Q4 2022 Advance Auto Parts Inc Earnings Call
Okay.
Hello, and welcome to the advance auto parts fourth quarter and full year 2022 conference call before we begin Elisabeth isolate senior Vice President Communications and Investor Relations will make a brief statement concerning forward looking statements that will be discussed on this call.
You may now begin.
Good morning, and thank you for joining us to discuss our Q4 and full year 2022 result.
I'm joined by Tom Greco, President and Chief Executive Officer, and Jeff Shepherd, Executive Vice President and Chief Financial Officer.
Following their prepared remarks, we will turn our attention to answering your questions.
Before we begin please be advised that 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 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, everyone.
Before getting into the details of the fourth quarter.
Full year 2022 results.
I'd like to begin by addressing our CEO succession news announced this morning.
After months of deliberation, I've informed the board that I plan to retire at the end of the year.
I believe that now is the right time to begin transitioning leadership for advances next chapter not only for my family and me, but for the business for two important reasons.
First we're in the final year of our three year strategic plan.
In the process of updating our next multiyear strategy.
The timing will help enable my successor to play a role as we undertake this work to ensure the long term success of advance.
Second the timing of this leadership transition will allow ample time for me to work with the board succession Committee to identify my successor.
The committee will be conducting a thorough and comprehensive search that considers both internal and external candidates and facilitate a smooth transition.
We're focused on finding a candidate who can ensure that we continue to deliver for customers and drive long term shareholder value.
In the meantime, I'm committed to the execution of our 'twenty three plan to ensure advance we'll continue our trajectory and capitalize on the significant opportunity ahead.
With this in mind, we have a lot to cover on our call today. So let me provide the key themes you'll hear from us first.
While we're not happy with our overall results in 2022, the decisive actions we took in the latter half of the year led to improved performance in Q4, and we expect that to continue into 2023.
Second after several years of significant investments in complex transformation initiatives and with the majority of the integration behind US, we're now able to focus more time and resources on improving execution.
Third we remain focused on our plan to drive long term shareholder value behind our four CSR drivers. This includes leveraging our differentiated professional assets to accelerate sales and profitable growth in our largest sales channel. So let's get started.
Well 2022 was a challenging year for AAP and our overall results did not meet expectations. The hard work and dedication of our team members helped US end the year on a more positive note.
We delivered improved top line results in the fourth quarter as we expanded our footprint increased customer loyalty and leverage the diehard brands gained DIY market share.
We continue to execute the disciplined inventory and pricing actions, we discussed last quarter.
These actions contributed to stronger results and we expect to improve parts availability throughout 2023, which we believe is the single most important driver to accelerate topline growth.
We also finished the year with expanded adjusted operating margins and returned more than $930 million in cash back to our shareholders in the form of share buybacks and dividends.
Looking at our Q4 performance net sales increased three 2% and comparable store sales increased two 1% Q.
Q4 was led by mid single digit comp sales growth in DIY Omnichannel, our professional business was slightly positive for the quarter.
As we continue to expand our footprint, our new locations are providing incremental revenue growth.
In 2022, we opened 144, new stores and branches, including most of our planned California locations.
Looking at our sales performance in Q4 from a category perspective growth was led by continued strength in batteries behind diehard with a double digit increase compared to Q4 of last year.
We also saw strength in fluids and motor oil.
Regionally, the West, Florida, and mid Atlantic outperformed our other regions.
It's important to note we gained DIY omnichannel share in the quarter based on syndicated data.
In Q4, we expanded adjusted operating income margin 146 basis points.
Adjusted diluted earnings per share increased by 39, 1%, primarily driven by the increase in operating income margin and inclusive of a benefit from the functional currency change of one of our subsidiaries outlined in our press release.
For the full year net and comp sales results increased one, 4% and 0.3% respectively.
Turning to margins and profitability adjusted operating income margin expanded 24 basis points and adjusted diluted earnings per share grew eight 5%.
As we discussed throughout 2022, one of the most significant SG&A headwinds, we faced was related to our California expansion.
Our startup cost for these new stores were significantly above our initial expectations for the year, which Jeff will discuss further.
As you know we've gone through a complex transformation spanning several years of significant investment with the majority of this effort behind US we're now able to focus more resources on driving execution and operating performance, including the opportunities discussed last quarter.
First we made targeted investments to get more skus closer to the customer.
It is important to note that in stock rates for front room categories were strong in the quarter as evidenced by sales growth and DIY share gains within diehard batteries and Motorola.
Inventory investments were concentrated in backroom hard parts categories.
As expected we saw modest improvements in our in stock levels and performance in Q4 across these categories.
We're continuing to work in close collaboration with supplier partners to ensure our in stock levels. Within these categories continue to build in Q1 and throughout the balance of the year.
Second we continued to execute our category management strategy, an important driver of gross margin expansion for us.
This strategy focuses on owned brand penetration strategic pricing and strategic sourcing in.
In terms of own brand penetration, we ended the year at 55% of mix, which increased 210 basis points compared with the prior year behind the strength of diehard and power question.
Owned brands continued to be an important differentiator for us and provide a mix of good better and best options.
Last quarter, we also talked about plans to leverage new capabilities to make surgical price investments through detailed reviews of our performance. We've made targeted investments and we'll closely monitor and adjust pricing as needed given industry dynamics.
Beyond these initiatives I want to mention a couple of other action items, we believe will add value and help drive growth in 2023.
First we remain focused on building our brands to drive distinction and pricing power. We recently launched our die hards choose diehard a 62nd documentary style video campaign, featuring Kirstie Ennis, a former marine Sergeant and world renowned climber, who is the embodiment of.
Diehards attributes of reliability durability and power.
Titled The climber. This campaign is appearing on advances social media pages and debuted in theaters.
We're confident this campaign will continue to help build awareness of both diehard and advance.
Second we continued to expand our customer loyalty program speed perks to increase share of wallet with DIY ours.
In 2022, we increased membership by nearly 1 million members in our percent of transactions grew by 100 basis points year over year.
We finished 2022 with $13 6 million active members contributing to our strong DIY performance in the quarter.
And view this as a continued growth driver for our company in 2023.
Third we continue to invest in digital capabilities in both DIY and pro on our <unk> website, we improved shop ability to drive higher conversion and growth.
We also continue to invest in our mobile app, including homepage design with a better user dashboard for speed perks members and optimize placement for featured products and promotions.
Within professional we integrated the advance pro platform into new shop management and procurement systems.
This drives efficiency and ease of doing business by providing more professional customers with delivery estimates.
In addition, we improved our BTB online experience, which resulted in a significant increase in digital penetration.
Now, let me speak to our longer term strategy to grow our professional business, where we start from a position of strength.
As we said previously we're the only major company with a pure play professional model behind willpower.
Now that Autopart international has been fully integrated into <unk>. We have 316 existing locations that are dedicated to serving the professional customer with significantly more hard parts skus than a traditional retail store.
We also have nearly 330 advance hubs and super hubs, which offer a broad range of parts.
These assets allow us to better serve the needs of our professional customers with a comprehensive lineup of national brands owned brands and OE parts focused on with our pro customers need.
We're now well positioned to execute the next generation of our strategy to profitably grow our professional business by getting the right part in the right place at the right time.
Ultimately this will involve positioning our enterprise wide assortment as close to the customer as possible ideally under one roof.
To provide consistent and reliable delivery of the entire job.
As an example in Toronto, we recently combined two distribution centers into one with our enterprise assortment located in a single building.
We're pleased with the early results we are seeing in Toronto and believe a similar approach to this has the potential to provide a superior customer experience in other markets across North America.
For years World Pac has leveraged online ordering from its customers to determinant assortment and to ensure we have the right part.
Utilized a singular demand signal to position inventory in the right place.
And provided a clear window for delivery. So the installer consistently gets the part at the right time.
Five years ago, we had four disparate supply chain and technology platforms.
Today, our systems are much better connected and enable us to take learnings from <unk> and apply them across all of our pro business.
Our vision here is to leverage the entirety of our enterprise assets to provide a superior customer experience within pro as we accelerate growth and profitability.
We look forward to sharing more in the next evolution of our strategy.
Before I turn the call over to Jeff Let me speak briefly about how we're thinking about 2023.
As the final integration and amortization costs wind down we've made the decision to shift to GAAP results as our guidance metrics.
Jeff will provide further rationale for this but we're excited to see our broader integration costs coming to an end, culminating in the exhaustion of GPI amortization costs in 2025.
As we begin the year, we remain cautious surrounding the macroeconomic backdrop, including the potential for ongoing pressure on low to middle income consumers. However, our 2023 guidance is underpinned by continued industry strength with the drivers of demand remaining positive.
Further we expect the strategic inventory investments we began in the second half of 2022 will help drive growth in 2023.
In terms of our expectations for the year were guiding to growth in net in comp sales as well as GAAP operating income margin expansion.
I'll now turn the call over to Jeff to review, our Q4 and full year financials in more detail and provide our outlook for 2023, Jeff.
Thanks, Tom and good morning.
I would also like to start by thanking our team members for their commitment to advance this past year.
While the year was not without challenges our team members continue to put our customers first.
In Q4 net sales of $2 5 billion increased three 2% compared to Q4 2021.
Driven by strategic pricing and new store openings.
Comparable store sales increased two 1%.
Adjusted gross profit margin expanded slightly to 46, 9% compared with 46, 8%.
This was driven by strategic pricing channel mix favorability and owned brand expansion.
In the quarter same SKU cost inflation was approximately six 9%.
Q4, adjusted SG&A of $943 million.
Was flat compared with the prior year.
As a percent of net sales adjusted SG&A improved 136 basis points.
This was primarily driven by a year over year decrease in incentive compensation and marketing expenses in.
In terms of marketing, we improved efficiencies in the quarter by shifting to higher return investments within the marketing mix.
We also incurred lower startup costs versus the prior year as a result of the ramp up of our new store openings in California.
These benefits were partially offset by inflation and store labor and higher medical costs.
Our Q4 adjusted operating income was $219 million, an increase of 23, 6%.
Our Q4 adjusted Oi margin rate was eight 8% an increase of 146 basis points.
And our adjusted diluted earnings per share increased 39, 1% to $2 88.
The EPS improvement was driven by stronger operational results.
And our Q4 benefit of approximately 16 due to a change in the functional currency of our subsidiary in Taiwan.
For the full year 2022, net sales of $11 2 billion increased one 4% compared with the prior year.
Our adjusted gross profit increased four 4% and adjusted gross profit margin expanded 135 basis points to 47, 3%.
Adjusted SG&A expenses for the full year of 2022 increased four 5% compared to 2021.
On a rate basis, adjusted SG&A as a percent of net sales increased 111 basis points to 37, 5%.
As we discussed throughout 2022, our expansion in California weighed on SG&A throughout the year.
Delays in permitting and construction resulted in significantly fewer sales weeks and we plan for a California based stores.
As Youll recall, we made a decision early on to hire the existing pet voice team members in the stores prior to opening given the tight labor market.
This helped ensure we had the customer relationship and geographic knowledge needed for long term success.
In short, we are paying rent and store payroll without sales well in excess of our original plan.
We called out these costs each quarter last year, but for perspective.
Presented approximately $60 million of startup costs in 2022.
The good news is we now have nearly 90 stores open and the startup costs are largely behind us with less than 20 stores to open.
The stores are gaining more share in DIY every period and were building the professional business week by week.
We're now able to service, our large and vitally important national pro customers in California, which will continue to build over time.
Our full year 2022, adjusted operating income increased 4% to $1 1 billion.
On a rate basis, our adjusted Oi margin expanded 24 basis points to nine 8%.
Our adjusted diluted earnings per share of $13 <unk> increased eight 5%.
Our 2022 capital expenditures were $424 million compared with two.
$290 million the previous year.
This was driven by our continued investment in the business primarily related to our new store openings.
And supply chain.
As we continue to execute on our strategic objectives for 2023, our overall capital allocation priorities remain unchanged and.
And we plan to continue to deliver for customers and shareholders alike.
Free cash flow for the full year was $298 million.
As Tom mentioned, we're making strategic inventory investments to improve availability in 2023, which are important to accelerate growth this year.
In addition through process and technology improvements, we were able to process disputed payables more efficiently.
In 2022, we returned approximately $934 million.
Through a combination of share repurchases and our quarterly cash dividend.
Our board also recently approved a quarterly cash dividend of $1 50.
Turning to 2023 guidance as Tom mentioned, we're shifting to GAAP measures for the purposes of guidance and will no longer be reporting non-GAAP results beginning in 2023.
There are three primary drivers pertaining to the timing of this decision.
First our transformation costs are getting less impactful.
Do see the need for non-GAAP adjustments.
Our largest integration initiatives are largely completed and our amortization cost will be exhausted in 2025.
Second.
No longer reporting on a non-GAAP basis will improve comparability with our peers, including similar treatment of LIFO moving forward.
And lastly, many investors and analysts have requested that we prioritized debt metrics ultimately our intention with this change is to help enhance the transparency and simplify our financial reporting going forward.
Distant with feedback we received.
With that said this year, we will continue to highlight activities and related costs that were previously excluded from GAAP results, including but not limited to impact associated with LIFO or.
Our transformation related costs.
And amortization associated with the GPI acquisition.
Our 2023 guidance is highlighted by modest growth in both our net and comp sales and gas margin expansion.
Our 2023 guide is underpinned by a cautious macroeconomic outlook.
Given the pressure on low and middle income consumers.
Balanced with the continued industry strength as the primary drivers of demand remain positive.
In 2023, we expect product cost inflation of mid single digits overall with moderation throughout the year.
From a phasing standpoint, we expect Q1 2023 to be the most challenging quarter of the year for three reasons first based on GAAP accounting, we expect higher product costs year over year in Q1 and the subsequent quarters.
Second we expect to build sales momentum throughout the year as we improve availability.
Third we expect higher transportation costs within SG&A in Q1.
Given these factors, we expect to experience stronger growth and margin expansion post Q1.
Considering these factors our guidance includes net sales of 11, 4% to $11 6 billion.
Comparable store sales of 1% to 3%.
GAAP operating income margin of seven 8% to eight 2%.
Income tax rate of 24% to 25%.
Diluted earnings per share of $10 20 to $11 27.
Capital expenditures of $300 million to $350 million.
A minimum of $400 million in free cash flow.
And 60% to 80, new store branch openings.
With last year's investment in inventory, resulting in higher payable payments this year.
And anticipated continued inventory investments.
We have temporarily paused share repurchases under our existing program.
At this time, we're not guiding a range of repurchases for the full year.
Importantly, we remain committed to paying quarterly cash dividends.
Over the long term, we remain committed to a balanced capital allocation approach and returning excess cash to shareholders.
With that I'd like to turn it back over to Tom for closing remarks.
Thanks, Jeff.
I joined this team in 2016 I've seen this company made terrific progress.
I believe we have a strong team in place and a sturdy foundation for growth and profitability both in 2023 and beyond.
With the heavy lifting of the integration behind Us I'm confident we're better positioned now for growth and value creation than ever before.
With that let's open the phone lines to questions operator.
Thank you as a reminder, if you'd like to ask a question E Press Star one on your telephone keypad, if you'd like to control. Your question you May Press Star two.
And show you Unmetered locally when asking your question.
Our first question comes from Simeon Gutman from Morgan Stanley . Your line is <unk>. Please go ahead.
Hey, good morning, everyone, Tom wishing you well I'm, sorry, I forget the timing.
Too soon then I wish you well again.
My question is on the margin.
GAAP EBIT margin around eight ish percent.
Give or take is not that different from where the business was several years ago. So the question is is there some gap of inefficiency relative to peers, where should we think about margin expansion from here, it's more ratable with sales growth going forward.
Good morning, Simeon, we still see a substantial opportunity to grow margins and drive Etfs and therefore shareholder value. The fact that we've moved to GAAP doesn't change that.
We're going to be working through our strategic plan in 2004 through 26.
One of the things that we're excited about is have the integration behind us and that means the transformation costs that we've been calling out are going to be coming down over time, you've heard in the prepared remarks that.
The amortization is exhaust it completely by 2025 at the integration costs will come down so that will help us with margin expansion.
We talked about changes in the competitive landscape last fall that impacted the pro sales channel, but we're confident that we can continue to grow margins from here right. Now, we're obviously focused on 2023 and delivering our guidance for the year.
And then a follow up on the free cash flow.
This year's number encumbered by inventory purchases and then that doesn't repeat or is this a reasonable framework.
Capex as well as working capital.
And then that grows ratably with the earnings power of the business.
Yes, it really it's the it's what you said in the beginning there in terms of our investment in inventory.
In 2022 and in the early part of 2023 were just responding to that change in competitive landscape regard with regards to inventory investment. So we're going to be investing in our inventory to compete more effectively and really better serve our customers. This is primarily within professional so we expect this.
To be a 2023.
Investment and we would see changes going forward and we're working through that right now as we work on our SPP for 2004 through 26.
Okay. Thanks, Jeff Thanks, so much.
Sure.
Thank you. Our next question comes from Chris holders of Jpmorgan Chase.
Chris Your line is now open. Please go ahead.
Hi, It's Christian <unk> on for Chris.
On the fourth quarter can you just give us some sense of how much you think weather benefited the quarter and any any color on quarter to date performance.
Hey, good morning.
We had a really strong quarter in DIY.
We called out the mid single digit growth there, we did gain share in DIY in the quarter.
December was obviously a colder than it was the previous year and the northern markets. So we did benefit from that so overall.
The weather was a slight benefit to us I would say in the fourth quarter.
That said, we gained share so we feel good about our relative performance in DIY, which is the one that tends to move more with weather.
We're not going to comment on specific quarter to date results.
December was colder January was warmer you all know that.
But we fully contemplated that in our in our full year guidance. We said that we expect comp sales to improve this year as the year goes on that that's an important point the inventory availability investments that we've been making are going to benefit that's more as the year goes on.
Got it and then on the margin guidance could you help us understand the complexion of gross margin versus SG&A outlook and more specifically do you have.
Still expect the capitalized cost headwinds primarily hitting in the first half or should continue inflation should continued inflation drag that out into the second half potentially.
Yes, I'll take the second part of that question first in terms of.
Inflation, particularly product inflation, we do think it's going to be more of a first half versus the second half.
That's the way, we've sort of modeled it here internally, we havent broken out the contribution both gross margin and SG&A specifically for the year in terms of the 140 to 180 basis point expansion, but we do believe that we'll get margin contribution from both gross margin and SG&A.
Overall, we think gross margin will likely contribute more but we're laser focused on both growing our gross margin while controlling our cost base.
Thank you that's really helpful best of luck.
Thanks. Thank.
Thank you next question for today comes from Elizabeth Suzuki from Bank of America.
Your line is now open. Please go ahead.
Great. Thank you so regarding your distribution network and getting the right parts of the customer at the right time, you talked about the Toronto Dcs that were consolidated in that there's more opportunity. So what percentage of your distribution network. Do you think is due for an upgrade or consolidations slash replacement at this point.
Hey, good morning Liz.
Let me give you a bit of context on how we're thinking about our longer term strategy and growth.
We feel very well positioned to execute execute the next generation of our go to market strategy.
<unk> is really to leverage the entirety of our enterprise assets.
Provide a superior customer experience within pro as we accelerate growth and profitability.
I know all of you know that the <unk> business has a lower gross margin than the DIY business, we're uniquely positioned to be able to grow top line sales from here and continue to improve our margins.
Even though you are growing the <unk> business faster and that's because we've got plenty of assets to compete out there in.
In the past they just werent as connected as they were.
Sorry, as they are today, we used to have four disparate supply chains for technology platforms. That's all behind us so to your direct question.
We're testing variations of this end state vision now.
We talked about Toronto, we've got all of the enterprise assortment located into a single building. We think this has application much more broadly across that.
The entire enterprise, we got still prove that out, but we feel really good about what's happening in Toronto and I think look for us to replicate that in markets across North America.
Okay.
Alright, great. Thank you.
Thank you.
Next question comes from Brett Jordan of Jefferies. Bret. Your line is now open. Please go ahead.
Hey, good morning, guys.
Good morning, Brandon on the pro performance, I guess sort of relatively underperforming versus peers could you talk about sort of what you see as the major impacts I mean is it availability issue is it sort of slow traction on the private label program.
And I guess are you seeing competition where IMC.
Against Autopart International World Pack is there other sort of fringe competitors that are changed in the environment, but if you could sort of lay out how you see that the pro business, maybe trailing a little bit and what the factors are that would be great.
Sure.
We talked a little bit about the actions, we're taking Brett on the call and we expect pro to accelerate through the year really three elements to the plan I mean, we've done a lot of work to identify what's driving the underperformance and there's really a couple of things first of all the.
The availability opportunity that we've talked about on the last call. We've made targeted inventory investments to improve that and that spans both high velocity skus, which we're putting up in both our stores and our distribution centers and in some cases, adding breadth and coverage to hubs super hubs in market nodes.
So first of all inventory investments to improve availability is job one that's the biggest opportunity secondly, we talked about surgical price investments to close the competitive price gap and we've made a lot of progress there.
Monitor that every week, it's been really account by account and category by category, but the actions we're taking.
Our enabling us to drive more topline sales and pro and still show margin expansion and then third we've got a pretty robust customer.
<unk> activation plan that the field is executing.
Obviously, you've done by customer based on performance competitive intensity all of the things you would expect.
We leverage the quality of our parks.
And all of the things that we bring to the table so the.
The good news is we are seeing improvement in our hard parts categories on a year to date basis, and we expect that to accelerate through the balance of the year.
Okay. So your internal data I would say the conquest private label brands has fraction equal in pro to DIY.
Sorry say again.
The private label program, you'd say, it's penetration and pro is equal to the DIY penetration, it's accepted as much by the DIY customer yeah, absolutely absolutely I would say, it's more accepted in prop.
The brand is the name on the door.
For our independents that are out there that has a heritage that started and the professional installer community. The installers loved the product that's not the issue. We just got to make the and bring the availability and make sure. We're competitively priced and we will grow that business.
Great. Thank you.
Yeah.
Thank you. Our next question comes from Michael Lasser from UBS. Michael Your line is now open. Please go ahead.
Good morning, Thanks, a lot for taking my question.
Over the last few years, we've taken a number of steps to improve the margin profile of the business.
Integrating supply team working on.
Pricing you've got in your private label penetration now above 50%.
What's going to drive margin growth from here is it just a function of generating sales growth and leveraging your fixed expenses.
Good morning, Michael for sure we've got to accelerate our top line I mean, the original plan that we laid out.
In 2021 contemplated higher growth certainly than we delivered last year so for sure.
Need to accelerate our top line sales growth, that's an important part of the plan.
And we still have a lot of opportunity to expand margins I think uniquely.
Given what I mentioned earlier.
To the earlier question on pro we can grow the pro business and grow margins, while we're doing that.
Through private label penetration through continued actions on category management, we are raising our game on category management for sure.
<unk> sales and profit per square foot in the stores all the things that you would expect so yes, we do expect to continue to drive margin expansion through category management, we expect to drive it through continued supply chain efficiencies and then as you said, we want to drive our topline sales growth to leverage SG&A.
Thank you our.
Our next question from Steve comes from Michael Mann Tani of Evercore ISI. Michael Your line is now open. Please go ahead.
Yes.
Yeah.
Michael Your line is now open. Please go ahead.
My apologies for not receiving any O J, we will move on to the next question from Brian Nagel Oppenheimer. Brian . Your line is now open. Please go ahead.
Hi, good morning.
Tom Congratulations great retirement.
Thank you so my first question.
Just with regard to inflation, so you and number of others in your sector have talked about this.
Expected trajectory, where inflation sort of say eases in the second half of 'twenty three so as we think about that forthcoming dynamic.
One of the white likely impacts.
To advance both of our sales.
Margin perspective, recognizing theres a lot of other pieces moving parts with your P&L, but if we isolate that inflation dynamics, how should we think about the impacts of that.
Yes, I think first the important part is the cadence.
The way, we're thinking about it really break it into a first half second half.
We think inflation is going to continue to be elevated as we're seeing today in the first half and then that's going to come down over time.
You saw Q4 sequentially improved slightly for us at least on product cost inflation and as that comes down given that we're now on LIFO you incur those costs.
As we as the inflation hit so it's inflation is steady with what we saw in Q4, that's going to be more impactful to our gross margin as those costs continue to abate, you'll get that relief over the course of the year. So I think guidance sorry cadence as the.
The biggest component to that and I think the biggest driver really is the product cost inflation. We've got inflationary estimates on the rest of the P&L, but wage inflation. For example, we think it would be fairly static yields you won't see that kind of variation that youll see in product cost inflation.
Perfect and just as a follow up to that so is it still the base case assumption that even as input costs moderate the pricing at your stores as the prices consumer will largely stay the same.
Yes, we obviously look at that very closely we want to make sure we stay competitive.
We have assumptions around how much price, we can maintain when costs come down.
There is obviously elasticity depending on the category that you're you're seeing those costs deeply oriented fleet for that matter.
So we look at that on a category by category basis, and we're going to make sure we stay competitive as we see hopefully the the cost structure start to improve.
Right.
Great color. Thank you.
Thank you. Our next question comes from David Bellinger from MKS Partners. David Your line is now open. Please go ahead.
Hey, Thanks for the question and Tom Congrats on the announcement.
Could you just help us contextualize, the topline acceleration Q3 to Q4s.
How much of that is internal versus external or are we seeing the payback from these inventory investments are ready and I don't think you called out the shift to private label parts.
Comp sales headwinds was that still.
Sizable impact in the Q4 period.
Hey, Good morning, David Yes first of all.
The acceleration in Q4 was largely DIY, we're really happy with our DIY business in the fourth quarter as you know, it's a very profitable part of our business, we paid a lot of attention to it.
We had a strong quarter on the on diehard.
To build that brand.
Our speed perks platform is really starting to generate some returns for US. We've added members. We're graduating members so our ability to drive DIY and by the way through E. Commerce. Our E. Commerce business is now back in double digit land again, which is really important for us over the long term. So we think we can continue to grow that.
DIY business as we get into 2023.
And obviously that helps us on the margin front, we didn't get a lot of benefit on the pro side in the fourth quarter from the investments we're going to do that in a very disciplined fashion.
We've got a very robust plan to drive growth in probe and we wanted to do it the right way and it's done as I say very targeted inventory investments very surgical price investment.
We're confident that that will drive growth in pro as the year unfolds, but we didn't see a lot of benefit from.
From that in the fourth quarter.
Just on the owned brand mix in particular on the topline that was a headwind.
But.
With the third quarter. It was a benefit to our gross margin rate so relatively consistent what we saw in the third quarter, yes, it's kind of in our base David.
We're not calling it out.
A specific and it's in our base now it's trying to continue to grow up from here, but the impact is less.
Got it Okay, and then a follow up on the share repurchases being paused.
Around 7% of your market cap based on what you did in this year. So what would you need to see.
Buy back stock again are there any specific metrics you need to hit and is there a certain point in the year, where you could go and step back into the market beginning.
Purchases again.
Yes for sure. We first of all I think it's important to point out that we think this share repurchase to be temporary.
We're going to be executing FERC capital allocation priorities investing in the business, both capex and working capital that we've talked about.
We're still really excited about the fact that we're paying a very strong dividend.
Having said that we'll be monitoring as our free cash flow.
We don't have any plans to take out debt to repurchase shares and so we're going to be laser focused on improving that free cash flow as we navigate through the year, but we're going to prioritize making sure we have the very best availability.
And so as we worked through that if that improves topline higher than expectations and it improves the free cash flow.
We'll be back in the market, it's just a matter of making sure we have the free cash flow to support it.
Great. Thank you both.
Thank you. Our next question comes from Zack <unk> from Wells Fargo.
Your line is now open. Please go ahead.
Hi, good morning, and thank you so Tom could you talk us through your take on the industry growth rate in 2023, how that breaks down between DIY versus pro.
And then how you bridge the gap both for your DIY and do it for me expectations relative to the industry growth rate.
Sure.
First of all we expect.
Kind of four ish for.
For the industry on employer basis, that's kind of our current projection.
We expect trop two outperformed DIY.
That's an interesting dynamic this year, obviously, you've got a lot of factors at play Zak with.
Some macroeconomic uncertainty and pressure on the low to middle income consumer which tends to shift business to DIY. So as we sit here today with 10 months ago. Those are the numbers that we see.
We believe we can continue to drive growth in DIY in particular benefiting from some of the digital investments we've been making over time to grow share in DIY and as we said a couple of times here the pro business to ramp up through the year and get to the industry growth rate or above by as we get into the back half.
Got it and when you think about your historical non-GAAP margin goal of 10 five to 12 five can you walk through what that would equate to on a GAAP basis, and then for 2023 could you talk about your expectations for the LIFO benefit and also the transformation costs that you're embedding in the outlook.
<unk>.
Yes, sure I mean, it's a little bit of apples and oranges as you know.
But as Tom mentioned earlier, the initiatives really don't change and they don't change our ability to expand margins here in the short term and even longer term, whether on a GAAP or non-GAAP .
Thinking about the sort of reconciliation if you will really there's three primary components, you've got your our transformation cost restructuring cost.
Have the amortization associated with GPI and then LIFO.
First two a little bit easier.
Information and restructuring.
We move into 2023, we think thats going to be roughly the same in terms of what we saw in 2022.
From a cost standpoint amortization.
It's straight line. So you should expect that to be the same and that will exhaust in 2025.
That's a difficult one as you pointed out is LIFO.
And.
Take a step back last year, we started LIFO and we thought it could be roughly in line with 2021, which was $120 million roughly and we were nearly three ex that so we're not giving any guide around LIFO, what we did say as we expect.
Cost inflation, which is a big driver there is other components, but.
We expect that to moderate throughout the year. So what I can tell you is we don't expect LIFO to be another $300 billion headwind, but we're not going to provide any guidance beyond that.
Maybe similar in Q1 that looks to address.
To add that.
Okay.
Go ahead.
Ask your question.
I just wanted to clarify would Q1 be similar to Q4, and then sorry go ahead, sorry to interrupt.
Yes, again, we're not going to break out the LIFO on a quarterly basis.
It'll be dependent on what those.
Supply chain and product costs come in at.
Got it yeah, Zach I wanted to add that Youll see on our website, we've broken out and we've had so many questions over the years on this GAAP to non-GAAP comparison, we've broken out the lab.
Last five years, you can clearly see the relative performance GAAP versus non-GAAP . If you look at our adjusted EPS growth over the last five years, it's basically two four times thats more than double what it was in 2017, it's got about a 19% CAGR.
And this year at the midpoint of our 2023 guide on a GAAP basis, you see a similar number so.
It's all there we want to make sure that it's clear to everyone. It back to the transformation costs. We're excited about the fact that theyre coming down over the next couple of years and we back that will enable us to expand margins through the Avalon.
Got it I appreciate the time guys.
Thank you.
Thank you.
If you'd like to ask a question star one on your telephone keypad. Please limit yourselves to one question and one follow up question and Lee. Thank you.
Our next question for today comes from Scott <unk> from Trust Scott. Your line is now open. Your line is now open. Please go ahead.
Good morning, guys Scot Ciccarelli.
How should we be thinking about the pricing investment that you guys mentioned last quarter relative to let's call. It the price optimization efforts to implement over the last few years like how are we supposed to kind of.
Reconcile if you will kind of the price investment versus let's call. It raising prices over the last couple of years, which I think it's been pretty big gross margin driver.
Okay.
Yes.
Couple of things there, we talked about the unprofitable discounts we've worked through the vast majority of that that's going to be an ongoing.
Process is really something that doesn't go away did.
<unk> did not have a significant impact in the fourth quarter. In fact, we saw a very slight benefit meaning that we didn't lose those customers and we were still getting the sales.
<unk> and improve margin, because we werent, giving it away through an unprofitable discounts.
More broadly in terms of.
Competitive set Tom mentioned this earlier, but we're going to we're going to be very surgical in the pricing investment that we make to close the competitive gap and we used the word surgical for a reason.
We look at CPI in peak last summer.
And as we were into the fourth quarter, we're back to where we want to be.
And fourth where we're testing in different markets.
Monitoring this on a daily and weekly basis, and we're clearly seeing results. So we're going to make sure. We're competitive we're not going to lose on price and we're going to improve our availability.
That's a tough for a very strong there.
That's helpful. And then just any more color on the first quarter outlook given your comments in your prepared remarks about <unk> being more challenging.
Okay.
I mean, not a whole lot I mean, it really is the three drivers that we called out it's the inflation. It's the availability. We do have some some transformation related costs that we anticipate will be in Q1 will be able to talk about that a little bit more. The next time, we meet in whatever it was April or may.
And those are really the three drivers I mean the.
Obviously, the product costs when they come in and we're going to incur them under LIFO and the availability as we talked about just it takes some time to get that into our network can get it forward deployed.
It's one thing to get into your distribution center, but we need to get it throughout the network to make sure. We're available all the time for our customers.
Got it okay. Thanks, guys.
Okay.
Thank you. Our next question comes from Steven <unk> from Citigroup. Steven Your line is now open. Please go ahead.
Great. Thanks for taking my questions, Tom Best wishes and the next step.
Just to clarify on the first quarter.
Just to follow up on that last question would you expect first quarter comps to be at the low end of our full year range or would they actually be slightly below that full year guidance range.
Yes, we're not going to breakout the comps we feel really good about the one to three over the course of the year.
It's really difficult at this point I mean January December these timeframes are incredibly volatile and to try to.
Put some sort of.
Analysis around the first for six weeks and say, that's going to make our quarter, which by the way is our longest quarter.
Our 16 week quarter spring selling season, sometimes it's Q1, sometimes it's Q2.
We're at least here in Raleigh, we're off to an early spring but.
It is premature to really say, whether or not we think comps will be on the low or high end of that range.
Okay Fair enough. Thank you then second question I had was could you talk a bit more about the outlook for SG&A leverage in 2023.
What's the puts and takes wages are a pressure point across retail. So curious for your input there and then as we shift to gap how should we think about the ability to drive leverage on SG&A what level of comp growth do you really need on a go forward basis.
Yes, I mean, when it comes to SG&A, you have those transformation and amortization costs that are going to manifest themselves there.
We're going to be relatively flat so.
We don't expect any significant volatility, but those in particular.
In terms of some of the puts and takes you certainly called out the biggest factor, which is the wage inflation, we're cognizant that we've modeled wage inflation yet again.
For 2023.
<unk>.
We do think we have some opportunities in terms of overall cost takeout.
Leveraging some of our.
Sorry, I'm blanking on the term or.
Got my delivery and.
Yes. Thank you.
The online or I'm, sorry, the automated.
Payroll and getting the hours into.
Really getting the hours associated with the revenue and so we've been working through that for a number of years, we've got some significant opportunities there.
So we do feel good that we can we can get some improvement in our what we call sales and profit per store another big one that we called out.
Where are the startup costs that we had with our.
Our California expansion and those were sizable in 2022. Good news is we're beginning to get those stores open. We've got nearly 90 stores open and we got a little less than 20 to go so there's still going to be some startup costs, there, but it won't be nearly as sizable with what we saw in 2022.
The combination of all those gives us.
Reasonable level of confidence that we're going to leverage SG&A in 'twenty three.
Yeah.
Great. Thank you.
Thank you. Our next question comes from Seth Sigman of.
Please Seth your line is now open. Please go ahead.
Great. Thanks for taking the question and nice to talk to everybody Tom Congrats to you.
Some of these are follow ups, but I just wanted to clarify when we think about that 8% operating margin for 'twenty three I guess on an apples to apples basis.
Does that compare to what your prior expectations were for 'twenty, three and maybe what some of those big.
The differences could be.
Yes, I mean again, the big drivers between GAAP and non-GAAP are the things that we talked about the transformation the.
<unk>.
The LIFO, obviously being the biggest one we had 300 million over $300 million of LIFO. So those you have to factor back in.
The initiatives that we have in place don't change.
Our ability to drive margins through owned brand expansion doesn't change or our ability to take cost out through our <unk> through the my delivery don't change.
So those we really don't see it any different.
We really think the timing to go from non-GAAP to GAAP is appropriate given that we are seeing the.
The non-GAAP items, beginning to moderate and eventually go away.
So for all those reasons, that's why we wanted to make the change and.
There are no change in the underlying assumptions in terms of our margin growth outside of going from non-GAAP to GAAP.
Got you. Okay. That's helpful. And then just two quick follow ups on the different channels on the DIY business did you actually say, whether the momentum that you saw in the fourth quarter had continued into Q1 and then just quickly on the pro business I'm. Just curious as you sort of step back and look at the underperformance of that business, how broad based is that underpin.
Performance or maybe you could speak to like different customer types different.
Sizes regions et cetera, I'm, just trying to understand where that gap may be within that thank you.
Sure well first of all on DIY, we do we do believe we can sustain sustain the momentum that we have on DIY in 2023.
Once again based on all the things I talked about that.
19, Oh next question for today comes from a passion of Wedbush assess your line is now open. Please go ahead.
Thanks, a lot of good morning, and best wishes time. My question is a follow up just to make sure I understand the guidance on a gap basis in terms of <unk> 2023. It seems like there's a small piece from lower startup costs and the counties to work, but the biggest piece of that step up is going to be from white, though.
Is that the right way to think about it.
Yep that is that's the right way to think about it you know we think we've gotten through the majority of the inflationary costs on a lethal basis, they're still going to be <unk> and that's why we wanted to be real clear about the cadence in terms of what we're expecting to one for sure being the world's challenging for the reasons that we.
Point it out.
But yeah, we definitely think we're gonna see improvement in gross margin.
It it'll be largely led by life. Those we have our other initiatives that are also gonna help us contribute whether it's the you know one brand expansion of the availability. We think we have opportunities there as well, but you are thinking about it correctly.
Alright, great. Thank you and then the other question on the guidance in terms of your store growth extra 20 additional California's towards you still have to open your looking at doing only 40 to safety net new stores.
Which is pretty low relative to your store base I know that a year or two ago. You guys had a stated goal of spring to accelerate store growth can you just tell us how you're thinking about growth in the future from a store base standpoint.
Sure well this year you know we wanted to make sure that we really dial the the completion of the California openings.
We talked a lot about the delays we experienced last year now that we're open we're gaining market share out there. We've got some really strong team members that came to us from Pep boys that have a lot of content knowledge and geographic knowledge product knowledge for that market. So we want to really drive growth in market share gains out in California.
And obviously continue to grow the new stores that we have a plan for the year. What I would tell you is that we're doing our strategic plan and I alluded to this earlier sad.
We're taking a very close look at our our the entirety of our asset base to drive our pro business.
And leveraging everything that we have we've got three over 300 buildings at World packing Autopart International over 300 hubs and Super hub. So we believe there is a way to further optimize our asset base in pro and that has an impact on how we think about new store openings in the future. So as we construct our plan.
For 24 through 26 will will obviously be considering.
How that unfolds in the future, but for this year, we guided the way we got it.
I understood. Thank you.
Thank you I'll see last question for Tonight, So how 'bout to see <unk> for any further remarks.
Well thanks for joining us today are twenty-three guidance reflects growth and carpet net sales as well as gap margin expansion, where police have the bulk of the integration behind us. So we can focus on execution and update our strategy. Our goal is to win in the future and continue to drive strong earnings per share growth.
And shareholder value. Thank you.
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