Q3 2023 Advance Auto Parts Inc Earnings Call
Hello, and welcome to the advance auto parts third quarter 2023 conference call before we begin Elisabeth is Japan, Senior Vice President Communications and Investor Relations will make a brief statement concerning forward looking statements that will be discussed on this call.
Good morning, and thank you for joining us to discuss our Q3 2023 result.
I'm joined by Jim Lee, our interim Executive Chair, Cheneau, Kelly, President and Chief Executive Officer, and Tony S. Gander interim Chief Financial Officer.
Following Shane and Tony's prepared remarks, we will turn our attention to answering your questions.
Before we begin please be advised 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 ongoing strategic and operational review.
Michigan 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 Form 10-K and subsequent filings made with the Commission now let me turn the call over to Shane.
Good morning, everyone and thank you for joining us I'm pleased to be here for my first earnings call as the CEO of advance we have several topics to discuss with you. This morning, but before I begin I'd like to thank all of advances team members, who have come to know during my first 60 days with the company.
During that time I visited our stores across multiple markets met with numerous customers spend time in our distribution centers.
Nowhere conquest independence and attended our annual vendor summit, whereas the chance to meet with many of our major suppliers.
Through all of this I came away impressed with the passion and dedication of our frontline team members and I remain optimistic about the future of the company.
In addition to spending time in the field I have partnered closely with the board and management team to make progress on our strategic and operational review.
As the new CEO I placed a premium on capabilities learn during my time in the military.
This includes aligning the company around fewer measurable goals, while ensuring discipline and accountability and the process to achieve those goals. During my review of advance we identified the need to simplify our overall strategy, while also improving execution, both of which will create value.
Consistent with that we are moving forward with a sense of urgency to help stabilize the company and return to profitable growth.
We are announcing decisive actions that we have initiated to achieve these objectives. Those actions are number one the initiation of a sale process for worlds Pak <unk>.
Number two the initiation of a separate sales process for our Canadian business.
<unk> three significant cost reductions.
<unk> for reinvestment in the field and.
And number five the appointment of a new CFO as well as other organizational updates.
These decisive actions are further reinforced with a renewed a vigorous commitment of selling auto parts.
That is our core business.
This includes eliminating numerous initiatives that were distracting us from our clear focus on the most fundamental aspects of our business.
We believe our success will come from disciplined execution across the blended box model, where we service both professional installers and DIY customers from our advance and car quest locations.
Let's take a moment and further describe our five decisive actions beginning with the decision to initiate the sale process for World pack.
World Pack is a high performing business and as you know is very different than our core blended box model as.
As we get back to the fundamentals of servicing our professional and DIY customers. We view now as the right time to simplify our model.
The World Pac business still operates relatively independently from advance and we believe that the sale process will not create a distraction.
Next let's talk about our business in Canada, which goes to market under the car Quest banner.
Today, we are announcing a separate sale process for that business.
World Pack, our Canadian business also runs largely independently and predominantly serves professional customers. We do not believe this sales process will cause a distraction for our U S business.
Third as part of our operational review, we have launched a new cost reduction program that we expect will generate a minimum of $150 million in savings on an annualized basis.
These savings will be primarily driven by simplifying our organizational structure minimizing duplicative efforts and eliminating investments that are not core to supporting our frontline team members and customers.
Fourth while we expect to see the benefits of these cost reductions beginning next year, we recognize that we must take action to improve the retention of our frontline teams and ensure we have experienced team members to serve our customers in.
In line with this we expect to reinvest approximately $50 million of our savings back into the business inclusive of wages and training enhancements.
In fact, we began making changes to our frontline compensation structure in Q3 and are already seeing a reduction in turnover in targeted frontline roles.
And fifth <unk>.
Following a robust search I am pleased to announce that we have appointed a new CFO.
We're thrilled that Ryan Grimsley will be joining the advanced family from Lowe's to lead our finance organization Ryan.
Brian has more than 20 years experience, leading high performing teams and Omnichannel retail businesses, serving both pro and DIY customers.
He has a strong track record of driving organizational improvements, while implementing best practices to resolve complex issues.
Look forward to Ryan joining US later, this month and partnering with him and the entire leadership team to drive the needed change for advance.
In addition to our CFO announcements, we've taken actions to streamline our management structure we.
We have reorganized parts of my leadership team and transition responsibilities for our marketing merchandising and ecommerce functions to the appropriate leaders in our organization, who will drive enhanced collaboration and accountability.
We have made additional organizational adjustments in several other areas to help us operate more effectively.
I would also note as part of our strategic review, we are taking a disciplined approach to the evaluation of all assets, including corporate stores independently owned park west locations and our distribution network all to enhance productivity. This may include the rationalization of unprofitable assets.
To better allocate resources focused on core fundamentals.
We're early in this process and expect to share more as we progress in the thorough evaluation of our entire business.
As I emphasized earlier, we are sharpening our focus on the fundamentals.
As an example last month, we held our annual partner summit and our teams spend a few days with hundreds of representatives from key suppliers, who are critical to how we better serve our customers. This annual event is a valuable opportunity for us to collaborate and share updates on our strategy.
This year's summit was a great venue for us to articulate to our vendors. How we are turning the page as an organization and we are excited to return to growth with their partnership.
We recognize that having the right inventory availability is crucial for our team members' ability to serve customers, which would not be possible without the strong support of our vendor partners.
Finally, before I hand, the call off to Tony I'd like to thank him for his dedication and incredible work over the past few months, serving as our interim CFO. In addition to his role as Treasurer. His service leadership has been instrumental across our finance organization I look forward to continue to partner with Tony as we build advance.
And capture the immense opportunity ahead of us.
With that I'd like to now turn the call over to Tony to discuss our Q3 results and provide an update on our outlook for the full year Tony.
Tony.
Thanks, Shane and good morning, I would also like to thank all our team members for their continued dedication and focus on the customer.
In Q3, our net sales of $2 7 billion increased two 9% compared with Q3 2022 due to continued strength across our professional business comparable store sales increased one 2%.
All of our regions were positive during the quarter with the West, Florida and northeast regions posted mid single digit growth.
From a category perspective, we saw strength in filters engine management motor oil and batteries.
Importantly, we delivered meaningful growth in heating and cooling as we significantly improved our in stock levels year over year.
In terms of the cadence of the quarter, both pro and DIY Omnichannel saw strength in the first two periods and softened the last four weeks of the quarter.
Our pro business was positive throughout Q3, and outperformed DIY Omnichannel as transactions continued to improve and were up mid single digits from the previous year on top of the improvement in Q2.
As expected average ticket and pro was down slightly as part of our ongoing efforts to maintain competitive price targets. However units have increased slightly year over year.
DIY Omnichannel average ticket was up mid single digits with transactions down low single digits in Q3.
Before turning to the balance of our P&L, we've made strong progress towards mediating the material weakness and as part of our diligence in this process, we uncovered non material issues with our previously reported financial results.
The balance of our financial results will compare our Q3 actual result to the correctly results for the prior year.
The remediation of our material weakness remains a top priority.
Despite improving topline trends our gross profit margin was negatively impacted by several factors and Deleveraged 130 basis points compared with Q3 2022.
First in line with the decisive actions Jane highlighted earlier and as part of our operational review of the business. We implemented a change in estimate regarding our excess inventory reserve and incurred a one time impact of approximately $119 million.
Further like previous quarters, we experienced approximately $80 million and higher product costs that were not fully covered by pricing action as we sustain our CPI target.
In addition, wage inflation and increased volume resulted in elevated supply chain expense.
These headwinds were partially offset by a reduction in LIFO related expenses as we recognize the $56 million benefit this quarter compared with $67 million of expense in the same period last year.
While SG&A dollars in the quarter increased year over year as a percent of net sales SG&A leverage nearly 30 basis points.
Our Q3 operating income margin Deleveraged, approximately 810 basis points compared with the prior year quarter.
As you saw in our release this morning, and as change discussed we are taking actions to significantly reduce costs in the business that has increased faster than sales over the past few years.
We expect to see the full annualized savings of a minimum of $150 million in 2024 with approximately $50 million reinvested in our frontline team members.
Diluted loss per share was <unk> 82 in Q3 compared with diluted earnings per share of $1 92 in the prior year quarter.
Free cash flow in the quarter was an inflow of $148 million and year to date was an outflow of nearly $157 million.
As we continue to focus on our working capital metrics, our AP ratio expanded 470 basis points from Q2 2023 to 79, 8%.
Before turning to guidance, let me touch on supply chain.
We have maintained a similar level of capacity in our supply chain Finance program. Thanks to the strong bank partners that continue to support us and our vendors.
As you saw in our release. This morning, we are updating our full year guidance.
We are adjusting the top end of our net and comparable store sales ranges.
However, as mentioned there are several onetime factors impacting margins in the back half of the year.
This includes the change in our excess inventory estimate in Q3 and costs, we expect to incur related to our organizational restructuring in Q4.
Accordingly, we are reducing our operating income margin diluted EPS and free cash flow guidance ranges.
We are taking decisive actions to improve our cost structure now and will continue to evaluate further opportunity as we make additional progress on our strategic and operational review as a result, we are updating our 2023 guidance ranges to include.
Net sales of 11, two 5% to $11 3 billion.
Comparable store sales of minus <unk>, 5% to flat.
GAAP operating income margin of one 8% to 2%.
Income tax rate of 25%.
Diluted earnings per share of $1 40.
To $1 80.
Capital expenditures of $200 million to $250 million.
Positive free cash flow of $50 million to $100 million.
And 55 to 65, new store and branch openings.
With that I'd like to turn the call back to Shane.
As I mentioned earlier, we recognize there is substantial work to be done and are focused on executing our strategy centered on our customers and our frontline team members, while continuing to look at additional opportunities to simplify our operations.
We are taking and will continue to take the <unk>.
The action to stabilize the business and positioned advance for long term sustainable success.
All of us that advance the board and the entire management team are committed to returning to profitable growth and creating value for shareholders I look forward to providing with further updates on our next earnings call.
I'd now like to open it up to address your questions.
Operator.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to attract your question. Please press Star then.
Ask your question Pete I'm sure you'll find can meet you lately.
We ask you please limit yourself to one question and one follow up.
I'll also ask questions that go to Michael Lasser of UBS. Michael. Please go ahead. Your line is open.
Good morning. Thank you so much for taking my question Jean I know, it's been very early in your tenure at advance auto parts, but theres. So many moving pieces in the business right now.
Do you think about the long term, what's a realistic operating margin for the core business.
Excluding some of the businesses that you're looking to sell and it seems like the implied gross margin is going to settle around 41% range is that the correct run rate that we should think about for the long term.
Hey, Michael Thanks for the question.
Too early for me to set what the long term Oi looks like for this company other than to say that.
<unk> optimistic about where it can go and that if we do these five decisive actions as we implement them and bill all help in boosting where we sit there and then same for margin early days, but know that we are absolutely focused on where we can increase the margins and we will be looking to do that in 'twenty four.
Just one other small comment there a way to help think about making that happen is with our org structure, where one dimension of that is having merchandising be a direct report to me and I view that as a critical component for managing margin and a retail company.
Okay.
Follow up question.
It is are you seeing any impact from the negative credit rating downgrade.
How how are you thinking about.
Capital needs of the business.
And if anything you could comment around the size of Wolf pack or the Canadian business that will help that.
As you go through the process.
So a lot there I'm going to ask Tony to comment, but we don't have liquidity issues or issues on supply chain financing and then not going to comment on the size of a world Pac or Canada, we've engaged centerview to manage that process in and interested parties can can reach out to them, but Tony can you tell us about the liquidity.
And financing, yes, Hey, Michael good to talk to you again.
As you heard in my prepared remarks.
We have we have.
Continued to maintain the same level or very similar levels for our supply chain Finance program, which really supports our vendors and our finance program. So we're not seeing any impact and as you saw in our earnings release, we continue to grow cash flow our cash balance on the balance sheet grew and we did not have any outstanding on the revolver.
As we have paid that down during the quarter as well.
And.
There is no.
And Michael there is no urgency or requirements around the sale of World Packard, Canada, they're both good businesses. This is really around our strategy and what we want to focus on as a company going forward, which is that domestic blended box model.
Understood. Thank you very much and good luck.
Okay.
Thank you and our next question, Chris <unk> of Jpmorgan, Chris. Please go ahead. Your line is open.
Hi, Good morning, it's Christian Carlino on for Chris.
I guess stepping back how would you characterize.
What went wrong with the supply chain and any color on the path forward in terms of the timeline or the cost to fix it.
You laid out the time line for the cost saves, but it seems like you will you also be paring back maybe some of the smaller car quest Dcs.
So what we then need to add more modern or better located facilities or is it more on the operational front fixing the inventory management process.
So a lot there. Thanks for the question. The first thing I'll say is you know that that our supply chain stems from the two entities from Clark question from from advance that'll be one of the next areas, where I'll be putting focus is really around validating the design of our future supply.
Chain and as we do that there'll be some rationalization there may be some facility additions, but we're comfortable we'll develop that plan as we go forward in terms of availability those efforts can be discrete of just what occurs on the actual supply chain design and theres been a lot of work going on there.
Which we improved across a number of areas think about that as under car engine management heating and cooling brakes and that comes from the pick and shovel work going on with the with the merchandise and inventory teams.
Got it that's helpful. And then one quick one on the guide.
What are you, including for the one time of reorganization costs in <unk>.
And then I guess also.
In terms of how youre managing the supply chain Finance program.
It is the implication that you are maybe giving suppliers back some margin in exchange for holding the paper based somewhat constant how should we think about that.
The puts and takes there.
Yes.
Good question. So first let's address the supply chain financing, we are not seeing that kind of impacting our programs. We have very strong bank partners.
And we have a tremendous amount of support from our key vendors and we are not seeing any of that at this time.
In terms of that we feel good in terms of the guide in the back half we have not laid out the path.
<unk> from the restructuring it is included in our guide.
We're really not commenting on that just due to the to the.
<unk> around our team members as we kick this off.
Yes.
Reorganization dimensions are taking place this week and we want to be sensitive to our associates.
It's a difficult process for any company to go through.
Got it that makes sense.
Great helpful.
Thank you. The next question guys you Elizabeth Suzuki of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Great. Thank you just a question on the decision to increase the new store opening pace, particularly in the context of simplifying the business and preserving cash. So just curious what youre seeing in terms of.
New store profitability, and whether thats been exceeding your expectations.
Yes, so it was good.
Good to talk to you again.
<unk> increased that based on a couple of opportunities that we have had in terms of opening stores are accelerating some of those openings new store openings.
We believe that.
We will continue to be very prudent in our approach to new stores.
And we will continue to focus on asset productivity that we've talked about the last two quarters.
That's an important part of our business.
And just just a question on the businesses that you're planning to sell and what was acquired back in 2014, just thinking about how that how those assets have evolved and whether because so you're selling the Canadian part of the car quest business that.
Keeping the U S part and selling the world Pac part of the GPI acquisition. So just trying to frame our size there is.
As much as possible for.
<unk> Alright analysis.
If we don't do segment reporting so not prepared to break those out now, but just reiterating they're both good businesses.
And that sales process as we're just starting that now so we will do price discovery with potential suitors no requirement to sell the business. If we're not satisfied with what we see in the market.
And so we're just starting that now.
Okay fair enough. Thank you.
Thank you. The next question goes to Steven Zaccone of Citigroup. Steven. Please go ahead. Your line is open.
Good morning, Thanks, very much for taking my question to follow up on the prior question could you at least talk about the world pack business is it much higher than we reported operating margin that you have today and then help us think about the priorities for the cash proceeds from these sales how would you rank using that cash.
Yes. So good question. Unfortunately back on the segment reporting not going to talk about the business other than to say, it's a great business.
Don't have a requirement to sell it selling it lets us simplify our approach going forward, which is to that blended box model.
Question on the proceeds is a good one.
And first and always in our business. If you if you have.
Yes.
The economic dollars from an event like this we're going to deploy it to initiatives that clear our internal rates for what we want to do with the business. So theres investment for our business the growth of the remaining business. We're excited about that secondly, always prudent to deploy funds to strengthen our balance sheet. So that becomes an option for the proceeds and then.
Third we can look at shareholders and where excess capital might be returned at that those would be the three major efforts of how we think about that.
Okay understood. My follow up question is just on the.
On the <unk> side, so with your fresh perspective on the business why do you think the core advance business had been losing share.
And I guess specific specifically their average ticket has been a bit of a drag how long do you expect that to be a drag to the pro side of the business.
Yeah, So I'm going to ask Tony to break out a bit of flavor on our DIY versus <unk> performance, but know that my focus coming into the organization is to take those decisive actions that help us simplify the business and then provide the phone.
Because at that store level for both the DIY and Ti FM customer and as we do that I think that's where we gain success, but Tony can you just characterize what <unk>.
Are you seeing on <unk> right now, yes, correct. So as you've heard US talk about the last two to three quarters. We continue to focus on a very targeted CPI number and as part of that that will bring down our average ticket.
As a result, though our transactions continue to increase.
Okay. Thanks very much.
Thank you. The next question, Greg <unk> of Evercore ISI Greg. Please go ahead. Your line is open.
Hey, Greg.
Hey go ahead, such as the next one.
Thank you. The next question go to Bret Jordan of Jefferies. Please go ahead. Your line is open.
Hey, good morning, guys.
I guess coming into this space.
Coming into this hey, good morning. This is sort of clean looking at the business with fresh eyes, and obviously the perception has always been this sort of a mash up of various supply chain systems.
How close do you see this being sort of consolidated to being a common supply chain across all of the stores ex World pack we.
We had real progress been made from a system standpoint.
Yes, so the supply chain team is diligently.
On task for that and for me that you would think about the five decisive actions recover that's where my immediate focus is a pivot to supply chain.
Shortly after that.
My sense is we will come back to you.
On future calls on what the timeline looks like but we're working on it it's not something that'll be done overnight, but confident that we can get to.
The unified supply chain for the company.
Okay, and then I guess on World Pack, what do you see I guess, a dis synergy in the sale of where their common customers or sales to advance that were a result of you're having the world pack business that you might lose or is it.
Relatively separate.
So it is a different business and it runs as a separate business. So I really don't see dis synergies there, but what I see for us as we sell that business is a simplification of our focus and going back to the fundamentals of we're going to sell auto parts out of a blended box model.
We think that's a good recipe for success.
And as we do that world pack doesn't fit in that future models. So we will explore the sales process, which we're kicking off today.
Okay, and a quick housekeeping for Tom what was the price contribution to comp what was inflation versus traffic.
Yes, I think thats for Tony.
Yes, so in terms of price inflation, we priced just enough to cover.
Portion of costs. So it was very minimal to our comp in the <unk>.
Third quarter.
Okay. Thanks.
Thank you. The next question Betsy Scott This rally.
Sure Scott. Please go ahead your line is open.
Good morning, guys Scot Ciccarelli.
To ask about the restatements under the where there's smoke there's fire concept.
Could you guys confidence there arent bigger issues than your historical financials, because it seems like what you disclosed today was uncovered after a pretty short stent for the new finance team. So could we end up in a situation where more digging reveals more issues.
Thank you Scott Tony here.
We are meeting the material weaknesses, our top priority and finance and we continue to dig in and we are we are committed to getting this material weakness remediation and behind this as quick as possible. It is possible, but it is possible that.
So we'll continue to share as we find more information, but we will keep you abreast of that material weakness remediation as well.
Got it and then can you repeat the comments you made on LIFO did your numbers. This quarter actually include a sizable year over year benefit from LIFO is that what I heard.
Thats correct Scott.
Got it okay. Thank you very much.
Yes.
Thank you. The next question go to Simeon Gutman of Morgan Stanley Simeon. Please go ahead. Your line is open.
Hey, guys. This is Jackie Stefan on for Simeon. Thanks, So much for taking our question.
Guys mentioned in your prepared remarks that some of the cost savings will go towards reinvesting to improve employee retention in your you had.
Kind of done enough to retain its best people and what are some areas of improvement that you see or Conversely areas, where you feel like youre executing pretty well.
So.
As I've been in the field I'm impressed with our frontline associates got an energized team members engaging every day doing their level best to take care of customers. What we found is in certain key positions in the company, where we were from a wage perspective was below where we wanted.
So we've started to make some of those investments and we see correspondingly, where we make the investment the turnovers reduced and so we think taking some of the monies from the cost reduction and putting that into wage will help further reduce turnover for key positions.
The initiative will extend beyond wage.
And as our as our team our field team and our HR teams worked together, we also think that training.
Career pathing, showing folks how they can develop over time with advance that's all part of it as well and the idea is that for our frontline associates as they come in they are energized to be here and then they feel that they can have their career with the company and they can see where they can go so thats all part of the program that we're putting together.
<unk> and the early read from early investments is that it's doing exactly what we wanted to do.
Got you that's super helpful and just one more kind of housekeeping question regarding to the cost savings that you mentioned, where will that kind of statement across the P&L or is that mostly on the SG&A side, our cross congrats as well.
Some color on that thank you.
Yes, it's predominantly in SG&A youll see most of that savings come through there.
Great. Thank you.
Yes.
Thank you. The next question, Chris, particularly of BNP Paribas, Chris. Please go ahead. Your line is open.
Okay.
Hey, everybody. Thanks for taking the question.
I was hoping you could elaborate more on this inventory write down like appreciate guys are clean accounting I think it's really great to see it somewhere like concerns for a while now.
But does that all relate to like the capitalized supply chain costs.
That's been growing for years beyond.
Beyond the kind of like the one time write down was there some over earning in prior periods because of this adjustment just wanted to kind of understand what the impact is going forward.
Yeah, Hey, Chris It's Tony Good to talk to you a week, we changed the way we estimate excess inventory and as a result, we took a one time.
Change are charged to our P&L of $119 million.
It's not relevant to say that it's part of the capitalized supply chain costs. The capitalized supply chain costs continued those are in and out as a result of how much inventory, we buy or sell. So this is just a pure result of our change in estimate.
Got you, Okay, that's really helpful.
Then.
What do you think like the right SG&A growth rate of this business is moving forward. It seems like peers are kind of ramping up our investment in terms of SG&A per store I think it's great that you're reinvesting $50 million of the 150, but why not all 150.
Like how do you think about reinvestment it seems like if youre cutting cost and your peers are accelerating investment in thick.
I think it's one of the challenges the business has faced a lot.
Five years or so so I'll start yes, it's a good question I'll start I'll start and ask Tony to comment.
We're not suggesting to this cost cutting that we're not going to reinvest in the business, where we're not going to invest in the business going forward. This was really around looking at the current state of the business and where we're spending money and where we were heavy or where we werent getting productivity, but we will absolutely be investing for.
Growth in the in the future I think that's a key part of it and then in SG&A.
The way I think about just the retail businesses in general we want to be creating leverage as we go forward, but Tony if you have any any character on how we think about that that'd be great. Yes, Chris So the way to think about it is over the last few years, our SG&A or cost structure has outpaced has outgrown our topline so we did too.
Actions, we took and we're announcing today are not to stop investing in our in our stores are in the business. This is to stop doing certain projects or focus on what's really the fundamental of the business, So and thats, how we approach this.
Cost reduction program.
Hello, Thank you for the color.
Thank you. The next question. This is Steven Forbes of Guggenheim Partners. Steven. Please go ahead. Your line is open.
Good morning, Shane Tony Shaffer.
I wanted to revisit the decision to sell <unk>.
Really if we could just take a step back Shane.
So early on into the 100 day review process why such urgency in the message.
And the decision to sell the World Pac asset.
What is the urgency really stemming from.
Yes, So first I don't want you to think that these are knee jerk decisions.
The benefit of counseling continuity from our executive Chair Jean also talking with statured leaders in.
In the company in terms of assessing what the right direction is so so that perspective doesn't just come from me being in the business for 60 days.
Do bring in terms of fresh eyes is a validation of that perspective, and then a bias for action.
And I think that's really important one of the things that this company needed to do to reset is to make the decisions that will set us on the trajectory for success going forward. It doesn't mean I have all the answers readily admit it doesn't mean that in some of these initiatives that we wont make mistakes and where we do will correct course.
But clearly as you looked at the performance of the company over time, which I did before it came in it's clear that where we were with our status quo activities wasn't working and so that's where that comes from and.
And we think strategically.
Rowing forward at that blended box model is a tenant for our success.
And then I appreciate that Shannon just a quick follow up I realize you are not providing financial color on the assets for sale.
I'm not sure if you can maybe help reframe, what the remaining assets would be free cash flowing.
This year right as we sort of think through the $50 million to $100 million guidance for the full year.
What is what is the.
Is the core asset free cash flow positive this year.
Yeah.
Yes, since we don't segment report, we can't break that out for you.
Don't anticipate any sale to happen. This year. So the 50 to 100 is inclusive of our consolidated financial operations.
Thank you.
Okay.
Thank you. The next question Betsy Seth Basham of Wedbush Seth. Please go ahead. Your line is open.
Thanks, a lot good morning, Mike.
My question is around gross margin and <unk>.
Please give us more color on the step down gross margin from last quarter. This quarter, even excluding the inventory charge, we saw a step down I'm sure I understand alright, as your gross margin.
Yeah.
Yes, I'll take that so when you when you look at when you look at the or you exclude the inventory.
There's a couple of key factors one is we continue to not cover costs.
With price cost as we called out that that's predominantly the bigger chunk, excluding the inventory. We've also seen some additional.
Deleverage in our supply chain costs, but the predominant.
Structure is really coming from non carbon cost and then the other thing that I'd add to that is really the channel mix as we continue to see our pro rebound.
Does have lower margins than our DIY business.
So on a per unit basis are you seeing your costs continue to rise and is that partly due to higher.
Financing costs from your vendors in our supply chain financing program.
No. We're not it's not that it's there is there is inflationary costs that are already built in but we are not building an additional price to cover that cost.
Okay.
Alright, Thank you very much.
Thank you. The next question does he Zach <unk> of Wells Fargo. Zach. Please go ahead. Your line is open.
Hey, good morning, So first of all Shane Congrats on the first earnings call.
So the question could you talk a bit about the game plan for growing your do it for me business today, whether you think the current 60 40 ish do it for me DIY mix is optimal and then as you think about balancing growth and profitability.
We expect the calling of the business to remove less profitable customers or is there a plan to prioritize the topline over profitability any color there.
Yeah.
Great. So let's talk about those each in turn first on growing the pro we certainly want to have the probe a prominent part of our growth and the way you do that is engagement in the market. It starts with the CPP is in the stores those are our store base pro.
Representatives also our field based representatives, our camps and so we've done some moves in terms of how we're organizing that pro part of our business under Junior Award and so we've made some streamline moves and in particular as we get ready to divest <unk> so that.
He will help us on the pro side of the house and we will have that focus there. Obviously it also means we've got to have the right parts on hand for the pros.
In this business you want to be first call and Thats, where we're aligning our efforts so that as our as our pro customers need product they call.
And we go ahead and get it.
As it relates to how we think about less profitable customers I'm going to just put this broadly under just.
An effort around asset assessment and utilization across the company, we just need to look at how we operate and where we operate and make rational decisions around where we can grow and grow profitably and I don't want to just do top line without the expense of.
Contributing operating income I think that's important so that's what we're looking at it we're looking to get advance back on a trajectory of consistent profitable growth.
As we look at all of our assets inclusive of.
Our stores our supply chain, how we merchandise and then who we sell to I think it's appropriate to make logical decisions about.
With each of those about getting to that profitable growth.
Got it appreciate the color there and then I think you suggested that your operating margin is expected to grow in 2024. So just curious if you could talk a little bit about the makeup there in more detail with respect to topline growth versus margin recovery.
Versus structural change like taking world pack and other costs out of the business.
Yes, I think it's too soon to start talking about 2024 in terms of margin will come back to you in February and provide you additional color.
We have said so far is the <unk>.
Cost reduction program that we announced today.
That will benefit full run rate in 2024, so but more to come in February as we continue down the strategic and operational review of our business.
Yeah.
Got it thanks for the time.
Thank you.
Thank you. The next question does your payout alright.
Barclays. Please go ahead your line is open.
Hi, Thank you for taking our question this is <unk> and we.
We have a question in terms of the credit ratings are you considering soliciting our Fitch rating at this moment. Thank you.
Yes, as we continue to assess our overall capital structure, we will always consider what makes the most sense for the business.
If we decide to.
Solicited Fitch rating for public we will we will announce that in the future. At this time, we are maintaining what we have today, we are focused on turning our business and we continue to improve our cash flow and working capital metrics that you've seen us announced this quarter.
Thank you.
Thank you. The next question does seem Michael <unk> of Evercore ISI. Michael. Please go ahead. Your line is open.
Yeah.
Hey, Good morning. This is Mike <unk> on for Greg Melick, Thanks for taking the questions.
Just wanted to ask first off on the cash flow side. If you could discuss the plans to inflect that positive for the full year. I think you are running about $150 million negative through the first three quarters. So.
Probably something simple, but how do you get that inflected positive in the fourth quarter.
Yeah as <unk> seen over the last two quarters, we continue to generate positive cash flow each of those quarters as we continue to focus on the business focus on sales and our working capital metrics continue to improve we expect that to continue into Q4 at this time based on what.
We know and Thats, what we are.
Looking at based on the recovery of.
All of our working capital as well as higher sales.
<unk> seen in Q2 Q3.
Got it and then if I could just follow up on the sales line you did mentioned some deterioration in the final period was curious if you could discuss if that's continued into the fourth quarter and also if theres any color in terms of was it DIY that slowed versus pro or what would have driven the slowdown.
Yes, we're very we're very conscious of the DIY consumer and the pressures that they are facing but as we started the fourth quarter, we're actually tracking slightly better than the first four weeks, but we know that we have a challenging December ahead of us given the lap of last year, where we had a significantly.
Colder period, and we are expecting this year, but we continue to be very conscious of the DIY consumer and we expect pro to continue to remain positive as well.
Thank you.
Thank you our final question Vishal.
Each has enough of Oppenheimer. Please go ahead your line is open.
Hey, it's Brian Nagel from Oppenheimer.
Thanks for taking our questions. We appreciate it so a couple of questions.
First off.
Just with respect to the competitive environment given the transition transformation. If you will at advance and that was pretty well documented are you seeing anything change competitively.
Whether either from your larger competitors or some of your smaller competitors, particularly on the professional side, but then my second question.
Shayne you've laid out welcome first of all and maybe you've laid out some initial steps here in the in the transformation of advance.
Should we be expecting as analyst investors watching the company should we be expecting at some point in not too distant future you'll kind of a.
Our longer term operating plan from you and your team.
Indicated where this business could ultimately head.
So let's thanks, Brian.
On the competitive environment.
We obviously compete in the market with with a number of.
Competent larger players and smaller players.
What I see notably in the in my early days is internal excitement with our team.
And we've got great frontline team members, who I think we're waiting for the unlock around simplifying our focus and as we do these decisive actions. That's what that's what's going to occur we're enabling our frontline to be successful with our with our customers which I.
Think helps in that competitive environment. So.
Early days to talk about where there might be.
Progress economically, but certainly from a from a.
Our philosophy perspective, and an engagement perspective, having that field first mentality.
I think is going to create momentum for us.
On the on the longer term plan.
We're still mapping out my first 60 days.
And we certainly will be in the future looking at what the long term trajectory for the business is inclusive of the initiatives that we're currently undertaking and then the future years, where I'll be taking in.
Got it I appreciate it thank you.
That is other questions. We had today. Thank you all for joining US we're grateful for your continued support should all very happy Thanksgiving next week and look forward to sharing more in February.
Thanks.
Thank you. This now concludes today's call. Thank you all for joining you may now disconnect your lines.
[music].
This now concludes today's call.