Q3 2021 Advance Auto Parts Inc Earnings Call
Welcome to the advance auto parts third quarter 2021 conference call before we begin Elisabeth I Slaven Senior Vice President Communications and Investor Relations will make a brief statement concerning forward looking statements that will be discussed on this call. Please go.
Ahead.
Yeah.
Good morning, and thank you for joining us to discuss our Q3 2021 results that we highlighted in our earnings release yesterday.
I'm joined today by 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 fact are forward looking statements.
Clothing, but not limited to statements.
Statements regarding our initiatives plans projections and future performance.
Actual results could differ materially from those projected or implied by the forward looking statements.
Additional information about factors that could cause actual results to differ can be found under the captions forward looking statements and risk factors in our most recent annual report on Form 10-K, and subsequent filings made with the commissioning.
Now, let me turn the call over to Tom Greco.
Thanks, Elizabeth and good morning to all of you joining us today.
As always we hope that you and your families are healthy and safe.
I'd like to start by thanking the advance team and car quest independents for their hard work and perseverance through these challenging times.
Their continued dedication to provide outstanding service to our customers allowed us to deliver another quarter of topline sales growth adjusted margin expansion and a double digit increase in earnings per share.
We've been investing in both our team and our business over multiple years to transform and better leverage advances assets.
In Q3, this helped enable us to comp the comp on top of our strongest quarterly comparable store sales growth of 2020.
Specifically, we delivered comp store sales growth of three 1%.
Sustaining an identical two year stack of 13, 3% compared with Q2.
As expected. This was led by the continued recovery of our professional business.
<unk> improvement in key urban markets.
By putting DIY consumers and pro customers at the center of every decision we make we.
We've been able to respond quickly to evolving needs.
In Q3. This was highlighted by an overall channel shift back to professional and a return to stores for DIY ours.
Within professional we're seeing increasing strength in certain geographies, which lagged the rest of the country last year.
Ongoing return to office, a professional workers in large urban markets catches up with the rest of the country.
Our diversified digital and physical asset base has enabled us to respond rapidly to these changing channel dynamics in the current environment.
In addition.
<unk>, we also delivered significant improvement in our adjusted gross margin rate of 246 basis points led by our category management initiatives.
Our adjusted SG&A cost as a percentage of net sales were 209 basis points higher as we lapped a unique quarter in Q3 2020.
As we've discussed over the past year.
Our SG&A costs were much lower than normal in Q2, and Q3 of 2020.
This was due to an unusually high DIY sales mix and actions we took last year during the initial stages of the pandemic, which were not repeated.
Overall, we delivered adjusted operating income margin expansion of 37 basis points to 10, 4% versus Q3 2020.
Adjusted diluted EPS of $3 21.
Increased 21, 6% compared with Q3, 2020, and 31% compared with the same period of 2019.
Our year to date adjusted earnings per share are up approximately 50% compared with 2020.
Year to date, our balance sheet remains strong with a 19% increase in free cash flow to $734 million, while returning a record $953 million to our shareholders through a combination of share repurchases and quarterly cash dividends.
Consistent with the front half of the year there were several industry related factors, coupled with operational improvements contributing to our sales growth and margin expansion in Q3.
As discussed in our April Investor presentation. The three primary external drivers of industry demand are still improving versus prior year.
Outlook remains positive.
The car park continues to grow slightly.
Fleet is aging and perhaps most importantly vehicle miles driven continue to improve versus both 2020 and 2019.
More broadly the chip shortage continues to impact the availability of new vehicles and is contributing to a surge in used car sales.
This benefits our industry as consumers are repairing and maintaining their vehicles longer.
As we all know over the last 18 months, the pandemic changed consumer behavior across our industry, which led to a surge in DIY omnichannel growth in 2020, while the professional business decline.
However, as the economy continues to reopen with miles driven steadily increasing our professional business is now consistently exceeding pre pandemic levels as discussed last quarter.
Regional performance was led by the southwest and West Cat.
Category growth was led by brakes motor oil and filters as miles driven reliant categories improved versus a softer 2020.
We also saw continued strength in diehard batteries, which led the way on a two year stack basis.
Each of these categories performed well as a result of the diligent planning between our merchant and supply chain teams, enabling a strong competitive position despite global supply chain disruptions.
At the same time, we experienced challenges in Q3, as we strategically transitioned tens of thousands of under car and engine management skus to own brand.
Importantly, these in stock positions are now significantly improved and we're confident these initiatives will help drive future margin expansion.
Overall comp sales were positive in all three periods of Q3 led by professional.
DIY Omnichannel delivered slightly positive comp growth in Q3, while lapping high double digit growth in the prior year.
Within professional we navigated a very challenging global supply chain environment to allow us to say, yes to our customers.
The investments we've made in our supply chain inventory positioning and in our dynamic assortment tool helped put us in a favorable position competitively.
We've implemented the dynamic assortment tool in all company owned U S stores as well as over 800 independent locations.
Our my advanced portal and embedded advance pro catalog continues to be a differentiator for us while driving online traffic.
Our online sales to professional customers continues to grow as we strengthen the speed and functionality of advanced pro.
We remain committed to providing our industry, leading assortment of parts for all professional customers.
This will help enable us to grow first call status and increase share of wallet in a very fragmented market.
In addition, we expanded diehard to our professional customers.
Following a recent independent consumer survey diehard staked its claim as Americas, most trusted auto battery.
During Q3, we announced a multiyear agreement with our national customer Bridgestone to sell a diehard batteries and more than 2200 tire and vehicle circle centers across the United States.
With this system wide rollout during Q3, we replaced their previous battery provider, making.
Making us the exclusive battery supplier across all Bridgestone locations.
In terms of our independent business, we added 16, net new independent car quest stores in the quarter, bringing our total to 44 net new this year.
We continue to grow our independent business through differentiated offerings for our car Quest partners, including our new car Quest by advance banner program, which we announced earlier this month.
As we continue to build and strengthen the advance brand and our DIY business car quest by advance as DIY relevance for our car quest branded independent partners, while providing incremental traffic and margin opportunities.
We have recently rolled this new initiative out to our independent partners and look forward to further expansion over time for both new and existing car quest independents.
Transitioning to DIY Omnichannel comparable store sales were slightly positive in Q3.
As Youll recall, our DIY Omnichannel business reported strong double digit comp sales growth in Q3 2020, we.
We continue to enhance our offerings and execute our long term strategy to differentiate our DIY business and increased market share.
In Q3, we continued to leverage our speed perks loyalty program as VIP membership grew by 13% and our number of elite members, representing the highest tier of customer spend increased 21%.
Last year the launch of our advanced same day suite of services helped enable a huge surge in e-commerce growth.
This year as <unk> returned to our stores in store sales growth led our DIY sales growth.
Part of this was expected due to a planned reduction in inefficient online discounts, which significantly increased gross margins.
Turning to margin expansion, we again increased our adjusted operating income margin in the quarter.
Like Q2, this was driven by category management actions within gross margin.
Where our key initiatives played a role.
First we are realizing benefits from our new strategic pricing tools and capabilities.
Like other companies, we're experiencing higher than expected inflation. However, our team has been able to respond rapidly in this dynamic environment as industry pricing remains rational.
Behind strategic sourcing vendor income was positive versus the previous year with continued strong sales growth.
Finally double digit revenue growth in owned brand outpaced our overall growth in the quarter as we expanded the <unk> brand into new categories.
Markwest products have a lower price per unit than comparable branded products, which reduced comp and net sales growth in the quarter as expected.
At the same time the margin rate for owned brands is much higher and contributed to the Q3 adjusted gross margin expansion.
Shifting to supply chain, we continue to make progress on our productivity initiatives in.
In Q3 that benefits from these initiatives were more than offset by widely documented disruptions and inflationary pressure within the global supply chain.
As a result, we did not leverage supply chain in the quarter.
We completed the rollout of cross banner replenishment or CVR for the originally planned group of stores in the quarter.
The completion of this milestone is driving cost savings through a reduction in stem miles from our Dcs to stores.
Over the course of our implementation our team identify additional stores that will be added over time.
Secondly, we're continuing the implementation of our new warehouse management system or WNS.
This is helping to deliver further improvements in fill rates on hand accuracy and productivity.
We successfully transitioned to our new Wm that and approximately 36% of our distribution center network as measured by unit volume.
As previously communicated we followed that beyond that with a new labor management system, or LMS, which drive standardization and productivity.
We are on track to complete the WNS and LMS implementations by the end of 2023 as discussed in April.
Further our consolidation efforts to integrate <unk> and Autopart international known as AI are also on track to be completed by early next year.
This is enabling accelerated growth gross margin expansion and SG&A savings.
Gross margin expansion here comes behind the expanded distribution of AI high margin owned brand products, such as shocks and struts to the larger world pack customer base.
Finally, as we expand our store footprint, we're also enhancing our supply chain capabilities on the West Coast with the addition of a much larger and more modern D C and San Bernardino.
This facility will serve as a consolidation point for supplier shipments for the Western U S and enable rapid e-commerce delivery.
In addition, we began to work to consolidate our DC network in the greater Toronto area.
Two separate distribution centers, one car quest and one world pack will be transitioned into a single brand new facility that will allow us to better serve growing demand in the Ontario market.
Turning to SG&A, we continue to execute our initiatives both sales and profit per store along with the reduction of corporate SG&A.
As previewed on our Q2 call. We also faced both planned and unplanned inflationary cost pressure versus the prior year in Q3.
SG&A headwinds include higher than planned store labor cost per hour higher incentive compensation and increased delivery costs associated with the recovery of our professional business.
Jeff will discuss these and other SG&A details in a few minutes.
We remain on track with our sales and profit per store initiative, including our average sales per store objective of one 8 million per store by 2023.
In terms of new locations year to date, we've opened 19 stores six new <unk> branches and converted 44 net new locations to the car Quest independent family.
This puts our net new locations at 69, including stores branches and independents during the first three quarters.
Separately, we're actively working to convert the 109 locations in California, We announced in April.
However, we're experiencing construction related delays, primarily due to a much slower than normal permitting process.
This is attributable to more stringent guidelines associated with COVID-19, which were exacerbated by the surge of the Delta variant.
We now expect the majority of the store openings planned for 2021 to shift into 2022.
As a result, we're incurring startup costs within SG&A for the balance of the year, while realizing less than planned revenue and income.
The good news is we remain confident that once converted these stores will be accretive to our growth trajectory.
Yeah.
The final area of margin expansion is reducing our corporate and other SG&A costs.
We began to realize some of the cost benefits related to the restructuring of our corporate functions announced earlier. This year. In addition to savings from our continued focus on team member safety.
In Q3, we saw 22% reduction in our total recordable injury rate compared with the prior year.
Our lost time injury rate improved 14% compared with the same period in 2020.
Our focus on team member safety is only one component of our ESG agenda at advance.
Our vision advancing a world in motion is demonstrated by the objective we outlined last April.
To deliver top quartile total shareholder return in the 2021 through 2023 time frame.
While delivering this goal we're also focused on ESG.
As part of this commitment we launched our first materiality assessment earlier this year to help prioritize ESG initiatives.
During Q3, we completed this assessment and are working to finalize the findings.
The results will be incorporated in our 2021 corporate sustainability report, which we expect to publish in mid 2022.
Before turning the call over to Jeff I want to recognize all team members and generous customers for their contribution to our recent American Heart Association campaign.
This year, we introduced a new technology solution in stores that allows customers to round up at the point of sale.
This made it even easier for customers to participate and helped us achieve a record setting campaign of $1 7 million.
The mission of this organization is important to all of us across the advance family I don't want to personally thank everyone for helping making this our most successful campaign to date.
With that I'll turn it over to Jeff for more details on our financial performance.
Tom and good morning.
I would like to start by thanking our team members, who prioritize the health and safety of our customers and fellow team members, while continuing to deliver exceptional results during uncertain and challenging times.
In Q3, our net sales increased three 1% to $2 6 billion.
Adjusted gross profit margin improved 246 basis points to 46, 2%.
Primarily the result of our ongoing category management initiatives, including.
Strategic pricing.
Strategic sourcing.
Owned brand expansion and favorable product mix.
Consistent with last quarter. These were partially offset by inflationary product and supply chain costs.
As well as an unfavorable channel mix.
In the quarter same SKU inflation was approximately three 6%.
Although our plans entering the year and was by far the largest headwind we had to overcome within gross profit.
We're working with all of our supplier partners to mitigate costs where possible.
Year to date, adjusted gross margin improved 184 basis points compared with the same period of 2020.
As expected our Q3 SG&A expenses increased due to several factors we discussed earlier in the year.
As a percent of net sales our adjusted SG&A deleverage by 290 basis points, driven primarily by labor costs, which included a meaningful cost per hour increase as well as higher incentive compensation compared to the prior year.
In addition, we incurred higher delivery expenses related to serving our professional customers and approximately $10 million and startup costs related to the conversion of our California locations in Q3.
Year to date SG&A as a percent of net sales was relatively flat compared to the same period of 2020.
Increase of nine basis points year over year.
While we've reduced our COVID-19 related costs by $13 million year to date.
The health and safety of our team members and customers continues to be our top priority.
Our adjusted operating income increased to $274 million in Q3 compared to $256 million one year ago.
On a rate basis, our adjusted Oi margin expanded by 37 basis points to 10, 4%.
Finally, our adjusted diluted earnings per share increased 21, 6% to $3 21.
Compared to $2 64 in Q3 of 2020.
Compared to 2019, adjusted diluted EPS was up 31% in the quarter.
Our free cash flow for the first nine months of the year was $734 million.
An increase of 19% versus last year.
This increase was primarily driven by improvements in our operating income as well as our continued focus on working capital metrics, including our accounts payable ratio, which expanded 351 basis points versus Q3 2020.
Year to date through Q3, our capital investments were $191 billion.
We continue to focus on maintaining sufficient liquidity, while returning excess cash to shareholders.
In Q3, we returned approximately $228 million to our shareholders through the repurchase of one 1 million shares at an average price of $205 65.
Year to date, we returned approximately $792 million to our shareholders.
Through the repurchase of nearly $4 2 million shares at an average price of $189 43.
Since restarting our share repurchase program in Q3 of 2018, we returned over $2 billion in share repurchases at an average share price of approximately $164.
Additionally, we paid a cash dividend of $1 per share in the quarter totaling $63 million.
As we mentioned in our press release yesterday.
Our board once again approved a quarterly cash dividend of $1 per share.
We remain confident in our ability to generate meaningful cash from our business in.
And expect to return excess cash to our shareholders in a balanced approach between dividends and buybacks.
As you saw in yesterday's 8-K filing with the SEC.
We recently closed a refinancing of our new five year revolving credit facility.
The prior facility was set to mature in January 2023, and our bank markets have returned to pre pandemic levels, we took the opportunity to secure our liquidity for another five years.
This included improved pricing and terms, while also increasing the overall facility size to $1 2 billion.
We have strong relationships with our banks.
This commitment allows us to secure future financial flexibility.
More details of the facility can be found in our 8-K filings.
Turning to our updated full year outlook, we are increasing 2021 sales and profit guidance to reflect the positive results year to date and our expectations for the balance of the year.
Through the first four weeks of Q4, we're continuing to see sales strength in our two year stacked remaining in line with what we delivered in the last two quarters.
This guidance incorporates continued top line strength.
Ongoing inflationary headwinds and up to an additional $10 million in start up costs in Q4 related to our west coast expansion.
As discussed the construction environment, California remains challenging.
Resulting in a reduction of our guidance for new store openings and capital expenditures.
As a result, we are updating our full year 2021 guidance to net sales of $10 nine to $10 95 billion.
Comparable store sales of nine 5% to 10%.
Adjusted operating income margin rate of nine 4% to nine 5%.
A minimum of 30 new stores this year.
A minimum of $275 million in Capex.
And a minimum of $725 million in free cash flow.
In summary, we're very excited about our current momentum.
We remain focused on the execution of our long term strategy, while delivering top quartile total shareholder return over the 2021 to 2023 time frame.
Now, let's open the call for your questions operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Michael Lasser from UBS. Your line is open.
Good morning, Thanks, a lot for taking my question.
The two year stacks were steady this quarter versus last quarter.
The implied <unk> FM combat advance realized this quarter was lower than its competitors.
What would be causing your share to lag in this environment, especially as your leverage.
Geography.
Going to recover probably faster than other areas.
Hey, good morning, Michael.
First of all on the.
Geography front, our leading geographies, where the west and southwest which are.
Two of our smaller regions, we're really excited about our performance out there we're gaining share out there, but they are smaller we haven't seen.
Northeast come back at the level, we would have liked at a two year stack basis, So thats kind of the geography point.
I think it just go back to the framework we shared in April.
We're targeting top quartile total shareholder return and there's three components to that the first one as comp sales and it's very important I mean, we've got 7% of the industry sales and we want to grow above the market and comp sales are very important.
The second is to significantly expand our margins and the third is to return a substantial amount of cash back to our shareholders.
<unk> got a unique opportunity as a company.
With top quartile, we said, we would deliver $20 to 22% total shareholder return over the next couple of years and we delivered about 22% EPS growth in the quarter. So we think thats going to stack up really well I will say that.
We wish our comp sales would have been higher in the quarter and I think the thing that we called out in the script.
Pertained to a couple of categories that we.
We've made a pretty big change and I think our supply chain and merchant team did a terrific job on the sourcing front in terms of brakes in batteries and filters, we had a very strong quarter on those categories.
In terms of engine management and steering and suspension.
We transitioned tens of thousands of Skus.
In the quarter to car correct owned brand and given the current global supply chain environment. It was just challenging.
They've got.
Our in stocks, we are just not where we wanted them to be overall and in the end I think in the quarter. The category changes, we made ended up giving us some short term pain in the quarter, but it's definitely for long term gain and this is a huge move for us we're in much better shape narrow than we were this summer and our customers love. This product is a great.
Product, it's OE quality.
It's selling extremely well our in stock rates are improving and obviously, we love the margin rate. So we didn't like the in stock. This summer on those categories, but the move is highly consistent with our plan to drive total shareholder return.
And we believe that it will be a big margin driver for US next year into 2022.
Understood.
Follow up question.
Had those issues already been addressed.
We're having less of an impact on the business.
And more significantly.
The path to the 2023 operating margin target should the margin expansion be pretty consistent in 2022, and 2023 or are you expecting more like a hockey stick inflection in 2023.
Given some of the moving dynamics that are going on.
Sure I'll take the first one I would say we're in much better shape and earn those categories. I don't think we're where we want to be at this point.
But we're in much better shape that it's improving every week I'll, let Jeff talk to the.
The cadence of our margin expansion going forward, yes, sure in terms of overall margin expansion over the next couple of years Youll first of all we will provide guidance for 'twenty two.
Here in February but overall the way, we're thinking about it as railroad relatively consistent growth from our margin expansion initiatives that some are faster than others, but in the aggregate. We expect contributions relatively evenly over 'twenty, two and 'twenty three.
Thank you so much.
Your next question comes from the line of Bobby Griffin from Raymond James Your line is open.
Yes.
Hey, everyone. This is Mitch ingles filling in for Bobby Congrats on another nice quarter.
Gross margin rate ex LIFO impact has improved roughly 250 basis points over the past few quarters, which is impressive given the current retail environment.
Should we think about your gross margin performance in <unk> and how that correlates to your FY 'twenty, one EBIT rate outlook of $9 four to nine 5%.
Yes, sure I'll start with the second part first what we've said.
Really going into the back half as our margin expansion overall was going to be led by gross margin largely in line with those.
Category management initiatives that we just talked about.
That's really going to be the contributing factor SG&A. We've said at this point is either going to be.
Flat or a slight headwind. So we really think the growth that we're going to see this year is all up in gross margin.
Fourth quarter, largely a lot of the same we think the <unk>.
Have the pricing power to sustain we're going to continue with our strategic sourcing and as Tom just mentioned with the challenges behind US we're going to continue to see benefits from the the owned brand expansion.
Got it thanks, Jeff and then as a follow up inventory levels are likely not optimal given order partners trains across retail.
This is actually pressuring sales and what im getting that and our customers simply substituting out of stock product was in stock product or is this actually hurting conversion rates. So any insight there would be helpful. Thank you.
Sure I'll take that one body I mean first of all.
As I mentioned I don't know.
The big categories brakes batteries, we have been in good shape. The whole time in fact, I would say we've been advantaged.
Competitively on those categories and for sure we're seeing that as we as we start this quarter.
Gearing and suspension engine management.
Big Big Difm's categories, we're really pleased that that's coming back in and in some cases certainly in the summer, where we're making the transition and we didn't have something that we.
Would have lost that sale I don't know that we were able to pick up everything that we would have liked in the summer, but as that comes back in <unk>.
Starting to see those categories bounce back nicely and.
Obviously, there are certain occasions, where you've got an application that you've got an alternative for it but.
There are others, where you just don't so.
The moral of the story is I think we are in much better shape now than we were in the third quarter and we're seeing that in our early performance.
Great to hear you're closer to call it.
Your next question comes from the line of Christopher <unk> from Jpmorgan. Your line is open.
Hi, Good morning, it's Christian on for Chris.
On the long term margin outlook.
Open to 280 to 290 basis points of inflation in your.
<unk> 2023 margin target how are you thinking about both the magnitude of that as well as the mix.
SG&A and gross margin impact.
Yes, certainly as we look at it in the short term.
We'd be exceeding that in terms of the inflation that we're seeing across the P&L. So that's the combination of.
Input cost product cost.
Transportation wages fuel what have you. So if we were to go back now and look at it I think we would be adding more to that but we also have opportunities in the form of really the category management and in particular, we've been extremely pleased with our ability to pass this on in the form of price or strategic pricing.
<unk> has proven to be able to offset that so far.
Got it that's really helpful. And then in terms of the monthly cadence could you speak to how DIY and do it for me trended through the quarter and any comments on whether pricing increasing inflation drove an acceleration in trends through the quarter.
Sure well the short answer is <unk> is continuing to recover as we expected, but we are encouraged by the strength and resiliency of the DIY business, which has a.
Pretty consistently performed above our expectations throughout the year and.
The pro once again it wasn't a surprise we felt that was going to lead the way as people return to offices in school and started to travel again for both personal and business.
These these kind of consumer dynamics that were created by the pandemic create.
Creating an increased need for people having their vehicle, it's been a positive on miles driven and our industry overall, but in terms of DIY and we've seen some interesting and also positive trends you've got consumers picking up hobbies.
Like their detailing their cars, you've got people keeping their cars longer because they can't find a new when they are buying recreational vehicles.
To visit parts of the country, they've never seen before and even in urban markets. You've got some people that are bought cars because they are no longer comfortable with mass mass transit. So it's difficult to say, how how sticky. Some of these trends are going to be but we're seeing robust demand across both DIY and the AFM and we're excited by it.
It's a very good time for the industry.
Great. Thank you for that and best of luck.
Thanks.
Our next question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open.
Hi, This is Jackie sussman on for Simeon.
We have a wondering we saw that operating income grew 7% to 8% in quarter three on a 3% comp and continue to comp around this level, Ken EBIT dollar growth being even stronger I guess the reason, we're asking is to hit that high end of the 10 five to 12 and a half margin guidance by 23 does EBIT need to grow quicker. Thanks, so much.
<unk>.
Yes.
First of all just looking into the last quarter here.
Incorporated the continued top line strength that we saw for the first four weeks.
Also balancing that with the ongoing inflationary headwinds and then up to another $10 million of startup costs in the fourth quarter related to our west coast expansion. So.
We maintained the first four weeks, we believe there would be upside to the full year results forward.
2021.
Keep in mind, though that our fourth quarter is historically the most volatile so we're being cautious there over the longer term.
I would I would take you back to the April Investor event.
We are laser focused on our margin expansion initiatives.
Very confident that as we continue to execute those that will provide us the margin rates.
Our rates that we're looking for that will get us well into that 10, 5% to 12, 5%.
Great. Thank you very much and just a quick follow up.
How should we think about supply chain cost in the context of chief of achieving that $10 $12 five EBIT margin targets.
Kind of preclude from hitting the high at thanks, so much.
Well, we're continuing to execute our plans on supply chain.
Each of these big initiatives, we have are going to play a role in taking unnecessary cost out of our supply chain as we highlighted in the prepared remarks, we are seeing inflation in the.
Basically wages and distribution centers.
Traffic in freight that are above what we expected, but that's not going to stop us from executing our plan, we're going to continue to execute all the initiatives supply chain is a big part of taking costs out of our system and we're going to execute those plans over the next couple of years.
Thanks, so much congrats on great quarter.
Thanks.
Your next question comes from the line of Zacks, Adam from Wells Fargo. Your line is open.
Hey, good morning, Tom can we start with your commentary about DIY turning positive in the quarter, but first of all did this include every period in the quarter as well as the quarter as a whole and then in terms of broader DIY demand is it fair to say that DIY is improved on a two year basis or is that trend accelerating.
Well first of all.
The cadence as we talked about on our prepared remarks, Zach was was pretty consistent through the quarter, we did see.
Some acceleration towards the end of the quarter.
In terms of DIY overall, as I mentioned, a minute ago, I mean really really pleased with the resiliency of that its really hung in there a lot of the initiatives that we've put in place over the last couple of years, including.
The launch of Diehard, our battery business continues to perform well at the big category within DIY.
Our speed perks loyalty program is gaining momentum our percent of transactions increased in the quarter.
Our field team is really executing well on the DIY initiatives, so I'm not going to comment on the on the two year stack specifically, but.
It's been very resilient and we're very pleased with how it's going and we're going to continue to drive DIY. It's an important part of our equation.
Got it and then on the impact of accelerating inflation can you talk about any changes you're seeing consumer behavior volume, where trade down as well as the competitive pricing landscape and in your mind is there a level of inflation out there where it gets to be too much and the consumer starts to push back.
Well obviously.
Particularly in DIY, where you do have an economically challenged customer we're very.
Cautious about that top exactly to your point.
The thing that I feel good about is as we've made some transition into owned brand products, we're able to offer products at a lower price point.
Give people some auctions right to potentially purchase something that was more expensive.
A national branded standpoint so.
I mentioned the change we're steering and suspension in engine management, we've got a terrific product.
Lower price point.
That gives the customers some options that honestly, we didnt have before and we have.
The advantage of that being a much higher margin than the alternatives.
I am concerned about it we're going to watch it very closely.
To make sure that.
When we're driving these initiatives that we're wary of whats the implication going to be on the price point, I mean, theres, a theres a comp yes, right when a customer trade down you've got a lower price per unit on some of these owned brand product, but it gives the customer an alternative and it gives you an incremental transaction that you might not have otherwise been able to achieve.
It makes sense I appreciate the time.
Thank you.
Your next question comes from the line of Bret Jordan from Jefferies. Your line is open.
Hey, good morning, guys.
Morning.
Three 6% same SKU inflation sort of that sort of low end of the peer range, which is kind of running for the fives and how do you see the cadence of inflation are you still sort of picking up price as your supply chain costs are a pass through and could you talk about where you see inflation, maybe being into the fourth quarter and first half of 'twenty three.
'twenty two.
Yes, we definitely think the inflation is going to continue and it's going to be higher going into the fourth quarter. We are still seeing those those cost increases coming through so we absolutely anticipate that it will be higher it will be higher than the three six that we called out in the third quarter for the year, we're still very comfortable with the range that we put.
Out there of 2% to 4%.
We're working through 'twenty, two we haven't given guidance yet we'll do that in February but we certainly don't think that this turns off when the calendar turns to 2022 so.
Certainly in the first half it's going to continue to be a <unk>.
<unk>, but.
We're going to continue to work through that and we think we still have pricing capabilities to offset that.
Okay, great and on the chassis topic. It did sound like that was kind of tough in the quarter up it sounds it gets resolved itself, but do you have any ability to quantify maybe what the impact in chassis out of stock was on your comp.
Yes, I mean, we're not going to break that out Brad what I can tell you is there's two elements. There there's the price per unit trade down right, which you have which was meaningful in the quarter.
Once again.
The absolute dollars and a profit margin per unit the profit margin rate per unit is a very attractive but the net sales per unit is just lower and then on the in stock front.
Maybe it's literally tens of thousands of Skus as we mentioned so we made the change we've debated. This as we exited last year into this year. We knew it was going to be a big change where in the middle of the pandemic.
The supply chain.
What was the question Mark a little bit, but the reality is we wanted to get this behind us.
Porton margin driver for our future.
Margin expansion plans. It is a big GSR driver for us and we're pleased that we're able to put to put make that change in the timeframe that we did.
I guess on that in stock topic. If you think about your fill rates today versus where they were through the quarter could you talk about the cadence of fill rates.
Maybe where we are versus target right now.
Yes, it's definitely moved up.
Significantly since the middle of the summer it's been steadily improving.
Every week it gets better I mean, obviously, we commissioned new suppliers to come in and make the car quest product and again I'm going to reiterate this is a terrific product our customers and our field team loves the product so in terms of customer receptiveness.
It's been extremely high the return rates are much lower so when we get it in across the board. We're in very very good shape. So.
There was a significant improvement though to your question.
From say August.
Which is probably when it was the most challenged.
Into now which is evidenced by our quarter to date sales, we feel pretty good about where we are now with a little bit of room to go to get it to where we want speed.
Okay that statement applies to all inventory or adjust the chassis category August to present, it's really if you think about chassis.
And also engine management, that's the other big one.
Alright, thank you.
If you have just said inventory in general would you say it is improving and your total inbox, yes.
Our inventory is strong on categories like brakes batteries filters as I mentioned I think relatively speaking we track this versus peers, all the time and we feel very good about those categories. It was really the categories, where we made this huge transition that were most challenged.
Great. Thank you.
Your next question comes from the line of SaaS Basham from Wedbush. Your line is open.
Thanks, a lot and good morning. My question is around the implied operating model. Thanks for the fourth quarter in.
Implies a bit more of a step down than is typical.
Time of year from the third quarter and the fourth quarter at least on a pre pandemic basis are there any things you can point to that are driving a more material step down in operating margins sequentially.
Overall, we're just trying to be very cautious in terms of how we approach the fourth quarter as I said earlier, it's historically volatile we do know we're going to have startup costs in the fourth quarter similar to what we saw in the third quarter, which is not something you would have seen last year, and we think that could be up to $10 million.
So that would certainly be something that we have contemplated as part of that fourth quarter, but as we said we got off to a great start and certainly if we were to maintain that.
<unk> maintained the first four weeks, we believe there would certainly be upside.
Right now, we're just being very cautious given the volatility of the fourth quarter.
Got it. Thank you and my follow up question is around capitalized supply chain cost at that point and drivers gross margins in recent quarters and I think you've called it out this quarter can you give us some insight into what's happening with that metric and how to think about it over the next couple of quarters.
Sure.
For the quarter it was actually a fairly small it was a little light.
<unk>, but really nothing significant to call out we expect thats going to continue into the fourth quarter, we will give more insights to 'twenty two in February but I would expect something similar in the fourth quarter that we saw in the third quarter. The real driver of gross profit or the or the category management items that we pointed out strategic pricing.
Strategic sourcing and the introduction of the owned brands and these are all things that we have a lot of control over we feel really good about it.
Great to hear thanks, a lot and good luck. Thanks.
Thanks, Jeff.
Your next question comes from the line of Michael <unk> from Evercore ISI. Your line is open.
Hi, Thanks for taking the question just wanted to ask on the fourth quarter guidance.
Was getting to around four four and a half comp kind of being implied which suggests maybe like a 1% to 3%.
For the rest of the quarter I just wanted to see if theres anything in particular, we should be mindful of or if it speaks more to kind of the volatility that you all have been mentioning.
Yes, it really speaks to the volatility.
We said, we wanted to be cautious going into the fourth quarter.
It is our lowest revenue quarter of the year.
<unk>.
<unk> got a fixed cost and SG&A like we have.
Having that lower topline revenue makes it a little bit harder to flow it through and we just want to be cautious we've seen volatility in the past and while we're off to a great start.
I just want to make sure that we're being cautious as we finish out the year.
Okay. Thanks, and then for the follow up if I could on the third quarter comp.
Can you give some extra color in terms of what happened with transaction counts as possible tour DIY and DSM was the three one comp basically all of the $3 six inflation or was there also some impact there as well.
Our transactions were down in the quarter, primarily due to DIY, which is the majority of our total transactions. Michael If you remember last year, we had very robust transaction growth in DIY on.
On the pro side, our sales per account is up double digits and if I look at our transactions with the largest segments of accounts. It was up significantly on both a one and two year basis, the big strategic accounts, our tech net customers.
We're really pleased to be growing our share of wallet with our biggest accounts because that really drives more loyalty. It means we're selling more of the whole job for the customer.
There's obviously a lot of variables that go into transaction growth changing vehicle technology shifting channel dynamics.
We love to get the whole job in one transaction for our pro customers, which is always the goal. So we're very focused on growing both transactions and dollars per transaction, but thats kind of what happened in the quarter.
Great. Thanks for taking the question and good luck.
Michael.
And we have reached our allotted time for questions. Mr. Tom Greco I turn the call back over to you for some closing remarks.
Well, thanks for joining us today, we're very excited to finish up the year strong the industry fundamentals are healthy and we're continuing to execute against our long term strategic plans and we also have a lot to be grateful for I'd like to take a moment to recognize and thank all of our nation's military heroes for their service, including the <unk>.
<unk> of advance team members, who currently or previously serve advance is proud to honor these men and women through their incredible events as one our service team network posted last week.
As we continue to celebrate our veterans through our continued partnership with organizations that helps support service members, including building homes for heroes with that take care stay healthy and safe and I wish you and your families a happy Thanksgiving holiday, we're grateful for your ongoing support and we look forward to sharing our 2020 results and 2022.
Guidance in February thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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