Q3 2024 Advance Auto Parts Inc Earnings Call
Okay.
Yes.
Okay.
Yes.
Yes.
Yes.
Yes.
Okay.
Yes.
Yeah.
Yes.
Okay.
Sure.
Okay.
Charlie: Hello, everyone and welcome to the Q3 2020 School advanced Auto parts earnings Conference call. My name is Charlie and I will be coordinating the call today.
You will have the opportunity to ask your questions at the end of the presentation. If you thought you Register your question. Please press star followed by one on your telephone keypads.
Speaker Change: I'd now like to hand, the cool lab to our host <unk> <unk>, Vice President of Investor Relations to begin.
Speaker Change: Please go ahead.
Speaker Change: Good morning, and thank you for participating in today's call I am joined machinery, Kelly, President and Chief Executive Officer, and Ron <unk> Executive Vice President and Chief Financial Officer.
Speaker Change: Before we begin please be advised that managements remarks today may contain forward looking statements.
Speaker Change: Other than statements of historical fact are forward looking statements, including but not limited to statements regarding our strategic and operational review initiatives plan projections and expectations for the future actual results could differ materially from those projected or implied by the forward looking statements.
Speaker Change: Information about forward looking statements can be found on the forward looking statements in our earnings release.
Speaker Change: <unk> and risk factors in our most recent Form 10-K, and subsequent filings made with the SEC.
Speaker Change: During today's call, we will be referencing slides, which are available to view why are they a cost a copy of the slides have also been posted to our Investor Relations website. In addition, we have also filed historical financials for the advanced that are meaningful that can be accessed on our website.
Speaker Change: Ill begin todays discussion with an overview of our third quarter 220, <unk> results after that Jim will provide an update on our strategic thoughtful word.
Speaker Change: Then Brian will discuss our financial objectives for the next three years. Following management's prepared remarks, we will open the line for questions now, let me turn the call over Casino Kelly Chen.
Speaker Change: Thank you <unk>. Good morning, everyone. This morning advanced took a big step forward on its journey to operational excellence and value creation, our entire management team is confident focused and excited.
Brian: Today, we will discuss Q3 results, our near term outlook and our strategic path forward through 2027.
As Youll note from our earnings release. This morning, we have provided you with a lot of information.
Brian: With the successful completion of the World Pac transaction, we have outlined the financial position of advance auto parts remain co. So that you have a clearer and Fuller picture of where we are where we are heading and how we will measure our progress along the way.
Brian: I feel that what's been done so far is working.
Brian: It is very satisfying for me to see that with the team effort involved we now have line of sight to achieve our 2027 outlook, which I'm delighted to share with you today.
Brian: We are laying out a plan to deliver anticipated adjusted operating margin of approximately 7% by year end 2027 my.
Brian: My confidence in achieving these goals stems from approximately 500 basis points of expected improvement that will be driven primarily by factors within our management team's control, including merchandising excellence inter.
Internal supply chain transformation and store efficiency.
Before we get into those details I would like to express my gratitude to the more than 65000 hard working team members that advance whose efforts during the recent hurricanes has been exceptional.
Brian: We are thankful to our many associates, who partnered with local communities to bring relief to those impacted with efforts ranging from helping reopening our stores two leading donation drives.
Brian: This quarter results came in below our expectations as the sales softness that began in early Q3 persisted throughout the quarter.
Brian: Macro headwinds and economic uncertainty continued to weigh on the consumer spending while our results were also impacted by other events, such as hurricanes and the crowd strike outage.
Brian: We are pleased to have made progress on our strategic actions, including the completion of the sale of World pack and a comprehensive productivity review of our assets. This review has identified opportunities to improve our adjusted operating income margin over the next three years through a broad range of actions, including a re.
<unk> of our stores and DC portfolio.
Brian: Over the past year I have spent a considerable amount of time at our stores and in our distribution centers meeting with our team members vendors and customers throughout these conversations one common thread that emerged is advances rich legacy and the important role we play in the industry and in the lives of our customers.
Brian: With that foundation today, we are excited to share our strategic and financial plan for the next three years, but first let me pass it on to Ryan to discuss our Q3 results Brian.
Ryan: Thank you Shane and good morning, everyone. Following the successful sale of World Pack, we have made certain changes in the presentation of our financial statements.
Ryan: First our results show a breakdown of discontinued operations related to world pack and continuing operations, reflecting results for the advanced business.
Ryan: Second to provide a better understanding of our underlying operational performance. We report certain financial measures on an adjusted non-GAAP basis to exclude the impact of certain items our.
Ryan: Our guidance and financial plan for the next three years is based on these adjusted financial measures.
Ryan: Lastly, our results were also impacted by certain atypical items that are not included in the non-GAAP adjustments, which I will discuss shortly and our view looking at our reported results through this lens will provide more helpful understanding of our performance.
Ryan: Now, let's turn to reported results for advanced continuing operations.
Ryan: Net sales from continuing operations were $2 1 billion or.
Ryan: A 3% decrease compared with Q3 last year.
Ryan: Comparable store sales declined two 3% driven by continued softness in the overall consumer spending environment.
Ryan: In addition to other events impacted us this quarter first our store and server systems were impacted by the global crowd strike system outage due to which stores were temporarily unable to serve customers and closed transactions.
Ryan: Later in the quarter Hurricane Helene impacted sales at over 300 stores. We estimate both these events combined accounted for approximately 50 basis point headwind to Q3 comp.
Ryan: Without these events our two year comparable sales growth would have been about in line with the second quarter and our expectations.
Ryan: In terms of channel performance, both pro and DIY declined in the low single digit range with pro performing relatively better importantly on a two year basis, our pro comp was positive and accelerated compared with last quarter.
During Q3 transactions declined in the low single digit range led by a mid single digit decline in DIY transactions.
Average ticket growth was positive in both channels from a category perspective, we saw strength in batteries filters and engine management sales and discretionary categories were weaker.
Gross profit from continuing operations was $908 million or 42, 3% of net sales.
Ryan: An improvement of approximately 540 basis points over the prior year.
Ryan: As a reminder, in Q3 last year, we had onetime inventory adjustments. This contributed approximately 525 basis points of the year over year improvement.
Ryan: The balance was driven by stabilization of product cost offset by pricing investments from earlier in the year.
Ryan: Adjusted SG&A from continuing operations was $891 million are about flat year over year.
Ryan: As a percentage of net sales adjusted SG&A was 41, 5% compared with 42% with 130 basis point deleverage attributed to lower sales.
Ryan: We incurred higher labor related expenses to the frontline investments, which were offset by our cost out efforts.
Ryan: Adjusted operating income from continuing operations was $16 $7 million and 80 basis points as a percent of net sales compared to negative three 3% last year.
Ryan: Adjusted diluted loss per share from continuing operations was <unk> <unk> compared with a loss of $1 19 per share in the prior year.
Ryan: We estimate that the loss in sales due to the crowd strike outage and hurricane impacts accounted for approximately 13 cents of EPS headwind during the quarter.
To conclude my discussion on Q3 results I would like to provide some additional details of certain atypical items that influenced Q3 results.
Ryan: As a reminder, these items are not part of our adjusted non-GAAP results.
Ryan: We believe that explanation of these items is helpful to understand our performance.
Ryan: As you can see on this slide we estimate atypical items amounted to 125 basis points of operating margin headwind and approximately 34 cents of EPS headwind during the third quarter.
Speaker Change: While Q3 performance was below our expectations. We believe that we have the right action plan to deliver improved results in the quarters ahead, and I look forward to sharing details of our financial plan later now let me hand, it back to Shane to provide some insights in our strategic path forward.
Shane: Thank you Ryan it's an honor to lead this company and work alongside so many talented team members I am confident in the team's ability to execute our strategic plan and deliver stronger results.
And I would like to begin by highlighting the key drivers of our turnaround.
Shane: Number one we're a leading player in the more than 150 billion dollar auto aftermarket industry that has strong demand drivers. We believe that this plan will position us to grow by serving millions of customers through our extensive store network, where we have the right to win as a reminder, even incremental improvements in our performance.
Shane: Can yield substantial results.
Number two our strategy is centered on getting back to the fundamentals of selling auto parts. The slope of our improvement will be determined by the multitude of smaller decisions made by our team.
Shane: And we are embedding industry best practices in our operations and focusing on executing a clear strategic framework to elevate the performance of the advance blended box.
Shane: Three our leadership team brings deep automotive experience with broad retail fundamental expertise.
Shane: In addition, following the World <unk> sale, we will also have an enhanced liquidity position, providing incremental capital to execute our plan.
Shane: Number four we completed a thorough assessment of operational productivity across our asset base and identified opportunities to improve profitability. We believe our plan, including store footprint optimization will enable us to narrow our margin gap to the industry.
Shane: And number five we are now introducing our goal to deliver approximately 7% adjusted operating income margin by the end of fiscal 2027.
Shane: We expect to achieve this by stabilizing the business to deliver stronger productivity. This will provide a strong foundation to subsequently deliver value for our shareholders over time.
Shane: Now let me discuss each of these drivers.
Shane: On slide 10, you'll see that advanced operates in an attractive sector with strong demand drivers and access to a large addressable market.
Shane: In the U S vehicles in operation continues to grow with over 280 million cars on the road and nearly 85% of those vehicles are at least four years old. The average age of these vehicles has continued to grow and is currently at 12 eight years as consumers continue to hold.
Shane: Onto their cars longer.
Shane: This trend is influenced by factors such as new vehicle acquisition cost and the high cost of insurance.
Shane: Despite volatility in energy prices miles driven continues to grow creating the need for regular maintenance. These factors are expected to contribute to healthy consumer spending on auto repair and maintenance supporting demand for parts and accessories and creating a strong backdrop for growth in the near term. We are cognizant of the economic uncertainty that is.
Shane: Weighing on consumer sentiment and we are planning our business accordingly.
Shane: Next slide.
Shane: To reposition advance for growth, we are getting back to the basics, which starts with putting the customer first when I began this role a year ago. We started work on a cultural change to put greater emphasis on listening to the customer we strongly believe that when we put the customer first and align the rest of the organization to meet the customers' need.
Shane: We win.
With this focus in mind, we have taken several decisive actions over the last year.
Shane: These include refocusing our efforts on the blended box, which drove our decisions to sell world pack and retain our Canadian business.
We also reduced costs and then invested additional resources in our frontline to help reduce turnover and enabled frontline team members to better serve our customers through these efforts turnover in four key field roles has been reduced by nearly 700 basis points over the past year.
Shane: We initiated the consolidation of our supply chain, which has been accompanied by the rollout of market hubs to create economies of scale and enhanced service levels for our stores.
Shane: We are seeing early results that the market hubs and the stores served by the market hubs are comping better relative to markets without hubs.
Shane: We also invested in pricing to improve our competitive position and are seeing improvement in unit sales trends.
Shane: We also estimate that we've recovered approximately half of the investment of these pricing moves on an annualized basis.
Shane: From a talent perspective, our new leaders have been rebuilding teams and refreshing processes to focus on core retail fundamentals, which is integral to our success during the turnaround.
Shane: Next slide.
Shane: Over the last year, we have refocused the organization's actions on improving efficiency of the blended box, which serves both DIY and pro customers from the same store.
Shane: In our view, our blended box focus will enable us to grow our share in the large fragmented market, where the top four players account for just under 30% share we.
We are dedicating our efforts to provide pro and DIY customers with a mix of well recognized high quality national and private label brands, including our popular car quest and diehard lines of product, we have a loyal base of more than $15 million DIY speed perks members and tens.
Shane: Thousands of pro rewards members to support our growth.
Shane: Based on industry estimates pro is expected to be the primary engine of growth due to shifting consumer preferences, which is in part being driven by increasing parts complexity we.
Shane: We have access to a large vendor community that is fully supportive of our turnaround efforts and our renewed focus on the blended box.
Shane: With our merchandising initiatives development of effective end to end supply chain capabilities and changes to our store operating model, we will enable our stores to serve grows faster.
Shane: And our pro sales team, we have redesigned incentive structures in increased wages to market levels to improve retention and drive higher productivity.
Shane: In our DIY business, we are making investments in stores team member training and e-commerce capabilities to improve customer experience and conversion.
Shane: On page 13, you can see that our executive team has nearly 300 years of combined relevant leadership experience. We have recently brought in talented leaders in finance real estate and merchandising who possess fundamental expertise in executing retail operations.
Shane: As shown on this page, but important to mentioned is our store team leaders, including our field based regional Vice presidents bring extensive automotive expertise.
Shane: We have also augmented functional talent and merchandising and supply chain and I am confident that this team's blend of automotive and retail fundamental knowledge will successfully execute our strategic plan.
Shane: Next slide.
Shane: Last week, we announced the successful completion of the World pack sale, adding $1 5 billion of additional liquidity to our balance sheet. As a result, we currently have approximately $2 billion of cash which exceeds our aggregate debt position as.
Shane: As Ryan will describe in more detail later, we believe the combination of the world Pac proceeds and the anticipated improvement in our operating cash flow will provide the requisite liquidity to run our business and fund our investments in the coming years. We are focused on two main priorities. The first is investing in.
Shane: He is to improve the business and the second is supporting our balance sheet, including repaying debt at or before maturity.
Shane: Next slide.
Shane: In August we began a comprehensive review of asset productivity. Our goal is to assess actions already underway and identify additional areas of structural changes that would establish a stronger foundation for our future. Following this review we have anchored our strategic plan on three pillars to put us on the path to.
Shane: <unk> consistent profitable growth as shown on the slide.
Starting with our store operations as indicated in our release. This morning, we made the decision to close certain nonperforming nonstrategic stores in the U S to better position our asset base for long term sustainable growth as we move along our turnaround journey with a revised asset base. We're also redesigning.
Our basic store operating model to yield stronger labor productivity.
Shane: The second pillar is merchandising excellence, we are taking a fundamentally different approach to negotiating with vendors to lower our direct product costs. This involves working with our suppliers to show how a partnership with advance can drive mutually profitable growth.
Shane: Regarding assortment management, we already have work underway to improve our parts availability by market and to increase the speed of customer service.
Shane: Earlier. This year, we also made critical pricing changes to become more competitive while avoiding unnecessary discounting in keeping with our industry's rational pricing practices. Our review has also revealed opportunities to improve margins by better managing promotions, including reducing unproductive promotions.
Shane: And the third is supply chain, we continue to make progress in consolidating our distribution centers to operate with a streamline network of large distribution centers and as a result have closed or converted 10 small dcs.
Shane: We have opened 18 market hub stores to date and are targeting to open 60 by mid 2027.
Shane: This is slightly behind our original expectation of 2026, as we pause the build out to complete the closure of stores and Dcs announced this morning.
Shane: While we consolidate Dcs and build new hubs, we are simultaneously pursuing opportunities to optimize our DC to store transportation routes to reduce costs and increase productivity.
Shane: Separately and in conjunction with other operational changes, we have made the difficult decision to eliminate certain positions across the organization to align our structure to current business requirements and the execution of our strategic plan.
Shane: We expect this will yield around $50 million in annualized savings. In addition to the SG&A reductions announced last year.
Let me now dig deeper and provide an overview of our strategic actions across each of these pillars next slide.
Shane: A key component of our operational productivity review was evaluating the health of our stores. Following the review we have made the decision to close more than 500 advance stores and exit our relationship with more than 200 independent locations. This reduction consists of complete market exits in certain western <unk>.
Shane: <unk>, coupled with the optimization of our footprint in other markets, including the Eastern States, where we have higher density further there are four western Dcs that are included in the closures.
Our decision does not impact locations in Canada, we considered multiple criteria during our evaluation process and I'd like to further discuss three store profitability DC productivity and operational execution.
Let's begin with store profitability, we evaluated the operating and financial performance of stores across our entire footprint along with their relative competitive intensity to determine the viability of each location.
Shane: Second distribution center productivity are four Dcs on the West coast serve a lower concentration of stores and we would need to allocate significant capital and resources to infill those markets.
Shane: We do not believe this would be the best use of our capital and believe that investing in other core areas of the business will help deliver stronger profitability. As a result, we decided to close the four dcs and associated corporate stores and independent locations in these less dense markets, resulting.
In a complete exit of certain markets on the West coast.
Shane: And third establishing a stronger foundation to simplify operational execution.
Our objective was to improve store concentration in our strongest markets to conserve resources and be better positioned to grow in those markets. Following the closures over 75% of our revised store footprint will be in designated market areas, where we will have the number one or number two position based on <unk>.
Speaker Change: Tore density.
Speaker Change: We expect to execute these closures by mid 2025 to 700 locations outline for closure are dilutive to annual operating income by approximately $60 million to $80 million, which we expect to recover following the closures, we expect to collaborate with landlords too.
Speaker Change: Leased store locations in a reasonable manner to manage the obligations on our balance sheet.
Speaker Change: Making the decision to close such a meaningful percentage of our store base was not an easy one as it affects a significant number of our team members. However, we believe this action is prudent to support the long term health of the company.
Speaker Change: Next slide.
Speaker Change: As we execute our plans with an optimized store footprint, we expect to derive stronger value from our turnaround efforts. This page provides a financial overview of our revised store footprint on an aggregate basis. Our decision includes closure of approximately 10% of our corporate stores and approximately a 20% reduction.
Speaker Change: In U S independent locations the higher share of independents is primarily driven by our decision to exit the west coast markets, where there is a higher concentration of these locations base.
Speaker Change: Based on financials over the last 12 months the reduction of these 700 locations is expected to reduce our net sales by approximately $700 million, our revised corporate store footprint base now implies about 4% higher sales per store compared to the store base pre closures.
Speaker Change: Slide.
Speaker Change: This page shows an updated map of our store locations. We believe that our revised store base will enable us to generate higher returns from our turnaround efforts and support improved financial performance in the future. In addition, we will focus new store growth and higher density markets and plan to achieve an annual opening cadence of 100 stores per.
Speaker Change: Year over time, our real estate team is mapping out opportunities in each market designing a plan to accelerate new store openings, while compressing our opening timeline opening new stores is a successful way of growing regional market share and gives vendors the opportunity to grow with us next slide.
Speaker Change: As a next step to maximizing productivity in our stores, we are redesigning our operating model with an emphasis on quality and speed of service, let's break this down by DIY and pro.
Starting with DIY, we are adopting a data driven centralized approach to managing team schedules based on DIY traffic patterns, which enables general managers to dedicate more time to selling activities.
Speaker Change: We are also reducing the amount of manual paperwork that our gms do we are providing them with better reporting to track their performance and we're also replacing outdated RF scanners with zebra devices.
Speaker Change: From a talent perspective, we recently launched centralized recruiting for stores in certain markets to give our gms more operational flexibility and we plan to roll this out across all markets last month. We also made the decision to sunset our UBS access point program, the time devoted to EPS drop offs and pickups.
Speaker Change: Took time away from serving our customers.
Speaker Change: To elevate the quality of our service we have launched a mini training series for our team members. So that they can build their knowledge faster and be better equipped to guide the customer with the repair and maintenance needs.
Speaker Change: Moving on to the pro we are reallocating resources by sales volume competitive intensity and customer demand. This includes a standardization of our driver vehicle schedules a reduction in third party deliveries and the management of commercial parts pros in stores with regard to drivers schedules.
Speaker Change: We are assessing store level performance to allocate resources to high volume stores and manage labor costs and lower traffic stores. This approach will drive stronger labor productivity, while ultimately lowering our time to service pro customers today, our time to serve is slower than what we wanted to be and we are focused on <unk>.
Speaker Change: During this over time.
Speaker Change: Next slide.
Speaker Change: To win in the aftermarket and enhance our reputation as a destination for high quality auto parts, we need to consistently make available thousands of parts for our customers. We have successfully added new leadership with critical expertise to transform our merchant organization and reestablish advance as a long term.
Partner within the vendor community.
Speaker Change: This starts with changing our philosophy with vendors from what can you do for me to how can we grow together, we are undertaking joint business planning with our vendors discussing category strategies placement for Skus and mutually establishing rules to build trust our conversations with vendors have.
Speaker Change: Been constructive and we look forward to building our dialogue with the aftermarket vendor community at our summit in January. In addition, we are also focused on improving cross functional collaboration between our supply chain and merchandising teams to drive higher volumes and reduce costs.
Speaker Change: To effectively serve the aftermarket based on different demand and service expectations, we need to provide parts coverage for thousands of skus at any given time. This begins with product line reviews that help us identify unproductive skus introduced new products evaluated private versus national brands and assess supplier diver.
Speaker Change: Suffocation to improve the speed with which we bring products to the market. We expect to undertake between 200 250 line reviews. This year and plan to pick up the pace over the next two years, our ability to bring parts to the market faster also depends on the speed at which the parts are setup in our system.
Speaker Change: Our goal is to bring this timeline down significantly by breaking down existing processes and leveraging automation setting up parts faster will enable us to capture demand signals faster and results in effective SKU management across the network.
On assortment our goal is to ensure accurate availability of parts in our network. Our assortment is complex and includes more than 90 million unique store SKU combinations. We are addressing internally identified SKU gaps and building competitive intelligence to expand availability for our customers.
This will also support higher labor productivity as our frontline team can reduce time chasing parts from surrounding stores that they do in order to complete an order.
We have also started measuring store availability through DC and store in stock depth. Today. This metric sits in the low nineties and we expect it to reach a high <unk> level over time as we introduced technical capabilities to previously manual processes.
Speaker Change: Along with bringing parts to market faster, we are reevaluating, our promotional and discounting mechanisms to provide relevant offers to our customers and reduce unproductive promotions for our pro business. Our team is designing new category based and customer segmented promotional models, along with stronger technical testing capabilities to unlock.
Speaker Change: <unk> the impact of promotions.
Speaker Change: These models will consider factors such as customer spending volume our speed of service and competitive density.
Data driven approach will enable us to be more targeted in our campaigns based on market characteristics.
Speaker Change: In our DIY business, we plan to run fewer bigger and bolder promotions in store and online based on our estimates the number of items sold at discount on our website is almost two times higher compared to others, while the ROI on these promotions has been inconsistent.
Speaker Change: We have also created execution challenges for our teams in managing skewed depth across multiple simultaneous promotions to optimize this our team is focusing on the fundamental goal of driving higher comparable margin dollars on a year over year basis, and amplifying our vendor funded media campaigns to influence traffic.
Speaker Change: Nick.
Nick: Next slide.
Nick: We are highly focused on optimizing our supply chain with one simple goal of reducing the time in which customers receive parts and doing so in the most economical manner to achieve this we are consolidating our DC infrastructure to create economies of scale.
Nick: At the beginning of the year, we operated 38 Dcs of varying sizes by 2026, we plan to operate 13, Dcs with each averaging about 500000 square feet. This is a change from our prior expectation of 2014 Dcs due to the exit of one large DC on the west coast related to our App.
Nick: Optimization work.
Nick: These dcs will operate on a single warehouse management system to establish better SKU tracking and inbound outbound inventory processes. We have successfully completed the conversion of our final DC to the new W and our system as we consolidate the volume of smaller Dcs in the larger ones we've been.
Nick: Again, moving more volume by a truckload shipments compared to LPL shipments, which lowers our overall freight costs. For example in our home state of North Carolina are DC consolidation project as a resulted in 15% more volume moving by truckload, which has lowered freight costs.
Nick: Operating fewer larger Dcs also provides an opportunity to optimize our picking an outbound replenishment activities, we measure DC labor productivity through L. P. H four lines per hour, which shows the number of product lines and shipped on an hourly basis. This kpis currently in the mid twenties range.
Nick: <unk> and our interim goal is to improve it by 15% to 20%.
Nick: Along with the consolidation we are building a multi echelon D C store hub network.
Nick: Our new market hubs are designed to improve our speed of service by placing 85000, skus closer to the customer, thereby increasing availability by 70% compared to a hub store and by more than 200% compared to a regular store while still early in our build out. This is a proven model in the industry and we.
Nick: We're encouraged with the initial results on a year to date basis comparable sales growth for a market hub and its network of service stores has been outperforming DMA without market hubs. This network also helps reduce the number of touches per product driving higher labor productivity for example.
Nick: Instead of a store driver going to multiple stores to fulfill our customer order. The order can be directly sourced from a single hub where market hub.
Nick: While the consolidation and build out continue we're also putting plans into action to lower fixed transportation costs and a replenishment model. We plan to do this by optimizing routing from Dcs to reduce the number of routes, adding more stops along the route and renegotiating carrier contracts.
Nick: Separately as part of the optimization, we are building capabilities to improve DC service levels for stores to support more sales and high volume stores or to win with availability in highly competitive markets.
Nick: Next slide.
Nick: We fully recognize that advance is a significant operating margin gap to the industry and we are focused on narrowing that gap. We strongly believe that with our current plan, we can improve our ability to generate higher profits more consistently based on cost factors alone. We have identified approximately 500 to 700 basis points of margin.
Nick: <unk> this is associated with reducing supply chain and product costs, improving pricing and promotions management and extracting SG&A efficiencies our largest gap to peers is sales productivity at the store level, which is almost equal in magnitude to the cost factors as we take actions to improve our direct.
Nick: And indirect expense structure, we expect a greater percentage of our sales dollars to flow to the bottom line, which will enable us to further narrow the gap I would also like to note that on the far right section of the chart, we show structural components within our financial profile that will limit our ability to fully close the gap in the long term.
Nick: These include a higher mix of rented store locations the relative mix of pro customers and margin considerations from sales through independent locations that being said, we are confident in our ability to improve margins to attractive levels in the long run.
Our productivity review has identified opportunities to generate over 500 basis points of margin over the next three years to reach our objective of delivering approximately 7% adjusted operating income margin by the end of fiscal 2027.
Nick: These margin opportunities stemming from actions within each of our strategic pillars, Ryan will share more details on our long term financial objectives, and how we plan to track our progress.
Nick: As I wrap up my section I would like to reiterate that each activity and our strategic plan reflects an operating philosophy based on core retail fundamentals, we will remain focused on executing and tracking the success of these actions to elevate the performance of the advanced blended box I will now hand, it over to Ryan to describe how these strategic actions.
Speaker Change: <unk> drive our financial plan Brian.
Ryan: Thank you Shane I am excited to share our financial roadmap through fiscal 2027 and plans to deliver value for our shareholders. Our financial plan reflects progress on achieving greater operational productivity through our strategic actions.
As we discussed our financial plan today, both Shannon I recognized that we need to build a track record of success.
Ryan: Over the past several months, we have dedicated time to dive in into the business understanding the opportunities that lie ahead and building a plan backed by solid fundamental actions with measurable kpis to track progress.
Ryan: We are focused on four key areas to enhance shareholder returns over the next three years and beyond.
Ryan: First we are optimizing our asset portfolio to store closures and SG&A reductions to provide a healthy foundation for long term growth.
Speaker Change: As Shane mentioned, we have identified over 500 basis points of margin opportunity over the next three years from operational efficiencies and merchandising supply chain and store initiatives.
Speaker Change: Importantly, we do not view this as the final destination, but the beginning of our continued operating margin expansion in the future.
Speaker Change: Third we believe that we have ample liquidity for investment in high return projects across critical areas to support our growth.
Speaker Change: This includes building, our multi echelon network and accelerating new store openings.
Speaker Change: And fourth we anticipate our strategic actions will enable us to improve cash generated from operations driving an improvement in free cash flow, even as we step up capital expenditures over the next few years.
Speaker Change: While we have already begun executing part of our plan. This year the largest portion of the implementation is not expected to begin in earnest until 2025.
As a result, we expect these benefits to start showing meaningful progress in 2026 and beyond.
Speaker Change: During the implementation, we will be measuring the success of each pillar with clearly defined operational kpis and holding our organization accountable to those goals.
Speaker Change: To monitor progress on these initiatives, we have set up internal work streams to manage the implementation and allocation of resources to achieve these goals.
Speaker Change: We are keenly aware that the initiatives on this slide are frequently used concepts in retail the difference between companies that are successful and those that are not is the quality of execution.
Speaker Change: As a management team that is where we spend most of our time with a focus on getting the basics right.
Speaker Change: Before discussing our three year plan, let me provide some color on our financials adjusting for the full impact of store closures and the sale of oil patch.
Speaker Change: Starting with the midpoint of our 2020 for guidance and excluding stores planned for closure our pro forma revenue is expected to be between eight two and $8 4 billion.
Speaker Change: As previously noted the store closures reduced our net sales by approximately $700 million. However, we are re basing our plan around $600 million to $800 million in net sales reduction.
Speaker Change: The high end of this range assumes modest levels of sales transfer to locations in markets, where we will continue to have a presence.
Speaker Change: The low end of this range bakes in potential headwinds associated with realignment of our sales team efforts due to the reduction in store footprint.
Speaker Change: In addition, we showed the midpoint of our 2024 operating income margin guidance as well as the anticipated 70% to 90 basis points of savings associated with store closures about 30 basis points of atypical items offset by the normalization of about 30 basis points of Woolpack intercompany margin.
Speaker Change: Over the next few slides I'll provide an overview of our three year financial plan with preliminary expectations for 2025, starting with net sales for 2025, we expect net sales of approximately eight 4% to $8 6 billion.
Speaker Change: We expect to begin closing stores later this year with full completion of this activity by mid 2025 as a result, our 2025 net sales target includes a partial impact of lost sales.
Speaker Change: We also plan to open 30, new stores next year and grow comparable sales between 50 to 150 basis points, which is an improvement on our current run rate with modest contribution from strategic actions currently in flight.
Speaker Change: This rate of growth also includes the carryover of pricing actions, which we expect it to be fully annualized in the first half of 2025.
Speaker Change: Over the following two years, we expect our rate of comparable sales growth to improve as we realize the benefits of our store operating model changes improved parts availability and an overall improvement in customer service, including a reduction in our time to serve.
Speaker Change: While we expect to deliver continuous improvement in our sales trajectory the timing of the benefits from our initiatives are difficult to predict.
As a result, our plan is based on comparable sales growth below industry levels. We also plan to gradually accelerate our pace of new store openings each year to ultimately achieve our long term target of opening 100, new stores post 2027.
Now looking at adjusted operating margin by the end of 2025, we are planning for adjusted operating margin between 2% to 3%, implying an expansion of 150 to 250 basis points compared to the midpoint of our remain co 2020 for guidance.
Speaker Change: As indicated earlier, we expect to save approximately $60 million to $80 million in operating costs related to the store closures or about 70% to 90 basis points in margin during.
Speaker Change: During 2025, we expect to recover about half of these savings to the timing of closures. The full run rate of operating cost savings is expected in the second half of 2026, the rest of our margin improvement in 2025 is being driven by cost savings from merchandising activities, including line reviews and product.
Speaker Change: Cost negotiations.
Speaker Change: We expect modest SG&A leverage in 2025 from labor productivity and indirect cost out initiatives offset by normal wage inflation.
Speaker Change: Over the following two years, we expect operating margin to increase by another 400 to 500 basis points, which.
Speaker Change: Which includes the full operational cost savings associated with the store closures. Our plan assumes fiscal 2027 gross margin in the mid Forty's range and SG&A below 40%.
Speaker Change: The gross margin improvement is expected to be driven by three primary factors.
Speaker Change: First strategic vendor negotiations as Shane mentioned, we are conducting joint business planning discussions with our strategic suppliers to grow our business with them and improve the economic outcome for us and our suppliers.
Speaker Change: Second DC.
Speaker Change: <unk> productivity and transportation optimization, we expect to leverage supply chain costs and drive stronger DC productivity through higher inbound and outbound volumes, but operating fewer large dcs.
Speaker Change: We also plan to optimize our story punishment rounds based on transaction volume and market needs and.
Speaker Change: And third promotions with the use of targeted promotions, we aim to remove unproductive offers and drive better gross margin returns to a disciplined promotional cadence that will yield higher returns at the same time, we plan to manage pro customer discounting the new pricing models to increase our wallet share from existing customers.
Regarding SG&A the margin improvement is expected to be driven by increased labor productivity from changes in our store operating model and higher fixed cost leverage supported by better parts availability.
Speaker Change: We remain committed to maintaining sufficient liquidity over our planning horizon, our balance sheet is strong with approximately $500 million of cash available at the end of Q3, the sale of Woolpack added approximately $1 2 billion of incremental cash to support our strategic plans.
Speaker Change: While we expect to incur certain cash related costs associated with the execution of store closures. We are simultaneously evaluating options to unlock value from the closed locations to minimize the cash flow impact.
Speaker Change: Even after reflecting these costs, we expect we would have over a $1 billion in cash on our balance sheet.
Speaker Change: This position I've just described does not take into account our revolving credit facility, which is currently undrawn.
Our financial plans assume we will be able to generate strong operating cash flow to fund higher capex, which in turn will help deliver higher free cash flow.
Speaker Change: In 2025, we anticipate spending at least $300 million in capital expenditure related to our strategic initiatives funded through operating cash flow.
Speaker Change: As we execute our turnaround and improve the performance of the business improving our leverage profile remains a key priority.
Speaker Change: Our objective is to reduce remain co leverage ratio from approximately four times at the end of Q3 to approximately two five times no later than the end of 2027.
We expect to reach this target by repaying our debt obligations at or before maturity along with the reduction in our lease obligations.
Speaker Change: On a preliminary basis, we expect to exit approximately 40% of these leases tied to closed stores over the next 12 to 18 months.
Speaker Change: Partially offset by leases for new stores through 2027.
I would like to note, we anticipate reaching our target leverage ratio regardless of outcomes from our efforts to reduce lease obligations.
Speaker Change: Regarding supply chain financing, we currently have sufficient in growing capacity on the facility and our current three year planning horizon assumes we maintain approximately $2 8 billion.
Speaker Change: A remain co payables under financing agreements with our banks.
Speaker Change: Separately as it pertains to inventory or payables coverage ratio has improved by approximately 300 basis points following the sale of oil back.
Speaker Change: Our three year financial plan assumes we maintain our current payables ratio.
Speaker Change: We expect to deliver further improvements in this ratio over time, as we execute our merchandising strategies and enhanced vendor relationships.
This implies approximately three 5% of net sales over our planning horizon.
Speaker Change: We are allocating incremental capex to support our ongoing business needs.
Speaker Change: Celebrate new store growth and invest in strategic initiatives to stabilize and grow the business. We will continue to spend towards the buildout of our multi echelon supply chain and other merchandising projects to improve inventory availability.
Speaker Change: Additionally, a portion of the capital will be allocated towards store in technology that these expenditures will be targeted primarily on the key maintenance items, such as age roofing HVAC or technology systems.
Speaker Change: In summary, we believe we have the right strategy centered on core retail fundamentals to deliver our financial objective for 2027.
Speaker Change: Shane and I are confident in this plan and the team's ability to execute this turnaround.
We are focusing on execution and holding the entire organization accountable to delivering progress on our kpis.
Speaker Change: As we solidify our foundation and work to achieve these targets in 2027, we believe we have further upside potential to narrow our gap to the industry and to exceed 7% adjusted operating margin beyond 2027.
Speaker Change: Moving to an update on our full year 2024 guidance before moving to Q&A.
Speaker Change: Our guidance is presented on an adjusted non-GAAP basis for the advanced remain co.
Speaker Change: Net sales, we now expect net sales for the full year to come in approximately $9 billion <unk>.
Speaker Change: Including comparable store sales of approximately negative 1%.
Speaker Change: To date, our trends are tracking about in line with Q3 and our guidance assumes we continue at the same trend through the end of the quarter.
Speaker Change: The impact of store closures is not expected to be meaningful to fourth quarter comp trends due to timing of closures.
Speaker Change: We expect adjusted operating income margin for the full year to be between positive 25 basis points and 75 basis points.
Speaker Change: Adjusted diluted EPS for the full year is now expected to be in the range of a loss of <unk> 60 to flat.
Speaker Change: We expect free cash flow of approximately flat at the end of the year, which includes cash outflow associated with the execution of store closures.
Our guidance for capital expenditures is now expected between $175 million to $225 million as we continue to undertake projects to enhance our E.
Speaker Change: Stores and supply chain infrastructure.
Speaker Change: Understanding. This is the first time, we are providing remain co guidance, let me share my thoughts on fourth quarter.
Based on our guidance fourth quarter adjusted operating margin is expected to be negative.
Speaker Change: We expect gross margin to be up year over year, although due to the lower sales, we will experience some deleverage in fixed supply chain expenses.
Speaker Change: Q4 is traditionally the lowest gross margin rate of the year and I would expect that to continue.
Speaker Change: On SG&A, we expect dollars to be sequentially, lower although higher compared to last year due to lapping of certain favorable annual trips, which is expected to drive deleverage on lower sales.
I would also like to note that our Q4 expectation assumes a temporary re prioritization to execute store closures.
Speaker Change: That could potentially impact our day to day operations.
Speaker Change: We believe these strategic actions are the right path forward to establish a stronger foundation for future growth.
Speaker Change: In summary, I would like to thank our entire team for their commitment to the turnaround and helping shape our strategy for the long term we.
Speaker Change: We have a rich legacy and a trusted brand name along with an extensive network of stores to capitalize on strong industry drivers for our growth.
Speaker Change: Our strategic plan is focused on getting the basics right every day.
Speaker Change: We have a strong leadership team and talented frontline workforce to serve our customers. We have a solid balance sheet to support our investment needs. We now have a clear pathway to narrow our margin gap to the industry and create value for our shareholders.
Speaker Change: Look forward to sharing more about our progress in the future with that I will now hand, the call back to Shane.
Shane: Thank you Ryan in closing I want to thank everybody for joining our call today, we hope today's presentation provided a clearer view of our path forward and our opportunities for growth.
Shane: Each leader in our organization is committed to delivering against our three year plan.
Shane: I would like to thank our team members once again for their continued dedication to serving our customers. While we take the required actions to fuel the improvement and long term growth of the company with that let's open up the call for questions operator.
Speaker Change: Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad, if you're allowed to ensure your question. Please press star followed by two.
Speaker Change: Parents, who asked you a question please ensure you're on mute locally.
Speaker Change: We ask that you please limit yourself to one question and a follow up before returning to the queue.
Speaker Change: Our first question comes from Michael Lasser of UBS, Michael Your line is open. Please go ahead.
Michael Lasser: Good morning. Thank you so much for taking my question.
Michael Lasser: On the long term outlook, how much really investment have you assumed that you would need to make.
Michael Lasser: The cost savings into the business over the next couple of years and as part of that have you assumed that you will be able to maintain your vendor financing program as it currently stands.
Speaker Change: Moving forward. Thank you very much.
Yeah.
Hey, Thanks, Michael.
Speaker Change: On the supply chain Finance base, yes, we are.
Factory name we're maintaining.
Speaker Change: The ability of the two eight is roughly where we are targeting that might fluctuate up and down a little bit as we continue to work with our vendor partners, but we're we're targeting two eight targeting that we will have the capacity to support the two way going forward from a reinvestment standpoint.
Speaker Change: We feel like we're at a good SG&A level will have obviously some inflation going forward.
Speaker Change: But I think in our guide we've factored in.
Speaker Change: The incremental capex that will be part of that investment so moving up to three.
Speaker Change: $300 million on average per year that might fluctuate a little bit depending on the timing of some of those initiatives, but thats. The reinvestment, we're making more on the capex side on the cost savings side.
Speaker Change: Bring it a lot of those cost savings to the bottom line.
Speaker Change: That's somewhat offset by inflation going forward, but factored into our guide.
Speaker Change: Got you. Thank you very much Mike.
The question is.
Speaker Change: Philosophically is the plan to say hey.
The advanced auto can compete effectively in the marketplace as a leaner more nimble more regional type of organization and there is evidence to support that from the fact that there are strong regional players in the market already.
Speaker Change: Because clothing stores getting out of markets would suggest that the store growth the ability to be a national retailer is going to be limited.
Speaker Change: Over time, so if you could just give us.
Speaker Change: Is that what the long term vision on how advanced is expecting to compete with this plan that would be great.
Hey, Michael it's Shane good morning, Thank you for the questions.
Speaker Change: We have no doubt that we can compete and that evidence strongly exists today, we don't need to look at regional players. We just look internally at our company and where we have density.
Speaker Change: We perform and we see that in numerous markets and if you look at how we'll be coast store closing will be number one or number two in terms of density and 75% of our markets. So when you do a bell curve of our store performance, we see plenty of locations, where we not only compete with thrive we win.
Speaker Change: And so the idea is to focus on that get back to winning deliver the economic numbers that we've depicted today and during that journey. We returned to growth which includes opening new stores. So I don't think about it in terms of national or not national we just could we think about it in terms of.
Speaker Change: Where we can win where we can grow and then start doing that.
Speaker Change: Thank you very much and good luck.
Michael Lasser: Thanks, Michael.
Thank you. Our next question comes from Chris <unk> of Jpmorgan, Chris. Your line is open. Please proceed.
Speaker Change: Thanks, Good morning, everybody and thanks for the presentation.
Speaker Change: My first question is.
Speaker Change: Understanding that you do have less sales in the fourth quarter and youre going to deleverage.
Speaker Change: It seems like you're implying a down 5% operating margin. So I guess my question is are there onetime costs that are included in <unk> non-GAAP that arent per se recurring.
Speaker Change: Our continuing so related to that on slide seven it seems like youre, saying that the zero, 0.8% adjusted operating margin in three and <unk> included.
Speaker Change: 125 basis points of what things that that won't necessarily repeat next year.
Yes, Thanks, Chris.
Speaker Change: Youre doing the math right Q4 is going to be a little bit down.
Speaker Change: Close to what you are saying there is.
Speaker Change: It's more of we're cycling a couple of things that happened last year.
Speaker Change: We're factoring in some disruption given the turnaround right now.
Speaker Change: Isn't the surface sales and our gross profit rate in Q4 is traditionally the lowest gross profit rate in the year.
Speaker Change: There's a couple of things impacting that gross profit rate, but nothing thats.
Speaker Change: We're adjusting out the strategic initiatives. So that's out of that guide.
Speaker Change: But we're factoring in just a little bit of risk adjustment in Q4 relative to us being prioritizing this turnaround in the store closures.
Speaker Change: Really the gross profit traditionally in Q4 is lower a lower rate and thats driving it as well.
Speaker Change: And then so am I right on slide seven that <unk> had 125 basis points of stuff that youre, putting in the adjusted but youre, saying won't necessarily recur next year and as you think about the bridge. The 25, Youre modeling 200 basis points of operating margin.
Speaker Change: Spansion sort of midpoint to midpoint how.
Speaker Change: How much of that that expansion would you say is discrete lapse like one time costs, one time impacts whether it's the weather or that that gets you to the that level of expansion year over year.
Speaker Change: Yes, the 125 basis points is just kind of those things that pop up during the year like the hurricane the crowd strike impact on our system. There are other items in there so they're kind of atypical items that aren't necessarily part of the normal run the business.
Speaker Change: The 125 that we're calling out.
Speaker Change: It's something that's emerging.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: How much is there how much of that 200 and that next year is sort of execution free I E. There are unique cost and unique disruptions. This year that maybe you put into results adjusted results but.
Speaker Change: You have clear line of sight of getting those costs back next year.
Speaker Change: Yes, the 200 going into next year is just when you've got the store closures that are coming in.
Speaker Change: We're executing those as are popping in.
Speaker Change: The margin improvements that we're seeing as we partner with our vendors. The 200 is clear line of sight on our business actions and objectives.
Speaker Change: That's really what's driving the increase next year.
Speaker Change: Understood Thanks very much.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from Scot Ciccarelli of Jewish Scott. Your line is open. Please go ahead.
Scot Ciccarelli: Thank you and good morning, guys.
Speaker Change: So it looks like Cogs is supposed to be the biggest driver of your expected EBIT improvement both in 'twenty five as well as for your three year plan can you guys break it down a little bit more for us, meaning how much of that improvement supposed to come from supply chain, how much from better promotional management, just so we can understand the.
Speaker Change: What's really going to drive that improvement in Cogs.
Speaker Change: Yes, Scott Thanks for the question.
Speaker Change: Well I'll give you some general themes that we won't we're not going to give specific ones, but we are excited about where we're going with the cost improvement.
Speaker Change: It's broken down between both import costs versus cost as we partner with our vendors.
Speaker Change: Pricing and promotional improvement in there as well we know we have work to do to improve the effectiveness of our promotional cadence.
Speaker Change: Scale the size of those the effectiveness of them and then our pricing and where we're pricing and it's mainly to our pros and making sure that we've got the right pricing structure for our pros supply chain is a portion of that the supply chain as we can continue to consolidate our dcs and our market hubs.
Speaker Change: That is a longer tail than say, probably the merchandising piece of this so if we're looking at the Cogs improvement.
Speaker Change: Probably a larger portion of that cost improvement is coming from the merchandising excellence portion.
Speaker Change: And how would you guys kind of rate or rank your confidence in the ability to drive that gross margin improvement because obviously this year hasn't necessarily played out maybe the way you originally anticipated. So just trying to understand again, a little bit better on confidence levels.
Speaker Change: Gross margin improvement going forward. Thanks.
Speaker Change: Hey, Scott, it's Shane Great question, Thanks for asking.
I'm very confident and and the reason.
Speaker Change: Starts with leadership. So we're now starting to see is the impact of the changes we've made with key leaders. So Bruce Starnes has joined US from target keys started to build an outstanding team.
Speaker Change: And I saw this as we were out in apex meeting with vendors both in terms of discussions with existing vendors and working collaboratively to develop plans that support what we're trying to do also from vendors. We havent worked with <unk> now said, Hey, how do we how do we think about working with advance so he's digging in on a number.
Speaker Change: <unk> of retail fundamentals that pls process being one.
Speaker Change: Availability being another.
Speaker Change: So as he goes through those.
What I would consider a tried and true merchandising activities.
Speaker Change: His previous company will be known for those will yield results for us.
Speaker Change: Thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from Simeon Gutman of Morgan Stanley Simeon. Your line is open. Please go ahead.
Speaker Change: Hi, This is zach on for Simeon Thanks for taking our questions.
Speaker Change: Jamie.
Speaker Change: Realize the company is completely different than two five and even 10 years ago. As you know there always been margin goal is much higher in the future and margins of only contracted over time. So why is this time different and touching upon the earlier question and sort of what gives you confidence on the target you set out.
Speaker Change: Yes.
Thanks, Zack I appreciate the question.
Speaker Change: I can't speak to the past in terms of different decisions.
Speaker Change: Promises made for this management team, we want to improve our say do ratio. We're confident in what we're doing and I think about that in terms of the tale of the tape. So.
Speaker Change: Been here a year and so place, let's let's just review briefly what's transpired came onboard.
Speaker Change: Depicted that we reduced decisive actions started a strategic review said Hey, we'll investigate the sale of <unk>, We sold World pack, we picked up a $1 billion five for that we've shored up our balance sheet, we looked at Canada, we like Canada, where.
Speaker Change: We're keeping Canada, we invested in the supply chain, we looked at it and said Hey, we've got this sprit supply chain, let's move to our consolidated supply chain. We've made that action. We looked at our frontline said what are the roles what's the compensation. What's the training we made those changes we looked at our leaders and said where do we need key leaders in key areas. We've made a number of those <unk>.
<unk> and now as we go forward, we looked at the store base not easy we went across every store in the network across.
Speaker Change: Depicted three criteria, we actually had a broader list. We evaluated every one of our locations. We made an incredibly difficult decision to close 500 company stores 200 independents, we're willing to do the things that we need to do to be successful.
Speaker Change: And by the way the lens that we put on each of these is what does it take if youre going to be an auto parts retailer focusing on a blended box what are the activities. What are the fundamentals that that type of company needs to do and Thats, what we do and if it doesn't fit in that construct we don't do it and so that's what gives me confidence.
Speaker Change: I'll also depicts that.
Speaker Change: We have been.
Speaker Change: Appropriately reflective.
Speaker Change: Slow before we put out the 7% so Ryan and I have spent a lot a lot of time thinking about when's, the right time to come to the market and say here is something that we believe that we have conviction that we will hit and so we've put out the 7% in 2027 people have been asking people asked last quarter the quarter before high how come you guys won't give us more definitive.
Speaker Change: The numbers, we want today to be about really showing you showing the street showing.
Speaker Change: Everyone. This is who we are.
Speaker Change: This is this is what we're going to do and this is the result of where we're going.
Speaker Change: That's helpful. Thank you and then just as a follow up so with the business Comping down low single digits.
Speaker Change: This industry weakness our share loss and maybe a little bit of both and can you help us think about the path back to positive territory moving forward.
Speaker Change: Yes, so the weakness that we've seen recently is a little bit on the DIY side, and we do see the consumer being pressured while we are excited.
Speaker Change: Excited about is on a two year basis, our pro comp trend actually accelerated in Q3.
Speaker Change: More on the comparable side of it. So there is a little bit of pressure on the consumer right now.
Speaker Change: This industry is pretty resilient in these times I mean at some point you start to start stop your car.
Speaker Change: So the push off of discretionary purchases less of an impact here, it's more short term in nature. So we've got a good strong in.
Speaker Change: Industry backdrop, but there is a little bit of pressure more recently on the consumer and that's showing up in the DIY comps.
Thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from Seth Basham of Wedbush Seth. Your line is open. Please go ahead.
Thanks, a lot and good morning, Thank you for the presentation.
Speaker Change: First just some clarifying questions regarding the guidance for 2025 at first time adjusted EPS basis or are you aiming for there to help us get a sense of that below the operating margin line.
Speaker Change: Moving basis.
Speaker Change: Yes, good question.
Speaker Change: We are going to come back in Q4, we'll probably give more details on EPS and will refine the guidance for 25. So we gave the operating income 2% to 3% I would expect low single digit share dilution. So if you're doing the math just think of that for next year low single digit share dilution you should be able to get to a decent EPS range based.
Speaker Change: On that.
Yes.
Speaker Change: Okay, and Relatedly regarding free cash flow in 2025 inclusive of some of these restructuring efforts.
Speaker Change: Or are you aiming for in that area.
Speaker Change: Yes.
Speaker Change: 30 to 40 is included in that.
Speaker Change: Okay.
Speaker Change: And then just lastly bigger picture question.
Speaker Change: What changed that you guys have in your plan managing that change and executing is critical factor as you mentioned chain you have accountability targets you have teams set up.
Speaker Change: Where if you go wrong do you think are the biggest risks to execution.
Speaker Change: Yeah, So Andy.
Speaker Change: Anytime you're executing broad based plans you need to make sure you're appropriately comprehensive you need to make sure you're communicating thoroughly need to make sure that you have resource.
Speaker Change: Resource that correctly, and so we know that running the existing business and executing the simultaneously does present degrees of risk and we need to execute against that.
Speaker Change: <unk> brought in support Alvarez and Marsal is working with the company and has been.
Speaker Change: Helpful. In terms of how we think about this and how it will go against the closure cadence we've got additional support as it relates to negotiating with landlords on different pieces, we're bringing in support as it relates to how we think about moving inventory in terms of whether we sell it in place whether we decide to relocate it.
Speaker Change: And so that's that's a key dimension of it but we're confident in terms of our ability to do it and it's consistent with how we've been running the company since Ive been here and we'll go through it and continue to focus on the fundamentals. The remaining company in terms of where we're located and how we will operate youll see an ability for.
Us to execute those three pillars.
Speaker Change: So in terms of the store operations in terms of merchandising excellence in terms of the continuation of the supply chain consolidation.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Steven Zaccone Citigroup Steven Your line is open. Please go ahead.
Steven Zaccone: Great. Good morning, Thanks for all the detail today and I appreciate taking my question.
I wanted to shift back to the top line discussion could you just help us understand the fourth quarter comp sounds like it's going to be down you gave some quarter to date comment that it's running in line with the third quarter is that excluding like the hurricane impact and the crowd strike and then if we look forward right you've given is preliminary.
Outlook for 25, and then what you think 2027 will be how do you think about the market growth rate for next year and then maybe as you think about your ability to take market share, whereas the bigger opportunity is on the pro side or is it on this DIY getting better.
Speaker Change: Yes, so ill.
Speaker Change: Take the first part of that first part so we did back out the hurricane impact to say the trends from Q3 to Q4 in line.
Speaker Change: So you would adjust for the hurricane crowd strike impact on that to get to kind of where it trends arent going into the quarter.
Yes, I'll start let me talk about the market for next year in terms of how we return to positive comps I think we'll have progress in both arenas on the DIY side, Brian touched on it the consumers definitely had a bit of a hangover.
Speaker Change: Coming out of Covid I think election jitters.
Speaker Change: And in the in the low cohort familial spend category. So.
Speaker Change: 50, K 75, K family groups that that group has been deferring wherever possible. So we'll look for that market to return and so we will participate in in that spend but we're also very excited about what we're doing in the pro arena. So between our outside sales team members where we.
Rejuvenated compensation plans. We have also created focus in terms of of which accounts they call on and there is a significant effort around what we call up and down the Street Pro. These are these are small shops two day three day four day shops that.
Speaker Change: That we're catering are offering.
Speaker Change: To better penetrate so so that activity is underway also with our Cps, where we looked at what their compensation plans look like these are our commercial parts pros inside of our stores.
Speaker Change: <unk>, which accounts that they're calling on so there's a lot of effort on the pro side.
Speaker Change: And thats augmented by two other things parts availability and being able to get parts in market faster and then secondly, where and how we allocate drivers in our stores. So we've got a better sort of data oriented way of which stores get how many vehicles to make sure that we're lining up with.
Speaker Change: Where the growth is so those are a number of the dimensions.
Speaker Change: Where we look for growth in probe.
Speaker Change: Okay and then.
Speaker Change: Go back to the free cash flow discussion just to understand that correctly did you provide preliminary outlook for free cash flow in 'twenty five.
Speaker Change: And maybe.
Speaker Change: If if the top line plan or the margin execution comes all but weaker than expected next year.
Speaker Change: What could be another strategy here to protect profitability and protect the cash flow.
Speaker Change: Yes, so we didn't provide.
Speaker Change: Free cash flow forecast, we just said we expect to fund the Capex with operating cash flows next year. So operating cash flow should be able to fund the investments, we're making going forward.
Speaker Change: And do you mind repeating the second question there.
Speaker Change: So you had a follow up on that one.
Speaker Change: Yes, given the balance sheet here or are you still have the debt right and clearly youre not using the proceeds to pay down debt.
Speaker Change: If the top line comes in weaker than expected right. If some of this cost execution does not playing out as expected can you just help us think theres some additional levers to.
Speaker Change: To protect cash flow.
Speaker Change: Yes, we have levers within the organization that will pull on absolutely. We think we've got the liquidity to manage through the downside. If there is additional downside to this but we feel like the numbers are putting out there.
Speaker Change: If we think about the store closures being 70 to 90 basis points going into next year. We'll work we've already done and started on merchandising excellence programs, we feel pretty confident in our ability to achieve the 2% to 3% next year on a very modest.
Speaker Change: Topline that 50 to 150 basis points.
Speaker Change: Market is going to be low single digits.
Speaker Change: So yes, there's risk there's levers we can pull along the way, but from a liquidity standpoint, we feel like our balance sheet is really strong I wouldn't say that we're not paying down debt, we will plan to pay down debt at maturity or before maturity.
Speaker Change: Work and execute this turnaround plan our goal is to get to $2. Five so some of that cash eventually will be used to pay down debt along the way just to add in terms of managing the business.
Speaker Change: Fewer relevant metrics related to the performance of the business are now being tracked the review cycle with the leaders around those metrics to create accountability to create ownership. So the rhythm of how we're running the company is different.
Speaker Change: And directly related to the things that contribute to the performance numbers were putting up so look for that scrutiny to assist that just I don't think about it in terms of protecting the downside, but in terms of creating the conditions to deliver against what we're saying.
Speaker Change: Okay. Thanks for the detail.
Speaker Change: Thank you. Our next question comes from Seth Sigman of Barclays. Seth. Your line is open. Please go ahead.
Speaker Change: Hey, good morning, everyone I wanted to focus on store closings can you just elaborate on what you identified that's different in those stores in those markets relative to the rest of the go forward store base and maybe also just the decision to exit certain states any more color there. Thank you.
Speaker Change: Yep. Thank you Seth I'll start with that question Ryan can can chime in we had a series of criteria that we put against all of the stores in.
Speaker Change: In the network and by the way we are geographically agnostic in terms of what stayed open and what closed and so there wasn't an eye towards particular entire state exits just.
Speaker Change: As a result of the analysis some of those metrics store profitability. So if the store is fundamentally unprofitable. That's a key metric for us we'd look at say what is the horizon to which we think we can make it profitable or how long has it been unprofitable has there been a managerial component and so that's that was.
Speaker Change: One demur.
Speaker Change: Dimension.
Speaker Change: One is the DC productivity and this did influence how we thought about the western markets. So when you have a DC infrastructure in place to support stores typically there's a number of stores that creates the scale for DC operations and we don't have the density of stores to support that.
Speaker Change: It ends up impacting the profitability and what we found with the western markets.
Speaker Change: For us to get to the scale for the DC operations to run where we need them to run we'd have to infill over a period of years and put a significant amount of capex to then get a baseline level of profitability and we didn't see that.
Speaker Change: Occurring or we didn't think that the use of all of our capital to bring that about and the time horizon to make that happen.
<unk>.
Speaker Change: <unk> was a good use of how we're thinking about the future. So that's that's how the western markets came about other metrics we've talked about operations.
Speaker Change: Have other ones physically, whereas the store located as it's in the real estate market how much do we pay in rent what's the horizon. So so this was a very thorough review not taken lightly obviously when you are when you are closing a store both in terms of the permanence of that activity in terms of the the companys ability to garner future.
Speaker Change: Revenues, but also the human side and I don't want to lose sight of that anytime that you're making these moves and team members now don't get to continue the journey with the company.
Speaker Change: Nobody feels good about that.
Speaker Change: Got it okay. That's all helpful. If you're sort of zoom back you've laid out a plan today that I think it is clearer for the next few years, but still embeds a lot of improvement ahead from all of these initiatives were getting the question Youre getting the question in a number of ways. What gives you confidence that this is fixable that it's not structural.
Speaker Change: Are there specific data points you can share on the early wins, maybe how different store cohorts are performing you started to rollout some of the hub stores are there. Examples there you can give or you've had pricing actions I know there've been a number of early initiatives any specific data points, you can share to help instill that confidence.
Speaker Change: Thanks, so much.
Speaker Change: Yes, so you talked about the hub stores, that's certainly one.
Speaker Change: As we look at other key metrics, where we do things around our.
Speaker Change: Our store activities, and we say hey, if we move vehicles to stores that have the opportunity for pro growth how do they do they get more pro business. If you look at merchandising, we say hey, if we do a better job around parts availability and pilot that how did the sales do we do better in terms of sales.
Speaker Change: If you look at how we're structuring some of our relationships with our vendors can we can we create constructs that deliver better economics, and so we're seeing those things, but I think the.
The more important picture if you come up to 50000 feet is.
Speaker Change: We're projecting to do our items under management's control.
Speaker Change: So these are predominantly cost related actions doesn't mean necessarily all easy but these are management controlled items that if we can put good plans in place and focus on executing those.
Speaker Change: Numbers follow up we have a streamlined supply chain the numbers follow if we have availability consistent with what.
Speaker Change: What you would see typically the numbers follow so so this isn't predicated on outsized above market sales growth for example.
Speaker Change: And so the idea that this is under our control it doesn't require us to take share.
Speaker Change: That's what gives me confidence in particular as I see the plans that are coming from the different leaders as they see the leaders in the respective seats, that's where I feel very good about it Brian.
Speaker Change: The things that we are executing just in the last few weeks, we've seen store availability pump significantly as we started focusing on the right metrics in there.
Speaker Change: A warehouse management system now in all of our D C and the lines per hour improving across all of that.
Speaker Change: These metrics are coming in as we continue to focus on these specific metrics.
Speaker Change: The actions.
Speaker Change: We've solved for half of that pricing actions already in an environment, where the DIY consumer is pressured.
Speaker Change: And so we're seeing it here, it's starting to come come through it's going to start to realize over the course of the next year and we will be sharing these key metrics that we talked about and the progress of those every single quarter. So you can get an update on a quarterly basis of these key operational kpis and we'll share those every quarter. So you can get a feel for how.
Speaker Change: It's going to we understand this and it's not like we build a track record of the financial things hitting yet, but we are these decisive actions, we're taking youre seeing that start to happen and we went from 30 ATC is down to 2008 Dcs. We are taking action. Some of these kpis are starting to come through.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you our final question today comes from Zach <unk>.
Speaker Change: Wells Fargo is that your line is open. Please go ahead.
Speaker Change: Hey, good morning, and thanks for all the details today.
Speaker Change: So as you think about the path from sub 1% operating margins today that two and a half next year and 7% down the road.
Speaker Change: Would you characterize the 25 in 2017 margin expectations, if comps were flat rather than up low single digits. So said differently how much of the 2025 and 2027 margin expectations are predicated on higher comps.
Speaker Change: Yes. It is.
Speaker Change: Because we're not we're not expecting to.
Speaker Change: Beat the market, where our assumptions going forward are mainly on what we control and these actions, we're taking not on top line significant topline growth.
Speaker Change: We are focused on improving time to serve.
Speaker Change: Store availability or supply chain costs and infrastructure all of these things are things we control. So the top line is not the driver of this growth and margin expansion.
Speaker Change: And our work that's sales per store is a big chunk of.
Speaker Change: The gap that we have to our peers and thats not the big part of the driver of this solves so if if we improve that.
Speaker Change: That goes that's just upside potential for US now if you had black comps, there's a little bit of pressure from inflation, 2% to 3% cost inflation that will be there.
Speaker Change: But for the most part we're assuming low single digit over the next three years Zack Seamus. Thanks for the question you see the comp expectations, we put out which are pretty modest.
Speaker Change: The idea that we can grow at market rates or above market rates. That's the second bite of the Apple for where we can improve the bottom line of the company. What we're depicting for you today are the things that are cost oriented that management has line of sight to executing again.
Speaker Change: <unk> that plans are in place and in many cases activities underway that we've got metrics involved with that we have confidence in achieving.
Speaker Change: We get those and hit those in stride, that's where I think we have the follow on discussions on what further Oi margin.
Margin areas can we close the gap with perhaps related more towards the sales side.
Speaker Change: Got it and then on the one 2 billion in cash from World pack, you've talked about reinvesting a chunk of that but for the remaining $1 billion or so can you walk us through just the decision making process.
Speaker Change: Around how to how to deploy the $1 billion, maybe share some thoughts around the decision not to pay down debt right away and then how you think this decision or the decision you made could impact your credit rating, one way or the other.
Speaker Change: Yes, so on the we haven't made a full decision yet not to pay down debt. We are managing our liquidity as we go through this restructuring.
Speaker Change: Ensuring that we have.
Speaker Change: Right.
Speaker Change: And our balance sheet as we go through it.
Speaker Change: We are looking at the market today.
Speaker Change: Making sure when when does it make the most financial sense for us to de lever and pay down some of that debt.
Speaker Change: So we are leaving it open right now to pay down debt at maturity or before maturity, but especially in the early stages of this turnaround and this restructuring.
Speaker Change: We're leaving that flexibility out there for us, but that doesn't mean that we won't pay down debt before maturity.
Speaker Change: Got it thanks for the time.
Speaker Change: Yep. Thanks Zack.
Speaker Change: Thank you. Therefore this does conclude today's Q&A session I'd now like to turn the call back over to Steve, saying that Kelly for any further or closing remarks.
Speaker Change: Ladies and gentlemen, thank you for joining us today today, we have depicted our future in terms of where we're going over the next three years, we owe gratitude to all the team members on the frontline who work hard every day. We appreciate you taking the time to spend with us to go through each of those actions.
Speaker Change: We will update you on our journey as it unfolds. We appreciate your questions lets go advance. Thank you.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Speaker Change: This is how we advance.
Speaker Change: Sure.