Q4 2021 Advance Auto Parts Inc Earnings Call
Catherine I will reference the same or drivers of the CSR performance.
Outlined in that meeting.
First build an ownership culture second grow faster than the market.
Third capitalize on our unique margin expansion opportunity and fourth return a substantial amount of cash to shareholders.
I'd like to begin by thanking the entire advance team and car quest independents for helping us build an ownership culture and delivering the strong results. We are about to review.
As we look back on the past two years of managing through a global pandemic.
Nothing has been more important to us than the health safety and wellbeing of our team members and customers.
The investments we've made enabled us to keep infection rates at AAP below the national averages.
In addition, we believe the consistency of our words and actions managing through COVID-19 enable us to build trust during a defining moment for companies.
Improving organizational health has never been more important amidst a labor market, where people have more choices than ever in terms of where when and how they work.
We fundamentally believe that when we take care of our team members.
They in turn will take care of our customers.
Resulting in strong shareholder returns.
Our team members are critical to our customer value proposition.
They build enduring relationships with customers.
They work together as a team across market to serve customers.
And throughout the pandemic, they fulfilled surging demand for customers.
They also navigated this challenging environment to welcome new customers grow our business with existing customers and train new AAP team members.
Meanwhile, because our team members are so vitally important to our long term sustainable growth that advantage.
We continued to invest in them and in our business. Despite the pandemic.
This includes investments in our differentiated fuel the frontline stock ownership program.
Infrastructure supply chain stores independent partners and in leading digital capabilities to help our team better serve customers in the future.
In summary, we're incredibly proud and thankful for the progress our team members and independent partners made throughout the past two years to strengthen and build an ownership culture here at advance.
Shifting to our Q4 results and as a reminder, we were lapping a 50 <unk> week in the previous year.
In our press release, you will find detailed summaries of our 2021 results compared with 2020 on a like for like 12, and 52 week basis.
In our remarks today will be measuring our performance apples to apples.
In other words, Q4, 2021 will be compared to the relevant 12 weeks in 2020.
And the 52 weeks of 2021 will be compared with the relevant at 52 weeks in 2020.
In Q4, we were level to once again comped the comp.
Delivering comparable store sales growth of eight 2% or 12, 9% on a two year stack.
Our adjusted operating margin rate expanded 96 basis points in the quarter.
And adjusted earnings per share grew by 35, 4% to $2 seven.
For the full year, we delivered double digit comp sales growth of 10, 7% and 13, 1% on a two year stack.
Adjusted operating income margin rate of nine 6% was up 159 basis points, resulting in adjusted EPS of $12 two.
Which increased nearly 48%.
Shifting to the second CSR driver, we outlined last April grow faster than the market we.
We've said many times that the key to this business is to ensure we have the right part in the right place at the right time to deliver on the benefits of availability care and speed.
To build competitive advantage.
We ask ourselves how do we leverage our diversified asset base.
One can advance offer that sets us apart.
In terms of availability, it's about leveraging our industry, leading assortment of national and OE brands, while building powerful trusted owned brands like Diehard and car quest.
When we talk about care.
How we provide a superior and more personalized online in store and in garage experience for customers.
In terms of speed, it's about integrating digital and physical assets to serve our customers quickly through our advanced same day suite of services.
Delivering speed now includes opening new stores on the strength of an improved customer value proposition.
We made progress in each of these areas in Q4, and our category sales growth was led by brakes motor oil and filters.
Regionally our performance was once again led by the southwest and West regions, which led our growth most of the year.
In terms of channels professional led the way once again in Q4 with double digit comp sales growth with DIY omnichannel delivering mid single digit comp growth.
Throughout 2021, our professional customers continue to navigate significant COVID-19, labor and global supply chain challenges.
As a result, our teams stepped up to help them in a time of great need.
This includes providing world class training from our car Quest Technical training Institute by delivering virtual courses in 2021, and an innovative format that provides technician alive interactive learning experience.
In terms of sales growth our strategic accounts led the way in Q4 in.
In addition, we cross 14th <unk> to close the year and improvements made in our my advanced digital platform led to the highest online <unk> penetration rate ever.
We expanded owned brands with great customer acceptance, including a significant increase in distribution of diehard batteries in pros arises throughout North America.
Our car Quest Independents also had a very strong year.
In 2021, we welcomed a record 75, new independent locations and remain excited about the continued growth of this business.
Our track record of growing sales and profitability for independents continues to attract new partners to the <unk> program.
Turning to DIY Omnichannel, our success was led by the strength of diehard.
Following the launch of Diehard in mid 2020, diehard crossed $1 billion in annual sales in 2021.
Through effective marketing and PR, we ensured that consumers knew that die hard was back.
Not only did they know diehard was back consumers recently rated diehard as Americas, most trusted battery brand.
Behind the success of Diehard, we've demonstrated our ability to build brands.
By strengthening the diehard advance and <unk> brands, we not only build customer loyalty, but we also build pricing power.
In addition, we're beginning to increase diehard product offering with diehard power tools launched in Q4, and diehard hand tools in the front half of 2022.
We're also focused on leading and product innovation.
As an example, we were first to market with an enhanced flooded battery in 2021, which carries an attractive four year warranty.
And yesterday, we announced the exciting news that diehard is received formal certification from UL as the first automotive battery to achieve one of their distinguished validation.
<unk> is a globally recognized nonprofit organization dedicated to the advancement of a safer and environmentally sustainable future.
Diehard AGM batteries are now the first and only global automotive battery to receive <unk> validation within the circularity or closed loop or closed cycle space.
This notable validation is the result of years of work between advance and our strategic manufacturing partner <unk>.
Our disciplined execution of battery core returns along with our proprietary manufacturing process allows for continual reuse of environmentally sensitive raw materials.
Simply put this means that new diehard batteries come from recycling all diehard batteries.
Which contributes to a circular economy and environmental sustainability.
Diehard is America's most trusted auto battery.
And not only is it reliable durable and powerful but it also stands for innovation.
While we're pleased with our early success behind Diehard, where Jeff.
Just getting started on building and strengthening this powerful brand.
We also made progress driving DIY loyalty through speed perks, we added new speed perks members throughout the year, finishing at $12 6 million, while increasing loyalty and share of wallet with existing customers.
To further strengthen royalty, we recently announced a new benefit for speed perks members gas rewards.
Fuel savings has been a request of speed perks customers and we're delivering.
Partnering with shell to help customers save at the pump, while driving further brand loyalty and share of wallet.
Finally, our execution in stores continues to improve and we remain focused on strengthening the customer experience and increasing net promoter score.
Behind the strengthened customer value proposition, we opened 31 stores and eight world Pac branches in 2021, as we began to ramp market expansion.
This includes our first seven stores converted in California, and after some disappointing delays due to COVID-19.
As you saw in our release yesterday, we expect to open an additional 125 to 150, new stores and branches in 2022.
In terms of our third Tsi driver, we believe our opportunity to further expand margins is unique within our space.
Our Q4 operating income margin expansion was led by gross margin improvement driven by category management.
This incorporates strategic pricing owned brand expansion and strategic sourcing, culminating in a disciplined execution plan.
Our strategic pricing capabilities have improved considerably following the implementation of our new technology platform in 2020.
Our new tools enable us to eliminate unproductive discounts and react quickly to cost increases related to inflation.
We incorporated advanced analytics competitive intelligence price elasticity and customer segmentation into our category plans.
Increased owned brand penetration also played a meaningful role in the quarter driving margin expansion.
We transitioned tens of thousands of Skus within under car in engine management with our in stocks and improving throughout the quarter.
Separately, we continue to transform our enterprise wide supply chain infrastructure.
We made further progress on integrating the assortment supply chain and technology platforms within <unk> and Autopart International during Q4.
By year end, we consolidated 55% of AI locations onto the World Pac Tech stock.
Getting to a single supply chain and tech stack for our pure play professional business improves customer service drives incremental sales and increases margins.
We expect this transition to be completed by mid year.
In terms of the integration of our advance and <unk> supply chain, we completed the rollout of cross banner replenishment, our entire advance and <unk> network of stores are now serviced by our freight logical distribution center, which reduced our annual mileage driven from DC to store by approximately 14% in 2020.
One.
Our next big step is to get to a single warehouse management system or WNS.
As of December 21, we've transitioned 44% of our distribution center network as measured by unit volume to the new WNS.
As we complete WNS in DC, we followed up with the implementation of our labor management system, which drives further savings through enhanced performance pipe.
The full run rate benefits of WNS and LMS remain on track to be realized by the end of 2023.
Finally, we continue to look for ways within our supply chain to optimize and modernize our network.
We're excited about the transition to our new San Bernardino and Toronto, Dcs that we announced last quarter.
Once fully operational San Bernardino will be the central location for supplier shipments and help facilitate rapid store and ecommerce delivery in the western United States.
As we ramp the opening of this new DC, we recently announced to our team members. It will be consolidating operations from a much older Riverside DC to this new facility.
Similarly, our Toronto DC enables the consolidation of two distribution centers, one car quest and one <unk> to a single and much larger facility.
This will significantly improve our availability and the very large Ontario market.
Shifting to SG&A, we're pleased to report that we exceeded our previously stated goal of $1 8 million in sales per store in 2021.
As we move into 2022, we plan to build on this achievement behind continued improvement in sales per store, along with the disciplined execution of profit per store productivity initiatives.
This includes automating tasks and stores to enable more customer facing time, and leveraging technology that integrates internal driver availability with the gig economy.
In addition to improving sales and profit per store, we completed our finance ERP integration.
The health of our balance sheet has improved and we expect to realize the full run rate of savings in 2022.
We'll continue to build on this integrated platform to deliver further improvements in the customer experience and reduce cost.
Finally, we are building an enviable track record on team member safety for the full year 2021, we saw a 10% reduction in our total recordable injury rate versus 2020, and our lost time injury rate reduced by 20%.
Our frequency rate on both metrics is now close to one half of what it was five years ago.
In summary advance is a very different company than we were several years ago. We.
We have strengthened our core customer value proposition.
Integrated many parts of the company enhanced our diversified asset base and significantly improved execution.
During 2021, we also conducted our first materiality assessment to sharpen our focus and prioritize our ESG agenda.
We will share additional information about the results of this assessment and our upcoming corporate sustainability report.
Well, we are proud of our 2021 performance, we see plenty of runway in 2022 to further drive total shareholder return.
As you saw in our press release yesterday, we introduced our 2022 guidance.
This contemplates the continuation of our topline growth and margin expansion initiatives.
As well as the following external tailwind.
An aging vehicle population with several millions of vehicles entering our sweet spot as availability of new cars continues to lag historical trends.
And ongoing and gradual recovery in miles driven which has still not reached 2019 levels.
And the outperformance of our professional business compared to DIY for reasons, we've discussed in the past.
Our guide also takes into consideration certain factors that have changed since we initially share our three year strategic plan.
This includes the acceleration of broad based inflation across the economy.
And the lapping of significant stimulus dollars.
Both of which could negatively impact our core customer.
Within our industry inflationary pressures across commodities wages and transportation.
Overall, we're very encouraged by the resiliency of our industry in 2021, and the momentum we're building behind the disciplined execution of our strategic plan.
Jeff will now go deeper on our financials and provide an update on our fourth GSR driver a substantial return of cash to shareholders and discuss our 2022 guidance.
Jeff.
Thanks, Tom and good morning.
I'd also like to thank our team members for their dedication this past year to care for our customers and each other.
And deliver record results.
Before I review, our financial results I also wanted to remind you 2020 included an additional week.
To provide a better year over year comparison, the impact of this additional week has been excluded from our discussion of previous year.
Please refer to our earnings release for the full impact of the additional week in 2020.
In Q4, our net sales of $2 4 billion.
<unk> eight 6% compared with Q4 of 2020.
Adjusted gross profit margin expanded 145 basis points to 46, 8%.
Driven primarily by improvements in category management.
Led by strategic pricing.
Inventory related and owned brand expansion.
Yeah.
This was partially offset by ongoing inflationary costs lapping shrink benefits in Q4, 2020 and unfavorable channel mix.
Same SKU inflation in Q4 2021 increased 5%.
Additionally, despite today's inflationary environment and global supply chain pressures.
Pleased that we delivered slight supply chain leverage in Q4 and for the full year.
Our Q4, adjusted SG&A was $946 million or 39, 5% of net sales.
This compares to 39% of net sales in Q4 of 2020.
<unk> Q3, this was primarily driven by inflationary headwinds within labor as well as increased incentive compensation behind the record setting results our team delivered.
As expected incremental costs associated with the opening of our California stores ahead of planned revenue continued to be a headwind to SG&A in the quarter.
These headwinds were partially offset by a year over year decrease in COVID-19 related expenses.
Our Q4, adjusted operating income was $177 million an.
An increase of 24, 8% compared with Q4 2020.
Our Q4, adjusted Oi margin improved 96 basis points to seven 4%.
Our adjusted diluted earnings per share of $2 seven increased 35, 4% compared with Q4 2020.
For the full year, our net sales were a record $11 billion an increase.
<unk> 10, 6% compared with 2020.
Our adjusted gross profit increased 14, 9% and adjusted gross profit margin expanded 175 basis points.
Adjusted SG&A expenses for the full year 2021 increased 11% compared to 2020.
On a rate basis, adjusted SG&A, Deleveraged 16 basis points to 36, 4% of net sales.
While we reduced our COVID-19 related expenses by $28 million in 2021, we continue to prioritize the health and safety of our team members and customers.
Our full year 2021, adjusted operating income increased 32, 5% to $1 1 billion.
On a rate basis, our adjusted Oi margin expanded 159 basis points to nine 6%.
In addition, we delivered record adjusted diluted earnings per share of $12 from <unk>.
Our 2021 capital expenditures were $290 million.
Our free cash flow for the year increased $121 million or 17, 2% year over year to $823 million driven by improved operating performance.
As Tom mentioned, we completed our finance ERP implementation in 2021.
We began to see some benefits in 2021, which partially contributed to the approximately 400 basis point improvement in our AP ratio year over year.
We expect to begin seeing the full run rate of savings this year.
To close out our discussion on our TSS. Our drivers we returned a record $1 billion in 2021 to our shareholders through a combination of share repurchases and our quarterly cash dividend.
Okay.
In line with our capital allocation priorities and confidence in the continued robust cash generation of our business. Our board recently approved a 50% increase to our quarterly cash dividend to $1 50 per share.
This supports our stated objective of a 35% to 45% dividend payout ratio.
In addition.
Our board also approved an additional $1 billion authorization to our existing share repurchase program.
Which at the end of 2021 with $545 million.
We're confident in our ability to generate meaningful cash flow and committed to a balanced return of excess cash to shareholders.
In consideration of the factors Tom discussed surrounding our 2022 outlook our.
Our guidance includes <unk>.
Net sales of 11, 2% to 11 5 billion.
Comparable store sales of 1% to 3%.
Adjusted operating income margin of 10 to 10, 2%.
And income tax rate of 24% to 26%.
Adjusted diluted earnings per share of $13 20 to.
To $13 75.
Based on our outstanding share count as of yesterday.
Capital expenditures of $300 million to $350 million.
A minimum of $775 million in free cash flow.
Share repurchases of $500 million to $700 million.
And 125 to 150, new store and branch openings.
We are encouraged that through the first four weeks of 2022, our comp sales are running above the top end of our full year guidance.
Finally, our guidance for new store openings includes the California stores that were delayed last year, primarily due to permitting challenges, resulting from the pandemic.
This guidance includes new locations across all banners in both the U S and Canada, but exclude independent locations.
Once again I'd like to thank our team members for their continued dedication as we build on the momentum of our 2021 results.
With that let's open the phone lines to 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.
Your first question comes from the line of Chris <unk> from Jpmorgan. Your line is open.
Thanks, Good morning, everybody talking about your guidance, the 1% to 3% comp.
Thats bracketing, the low end of your 2% to 4% multiyear Aldo.
And you're flowing through 50 basis points at the low end of that two I felt it would have been like more like closer to 100 basis points. So.
Is there something that's changing in the environment just your competitors' pricing commentary as it is a conservatism is it changing in terms of your ability to pass through inflation.
Wanted to get your thoughts on that.
Hey, good morning, Chris.
First I will give you some color on the on the sales guide and then and then Jackson.
Chime in a little bit on the margin.
First of all we're continuing to target growth above the market in 'twenty two.
Our sales guide for the year reflects an estimate of lower industry growth certainly versus 2021.
Going to see less growth than we saw last year.
As we said in our prepared remarks on the one hand, we see tailwind for the industry.
Got an aging vehicle population with several million dollars CFO , David Sweet spot.
The new cars are very difficult to get the availability lags historical trends and we do expect a gradual recovery in miles driven which still have not reached 2019 levels.
At the same time, we're cognizant of potential headwinds for the industry.
Following last year, which was record breaking across the board.
Difficult to predict with display to growth rate's going to be this early in the year as you know we've seen an acceleration of broad based on place and across the economy.
With three flavors at a 40 year high.
Last week basically so we're also going to have less stimulus dollars 22 versus 21 so.
With that over to Jeff to talk a little bit about how that translates through to margin Jeff. Yes. So just taking that a topline sales guide in terms of our margin expansion, Chris first of all our margin expansion initiatives remain on track.
But as we've talked about in our prepared remarks, the inflation that we're seeing right now is substantially higher than when we develop that strategic plan.
At this early stage of the year, we're mindful of the impact of this will have not only on the industry demand as Tom said, but also our cost base. So the costs within the P&L and the impact of deflation could have on all of those various line items in 2022. So right now our plan is to execute our market expansion initiatives.
In a disciplined manner and then as we get further into the year, we'll have a better handle on the impact of the inflation on both industry industry demand, our consumers as well as our cost base.
Yeah.
So then as a follow up.
As you think about that kind of five to 12, 5% operating margin in 2023 is it is your commentary on inflation.
More saying, hey, guys more likely to be at the low end of that range or is your commentary more like it's just too early in the year, let's not get ahead of ourselves given.
The uncertainty that lies ahead.
Yeah, it's really the latter.
We remain confident in delivering our long term targets, we provided last April .
We talked about with the 'twenty two dies.
Background was long term industry fundamentals are attractive, we're innovating and positioning <unk> for long term success, we still have a significant CSR opportunity for us. So it's really the latter.
Thanks, very much best of luck.
Thank you.
Your next question comes from the line of Michael Lasser from UBS. Your line is open.
Good morning, Thanks, a lot for taking my question with two of your large competitors, making price investments to gain market share in the commercial sector and your comps trailing behind these tiers that how much do you need to invest in price above and beyond what you originally expected in order to.
Cleaning your market share.
Hey, good morning, Michael we've been talking about our category management initiatives for a couple of years now and strategic pricing along with increasing owned brand penetration and strategic sourcing are key elements of this plan.
Let me provide some color we're thinking about our pricing strategy in the professional channel three.
Three things first of all.
We've been conducting a survey amongst our professional customers for many years and just to give you a data point from last year's survey. The top three variables were availability ease of doing business and speed of delivery. They were all ranked ahead of price.
At the same time, we know competitive pricing is important and our strategy is rooted in how the pro customer makes a decision.
We incorporate an extensive assessment of competitive pricing for each of the pro channels, we compete in by category.
And the reason, we expanded our lower price point higher margin owned brand portfolio was to provide more value priced options for our customers.
Secondly, during our Investor day, we highlighted our approach to meeting the unique needs of different pro customers by leveraging our diversified go to market asset base.
This includes advance stores car quest independent and <unk>, which as you know is an entirely professional or pure play DWP.
It is important to note that world packets competed with WPS for many years and already has very competitive pricing, which inform our enterprise pro pricing strategy.
<unk> has a different pro model than conventional real retail parts stores and we're keenly aware of the competitive landscape within pro which is usually very different by category and in some cases, even bipartite.
Finally, we have been investing in improving the customer experience through a single parts lookup technical training and digital assets to improve speed and visibility of delivery. We also provide customized service models, where element. So in summary, Michael our comprehensive approach is tailored to the unique needs.
But what's most important to each customer and our strategy is working we grew double digits within pro last year, and we continue to believe our differentiated strategy will deliver profitable growth and margin expansion.
Okay.
And my follow up question is on the inflation discussion.
Jeff mentioned that part of the reason why you guided like you did for this year was because of cost inflation. Your SG&A dollars grew 9% in 2021.
Advanced had already been experiencing significant operating expense inflation now.
You're suggesting you're mindful of that continuing into 2022.
It shouldnt be more than covered by price increases that the industry historically.
Typically price to a full margin why would you not new border recover.
Sure.
The cost increases now.
Whereas the industry has been able to do that in the past.
Yeah sure well I think Michael you are right. The industry has been an incredibly rational over periods of inflation.
And we have been able to cover.
Cost inflation as it relates to maintaining gross margin rate.
We talked about in our prepared remarks, and as I mentioned earlier, we're seeing record inflation across the P&L. So it's not just product cost inflation not just commodities.
Just to give you a couple of data points.
Our two largest items on our cost base, our product costs and wage inflation.
And as we sit here and look at that today, we're expecting those to both be in that mid single digit range for 2022 on top of what we've already seen in 'twenty one.
Product cost is on a same SKU basis as you know.
But thats fairly significant so right now we don't have a model that says our pricing will cover inflation to cover the entire P&L, we're confident that pricing along with our other category management initiatives were more than offset in gross margin and then our SG&A initiatives will offset that inflation.
SG&A.
Jeff just to clarify what does your model to get there.
<unk> advanced will be a contribution from seeing SKU inflation in 2022.
Mid single digits.
Okay, Alright, thank you very much.
Your next question comes from the line of Liz Suzuki from Bank of America. Your line is open.
Great. Thank you just a question on the die hard brand youre expanding into new categories and what do you think is the ultimate total addressable market for diehard, how many categories can you expand into and what percentage of your sales do you think that could represent.
Well first of all we're thrilled we crossed $1 billion I mean, it's not every day that you build a $1 billion brand and in a single year I mean, the brand had really languished lives as you probably know and we're getting new.
Customers were engaging younger consumers were saying really improved awareness amongst all demographics with diehard and we've been gaining share within batteries that are terrific two years and we've got a lot of runway yet so how we look at diehard is.
Obviously, the core equity that Bull's eye. If you will is an automotive battery, but as you extend out the concentric circles around it.
There are ancillary categories, where we can extend the brand and we talked about power tools and hand tools.
More to come there, but we believe that diehard brand is one that we can build out and be a very strong differentiator for us are our CRO customers love.
The stocking program that we've put in place for diehard buyers, we're continuing to build that out so lots of room to run with diehard and more to come on warehouse, we can extend.
Great and then just one quick follow up on.
What percentage of your sales do you estimate are for brake extra general maintenance purposes versus more discretionary categories and yes. There is.
Can I ask you is as you look at 2020 in 2021, and just the strength in DIY, a lot of which with people spending more time at home defining Cumulus <unk>, how much do you think that DIY strength, all stirred by discretionary categories like accessories.
Well first of all there is no question when people have time on their hands they were doing more with their cars when they're at home.
I couldnt sit at the moment.
Watch their computer screen and Netflix all base. So we did see a surge there, but I can tell you.
The resiliency of what we saw at the height of the pandemic within DIY.
Right up until the fourth quarter has been very encouraging for us and we're continuing to be pleased with our DIY omnichannel business and we're going to continue to drive and grow that business. Obviously to your earlier question Diehard plays a key role there if we can drive people into our stores with a differentiated brands such as diehard.
Grow the DIY business.
So the first part of your question, we look at the customer journey as it pertains to DIY and they really do very I mean.
My car won't start as the journey for batteries by breakthrough squeaking as the journey for brake.
All of them have a very.
<unk> degrees of urgency. So we're very focused on the specific drivers of choice within each one of those journeys and Thats, how we feel about our business.
Alright, thank you.
Your next question comes from the line of Seth Basham from Wedbush. Your line is open.
Thanks, a lot and good morning, My question is offering and pricing environment and the impact on potential demand destruction are you seeing any of that occur now and have you built into your plan for 2022.
Well in terms of demand specifically fac.
Yes exactly.
Yes.
We haven't seen it yet and to be clear I mean, we are not seeing trade down we're not seeing deferred maintenance.
It's just a question of.
We've got 10 five months of the year left and.
The inflation is pretty significant across all categories.
Fuel prices et cetera.
That's what we're mindful of and as the year unfolds, we'll be in a better position to see the full impact of it but it's really a case of making sure that we're looking at all potential outcomes for the industry for the year.
Understood and what have you built into your comp sales clerks at 'twenty two from that effect.
While our guide as to at the midpoint.
Understood, but does that include some demand destruction assumptions for the balance of the year.
I'm, sorry can you repeat that.
Does that include some pressure from demand destruction associated with inflation net core customers experiencing for the balance of the year, yes.
Yes, yes, it does I mean, what we're assuming coming off a year when EBITDA would say at the industry grew high single digits in 2021, right I mean thats. The latest information we have from auto care Association, we're assuming low single or even one to two for the industry overall now.
Given all of the tailwind that could be a very low estimate we acknowledge that but it's just it's an unusual time, we've got an unprecedented level of inflation. We've got 10 five months ago. So that's really the <unk>.
Okay.
Understood. Thank you so much.
Your next question comes from the line of Greg <unk> from Evercore ISI. Your line is open.
Hi, Thanks, I just wanted to.
Thanks, sure I got the guidance right the mid single digit inflation implies that.
Basically units would be down this year.
And then do you expect the pro and DIY split.
To be similar to last year.
Narrow or widen.
Yes, good question, Greg So obviously given.
The guide.
We are assuming DIY transactions, which is.
Well over half of our transactions obviously the dollars per transaction is.
<unk> is lower on DIY, we expect the iwai transactions can be down that is embedded in our guide we do expect growth in pro transactions. So overall positive growth on the transactions and average ticket and pro <unk>.
Transactions down in DIY, we're assuming some level of growth in DIY, However, and pro outpacing DIY for the year really has been the case for the last couple of quarters.
Alright, and then secondly could you update us on where you are in the one brand strategy you gave a $1 billion for <unk>.
Diehard when you add in advance and car quest.
Are we 40% 50% of the mix now.
Yes, what we've said in the past Greg as we started out this journey in the high 30 in terms of our percentage of owned brand penetration and we've moved that up nicely.
We're well into the <unk> now into the most recent quarter into the higher <unk> and we still believe we have room to grow there. So we're very pleased with the strength of our own brands as we've said many times.
It carries a in general a lower price per unit certainly in the hard parts segment and the national branded competitors, but the quality is very good our return rates are much lower than they've been in the past.
Our in stocks improve done on all of the categories in the fourth quarter. So.
Pleased with own brand penetration and relative to others, we still got opportunities there.
And then last.
If we look at the guidance for the adjusted margin expansion, so just over 10%.
Hi.
Is that should that be equally between gross margin and SG&A leverage or how should we think about that that margin expansion.
Yes, we think we're going to.
Grow our margins in 'twenty, two coming both from gross margin improvement as well as SG&A improvement the <unk>.
Margin improvement is going to benefit from the things we've been talking about our category management as well as our supply chain initiatives.
And SG&A is going to benefit from the strategic initiatives, we outlined last April which is to reduce SG&A costs and improve our sales and profit per store.
That's great good luck guys.
Great. Thanks, Greg.
Your next question comes from the line of Scot Ciccarelli from <unk>. Your line is open.
Good morning, guys Scot ciccarelli, so given the lower price points on your own brands can you quantify for us the impact.
The headwind for both comp and gross profit dollars from that mix shift.
Yes, we don't break that out Scott, but I mean, it obviously varies by product and category.
Absolutely is a lower price point it is a comp sales headwind.
<unk>.
Sell an equivalent amount of units obviously, our goal is to accelerate new units because as we said, we're providing more value priced option for our customers and that gives us a lower absolute price point.
For our professional customers as we ramp it up the unit growth should offset that but I can also tell you in many cases the gross profit dollars are higher.
We're very pleased with the own brand performance. It was a significant driver of our margin expansion in 2021 and it will be for the next couple of years.
Okay understood.
Just to remind you Edwin.
Significantly better the margin rate is significantly better on those those categories.
Yes, I guess I had been under the impression that the branded products still typically generate more gross profit dollars, which is hence the question.
Yes, not necessarily.
Got it Okay, and then switching gears for a second the last time you guys enhance your speed Kurt benefits, we had some pretty notable gross margin headwind.
With the new guest rewards slightly is there anything we should be wary of.
People start to utilize that in what appears to be a very high gas price environment.
Yes, we're going to get back on our front foot on speed Perks, Scott I mean, we did through the pandemic.
The level of demand that was coming into our stores.
It was substantial and we wanted to make sure we took care of the customers.
Obviously, having conversations with our customers a better loyalty program. It takes time and the subsea gated that.
There is.
No financial consequences at all for gas rewards.
We've engineered in such a way that it will be a real positive.
Candidly for US, we think it drive share of wallet in.
In a time of rising gas prices I was just out in California, It's almost six bucks a gallon.
You've got a situation where consumers are going to be really mindful of what they're what they're paying at the pump.
We're enthusiastic about how our team is engaged with this gas rewards program, we're going to be working it really hard in the stores signing up new members and graduating members. So this will be a nice little boost for us on DIY in 2022.
Got it thanks, a lot guys.
Thank you.
Your next question comes from the line of Simeon Gutman from Morgan Stanley . Your line is open.
Hey, good morning, everyone.
You mentioned that you achieve supply chain leverage this quarter can you talk about the puts and takes I think I'm sure. Some of your initiatives are helping it and versus labor and transport, which would have been a headwind. So can you maybe tell us.
I guess, what the headwind was that we can quantify how good you are doing underlying land.
Yes, if you were just to strip out the inflation or we'd be talking about the supply chain tailwind being a much more meaningful number.
Said, another way Simeon our initiatives in supply chain or on track I think we've talked about this in the third quarter, but we completed the cross banner replenishment.
We're on track with our <unk> and LMS to be done by 2023, and those are providing the benefits we had anticipated.
Once you factor in the inflation, although we did leverage it was just small because of the inflation in the labor inflation has been acute.
Specifically in that supply chain kind of warehouse employee the battle for that talent is just intense.
And then you also see it in the areas that you pointed out transportation fuel what have you those all built in there as well.
Thanks, and then Tom you clarified the industry is expected to grow this year do you have a range or a sense that you can tell us and then I expect to be do you expect to take market share this year.
Yes.
Absolutely we do.
Do you expect to take market share.
We have modeled a low number Simeon as we explained earlier for overall industry growth to make sure were expensive.
We don't get surprised by.
By something as the year unfolds, given the unprecedented levels of inflation, but.
What we showed back in April was as an estimate for 'twenty two 'twenty three with 2% to 4%. If you recall and we believe it's going to be at the lower end of that for all the reasons. We explained if that is somewhat.
Ends up being something different in the industry proves to be as resilient as it has been in the past 2009, 2011, most notably where it was performing extremely well in a recessionary time.
That'll be good news.
Thank you good luck.
Thank you.
Your next question comes from the line of Michael Baker from D. A Davidson your line is open.
Hi, Thanks, guys.
Couple of follow ups one.
First of all let me ask about the hiring and the labor situation is.
Is that as bad as it was is it getting worse is it getting any better now that some.
Client benefits.
Have rolled off and any sort of an insight in terms of that pressure point.
Yes, good question Michael.
We are.
I'm really happy that we're starting to go the other way.
In both the distribution centers in the stores, we measure turnover very very closely.
On the stores did not jump up as much I mean, our unique stock ownership program.
Where we've invested over $60 million and our frontline team members over the past couple of years Thats helped US there we've been able to retain our general managers, our commercial parts pros et cetera.
And then in the supply chain in the Dcs, We peaked really around the third quarter of last year in the summer and started to come back down it's still not back to where it was pre pandemic I can tell you that earn in the Dcs, but we are coming back down and as you said.
The applicant pool is starting to open up.
People have.
Your options and where we've obviously headset.
Invest in compensation in our supply chain, but thats a much of that is behind us at this stage and we've got plans this year to see that turnover continue to come down or the <unk>.
Both the stores and the Dcs.
Okay. Thanks.
That's good news.
Also wanted to follow up on the pricing question and related to <unk> question earlier, the way I interpret your comments as.
Some of your competitors, including O'reilly last week had a pretty I thought a pretty interesting announcements.
You are saying no change in your strategy you are happy with where your pricing is because you compete with the.
Private label that sort of is your answer to them and autozone, reducing prices is that the right way to think about it.
Absolutely.
We're incredibly focused on the pro customer and the competitive environment within the protein that's what when we look at it every week, we look at our price comparison across the market I'm sure our peers due to the very same thing.
We're very familiar with the broader competitive landscape I mean, the wholesale distributors the specialty players.
And there are a big factor in large urban markets World package competed with them for 20 years, plus so we know that there are pure plays out there that have lower prices on very specific product and we organize our enterprise pricing strategy around that so.
No change in our pricing strategy going forward.
One more quick one if I could sorry is can you talk about the private label penetration within the pro business versus the DIY business I know in the past.
<unk> via private label as much but it sounds like diehard is being well accepted.
By the pro customer can you sort of flesh that out a little bit.
Sure I mean, we'll diehard and car Quest I mean car quest is a powerful brand in the professional sales channel car quest breaks us as a leader in the professional channel they're high quality.
Our customers request them and as we extend Michael into engine management.
Under car some of these other categories car quest is being very well received so.
In part because it doesn't it doesn't have a brand name on the front door.
Our retail stores. So that's part of the reason why but.
It's equally powerful there if you've got a high quality owned brand product that carries.
Good value for our customer and you can get it to them quickly theyre going to be very supportive, but just to reinforce national brands play a key role in our portfolio also and we're partnering very closely with our national brand suppliers to make sure that we're lifting up their brands at the same time.
Makes perfect sense. Thank you for the color.
Your next question comes from the line of Kathleen Brennan from Goldman Sachs. Your line is open.
Hi, its actually coat mcshane.
Goldman Sachs.
Just wondered if we could just go back to your comment on that on a quarter to date running above that 3%.
At the high end of your full year guidance can you talk a little bit about what's the primary driver of the outperformance and what kind of comp we're facing quarter to date.
Last year.
Sure Good morning, Kate well first of all.
It's always interesting the way the the big seasons straddle quarters right.
<unk> selling season straddles Q1, and Q2, the middle of the winter straddles Q4 and Q1.
We have a very large presence in the northeast I think obviously you know that.
It was a pretty mild December in the northeast it got cold.
And in the first period of the year so.
That's that swings business out of the fourth quarter and into the first quarter for us the west was really cold in December .
We had very strong growth in the west and the southwest in December .
Not so much in the northeast so I mean.
What we're seeing so far we're very pleased we like the fact that we've had a pretty harsh winter so far across the country that should be good for us.
In the second quarter also we've had a lot of snow, we love those big heavy machines tearing up the roads up in New York, and Detroit and up in those markets, where we're in so hopefully that creates a strong tailwind for us in the second quarter. So it really is.
There has been favorable weather in the first quarter and as you talk about the compares we're starting to look at three year stacks, obviously I mean, the two year stack will become a basically a relevant by the second quarter right. So we'll start to look at three year stacks in the three year stack looks good on a year to date basis.
Thank you.
Thank you.
Our next question comes from the line of Zacks, Adam from Wells Fargo. Your line is open.
Hey, Good morning, Tom do you think elasticity in the industry has changed at all for the do it for me customer.
Given the importance of service and availability why do you think peers are having are seeing success lowering price and to what extent do you even do pricing a needle mover. When you go head to head with peers and WD.
Well I mean, as we said earlier zac.
There are other variables that are more important to our pro customers.
I speak to them all the time, whether it's the Ceos of the company or in the garage it themselves.
When you have the park and Youre able to get it to the customer correctly.
By far the most important variable.
There are certain categories, where.
The time to repair is longer.
There are pure play.
Operators in markets, who specialize in something like AC as an example, our radiator's when you have those types of jobs.
Price becomes more of a factor and we are very aware of that those are not new dynamic those dynamics of that existed for a long time.
And we obviously compete in that environment. So it's.
It's really a question.
In our case, we're focused on what's important to the customer and improving our fundamental value proposition that we're going to drive topline growth, but it is also vitally important for us to ensure that that growth is profitable and that results in big earnings growth and we put up 48% earnings per share growth last year, we went back to trans.
Late into.
Cash generation that we can return that money back to our shareholders. So our focus is to make sure that we are driving profitable growth and thats, what youre going to see us do that.
The competitive environment is clearly something we pay attention to but we're very thoughtful about how we approach it.
Got it and for Jeff what are you assuming for lifestyle. This year and as we bridge the gap from your Big Picture 2022 outlook to 2023 margin guidance 10, five to $12. Five do you still expect equal parts expansion in both 'twenty two 'twenty three in each year or should be.
Great.
That's up in 'twenty three as we move past some of the 'twenty two headwinds like inflation.
Yes, so starting with the LIFO question, we certainly think it's going to be a sizable this year.
Early estimates could be I think we finished this year at $122 million.
We are estimating 2000, I'm, sorry last year $122 million this year as much as $100 million.
What's important to know on that is.
The LIFO costs that we experienced last year are beginning to manifest themselves in the P&L. This year. So we're starting to see that and Thats already built into our model for 'twenty two as we move into 'twenty. Three we know some of that will move into that year, but having said that we're very confident in our margin expansion.
<unk> and we think we can continue to grow both in gross margin and in SG&A in 'twenty three as we get into that 10, 5% to 12 five.
Got it thanks for the time today.
Okay.
Your next question comes from the line of Daniel <unk> from Stephens. Your line is open.
Yeah, Hey, good morning, guys.
And to follow up on private label fill rate Tom I think you mentioned in your prepared remarks that the under car categories improved through the quarter.
Or are those still rate maybe relative to your desired level.
If there are any where are the bottlenecks in the supply chain as you move more of that category kind of in house and away from other brands.
Sure well first of all.
Our fill rates overall, I mean, we still have pockets of difficulty there Daniel Foley.
Disclosure.
Whether that.
Results of our suppliers' inability to get people in to work, whether that's related to the global supply chain, which is still not back to where it once was.
In terms of the transition to owned brands, it's improved materially from where it was last summer.
So I would say a couple hundred basis points off where we want to be but we're much better off than we were last summer and it.
It was almost 40000 skus it was a huge undertaking but we're thrilled that we've got.
The changeover of those skus largely behind us and we see lots of upside going forward as a result of it.
Got it that's helpful. And then just wanted to follow up on <unk> question, just from a LIFO benefit they can be.
Clear that if you saw $122 million of benefit to 'twenty. One I think you just said.
You are guiding to a $100 million of LIFO benefit in 'twenty two.
Prices plateau.
Three does that create.
On gross margin headwind.
It seems like just numbers wise that would be sizeable for me to walk through the puts and takes or are you guys thinking pricing doesn't blot. So just trying to understand how if we have that big of accumulated LIFO benefit how were when that unwind through the P&L and weighed on gross margins.
So first of all its unwinding now we're already starting to see it.
We're going to see it throughout 'twenty, two and thats embedded in the model or the guidance that we're providing.
Yesterday so.
We returned about 135 times a year that translates into about 10 months rough math tells you that when it come back to you.
On the P&L. So again, we planned that for 'twenty, two we're going to be planning that as we move into 'twenty three if everything else were to remain completely static youre right in absolute terms it would be a headwind and that's something we're contemplating and that's why we're really excited we have the margin expansion initiatives that we have because we are confident we can overcome that.
Got it thanks, so much the color and best of luck.
Yes, Daniel I, just wanted to clarify one thing on <unk>.
<unk>, we're pretty close to our in stock.
On engine management, that's the one that I was referencing and I think you asked on their cars. So just to clarify we're pretty much where we want to be an underground.
Thanks, Tom.
And your final question comes from the line of Brian Nagel from Oppenheimer. Your line is open.
Hi, good morning.
Thanks for slipping me in here.
Sure.
I know theres already been a couple of question a few questions maybe on the whole pricing dynamic so I apologize.
I just have a question I wanted to ask you.
Tom from your vantage point, recognizing youre very close to your commercial customers and you'll watch your competition.
Are you seeing some of the lesser known competitors, maybe the WD speaks actually move twice at this point or or maybe not take price amid amid broader based inflation is there. Some is there some changing dynamic there within that cohort.
What we really habits and I think that.
From our vantage point.
They operate very rationally right I mean these are many cases private companies.
They don't have retail store there.
Warehouse that doesn't pay the same rents.
They don't have some of the cost base within SG&A that you have with the traditional retail parts of our I mean, it's just that simple so their prices tend to be lower their gross margins tend to be lower and our SG&A tends to be lower so.
They operate in a very rational basis, they priced typically below with the retail parks companies do and Thats, why <unk> Pak and our diversified asset base helps us because we already have that.
Arrow in our quiver and where our packages are expanded parks cigna.
Significantly over the past several years and we are very thoughtful about how we price in accordance with that our growing the world Pac business substantially it's integrating with Autopart International and we're growing margins at Royal pack. So it's a very.
Good story for us in that regard and we obviously want to maintain our competitiveness, but we've got some things in our.
Two a bag that that helps us there.
Got it that's very helpful. Then my follow up question I guess with respect to demand. You'll clearly you ended the year very strong and just given your commentary just simply just rates persisted here into the new year.
As the economy potentially once again begin to pull away from the Covid crisis are you seeing greater variability market to market, depending on where each market is relative to the pandemic.
Well that's a good question I mean.
We are definitely.
I'll use miles driven okay as the proxy here.
<unk>.
We just need everybody to do at Microsoft didn't last 24 hours as everybody go back to their offices.
Im joking, obviously, but the reality is.
The number of people going back to offices in particular in large urban markets is still below where we want and if you look at the miles driven.
It has recovered in parts of the country.
Almost a 2019 levels. If you look at the southwest or the southeast <unk> seen that miles driven recover the northeast is still almost 10% below where it was two years ago. If you look through the tail end of last year on the miles driven now it's coming up but it's still below so I think you will continue to see that miles.
Even improve.
The information we have says it's down still versus 19, we expect that to continue to improve.
That's very helpful. Thank you.
There are no further questions at this time, Mr. Tom Greco I turn the call back over to you for some closing remarks.
Well, thanks for joining us this morning, and as you've heard throughout the call. We remain confident in the strategic plan, we are executing and in our ability to deliver top quartile total shareholder return through the four CSR drivers we discussed today.
We plan to build on our 2021 results and leveraged strong industry fundamentals and continue to strengthen our customer value proposition deliver against our margin expansion initiatives and returned substantial cash back to our shareholders. We remain committed to the execution of our strategic initiatives, while driving innovation.
The position advance for long term profitable growth and we look forward to sharing more of our progress throughout the year.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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