Q2 2025 Advance Auto Parts Inc Earnings Call

Speaker #2: See store for details.

Speaker #1: This is how we advance.

Speaker #3: Welcome to the Advance Auto Parts second quarter 2025 earnings conference call. I would now like to turn it over to Lavesh Hemnani, Vice President of Investor Relations.

Lavesh Hemnani: Welcome to the Advance Auto Parts second quarter 2025 earnings conference call. I would now like to turn it over to Lavesh Hemnani, Vice President of Investor Relations.

Speaker #4: Good morning, and thank you for participating in today's call. I'm joined by Shane OKelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer.

Lavesh Hemnani: Good morning and thank you for participating in today's call. I am joined by Shane O’Kelly, President and Chief Executive Officer, and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides which have been posted to our Investor Relations website. Before we begin, please be advised that management's 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 initiatives, plans, projections, guidance, and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and our strategic priorities.

Speaker #4: During today's call, we will be referencing slides that have been posted to our Investor Relations website. Before we begin, please be advised that management's remarks today will contain forward-looking statements.

Speaker #4: All statements are within statements of historical fact or forward-looking statements, including but not limited to statements regarding initiatives, plans, projections, guidance, and expectations for the future.

Speaker #4: Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under 'Forward-looking Statements' in our earnings release, and risk factors in our most recent Form 10-K and subsequent filings made with the SEC.

Speaker #4: Shane will begin today's call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the second quarter and provide an update on full-year 2025 guidance.

Lavesh Hemnani: Later, Ryan will discuss results for the second quarter and provide an update on 2025 guidance. Now, let me turn over the call to our CEO, Shane O’Kelly. Shane?

Speaker #4: Following management's prepared remarks, we will open the line for questions. Now, let me turn over the call to our CEO, Shane OKelly. Shane?

Speaker #5: Thank you, Lavesh, and good morning, everyone. I would like to take a moment to express my gratitude for the hard work and dedication of the Advance team.

Shane O’Kelly: Thank you, Lavesh, and good morning, everyone. I would like to take a moment to express my gratitude for the hard work and dedication of the Advance team. Their focus on providing excellent customer service and driving progress in our initiatives enabled the company to deliver solid Q2 results that were in line with the upper end of our expectations. In Q2, we also achieved an important milestone in our turnaround journey with the return to profitability. This was supported by actions to optimize our store footprint and progress with our strategic initiatives. Comparable sales growth was about flat for the quarter, and our performance was driven by strength in the pro business, which continued to deliver positive comp growth. In our DIY business, we are encouraged by emerging signs of stabilization as comparable sales were consistent with Q1 and improved on a two-year basis.

Speaker #5: Their focus on providing excellent customer service and driving progress in our initiatives enabled the company to deliver solid second quarter results that were in line with the upper end of our expectations.

Speaker #5: In Q2, we also achieved an important milestone in our turnaround journey, with the return to profitability. This was supported by actions to optimize our store footprint and progress with our strategic initiatives.

Speaker #5: Comparable sales growth was about flat for the quarter, and our performance was driven by strength in the pro business, which continued to deliver positive comp growth.

Speaker #5: In our DIY business, we are encouraged by emerging signs of stabilization, as comparable sales were consistent with Q1 and improved on a two-year basis.

Speaker #5: Notably, we concluded the quarter on a strong note, with both pro and DIY delivering positive results, and this momentum has continued into the first four weeks of Q3.

Shane O’Kelly: Notably, we concluded the quarter on a strong note, with both pro and DIY delivering positive results, and this momentum has continued into the first four weeks of Q3. We are working with our vendor partners to effectively manage tariff-related cost increases while thoughtfully adjusting retail prices in response to market dynamics. We anticipate that tariffs will have a more pronounced impact in the second half of this year. Importantly, more than 90% of our business is non-discretionary, with demand driven by maintenance work and brake fix repair for an aging and growing vehicle fleet in the United States. We believe that this puts us in a strong position to navigate a higher product cost environment. Our industry has consistently demonstrated a disciplined approach to adjusting prices in response to rising costs. This rational behavior is evident in the current tariff environment, and we expect that to continue.

Speaker #5: We are working with our vendor partners to effectively manage tariff-related cost increases, while thoughtfully adjusting retail prices in response to market dynamics. We anticipate that tariffs will have a more pronounced impact in the second half of this year.

Speaker #5: Importantly, more than 90% of our business is non-discretionary, with demand driven by maintenance work and break/fix repair for an aging and growing vehicle fleet in the United States.

Speaker #5: We believe that this puts us in a strong position to navigate a higher product cost environment. Our industry has consistently demonstrated a disciplined approach to adjusting prices in response to rising costs.

Speaker #5: This rational behavior is evident in the current tariff environment, and we expect that to continue. From our perspective, the market is in a transition phase, and while recent trade deals are expected to provide further clarity in vendor negotiations, consumers are still adapting to an evolving landscape of higher prices.

Shane O’Kelly: From our perspective, the market is in a transition phase, and while recent trade deals are expected to provide further clarity in vendor negotiations, consumers are still adapting to an evolving landscape of higher prices. We are closely monitoring consumer behavior and the potential for recalibration in purchasing habits, especially within our DIY business. While we have not observed any significant shifts to date and remain encouraged with our recent DIY trajectory, we believe it is prudent to take a cautious approach in planning for the remainder of the year. This is reflected in our assumptions for the second half of 2025, and we are reaffirming our full-year sales, operating margin, and free cash flow guidance. As a management team, we have maintained transparency in our efforts to take decisive actions that drive progress on our turnaround.

Speaker #5: We are closely monitoring consumer behavior and the potential for recalibration in purchasing habits, especially within our DIY business. While we have not observed any significant shifts to date and remain encouraged with our recent DIY trajectory, we believe it is prudent to take a cautious approach in planning for the remainder of the year.

Speaker #5: This is reflected in our assumptions for the second half of 2025 and we are reaffirming our full year sales, operating margin, and free cash flow guidance.

Speaker #5: As a management team, we have maintained transparency in our efforts to take decisive actions that drive progress on our turnaround. These include the decision to divest world pack, optimize our store footprint, and consolidate our supply chain.

Shane O’Kelly: These include the decision to divest Worldpac, optimize our store footprint, and consolidate our supply chain. In line with this commitment to take decisive actions, we proactively reorganized our debt capital structure earlier this month to ensure financial flexibility in the turnaround. We believe this action will enable us to support our current supply chain financing program while also allowing us to strategically optimize its utilization for the long term. I would also like to note that we view this as a bridge structure as we work to return to an investment-grade credit rating in the future. We are confident that the long-term advantages of a stable supply chain financing program and enhanced financial flexibility will serve as catalysts for driving EPS growth and value creation over time. Let us now turn to an update on our strategic initiatives.

Speaker #5: In line with this commitment to take decisive actions, we proactively reorganized our debt capital structure earlier this month to ensure financial flexibility in the turnaround.

Speaker #5: We believe this action will enable us to support our current supplier financing program while also allowing us to strategically optimize its utilization for the long term.

Speaker #5: I would also like to note that we view this as a bridge structure, as we work to return to an investment grade credit rating in the future.

Speaker #5: We are confident that the long-term advantages of a stable supply chain financing program and enhanced financial flexibility will serve as catalysts for driving EPS growth and value creation over time.

Speaker #5: Let us now turn to an update on our strategic initiatives. To recap, our turnaround plan is built around three strategic pillars, each supported by targeted initiatives that we believe will position us to deliver profitable growth.

Shane O’Kelly: To recap, our turnaround plan is built around three strategic pillars, each supported by targeted initiatives that we believe will position us to deliver profitable growth. I will share updates on the progress we have made within each pillar before Ryan discusses our financial performance. Let's begin with merchandising. Approximately a year ago, the merchandising team embarked on a transformation journey following the appointment of our Chief Merchant, Bruce Starnes, and other key leaders in pivotal roles. They have been focused on reestablishing Advance Auto Parts Inc. as a premier destination for high-quality auto parts and rebuilding trust as a long-term growth partner for vendors. The team is engaged in line reviews and several rounds of negotiations with vendors to secure products at a more competitive cost.

Speaker #5: I will share updates on the progress we have made within each pillar before Ryan discusses our financial performance. Let's begin with merchandising. Approximately a year ago, the merchandising team embarked on a transformation journey, following the appointment of our Chief Merchant, Bruce Starnes and other key leaders in pivotal roles.

Speaker #5: They have been focused on reestablishing Advance as a premier destination for high-quality auto parts and rebuilding trust as a long-term growth partner for vendors.

Speaker #5: The team is engaged in line reviews and several rounds of negotiations with vendors to secure products at a more competitive cost. They have undertaken joint business planning with vendors to discuss category strategies, SKU development, and growth plans that establish mutual trust for a long-term partnership.

Shane O’Kelly: They have undertaken joint business planning with vendors to discuss category strategies, SKU development, and growth plans that establish mutual trust for a long-term partnership. We have completed about two-thirds of our line reviews and continue to march towards our goal of delivering about 50 basis points of annualized cost reductions in the second half of 2025. We expect to build on this next year as the remaining activities are completed over the next few months. The groundwork laid by this team over the last year is also supporting productive negotiations with vendors on sharing the tariff burden. As we have indicated previously, approximately 40% of our reported cost of goods is exposed to tariffs at a blended rate of approximately 30%. The dynamic tariff environment has certainly presented challenges across the industry.

Speaker #5: We have completed about two-thirds of our line reviews and continue to march towards our goal of delivering about 50 basis points of annualized cost reductions in the second half of 2025.

Speaker #5: We expect to build on this next year as the remaining activities are completed over the next few months. The groundwork laid by this team over the last year is also supporting productive negotiations with vendors on sharing the tariff burden.

Speaker #5: As we have indicated previously, approximately 40% of our reported cost of goods is exposed to tariffs at a blended rate of approximately 30%. The dynamic tariff environment has certainly presented challenges across the industry.

Speaker #5: However, we have been able to navigate through this complex landscape thanks to our much-improved price management capabilities. Our pricing team has been successful in identifying dutable components across product lines, which has enabled more effective discussions with vendors around cost increases.

Shane O’Kelly: However, we have been able to navigate through this complex landscape thanks to our much-improved price management capabilities. Our pricing team has been successful in identifying duty-able components across product lines, which is enabling more effective discussions with vendors around cost increases. Simultaneously, the team has been proactive in exploring alternative sources of supply and diversifying countries of origin to mitigate costs. In addition to handle external tariff discussions, the team is internally optimizing product promotion strategies to minimize reliance on ineffective promotions. This work involves close collaboration with store teams to refine the use of unproductive discounting mechanisms. We view promotion management as an important lever to balance the impact of higher costs and to maximize profit dollars. We expect to make progress on this initiative later this year with a bigger impact in 2026.

Speaker #5: Simultaneously, the team has been proactive in exploring alternative sources of supply and diversifying countries of origin to mitigate costs. In addition to handle external tariff discussions, the team is internally optimizing product promotion strategies to minimize reliance on ineffective promotions.

Speaker #5: This work involves close collaboration with store teams to refine the use of unproductive discounting mechanisms. We view promotion management as an important lever to balance the impact of higher costs and to maximize profit dollars.

Speaker #5: We expect to make progress on this initiative later this year, with a bigger impact in 2026. Moving to assortment management, the team has made great strides in accelerating new SKU growth and the speed at which we bring parts to market.

Shane O’Kelly: Moving to assortment management, the team has made great strides in accelerating new SKU growth and the speed at which we bring parts to market. Over the past year, we have made considerable progress on analyzing customer needs, identifying gaps within our assortment, and improving internal processes to introduce new products in the market. This has enabled us to add more than 60,000 new SKUs in our network year to date, which is up nearly 300% compared to last year. Providing faster access to parts enables us to respond to demand signals more quickly, driving more effective placement of SKUs across our network. The progress we have achieved in SKU expansion has also contributed to the improvement in our store availability KPI, which increased by approximately 100 basis points compared to Q1 and is currently in the mid-90s range.

Speaker #5: Over the past year, we have made considerable progress on analyzing customer needs, identifying gaps within our assortment, and improving internal processes to introduce new products in the market.

Speaker #5: This has enabled us to add more than 60,000 new SKUs in our network year to date, which is up nearly 300% compared to last year.

Speaker #5: Providing faster access to parts enables us to respond to demand signals more quickly, driving more effective placement of SKUs across our network. The progress we have achieved in SKU expansion has also contributed to the improvement in our store availability KPI, which increased by approximately 100 basis points compared to Q1 and is currently in the mid-90s range.

Speaker #5: Next, I'd like to provide an update on the rollout of our new assortment framework, which is designed to enhance parts coverage across each store, hub, and market hub within a designated market area.

Shane O’Kelly: Next, I'd like to provide an update on the rollout of our new AI-driven assortment framework, which is designed to enhance parts coverage across each store, hub, and market hub within a designated market area. We have been able to accelerate this rollout by harnessing advanced technological tools, including the use of AI. These innovative tools are enabling us to introduce greater intelligence in the assortment planning process, which has traditionally been done manually. Today, we are better equipped to make data-driven decisions and swiftly adapt to SKU requirements by market. We are successfully increasing coverage in key hard parts categories by rebalancing hundreds of SKUs per store to better align inventory with market-specific needs. We recently completed this rollout in an additional 19 DMAs and currently operate the new framework in the top 30 DMAs.

Speaker #5: We have been able to accelerate this rollout by harnessing advanced technological tools, including the use of AI. These innovative tools are enabling us to introduce greater intelligence in the assortment planning process, which has traditionally been done manually.

Speaker #5: Today, we are better equipped to make data-driven decisions and swiftly adapt to SKU requirements by market. We are successfully increasing coverage in key hard parts categories by rebalancing hundreds of SKUs per store to better align inventory with market-specific needs.

Speaker #5: We recently completed this rollout in an additional 19 DMAs and currently operate the new framework in the top 30 DMAs. We expect to substantially complete the rollout across the top 50 DMAs, representing approximately 70% of our sales, by the end of the third quarter, well ahead of our original schedule.

Shane O’Kelly: We expect to substantially complete the rollout across the top 50 DMAs, representing approximately 70% of our sales by the end of the third quarter, well ahead of our original schedule. While it is still early to assess the results of the recent rollout, the improvements in the newer DMAs are tracking directionally in line with the DMAs completed earlier in the year. The initial DMAs continue to deliver an average comp uplift of approximately 50 basis points. Notably, in some of these markets, we are beginning to observe a comp uplift exceeding the average, which in our view is a promising indicator of this initiative's growth potential. Based on our expectations, the complete benefit of this initiative will become more apparent over a 12 to 18-month horizon due to the slow-turning nature of inventory in the industry.

Speaker #5: While it is still early to assess the results of the recent rollout, the improvements in the newer DMAs are tracking directionally in line with the DMAs completed earlier in the year.

Speaker #5: The initial DMAs continue to deliver an average comp uplift of approximately 50 basis points. Notably, in some of these markets, we are beginning to observe a comp uplift exceeding the average, which in our view is a promising indicator of this initiative's growth potential.

Speaker #5: Based on our expectations, the complete benefit of this initiative will become more apparent over a 12 to 18 month horizon due to the slow turning nature of inventory in the industry.

Speaker #5: We are energized by the progress achieved thus far and optimistic about the potential to meaningfully advance our goal of enhancing parts availability. Turning to supply chain, year-to-date, we have successfully closed or converted 90 distribution centers in the U.S. and remain on track to achieve a total of 12 closures by year-end, bringing us to a total of 16 distribution centers in the U.S.

Shane O’Kelly: We are energized by the progress achieved thus far and optimistic about the potential to meaningfully advance our goal of enhancing parts availability. Turning to supply chain, year to date, we have successfully closed or converted nine DCs in the U.S. and remain on track to achieve a total of 12 closures by year-end, bringing us to a total of 16 DCs in the U.S. In parallel, we are enhancing productivity within these facilities by refining processes, which we anticipate will drive sustained improvements in product throughput, measured as lines per hour. Year to date, we have achieved a low single-digit increase in this metric. The operational efficiencies of our DCs have a direct and significant impact on parts availability for our stores. Our supply chain team is actively identifying and sharing best practices across all facilities while fostering a culture of operational excellence.

Speaker #5: In parallel, we are enhancing productivity within these facilities by refining processes, which we anticipate will drive sustained improvements in product throughput, measured as lines per hour.

Speaker #5: Year to date, we have achieved a low single-digit increase in this metric. The operational efficiencies of our DCs have a direct and significant impact on parts availability for our stores.

Speaker #5: Our supply chain team is actively identifying and sharing best practices across all facilities while fostering a culture of operational excellence. These efforts are aimed at ensuring high product availability and reliable service for our stores.

Shane O’Kelly: These efforts are aimed at ensuring high product availability and reliable service for our stores. Recent operational changes in our DCs are already yielding measurable results. Over the past six months, we have reduced shipment errors from the DCs to stores by approximately 33% and also improved DC-to-store order fill rates. To unlock further productivity, we are optimizing our warehouse management system that was fully rolled out at the end of last year. Our efforts are focused on the execution of key functions such as product picking, packing, and routing deliveries to stores. We expect these efforts to improve the efficiency of our DC-to-store operations as we strive to leverage fixed costs and narrow our margin gap relative to the industry. Moving to an update on market hubs. As a reminder, we introduced the market hub last year as a new node in our multi-echelon supply network.

Speaker #5: Recent operational changes in our DCs are already yielding measurable results. Over the past six months, we have reduced shipment errors from the DCs to stores by approximately 33% and also improved DC-to-store order fill rates.

Speaker #5: To unlock further productivity, we are optimizing our warehouse management system that was fully rolled out at the end of last year. Our efforts are focused on the execution of key functions, such as product picking, packing, and routing deliveries to stores.

Speaker #5: We expect these efforts to improve the efficiency of our DC-to-store operations as we strive to leverage fixed costs and narrow our margin gap relative to the industry.

Speaker #5: Moving to an update on market hubs. As a reminder, we introduced the market hub last year as a new node in our multi-echelon supply network.

Speaker #5: The market hub carries 75,000 to 85,000 SKUs, expanding same-day parts availability for a service area of about 60 to 90 stores. It plays an important role in improving customer service.

Shane O’Kelly: The market hub carries 75,000 to 85,000 SKUs, expanding same-day parts availability for a service area of about 60 to 90 stores. It plays an important role in improving customer service. With stores receiving multiple shipments from a market hub each day, they are able to more quickly access and deliver parts to customers. Our commitment to delivering complete job quantity parts within a reasonable timeframe reinforces our reputation as a reliable and trusted service provider for our customers. We remain on track to open a total of 10 market hubs this year. During the quarter, we opened three market hubs, including two Greenfield locations. These newly established locations represent a key component of our growth strategy. Greenfield locations are set to become a primary driver of expanding our market hub network, and we believe they have the potential to drive stronger sales growth over the long run.

Speaker #5: With stores receiving multiple shipments from a market hub each day, they are able to more quickly access and deliver parts to customers. Our commitment to delivering complete, job-quantity parts within a reasonable timeframe reinforces our reputation as a reliable and trusted service provider for our customers.

Speaker #5: We remain on track to open a total of 10 market hubs this year. During the quarter, we opened three market hubs, including two Greenfield locations.

Speaker #5: These newly established locations represent a key component of our growth strategy. Greenfield locations are set to become a primary driver of expanding our market hub network, and we believe they have the potential to drive stronger sales growth over the long run.

Speaker #5: We are building a robust pipeline for openings in 2026 and 2027 to achieve our goal of establishing 60 market hubs by mid-2027. Based on the aggregate performance of hubs through Q2, along with the performance of the stores that they service, we continue to see an average estimated comparable sales uplift of 100 basis points, which continues to validate the effectiveness of this strategy.

Shane O’Kelly: We are building a robust pipeline for openings in 2026 and 2027 to achieve our goal of establishing 60 market hubs by mid-2027. Based on the aggregate performance of hubs through Q2, along with the performance of the stores that they service, we continue to see an average estimated comparable sales uplift of 100 basis points, which continues to validate the effectiveness of this strategy. In our stores, we remain committed to delivering consistent, high-quality service aimed at strengthening customer relationships. During Q2, our pro business led the sequential improvement in comps, achieving another quarter of positive low single-digit growth, which translated into mid-single-digit growth on a two-year basis. From a category perspective, the strength in pro was delivered by core hard parts categories, which reflects the benefits of collaborative efforts across the organization.

Speaker #5: In our stores, we remain committed to delivering consistent, high-quality service aimed at strengthening customer relationships. During Q2, our pro business led the sequential improvement in comps, achieving another quarter of positive low single-digit growth, which translated into mid-single-digit growth on a two-year basis.

Speaker #5: From a category perspective, the strength in pro was delivered by core hard parts categories, which reflects the benefits of collaborative efforts across the organization.

Speaker #5: The new assortment framework initiative has expanded the number of parts available in the back rooms of our stores, with an emphasis on meeting the needs of our pro customers.

Shane O’Kelly: The new AI-driven assortment framework initiative has expanded the number of parts available in the back rooms of our stores, with an emphasis on meeting the needs of our pro customers. In addition, we are leveraging technology to enhance customer data visibility and to streamline territory planning for our frontline teams. These advancements are enabling us to build trust with customers and are contributing to a motivated pro workforce. Furthermore, we have made significant strides in improving our speed of service, with our time to serve moving into the target range of 30 to 40 minutes. As a result, pro customers are gaining further confidence in our ability to serve as a reliable parts provider across the marketplace. This confidence is evident in the continued sales growth in our Main Street pro accounts, which has been an important area of focus for the team over the past year.

Speaker #5: In addition, we are leveraging technology to enhance customer data visibility and to streamline territory planning for our frontline teams. These advancements are enabling us to build trust with customers and are contributing to a motivated pro workforce.

Speaker #5: Furthermore, we have made significant strides in improving our speed of service, with our time to serve moving into the target range of 30 to 40 minutes.

Speaker #5: As a result, pro customers are gaining further confidence in our ability to serve as a reliable parts provider across the marketplace. This confidence is evident in the continued sales growth in our Main Street pro accounts, which has been an important area of focus for the team over the past year.

Speaker #5: Looking ahead, our pro team is dedicated to maintaining consistency in customer service to carry forward the positive momentum. Shifting to DIY, in the second quarter, our DIY comps were in line with Q1 and improved on a two-year basis.

Shane O’Kelly: Looking ahead, our pro team is dedicated to maintaining consistency in customer service to carry forward the positive momentum. Shifting to DIY. In the second quarter, our DIY comps were in line with Q1 and improved on a two-year basis. While we are encouraged to see emerging signs of stabilization, we still have a lot of work ahead of us to fully turn around the trajectory of the DIY business. We have a passionate store team that is eager to serve customers, and we are prioritizing initiatives to set them up for success. We are putting in robust training plans to develop stronger product knowledge. This includes seasonal product training, vendor collaboration, and the introduction of a playbook for new team members on how to serve customers. Separately, our store team is reinforcing the value provided by our service offerings to build long-term customer relationships and drive sales.

Speaker #5: While we are encouraged to see emerging signs of stabilization, we still have a lot of work ahead of us to fully turn around the trajectory of the DIY business.

Speaker #5: We have a passionate store team that is eager to serve customers, and we are prioritizing initiatives to set them up for success. We are implementing robust training plans to develop stronger product knowledge.

Speaker #5: This includes seasonal product training, vendor collaboration, and the introduction of a playbook for new team members on how to serve customers. Separately, our store team is reinforcing the value provided by our service offerings to build long-term customer relationships and drive sales.

Speaker #5: We offer a range of services, including battery testing, wiper installation, and engine light scanning, along with a robust portfolio of high-quality national and private label brands.

Shane O’Kelly: We offer a range of services, including battery testing, wiper installation, and engine light scanning, along with a robust portfolio of high-quality national and private label brands. In addition to the focus on training and service execution, we are also allocating incremental capital expenditure to refresh our stores. We have been upgrading HVAC systems, roofing, parking lots, paint, and signage in our stores. Year to date, we have already invested about three times more on maintenance CapEx than in 2024. This spend has been allocated to major upgrades at more than 1,000 stores compared to approximately 400 stores upgraded in all of 2024. These store infrastructure investments are part of a multi-year plan to improve the in-store experience for our customers and our store team.

Speaker #5: In addition to the focus on training and service execution, we are also allocating incremental capital expenditure to refresh our stores. We have been upgrading HVAC systems, roofing, parking lots, paint, and signage in our stores.

Speaker #5: Year to date, we have already invested about three times more on maintenance capex than in 2024. This spend has been allocated to major upgrades at more than $1,000 stores compared to approximately $400 stores upgraded in all of 2024.

Speaker #5: These store infrastructure investments are part of a multi-year plan to improve the in-store experience for our customers and our store team. To conclude, I want to reiterate our strong commitment to driving sustained improvement in our turnaround efforts and I want to thank the team for their hard work on delivering progress thus far.

Shane O’Kelly: To conclude, I want to reiterate our strong commitment to driving sustained improvement in our turnaround efforts, and I want to thank the team for their hard work on delivering progress thus far. I will now hand the call over to Ryan to discuss our financials. Ryan.

Speaker #5: I'll now hand the call over to Ryan to discuss our financials. Ryan? Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers and delivering solid Q2 results.

Ryan Grimsland: Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers and delivering solid Q2 results. For the second quarter, net sales from continuing operations were $2 billion, an 8% decline compared to last year. This decline is mainly attributable to the store optimization activity that was completed during Q1. Comparable sales growth was positive 0.1% for the quarter, which included an approximately 25 basis points headwind due to the shift in timing of Easter from late Q1 into early Q2. During the second quarter, sales growth in the first four weeks was in line with trends exiting Q1. In the middle four weeks of the quarter, trends softened. We believe this was driven by higher-than-normal precipitation levels, which contributed to softer transaction growth.

Speaker #5: For the second quarter, net sales from continuing operations were $2 billion, an 8% decline compared to last year. This decline is mainly attributable to the store optimization activity that was completed during Q1.

Speaker #5: Comparable sales growth was positive 0.1% for the quarter, which included an approximately 25 basis point headwind due to the shift in timing of Easter from late Q1 into early Q2.

Speaker #5: During the second quarter, sales growth in the first four weeks was in line with trends exiting Q1. In the middle four weeks of the quarter, trends softened.

Speaker #5: We believe this was driven by higher than normal precipitation levels, which contributed to softer transaction growth. Sales growth was strongest in the final four weeks of the quarter, with both DIY and pro channels comping positive.

Ryan Grimsland: Sales growth was strongest in the final four weeks of the quarter, with both DIY and pro channels comping positive. This improvement was driven by a recovery in transactions and strength in our core hard parts business. Undercar components, engine management, and the brake category led performance during the quarter. For the quarter, transactions declined in the low single-digit range, while ticket was positive and improved compared to Q1. We estimate that inflation was about 2% during the quarter and included tariff-related price adjustments that began midway through Q2. This rate of inflation was also influenced by the comparison to last year's price investments, which had pressured ticket growth last year. Looking at channel performance more broadly for the full quarter, pro grew in the low single-digit range and accelerated compared to Q1. DIY underperformed with a low single-digit sales decline. However, Q2 DIY performance was stable compared to Q1.

Speaker #5: This improvement was driven by a recovery in transactions and strength in our core hard parts business. Undercar components, engine management, and the brake category led performance during the quarter.

Speaker #5: For the quarter, transactions declined in the low single-digit range. While ticket was positive, an improved compared to Q1. We estimate that inflation was about 2% during the quarter, and included tariff-related price adjustments that began midway through Q2.

Speaker #5: This rate of inflation was also influenced by the comparison to last year's price investments, which had pressured ticket growth last year. Looking at channel performance more broadly for the full quarter, Pro grew in the low single-digit range and accelerated compared to Q1.

Speaker #5: DIY underperformed with a low single-digit sales decline. However, Q2 DIY performance was stable compared to Q1. On a two-year basis, both channels improved relative to Q1.

Ryan Grimsland: On a two-year basis, both channels improved relative to Q1. Adjusted gross profit from continuing operations was $880 million, or 43.8% of net sales, resulting in gross margin expansion of about 16 basis points compared to last year. Our Q2 gross margin was relatively in line with expectations. The year-over-year margin expansion was driven by savings associated with our footprint optimization activity completed in March. These savings were partially offset by the reversal of previously capitalized inventory costs. Adjusted SG&A from continuing operations was $819 million, or 40.7% of net sales, or about flat compared to last year. The year-over-year reduction in SG&A expense was primarily related to operating fewer stores compared to last year. As a result, adjusted operating income from continuing operations was $61 million, or 3.0% of net sales, resulting in about 20 basis points of margin expansion.

Speaker #5: Adjusted gross profit from continuing operations was $880 million, or 43.8% of net sales, resulting in gross margin expansion of about 16 basis points compared to last year.

Speaker #5: Our Q2 gross margin was relatively in line with expectations. The year-over-year margin expansion was driven by savings associated with our footprint optimization activity completed in March.

Speaker #5: These savings were partially offset by the reversal of previously capitalized inventory costs. Adjusted SG&A from continuing operations was $819 million, or 40.7% of net sales, remaining relatively flat compared to last year.

Speaker #5: The year-over-year reduction in SG&A expense was primarily related to operating a fewer stores compared to last year. As a result, adjusted operating income from continuing operations was $61 million, or $3.0% of net sales.

Speaker #5: Resulting in about 20 basis points of margin expansion. Adjusted diluted earnings per share from continuing operations was $0.69 compared with $0.62 reported in Q2 last year.

Ryan Grimsland: Adjusted diluted EPS from continuing operations was $0.69 compared with $0.62 reported in Q2 last year. Year to date, free cash flow was a use of $201 million and included a $15 million improvement in operating cash flow compared to last quarter. Q2 free cash flow also included $20 million in cash costs related to our store optimization work. Next, I would like to discuss our recent debt offering and the rationale for pursuing a reorganization of our debt capital structure. In early August, we completed a debt offering of $1.95 billion of senior notes divided into two equal tranches, one maturing in 2030 and the other in 2033. We received net proceeds of $1.92 billion after payment of transaction fees. Separately, we have also entered a new $1 billion asset-backed revolving credit facility to replace our prior $1 billion revolving facility.

Speaker #5: Year to date, free cash flow was a use of $201 million and included a $50 million improvement in operating cash flow compared to last quarter.

Speaker #5: Q2 free cash flow also included $20 million in cash costs related to our store optimization work. Next, I would like to discuss our recent debt offering and the rationale for pursuing a reorganization of our debt capital structure.

Speaker #5: In early August, we completed a debt offering of $1.95 billion of senior notes, divided into two equal tranches: one maturing in 2030, and the other in 2033.

Speaker #5: We received net proceeds of $1.92 billion after payment of transaction fees. Separately, we have also entered a new $1 billion asset back revolving credit facility to replace our prior $1 billion revolving facility.

Speaker #5: Proceeds from the senior notes offering were used to redeem $300 million of outstanding senior notes due 2026. Following this redemption, we expect to carry more than $3 billion of cash on the balance sheet, up to $2.5 billion of this cash, plus other assets, including inventory and accounts receivable, will be used to support the new $1 billion asset back revolving credit facility, and the $3 billion supply chain financing program.

Ryan Grimsland: Proceeds from the senior notes offering were used to redeem $300 million of outstanding senior notes due 2026. Following this redemption, we expect to carry more than $3 billion of cash on the balance sheet. Up to $2.5 billion of this cash, plus other assets, including inventory and accounts receivable, will be used to support the new $1 billion asset-backed revolving credit facility and the $3 billion supply chain financing program. Essentially, we are providing a one-for-one asset support for the new debt capital structure. I would like to note that we expect to operate the supply chain financing program as we did prior to the debt offering. The revolving credit capacity under the new ABL facility provides an additional liquidity source beyond our cash on hand. We have no current plans to draw on the new revolver.

Speaker #5: Essentially, we are providing a one-for-one asset support for the new debt capital structure. I would like to note that we expect to operate the supply chain financing program as we did prior to the debt offering.

Speaker #5: The revolving credit capacity under the new ABL facility provides an additional liquidity source beyond our cash on hand. We have no current plans to draw on the new revolver.

Speaker #5: The supply chain financing program is important to our vendor community, and we have taken proactive steps to ensure continuity in the program and mitigate potential risks.

Ryan Grimsland: The supply chain financing program is important to our vendor community, and we have taken proactive steps to ensure continuity in the program and mitigate potential risks. We believe this transaction puts us firmly in control of deciding the best course of action for the program for the long term. The new debt capital structure helps preserve financial flexibility, allows us to focus on execution of our turnaround plan, and serves as a bridge toward reattainment of an investment-grade credit rating in the future. Turning to an update on guidance. For fiscal 2025, we have revised our EPS guidance to account for the recent debt issuance. For the other items, we are reaffirming our expectations for the year. We are pleased with the progress on our strategic initiatives. However, we recognize that we are still in the early phases of our three-year turnaround plan.

Speaker #5: We believe this transaction puts us firmly in control of deciding the best course of action for the program for the long term. The new debt capital structure helps preserve financial flexibility, allows us to focus on the execution of our turnaround plan, and serves as a bridge toward the re-attainment of an investment-grade credit rating in the future.

Speaker #5: Turning to an update on guidance, for fiscal 2025, we have revised our EPS guidance to account for the recent debt issuance. For the other items, we are reaffirming our expectations for the year.

Speaker #5: We are pleased with the progress on our strategic initiatives. However, we recognize that we are still in the early phases of our three-year turnaround plan.

Speaker #5: We remain committed to diligently monitoring the implementation of our initiatives, to drive further operational improvements. Also, as Shane indicated, the market is still in a period of transition.

Ryan Grimsland: We remain committed to diligently monitoring the implementation of our initiatives to drive further operational improvements. Also, as Shane O’Kelly indicated, the market is still in a period of transition as consumers adapt to an environment of higher prices. In this backdrop, we believe our guidance reflects the potential risks related to tariffs. Our approach to navigating tariffs is unchanged. We expect to be measured while adjusting prices, with a goal to hold rate where possible, but prioritizing profit dollar expansion. We also expect to continually measure competitive response and price demand elasticity as we execute our response to tariffs through the year. Let's discuss our full-year expectations. Starting with net sales, we expect net sales in the range of $8.4 billion to $8.6 billion. Comparable sales are expected to grow in the range of 50 to 150 basis points on a 52-week basis.

Speaker #5: As consumers adapt to an environment of higher prices, in this backdrop, we believe our guidance reflects the potential risks related to tariffs. Our approach to navigating tariffs is unchanged.

Speaker #5: We expect to be measured while adjusting prices, with a goal to hold rates where possible, but prioritizing profit dollar expansion. We also expect to continually measure competitive response and price demand elasticity as we execute our response to tariffs throughout the year.

Speaker #5: Let's discuss our full year expectations. Starting with net sales, we expect net sales in the range of $8.4 to $8.6 billion, comparable sales are expected to grow in the range of $50 to $150 basis points on a 52-week basis.

Speaker #5: We expect positive low single-digit comp growth in Q3 and Q4, supported by our focus on improving parts availability and elevating service levels. Our tariff-related price actions are expected to contribute to low to mid-single-digit same SKU inflation in the second half.

Ryan Grimsland: We expect positive low single-digit comp growth in Q3 and Q4, supported by our focus on improving parts availability and elevating service levels. Our tariff-related price actions are expected to contribute to low to mid-single-digit same SKU inflation in the second half. Full-year net sales also include contributions from new stores planned to be open this year, and we expect the 53rd week to contribute approximately $100 million to $120 million in net sales. Moving to margins, adjusted operating income margin is expected in the range of 2% to 3%. For Q3, we are planning for adjusted operating income margin above 4%. This range embeds gross margin about in line to slightly better than Q2, supported by the merchandising team's progress on product cost negotiations and a range of potential scenarios for our tariff management activities. For SG&A, we expect expense dollars to be relatively in line with Q2.

Speaker #5: Full year net sales also include contributions from new stores planned to be opened this year, and we expect the 53rd week to contribute approximately $100 million to $120 million in net sales.

Speaker #5: Moving to margins, adjusted operating income margin is expected in the range of 2% to 3%. For Q3, we are planning for an adjusted operating income margin above 4%.

Speaker #5: This range embeds gross margin about in line to slightly better than Q2, supported by the merchandising team's progress on product cost negotiations at a range of potential scenarios for our tariff management activities.

Speaker #5: For SG&A, we expect expense dollars to be relatively in line with Q2. Finally, with respect to Q3 and as disclosed in our results last year, we are lapping about 130 basis points of atypical sales and margin headwinds, which is expected to drive favorability in year-over-year operating margin leverage.

Ryan Grimsland: Finally, with respect to Q3, and as disclosed in our results last year, we are lapping about 130 basis points of atypical sales and margin headwinds, which is expected to drive favorability in year-over-year operating margin leverage. Based on our expectations for Q3, combined with first-half results, our Q4 operating margin range implies a wide range of potential outcomes. While we continue to expect sequential improvement in margin leverage compared to Q3, it is important to note that Q4 is our lowest volume quarter and generally subject to seasonal volatility, which could impact results. Moving to other items in our guidance, we now expect adjusted diluted EPS to range between $1.20 and $2.20 compared to our prior guidance of $1.50 and $2.50.

Speaker #5: Based on our expectations for Q3, combined with first half results, our Q4 operating margin range implies a wide range of potential outcomes. While we continue to expect sequential improvement in margin leverage compared to Q3, it is important to note that Q4's are lowest volume quarter, and generally subject to seasonal volatility which could impact results.

Speaker #5: Moving to other items in our guidance, we now expect adjusted diluted EPS to range between $120 and $220, compared to our prior guidance of $1.50 and $2.50.

Speaker #5: This revision is mainly driven by the higher interest expense associated with the recent offering of $1.95 billion of senior notes, and savings from the redemption of the 2026 notes.

Ryan Grimsland: This revision is mainly driven by the higher interest expense associated with the recent offering of $1.95 billion of senior notes and savings from the redemption of the 2026 notes. We expect some of the interest expense to be offset by higher interest income from short-term cash investments. Regarding free cash flow, we continue to target a range of negative $85 million to negative $25 million for the year, which includes positive operating cash flow through the end of the year. We continue to expect $150 million of cash expenses related to our store optimization project. In summary, we are pleased to enter the second half with positive sales and margin momentum. As we look to the balance of this year, we are planning cautiously in a dynamic macro backdrop and closely monitoring consumer behavior. To wrap up, I want to provide a quick overview of our 2027 objectives.

Speaker #5: We expect some of the interest expense to be offset by higher interest income from short-term cash investments. Regarding free cash flow, we continue to target a range of negative $85 million to negative $25 million for the year, which includes positive operating cash flow through the end of the year.

Speaker #5: We continue to expect $150 million in cash expenses related to our store optimization project. In summary, we are pleased to enter the second half with positive sales and margin momentum.

Speaker #5: As we look to the balance of this year, we are planning cautiously in a dynamic macro backdrop, and closely monitoring consumer behavior. To wrap up, I want to provide a quick overview of our 2027 objectives.

Speaker #5: We continue to target low single-digit comparable sales growth and an adjusted operating income margin of approximately 7% for fiscal 2027. Following the recent debt issuance, we are updating our leverage ratio to a net adjusted debt leverage ratio of approximately 2 to 2.5 times.

Ryan Grimsland: We continue to target low single-digit comparable sales growth and an adjusted operating income margin of approximately 7% for fiscal 2027. Following the recent debt issuance, we are updating our leverage ratio to a net adjusted debt leverage ratio of approximately two to two and a half times. We believe this target provides financial stability for the business while maintaining the flexibility to invest for growth. We expect our strategic initiatives to strengthen cash flow generation and enable us to effectively manage supply chain financing and gradually reduce leverage over time. By achieving our leverage target, we aim to position the company to regain an investment-grade credit rating in the future, further strengthening the resilience of our strong balance sheet. I again want to thank our frontline associates for their commitment to serving our customers and delivering solid results in the quarter.

Speaker #5: We believe this target provides financial stability for the business while maintaining the flexibility to invest for growth. We expect our strategic initiatives to strengthen cash flow generation and enable us to effectively manage supply chain financing and gradually reduce leverage over time.

Speaker #5: By achieving our leverage target, we aim to position the company to regain an investment grade credit rating in the future, further strengthening the resilience of our strong balance sheet.

Speaker #5: I again want to thank our frontline associates, for their commitment to serving our customers, and delivering solid results in the quarter. I will now hand the call back to Shane.

Ryan Grimsland: I will now hand the call back to Shane.

Speaker #5: Thank you, Ryan. Before closing today's call, I want to thank all our team members and frontline associates once again. We believe we have the right strategy, centered on core retail fundamentals, along with a talented team driving execution on our strategic initiatives.

Shane O’Kelly: Thank you, Ryan. Before closing today's call, I want to thank all our team members and frontline associates once again. We believe we have the right strategy centered on core retail fundamentals, along with a talented team driving execution on our strategic initiatives. I look forward to continuing to share updates on our progress in the future. With that, let's open the call for questions. Operator.

Speaker #5: I look forward to continuing to share updates on our progress in the future. With that, let's open the call for questions. Operator.

Speaker #3: Of course. Who'd like to ask a question on today's call, please press star followed by one on your telephone keypad now to enter the queue.

Lavesh Hemnani: Of course. If you would like to ask a question on today's call, please press star followed by one on your telephone keypad now to enter the queue. When preparing to ask your question, please ensure you are unmuted locally, and participants are asked to limit themselves to one question and one follow-up per person. With that, our first question comes from Bret Jordan from Jefferies. Bret, please go ahead. Your line is open.

Speaker #3: When preparing to ask your question, please ensure you are unmuted locally, and participants are asked to limit themselves to one question and one follow-up per person.

Speaker #3: And with that, our first question comes from Brett Jordan from Jefferies. Brett, please go ahead, your line is open.

Speaker #6: Hey, good morning, guys.

Ryan Grimsland: Hey, good morning, guys.

Speaker #5: Hi, Brett.

Lavesh Hemnani: Hi, Brett.

Speaker #6: The revised capital structure. Are you expecting cost savings, given that the risk spread in the factoring program has likely come down for you?

Ryan Grimsland: The revised capital structure, are you expecting cost savings given the risk spread in the factoring program has likely come down for you? I mean, I think it is a good question, and Ryan Grimsland can comment. You know that the discussions on the supply chain financing largely take place independently between the bank and the impacted vendor. We like to think that with our support of supply chain financing on a dollar-for-dollar basis relative to what we had previously, which was effectively unsupported, that that would potentially have an impact. But, you know, it is early days. Ryan? Brett, great question. I think putting this program in a stable place and supporting it as we bridge back to investment grade was the most important thing here.

Speaker #3: Yeah, I mean, I think it's a it's a good question, and Ryan can comment, you know that the discussions on the supply chain financing largely take place independently between the bank and the, the impacted vendor.

Speaker #3: We like to think that with our support of supply chain financing on a dollar-for-dollar basis, relative to what we had previously, which was effectively unsupported, that that would potentially have an impact. But, you know, early days, Ryan?

Speaker #7: Yeah, Brett, great question. I think staying, you know, putting this program in a stable place and supporting it, as we bridge back to investment grade, is the most important thing here.

Speaker #7: This is an important, vehicle for our vendors, and ensuring that that, was in place for them as we bridge back to investment grade was critical.

Ryan Grimsland: This is an important vehicle for our vendors, and ensuring that that was in place for them as we bridge back to investment grade was critical. Getting back to investment grade is going to be the biggest impact for that. Now, with this structure, we will work with the banks and try to find opportunities where it is. But at this time, there is nothing implied in our guidance and nothing that we have to share relative to that. But I would say the program is in a better place when you have a one-to-one asset support of it, and hopefully over time, as the business performs, the financial profile improves in the business, we could see some benefits over time. But there is nothing at this point.

Speaker #7: Getting back to investment grade is going to be the biggest impact for that. now, with this structure, we'll work with the banks and try to find opportunities where it is, but at this time, there's nothing implied in our guidance, and nothing that we have, to share, relative to that.

Speaker #7: But I would say the program is in a better place when you have a one-to-one asset support of it, and hopefully over time, as the business performs, the financial profile improves on the business, we could see some benefits over time, but there's nothing at this point.

Speaker #7: The biggest thing here is something that bridges us back to investment grade, because getting back to investment grade would be the critical unlock there.

Ryan Grimsland: The biggest thing here is something that bridges us back to investment grade, because getting back to investment grade would be the critical unlock there. Last thing I will just add there, and if you look at the trajectory of what we have been doing as a company, we have looked to be proactive and decisive to position the company for success in the turnaround. So we looked at Worldpac. We made that decision, keeping Canada, adjusting our store footprint, making the decision to get to a unified supply chain, looking for where we needed to invest in the front line. So this was consistent with those moves. This was a proactive effort on our part to preserve an important program for our vendors. And so we went to the capital markets successfully to now have this support so we can continue the program and we can continue the turnaround.

Speaker #5: Last thing I'll just add there, if you look at the trajectory of what we've been doing as a company, we've looked to be proactive and decisive to position the company for success in the turnaround.

Speaker #5: So, we looked at world pack, we made that decision, keeping Canada adjusting our store footprint, making the decision to, to get to a unified supply chain, looking for where we needed to invest in the front line.

Speaker #5: So this was consistent with those moves. This was a proactive effort on our part to preserve an important program for our vendors, and so we went to the capital markets, successfully, to, to now have this support so we can continue the program.

Speaker #5: And we can continue the turnaround.

Speaker #6: Great. And then on the capex, you're talking about doing a sort of an upfit of 1,000 stores. What percentage of the store base do you think needs capex to sort of bring it up to market standard?

Ryan Grimsland: Great. And then on the CapEx, you are talking about doing a sort of an uptake of 1,000 stores. What percentage of the store base do you think needs CapEx to sort of bring it up to market standard? Well, Bret, we, I mean, there's a good portion of it. We went many years on a break-fix model. When we were fixing things broken, we had lifecycle maintenance out. Just to give you an example from an HVAC perspective, we had 80% of our HVACs beyond useful life. That should give you a basis of kind of where the fleet was at. Roofs above 50%, arcing lots above 50% beyond useful life and needing repairs. This is over the next three to five years, we will be tackling these stores from HVAC, roofing, paint, signage, etc.

Speaker #7: Well, Brett, I mean, there's a good portion of it. I mean, we went many years on a break/fix model, where we were fixing things broken. We had life cycle maintenance out.

Speaker #7: We had, just to give you an example from an HVAC perspective, we had 80% of our HVACs beyond useful life. So to give you a basis of kind of where the, the fleet was at, roofs, above 50%, parking lots above 50%, beyond useful life, and needing repairs.

Speaker #7: So, this is over the next three to five years, we'll be tackling these stores. from HVAC, roofing, paint, signage, etc. So it's, we'll, we'll eventually touch all of our stores and it'll end up being part of normal maintenance, and life cycle management.

Ryan Grimsland: We will eventually touch all of our stores. It will end up being part of normal maintenance and lifecycle management. As we go around, obviously we want this to be a good experience for our customers. It is also critical for our store team members, and they are working hard, and the idea that the HVAC is not working, that is not acceptable. We are making those changes, and by the way, we are doing it in conjunction with the other pillars. Think about our assortment planning work. The store environment gets better, then we get the product mix adjusted, and then the team member is able to say yes to the customer more frequently. There is a sort of reinforcing cycle there in terms of building momentum for the company. Great. Thank you.

Speaker #5: Yeah, and as we go around, obviously we want this to be a good experience for our customers. It's also critical for our store team members.

Speaker #5: and they're working hard and the idea that, that the, the HVAC isn't working, that's not acceptable. So we're making those changes, and by the way, we're doing it in conjunction with the other pillars, and so think about our assortment planning work.

Speaker #5: So, the store environment gets better, then we get the, the product mix adjusted and, and then the team members able to say yes to the customer more frequently.

Speaker #5: There's a sort of reinforcing cycle there in terms of building momentum for the company.

Speaker #6: Great, thank you.

Speaker #3: The next question comes from Simeon Gutman from Morgan Stanley. Simeon, please go ahead, your line is open.

Lavesh Hemnani: The next question comes from Simeon Gutman from Morgan Stanley. Simeon, please go ahead. Your line is open.

Speaker #8: Hey guys, good morning. my first question: try to keep it high level and simple. Just achieving the pickup and comp in the second half of the year, what gives you confidence in it?

Shane O’Kelly: Hey guys, good morning. My first question, try to keep it high level and simple. Achieving the pickup in comp in the second half of the year, what gives you confidence in it? Can you just think us through the drivers? Then my follow-up, I will test you on some of those assumptions. Thanks.

Speaker #8: Can you just think, three, think us through the drivers and then my follow-up, I'll, I'll, I'll test you on some of those assumptions. Thanks.

Speaker #7: Yeah, a couple, a couple of things on the back half of the year. One is, we start to see some benefit from some of the work that we've been doing, but we also have some easier comparisons in the back half of the year.

Ryan Grimsland: Yeah, a couple of things on the back half of the year. One is we start to see some benefit from some of the work that we've been doing, but we also have some easier comparisons in the back half of the year. Just in Q3 alone, think of we had a CrowdStrike incident, we had the hurricane impact. We've got some back half of the year impacts to our sales that made the comparisons a little easier, but we also saw improving trends. We saw improving two-year comp trends coming out of Q1 into Q2, and also the later part of Q2, we saw improving trends moving in the back half of the year. I feel like the scenarios we've got right now play within our guidance.

Speaker #7: just in Q3 alone, think of we had a CrowdStrike incident, we had the Hurricane impact. So we, we've got some back half of the year, impacts to our sales that made the comparisons a little easier, but we also saw improving trends.

Speaker #7: So we saw improving, two-year comp trends coming out of Q1 into Q2, and also later part of Q2, we saw improving trends, moving to the back half of the year.

Speaker #7: So, it feels like the scenarios we've got right now play within our guidance. And you can tell, like if you look at 50 to 150 basis points on the full year, there is a step up in the back half.

Ryan Grimsland: You can tell, like if you look at 50 to 150 basis points on a full year, there is a step up in the back half, but I'd say on a two-year basis, it's not a material difference.

Speaker #7: but I'd say in a two-year basis, it's not a material difference.

Speaker #8: Okay, so it's more comparison than it is underlying change. and I think that's fair. One of the assumptions, it looks to us that the, the DIFM business would probably need to comp in at least the mid-single digits to get there.

Shane O’Kelly: Okay, so it is more comparison than it is underlying change, and I think that is fair. One of the assumptions, it looks to us that the DIFM business would probably need to comp in at least the mid-single digits to get there. Is that to the comparison? I do not know if tariff pricing is more pronounced in do it for me versus do it yourself, but can you talk about how that, the nuance between the two, I guess your assumptions between the two divisions lay out through the back half of the year?

Speaker #8: Is that too the comparison? And then, I don't know if tariff pricing is more pronounced in, do it for me versus do it yourself.

Speaker #8: but can you talk about how that, the nuance between the two, the, I guess your assumptions between the two divisions lay out through the back half of the year.

Speaker #7: Yeah, well, the biggest thing for us when you think of DIFM, the strength in pro, continuing to grow, that's really the big driver in the underlying business.

Ryan Grimsland: Well, the biggest thing for us when you think of DIFM, the strength in pro continuing to grow, that is really the big driver in the underlying business. We really like to see, we like seeing what is coming from the pro initiatives, the work we are doing there. From a price inflation perspective, we are looking at low to mid-single digit in the back half of the year, so 2% Q2. As those prices kind of continue to play out, what we are cautious on is the elasticity in the DIY consumer, and some of that really has not gotten into the market yet, so we are a little cautious on how the DIY consumer will respond in the back half of the year.

Speaker #7: We, we really like to see, we like seeing what, what's coming from the pro initiatives, and the work we're doing there. From a price inflation perspective, we're looking at low to mid-single digit in the back half of the year, so a 2% Q2.

Speaker #7: and as those prices kind of continue to play out, what we're cautious on is the elasticity and the DIY. consumer and, and some of that really hasn't gotten into the market yet, so we're a little cautious on how the DIY consumer will respond in the back half of the year, but, the underlying business really being the pro, I think of the DMA work, the assortment work that we're putting out, we'll have that done ahead of schedule, we'll have that in Q3.

Ryan Grimsland: The underlying business really being the pro, think of the DMA work, the assortment work that we are putting out, we will have that done ahead of schedule, we will have that in Q3, so that will have a positive impact in the back half of the year as well in those top 50 DMAs. You got anything? You mentioned the pros, the energy in the pro team going across the spectrum of pro customers. That includes our larger accounts. That also includes a lot of effort on smaller Main Street accounts. The assortment work helps here. The other thing that is helping with pro is our reduction in time to serve.

Speaker #7: So that'll have a positive impact in the back half of the year as well in those top 50 DMAs. Shane, you got anything?

Speaker #5: Yeah, so you mentioned the pro, the energy and the pro team going across the spectrum of pro customers. that includes our larger accounts, that also includes a lot of effort on smaller main street accounts.

Speaker #5: And so the assortment work helps here. The other thing that's helping with pro, is our reduction in time to serve. And I was recently with the large customer, who, who shops with a number of players and said, "Hey, your time to serve, we see it, it's under 40 minutes." And it's right there where, where we would get product from anybody else, and we're really happy with that.

Ryan Grimsland: I was recently with a large customer who shops with a number of players and said, "Hey, your time to serve, we see it is under 40 minutes." It is right there where we would get product from anybody else, and we are really happy with that. As we continue with our store efforts on time to serve, as we continue with the assortment, as we continue with call planning and how our outside sales team members target customers, we think that all helps contribute to that. I think Ryan Grimsland said it well on the DIY side. If you look at the impact in households on things like car insurance and food, they are seeing that impact. Are there secondary tertiary impacts coming in other tariff categories that impact their wallets that, I think is worth paying attention to as we see how the back half shapes up?

Speaker #5: So as we continue with, with our store efforts on time to serve, as we continue with the assortment, as we continue with call planning and, and, and how our outside sales team members target customers, we think that all helps contribute to that.

Speaker #5: And I think Ryan said it well on the DIY side. If you look at their impact in households on things like car insurance and food, you know, they're seeing that impact.

Speaker #5: Are there secondary, tertiary impacts coming in other tariff categories that, that impact their wallets that, that, you know, I think is, is, worth paying attention to as, as we see how the back half shapes up.

Speaker #8: Okay, thanks guys, good luck.

Shane O’Kelly: Okay, thanks guys. Good luck.

Speaker #7: Thanks, Simeon.

Ryan Grimsland: Thanks, Simeon.

Speaker #3: The next question comes from Michael Lasso from UBS. Michael, please go ahead, your line is open.

Lavesh Hemnani: The next question comes from Michael Lasser from UBS. Michael, please go ahead. Your line is open.

Speaker #9: Good morning. Thank you so much for taking my question. as part of your training. Question,

Michael Lasser: Good morning. Thank you so much for taking my question. As part of your transformation, there are elements. Good morning, Shane. As part of your transformation, there are elements that are within your control, and there are elements that are not within your control. Given that mix, how close is Advance Auto Parts Inc. to achieving the level of visibility in its near-term and short-term outlook that you would be even more comfortable with? I ask this because the gross margin for the Q2 did come in slightly below what the market was anticipating, suggesting that there is still a lack of at least visibility into some areas that will be necessary as you continue to execute against your transformation plan. Thank you.

Speaker #5: Hello Michael.

Speaker #9: there's, good morning Shane. As part of your training information, there's elements that are within your control, and there's elements that are without, not within your control.

Speaker #9: And, given that mix, how close is Advance Auto to achieving the level of visibility in its near-term and short-term outlook that you would be even more comfortable with?

Speaker #9: I, I ask this because you know, the growth, the gross margin for the second quarter did come in slightly below what the market was anticipating suggesting that there's still a lack of at least visibility into some areas that will be necessary as you continue to execute against your transformation plan.

Speaker #9: Thank you.

Speaker #5: I, I think it's a, it's a great question. And I'd answer it by saying, we're comfortable maintaining what we put out for approximately 7% operating income in 2027.

Ryan Grimsland: I think it's a great question. I would answer it by saying we are comfortable maintaining what we have put out for approximately 7% operating income in 2027. As we do that, 2025, this year and next year are really the big implementation years. This is where we are really grinding through all of the work. Some things we have strong lines of sight and control, to use your word there, and we are making steady progress. Other areas are a little more non-linear. We touched on with Simeon Gutman's question, what is going to go on with the DIY consumer? In some cases, a vendor discussion might yield benefit we might have anticipated it would be in 2025, and it comes in 2026.

Speaker #5: and that as we do that, 2025, this year and next year are really the big implementation years. So this is where we're really grinding through all of the work.

Speaker #5: And some things we have strong lines of sight and control, to use your word there, and we're making steady progress. Other areas are a little more nonlinear.

Speaker #5: so we've, we've, we've touched on what Simeon's question, what's going to go on with the DIY consumer. But in some cases, you know, a vendor discussion might yield benefit.

Speaker #5: We might have anticipated it would be in '25, and it comes in in '26. As we think about things like our store operating model and making sure that we've got demand-based labor dynamically allocating across the network, you know, that takes time to implement.

Ryan Grimsland: As we think about things like our store operating model and making sure that we have got demand-based labor dynamically allocating across the network, that takes time to implement. I would say we feel good about the 2027 program that we are on, and as we get there, there is a mix of things that are non-linear and things that we see strong progress with. Michael Lasser, I will just add, we track the KPIs of our initiatives really tightly. Just to give you a little bit more details on this, we track KPIs in all of our initiatives very tightly. We have been testing and piloting a bunch of them. We are starting to roll them out. We accelerate where we can. The timing of those and implementation and benefit impact, it is not perfectly linear.

Speaker #5: So, so I would say we feel good about the, the, the 2027, program that we're on. And that as we get there, there's a mix of, of things that are nonlinear and things that we, we see strong progress with.

Speaker #7: Yeah, Michael, I'll just add, look, we track the KPIs of our initiatives really tightly. So, and so it just, just to give you a little bit more details on this, we track KPIs in all of our initiatives very tightly.

Speaker #7: We've been testing and piloting a bunch of them. We're starting to roll them out. We accelerate where we can. The timing of those and implementation and benefit impact is not perfectly linear.

Speaker #7: As Shane mentioned, you know, you can have a, negotiation with a vendor and new products coming in when they come in, when they come out, and the cost impact.

Ryan Grimsland: As Shane O’Kelly mentioned, you can have a negotiation with a vendor and new products coming in, when they come in, when they come out, and the cost impact. Margins were not that far off of our expectation. We like the way we are tracking so far throughout the year. Last thing on control, the one thing we really ensured that we had control on is the balance sheet. The idea that we completed this debt issuance to make sure that we can continue the important program of supply chain financing through the turnaround, and now we have the means to execute against that and all of the other key initiatives.

Speaker #7: Margins weren't that far off of our expectation. So, we like the way we're tracking so far. throughout the year.

Speaker #5: Last Last thing on control, the one thing we, we really, ensured that we had control on is, is the balance sheet. And the idea that we completed this, this debt, issuance to make sure that we can continue the important program of supply chain financing, through the turnaround.

Speaker #5: And now we have the means to execute against that and all of the other key initiatives.

Speaker #3: Super helpful. My, my follow-up question is, in light of that, and, and in light of, what is the very dynamic environment as you guys could rightfully pointed out, how should we as outsiders think about the linearity of the progress from here?

Michael Lasser: Super helpful. My follow-up question is, in light of that and in light of what is a very dynamic environment, as you guys could rightfully point it out, how should we as outsiders think about the linearity of the progress from here? Obviously, I ask because most street models are anticipating 100 to 150 basis points of margin expansion for 2026. This would be a great opportunity to help calibrate those expectations to say, "Hey, if indeed it will be the case, think more of the progress that's going to come in 2027, especially in light of, I don't know, A, B, and C tariffs, consumer, whatever it might be." Thank you very much.

Speaker #3: And obviously I ask because most street models are anticipating 100 to 150 basis points. Of, margin expansion for 2026, and this would be a great, opportunity to help calibrate those expectations to say, "Hey, if indeed it will be the case, think more of the progress is going to come in 2027." Especially in light of, I don't know, A, B, and C tariffs, consumer whatever it might be.

Speaker #3: Thank you very much.

Speaker #7: Yes, thanks Michael. Well, I'll just say it's a little early for us to be able to indicate what next year will, will look like from a margin expansion.

Ryan Grimsland: Yes, thanks, Michael. It's a little early for us to be able to indicate what next year will look like from a margin expansion. Obviously, you've got a goal of 7% in 2027, and you would need margin expansion next year. What the magnitude and size of that, we'll come back at a later date and share with you because we are still early in a lot of the initiative rollout and having a better, clearer idea of the timing of the impact of those next year. We'll need a little bit more time to be able to get to that. We will share that, but I would expect margin expansion. We need to get it going into 2027. Some of the things we're doing today will have positive impacts next year, absolutely.

Speaker #7: obviously we got a goal of 7% in '27, and you would need margin expansion next year. What the magnitude and size of that, we'll come back at a later date and share with you.

Speaker #7: Because we are still early in a lot of the initiative rollouts and, and having a better, clearer idea of the timing of the, the impact of those next year, we'll need a little bit more time to be able to get to that.

Speaker #7: We will share that, but I would expect margin expansion if, we need to get it going into '07. And some of the things we're doing today, we'll have positive impacts next year.

Speaker #7: Absolutely. The magnitude of it—we'll come back and share that at a later date—but there is some linear progression that's needed to get to the 7% for sure.

Ryan Grimsland: The magnitude of it, we'll come back and share with that at a later date, but there is some linear progression that's needed to get to the 7% for sure. It's just what is the timing and size and magnitude of that next year? We'll come back at a later date to share. In general, we want to have a say-do ratio that depicts, from your perspective, an understanding of where we're going with the business. When we've got insights, we'll share them. As we go through the decisive actions, we'll outline what we're doing there. The idea being that we'll make the progression maybe non-linear, but continuing towards that 7% in 2027.

Speaker #7: It's just, what is the timing? and size and magnitude of that next year, we'll come back at a later date to share.

Speaker #5: And in general, we want to have a say-do ratio that, that depicts from your perspective, an understanding of where we're going with the business.

Speaker #5: And so when we, when we've got insights, we'll share them. and, and as we go through the decisive actions, we'll, we'll outline what we're doing there.

Speaker #5: And the idea being that we'll make the, the progression maybe nonlinear, but, but continuing towards that '07 and '27.

Speaker #3: Totally understood. And best of luck. Thank you so much.

Michael Lasser: Totally understood. Best of luck. Thank you so much.

Speaker #7: Thanks, Michael. Appreciate it.

Ryan Grimsland: Thanks, Michael. Appreciate it.

Speaker #3: The The next question comes from Chris Wolves from JP Morgan. Chris, please go ahead, your line is open.

Lavesh Hemnani: The next question comes from Chris Horvers from JPMorgan. Chris, please go ahead. Your line is open.

Speaker #10: Hi, good morning. It's Christian Carlino, one for Chris. Thanks for taking our question. What are you seeing in terms of how peers are reacting to the tariff costs starting to flow through? Presumably, the upfront cash impact would have more of the pressure on some of the independent distributors.

Christian Carlino: Hi, good morning. It's Christian Carlino in for Chris. Thanks for taking our question. What are you seeing in terms of how peers are reacting to the tariff costs starting to flow through? Presumably the upfront cash impact would have more of a pressure on some of the independent distributors. So in addition to the work you've been doing, are you seeing a pickup in share performance? Or are peers either taking more price than you or running lower inventory levels that should lead to share gains over the coming quarters?

Speaker #10: So, in addition to the work you've been doing, are you seeing a pickup in share performance? Or, you know, are peers either taking more price than you, or running lower inventory levels that should lead to share gains over the coming quarters?

Speaker #7: Excuse me.

Ryan Grimsland: We see, I mean, I read what you read. What I read there, and then what we see in terms of what goes on with customers is a rational industry. I think players are appropriately doing actions similar to ours, which is trying to secure product at a good cost and then being rational in terms of what end pricing looks like. I would just say, Christian, that it has been a rational environment. What we have seen from our peers, we have not seen significant deviation in our CPI from any price actions we have taken. Competitors have taken price actions as well, and we have followed suit. We are following, and that is our strategy is to follow and be a competitive price every single day.

Speaker #5: So we see, I mean, I've, I read what you read, and, and so what I read there and then what we see in terms of, of what goes on, with customers is a rational industry.

Speaker #5: I think players are appropriately you know, doing actions similar to ours, which is, trying to secure product at a good cost and then, and then being rational in terms of what end pricing looks like.

Speaker #7: I would just say, Christian, that, it's been a rational environment. what we've seen from our peers, we haven't seen significant deviation in our CPI.

Speaker #7: from any price actions we've taken. competitors have taken price actions as well and, and we've followed suit. Our, we are following. And that is our strategy is to follow.

Speaker #7: and, and be a competitive price every single day.

Speaker #10: Got it. That is helpful. And you, you mentioned maintaining gross margin rate where you can, but prioritizing profit dollar expansion. So are you embedding, you know, a discrete headwind, amongst other things in gross margin from the tariffs in the back half?

Christian Carlino: You got it. That is helpful. You mentioned maintaining a gross margin rate where you can, but prioritizing profit dollar expansion. Are you embedding a discrete headwind amongst other things, gross margin from the tariffs in the back half? If so, could you quantify that?

Speaker #10: And, and if so, could you, could you quantify that?

Speaker #7: yeah, so we're expecting about low to mid-single-digit inflation in the back half of the year. Obviously, some of that is price related to, the tariffs.

Ryan Grimsland: We are expecting about low to mid-single digit inflation in the back half of the year. Obviously, some of that is price related to the tariffs. We are expecting, there are obviously multiple scenarios, and it is still kind of early to predict exactly how it all plays out. But even the changes that have happened, we are still at a blended rate of roughly 30% on tariff impacts in what the latest changes. Those prices are just starting to make it into the market. The biggest unknown will be the demand elasticity and how that might play out in the back half of the year. But within our guidance range, those scenarios all fall within there. It really depends on what is the elasticity, what is the impact, how does the consumer respond, how do they react will have an impact on the range outcome.

Speaker #7: We are expecting, there's obviously multiple scenarios, and it's still kind of early to predict exactly how it all plays out. But even the changes that have happened, we're still at a blended rate of roughly 30% on tariff, impacts.

Speaker #7: Even with the latest changes, those prices are just starting to make it into the market. So, the biggest unknown will be the demand, the elasticity.

Speaker #7: And how that might play out in the back half of the year. So, but within our guidance range, those scenarios all fall within there.

Speaker #7: and it really depends on what is the elasticity, what's the impact, how does the consumer respond, how do they react, we'll have a, an impact on the, the range outcome.

Speaker #10: Got it. Thank you very much.

Christian Carlino: Got it. Thank you very much.

Speaker #3: Thanks, Christian. Appreciate it. The next question comes from Scott Ciccarelli from Trivist. Scott, please go ahead, your line is open.

Ryan Grimsland: Thanks, Christian. Appreciate it.

Lavesh Hemnani: The next question comes from Scott Ciccarelli from Tribest. Scott, please go ahead. Your line is open.

Speaker #10: good morning guys. so my question is, it seems like you guys are planning for kind of a low, hi. Looks like you guys are planning for, low single-digit comps over the next, call it two to three years.

Shane O’Kelly: Good morning, guys. My question is, it seems like you guys are planning for kind of a low high. It looks like you guys are planning for low single-digit comps over the next, call it, two to three years. We have a natural SG&A inflation rate in the, call it, 2% to 3% store range. It seems like your medium-term target of 7% is really dependent on gross margin. A, is that a fair assessment? B, assuming it is correct, can you help size the different buckets of where that gross margin expansion should come from? It just seems like it is a lot given the comp environment. Thank you.

Speaker #10: We have a natural SG&A inflation rate in the, call it, two to three percent store range. So, it seems like your medium-term target of 7% really depends on gross margin.

Speaker #10: A, is that a fair assessment? And B, assuming it's correct, can you help size the different buckets of where that gross margin expansion should come from?

Speaker #10: It just seems like it's a lot, given the, the comp environment. Thank you.

Speaker #7: Yeah, Scott, well, I'll, I'll take that a little bit and then let Shane jump in as well. from a sizing perspective, yes, a larger portion of that is going to come from gross margin.

Ryan Grimsland: Yeah, Scott, I will take that a little bit and then let Shane jump in as well. From a sizing perspective, yes, a larger portion of that is going to come from gross margin. That is really two pieces that we have talked about in our strategic pillars. One is merchandising excellence, and that is the first cost that we are getting: improved promotion, improved pricing structure externally. We are still working through that. The team is making a lot of good progress. Our vendors are partnering with us well and being supportive as we work through that. But still a lot to do to get to 2027, and this year and next year, a lot going on there. That is probably the biggest bucket that will drive it. The next biggest bucket on that continuum is our supply chain and productivity within supply chain.

Speaker #7: And that's really two pieces, that we've talked about in our strategic pillars. One is merchandise and excellence, and that's the, the first cost that we're getting improved promotions and improved pricing structure, externally.

Speaker #7: We're still working through that. The team is making a lot of good progress. Our vendors are partnering with us well and being supportive.

Speaker #7: As we work through that, but still a lot to do to get to, to '27 and, and this year and next year, a lot going on there.

Speaker #7: That's probably the biggest bucket. That we'll drive it. The next biggest bucket on that, continuum is our supply chain. And productivity within supply chain.

Speaker #7: And we talked about our consolidation down to the big DCs, transportation costs, all of that falls into that bucket. and that is, one that as we consolidate down, we'll start to see more of it.

Ryan Grimsland: We talked about our consolidation down through the big DCs, transportation costs, all of that falls into that bucket. That is one that as we consolidate down, we will start to see more of it, the later tail to that one, more into 2026. There is still opportunity within SG&A. It is not as big as the other two, but there is opportunity within SG&A. Shane talked about the operating model and aligning our assets and our payroll hours based on demand and the work we are doing there and understanding the right model going forward will yield benefit for us on the SG&A side as well. So there is still opportunity within SG&A. More on the SG&A will be about keeping dollars, mitigating the inflation impact, and leveraging as some of that top line comes in. Yeah.

Speaker #7: It's a later tail to that one. more into '26. and then there is still opportunity within SG&A. But it's not as big as the other two, but there is opportunity within SG&A, Shane talked about the operating model and aligning our assets.

Speaker #7: And our payroll hours based on demand and the work we're doing there and understanding the right model going forward. we'll yield benefit for us, on the SG&A side as well.

Speaker #7: So there's still opportunity within SG&A. More on the SG&A will be about keeping dollars, mitigating the inflation impact. and, and, and leveraging, as some of that top line comes in.

Speaker #5: Yeah, and so, I think you're hypothesis is right. Scott, and margin certainly, have those things to work on that, that Ryan alluded to. But I also think the, you know, the success in this industry on the top line, which we need to be a, a regular participant in growth there as well, is, you know, customers ask, do you have it yes or no?

Ryan Grimsland: I think your hypothesis is right, Scott, and margin certainly have those things to work on that Ryan alluded to. But I also think the success in this industry on the top line, which we need to be a regular participant in growth there as well, is customers ask, do you have it, yes or no, and when can I get it? As we go forward to 2027, top line matters.

Speaker #5: And when can I get it? And so as we go forward to, to 2027, top line matters. And in that regard, our assortment coverage work to make sure we've got better availability.

Ryan Grimsland: In that regard, our assortment coverage work to make sure we have got better availability, that supply chain is getting it into the stores, and then from our store team's perspective that we have the delivery timelines to get it to the customer gives us a better chance on the do you have it and when can I get it, being able to say yes to both of those questions, which is nutritive in addition to the margin activities that Ryan relayed.

Speaker #5: That supply chain is getting it into the stores. And then from our store team's perspective, we have the delivery timelines to get it to the customer.

Speaker #5: It gives us a better chance on the "Do you have it?" and "When can I get it?" being able to say yes to both of those questions.

Speaker #5: Which is nutritive, in addition to the, the margin activities that Ryan relayed.

Speaker #3: Thanks a lot, guys. Very helpful.

Shane O’Kelly: Thanks, Mark. That's very helpful.

Speaker #7: Thanks, Scott.

Ryan Grimsland: Thanks, Scott.

Speaker #3: The next question comes from Seth Siegman from Barclays. Seth, please go ahead, your line is open.

Lavesh Hemnani: The next question comes from Seth Basham from Wedbush. Seth, please go ahead. Your line is open.

Speaker #10: Thanks. Good morning, everyone. I wanted to go back to the DIY business. you talked about the performance in Q1. I'm sorry, in Q2, being similar to Q1.

Shane O’Kelly: Thanks. Good morning, everyone. I wanted to go back to the DIY business. You talked about the performance in Q1, I am sorry, in Q2 being similar to Q1. It seems like you had more inflation in the second quarter. I am not sure if that implies that transactions may have flowed sequentially. Maybe you just clarify that because you also talked about signs of maybe some stabilization with that consumer. If we can reconcile all that, I think it would be helpful.

Speaker #10: It seems like you had more inflation in the second quarter. So I'm not sure if that implies that transactions may have slowed sequentially. Maybe you could clarify that because you also talked about signs of, maybe, some stabilization with that consumer.

Speaker #10: So if we can reconcile all that, I think it would be helpful.

Speaker #7: Yeah, absolutely. Well, so yes, there's some inflation in there. but we also saw transactions improve throughout the quarter. especially the later end of the quarter, we saw transactions in the DIY improve.

Ryan Grimsland: Yes, absolutely. Yes, there is some inflation in there, but we also saw transactions improve throughout the quarter. Especially the later end of the quarter, we saw transactions in the DIY improve. Not quite positive yet, but we did see it improve, which was positive for us to see. We saw on a two-year basis, those trends continued to improve as well. We saw some key DIY categories that we were happy to see move in the right direction. We did see progress throughout the quarter. Honestly, some of the inflationary impacts or price impacts from the tariffs started to enter Q2. It will be interesting as they start to really mature in the back half of this year, how that DIY consumer reacts to that. If you look at the maybe a lower to mid-income cohorts, they are more pressured than others right now.

Speaker #7: not quite positive. but yet, but we did see it improve, which was positive for us to see. We saw on a two-year basis, those trends continued to improve as well.

Speaker #7: We saw some key DIY categories that we were happy to see move in the right direction. So we did see progress throughout the quarter.

Speaker #7: and, and honestly, some of the inflationary impacts or price impacts from the tariffs are still while started to enter Q2. it'll be interesting as they start to really, mature in the back half of this year.

Speaker #7: How does that DIY consumer react to that? I mean, if you look at the maybe a lower to mid-income cohorts, they are more pressured than others, right now.

Speaker #7: The wages aren't necessarily fully keeping up with some of the inflation that's in there. And so, there are trade-offs that they're making.

Ryan Grimsland: The wages are not necessarily fully keeping up with some of the inflation that is in there. There are trade-offs that they are making, and we are still seeing that. It will be interesting to see how that plays out in the back half of the year. You see all what Ryan Grimsland is talking about. Let me just touch on things we are doing as a company to be better with DIY. Assortment and availability obviously matters, but we are doing some other interesting things. Training is a big one for us. What we find is new team members, when we execute training, they are interested in learning it in quicker bursts. We are working on short videos that can get people up to speed on different products so they can ask about add-ons, they can ask clarifying questions.

Speaker #7: And we're still, we're still, we're still seeing that. The interesting to see how that plays out in the back half of the year.

Speaker #5: And, and then so you see all the what Ryan's talking about. Let me just touch on things we're doing as a company to be better with DIY.

Speaker #5: So assortment and availability, obviously matters. but we're doing some other interesting things. Training is a, is a big one for us. And what we find is, is new team members, when they, when we, when we execute training, they're interested in learning it in quicker bursts.

Speaker #5: So we're working on short videos that can get people up to speed on different products. So they can ask about add-ons, they can ask clarifying questions.

Speaker #5: And then we're working across the functions in terms of, of how we do a promotion. where we set and stage products. We're looking at our planograms across the front room in the store where the DIY customer browses.

Ryan Grimsland: We are working across the functions in terms of how we do a promotion, where we set and stage products. We are looking at our planograms across the front room of the store where the DIY customer browses, and we are creating value events for them. We are using our Speed Perks loyalty program and engaging with those members. There are a lot of things that we are doing granularly that we have to do inside of the macro trends, but that helps us be a little bit better when somebody comes in the store.

Speaker #5: And we're creating a value events for them. We're using our speed perks loyalty program and engaging with those members. So there's a lot of things that we're doing granularly.

Speaker #5: That we have to do inside of the macro trends, but that helps us be a little bit better when, when somebody comes in the store.

Speaker #3: Got Got it. All right, that's super helpful. And then I just wanted to clarify on the operating margin guidance. You didn't change it for the full year.

Shane O’Kelly: Got it. All right, that is super helpful. I just wanted to clarify on the operating margin guidance. You did not change it for the full year. Did you actually change the composition of gross margin versus SG&A? More specifically, this quarter you had the reversal of some costs that were capitalized into inventory. I am just curious, what is driving that reversal now? If you could quantify the impact either on the quarter or the full year, what is embedded in the guidance, that would be helpful. Thank you.

Speaker #3: Did you actually change the composition of gross margin versus SG&A? And then more specifically, this quarter you had the reversal of some costs that were capitalized into inventory.

Speaker #3: I'm just curious, what's driving that reversal now? And, and if you could quantify the impact, either on the quarter or, or the full year, what's embedded in the guidance, that would be helpful.

Speaker #3: Thank you.

Speaker #7: Yeah, so on the capitalization costs, it's really inventory coming down. If you recall Q1, we made a forward buy of inventory ahead of tariffs and also our assortment work.

Ryan Grimsland: Yeah, so on the capitalization cost, it is really inventory coming down. If you recall Q1, we made a forward buy of inventory ahead of tariffs and also our assortment work. That obviously provides a benefit from our capitalization because we would capitalize more cost to that inventory. As you work that inventory down, there is less inventory to capitalize against. You see the reversal of that in the quarter. That happened in this quarter, and we expect that to actually continue through the back half of the year, and that is embedded in our guidance. The benefits of the work we have done from a cost out. Also, keep in mind the store optimization work. A lot of that impact is in COGS.

Speaker #7: That obviously provides a benefit from a capitalization because we can capitalize more costs to that inventory. As you work that inventory down, there's less inventory to capitalize against.

Speaker #7: So you see the reversal of that in the quarter. That happened in this quarter. And we expect that to actually continue through the back half of the year, and that's embedded in our guidance.

Speaker #7: so but the, but the benefits of the work we've done from a cost out. Also, keep in mind the store optimization work, a lot of, a lot of that impact is in COGS.

Speaker #7: Think of our supply chain, nodes that we closed down, that were burdening our margin rates. That's $70 million that we talked about, you'll see in the back half.

Ryan Grimsland: Think of our supply chain nodes that we closed down that were burdening our margin rates. That is $70 million that we talked about. You will see in the back half. That is offsetting a lot of that as well, along with the work that the merchandising team has done to get costs out and improve our pricing promotion strategy. We are able to offset that plus. We are able to do that in Q2, but I would expect that pressure in our guidance for the back half of the year. From a difference between a margin rate and SG&A, our SG&A is the same. I would expect the dollars to be similar to Q2 for the rest of the year by quarter. Our margin rate obviously would be the plug to get back to the rate. The rate not significantly changed.

Speaker #7: That's offsetting a lot of that as well, along with the work of the merchandising team has done, to get cost out and improve our pricing promotion strategy.

Speaker #7: So we're able to offset that plus. We're able to do that in Q2, but I would expect that pressure is in our guidance, for the back half of the year.

Speaker #7: From a, a difference between a margin rate and SG&A, or SG&A, is the same. I would expect the dollars to be similar to Q2.

Speaker #7: for the rest of the year, by quarter. and our margin rate obviously would be, would be the plug to get back to the, the rate to the rate.

Speaker #7: Not significantly changed. The geography between gross margin and SG&A, not significantly changed.

Ryan Grimsland: The geography between gross margin and SG&A not significantly changed.

Speaker #3: Great. Thank you so much. The next question comes from Michael Montani from Evercore ISO. It's the final question of today's Q&A. Michael, your line is open.

Shane O’Kelly: Great. Thank you so much.

Lavesh Hemnani: The next question comes from Michael Montani from Evercore ISI. It is the final question of today's Q&A. Michael, your line is open. Please go ahead.

Speaker #3: Please go ahead.

Speaker #10: Hey, thanks for taking the question. It's, Mike Montani on for Greg Mellick. just wanted to ask, you know, with the two-half, comp assumption, implied at around two to three percent, should we be thinking about that as three to four points of pricing, and then a point or two of offset from elasticity?

Michael Lasser: Hey, thanks for taking the question. It is Michael Lasser on for Greg Melich. I just wanted to ask, with the two-half comp assumption implied at around 2% to 3%, should we be thinking about that as three to four points of pricing and then a point or two of offset from elasticity? Is that kind of what you are seeing in July? Then I just had a follow-up on your Main Street commercial accounts.

Speaker #10: Is that kind of what you're seeing in July? and then I just had a follow-up on your, main street commercial accounts.

Speaker #7: Okay, yeah, so just from an inflationary standpoint, I would say it's low to mid-single-digit inflationary. There is some, elasticity impacts embedded in there as well, but, keep in mind there's a wide range of outcomes that can happen as we think about the tariffs, price changes that go in, elasticity.

Ryan Grimsland: Okay, yeah, so just from an inflationary standpoint, I would say it is low to mid-single digit inflationary. There is some elasticity impacts embedded in there as well, but keep in mind there is a wide range of outcomes that can happen as we think about the tariffs, price changes that go in, elasticity. I think the full range that we have provided is a good assumption. In Q2, we had about 2% price elasticity, or sorry, price inflation impact. It is not fully demand elasticity was relatively similar. We did see improving trends in transaction in the later part of the quarter. As some price increases a little bit off of Q2, we will be cautious around what the consumer, how the consumer behaves and what the demand elasticity looks like.

Speaker #7: So I think the full range that we've provided is a good assumption. in Q2, we had about 2% price elastic, or sorry, price inflation impact.

Speaker #7: so it's not fully, demand elasticity was relatively similar. We did see improving trends in transaction in the later part of the quarter. so as, as some price increases a little bit off of Q2, we'll be you know, cautious around what the consumer, how the consumer behaves and what the demand elasticity looks like.

Speaker #3: Okay, and then, just to follow up.

Michael Lasser: Okay, then just to follow up, with the core consumer, the Main Street consumer, it sounds like you are seeing some strength from that group, but you did not mention as much larger wholesale accounts. I am just curious, how should we think about cycling through some of the wholesale accounts that you may have lost, and when would it become more apparent, with respect to the strength you are seeing from the Main Street pro customer?

Speaker #10: You know, with the core consumer, the main street consumer, it sounds like you're seeing some strength from that group. But you didn't mention, as much larger, wholesale accounts.

Speaker #10: And so I'm just curious, you know, how should we think about cycling through some of the wholesale accounts that you may have lost? And when would it become more apparent, you know, with respect to the strength you're seeing from the main street pro customer?

Speaker #7: Yeah, so you've depicted that as an, an either. and I would say it's an and. We still have our large pro accounts and we value those relationships and we work with them every day.

Ryan Grimsland: You have depicted that as an either, and I would say it is an and. We still have our large pro accounts, and we value those relationships, and we work with them every day. There is not a strategy here where we are disposing of being in that space. We have great customers and enjoy being part of their ecosystem. This is as we think about some marginal activity from our outside sales team members, prospecting smaller accounts where they might have been reluctant to do that in the past. We are making sure that we are covering the spectrum of pro customers, not sort of trading off one for the other.

Speaker #7: and so there's not a, there's not a strategy here where we're disposing of being in that space. We have great customers and, and enjoy being part of their, their ecosystem.

Speaker #7: This is, as we think about some marginal activity from our outside sales team members, you know, prospecting smaller accounts where they might have been reluctant to do that in the past.

Speaker #7: So, we're making sure that we're covering the spectrum of pro customers, not sort of trading off one for the other.

Speaker #5: I think a couple of things that we're really excited about in the back half of the year, the work on the pro team has done with our main street, but also maintaining the relationships with our national accounts.

Ryan Grimsland: I think a couple of things that we are really excited about in the back half of the year, the work on the pro team has done with our Main Street, but also maintaining the relationships with our national accounts. Also the way they have worked across the organization, merchandising and the hard part work, we are really excited about how our hard parts are performing with the pro, but also our inventory replenishment team. A lot of the assortment work we have done was more indexed towards hard parts, and that really has a benefit for our pro customers. That cross-collaboration across the organization, really excited about the work that they have done there and the improvement we are seeing in hard parts.

Speaker #5: But also the way they've worked across the organization. Merchandising and the hard part where we're really excited about how our hard parts are performing, with the pro.

Speaker #5: But also our inventory replenishment team, a lot of the assortment work we've done was more indexed towards hard parts, and that really has a benefit for our pro customers.

Speaker #5: But that cross collaboration across the organization, really excited about the work that they've done there and the improvement we're seeing in hard parts.

Speaker #3: This concludes today's Q&A session and thus concludes today's call. Thank you all very much for your attendance. You may now disconnect your lines.

Lavesh Hemnani: This concludes today's Q&A session and thus concludes today's call. Thank you all very much for your attendance. You may now disconnect your lines.

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