specific to our professional business, we began to see improving demand late in Q1, 2021, which continued into Q2, resulting in double digit comp sales growth.
This is directly related to the factors just discussed along with improved mobility trends as more people return to work and miles driven increased versus the previous year.
Strategic investments are strengthening our professional customer value proposition.
It starts with improved availability and getting parts closer to the customer as we leverage our dynamic assortment machine learning platform.
Within our advance pro catalog, we saw improved key performance indicators across the board, including more online traffic increased assortment and conversion rates and ultimately growth in transaction counts and average ticket.
We also continued to invest in our technical training programs to help installers better serve their customers.
Our Tech net program is also performing well as we continue to expand our north American Tech that members, providing them with a broad range of services.
Each of these pro focused initiatives has been a differentiator for advance enabling us to increase first call status with both national strategic accounts and local independent shops.
Finally, we're pleased that through the first half of the year. We added 28 net new independent car quest stores.
We also announced the planned conversion of an additional 29 locations in the west as Baxter Autoparts joined the car Quest family.
We're excited to combine our differentiated pro customer value proposition with an extremely strong family business highlighted by baxter's excellent relationships with their customers in this growing market.
In summary, all of our professional banners performed at or above our expectations in Q2, including our Canadian business. Despite stringent lockdowns.
Moving to DIY Omni channel our business performed in line with expectations, considering our strong double digit increases in 2020.
While Q2 DIY comp sales were down slightly DIY omnichannel is still the larger contributor to our two year growth.
DIY growth versus a year ago gradually moderated throughout the quarter as some consumers return to professional garages.
Within DIY Omnichannel, we saw a shift in consumer behavior back to in store purchases consistent with broader retail.
We've also been working to optimize and reduce inefficient online discounts.
These factors along with highly effective advertising contributed to an increase in our DIY in store mix and a significant increase in gross margins versus prior year.
We remain focused on improving the DIY experience to increase share of wallet through our speed perks loyalty platform.
We made several upgrades to our mobile app to make it easier for speed perks members to see their status and access rewards.
We continue to see positive graduation rates among our existing speed perks members in Q2, our VIP membership grew by 8% and our elite members, representing the highest tier of customer spend increased 21%.
Shifting to operating income we expanded margin in the quarter on top of significant margin expansion in Q2 2020.
This was led by our category management initiatives, which drove strong gross margin expansion in the quarter.
First our work on strategic sourcing remains a key focus as consistent sales growth over several quarters resulted in an increase in supplier incentives.
Secondly, we've talked about growing owned brands as a percent of our total sales.
This has been a thoughtful and gradual conversion and we began to see the benefits of several quarters of hard work in Q2.
This was highlighted by our first major category conversion with steering and suspension, where we saw extremely strong unit growth for our high margin car quest premium products.
In addition, the CQ product is highly regarded by our professional installers with consistent high level of quality standards that are now delivering lower defect rates and improved customer satisfaction.
We also recently celebrated the one year anniversary of the Diehard battery launch.
Following strong year, one share gains in DIY Omnichannel, we've now extended diehard distribution into the professional sales channel, where we're off to a terrific start.
Further expansion of a diehard and car quest brands is planned for other relevant categories.
In terms of strategic pricing, we significantly improved our capabilities leveraging our new enterprise pricing platform.
This platform enabled us to respond quickly as inflation escalated beyond our initial expectations for the year.
Moving to supply chain, while we're continuing to execute our initiatives, we faced several unplanned offsetting headwinds in Q2.
Like most retailers, we experienced disruption within the global supply chain wage inflation in our distribution centers and an overall shortage of workers to process a continued high level of demand.
In addition, our suppliers experienced labor challenges and raw material shortages disc.
Despite a challenging external environment, we continue to execute our internal supply chain initiatives. This.
This includes the implementation of our new warehouse management system, our WNS, which we're on track to complete in 2022.
And the Dcs that we've converted we're delivering improvements in fill rates on hand accuracy and productivity.
The implementation of WNS is a critical component of our new labor management system or LMS. Once completed LMS will standardized operating procedures and enable performance based compensation.
We also continued to execute our cross banner replenishment or CVR initiative transitioning stores to the most freight logical servicing D C.
In Q2, we converted nearly a 150 additional stores and remain on track with the completion of the originally planned stores by the end of Q3 2021.
In addition, with CBR, we're on track with the integration of World packing Autopart International which is expected to be completed early next year.
Shifting to SG&A, we lost several cost reduction actions in Q2, 2020, which we knew we would not replicate in 2021.
We discuss these actions on our Q2 call last year, primarily a reduction in delivery costs. As a result of a substantial channel mix shift along with a reduction in store labor costs at the beginning of the pandemic.
Jeff will discuss these in more detail in a few minutes.
In terms of our initiatives, we continue to make progress on sales and profit per store our team delivered sales per store improvement and we remain on track to reach our goal of 1.8 million average sales per store within our timelines.
Our profit per store is also growing faster than sales per store <unk>.
Enabling four wall margin expansion.
In addition to the positive impact of operational improvements, we've implemented to drive sales and profit per store. We have also done a lot of work pruning underperforming stores and we're back to store growth.
In the first half of the year, we opened six world Pac branches 12 advanced in car Quest stores and added 28, net new conquest independents as discussed earlier.
We also announced the planned conversion of 109 Pep boys locations in California.
We're very excited about our California expansion with the opening of our first group of stores scheduled this fall.
The resurgence of the Delta Varian has resulted in some construction related delays in our store opening schedule we expect.
To complete the successful conversion of all stores to the advanced banner by the end of the first quarter 2022.
Finally, we are focused on reducing our corporate and other SG&A costs, including a continued focus on safety.
Our total recordable injury rate.
Decreased 19% compared to Q2, 2020, and 36% compared to Q2 2019.
We're also finishing up our finance ERP consolidation, which is expected to be completed by the end of the year.
Separately, we are in the early stages of integrating our merchandising systems to a single platform.
Both these large scale technology platforms are expected to drive SG&A savings over time.
The last component of our SG&A cost reduction was a review of our corporate structure.
In terms of the restructuring of our corporate functions announced earlier this year savings were limited in Q2 due to the timing of the actions, we expect SG&A savings associated with the restructure beginning in Q3.
In summary, we're very pleased with our team's dedication to caring for our customers and delivering strong financial performance in Q2.
We're optimistic as the industry related drivers of demand continue to indicate a favorable long term outlook for the automotive aftermarket.
We remain focused on executing our long term strategy to grow above the market expand margins and returned significant excess cash back to shareholders.
Now, let me pass it to Jeff to discuss more details on our financial results.
Thanks, Tom and good morning.
Wanted to Echo Tom's thanks to our team members, who continue to prioritize the health and safety of our customers and their fellow team members, while helping to deliver solid results for the quarter.
In Q2, our net sales increased five 9% to $2.6 billion.
Adjusted gross profit margin expanded 239 basis points to 46, 4%.
Primarily as a result of the ongoing execution of our category management initiatives, including strategic sourcing strategic pricing and owned brand expansion.
We also experienced favorable inventory related costs versus the prior year.
These benefits were partially offset by inflationary cost and supply chain and unfavorable channel mix.
In the quarter same SKU inflation was approximately 2%.
And we expect this will increase through the balance of the year.
We're working with our supplier partners to mitigate costs where possible.
Year to date gross margin improved 156 basis points compared to the first half of 2020.
As anticipated Q2, adjusted SG&A expenses increased year over year and were up $109 million versus 2020.
This deleveraged 228 basis points.
And was the result of three primary factors.
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Our incentive compensation was much higher than the prior year.
Primarily in our professional business as we left a very challenging quarter in 2020, when pro sales were negative.
Second we experienced wage inflation beyond our expectations in stores.
We remain focused on attracting retaining and developing the very best parts people in the business and we will continue to be competitive.
We expect both headwinds to continue in the back half of the year.
Third and as expected, we incurred incremental costs associated with professional delivery and normalized hours of operation when compared to Q2 2020.
These increases in Q2 were partially offset by a decrease in COVID-19 related expenses to approximately $4 million compared to $15 million in the prior year.
As a result of these factors our SG&A expenses increased 13, 3% to $926.4 million.
As a percent of net sales, our SG&A was 35% compared to 32, 7% in the prior year quarter.
Year to date SG&A as a percent of net sales improved to 88 basis points compared to the first half of 2020.
While we've seen a decrease in COVID-19 related costs year to date.
The health and safety of our team members and customers will continue to be our top priority.
As the current environment remains volatile and the Delta variant remains a concern we may see increased COVID-19 expenses in the back half of the year.
Our adjusted operating income increased to $302 million compared to $282 million one year ago.
On a rate basis, our adjusted Oi margin expanded by 11 basis points to 11, 4%.
Finally, our adjusted diluted earnings per share increased 15, 3% to $3.40 compared to $2.95 in Q2 of 2020.
Our free cash flow for the first half of the year was $646.6 million, an increase of $338.4 million compared to last year.
This increase was driven impart by our operating income growth.
Along with continued momentum in our working capital initiatives.
Our capital spending was $58.7 million for the quarter and $129.6 million year to date.
We expect our investments to ramp up in the back half of the year and in line with our guidance. We estimate we will spend between $300.350 million in 2021.
Due to favorable market conditions, along with our improved free cash flow in Q2, we returned nearly $458 million to our shareholders through the repurchase of 2 million shares at an average price of $249.
And our recently increased quarterly cash dividend of $1 per share.
We're pleased with our performance during the first half of the year and moving into the first four weeks of Q3 on a two year stack our comparable store sales are in line with Q2.
We're continuing to monitor the COVID-19 situation as well as other macro factors, which may put pressure on our results, including inflationary costs and commodities wages and transportation.
Based on all these factors, we are increasing our full year 2020, one guidance ranges, including.
Net sales in the range of $10 six to $10.8 billion.
Comparable store sales up 6% to 8%.
Adjusted operating income margin of nine two to nine 4%.
As you heard from Tom on our new store openings, we've encountered some delays in the construction process of converting Pep boys stores.
Primarily permitting and obtaining building materials related to the ongoing pandemic.
As a result, we're lowering our guidance range and now expect to open 80 to 120 new stores this year.
Additionally, given the improvement of our free cash flow and our accelerated share repurchases in the first half of the year. We're also increasing our guidance for free cash flow to a minimum of $700 million.
And an expected range for share repurchases of $700 million to $900 million.
We remain committed to delivering against our long term strategy as we execute against our plans to deliver strong and sustainable total shareholder return.
Now, let's open the call for your questions operator.
And at this time, if you would like to ask a question. Thank you press. The Star then one on your telephone keypad Covid.
Your question. Please pass on key one on NPD first first question.
Our first question comes from the line of Michael Lasser of UBS. Your line is open.
Good morning, Thanks, a lot for taking my question.
Tom viewers.
Performance in Q2.
Trailed behind them in the industry as well as some indicators of how the industry performed.
What would you attribute that to and you see some signs that it's just going to be harder to realize the topline expectation that you have outlined as part of your long term plan.
Hey, good morning, Michael on the contrary, we're very pleased with our sales performance in the quarter.
This is one of those unusual quarters, where you have the timing of the quarter makes a very big difference. If you think about our quarter that started on April 25th we Didnt have the first 24 days of April.
Three week period, we can see our growth it was over 50% in those weeks.
And they get replaced by a couple of weeks in July our quarter ended on July 17, So it's really around the timing piece.
As far as we're concerned.
You've normalized the calendar for the months of April through June we're performing very well in relative terms. So in general. This is a very fragmented industry as well there is lots of room for everyone to grow we have just 7% of the total market. We're also pleased that we were able to grow margins grow.
Margins in the quarter on top of the sales growth. So again, when we normalize our quarter relative to our peers, we feel very good about our sales performance.
Understood.
Follow up question is on your operating expenses SG&A versus 2019 in the quarter was up around 14%.
When you're on an 11% increase in the first quarter.
Much of this has been due to wages in fleeting more than you expected and what's a reasonable expectation for us to assume wages are going to continue to increase in the next couple of quarters.
And then how much you think is going to be marketplace.
Other potential sources of savings or even the gross margin expansion mid teen sustainable you generated second quarter.
Yes, well, it's specific to SG&A when you compare it to 2019, you got to remember we do have the.
Covid related costs in 'twenty, one that we didn't experienced in 2019 and I think that just about evens. It out in fact, we might actually be a little bit better on a relative basis, when you take out those $4 million.
In terms of inflation.
We certainly experienced inflation throughout the P&L and the.
The wage inflation was higher than our expectations certainly the product costs are well within our expectations they were little over 2%.
But just kind of stepping back if we continue to execute our margin expansion initiatives, especially in gross margin many of which you saw this quarter. We think that's going to continue into the back half of the year and keep in mind a lot of our SG&A initiatives that we laid out in April either don't start in 'twenty, one at all or.
Just begin in the back half of 'twenty. One. So for example that $30 million of restructuring, we're not going to start seeing that till the back half. So that will help us somewhat but SG&A is going to be challenged throughout the balance of the year, but we're confident we can continue with our gross margin and then hopefully continue to show positive operating margins.
Thank you and good luck.
Thanks, Michael.
Your next question comes from the line of Simeon Gutman Morgan Stanley. Your line is open.
Hey, Thanks. Good morning, everyone. My first question is on gross margin this quarter. It looked like it was a pretty strong inflection on that line item can you talk about.
If it's reflective of the collective of initiatives that Youre working on and then is there any part of it that may not be repeatable.
Yeah, Thanks, Simeon, but the short answer is yes, it's a directly attributable to our category management initiatives at the.
The combination of our strategic sourcing our strategic pricing and as Tom mentioned, we rolled out our own brands and so if you take those and put them together that not only offset the inflation, which as I. Just mentioned was a little over 2% that we saw in product cost. It drove all of our gross margin improvement in the quarter.
And we absolutely believe that these are sustainable in the back half of the year now we did see favorability with some of those inventory related items, namely capitalized supply chain cost, but those were essentially offset by the supply chain headwinds in channel mix. So overall, we're very pleased with how our initiatives drove gross margin improvement in Q2 and <unk>.
We expect that to continue.
Okay. That's helpful and then maybe Jeff I'm going to stick with supply chain cost because I know you just mentioned it now and I think it was in the press release, because you know.
These costs are getting capitalized and we know what container rates and freight rates are moving up have we seen the peak level of these costs reflected or we have to wait as your inventory turns means we're going to see a little bit incremental pressure from these items down the road.
Over time down the road you would see these come back through remember, we've got $4 billion of inventory sitting on our balance sheet. So I wouldn't expect.
Wave to come back in any of the next few quarters and it really varies by the velocity of the various skus. So if it does get onto your balance sheet. It does come back off over time.
But overall, we're not anticipating anything at least not in the back half of the year and.
And just related to the same related to my first and the second question.
Inflection in terms of magnitude of gross margin combined with maybe some higher supply chain costs is there any rule of thumb, you know where the business should be doing 30, 50.70 basis points of margin or is it youre not going to draw a line in the sand that specifically yes.
Yeah, we're not going to draw lines in the sand that specifically, we're really pleased with the initiatives that we have in place. They are absolutely going to continue and we're going to try our best to manage the inflation as we go through the balance of the year.
Okay. Thanks appreciate it take care.
Thanks, Dan.
Your next question comes from the line of Christopher <unk> of Jpmorgan. Your line is open.
Thanks, guys and good morning. So my first question is on the commentary around quarter to date.
The DIY compare is really start to ease off going forward. If our math is right you were running sort of a low double digit through.
Through the end of August last year, and then it eased down to sort of mid single digit plus.
Latter part of the quarter is that fair and does that imply that youre running sort of like a low single digit one year positive at this point.
Good morning, Chris Youre in the ballpark.
He said was were in line with the two year stack in the second quarter, which as we reported this morning was at little over 13. So.
Our third quarter was 10, so you're in that ballpark and I think your cadence is right as well I mean July and August were very strong.
Last year and started to gradually moderate through the fall.
Understood It makes sense.
And then as a follow up just Helicoptering up you did it in the first quarter you had a 9% operating margin in the second quarter in a 11, 4% operating margin whats, what's the new sustainable level or maybe asked differently, what's what's not sustainable and 11, 4%.
Understand and some quarters seasonally light.
So less certain leveraged on the fixed cost side, but what sort of the build point that we're going from as we think about the second quarter and forward.
Yeah, a couple of things Chris.
We're pleased with the not only the one year, but the two year improvement in the second quarter on margin expansion of over 200 bps.
The big thing Thats, starting to kick in for Us and it's sustainable as the category management initiatives I mean, we've been working on those for a couple of years. We've said all along it's going to take time.
We've had several quarters five quarters in a row of growth now.
The last couple of years, we've only had.
One difficult quarter in early 2020, and Thats helped us on the on the sourcing side and vendor incentives piece.
The rollout of our own brands, which as you know given the turns in our category has taken time, but that is really starting to benefit our P&L.
Theres a significant difference in the margin rate between the car quest premium owned brand products and some of the alternatives that we have there.
And as you know we implemented that pricing tool.
In the middle of last year and that also has enabled us to be a lot smarter in how we price, whether that's regionally or by channel or by account all of those things. So clearly the category management initiatives are going to be sustainable for us.
Supply chain initiatives, we're going to continue to execute against they are very much on track what we're dealing with on the on the unknown side is just the ongoing inflationary environment than in the second quarter, we saw that coming we dealt with it.
We feel confident this is an industry that's been able to deal with unplanned inflation very successfully over many years. So.
That's the approach that we're going to take but the gross margin initiatives. We feel very strong very good about and we believe are sustainable and we're going to continue to execute them.
So I guess said another way.
Ex sort of seasonality and overall sales levels. There was nothing unusual in the 11, 4%.
Yes, we called out.
Inventory related costs that were basically fully offset as Jeff just said by.
So the channel mix in the supply chain headwinds, but other than that it was it was equal Jeff the only thing I would add to that Chris is in the back half we're going to continue to invest in marketing as long as it makes sense.
We're seeing a really good return on our advertising spend.
It was relatively flat in Q2, just so you know but in the back half.
We've got some plans to invest further into marketing and so we're going to see some of that in the back half.
Got it thanks very much.
Thank you.
Your next question comes from the line of Elizabeth Suzuki of Bank of America. Your line is open.
Hey, good morning, and thanks for taking our question. This is Jason Haas on for Liz Suzuki.
So I wanted to focus in on the DIY business I'm curious what you could say about the health of that customer we know they've been flushed with cash.
Stimulus and highest game rates for a while so it sounds like youre starting to see a moderation in that business I'm curious to what extent you think that's folks shifting over to the do it for me channel or do you think.
Maybe there's just some slowdown in there and they are spending after.
The stimulus dollar start to start to run out.
Well, we've actually been pretty pleased with the performance in DIY, we fully anticipated this year.
<unk> back to DIY at some point this year, given what happened last year again.
In the second quarter of 2020 people were locked in their homes. They had time on their hands they were doing things.
Wouldn't normally do including.
DIY automotive so as we get back into more of a.
Normalized environment here, where people are commuting theyre going out to baseball games and traveling on airplanes and all of the things that they do they lose that time, and then theyre going to obviously get their car repaired and maintained.
By a professional it's more likely that they would do that and also in the second quarter last year.
Many of the professional garages were closed for a period of time, so they couldn't even get them repair to the garage.
So it's really.
Our held up more than we would've expected and.
We're very pleased with our DIY performance in the quarter.
We can see that we held onto customers that joined US last year. It came on to our to.
To the advance team if you will last year and we maintain those those customers and the DIY business has held up so it hasnt, we havent given back a whole lot of the gains from last year.
Thanks, that's great to hear and then on.
On your inventory position I know you mentioned then that's been widely reported some supply chain challenges. So I'm just curious how that looks from here on out. If you are getting a sense that things are starting to to improve from here.
And then just just the state of your inventory and how do you feel for the remaining quarters of the year.
And then if it's related at all I did want to follow up on the free cash flow guidance.
Just curious what the drivers if that's inventory related I don't know if the delayed store openings hasnt impact just any color on that would be helpful as well. Thanks.
Okay, well I'll take the supply chain question I'll flip the free cash flow over to Jeff.
I think in general we would say our store in stocks are not where we'd like them to be.
At the same time, we're very well positioned competitively I've been out in the market a lot I can see what's going on.
In the in the DIY network and in DIY I feel very good about our competitive position I think everyone is experiencing some level of difficulties there I'm very proud of our merchant inventory and supply chain teams they've leveraged long term relationships that we have with our partners to keep the product moving.
So we're going to continue to work with them to build our inventory back and make sure that we're at the level of service that we want to be for our stores, but I feel very good competitively Jeff Yeah sure on the free cash flow really there's three things that are going to impact us in the back half that we didn't see as much in the first half.
So first of all we do think we're going to still generate meaningful operating cash in the back half, but that's going to be largely offset by three things first is our capital expenditures.
We still have a very robust plan in the back half to invest back in the business.
Investing in our margin expansion objectives, and so the capex spend will be elevated as compared to the second half as you saw we held our guidance there at $300 million to $350 million for the year.
Second and related to the first question, we are going to be making investments in inventory that will likely increase our inventory in the back half to support what Tom just said both the in stocks as well as our new store openings. So that will put some pressure on our working capital and then the last thing is we have a couple of expenditures that we didn't see in the first half we have.
To repay half of the cares act. So if you recall, we didn't have to make the cash payment.
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Employer payroll tax last year, we have payback half of that this year in the fourth quarter and then we do have an additional rent payment due to the timing of our fiscal year and so those are really the drivers for the lower free cash flow as compared to the first half.
Got it that's helpful. Thank you.
Your next question comes from the line of Steven <unk> of Citigroup. Your line is open.
Great. Good morning, everyone. Thanks for taking my question.
I wanted to start on the outlook for parts inflation. If you can elaborate on a little bit more on how you're thinking about the full year I think the prior expectation.
For 2% to 4% benefit to the full year comps or just talk about that and then I guess more broadly on the.
The pricing environment have you really seen any issues with passing cost onto the customer or the DIY consumer.
Yeah. So I'll take the first part I think you mentioned the parts inflation.
As I said you know in the quarter, we saw product cost at a little over 2%. When we started the year, we were estimating inflation of one to two we now think it's going to be two to four we do know there is more inflation coming we're planning for that so that two to four range, we feel like it's going to be.
It's still in that range.
Yeah and on the pricing piece.
<unk> been able to leverage our tools are much better this year, we're being a lot more strategic in how we pass on pricing we leverage all the work we do on the customer decision journey.
That's in DIY or in India.
Pardon me.
And with that in mind.
We've been able to pass it on very successfully.
It's kind of a tradition within our industry, we feel confident we'll be able to continue to do that.
Great.
And then just a second question on the broader macro backdrop and some of the industry drivers how do you see demand playing out over the balance of the year I guess in particular, we've seen the strength in used car sales do you think that's a tailwind that can continue here in the back half of the year.
We definitely do I mean.
That's a very important number to see that used car growth and we do believe that's going to continue to contribute to an aging fleet, which in turn means more parts sales. So that's our strength in the traditional drivers of demand all of them are relatively positive we're seeing a recovery in miles driven.
The car parks growing the fleet is aging so all of those contribute to incremental parts sales. So we do believe the industry continues to grow and as you saw from our April investor presentation.
As you get into 'twenty two 'twenty three we think that continues in the 4% range.
Great. Thanks, very much guidance.
Okay.
Your next question comes from the line of Kate Mcshane with Goldman Sachs. Your line is open.
Hi, Good morning, Thanks for taking my question I just wanted to go back to the wage inflation piece.
Just curious why maybe it was higher than expected in Q2 and I wondered if you could talk a little bit about turnover are currently at the Dcs versus stores and where your average average hourly wages currently.
Well first of all we definitely have planned some level of wage inflation for the year Kate.
It is a little bit I mean, you are very familiar with the labor situation assay, which was very challenged in the second quarter. So.
Our surgical with how we invested in wages, we look at a market by market and we look at it on an ongoing basis, we want to make sure. We've got the very best people that we can get into our stores to work with our customers and that's been a multiyear effort we've been investing in our frontline team members for several years, we've got a very unique.
<unk> program called fuel the frontline, which provides stock to our frontline team members no one else in the industry has that we've invested over $60 million there and as we look at our store team, we want to keep that turnover number down as low as possible. So there are markets, where we made investments in the quarter in the stores.
Supply chain is.
<unk> is a very challenging situation.
We are seeing inflation, there as we called out more than we expected.
That turnover I think has peaked and started to come down as what I would tell you there.
Obviously at some of the benefits the unemployment benefits et cetera start to come off.
We are seeing.
More applicants and able to source the people that we need so I think the difficult environment.
Is going to continue but it's going to be less challenging I think than it was in the second quarter.
Thank you.
Your next question comes from the line of Bret Jordan of Jefferies. Your line is open.
Hey, good morning, guys.
Good morning, Brett.
On the category initiatives I guess do you think that they are having any impact on your in stocks as you put more of the supply chain on your own plate as opposed to.
Third party distributors suppliers.
No I think in general we're transitioning certain categories, but.
Jim in general, it's a challenging environment for our suppliers getting people to work getting containers. Obviously, we've got source products from China, There's a lot of variables in there Brad So I think it's really a broader issue.
Okay, and then I guess on the <unk> topic, you talked about some of the store conversions.
Could you give us any color as how any.
Any early feedback on how those stores are performing if you've converted and I guess on those that you are having a problem with may they never convert is it something that you're just not getting approval on the zoning for and they may get left out or it's just going to be slower.
First of all I know, we'll get them all converted what we said was by the end of the first quarter of 'twenty two.
We obviously want to get this right as quickly as we can.
We've run into some challenges with with permitting and construction and things like that in California that are quite unique to that market, but I got to tell you. We're so excited about this opportunity Brett I have been out there a couple of times I have been through the stores meeting meeting. The team members. These are experienced team members. They know the la market they know the.
Before in your market, we're going to bring them all of our.
Initiatives to bring them diehard batteries car quest premium products all of our professional customer base. We're very excited about this opportunity and you're going to hear more about it this fall.
We're going to be starting opening soon.
Okay, Great and then one quick housekeeping question I guess why the accounts payable to inventory now in the <unk>.
Years ago, we talked about this maybe being a target do you think that number goes higher or are there just structural headwinds like world pack that would prevent your accounts payable north of a 100%.
Yeah, we've said in the past that we think we can get our AP ratio into the low ninety's for.
For the balance of the year, we think it will moderate to some extent versus what youre seeing in Q2, and that's largely driven by the inventory investments that I had mentioned earlier.
Okay, great. Thank you.
Sure.
Your next question comes from the line of Daniel <unk> of Stephens. Your line is open.
Good morning, everybody, thanks for taking our questions.
I wanted to start on the expense side I think in recent quarters, Jeff and Tom You've mentioned, taking up your advertising dollars I think you've noted that had probably skews towards more driving DIY sales in DIY mix with DIY sales slowing in becoming a smaller percentage going forward can you maybe talk about how youre planning those advertising dollars.
And frankly, how you're measuring ROI, just given the channel shifts going on in the business.
Yes, good morning, Daniel we measure it based on and the ability to drive the P&L and margin expansion incremental sales dollars are in the equation, obviously, but we've been very very successful at refining our marketing spend.
Diehard has been a homerun.
Launch diehard.
Last year, we gradually.
Reduced our discounts online on batteries or gross margin improvement in batteries is significant we report as part of our gross margin benefit in the quarter was related to batteries ware.
On a year to date basis, we're still gaining unit share and growing gross margin. So when when those marketing dollars would show up in SG&A are spent against and initiatives such as diehard. We look at the total picture not just the.
SG&A investment obviously to the extent, we can drive the entire P&L, we do that and that's how we look at it.
Got it that's not flying that's helpful. And then two just on the DIY customer first you know you talked about moving customers up your loyalty tiers.
What are their reward redemptions looking like at each level and is there a different gross margin impact is there a positive benefit from moving up tier with customers and then the last DIY question, just with gas prices much higher maybe year over year and frankly staying here at levels, we haven't seen in a while.
Is there any impact on that lower end DIY customer any pullback in discretionary spending you'd attribute to that factor.
Well first of all on speed Perks. We're pleased we're starting to grow share of transactions again, we saw a nice increase on that.
We are seeing.
What we call graduation, so the increases in our elite members increases in our VIP members. So the short answer is we want that we want to capture a higher share of wallet.
With our DIY customers and when we do that we make more gross profit dollars. The discounts are not are obviously factored into that but youre getting a higher share of wallet in total you're very happy with that outcome.
We haven't seen anything yet in terms of DIY customers trading down we're very cognizant of that though Daniel to your question.
And in some cases.
As we rollout car quest.
Premium owned brand, we're seeing that naturally and thats actually a good thing for us because it drives gross margin. However in general I don't think we can say, we've seen a broad trend to trade down yet, but we are cognizant of it given the environment.
And given the stimulus coming off and all of those things.
Got it thanks, so much guys best of luck.
Your next question comes from the line of Mike Ullman Tani of Evercore ISI. Your line is open.
Hey, good morning, and thanks for the taking the question I just wanted to ask for some incremental color if I could Tom in terms of transaction counts can you just give us some <unk>.
For how that played out on DIY D. I F. M. And then that 5.8 comp how much was traffic versus ticket there.
Sure Yeah Pro was strong across the board.
Drawn ticket growth strong average ticket DIY was down in terms of transactions.
Lapping huge growth last year. So in terms of our overall performance. We're pleased with both in terms of our expectations and what we how we thought the quarter was going to play out.
Ticket was strong in DIY as well by the way so a bit of a tale of two cities, but not different than we expected.
And just a follow up was if we look at the back half of last year, it's kind of a 100.150 bps higher EBIT margin in aggregate versus the back half of 19, and you know just thinking about this year's back half.
We're talking about kind of double digit.
Trends in terms of two year sales productivity lifts. So just wondering if there's any structural impediment that would kind of prevent that.
The retention of Montreal, all of that kind of benefit that you all had last year.
Well I mean, our back half guidance represents a combination of factors I mean, we looked at the environment. It's obviously, a pretty dynamic environment right. Now there is a lot of unknowns in the back half so we have.
<unk> reflected that in the guide.
Based on the tailwind we had in the second quarter and all of those headwinds that we see we did increase the guide for the third time on all of the key financial metrics and we're pleased that through the first four weeks on a two year stack. Our sales performance is in line with Q2, roughly 13%. So all of that positive Michael So we're going to.
Continue to execute our plan.
We want to grow faster than the market, we want to expand our margins are going to return the excess cash back to our investors and continue to do what we believe.
We're capable of doing over the next couple of years and we're cognizant of the dynamic nature of the environment.
Makes sense, thank you and good luck.
Thank you and I'm showing no further questions in the queue at this time I'll hand, the call back to Mr. Tom Greco for closing remarks.
Well, thanks again for joining us today as you heard this morning, we're very proud of our performance in the first half of the year and we're extremely grateful for nearly 70000 team members, who are dedicated to serving the customer while working to keep our advanced family safe and healthy amid a very challenging environment, we're committed to continue to execute.
Our long term strategy to deliver strong and sustainable total shareholder return and we are confident in our ability to deliver against our strategic initiatives I'd also like to announce that starting September one for launching our annual American Heart Association fundraising campaign at our stores as well as our independently owned car quest stores in the U S and Puerto Rico the funds.
We raise will go towards American heart associations fight against heart disease, and stroke, we believe that by increasing the awareness of heart health and raising critical funds for research. We can help improve the lives of our team members customers and members of our communities. We hope you'll join us in supporting this important mission.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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