Q1 2024 Advance Auto Parts Inc Earnings Call

Yeah.

Operator: Welcome to the Advance Auto Parts last quarter 2024 conference call. Before we begin, Elisabeth Eisleben, Senior Vice President, Communications and Investor Relations, will make a brief statement concerning forward-looking statements that will be discussed on this call.

Speaker Change: Welcome to the developed let's say pumps first quarter 'twenty 'twenty conference call before we begin Elisabeth.

Elisabeth: Senior Vice President Communications, and Investor Relations will make a brief statement concerning forward looking statements that will be discussed on this scope.

Elisabeth Eisleben: Good morning, and thank you for joining us to discuss our Q1 2024 results. I'm joined today by Shane OKelly, President and Chief Executive Officer, and Ryan Grimsland, Executive Vice President and Chief Financial Officer.

Speaker Change: Good morning, and thank you for joining us to discuss our Q1 'twenty 'twenty four results.

Speaker Change: I'm joined today by Shane Kelley, President and Chief Executive Officer, and Ryan, Glenn Glenn Executive Vice President and Chief Financial Officer.

Elisabeth Eisleben: Following Shane and Ryan's prepared remarks, we will turn our attention to answering your questions. Before we begin, please be advised that our remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding our strategic and operational review, initiatives, plans, projections, and future performance. However, actual results could differ materially from those projected or implied by such forward-looking statements. Additional information about forward-looking statements and the factors that could cause actual results to differ can be found under the captions, forward-looking statements in our earnings release, and risk factors in our most recent Form 10-K and subsequent filings made with the Commission. Now, I turn the call over to Shane OKelly.

Speaker Change: Following Shane and Ryan's prepared remarks, we will turn our attention to answering your questions.

Speaker Change: Before we begin please be advised that remarks today will contain forward looking statements.

Speaker Change: All statements other than statements of historical fact are forward looking statements.

Speaker Change: Including but not limited to statements regarding our strategic and operational review initiatives plans projections and future performance.

Speaker Change: Actual results could differ materially from those projected or implied by the forward looking statements.

Speaker Change: <unk> information about forward looking statements and the factors that could cause actual results to differ can be found under the caption.

Speaker Change: Forward looking statements in our earnings release 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 Kelley.

Shane M. OKelly: Thanks, Elizabeth. Good morning, and thank you for joining us for our first quarter earnings call. Before we review the quarter, I would first like to thank the entire Advance team for their continued dedication to serving our customers. Their passion and commitment make a difference each and every day. The year started off slower than anticipated across the industry. At Advance, we saw a negative impact from weather, coupled with a challenged consumer who is experiencing diminished purchasing power, higher credit card debt, and uncertainty about the balance of the year in terms of macro conditions.

Shane M. OKelly: Thanks, Elizabeth Good morning, and thank you for joining us for our first quarter earnings call.

Shane M. OKelly: Before we review the quarter I would first like to thank the entire advance team for their continued dedication to serving our customers their passion and commitment to make a difference each and every day.

Shane M. OKelly: The year started off slower than anticipated across the industry.

Vance, we saw negative impact from weather, coupled with a challenged consumer who is experiencing diminished purchasing power higher credit card debt and uncertainty about the balance of the year in terms of macro conditions.

Shane M. OKelly: As a result, our Q1 performance was lower than expected, with comps down 20 basis points year over year. On a positive note, our professional business saw low single-digit improvements in both comps and transactions. We believe that winning in pro is important to our overall strategy and are pursuing that business across multiple segments, including up and down the street customers, strategic accounts, CarQuest Independence, and WorldPAC. Regarding up and down the street customers, we are putting additional focus this year on winning with those accounts and recapturing lost customers. In terms of our turnaround, we continue to execute against our previously outlined decisive actions designed to simplify our business. Those decisive actions are:

Shane M. OKelly: As a result, our Q1 performance was lower than expected with comps down 20 basis points year over year.

Shane M. OKelly: On a positive note our professional business saw low single digit improvements in both comp and transactions. We believe that winning in pro is important to our overall strategy and are pursuing that business across multiple segments, including up and down the street customers strategic accounts conquest independence.

Shane M. OKelly: And World pack.

Shane M. OKelly: Regarding up and down the street customers, we're putting additional focus this year on winning with those accounts and recapturing lost customers.

Shane M. OKelly: In terms of our turnaround we continue to execute against our previously outlined decisive actions designed to simplify our business.

Shane M. OKelly: Those decisive actions are.

Shane M. OKelly: Number one, continuing the sale process for WorldPAC. Number two, reducing our costs to become more competitive while investing a portion of those savings back into the front lines. Number three, making organizational changes to position us for success. Number four, improving the productivity of all, and number five, consolidating our supply chain. We believe these actions will have a long-term positive impact on our business, and let me share a few important updates on each.

Shane M. OKelly: Number one continuing the sale process for worlds pack.

Shane M. OKelly: Number two reducing our costs to become more competitive while investing a portion of those savings back into the front line.

Shane M. OKelly: Number three making organizational changes to position us for success.

Shane M. OKelly: Number four improving the productivity of all assets.

Shane M. OKelly: And number five consolidating our supply chain. We believe these actions will have a long term positive impact on our business.

Shane M. OKelly: Let me share a few important updates on each.

Shane M. OKelly: Starting with the potential sale of WorldPAC, we are well underway with that process. We are very pleased to have healthy interest, and we are looking to conclude the process before we report our second quarter results. As a reminder, we previously discussed the potential sale of our Canadian business, and we'll evaluate that once the WorldPAC sale is complete. Second, reducing and controlling costs is a major focus, and we are beginning to see benefits from the actions we took in the fourth quarter. We delivered on the $150 million in annualized savings outlined on our previous calls, and this is evidenced by a reduction in our year-over-year SG&A of $21 million in this quarter, despite a softer top line.

Shane M. OKelly: Starting with the potential sale of World pack, we usually are.

Shane M. OKelly: Well underway with that process. We are very pleased to have healthy interest and we are looking to conclude the process before we report our second quarter results.

Shane M. OKelly: As a reminder, we previously discussed the potential sale of our Canadian business and we'll evaluate that once the world pack sale is complete.

Shane M. OKelly: Second reducing and controlling cost is a major focus and we are beginning to see benefits from the actions we took in the fourth quarter.

Shane M. OKelly: We delivered on the $150 million in annualized savings outlined on our previous calls and this is evidenced by a reduction in our year over year SG&A of $21 million in this quarter. Despite a softer top line.

Shane M. OKelly: We're also beginning to see benefits from the $50 million reinvested into our front line, including a more than 50% reduction in our district manager turnover, and we expect to see improvement in other key roles throughout the year. In addition, our indirect purchasing team is executing against our recently launched initiative to reduce a minimum of $50 million on an annualized basis. We have finished the diagnostic stage and are targeting reduced indirect expenditures in areas such as technology, transportation costs, and corporate contracts. We expect to see the bulk of the savings beginning in 2025.

Shane M. OKelly: We're also beginning to see benefits from the $50 million reinvested into our frontline <unk>.

Shane M. OKelly: Including a more than 50% reduction in our district manager turnover and we expect to see improvement in other key roles throughout the year.

Shane M. OKelly: In addition, our indirect purchasing team is executing against our recently launched initiatives to reduce a minimum of $50 million on an annualized basis.

Shane M. OKelly: We have finished the diagnostic stage and are targeting reduced indirect expenditures in areas, such as technology transportation costs and corporate contracts.

Shane M. OKelly: We expect to see the bulk of the savings beginning in 2025.

Shane M. OKelly: Next, regarding our third decisive action on organizational changes, we are excited to announce that Bruce Starnes is joining the Advance team as executive vice president and chief merchant. This is part of an orderly succession plan. And in this role, Bruce will lead all aspects of our merchandising function. Bruce is an auto enthusiast and brings deep merchandising experience. Having served at Target for nearly 20 years, most recently as Senior Vice President of Merchandising Capabilities and Operations,

Shane M. OKelly: Next regarding our third decisive action on organizational changes we are excited to announce that Bruce Starnes has joined the advance team as executive Vice President and Chief merchant.

Shane M. OKelly: The expertise of one of our newest board members, Tom Siebel, who has over 30 years as a merchandising leader in the automotive aftermarket industry, will also help speed Bruce's onboarding. Bruce will be partnering with our outgoing chief merchant, Ken Bush, who will remain in an advisory role to help ensure continuity in the merchandising function. We want to congratulate Ken on his upcoming retirement after nearly 20 years with the company

Shane M. OKelly: This is part of an orderly succession plan and in this role Bruce will lead all aspects of our merchandising function.

Shane M. OKelly: Bruce is an auto enthusiasts and brings deep merchandising experience, having recently served as a target for nearly 20 years. Most recently as senior Vice president of merchandising capabilities and operations.

Shane M. OKelly: The expertise of one of our newest board members, Tom Siebel, who has over 30 years as a merchandising leader in the automotive aftermarket industry will also help speed Bruce's onboarding.

Shane M. OKelly: Bruce will be partnering with our outgoing chief merchant, Ken Bush, who will remain in an advisory role to help ensure continuity in the merchandising function.

Shane M. OKelly: We want to congratulate Ken on his upcoming retirement after nearly 20 years with the company and we want to welcome Bruce to the advance auto parts family.

Shane M. OKelly: And we want to welcome Bruce to the Advance Auto Parts family. Turning to our fourth decisive action regarding asset productivity across the company, improving this remains a top priority and includes both company stores and independently owned CarQuest locations. In the first quarter, we closed 17 underperforming stores and opened seven new stores.

Shane M. OKelly: Turning to our fourth decisive action regarding our asset productivity across the company.

Shane M. OKelly: Improving this remains a top priority and includes both company stores and independently owned car quest locations.

Shane M. OKelly: In the first quarter, we closed 17 underperforming stores and opened seven new stores.

Shane M. OKelly: Last quarter, we shared that we had notified over 100 CarQuest independent locations that we were removing them from our program, and we completed this action in Q1. In addition, our IT team's focus on POS system reliability is enabling significant in-store productivity improvements for team members, and that is impacting their ability to better serve our customers. We will continue our efforts to elevate existing store operations across Advance and drive profitable growth. The last area I wanted to discuss in regard to asset productivity is inventory.

Shane M. OKelly: Last quarter, we shared that we had notified over 100 car quest independent locations that we were removing them from our program.

Shane M. OKelly: And we completed this action in Q1.

Shane M. OKelly: In addition, our.

Shane M. OKelly: Teams focus on Pos system reliability is enabling significant in store productivity improvements for team members and that's impacting their ability to better serve our customers.

Shane M. OKelly: We will continue our efforts to elevate existing store operations across advance and drive profitable growth.

Shane M. OKelly: The last area I wanted to discuss in regard to our asset productivity is inventory.

Shane M. OKelly: We have had recent success with the implementation of our new merchandising system. We put new leaders in charge of the project, along with additional accountability on the work plan, resulting in the achievement of several key milestones in Q1. This new system will overhaul key merchandising processes, including planogram sets and store replenishment. In the first quarter, we added 130,000 SKUs to the new system across nearly 500 suppliers.

Shane M. OKelly: We have had recent success with the implementation of our new merchandising system.

Shane M. OKelly: We put new leaders in charge of the project along with additional accountability on the work plan, resulting in the achievement of several key milestones in Q1.

Shane M. OKelly: This new system will overhaul key merchandising processes, including Planograph sets and store replenishment.

Shane M. OKelly: In the first quarter, we added 130000 skus in the new system across nearly 500 suppliers and.

Shane M. OKelly: And by the end of the second quarter, we expect all of our actively replenished cues to be converted to the new system, which is well ahead of our previous expectations to be complete by the end of the year. This is one of several steps to enhance inventory availability and productivity. And finally, our fifth decisive action to consolidate our supply chain is underway with the long-term goal of operating as a single unified network. We've now mapped what this network will look like.

Shane M. OKelly: And by the end of the second quarter, we expect all of our actively replenish skus to be converted to the new system, which is well ahead of our previous expectations. So to be complete by the end of the year.

Shane M. OKelly: This is one of several steps to enhance inventory availability and productivity and finally, our fifth decisive action to consolidate our supply chain is underway with a long term goal of operating as a single unified network.

Shane M. OKelly: We have now met with this network will look like and I'd like to take a few minutes to describe its components and our incremental progress.

Shane M. OKelly: And I'd like to take a few minutes to describe its components and our incremental progress. We expect our unified network to have 14 large D.C.s. We currently have 13 of the required replenishment DCs needed and are scouting the location for the 14. These 14 facilities, averaging approximately 550,000 square feet each, will serve as our nationwide replenishment node. The next component of the Unified Network will be MarketHunt. As discussed last quarter, this is a new node of our network, and we recently completed a successful pilot.

Shane M. OKelly: We expect our unified network to have 14 large dcs weaker.

Shane M. OKelly: We currently have 13 of the required replenishment tcs needed and our scouting the location for the 2014.

Shane M. OKelly: These 14 facilities, averaging approximately 550000 square feet each will serve as our nationwide replenishment nodes.

Shane M. OKelly: The next component of the unified network will be market hubs as discussed last quarter. This is a new node of our network and we recently completed a successful pilot.

Shane M. OKelly: Our market hubs will have an average skew count of more than 80,000 and will enhance our existing hub network. There are three ways that we will be adding market. Number one, converting existing stores with a sufficient footprint. Number two, converting smaller existing DCs. And number three, greenfielding new locations.

Shane M. OKelly: Our market hubs will have an average SKU count of more than 80000 and will enhance our existing hub network.

Shane M. OKelly: There are three ways that we will be adding market hubs number one converting existing stores with sufficient footprint number two converting smaller existing dcs and number three greenfield ing new locations.

Shane M. OKelly: We have completed four store-to-market hub conversions utilizing the learnings from our successful pilots. By the end of 2024, we expect to have at least 20 market hubs in operation, including approximately half from the conversion of existing DCs. Three of these DC conversions are already underway. Those are Baton Rouge, Raleigh, and Memphis, and we expect to complete all of them by the end of the third quarter.

Shane M. OKelly: We have completed four store to market hub conversions utilizing the learnings from our successful pilot.

Shane M. OKelly: By the end of 2024, we expect to have at least 20 market hubs in operation, including approximately half from the conversion of existing Dcs.

Shane M. OKelly: Three of these DC conversions are already underway, those our Baton Rouge, Raleigh, and Memphis, and we expect to complete all of them by the end of the third quarter importantly by using existing stores that have sufficient footprint and converting smaller legacy Dcs. We believe we can.

Shane M. OKelly: Importantly, by using existing stores that have a sufficient footprint and converting smaller legacy PCs, we believe we can accelerate this initiative with more rigor than if we were to greenfield all locations. The third component of our unified network includes over 300 existing hubs that we currently operate. These hub locations currently serve and will continue to serve as sources for expanded availability for surrounding stores. On average, they have approximately 35,000 SKUs on hand compared with approximately 23,000 in our traditional blended box stores.

Shane M. OKelly: Salary this initiative with more rigor than if we were to Greenfield all locations.

Shane M. OKelly: The third component of our unified network includes over 300 existing hubs that we currently operate.

Shane M. OKelly: These hub locations currently served and will continue to serve as sources for expanded availability for surrounding stores.

Shane M. OKelly: On average they have approximately 35000 skus on hand, compared with approximately 23000 in our traditional blended box stores.

Shane M. OKelly: The performance of our hubs and market hubs reinforces the benefit of having parts closer to customers. We expect the development of this unified network to take time and are planning to have the 14 large DCs and at least 60 market hubs added to our existing network of hubs by the end of 2026. Let me also provide a brief update on our implementation of our Warehouse Management System, or WMS, across our DC network. This is a key enabler of our unification. And last quarter, we indicated that there were three facilities still to convert.

Shane M. OKelly: The performance of our hubs and market hubs reinforces the benefit of having parts closer to customers.

Shane M. OKelly: We expect the development of this unified network to take time and are planning to have the 14 large dcs and at least 60 market hubs added to our existing network of hubs by the end of 2026.

Shane M. OKelly: Let me also provide a brief update on our implementation of our warehouse management system or <unk> across our DC network.

Shane M. OKelly: This is a key enabler of our unification and last quarter, we indicated that there were three facilities still to convert.

Shane M. OKelly: We have recently completed the implementation at our Delaware, Ohio, and D.C. offices and expect to complete the remaining two by the end of the year. Meanwhile, we are making early progress with all of our decisive action. We recognize that we have substantial work to improve our business's performance. Our entire team is committed to fostering a disciplined approach in all functions, leading to increased accountability and internal clarity. Turning to the broader macro environment, we are fortunate to operate in an attractive needs-based industry with stable fundamentals. However, we recognize that our business will still likely feel negative impacts as customers show signs of financial distress and if macro conditions deteriorate.

Shane M. OKelly: We have recently completed the implementation at our Delaware, Ohio, DC and expect to complete the remaining two by the end of the year.

Shane M. OKelly: While we are making early progress with all of our decisive actions.

Shane M. OKelly: We recognize that we have substantial work to improve our business performance.

Shane M. OKelly: Our entire team is committed to fostering a disciplined approach and all functions, leading to increased accountability and internal clarity of our goals.

Shane M. OKelly: Turning to the broader macro environment, we are fortunate to operate in an attractive needs based industry with stable fundamentals.

Shane M. OKelly: However, we recognize that our business will still likely feel negative impacts as customers show signs of financial distress and if macro conditions deteriorate.

Shane M. OKelly: Even with that backdrop, we are improving execution by remaining focused on our decisive action. We know this turnaround will take time, but I am encouraged every time I visit a store or D.C. and meet the team members who take care of our customers. We have established clear priorities, and our leadership team is energized to deliver on our goal. Now, I would like to turn the call over to Ryan to review our financial performance for the quarter. Ryan. Thanks, Shane.

Shane M. OKelly: Even with that backdrop, we are improving execution by remaining focused on our decisive action.

Shane M. OKelly: We know this turnaround will take time, but im encouraged every time I visit a store or DC and meet the team members, who take care of our customers.

Shane M. OKelly: We have established clear priorities and our leadership team is energized to deliver on our goals.

Speaker Change: Now I would like to turn the call over to Ryan to review, our financial performance in the quarter.

Shane M. OKelly: Ryan.

Ryan Grimsland: Thanks Shane, and good morning everyone. Before I move to our financials, I would also like to thank our almost 70,000 team members for their continued dedication and hard work throughout the quarter. Q1 was challenging from a year-over-year perspective. However, we have instilled renewed P&L discipline and rigor and remain confident in our ability to capitalize on the significant opportunity ahead. In the first quarter, net sales of $3.4 billion decreased 0.3% compared with Q1 2023. The decrease was primarily driven by the reduction in independence and store closures of about $11 million as we continue our focus on improving asset productivity. Comparable store sales decreased by 0.2%.

Ryan Grimsland: Thanks, Shane and good morning, everyone before I move to our financials I would also like to thank our almost 70000 team members for their continued dedication and hard work throughout the quarter Q1 was challenging from a year over year perspective. However, we have instilled renewed P&L discipline and rigor and remain confident in our ability to <unk>.

Ryan Grimsland: Capitalized on the significant opportunity ahead and.

Ryan Grimsland: In the first quarter net sales of $3 4 billion decreased <unk>, 3% compared with Q1 2023.

Ryan Grimsland: The decrease was primarily driven by the reduction of independence and store closures of about $11 million as we continue our focus on improving asset productivity 'cause.

Ryan Grimsland: Comparable store sales decreased <unk>, 2%.

Ryan Grimsland: While we still have room for improvement in our assortment and availability levels, we are encouraged by the actions we have taken, which, relative to our pro business, helped contribute to positive transactions and comp growth in the quarter. As anticipated, we saw continued pressure on DIY and Q1, resulting in low single-digit negative comparable store sales. From a category perspective, we saw strength in batteries, as well as filters and engine management, driven by improved availability.

Ryan Grimsland: While we still have room for improvement in our assortment and availability levels.

Ryan Grimsland: We are encouraged by the actions, we have taken and relative to our pro business helped contribute to positive transactions and comp growth in the quarter.

Ryan Grimsland: As anticipated we saw continued pressure on DIY in Q1, resulting in low single digit negative comparable store sales.

From a category perspective, we saw strength in batteries as well as filters in engine management driven by improved availability.

Ryan Grimsland: In the quarter, we experienced particular softness in several categories, as we are seeing consumers adjust their buying behavior and look to stretch every dollar they spend. This was evidenced by our year-over-year decline in discretionary categories, as well as deferred maintenance in the quarter. Such as brakes, were often purchased in combination with tire maintenance and installations, which have been down across the industry. The West and Midwest were our top performing regions, while the Mid-Atlantic Southeast, including Texas and Florida, were our most challenged.

Ryan Grimsland: In the quarter, we experienced particular softness in several categories. As we are seeing consumers adjust their buying behavior and looking to stretch every dollar. They spend this was evidenced by our year over year decline in discretionary categories as well as deferred maintenance in the quarter such as brakes were often purchased in combination with tire maintenance.

Ryan Grimsland: Installations, which had been down across the industry.

The west and Midwest were our top performing regions, while the mid Atlantic Southeast, including Texas, and Florida, where are most challenged.

Ryan Grimsland: As Shane mentioned, the weather impacted our sales as the country experienced a slower start to the spring season. In Q1, gross profit was $1.4 billion, or 42% of net sales, which declined 82 basis points from the prior year quarter. The D leverage was primarily driven by cost, not fully offset by price.

Speaker Change: As Shane mentioned, the weather impacted our sales as the country experienced a slower start to the spring season.

Speaker Change: In Q1 gross profit was $1 4 billion.

Speaker Change: We're 42% of net sales, which declined 82 basis points from the prior year quarter.

Speaker Change: The deleverage was primarily driven by cost not fully offset by price.

Ryan Grimsland: In terms of price, we've also been reassessing our relative position in the market, as well as our approach to strategic pricing. We recognize circumstances where we have been notably uncompetitive and have been making appropriate adjustments focused on categories with higher visibility and less visibility. In Q1, we actioned on 8,500 SKUs, an investment of approximately $40 million on an annualized basis. We are committed to driving accountability to achieve and remain competitively priced. I'm confident the restructuring to align our pricing and merchandising teams will help provide the appropriate discipline to ensure success.

Speaker Change: In terms of price, we've also been reassessing, our relative position in the market as well as our approach to strategic pricing.

Speaker Change: We recognize circumstances, where we have been notably uncompetitive and have been making appropriate adjustments focused on categories with higher visibility and elasticity.

Speaker Change: In Q1, we action on 8500, Skus, an investment of approximately $40 million on an annualized basis.

Speaker Change: We are committed to driving accountability to achieve and remain competitively priced I'm confident the restructuring to align our pricing and merchandising teams will help provide the appropriate discipline to ensure success.

Ryan Grimsland: In Q2, we continue our merchandising excellence initiative, including securing lower pricing from our vendors, assessing our assortment and its availability, as well as reviewing how we are priced in the market. Despite all of these efforts, we believe that we will see pressure in Q2, as the consumer will likely face continued uncertainty impacting our top line. In addition, we will be lapping last year's actions, which will cause margin rates to be significantly more challenging than Q1.

Speaker Change: In Q2, we continue our merchandising excellence initiatives, including securing lower pricing from our vendors assessing our assortment and its availability as well as reviewing how we are priced in the market.

Speaker Change: All of these efforts, we believe that we will see pressure in Q2 as the consumer will likely face continued uncertainty impacting our top line. In addition, we will be lapping last year's actions, which will cause margin rate to be significantly more challenged in Q1.

Ryan Grimsland: We expect to begin seeing improvement in the back half of the year, as we will have cycled the prior year's pricing initiatives and begin to see an acceleration in year one. In addition, we expect that our supply chain consolidation and ongoing merchandising productivity efforts, including key front room category resets and back room hard part line redevelopment, that were completed in Q1, will positively contribute to our supplier partner negotiations.

Speaker Change: We expect to begin seeing improvement in the back half of the year as we will have cycled the prior year's pricing initiatives and begin to see an acceleration on units. In addition, we expect that our supply chain consolidation and ongoing merchandising productivity efforts, including key front room category resets and backroom hard part line reviews.

Speaker Change: There were completed in Q1 will positively contribute to our supplier partner negotiations.

Ryan Grimsland: In addition to pricing, warehouse capitalization costs and the planned investment in our DC consolidation negatively impacted gross margin in the. Our overall supply chain productivity partially offset the D leverage driven by improved lines per hour, replenishment frequency, reduction of independent locations, and the previously announced closure of our Asheville, D.C. SG&A was $1.3 billion in Q1 2024, down $21 million compared with Q1 2023 and improved 48 basis points as a percent This was driven by cost-saving efforts we discussed earlier and included a significant reduction in corporate expenditures and headcount executed in Q4 last year. Additionally, we have had a one-time gain from an asset sale in Florida.

Speaker Change: In addition to pricing warehouse capitalization costs and the planned investment in our DC consolidation negatively impacted gross margin in the quarter.

Speaker Change: Our overall supply chain productivity, partially offset the deleverage driven by improved lines per hour replenishment frequency reduction of independent locations and the previously announced closure of our Asheville DC.

Speaker Change: SG&A was $1 3 billion in Q1, 2024 down $21 million compared with Q1, 2023, and improved 48 basis points as a percent of our net sales. This was driven by cost saving efforts. We discussed earlier and included a significant reduction in corporate expenditures and head count executed in Q4.

Speaker Change: For last year.

Speaker Change: Additionally, we have had one time gain from an asset sale in Florida.

Ryan Grimsland: As discussed previously, we are reinvesting a portion of these savings back into our frontline team members, which partially offsets the savings we realized. We experienced higher year over year professional fees primarily related to continued remediation of our material, which was a headwind to SG&A and Q1. Finally, similar to many retailers, we experienced ongoing inflationary pressure related to overall wages, occupancy costs, and transaction costs.

Speaker Change: As discussed previously we are reinvesting a portion of these savings back into our frontline team members, which partially.

Speaker Change: Really offset the savings we realize this quarter.

Speaker Change: We experienced higher year over year professional fees, primarily related to continued remediation of our material weakness.

Speaker Change: Which was a headwind to SG&A in Q1.

Speaker Change: Finally, similar to many retailers, we experienced ongoing inflationary pressure related to overall wages occupancy costs and transaction expenses.

Ryan Grimsland: Our Q1 Operating Income Margin decreased 34 basis points compared with the prior year quarter. In terms of the second quarter, we believe that this will be our toughest margin quarter of the year as a result of pricing actions taken last year that we are lapping. However, as the year progresses, we expect to see stronger margin improvement in the back. Diluted earnings per share were 67 cents in Q1 compared with 81 cents in the prior year quarter. EPS is primarily impacted by the decrease in operating margin, as well as a five cent impact related to a discrete tax item related to stock-based compensation.

Speaker Change: Our Q1 operating income margin decreased 34 basis points compared with the prior year quarter.

Speaker Change: In terms of the second quarter, we believe that this will be our toughest margin quarter of the year as a result of pricing actions taken last year that we are lapping however, as the year progresses, we expect to see stronger margin improvement in the back half.

Speaker Change: Diluted earnings per share were <unk> 67 in Q1, compared with 81 in the prior year quarter.

Speaker Change: <unk> is primarily impacted by the decrease in operating margin as well as a <unk> <unk> impact related to discrete tax item related to stock based compensation.

Ryan Grimsland: We have significantly increased the discipline around our capital spending, focused on investing in high-return initiatives aligned with our decisive action. As a result, our Q1 2024 capital expenditures were $49 million compared with $90 million in Q1 of 2020. Free cash flow for the quarter was an outflow of $46 million compared with an outflow of $470 million in the prior year quarter.

Speaker Change: We have significantly increased the discipline around our capital spending process focused on investing in high return initiatives aligned with our decisive actions.

Speaker Change: As a result, our Q1 2024 capital expenditures were $49 million compared with $90 million in Q1 of 2023.

Speaker Change: Free cash flow for the quarter was an outflow of $46 million compared with an outflow of $470 million in the prior year quarter. This was primarily driven by lapping the timing of payables in Q1 of the previous year.

Ryan Grimsland: This was primarily driven by lapping the timing of payables in Q1 of the previous year. Our full year of guidance remains unchanged. We are committed to executing against our decisive actions and believe they will enable steady performance improvement across. Before I turn the call back to Shane for Q&A,

Speaker Change: Our full year guidance remains unchanged, we are committed to executing against our decisive actions and believe it will enable steady performance improvement across advance.

Speaker Change: Before I turn the call back to Shayne and Q&A I want to provide an update on our internal control remediation efforts.

Ryan Grimsland: I want to provide an update on our internal control remediation. We continue to ensure we have the appropriate experienced personnel as we have backfilled open roles and hired approximately 30 experienced personnel with the requisite accounting and internal controls knowledge and experience. We made some important hires in the first quarter who are quickly onboarded and are making progress in their role. In addition, we've added redundant and compensated internal controls to enhance our internal control structure.

Speaker Change: We continue to ensure we have the appropriate experienced personnel as we backfill the open roles and hired approximately 30 experienced personnel with the requisite accounting and internal controls knowledge and experience we.

Speaker Change: We made some important hires in the first quarter, who are quickly onboard and are making progress in their roles in.

Speaker Change: In addition, we've added redundant and compensate and internal controls.

Speaker Change: To enhance our internal control structure.

Ryan Grimsland: We have been thoroughly testing our remedial efforts and are committed to completing the remediation. As you will see in our Form 10-Q, a prior significant deficiency identified in Q4 2023 has been elevated to a material weakness in a discrete area of control. Similar to our material weakness regarding staffing, we are robustly testing to ensure our controls are working as designed over an appropriate amount of time. Our internal control environment remains a top priority, and we look forward to updating you on the completion of our remediation. Now, I'll turn it over to Shane. Thank you, Ryan.

Speaker Change: We have been thoroughly test in a remedial efforts and are committed to completing the remediation.

Speaker Change: As you will see in our Form 10-Q, a prior significant deficiency identified in Q4 2023 has been elevated to a material weakness in discrete area of controls.

Speaker Change: Similar to our material weakness regarding staffing we are robustly testing to ensure our controls are working as designed over an appropriate amount of time, our internal control environment remains a top priority for us and we look forward to updating you on the completion of our remediation and now I will turn it over to Shane.

Shane M. OKelly: Thank you Ryan we have significant work to do in terms of turning around the business, but I am confident we are on the right path.

Shane M. OKelly: Brian, we have significant work to do in terms of turning around the business, but I am confident we are on the right path. I want to once again thank our team members for their unwavering dedication to supporting our customers while adapting to the challenges we face during the quarter. And in the wake of Memorial Day, it's always appropriate to reflect on the contributions of the brave men and women who gave their lives in the service of our country.

Shane M. OKelly: I want to once again, thank our team members for their unwavering dedication to supporting our customers while adapting to the challenges we faced during the quarter.

Shane M. OKelly: And in the wake of Memorial day, it's always appropriate to reflect on the contributions of the brave men and women who gave their lives and the service of our country with that I would like to open it up to address your questions.

Operator: With that said, I would like to open it up to address your question. Operator. If you'd like to ask a question on today's call, please press star followed by 1 on your telephone keypad.

Shane M. OKelly: Operator.

Operator: If you'd like to ask a question on today's call, please press star followed by 1 on your telephone keypad now to enter the queue. When preparing to ask your question, please ensure your headset is fully plugged in and unmuted locally. That's star followed by 1 on your telephone keypad.

Speaker Change: If you'd like to ask a question on todays call. Please press star followed by one on your telephone keypad announcements at the Q.

Speaker Change: I'll ask a question. Please ensure your headsets pretty plugged in and muted Luckily stock slipped by one telephone keypad.

Operator: And our first question today comes from Bret Jordan at Jeffrey's. Bret, your line is open. Please go ahead.

And our first question today comes from Bret Jordan of Jefferies. Your line is open. Please go ahead.

Bret David Jordan: Hey, good morning, guys.

Bret David Jordan: Good morning, Brian as you talk about the cadence of the first five five months that gives you comfort in your maintaining the comp guide for the year.

Shane M. OKelly: Yeah, I think the cadence. I think we started out a little bit slower due to weather, but it picked up throughout the quarter. I think Q2, we're seeing similar trends from Q1, but really expect the back half of the year to have more favorable comparisons. And some of the initiatives we're putting in place, we are expecting to see that continue to bear fruit, especially as we've seen in the pro business coming out of Q1. Yeah, as I think about positive pro comp and transactions. But you know, I think.

Brian: Yes, I think the cadence I think we started out a little bit slower due to weather.

Brian: It started to pick up throughout the quarter I think Q2.

We're seeing similar trends from Q1, but really expect the back half of the year, we will have more favorable compares and some of the initiatives we're putting in place.

Brian: We are expecting to see that continue to bear fruit, especially as we've seen in the pro business coming out of Q1.

Shane M. OKelly: Yeah, as I think about it, you're positive about comp and transactions. I think we'll look to continue doing that. As Ryan mentioned, we've got initiatives specifically targeting pros, notably up and down the street customers. But I also think on the DIY side, the U.S. consumer is facing a bit of an inflection point as they look at their personal debt loads and as they look at where their purchasing power is. And so I think there's some reticence there in terms of how they're spending. And so we think that will continue as well.

Speaker Change: Yes, as I think about it positive.

Speaker Change: So comp and transactions.

I think we will look to continue doing that as Brian mentioned, we've got initiatives, specifically targeting grows notably up and down the street customer.

Speaker Change: But I also think on the DIY side the U S consumer.

Speaker Change: The U S consumer is facing a bit of an inflection point.

Speaker Change: Look at their personal debt loads.

Speaker Change: Look at where their purchasing power is.

Speaker Change: Theres some reticence there in terms of how they are spending.

Speaker Change: And so we think that continues as well.

Speaker Change: Great and then on the pro side.

Speaker Change: National account versus up and down the street the positive comp you saw in the first quarter was there much difference between those two.

Speaker Change: Cypress.

Shane M. OKelly: Yeah, we don't like to break, I'd appreciate it, but we don't like to break out the specifics of those two, but we did see positive growth.

Speaker Change: Yes, we don't like to break bread appreciate it but we don't like to break out the specifics of those two but we did see positive growth.

Shane M. OKelly: on both sides.

Speaker Change: Positive comps in both sides.

Speaker Change: Yep.

Speaker Change: Yep.

Operator: The next question comes from Michael Lasser from UBS. Michael, your line is open. Please go ahead.

Speaker Change: The next question comes from Michael Lasser from UBS, Michael Your line is open. Please go ahead.

Speaker Change: Thanks.

Operator: Good morning. Thank you so much for taking my question. The challenging outcome with DIY, how are you thinking about that segment over the course of the year? And what are going to be the key drivers that improve the performance of DIY sales from here?

Michael Lasser: Good morning. Thank you so much for taking my question.

Michael Lasser: The challenging outcome with DIY, how are you thinking about that segment over the course.

Speaker Change: <unk> and <unk>.

Speaker Change: What are you going to be the key driver that improve the performance of our DIY sales from Europe.

Speaker Change: Yeah.

Shane M. OKelly: So I think there's a macro story here, and good morning, Michael, that affects where the consumer goes. I think the US consumer, the good news is there's a needs-based function for our business. And so those staples where you can't put off doing things, e.g., my car won't start, and it needs a new battery, so we'll continue to see those kinds of plays.

Speaker Change: So I think there is a macro story here and good morning, Michael that affects where the consumer goes.

Speaker Change: I think the U S consumer the good news is there is a needs based function for our business and so those staples, where you can't put off doing things EG My car won't start it needs new batteries. So we'll continue to see those kinds of plays but there is also a tendency now for consumers to defer maintenance if they.

Shane M. OKelly: But there's also a tendency now for consumers to defer maintenance if they can, as they wrestle with their checkbooks at the end of the month. I don't see anything changing that in the near term. And so I think the trend that we see continues. We're obviously doing a number of things in terms of how we get to them. We've done some creative marketing programs. We're using our website. We do training with our in-store associates in terms of how they greet customers and understand needs and do appropriate accessory sales.

Ken Bush: Ken as they wrestle with their check books at the end of the month I don't see anything changing that in the near term and so I think the trend that we see continues we're obviously doing a number of things in terms of how we get to them. We've done some some creative marketing programs, we are using our website.

Speaker Change: Right.

Speaker Change: We do training with our in store associates in terms of how they greet customers and understand needs and do appropriate attachment sales. So so there is certainly not.

Shane M. OKelly: So there's certainly not a lack of activity on our part to make sure we're maximizing opportunities where we interact with consumers, but I just think, fundamentally, at a macro level, there's a bit of a, as I said before, an inflection point.

Speaker Change: A lack of.

Activity on our part to make sure we're maximizing opportunities, where we interact with consumers, but I just think fundamentally at a macro level there is a bit of.

As I said before an inflection point.

Speaker Change: Yeah.

Shane M. OKelly: Okay, my follow-up question is on the WorldPAC sale. Is there any risk that it won't close or won't be announced in the second quarter? And can you give us some sense of what your guidance might look like for this year if you were to close the deal before the end of the year? Obviously, the intent of the question is to get some sense of how the underlying AAP business is doing outside of WorldPAC so we can have a basis to understand what the transformation is looking like there? Thank you.

Speaker Change: Okay. My follow up question is on the World pack sale.

Speaker Change: Is there any risk that it won't close or won't be announced in the second quarter.

Speaker Change: Can you give us some sense of what your guidance might look like for this year.

Speaker Change: To close the deal before the end of the year obviously.

Speaker Change: In terms of the question.

Speaker Change: Hum.

Speaker Change: Underlying.

Speaker Change: Business is doing outside of world packs. So we can have a thesis.

Speaker Change: Understand what the archway.

Speaker Change: <unk> is looking like there. Thank you.

Shane M. OKelly: Yeah, so great question, Michael, and certainly understandable that you'd want to get behind that. We don't do segment reporting, and I've used an expression in the 40 acquisitions that I've done, you know, a deal's not a deal until it's a deal.

Speaker Change: Yes, so great question, Michael and certainly understandable that you'd want to get behind that we don't do segment reporting and I've used the expression in the 40 acquisitions.

Speaker Change: I've done a deal is not a deal until a deal to deal. So when we have something to announce we will absolutely announce it.

Shane M. OKelly: So when we have something to announce, we'll absolutely announce it. But I'll just go to the big picture, which I think is important for everybody. You just got to respect the process.

Speaker Change: But I'll just go to the big picture, which.

Speaker Change: I think it's important for everybody.

Speaker Change: Just going to respect the process.

Shane M. OKelly: So we're very happy where we are. We're in the middle of it. We believe we'll have it wrapped up before our next earnings announcement. And that's what we've got. And as soon as something's different, e.g., we complete the transaction, we'll let you know. And then we'll look to Ryan to pick what the remainder of the company looks like. Yeah, Michael, we definitely want to give you

Speaker Change: So we're very happy where we are.

Speaker Change: We're in the middle of it.

Speaker Change: We believe we'll have it wrapped up before our next earnings announcement.

Speaker Change: And that's what we've got and as soon as something is different.

Speaker Change: We complete the transaction.

Speaker Change: Let you know and then we'll look to Ryan to pick what remainder company looks like yes, Michael we definitely want to give you that perspective, but we got to wait until Theres actually a decision and when we have that we will.

Ryan Grimsland: Yeah, Michael, and we definitely want to give you that perspective, but we've got to wait till there's actually a decision, and when we have that, we will, if and when we do have a transaction there, update our guide and update the projections going forward for the remaining company.

Speaker Change: It's been when we do have a transaction there we will update our guide and update the projections going forward for the remain co.

Speaker Change: Thank you very much.

Speaker Change: Okay.

Operator: The next question comes from Simeon Gutman from Morgan Stanley. Simeon, your line is open. Please go ahead.

Speaker Change: The next question comes from Simeon Gutman from Morgan Stanley Simeon. Your line is open. Please go ahead.

Operator: Hey, good morning, everyone. Shane, maybe one more try at WorldPAC, and I'll respect the process. Can I ask if the decision to sell it is still the right one for the business, or is it price dependent and then connected to that? The positive low single digits that I heard for commercial debt, I assume, does that include rollback, or are you separating them out from how you're conveying the message to the street?

Simeon Ari Gutman: Hey, good morning, everyone.

Simeon Ari Gutman: Shane maybe one more try at World Pac and I'll respect the process can I ask is.

Simeon Ari Gutman: The decision to sell it still the decision is the right one for the business or is it price dependent and then connected to that.

Speaker Change: Positive low single digits that I heard for commercial debt I assume does that include roll pack or youre separating them out from how youre conveying the message to the street.

Speaker Change: You want to take that yes. So.

Shane M. OKelly: Simeon, I appreciate that. We're not going to speak about WorldPAC versus the rest of the business at this time. We are in the midst of working through the process here, so we'll keep that off the table until we have something where we can speak to them. We are happy with our professional business. We are happy with the process and where it's at to date, and we'll be able to give you more updates as we actually firm something up.

Speaker Change: I appreciate that we're not going to.

Speaker Change: Speak about world pack versus the rest of the business at this time, we are in the midst of working through the process here. So we'll keep that off the table until we have something we can speak to them.

Speaker Change: We are happy with our pro business and we are happy with the progress and where it's at today.

Speaker Change: And we will be able to give you more updates as we actually firm something up.

Shane M. OKelly: The decision on this one is still, from a strategic standpoint, we still have the same strategy. We're focused on the blended box, and Wolfpack is not necessarily tied to that decision. That's why we're exploring this opportunity, and we'll continue to explore. We're happy with where it's at right now.

The decision on this one is still from a strategic standpoint, we still have the same strategy, we're focused on the blended box.

Speaker Change: <unk>.

Speaker Change: Not necessarily tied to that decision and that's why we're exploring this opportunity and well.

Speaker Change: We continue to explore we're happy with the.

Speaker Change: So we're happy with where it's at right now.

Shane M. OKelly: Yeah, thanks for asking the question. My father.

Speaker Change: Yes, thanks for asking the question.

Shane M. OKelly: Yeah, thank you. Go ahead. Nope. Oh, sorry.

Speaker Change: Yes. Thank you go ahead.

Shane M. OKelly: Yeah, the follow up. It's that you hired a new merchant. I wanted to ask about the opportunity with merchandising. If the SKU mix is aligned properly to the vehicle population, And then how should we think about your you're doing supply chain consolidation? If you decide to make changes to merchandising? Does that have any, you know, is there a timing or sequencing effect with the supply chain, or are there two different activities? Yeah, I would say there are two different activities.

Speaker Change: No.

Speaker Change: Alright. The follow up is you hired a new merchant I wanted to ask about the opportunity with merchandising if the SKU mix is aligned properly to the vehicle population and then how should we think about.

Speaker Change: Youre doing supply chain consolidation, if you decided to make changes with the merchandising does that have any is there a timing a sequencing effect with supply chain are there two different activities.

Shane M. OKelly: Yeah, I would put it this way, I would say there are two different activities. So, first, thanks for asking the question. We're thrilled to have Bruce Starnes joining us, and I think there are a couple things that are worth unpacking here. First, in terms of his leadership, and his fit, his energy level, he's personally an auto enthusiast; we view that as very important. His merchandising fundamentals, in terms of skills he's learned at Target, we have really, really enjoyed getting to know him through this process.

Speaker Change: Yes, I would put I would say there are two different activities. So so first thanks for asking the question.

Speaker Change: We're thrilled to have Bruce <unk>, joining and I think theres a couple of things that are worth unpacking here first in terms of his leadership and his fit his energy level.

Speaker Change: Personally in auto enthusiast review that is very important.

Speaker Change: His merchandising fundamentals in terms of skills. He's learned at target we have really really enjoyed getting to know him in this in this process.

Shane M. OKelly: I think it is worth mentioning in terms of how we're doing the transition. We have Tom Siebold on the board, who has been with us for 30 years as a merchant in the industry. He will help with Bruce's onboarding. Ken Bush is sticking around through a transition period through his retirement. So this is very much an orderly transition, and we're very excited to have him come on board. There's always work we can do as it relates to the SKU mix and the vehicle population.

Speaker Change: Think worth mentioning in terms of how we're doing the transition.

Speaker Change: We have Tom see bolt on the board, who joined US 30 years as a merchant in the industry.

Speaker Change: He will help with Bruce is onboarding.

Speaker Change: Penn Bush is sticking around through a transition period, who is retiring soon.

Speaker Change: So this is very much in an orderly transition.

Speaker Change: So we're very excited to have him come on board.

Speaker Change: There is always work, we can do as it relates to the SKU mix in the vehicle population I think there is an ocean of auto parts out there and so as Bruce puts his.

Shane M. OKelly: You know, I think there's an ocean of auto parts out there. And so, as Bruce puts his mark on the merchandising team, you will always review what our availability is and have the right part in the right timeframe for our customers. So, you can imagine a body of work going on there.

Speaker Change: Mark on the merchandising team will always review, what our availability is in having the right part.

Speaker Change: In the right time frame for our customers so.

Speaker Change: You can imagine a body of work going on there it doesn't come at the expense of nor is it a sequencing.

Speaker Change: Set of activities with supply chain, so supply chain is moving.

Shane M. OKelly: It doesn't come at the expense of, nor is it a sequential set of activities with the supply chain. So the supply chain is moving now rapidly. You know, Steve Szilagyi, our supply chain leader, spent about a year putting our plan together. He is now running in terms of getting our large DC infrastructure established, getting everybody on WMS, and introducing market hubs as a node inside of our system. And so, as that process goes on, changes to our assortment can occur within it and occur within our business every day today.

Speaker Change: How rapidly they spent steve's logia supply chain leaders spent about a year, putting our plan together. He is now running in terms of getting our large DC infrastructure established getting everybody on WNS introducing market hubs as a node inside of our system and so.

Speaker Change: As that process goes on changes to our assortment can occur within it and occur within our business every day today.

Speaker Change: Thanks, Good luck.

Speaker Change: Thank you.

Operator: The next question comes from Greg Melich from Evercore ISI. Greg, your line is open. Please go ahead.

Speaker Change: The next question comes from Greg minutes from Evercore ISI, Greg. Your line is open. Please go ahead.

Operator: I think I wanted to follow up on inflation and deflation and specifically the price investment you referenced. So could you just help frame the 8,500 SKUs, what percentage of the total SKUs that is, and the $40 million investment, assuming that's about 30 or 40 bps a year of deflation? Does the whole box still have a little bit of inflation, or how would you frame it?

Greg: Hi, Thanks, I wanted to follow up on inflation.

Deflation and specifically the price investment you you referenced.

Greg: So can you just help frame the 8500 skus what percentage of the total skus that is and in the $40 million investment.

Speaker Change: I mean, thats about 30, or 40 bps a year of deflation.

Is the whole box still have a little bit of inflation or how would you how would you frame that.

Speaker Change: Yeah.

Shane M. OKelly: So the impetus for the $40 million came from both our own data assessments and then getting feedback from customers. You know, they're professional customers and consumer customers where we were just fundamentally out of the market in terms of being competitive. I think this is important.

Speaker Change: So the impetus for the $40 million came from.

Speaker Change: Both our own data assessments, and then getting feedback from customers.

Speaker Change: The pro customers consumer customers, where we were just.

Speaker Change: Fundamentally out of the market in terms of being competitive and I think this is important.

Shane M. OKelly: I think the conduct in this industry is a rational one. We're a rational player in terms of what we do, but there are instances where our pricing just simply doesn't make sense relative to the market. We made some surgical moves to make sure our pricing reflected what the market was, so that we're viewed as a legitimate source from where customers will buy. So the $8,500 as a percentage risk skew is a relatively small percentage, right?

Speaker Change: I think the conduct in this industry is a rational one where a rational player in terms of what we do but in instances, where our pricing just simply doesn't make sense relative to the market.

Speaker Change: We've made some some some surgical moves to make sure our pricing reflected what.

Speaker Change: What the market is so that that we're viewed as a legitimate source from where customers will buy.

Speaker Change: So the 8500 as a percentage of our Skus is a relatively small percentage right. If you want to add Greg I mean, it's about 3% of the enterprise SKU count right now I think if we looked at advance only at about 8%. So.

Shane M. OKelly: Yeah, Greg, I mean, it's about 3% of the enterprise skew count right now. I think if we look at Advance, it's only about 8%. So it's not a significant portion of the overall, but it is just making sure that we get competitive in some key areas.

Speaker Change: Not a significant portion of the overall, but it is just making sure that we get competitive some key areas.

Ryan Grimsland: Got it. And that $40 million, would you say that across the box, if the industry is still rational, that we're still seeing slight inflation in the comp in the first quarter?

Speaker Change: Got it and Thats $40 million would you say that across the box that the industry is still rational there we're still seeing slight inflation in the comp in the first quarter.

Ryan Grimsland: Yeah, there's still a little bit of inflation in the industry, but just slight inflation in the quarter is very rational. Like we said, we want to be competitive from a pricing standpoint, and I think the overall industry is fairly rational. Yeah, I would use the term disinflation. So I don't think we've hit, you know,

Yes, there is still a little bit of inflation I think in the industry to slight inflation in the quarter is very rational and like we said we want to be competitive.

Speaker Change: From a pricing standpoint, and I think the overall industry is fairly rationale.

Ryan Grimsland: Yeah, I would use the term disinflation. So I don't think we've hit deflation. But certainly, that tempo of inflation has slowed down. Thanks and good luck.

Speaker Change: Yes, I would use the term disinflation, so I don't think we've hit deflation.

Speaker Change: But certainly that tempo of inflation.

Speaker Change: It has metered.

Speaker Change: Okay.

Got it thanks and good luck.

Speaker Change: Thank you.

Operator: The next question comes from Scott Ciccarelli from Truist. Scott, your line is open. Please go ahead. Good morning, guys. Can you provide any more color on the amount of.

Speaker Change: The next question comes from Scot Ciccarelli from Truest Scott. Your line is open. Please go ahead.

Speaker Change: Okay. Good.

Scot Ciccarelli: Morning, guys can you provide any more color on the amount of margin pressure you're expecting for <unk>, just given the moving pieces out there and then help us understand the bridge to getting better margins in the back half.

Ryan Grimsland: Yeah, absolutely. So we are going to see a little bit more pressure in Q2. Some of these pricing actions we've taken are going to cycle for a full quarter, and there's probably some more that we need to take to get competitive across the board.

Speaker Change: Yes, absolutely. So we are going to see a little bit more pressure in Q2. Some of these pricing actions. We've taken are going to cycle, a full quarter and there is probably some more that we need to take to get competitive across the board. So we will take additional pricing actions, where it makes sense to be competitive in the.

Ryan Grimsland: So we'll take additional pricing actions where it makes sense to be competitive in the marketplace. So we expect to see margin rate decelerate in Q2. Also, we're cycling last year where price was a lever that was pulled last year in Q2. And so we're cycling that.

Speaker Change: So we expect to see margin rate decelerate in Q2 also we're cycling last year, where price was a lever that was pulled last year in Q2, and so we're cycling that so it's not as much about hey, we're just bringing prices down but it's also about the comparison year over year in.

Ryan Grimsland: So it's not as much about, hey, we're just bringing prices down, but it's also about the comparison year over year. In Q1 of last year, it wasn't as much of a price action. In fact, they were actually trying a little bit to get more competitive last year in Q1. So the cycle and comparison weren't as significant. But in Q2, we're comparing it against some pricing actions last year, so that kind of compounds on it.

Speaker Change: In Q1 of last year, there wasn't as much of a price action. It back there were there were actually try and a little bit to get more competitive last year in Q1. So the cycle in comparison wasn't as significant but in Q2, we're comparing against some pricing actions last year, so that kind of compounds on it.

Ryan Grimsland: Not going to give specifics, you know, guide you around the quarter, but I would expect that rate from Q1 to decelerate. Now, what we're doing. A couple of things.

Speaker Change: We're not going to give specifics guide around the quarter, but I would see you would expect that rate from Q1 to decelerate now what we're doing.

Ryan Grimsland: One is all the PLRs that we've done in the first part of the year; we're going to start to see the benefit of those take place in the back half of the year. We're going to see the unit start to take off. We have seen where we've made changes in price, we've started to see some of the unit start to take hold. But that takes a little bit of time as consumers start to see that. So we'll see some of that.

Speaker Change: Couple of things one is <unk>.

Speaker Change: All the <unk> that we've done in the first part of the year, we're going to start to see the benefit of those take place in the back half of the year.

Speaker Change: See the unit start to take off we have seen where we've made.

<unk> enterprise is starting to see some of the unit start.

Speaker Change: Start to take hold but that takes a little bit of time as consumers start to see that so we'll see some of that and then we're continuing to work with our supplier partners on cost out that's going to help impact the second half of the year and then as our supply chain consolidation.

Ryan Grimsland: And then we're continuing to work with our supplier partners on cost out, and that's going to help impact the second half of the year. And then as our supply chain consolidation takes hold, we'll see some of that benefit start to hit the back half of the year. So these things take a little bit of time to come up in the back half. We also have better comparisons in the back half than we do in the first half.

Speaker Change: Take hold we will see some of that benefit start to hit in the back half of the year. So these things take a little bit of time to come up in the back half. We also have better comparisons in the back half than we do in the first half we mentioned that going into the year that our first half would be more pressure than the back half really due to some of these pricing actions, we're cycling in comparing against <unk>.

Ryan Grimsland: We mentioned that going into the year that our first half would be more pressured than the back half, really due to some of these pricing actions we're cycling and comparing again. Hopefully, that was helpful, Scott. It's super helpful. Just to clarify, though, like, you know, you do expect 2Q operating margin to be lower than your 1Q operating margin. Yeah, yeah, year over year, basically. Yeah, I mean, you're on a year-over-year basis, right, the D leverage, yeah.

Speaker Change: That was helpful.

Speaker Change: Super helpful. Just to clarify, though like you do expect <unk> operating margin to be lower than your <unk> operating margin.

Speaker Change: Yes, yes year over year on a year over year basis Thats sequential.

Speaker Change: Yeah.

Speaker Change: The year over year basis, right deleverage yep.

Speaker Change: Okay.

Speaker Change: Got it understood. Thank you.

Speaker Change: Yeah. Thanks, Scott.

Operator: The next question comes from Chris Horvers at J.P. Morgan. Chris, your line is open. Please go ahead.

Speaker Change: The next question.

Chris: <unk> comes from Chris <unk> with J P. Morgan Chris Your line is open. Please go ahead.

Operator: Hi, good morning. It's Christian Carlino on for Chris.

Christian: Hi, Good morning, it's Christian <unk> on for Chris.

Christian: Are you thinking about what structural gross margins might look like any differently now that youre investing in price or presumably that's been part of the plan and you still have visibility to eclipsing that 42% over the near and medium term once you recapture some other onetime costs from last year. Thanks.

Operator: Are you thinking about what structural gross margins might look like any differently now that you're investing in price, or presumably this has been part of the plan and you still have visibility to exceeding that 42 percent over the near medium term once you recapture some of the one-time costs from last year? Thanks.

Christian: Yes.

This is definitely part of the plan as we continue to investigate competitively price and we still are committing to our guide our guide for the year and we still have line of sight to that so.

Ryan Grimsland: Yeah, this is definitely part of the plan as we continue to investigate competitively prices, and we still are committing to our guide or our guide for the year, and we still have line of sight to that. So we're still comfortable with where we believe we'll land the year given the macro backdrop. But this is part of the plan, and we're going to invest where we can to be competitive. Yeah, I think the price is fair.

Christian: We're still we're still comfortable with where we believe we will end the year given the macro backdrop, but this is part of the plan and we're going to invest where we can be competitive yes, I think the pricing actions are modest and there is the other side of that equation, which is what our merchant team can do.

Shane M. OKelly: Yeah, I think the pricing actions are modest. And there's the other side of that equation, which is what our merchant team can do working with our vendors to make sure they're securing the appropriate source costs for our product. So I think we've got some opportunity there. And we'll look for Bruce as he comes on board to start putting programs in place for that.

Speaker Change: Working with our vendors to make sure they are securing the appropriate source costs for our product. So I think we've got some opportunity there and we will look for Bruce as he comes onboard to start putting programs in place for that.

Operator: Got it. That's helpful.

Speaker Change: Got it that's helpful and understanding theres not much to update us on on the transaction at this point could you speak to how youre thinking about the potential use of proceeds from the sale is there a level of leverage where you'd be more comfortable stepping up the investments in the DC conversions or some of the other turnaround efforts you're undertaking.

Shane M. OKelly: And understanding there's not much to update us on the transaction at this point, could you speak to how you're thinking about the potential use of proceeds from the sale? Is there a level of leverage where you'd be more comfortable stepping up the investments in the DC conversions or some of the other turnaround efforts you're undertaking?

Shane M. OKelly: Yeah, so we think about three potential uses. I think the first, Ryan, working with our treasurer, Tony Iskander, will look to delever the company to some degree. So they'll look at our various debt tranches and decide, you know, which ones we'd potentially take out. So I think that's an important use of the first use. And then the second use, which we've started to ask our different functional areas, is where we would accelerate investment for already underway initiatives that we can bring about a faster conclusion. And you can think about a couple of candidates here.

Speaker Change: Yes, So we think about three potential uses I think the first.

Ryan: Sure Ryan working with our Treasurer, Tony its Gander, we will look to Delever the company to some degree so they'll look at our various debt tranches and decide.

Speaker Change: Which ones, we would potentially take out so I think that's an important that's the first use and then the second use which we've started.

Speaker Change: To ask or different functional areas is where we would accelerate investment for already underway initiatives that we can we can bring about a faster conclusion and you could think about a couple of candidates here. So from a supply chain perspective, we've got this ongoing.

Shane M. OKelly: So from a supply chain perspective, we've got this ongoing new market hub development, our large D.C. network build out. So, Steve would likely be a candidate for proceeds technology. We talked about POS stability. We still have some stores that are on a legacy POS system. We could do POS unification be an example. And then as you think about stores in terms of our new store opening capability condition of our stores, Junior Ward, there'd be there'd likely be some opportunities there.

Speaker Change: New market hub development, our large DC network build out so so Steve would likely be a candidate for proceeds.

Speaker Change: Technology, we talked about Pos stability, we still have some stores that are on our legacy Pos system. We could do pass unification. Winn example, and then as you think about stores in terms of.

Speaker Change: Our new store opening capability condition of our stores June reward there'll be there'll likely be some some opportunities. There. So those three constituencies I think at the top of the list of where we would put money to move faster with things that we've got going on and so that's kind of the two priorities the third would be thinking about our.

Shane M. OKelly: So those three constituents, I think, are at the top of the list of where we would put money to move faster with things that we've got going on. And so that's kind of the two priorities. Third, we'd be thinking about our shareholders in some way. But those are the three.

Speaker Change: In some way, but those are the three.

Operator: Got it. Thank you very much. Bye for now.

Speaker Change: Got it. Thank you very much best of luck.

Operator: The next question comes from Zach Fadem from Wells Fargo. Zach, your line is open. Please go ahead.

Speaker Change: The next question comes from Zach <unk> from Wells Fargo. Zach. Your line is open. Please go ahead.

Shane M. OKelly: Hey, good morning. Can you talk a bit more about the game plan for market hub conversions? You mentioned some successful pilots. Curious what you saw that gave you confidence and any early color you can share in terms of what you would expect in terms of lifts for the pro or DIY customers.

Hey, good morning can you talk a bit more about the game plan for market hub conversions you mentioned some successful pilots curious what you saw that gave you confidence and any early color you can share in terms of what you would expect in terms of lifts on the pro or DIY customer.

Shane M. OKelly: Yeah, so I think you see this elsewhere in the industry. But the premise is that if you have parts closer to customers and you're more responsive, you get more orders. And so what we did is we looked at how we sit in that regard in terms of what we can get you in 30 minutes. What can we get you in two hours, four hours, same day, next day?

Speaker Change: Yeah. So.

Speaker Change: And I think you see this elsewhere in the industry, but the premise is that if you have parts closer to customers and Youre more responsive you get more orders.

Speaker Change: And so what we did is we looked at how we sit in that regard in terms of what can we get you in 30 minutes. What can we get you in two hours for our same day next day and we found there is a significant shortfall in the number of parts that we can get you at those requisite timeframes.

Shane M. OKelly: And we found there's a significant shortfall in the number of parts that we can get you at those requisite timeframes. So we said, well, how do we how do we accelerate that? How do we how do we become more competitive?

Speaker Change: So we said well how do we how do we accelerate that how do we how do we be more competitive and so when a market hub does is it pushes parts closer to the customer to where we can get it to other hubs stores, where it would otherwise have to come from the DC.

Shane M. OKelly: And so what a market hub does is it pushes parts closer to the customer so that we can get them to other hubs or stores where they would otherwise have to come from the D.C. And our D.C. works in two ways. We have replenishment orders that go to stores at some frequency. We also developed a parts delivered quickly program for one-offs, which was expensive and time-consuming. And so by using the hub, we can get it to a store more quickly than if it was coming from D.C. And so that's what we've seen and what we see both physically within that store, that actual hub where we have those parts; we get sales.

Speaker Change: And our DC works in two ways, we have replenishment orders, which which go to stores with some frequency. We also have developed a parts delivered quickly program.

Speaker Change: For one offs, which is expensive and time consuming and so by using the hub, we get it to we can get it to a store more quickly than if it was coming from the DC.

Speaker Change: So that's what we've seen and what we see both physically within that store that actual hub, where we have those parts. We get sales and then the surrounding stores. If you could think about that is about 100 stores Theyre now getting better service because they were previously relying on only the DC. So that's the that's the premise.

Shane M. OKelly: And then the surrounding stores, if you could think about that as about 100 stores, they're now getting better service because they were previously relying on only D.C. So that's the premise. I think just another comment here. Sometimes, in a business, being a fast follower can be an effective strategy. And so beyond our own pilot results, I think the effectiveness of this market hub concept elsewhere in the business also points to the idea that it's good.

Speaker Change: I think just.

Speaker Change: Another comment here, sometimes in a business being a fast follow can be an effective strategy and so.

Speaker Change: Beyond our own pilot results.

Speaker Change: The effectiveness with this market hub concept elsewhere in the business also points to the idea that it is a good one.

Speaker Change: Okay.

Operator: Got it. Thanks for the color.

Speaker Change: Got it thanks for the color and then a couple of clarification questions first on the gain on the SG&A line any quantification of the impact there and then second any color on the slight notch up in the high end of your 24 sales outlook.

Operator: And then a couple of clarification questions. First, on the gain on the SG&A line, any quantification of the impact there? And then second, any color on the slight notch up in the high end of your 24 sales outlook?

Ryan Grimsland: Yeah, Zach, I appreciate you bringing that up. When the press release was issued, we noticed the error immediately; we're going to send an amendment out. We are confirming our guide; the top end of that sales guide should be 11.4, not 11.5. The rest of the numbers are accurate. So you should see that come through shortly. As far as the gain is concerned, it was $18 million in the quarter. It was also implied in our guide that this was a P1 gain.

Chris: Yes, Chris.

Speaker Change: You're bringing that up with the press release was issued we noticed immediately.

Speaker Change: Are we going to have a Senate amendment out we are confirming our guide the top end of that sales got should be 11, 4% 11, 5%. The rest of the numbers are accurate. So you should see that come through shortly.

Speaker Change: As far as.

Speaker Change: Hi.

Speaker Change: The gain game with $18 million in the quarter. It was also implied in our guide.

Speaker Change: That was a <unk> gain.

Operator: Got it. Appreciate the time, guys.

Speaker Change: Got it I appreciate the time guys.

Speaker Change: Likewise, thank you.

Operator: The next question comes from Aaron Reed at North Coast Research. Aaron, your line is open. Please go ahead.

The next question comes from Erin Wright at Northcoast Research. Your line is open. Please go ahead.

Operator: Yeah, thanks for taking my call. I just wanted to follow up on the sale of WorldPak, and it sounds like you have the initiative, once the proceeds come in, the amount of reducing debt, really improving some of the stores, and it sounds like an additional component is possibly returning funds to shareholders. My question is, is that going to be largely dependent on the price that you get for it?

Erin Wright: Yes, Thanks for taking my call I, just wanted to follow up on the sale of <unk> and it sounds like you have the initiatives once the comment or the amount of reducing back I really improving some of the stores.

Erin Wright: And it sounds like an additional component or possibly returning funds to shareholders. My question there is that.

Speaker Change: Secondly, largely dependent on the price that you get for it.

Speaker Change: Or is there something to where it is in order to hear where that first and then store improvement going to be I mean, how should we look at that allocation when that's all said and done.

Shane M. OKelly: Or is it something where it's an order tier where debt first and then store improvement is going to be, I mean, how should we look at that allocation when that's all said and done? Yeah, I'll start and then Ryan or Tony joined us this morning. He can jump in dead first. I think that's the best early use of proceeds. And so we'd go.

Shane M. OKelly: Yeah, I'll start, and then Ryan or Tony joined us this morning. He can jump in dead first.

Speaker Change: Yes al.

Speaker Change: Start and then Brian and Tony joined US. This morning, he can jump in.

Speaker Change: That first.

Shane M. OKelly: I think that's the best early use of proceeds. And so we'd go there, and again, Tony and Ryan would figure out exactly where we draw the line in terms of how much we would pay off. Our sense, though, is that there's money for all three of those potential use buckets based on our assessment of WorldPAC's value. But, but, gentlemen.

Speaker Change: I think thats the that is the best early use of proceeds.

Speaker Change: And so we'd go there and again, Tony and Ryan, we'll figure out exactly where we draw the line in terms of how much we would pay off.

Speaker Change: Our sense, though is that.

Speaker Change: Theres monies for all three of those potential use buckets.

Speaker Change: Based on our assessment of world tax value.

Speaker Change: Sure.

Speaker Change: Yes.

Speaker Change: Yes, so erinn good starts again.

Speaker Change: We would first money towards deleveraging going back and getting closer to our leverage targets that we've talked about publicly closer to two five times over time.

Speaker Change: We would also put money towards our initiatives some of which <unk> and Brian talked about earlier in our prepared remarks and of course anything excess would go back to shareholders and we will look to do that over time as well.

Ryan Grimsland: Aaron, I think the biggest thing is we're going to be prudent on this one as well, and the timing and sequencing.

Speaker Change: And I think the biggest thing is we're going to be prudent on this one as well.

Ryan Grimsland: and the timing and sequencing of that. We know this is a multi-year turnaround for the company, and so the first step priority of paying down the debt and then investing in the business for the turnaround are the top priorities for us.

Speaker Change: And the timing and sequencing of that we know this is a multiyear turnaround for the company and so the first priority of pay down the debt and then invest in the business for the turnarounds are the top priorities for us.

Operator: Okay, great. Thanks. And then I guess just a follow-up question to go a little closer, you said trying to get back closer to that target that ratio. Does that mean that you don't believe that with the sale and allocation, you will be able to fully achieve that target ratio?

Okay, great. Thanks, and then I guess just for follow up questions too.

Speaker Change: Turning a little closer you for trying to get that closer to that target that ratio does that mean that you don't believe that with the sale and allocation will be able to fully achieve your target debt ratio.

Ryan Grimsland: Yeah, Aaron, we're not ready to talk about the actual dollar amount.

Speaker Change: Yes, Aaron we're not ready to talk about the actual dollar amounts that we would get from the transaction. So we'll wait to be able to share that when and if we do have a transaction if that's all right.

Ryan Grimsland: that we would get from the transaction. So we'll wait to be able to share that when and if we do.

Operator: We'll wait to be able to share that when and if we do have a transaction, if that's okay. Yeah, great. Thank you very much. Appreciate it. Thanks, Aaron. The next question comes from Steven Forbes at Guggenheim Partners. Steven, your line is open. Please go ahead.

Speaker Change: Okay, great. Thank you Mark.

I appreciate it thanks, Eric.

Speaker Change: Our next question comes from Steven Forbes with Guggenheim Partners. Steven Your line is open. Please go ahead.

Speaker Change: Okay.

Operator: Good morning. This is.

Speaker Change: Good morning. This is Rene Marion on for Steve Forbes I wanted to focus on the D. C market have conversion can you help us think through the Kpis of our focus on as you think through the wrong.

Speaker Change: And what are these conversions from drive the improvement you need.

Speaker Change: Thank you.

Operator: I missed the very last part of your sentence. If you could just say that one more time, please.

Speaker Change: I missed the very last part of your sentence. If you could just say that one more time please.

Operator: Yep. And whether these conversions are driving the improvement. Oh, yeah, fantastic.

Speaker Change #100: Yes, and whether these conversions are driving the improvement you need.

Shane M. OKelly: So as we think about metrics... Sales per square foot, service interval for SKUs available, and sales are all important in terms of what we do, along with the cost to convert and then the ongoing operating costs. So those are some of the key metrics. But let me also talk qualitatively about what goes on.

Speaker Change #101: Well, yes fantastic.

Speaker Change #102: So as we think about metrics.

Speaker Change #103: Sales per square foot.

Speaker Change #103: Service Presentable for Skus available sales.

Our all important in terms of what we do it along with the cost to convert and then the ongoing operating costs. So.

Speaker Change #103: So those are those are some of the key metrics. Let me also talk qualitatively about what goes on one of the challenges in our network is we had previously made the decisions that we would treat all dcs equally so we have 30 adcs, serving the boxes and.

Shane M. OKelly: One of the challenges in our network is that we'd previously made the decision that we would treat all DCs equally. So we have 38 DCs serving the boxes, and the disparity in their size ended up with huge inequities in terms of what stores saw in terms of their replenishment. So you could be a store manager and have a million square foot distribution center that's a few hours away that's servicing your store, or you could be a store manager and have a 100,000 square foot distribution center servicing you and your facility. So the breadth and depth of what was available to you as a store were fundamentally different depending on which distribution center was serving you.

Shane M. OKelly: But we declared them all to be replenishment nodes, which creates an issue. By the way, we declared them all to be intake nodes, which we would go to our vendors and say, hey, we need you to ship product into 38 DCs, which meant some DCs could take a truckload, and other DCs would take an LTL skid. So we knew structurally that's just not a good way to operate a supply chain

Speaker Change #103: The disparity in their size.

Speaker Change #103: Ended up with huge in equities in terms of what stores saw in terms of their replenishment. So you could be a store manager and have a million square foot DC Thats, a few hours away that servicing your store or you could be a store manager and have 100000 square foot DC servicing U.

Speaker Change #103: Your facility so the breadth and depth of what was available to you as a as a store was fundamentally different depending on which DC was serving you, but we declared them all to be replenishment nodes, which creates an issue by the way we declared them all to be intake nodes, which we would.

Speaker Change #103: To our vendors and say hey, we need you to ship product into 38, Dcs, which meant some dcs could take a truckload and other Dcs would take an LPL skit. So so we knew structurally that's just not a good way to operate our supply chain.

Shane M. OKelly: So with that backdrop, as we've gone in and modeled it, it also makes sense from some of the metrics that we just alluded to. So what we're doing with a market hub is we're taking 40 to 50,000 square feet, and again, it comes from any one of the three sources.

Speaker Change #103: With that backdrop as we've gone in and model that it also makes sense from some of the metrics that we just alluded to so what we're doing with a market hub is is were taking 40% to 50000 square feet and again. It comes from any one of the three sources, we have some larger stores that can fit this profile. We have these DC conversion.

Shane M. OKelly: We have some larger stores that can fit this profile. We have these DC conversions, and then we also will be doing some greenfields. And then we think that 80,000 plus SKUs, give or take, some will cheat a little bit higher, is the right number of SKUs.

Speaker Change #103: And then we also will be doing some greenfields and then we think that 80000, plus skus give or take some some will cheat a little bit higher is that is the right number of Skus now for these dcs that we're converting we're in long term leases with them at favorable rates So X.

Shane M. OKelly: Now for these DCs that we're converting, we're in long-term leases with them at favorable rates. So economically, that's been something that's been good for us. We will partition what we need and sublease the rest. In some cases, we'll exit the facility altogether. But that's the method of how we then develop the baseline economics of the facilities. We also won't be using mechanization and think about both the ongoing maintenance and operating costs of that.

Speaker Change #103: <unk> that's been something that's been good for US we will partition, what we need and sublease. The rest in some cases will be will exit the facility altogether, but thats. The method of how we then.

Speaker Change #103: Develop the baseline economics of their facilities, we also won't be using mechanization and think about the both the ongoing maintenance and operating cost of that and instead. This will look with traditional racking and pick model in terms of what we will do and so as we've looked at what those what the cost to operate it and then the <unk>.

Shane M. OKelly: And instead, this will look like a traditional racking and pick model in terms of what we'll do. And so as we've looked at what those costs to operate it and then the service that's provided, that works. But I will go back to that original big picture, which is going to our vendors and saying, hey, you only need to ship from 14 into 14 large DCs. And then for our stores on replenishment, the full breadth and depth are now available or will be available to every store. So that that is is valuable to us as well. Thank you. The next question comes from...

Speaker Change #103: Service, that's provided that works, but I will go back to that original big picture, which is going to our vendors and saying Hey, you only need to ship from <unk> in the 2014 large Dcs and then for our stores on replenishment the full breadth and depth now available or will be available to every store.

Speaker Change #103: That.

Is as valuable to us as well.

Speaker Change #104: Thank you.

Operator: The next question comes from Maks Rakhlenko from TD Securities. Maks, your line is open. Please go ahead.

Speaker Change #105: The next question comes from Max <unk> from TD Securities. Your line is open. Please go ahead.

Speaker Change #106: Great. Thanks, a lot. So first the 8500 price action Skus is that the biggest chunk of the skus or is that just the start and the SKU count could ultimately look quite a bit bigger over time.

Shane M. OKelly: So one of the things that we did in the company is we moved pricing into merchandising. Previously, those had been disjointed functions.

Speaker Change #106: So.

Speaker Change #107: One of the things that we did in the company.

Speaker Change #108: As we moved pricing into merchandising. So previously those had been disjointed functions and so the way I think about pricing is we want to be.

Shane M. OKelly: And so the way I think about pricing is that we want to be competitive. We don't want to lead the market down. We don't want to be inappropriately high priced so that customers don't want to buy from us. And, as I mentioned before, we think it's a logical industry with good conduct. And so, what you can expect from us is that good merchants will be talking to their vendors to make sure that we're sourcing at the right cost. And I think we have opportunities there.

Speaker Change #108: Want to be competitive we.

Speaker Change #108: We don't want to lead the market down we don't want to be inappropriate Lee highly priced to where customers don't want to buy from us and I mentioned before we think it's a it's a it's a.

Speaker Change #108: Logical industry with with good conduct and so what you can expect from US is good merchants will be talking to their vendors to make sure that we're sourcing at the right cost. So I think we have opportunities there and good merchants are looking at their portfolio in some instances. They will say hey, I think were were higher relative to the market and we moved down in other.

Shane M. OKelly: And good merchants are looking at their portfolio. And in some instances, they will say, hey, I think we're higher relative to the market, and we move down. And other instances are going to say, actually, we have an opportunity to move prices up. I think the key message you can take away from us is that we'll have capable pricing teams working very closely with merchants to be in the market. And we'll look to make sure we're sourcing to hit the margins that we need. Yeah, Max, I'll add, of those 8,500 SKUs, some of them, we actually brought the price up. So this is about getting the right price.

Instances theyre going to say actually we have opportunity to move price up I think the key message you can take away from US is that we will have.

Speaker Change #108: Capable pricing teams working very closely with merchants to be at the market and we will look to.

Speaker Change #108: To make sure we're sourcing.

Speaker Change #108: To hit the margins that we need to hit.

Ryan Grimsland: We actually brought prices up. So this is about getting the right price across the portfolio. Obviously, the bulk of them were bringing prices down and being in a competitive place, but we did bring some up to Shane's point as well. And we said it was about 3% of the overall enterprise SKUs and 8% of Advance. Will that increase, as Shane said, as a new merchant comes in, as merchandising works through it? I'm sure there will be more of the latter. God, it's very helpful. And then, can you?

Speaker Change #109: Yes, Max I'll add.

Speaker Change #110: <unk> thousand 500, Skus some of them, we actually brought price up. So this is about getting the right price across the portfolio. Obviously, the bulk of them were getting bringing prices down and being in a competitive place, but we did bring some up to <unk> point as well.

Speaker Change #110: And we said, it's about 3% of the overall enterprise Skus and 8% of advance.

Speaker Change #111: The increase as Jane said as the new merchant comes in as merchandising works through it I'm sure there'll be more of that will add to it.

Speaker Change #112: Got it it's very helpful. And then can you speak to the competitive environment and progress, you're making with gear up and down the street accounts and then what are some of the key initiatives Besides price and how should we think about the cadence of acceleration as the year goes on.

Shane M. OKelly: Yeah, so if you look at our 92-year history, I think throughout Advance's history, we viewed the professional customer as a market that we have a right to participate in. And so it's a perfectly natural set of activities for us that we have a lot of steep capability.

Speaker Change #112: Yeah.

Speaker Change #113: So if you look at our 92 year history I think.

Speaker Change #114: Throughout advance this history, we viewed the pro customer as a market that we have a right to participate in.

Speaker Change #114: And so.

Speaker Change #114: A perfectly natural set of activities for us that we have a lot of steeped capability and so there's a whole series of activities going on so first.

Shane M. OKelly: And so there's a whole series of activities going on. So first, we use outside sales team members, CAMS, and we've rejuvenated their compensation program. And if you think about, you know, we've talked about investing in the front line. Hams and CPPs, CPPs being Commercial Parts Pros, and they're the in-store professional conduit.

Speaker Change #114: We used outside sales team members cams.

Speaker Change #114: We've rejuvenated their compensation program and if you think about we've talked about investing in the frontline <unk>.

Speaker Change #114: <unk> and Cpp's CPP as being commercial parts pros.

Shane M. OKelly: We're investing in both of those roles in terms of compensation. We're investing in those roles in terms of training. We're investing in those roles in terms of career trajectories. We're doing a lot in terms of understanding our market. So in the proximity to where a store exists, who are all the professional customers, and what's our relative penetration with those customers? What is the visit frequency? What is it?

Speaker Change #114: And there the in store pro conduit, we're investing in both of those roles in terms of compensation, we're investing in those roles in terms of training, we're investing in those roles in terms of career trajectories.

Speaker Change #114: We're doing a lot in terms of understanding our market. So in the proximity to where our store exists what are who are all the pro customers and what's our relative penetration with those customers. What is the visit frequency what is it what products are we propositioning.

Shane M. OKelly: What products are we proposing to that customer? Those are all things that go on. We have TechNet, which is a warranty service and capability builder for our pro customers that we bring to the market. And so there's a whole litany of activities, our pro website, our equipment program, our recognition trips. So across the spectrum of what a pro customer would find attractive, we have an answer for their needs. And it's just about being organized and highlighting those needs. And we're really pleased with the direction that's taking place.

Speaker Change #114: To that customer those are all.

Speaker Change #114: Things that go on we have tech net which is a warranty service and capability builder for our pro customers that we bring to the market and so there is a whole.

Speaker Change #114: <unk> of activities are pro website.

Speaker Change #114: Our our equipment program our recognition trips so.

Speaker Change #114: Across the spectrum of what a pro customer would find attractive we have an answer for further needs and it's just about about being organized and highlighting those needs.

Speaker Change #114: And we're really pleased with the direction Thats taking place.

Speaker Change #115: Great. Thanks, a lot and best regards.

Speaker Change #116: Thank you.

Operator: The next question comes from Chris Bottiglieri from BNP Paribus. Chris, your line is open. Please go ahead.

Speaker Change #117: The next question comes from Chris, particularly <unk> from BNP Paribas, Chris. Your line is open. Please go ahead.

Operator: Hey, thanks for taking the question. There's a couple of clarifying ones.

Chris: Hey, Thanks for taking the question.

Just a couple of clarifying ones. The 18 million was that a sales leaseback or something else and then.

Operator: Was that a sales lease pack or something else? The accounting control remediations, does that influence the WorldPAC sale? Like, does that need to be resolved first before the finance should be relied on? I'm just curious if that's having any impact on the asset sale.

Speaker Change #118: On World Pack.

Speaker Change #119: The accounting.

Speaker Change #119: Control remediation that influenced the OPEC sale like does that need to be resolved first before so the finance to be relying on so im curious thats, having any impact on the asset sale.

Chris: Yes, Chris.

Operator: That's the little package piece. It's not going to impact the transaction there from that perspective. That's kind of kept.

Speaker Change #120: That the oil patch is not going to impact the transaction there from that perspective.

Operator: 1999-2011 The Elliott Browne Company, LLC. All rights reserved. The Elliott Browne Company, LLC. All rights reserved. All rights reserved.

Speaker Change #120: That's kind of kept separate from a sale gain on asset sale leaseback.

Operator: Okay, and then just the last one, the capitalized supply chain costs. You called it out this quarter. Can you quantify that and tell us what you're thinking in terms of like Q2 in the back half, is that something that should persist or not?

Speaker Change #121: With Socialist correct, Okay, and then just the last one the capitalized.

Speaker Change #122: Quite chain costs, you called it out this quarter.

Speaker Change #123: Quantify that and tell us what youre thinking in terms of like Q2, and the back half is that something that should persist or not.

Ryan Grimsland: From an overall inflation standpoint, we expect that to be very moderate for the rest of the year from a, you know, product inflation rate. Obviously, in our guide originally, we said we wouldn't be able to capitalize on full inflation for the year because we were going to be taking pricing actions, and we'll continue to do that through the year. In fact, I think in our guide, we talked about inflation being about 1% in the industry, and we expect it to be somewhere still around.

Speaker Change #124: From an overall inflation standpoint, we expect that to be very moderate for the rest of the year from a.

Speaker Change #124: Product inflation rate.

Speaker Change #125: Obviously, we are in our guide originally we said we wouldn't be able to capitalize on full inflation on the year, because we were going to be taking pricing actions and we will continue to do that through the year.

Speaker Change #125: In fact, I think in our guide, we're talking about inflation being about 1% in the industry and we expect that the <unk> are still around 1%.

Ryan Grimsland: and the industry, and we expect that to be some that are still around.

Speaker Change #126: Okay. Okay. Thank you.

Speaker Change #125: Okay.

Operator: The next question comes from Carrick Irwin from Barclays. Carrick, please go ahead. Your line is open.

Speaker Change #127: The next question comes from Kerry Cohen from Barclays. Please go ahead. Your line is open.

Operator: Oh, hey, guys. It's Seth Sigman. Hopefully, you can hear me. It's a follow-up on a couple of questions. I guess, number one, hey, hey, guys, sorry for the confusion here. So two quick follow-ups, and I'll just ask them both up front here. So just on the guidance for Q2, just trying to think about, you know, more pressure year over year on operating margin. Can you just give us a little bit more flavor?

Speaker Change #128: Oh, Hey, guys had set Sigma.

Speaker Change #127: I'm.

Speaker Change #127: Hopefully.

Speaker Change #129: Can you hear me.

Speaker Change #130: It's a follow up on <unk> question, I guess number one.

Speaker Change #130: Hey, guys, sorry for the confusion here.

Speaker Change #131: Two quick follow ups and I'll just ask them both upfront here. So just on the guidance for Q2, just trying to think about more pressure year over year on operating margin can you just give us a little bit more flavor is that more on gross margin or SG&A or is it really a combination of both so let's just clarify that and then my real follow up question is around the store footprint.

Operator: Is that more gross margin or SG&A or is it really a combination of both? So let's just clarify that. And then my real follow-up question is around the store footprint. It looks like the pace of closings is starting to pick up a little bit here. How do you think about that? Do you have an opinion on the ultimate number of store closings and maybe any more color on what you're learning, some of the characteristics of the units that you're closing? That would be great. Thanks.

Speaker Change #131: It looks like the pace of closings starting to pick up a little bit here. How do you think about that do you have a view on the ultimate number of store closings and maybe any more color on what youre learning some of the characteristics of the units that you are closing that would be great. Thanks.

Ryan Grimsland: Yeah, absolutely. Great question, Seth. A couple of things.

Speaker Change #132: Yes, great question.

Speaker Change #133: <unk> the pressure in Q2 will be mainly driven on gross margin.

Ryan Grimsland: The pressure in Q2 will be mainly driven by gross margin. That's where we're going to see the pressure. It's mainly driven by the pricing actions of cycling those pricing actions from last year and just in some of the timing of us working to get some of the cost out of product costs, supply chain benefits, et cetera, and the unit list, which will take time as consumers recognize our new pricing, competitive pricing. So it's mainly going to be realized in gross profit from that perspective.

Speaker Change #133: Where we're going to see the pressure, it's mainly driven by the pricing actions are cycling those pricing actions from last year.

Speaker Change #133: And just and some of the timing of us working to get some of the cost out and product costs supply chain benefits et cetera, and the unit lift that will take time as the consumers recognize our new pricing competitive pricing. So its mainly going to be realized in gross profit on that perspective.

Shane M. OKelly: I'll talk about the store closing. Thanks for asking the question.

Shane M. OKelly: I'll talk.

Speaker Change #134: I'll talk on the store closing thanks for asking the question. So first we don't have an ni to go out and just say hey, we want to shut.

Speaker Change #134: X number of stores, it's all part of our asset productivity assessment and so we're looking across the network. We're looking at every every asset that we own and say Hey, what does this do for the company.

Shane M. OKelly: So first, we don't have an eye to go out and just say, hey, we want to shut X number of stores. It's all part of our asset productivity assessment. And so we're looking across the network; we're looking at every asset that we own and say, hey, what does this do for the company? And is it where it should be? And is it doing what it could be? So when we identify it as it relates to a store, the first thing we say is, "Hey, can we turn the store around?" I mean, that's the preferred lens.

Speaker Change #134: And is it where it should be and is it doing what it what it could be so when we identify it as it relates to a store. The first thing. We say is hey can we turn the store around I mean, that's the preferred lens and so we look at what the management is.

Speaker Change #134: And how the management is performing we look at it we talked about our pro efforts. So we say hey of our pro efforts grounded there what's going on with the outside sales team member in that geography. The Cpp's. So first blush with the store's performance is always to say can we make this a healthy store there are some instances.

Shane M. OKelly: And so we look at what management is and how management's performing. We look at our pro efforts, which we say, hey, of our pro efforts grounded there, what's going on with the outside sales team members in that geography, the CPPs. So the first flush with the store's performance is always to say, can we make this a healthy store? There are some instances where, if you look at our regional market share, we're just structurally in a situation where we just can't make the math work.

Speaker Change #134: Where if you look at our regional market share. We're just structurally we're in a situation where we just can't make the math work and Thats, where youre closing becomes an option.

Shane M. OKelly: And that's where closing becomes an option. And so we don't publish a number in terms of, hey, this is how many we think we are going to close or could close. It's just an ongoing management of the business. That's now one of the items in the toolbox, by the way.

Speaker Change #134: And so we don't publish a number in terms of Hey, we think this is this is how many we think we are going to close or could close. It's just an ongoing management of the business. That's now one of the one of the items in the toolbox by the way so too is opening a new store and in that regard.

Shane M. OKelly: So, too, is opening a new store. And in that regard, we haven't published an NSO number, but I think I want people to know that our real estate team, in terms of its capabilities, really is. We've really made a number of improvements there. We've unified real estate under one leader. We've looked at our real estate management process in terms of buy versus lease, in terms of site selection, in terms of timeline to get a facility up, in terms of hit out and fit out, in terms of new store opening processes. And so we're really seeing for the new stores we opened a much better process that is something that we'll look to leverage in the future.

Speaker Change #134: We haven't published in NSO number, but I think when people to know that our real estate team in terms of its capabilities.

Speaker Change #134: Is really.

Speaker Change #134: Okay.

Speaker Change #134: We really made a number of improvements there we've unified our real estate under one leader we've looked at our real estate management process in terms of buy versus lease in terms of site selection in terms of timeline to get a facility up in terms of fit out in fit out in two.

Speaker Change #134: <unk> of new store opening processes.

Speaker Change #134: So we're really seeing for the new stores, we opened a much better process that is something that we'll look to leverage in the future.

Speaker Change #134: Okay.

Operator: All right. Thank you all so much for joining us this morning. That's all the questions we've received. We appreciate your time and continued support. I look forward to updating you again after we report Q2. Have a nice day.

Speaker Change #135: Alright. Thank you also much for joining us. This morning on his other questions. We've received we appreciate your time and continued support and look forward to updating you again. After we report Q2 have a nice day.

Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

Okay.

Speaker Change #136: This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.

Speaker Change #136: [music].

Speaker Change #136: Okay.

Speaker Change #136: Yeah.