Q1 2022 Advance Auto Parts Inc Earnings Call
Welcome to the advance auto parts first quarter 2022 conference call before we begin Elisabeth ice Slaven Senior Vice President Communications and Investor Relations will make a brief statement concerning forward looking statements that will be discussed on today's call.
Good morning, and thank you for joining us to discuss our Q1 results I'm joined by Tom Greco, Our President and Chief Executive Officer, and Jeff Shepherd our.
Secular 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 will contain forward looking statements.
All statements other than statements of historical fact are forward looking statements, including but not limited to statements regarding our initiatives plan projections and.
Future performance actual results could differ materially from those projected or implied by the forward looking statements.
Additional information about factors that could cause actual results to differ can be found under the caption forward looking statements and.
And risk factors in our most recent annual report on Form 10-K, and subsequent filings made with the commission.
Now, let me turn the call over to Tom Greco.
Thanks, Elizabeth and good morning to everyone joining us today.
Our Q1 results and discuss progress against our long term strategic initiatives.
Before we begin.
I'd like to thank our entire team and independent partners for their dedication throughout Q1.
Let me start with three key themes surrounding the first quarter.
First we delivered our eighth consecutive quarter of growth in comparable store sales adjusted operating income dollars and adjusted earnings per share.
In addition, we did this while lapping the height of last year's stimulus and then inflationary macro environment.
Second our strategic initiatives are gaining traction to deliver top quartile total shareholder return over the long term.
And third our financial strength provides for continued investment in our business, while returning cash to shareholders.
Stepping back we began the year at many companies that are.
Amid uncertainty.
In our industry. It was unclear how substantial broad based inflation was going to impact consumer demand in 2022.
With rising fuel prices with due to vehicle miles driven.
And what the real benefit was from economic stimulus.
In particular to the 2021 stimulus.
We had to estimate how much this benefited our core DIY consumer.
More specifically what role did get significant cash injection play and temporarily spiking DIY demand in Q1 2021.
Through the first 10 weeks of 2022, we had a strong start at that point year to date comparable store sales were up mid single digits.
The final fix weeks of our quarter were more challenging than we expected with comparable sales declining mid single digits driven by DIY.
While we knew this timeframe included the most substantial loss of economic stimulus from the previous year. We also had a slow start to the spring selling season, primarily in northern geographies due to colder and wetter weather than the previous year.
Now that the impact of last year's stimulus has moderated and the weather has normalized our comparable store sales growth in the first four weeks of Q2, our once again trending within our annual sales guidance.
With the most difficult sales lap of 2021 behind US we're pleased to affirm our full year guidance.
Our industry has proven to be resilient, despite substantial cost inflation across commodity fuel and wages.
Particular, the professional business in auto parts has a different economic model than traditional retail.
For the most part our professional customers make their decisions based on availability and customer service, along with Indian reliability of delivery over price.
We believe that these dynamics combined with the new strategic pricing capabilities, we put in place in advance positions us well to manage inflation in the current environment.
Overall in Q1, we delivered comparable store sales growth of 0.6% and 25, 3% comp sales growth on a two year stack.
As we've said we believe it's now important to consider comparable store sales on a three year stack as it helps to smooth out pandemic related volatility.
We're encouraged that our three year stack accelerated in the quarter was 16% as compared to 13% in Q4 2021.
We grew adjusted gross margins 231 basis points, while adjusted SG&A, Deleveraged 229 basis points.
In total our adjusted operating income grew one 6% in the quarter with our adjusted operating margin rate of 9% in line with the previous year.
Adjusted diluted earnings per share were up approximately 7% and we returned over $400 million to shareholders through a combination of share repurchases and quarterly cash dividends.
Jeff will provide more color on our financial results shortly.
In terms of category growth motor oil batteries and brakes led the way.
We're particularly pleased with the continued strength in batteries, which has seen robust growth over the past two years as we transition to the diehard brand.
Regionally our performance was led by the West and Florida.
Our goal remains to deliver top quartile total shareholder return over the long term.
I'll now provide an update on the progress we're making on our four drivers of CSR, which we've outlined previously.
First build an ownership culture.
Grow faster than the market third capitalize on our unique margin expansion opportunity and for return a substantial amount of cash to shareholders. In Q1, we continued to build our ownership culture through concrete actions.
We recognize that our team members play a vitally important role in our customer value proposition.
We also believe that when we put our team members first they will in turn take care of our customers and that will result in improved total shareholder returns.
In addition to enhanced training and safety initiatives for our frontline team members.
We've also been investing in compensation, including our differentiated fuel the frontline stock Award program for several years now.
We can see that these significant investments in frontline compensation training and safety are working.
We've now granted more than 24000 fuel the frontline grant since the program started.
Which helps contribute to lower turnover.
In Q1, our store turnover declined relative to the previous quarter.
Our intention here is to build a more differentiated team member and customer experience over time.
The reduction in turnover is contributing to improvements in our net promoter score, which highlights that our investments are translating to an improved customer experience.
In terms of our focus on safety across advance we continued to see year over year improvement in our incident and are pleased to report that our total reportable incident rate decreased 35% year over year in the quarter and is now one three the lowest we've seen since we began measuring incident rates.
Some initiatives to drive shareholder value are easily replicated building.
Building an ownership culture is not one of them we.
We make this a priority and you can read more about this topic at our 2021 corporate sustainability and social report, which is now available online.
In terms of our second DSR driver grow faster than the market. Our objective here is similar.
We're focused on building long term sustainable competitive advantages.
This includes industry, leading parts availability through our diversified asset base for all makes and models.
Availability is not just about having any application or any parts of the customer that's about having high quality parts that enabled the installer to do the job easily parts to perform well posting installation and parts that have low return rates.
It's also about having brands that are trusted by Diyer and professional installers alive.
In that spirit, we continue to improve our availability and assortment of national and OE brands.
We're also expanding our lineup of differentiated billion dollar brands car quest and diehard.
With the car quest and diehard brands, we're innovating to serve our customers with leading technology breadth of assortment and world class training for all makes and models as.
As we look at the car park going forward, we fully recognize that there are years of growth ahead for parts and applications specific to internal combustion engines.
That said as the hybrid and battery electric car Park grows both DIY ours and our professional customers are looking for products and parts that are optimized for these vehicles. This demand is particularly concentrated in certain areas of the country.
With this in mind, we're thrilled to announce that dances exclusive first to market diehard EV batteries.
There are already $8 4 million hybrid or electric vehicles across the country.
By 2030. This number is expected to increase to 45 million vehicles.
Today. It is not widely known by consumers that every single one of these vehicles requires the 12 volt battery.
In addition, our research has shown that the power demands on these vehicles is already significant and increasing with the existing 12 volt batteries not lasting as long as consumers expected.
Our new Diehard EV is designed for improved and longer lasting battery performance, providing superior reliability and durability for all electric and hybrid vehicles.
But our plan to better serve hybrid and electric vehicle owners is not just about batteries.
In addition to our exclusive offering a diehard we continued to expand our parts catalog for full battery electric and hybrid vehicles.
We now have tens of thousands of hybrid and electric parts and products available.
In addition, we've been working very closely with our professional customers in terms of hybrid and electric vehicles.
Two are repositioning their business and operations to better serve these vehicle owners.
In March we held our annual supplier and training Expo or <unk> in Florida.
<unk> is widely known across the industry as the largest automotive aftermarket technical and business training event in North America due.
Due to Covid or training sessions with professional customers were conducted virtually over the past two years. So we were extremely excited to be able to host our supplier and training Expo in person this year.
More than 2400 technicians shop owners service riders and other automotive professionals attended.
Importantly, this year's classes on electrification and autonomous were in high demand and extremely well received.
In summary, <unk> remains committed to serving all vehicle owners, including hybrid and battery electric.
In addition, we plan to work collaboratively with our pro customers. So that both of US are ready to meet the evolving needs of our customer base.
Shifting the channel performance in Q1.
Once again, our professional business outperformed DIY in the quarter with mid single digit comparable store growth led by wall pack and car Quest, Canada.
From a pro channel perspective, our large strategic accounts grew double digits with Technip also delivering a strong quarter. Our tech net membership continues to grow and through Q1, we added over 500, new members, finishing the quarter with nearly 15000 members.
Finally, we once again had a strong quarter with our car quest the independents.
We remain committed to our independent partners and continue to bring more independent owners for the car Quest family.
Moving onto our DIY Omnichannel business.
<unk> experienced the most volatility in the quarter declining mid single digits.
As mentioned earlier, we had a much stronger first 10 weeks of the quarter with the final six weeks of very soft as we lap extremely difficult comps from the back half of Q1 last year.
Our analysis concluded that our DIY performance in the last six weeks in the quarter with impacted both the lap of economic stimulus and weather, while the entire country with impacted by stimulus or north regions also underperformed south regions. During this timeframe as a late start to the spring had a larger impact.
On these geographies.
Of course, while the weather's uncontrollable. It's also a temporary factor and we've already seen recovery in DIY and in the north during the first four weeks of our Q2.
While we are watching all of the variables closely we are encouraged by the consistency of the three year stacks in both DIY and pro quarter to date.
In terms of speed perks after announcing our gas rewards program last quarter, we experienced increases in both membership and graduation rates.
In addition, our percentage of speed perks transactions increased by 270 basis points compared to Q1 2021.
Turning to our store expansion efforts, we opened 35, new stores in the first quarter, including the conversion of our stores in California.
After delays related to COVID-19, we're making progress on this expansion and welcoming new team members and customers to advance.
We're continuing to execute our new store opening plans and expect to open between 125 to 150, new stores and branches in 2022.
Also consistent with our annual guidance.
Our third CSR drivers to further capitalize on the margin expansion opportunity in advance, which we believe is unique within broader retail.
We remain confident in our long term plans to expand margins as outlined last year.
Our first quarter performance was highlighted by significant adjusted gross margin improvement or.
Our adjusted gross margin expansion was enabled through our approach to category management and driven by strategic pricing and increased owned brand expansion efforts.
While we continue to experience record levels of inflation and investments we've made in strategic pricing capabilities are paying off this has significantly improved our ability to react quickly and appropriately to cost increases across the business.
We're now able to take targeted actions based off a variety of dynamic market factors, including regional dynamics and competitive intensity.
With our new tools, we're much more surgical with our pricing strategies across and within channels.
This is very different than our approach in the past in essence, one channel strategy is no longer dependent upon the other.
This allows us to evaluate price elasticity across categories and channels at a much more granular level, enabling us to pivot quickly as customer purchasing behaviors shift or adjust.
We now understand better what's important to our customers and it's not a one size fits all model.
Our tools have empowered us to leverage the roles categories play.
Within our assortment differently.
Reacting to variances in and across markets.
Our pricing strategy has continued to be substantiated through the use of robust analytics and integrated competitive intelligence.
We're confident these tools will enable us not to drive top line sales, but also drive profitable margin expanding growth separately, our own brand penetration continues to grow as we reached an all time high of close to 48% across the enterprise in the quarter.
This was led by the expansion of our <unk> brand into engine management and under car along with the expansion of Autopart international products into <unk> National distribution system.
Our supply chain transformation continues to evolve as we transition to our enterprise wide infrastructure, starting with the consolidation of <unk> and Autopart International.
By the end of Q1, we integrated all of the AI store locations into the World Pack technology stack.
As a result, we saw a significant improvement in customer service from an increased bill rates.
Our team members can quickly respond to our professional customers needs and partner with them to help grow their business through improved service and expanded coverage of national and owned brands availability.
Additionally, we continue to move our advance and <unk> supply chain to a single warehouse management system for WNS.
As of Q1, we transitioned approximately 46% of our distribution center network as measured by unit volume to the new WNS.
With the implementation of the new WNS at each DC, we continue to follow with our new Labor management system and expect to complete this rollout as planned by the end of 2023.
In addition, late in Q1, we began to ship our first stores out of our new San Bernardino DC and are continue to ramp this building to take on more capacity to support our west coast expansion.
This new location will be a valuable consolidation point for supplier shipments and meaningfully improve our speed of replenishment the stores and e-commerce capabilities.
Our new Toronto DC remains on track to be fully operational in Q4 2022.
We're very excited about the increased capacity and capability, we will have to support our Canadian expansion plans with this investment.
Finally, as we continue to optimize our overall DC network to improve efficiency.
We recently announced our teams that will be closing an additional DC located in Anchorage. This year shifting to SG&A, we're continuing to execute our cost reduction initiatives in Q1 savings on corporate SG&A and rent were more than offset by increases in store labor cost per hour as well as new.
New store startup costs.
These costs were largely anticipated and Jeff will review these and other factors in more detail shortly.
In summary, we believe that industry drivers of demand <unk>.
Including increasing car park, improving miles driven and over 5 million new vehicles in the sweet spot remained positive for the industry over the long term.
At the same time, we are cognizant of external headwinds such as broad based inflation and rising fuel prices.
Despite this challenging macro environment, we delivered another quarter of growth and remain confident in our ability to deliver our 2022 guidance, while executing our long term strategic plan.
I'll now turn the call over to Jeff to review, our financials for Q1, and our final CSR driver returning cash to shareholders. Thanks, Tom and good morning.
I would also like to thank all our team members for their dedication and resilience to quickly adapt to the current environment, which has remained volatile.
In Q1, our net sales of $3 4 billion increased one 3% compared to Q1 of 2021.
This was primarily driven by growth in our professional business, including conquest independently owned locations.
Adjusted gross profit margin expanded 231 basis points to 47, 1%.
Driven primarily by improvements in strategic pricing actions.
As well as expansion of our owned brand portfolio.
These were partially offset by ongoing inflationary costs in both category and channel mix.
Same SKU inflation in Q1 increased seven 1%, which was higher than we expected when we began the year.
In addition, inflationary headwinds from higher wages and fuel costs within supply chain in the quarter more than offset our productivity gains from ongoing initiatives.
The unfavorable channel mix in the quarter resulted from the professional business outpacing DIY growth.
Our Q1, adjusted SG&A was $1 3 billion or 38, 1% of net sales.
This compares to 35, 8% of net sales in Q1 2021.
Like previous quarters. This was primarily driven by inflationary headwinds led by store payroll as well as continued increases in fuel costs.
We also incurred approximately $20 million of startup costs related to our California expansion.
In Q2, we expect further investment and anticipate this will normalize in the back half of the year.
As expected pro outperformed DIY contributing incremental delivery costs.
These headwinds were partially offset by a year over year decrease in COVID-19 related expenses.
Things from actions, we took over the past couple of years to lower SG&A expenses, including corporate restructuring and rent reductions as well as lower incentive compensation due to the record results in the prior year.
Our Q1 adjusted operating income was $303 6 million, an increase of one 6% compared to Q1 2021.
Our Q1, adjusted Oi margin rate of 9% was in line with Q1 of the prior year.
Our adjusted diluted earnings per share of $3 57 increased six 9% compared to Q1 2021.
Capital expenditures for the quarter were $115 million as we continue to invest in our business and open new stores.
Our free cash flow in the quarter was an outflow of $170 million.
Compared with an inflow of $259 million.
In Q1 2021.
Working capital in the quarter was pressured by higher inventory not only from our usual build ahead of the spring selling season, but our team also bought ahead to navigate the dynamic situation in China.
This.
Combined with an unexpected slow start to the spring selling season reduced our AP ratio by 100 basis points.
Additionally, we experienced higher accounts receivable from increased professional sales as compared with last year. However, we expect balances to decline throughout the year.
Finally, as Tom mentioned, our fourth PSS driver includes returning excess cash to shareholders through a <unk>.
A combination of share repurchases.
And our quarterly cash dividend.
In Q1, we returned $248 million to shareholders through the repurchase of approximately $1 1 million shares for an average price of $231 41.
In addition, we returned approximately $154 $8 million towards shareholders through our quarterly cash dividend payments.
As mentioned in our earnings release.
Our board of directors has approved a cash dividend of $1 50.
We remain confident in our ability to generate meaningful cash for our shareholders.
We are continuing to execute against our long term strategic objectives and are confident in our ability to deliver further progress throughout the year.
As a result, we will.
Firming, our full year 2022 guidance ranges, including comparable store sales growth.
Margin expansion and double digit adjusted earnings per share growth. In addition, we're slightly increasing our adjusted diluted EPS range to $13 30.
To $13 85.
Reflecting year to date share repurchases.
While we recognize considerable volatility remains in the macro environment, we will continue to execute our plans and work to maximize performance.
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.
And we ask that you please limit yourself to one question and one follow up and your first question comes from the line of Simeon Gutman from Morgan Stanley . Your line is open.
Hey, good morning, everyone.
So my first question is on the backdrop realize there was some weather.
Are you surprised by the sensitivity of the industry to this weather and maybe the macro given that they.
The used car business has been so strong prices are up the fleet is aging. It just felt like the drivers were in place to power through some of them. So I don't know how you.
Think about some of these changing factors.
Okay.
Good morning, Simeon I think the.
The biggest factor in the quarter was the lap of the stimulus and we had modeled that early in the year I think we did in general a pretty good job of modeling that.
The weather is a short term swing as you know that can swing the business from the first quarter in our case to the second quarter. That's moderated as we said and we're back within our annual guide so I mean other than the fact that the.
Spring came a little bit later than we expected I mean, the quarter top line came in around what we had modeled.
And then is it.
Follow up.
With regard to fuel prices, our fuel costs can you talk about <unk>.
How quickly youre managing them.
How quickly our industry prices changing.
And does it seem like there is a pass through that's being rationally passed through into enterprises.
Given the current environment.
Yes sure. So when we gave guidance in February we modeled out all of the inflationary line items within our P&L, so whether its product cost fuel labor those are the certainly the big three but there are many others.
We put an assessment around that for every quarter and then obviously for the year as.
As we've gone through the first quarter.
<unk> been fairly close on and others were higher than our expectations and we would put fuel in that category are coming in significantly higher than our expectations.
In terms of ability to pass and we feel good about that.
We were certainly pleased with our gross margin results that was led by pricing as well as our owned brand expansion, but largely pricing and so that ability to pass those costs on were evident in this quarter. So we feel good about that.
Okay. Thanks, Jeff Thanks, Tom Good luck. Thank you.
Thanks.
Our next question comes from the line of Christopher <unk> from Jpmorgan. Your line is open.
Thanks, Good morning so.
Looking at the first quarter Big picture your comp flat EBIT margin was flat and cost inflation accelerated previously you talked about the ability to expand margins on a fly com, you'll give the inflation and fuel what levers do you have the pool just.
They are told to drive margin expansion this year as it as it is in your guide so said another way what costs come out and what self help accelerates as we look ahead.
Yeah, well certainly on the on the gross margin we have those capabilities in place the strategic pricing performed very well for us in the quarter and we anticipate to continue to use that.
Leverage our owned brand expansion also was a very strong contributor in the quarter and so from that standpoint, we feel good about the gross margin.
Really its more down in the SG&A.
And then let me frame that up just a little bit we really had three primary headwinds we had inflation we had in our startup costs associated with the California expansion and we have channel mix and then that was offset by a combination of.
Covid and some of our productivity initiatives as well as lapping some of that incentive comp, particularly on coal that we had a year over year benefit of $12 million.
Had a $16 million headwind last year, and only $4 million in this quarter. So we did get that benefit, but that's probably be the most significant benefit we see from Cove with all year given that that was the majority of the costs. We saw for Covid in 2021.
So looking forward at those three inflationary headwinds.
Starting with inflation, while we expect inflation to continue throughout the year.
We are going to be when comparing to the back half of last year. The inflation that we were seeing both in gross margin and SG&A. So the year over year impact is lessened.
Second as channel mix, we expect we expect further channel mix, but Chris we expect it to normalize so that will also come down and then the third one are the startup costs in California. If you remember, we really started to incur those costs in the back half of last year, and we're going to lap those costs, so that actually flips from a.
<unk> headwind to a tailwind in the back half of the year so on balance.
Back half of the year, we still fully expect to leverage SG&A now as we sit here today it looks more challenging in terms of full year leverage, but it's early in the year.
Reducing the impact of these costs along with other your typical cost savings measure we just looking at our full time part time mix all of that together, we certainly believe we're going to leverage SG&A in the back half.
We're going to keep working to reduce those costs.
Got it and then so just a couple of follow ups there so.
On the pricing front in the.
The fuel.
Fuel hits cost of goods on a on a lap given that ends up in inventory.
Inventory.
And then on the SG&A obviously.
The trucks to the to the mechanic is causing pressure are you. So are you planning to price that component in and then on the gross margin youre going to start to lap through higher cost inventory in the back half of the year. How do you think about the shape of gross margin as the year progresses.
I'll take the first one Chris I'll, let Jeff speak to the to the lapping of the gross margin components, but.
We have every single key cost line modeled out obviously I am sure most companies do.
In terms of the inflation.
Model it out by quarter, the big ones for US are of course product costs store wages, and then the fuel piece and they all come in different times different ways. We've obviously got the.
The LIFO component coming off the balance sheet. So we look at that collectively and of course, we look at the price increases by category, we push back hard on any cost increases that we get from our suppliers.
In the final analysis, we take a very strategic picture of the portfolio and Thats, what we did in the first quarter and that's what we've been doing the last several quarters to drive essentially.
Our our rate above a year ago, right, because we're able to not only price to cover but price strategically to offset any of those other inflationary costs that might come below the gross margin line. So that's essentially how we how we approach it Jeff do you want to take the other part yes, and then in terms of gross margin, Chris I think youre kind of talking about the <unk>.
Bo.
The costs that we have paid off on the balance sheet. So first of all it's important to frame the LIFO component into a broader gross margin plan. We have a comprehensive plan to improve our gross margin rate over time those are the category management pricing sourcing what have you as well as our supply chain improvements.
And we're well aware of the costs that are on our balance sheet, we know the products and the categories driving these inflationary costs.
Because we know that we can model, how and when these costs will impact us and then of course, our LIFO and gross margin improvements are incorporated into our guide. So while we initially thought lethal what's going to be roughly in line with last year seeing the higher inflationary costs, we've now modeled that it could be.
$200 billion or more but we have that contemplated into our plan.
Got it thank you very much.
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, Tom Your SG&A dollars have been growing faster.
On a relative basis than your than your peers, despite your comps being a little bit lower than your peers.
Do you think that it.
This reflects A&P, having under invested in wages and other store level expenses historically and are you at the point, where you are now have caught up from that Underinvestment and you can have a more moderate pace of SG&A growth moving forward.
Well good morning, Michael first of all we're very proud of the investments we've made in our frontline team we've invested in our fuel the frontline stock ownership program for a couple of years and as we called out.
We're seeing reduced turnover because thats an important part of our value proposition as you know I think the big difference for US is the entry into California.
For us we get one shot to answer a big market like California, I mean, it's like another country right.
And we want to make sure we get this right.
We're opening 109 stores in the heart of Los Angeles in cities in and around Southern California, and we're very focused on getting that value proposition right out of the gate.
They're a little more complicated than a traditional opening that we would have in an advanced startup of course, we've got to go in there it's adjacent to our pathways garage.
You've got the regulatory environment that is very different.
And then it's very important that we have the very best parts people in the industry in those stores. So when we open a store it has a terrific experience for the customer and I think that's been the big difference we incurred those costs in the back half last year, we incurred another $20 million this quarter.
Well the stores are going to do really well and once they're open they're going to make a meaningful contribution to our growth we are gaining share out there in the west so.
We're playing the long game here, we want to get this right.
$90 million is a lot in the first quarter, we know that that was important for us to keep these team members on staff and because it takes longer to get these stores open in California, We're just incurring the payroll the rent all of those normal store opening costs longer then we would look would've liked.
Thank you very much my follow up question is the big pushback on this quarter and really the last few years this quarter.
Operating margin is on pace with where it was at the same point in 2019, so with increasingly puts pressure on the forward quarters in order to achieve your longer term goals.
Is the is the point that you're making today.
What we're going to see the benefit of easier comparisons on SG&A, we're not going to have as much pressure from.
The startup cost associated with California, and then we can navigate through the.
The LIFO challenges that we're going to likely experienced in the coming quarters and that's what the market should take confidence in that we'll be able to achieve these longer term margin expectations that we set forth.
Well a couple of things I mean, I think Jeff answered the LIFO question.
Let me start with the top line, though Michael I mean, we ran a 16 three year stack in the quarter Candy.
Candidly that was a little below our expectations.
As we described the spring selling season kind of shifted and we've seen that come back. So if you look at our 16 three year stack.
We expect somewhere between a 2014 into 2016 on a full year basis, which puts us squarely into the annual sales guidance. So obviously, that's an important part of our of our overall equation.
The margin expansions are very much on track we knew what we were going to incur in the first quarter in terms of startup costs, we called out that the <unk>.
First part of this year was going to be John sorry gross margin.
Driven.
Kind of shifting into the back half, where SG&A is going to play a meaningful role in our margin expansion. So we expect to deliver full year <unk> margin expansion and double digit EPS just like we did last year.
<unk>.
The drag that we saw in SG&A in the first quarter as Jeff said eventually becomes a tailwind in the third and fourth quarter.
Okay. Thank you very much and good luck.
Thanks.
Your next question comes from the line of Bret Jordan from Jefferies. Your line is open.
Hey, good morning, guys.
Good morning could you talk about I guess, where you see your supply chain now and fill rates and obviously that's been a challenge during the last 12 months, but are we improving and how far to go to full target.
Yeah. Thanks, Brett we made a lot of progress in supply chain in the quarter I mean, we're executing the initiatives that we have I think our team did a really good job managing a tough environment, Jeff called out that way.
We looked at the situation in China early on in the year, we knew there was going to be some potential.
Disruption if we didn't get out ahead of it and we did get out ahead of it.
Our initiatives mitigated the impact of inflation, we finished the world Pac Autopart International integration, we're implementing WNS, we called that out in the quarter and we're integrating the advanced and car Quest network and we're starting to look for ways to bring the enterprise supply chain together.
We're on track to open San Bernardino in Southern California, that's going to be a Big addition for US as we open those stores in Socal, we're opening are.
Building up in and around Toronto in Bolton.
Rowing market the Canadian business is coming back it was a business that lag significantly the last couple of years because of the.
A little bit more stringent on the Covid front, we're closing four distribution centers, we called that out so we're streamlining our network.
We're improving our service to the customer emerge using cost in fact, our fill rates our assortment rates all of that we're really well positioned this summer Brett to deliver the top line growth that we need so I feel very good about where we are in supply chain and we'll just keep executing our plan.
Okay, and then a question on pricing I mean, there's a lot of talk about peers investing in price and obviously with a high inflation rate are you having are you seeing any competitive landscape shift out there, where it's harder to pass through the inflation youre getting on the on the inbound side.
Well I mean first of all I mean, the one thing that I would say is it does appear to us as if it's a very rational environment out there we're not seeing.
Broad based anything irrational, there's little things that we see here and there.
This isn't a very resilient industry I don't know if you you probably haven't seen yet quite a quite an article in the journal this morning about the industry.
The car park the age of the fleet all of those things remain very positive.
And we always.
Work hard to stay close to our professional customers and that model is just different than traditional retail.
Customers make their decisions based on availability customer service speed and reliability of delivery over price. So our investments are on those things and we're very strategic about our pricing and as we've said before we.
And we haven't been as version as perhaps some of our peers are in that that represents an opportunity for us. So all of these dynamics and the strategic pricing capabilities. We have we think position us very well in the current environment to drive margin expansion and topline growth.
Great. Thank you.
Your next question comes from the line of Michael Montana from Evercore ISI. Your line is open.
Hey, good morning, Thanks for taking my question.
Just first off just wanted to ask about on the consumer front. If there is any kind of noteworthy signs of trade down or if youre seeing more resiliency broadly speaking.
Yeah, Great question, Mike I mean, we are really seeing our customer being resilient.
First of all.
We were nervous in February about the inflation of fuel and the impact that could have in miles driven.
We haven't seen an impact yet I mean, the March numbers, just came out and we're seeing growth I think people are getting out and.
They are going out to do the things that they did prior to Covid and we're seeing some level of resiliency. There in terms of trade down we have not seen that either we look very closely at this we knew this is something that is important for our investors and we're not seeing it so.
In our case, we're continuing to invest in our own brands to make sure that we've got the highest possible quality available for our customers and we are seeing a shift to our own brands, but other than that we're not seeing any any kind of formal trade down on good better best or anything like that.
Okay. Thanks, and then second part was just around margin so.
First off is it still kind of a 1% to three comp that's kind of required to lever SG&A into the back half or is there enough kind of company specific actions that are not revenue dependent that perhaps that number is lower and then similarly is there a way to conceptualize things like price optimization WNS labor staff.
In closing Dcs like what kind of a gross tailwind does that.
Into the back half of the year. So a lot has been made about discrete headwinds. So I just wanted to think about what offsets you guys may have as well.
Yeah, I'll take the first part of that in terms of the comp.
We're confident we can continue to grow our margins.
Without the growth it certainly helps to have the comp having.
Having the new stores being open is.
Automatic tailwind for us.
Our initiatives that we have whether it's C&I category management supply chain.
And even the SG&A costs.
We can still grow our margins.
The 1% to three is certainly helpful for us it allows us to leverage some of that fixed cost base that we have particularly in SG&A.
Yes in terms of as a second part of your question.
We laid out our strategic plan, Mike as you know a year ago in April and it highlighted specific margin expansion plans by the four big buckets that we talked about.
We are executing those to the letter.
One of those initiatives were measuring every period.
Look at our performance there is pluses and minuses in there but in general we.
We are on track to deliver against our cost reduction efforts that we have inside of those four big buckets.
The inflation that we're experiencing is obviously higher than we modeled a year ago in April and to the extent that continues.
We would expect that would be an industry wide challenge and in general the plan is to continue to drive our strategic pricing initiatives to offset that.
Your next question comes from the line of Daniel <unk> from Stephens. Your line is open.
Yes, Thanks, good morning, guys and thanks for your questions.
I wanted to start Tom maybe on the loyalty program.
On the progress there with speed Perks I mean, I think you guys have talked more about your program than peers, you've obviously signed up fuel partners last quarter and it just feels like more of a strategic focus but are you seeing the step up in sales in the program.
You would have expected just trying to measure your sales growth first other than how much of a contributor of that program could be.
Well, it's early Daniel we just rolled it out in January but we're encouraged by what we're seeing as we called out our percent of transactions increased with.
<unk> graduated customers up the ladder.
So we've got our percentage of transactions is now in the high Thirty's I mean, we think there's a lot of runway there because again the big win here is to get the first party data and to personalize our offers to drive incremental.
Incremental top line growth. So we are making progress on speed perks, we want to continue to drive per cent of transactions up personalize the offer and drive market share gains associated with it. So we're the DIY business in aggregate at an industry level was quite pressured in the first quarter and largely due to the stimulus slot that we talked about but we're very.
We feel good about where we are from a syndicated data standpoint and market share in DIY.
And you just mentioned that the topline growth would come from kind of personalized promotions and discounting I guess how.
How does that tie into your margin expansion if sales through the loyalty program has to come with more.
Promotions, maybe tied to them I mean do you still can you still grow margins in that environment or could that pressure margin more than more than you anticipated.
Yes.
Personalized program that Didnt necessarily say discounting.
The personalization comes from an intimate knowledge of the customer.
Knowing.
The kind of vehicles they drive their purchase frequency, where they live whether theres, a storm coming to their neck of the woods, so rather than sending generic offers across the country. We were able to get much more tailored and version with what we send out to the customer and that's where we're going to see our growth.
You Wanna be relevance right I mean, it doesn't necessarily mean offering a huge discount it means having a relevant offer at the right time to the right customer and Thats what speed Perks is all about and then finally the gas rewards initiative has.
We didn't know that there was going to be all of the things that happened in 2022, when we drew up gas rewards, yes, that's going to get increasingly important as the year goes on obviously as fuel prices continue to be high.
Got it and follow up Jeff I wanted to ask on the buyback.
You also bought back one 1 million shares, but I don't think you guys bought back any since the <unk> release, I think thats. How many were bought back as of mid February . So maybe can you talk about why you guys laid off the buyback in the back half of the quarter and then how should we think about the cadence of repurchases moving forward.
As a use of cash.
Yeah, we got into the market early that was something strategically we wanted to focus on to get some of those shares out of our weighted average.
Share count.
We did buy subsequent to the end of the first quarter another $100 million there.
So we're still very much on track that's the $350 million for the year. So far on our stated goal of $500 million to $700 million. So we feel really good about it theres, obviously, a lot of volatility right now.
We feel good about the 5% to 700 and we're on track to achieve that.
Great Best of luck guys.
Thanks. Thanks.
Well, thanks again for joining.
Sorry, there are no further questions at this time, Mr. Tom Greco I'll turn the call back over to you for some closing comments.
Well, thanks again for joining us this morning, despite continued macroeconomic volatility.
We're continuing to deliver growth for AAP and for our shareholders. This was our eighth consecutive quarter of growth in Q1, and importantly, we are executing against our long term strategic plans and we've made progress on our initiatives to deliver top quartile total shareholder return, while returning cash to our shareholders. We look forward to sharing more on our progress next quarter.
But before we go and as we approach Memorial day, This weekend and I hope that we can all take a moment to recognize and honor all the breakdown in women, who paid the ultimate sacrifice defending our country on behalf of the entire advance family I'd like to express my sincere gratitude for their service as well as to their families. Thanks again.
We will speak to you again in August .
This concludes today's conference call. Thank you for your participation you may now disconnect.
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