Q2 2019 Earnings Call
Ladies and gentlemen, please stand by your conference call will begin momentarily once again, thank you for your patience simply standby.
Welcome to the advance auto parts second quarter 2019 conference call before we begin Elisabeth Eisleben, Vice President Investor Relations will make a brief statement concerning forward looking statements that will be discussed on this call.
Good morning, and thank you for joining us to discuss our second quarter 2018 result.
I'm joined by Tom Greco, our President and Chief Executive Officer, and Jeff Shepherd, Our executive Vice President and Chief Financial Officer. Following their prepared remarks, we will turn our attention to answering your question.
Before we begin please be advised that our comments today may include forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
Well actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, which are described in the risk factor section in the Companys filings with the Securities and Exchange Commission, we maintain no duty to update forward looking statements made.
Additionally, our comments today include certain non-GAAP financial measures, we believe providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results.
Please refer to our quarterly press release and accompanying financial statements issued today for additional detail regarding the forward looking statements and reconciliations of these non-GAAP financial measures to the most comparable GAAP measures referenced in today's call.
The content of this call will be governed by the information contained in our earnings release and related financial statements now, let me turn the call over to Tom Greco.
Thanks Elizabeth.
Good morning, everyone and thank you for joining us today as we review our second quarter 2019.
Before we begin I'd like to thank our more than 70000 team members and our network of Carquest independence for their continued commitment towards our long term goals.
In the second quarter net sales increased to $2.3 billion and comparable store sales were flat.
Our adjusted operating income margin of 8.4% decreased 40 basis points compared to the prior year quarter and our adjusted diluted earnings per share increased 1.5% to $2.
Through the first half of 2019, our net sales increased 1.6% with comparable store sales up 1.5% year to date, our adjusted operating income margin of 8.3% increased seven basis points and our adjusted diluted EPS was $40.46 an increase of 9.6%.
While our Q2 results were below our expectations.
We remain confident in our ability to capitalize on the significant opportunity ahead. We are relentlessly focused on the disciplined execution of our long term strategic plan to enable sales growth margin expansion and meaningful cash flow improvement.
As you saw in our press release, we updated our full year guidance ranges slightly narrowing our sales and adjusted Oi margin ranges, while increasing our free cash flow expectations for the year.
Jeff will provide further details of our financial results momentarily. However, I want to spend some time reviewing our performance both in Q2 and year to date.
As we said in the past the spring selling season straddles our first and second quarter, each year, which can impact performance between the two quarters.
We saw this play out in our first half results.
In contrast to 2018, when we had a soft finish to Q1 and a very strong start to Q2, the exact opposite occurred this year.
In fact during the last four weeks of our Q1 this year comp sales were up mid single digits.
The week, our Q2 began on April 20, Onest, the weather turned cooler and wetter than historic norms and significantly cooler and wetter than 2018.
As a result comp sales during the first four weeks of our Q2 were down.
Driven entirely by DIY retail in fact, our first full month of the quarter was one of the wettest Mays on record with many parts of the US also reporting below average temperatures.
For these reasons, it's beneficial to consider our performance over the front half of the year to smooth out seasonal volatility from quarter to quarter with this in mind, we delivered growth in the first half of the year with net sales up 1.6% well within our full year guidance range.
Well. This is the strongest first half performance, we reported since 2015 on both a one and two year stack basis, its clearly below our internal sales expectations.
As we look at the different channels of our business our professional business delivered growth across all banners as pro is less impacted by weather volatility.
Compared to our stated goal of growing at or above market growth rates, our professional business performed well in both Q1 and Q2 and is building momentum importantly professional grew in each of the three periods in Q2, and our two year stack accelerated.
Our team is focused on delighting, the customer and driving continuous improvement every day.
We have the broadest assortment of parts in the industry, including National brands, OE and private label, which is critically important for our professional customers.
Consistent with our ongoing integration efforts, we're strengthening the effectiveness of our enterprise catalog advance pro leveraging cross manner visibility and integrating our enterprise assortment.
In addition, during the first half of the year, we continue to rollout dynamic assortment. All of these actions are enabling us to improve stock and close rates and reduce order to delivery times, and therefore say, yes more often.
This is evidenced by double digit growth in both strategic accounts and technet customers in Q2.
In addition to driving growth across our professional business, we continue to make progress on our DIY Omnichannel e-commerce platforms.
During the second quarter, we enhance customer notification capabilities on order tracking and executed multiple website upgrades to further improve the usability and functionality of our website for our customers.
This drove a substantial year over year increase in online traffic improved conversion rates and resulted in double digit growth for both online transactions and sales.
We are relentlessly focused on improving the omni channel customer experience with further initiatives planned for the balance of the year.
Stepping back to assess our DIY retail business were disappointed in our first half performance.
We attribute this to both external and internal factors.
Theres no doubt the weather trends had an impact on our second quarter performance in DIY retail.
We finished the last four weeks of Q1 up mid single digits, and then gave nearly all of that back in the first four weeks of Q2.
Demand to remain soft throughout the balance of Maine, and therefore, we did not begin to recover from this until very late in the quarter.
This was reflected in the performance of our regions as our growth slowed significantly in Q2 versus Q1 in northern markets like the northeast mid Atlantic and Great Lakes regions, where we have a disproportionate concentration of stores.
Our strongest Q2 performance was in the Carolinas Midwest and west regions.
From a category perspective, we saw the highest growth in brakes filters and batteries.
Not surprisingly cooling in engine management related products were down significantly in Q2, particularly in those same northern geographies.
These categories are already recovering in the third quarter with extreme heat impacting a large portion of the us and the very regions that slowed down in Q2, our leading the improvement we've seen in the early weeks of Q3.
Given the improved demand we saw with more normalized weather late in Q2 and in the early part of our Q3, we expect comp sales growth in the back half of the year, resulting in an acceleration of our two year stack.
All that said there are some internal factors that need to be addressed in DIY retail.
We believe there is plenty of room for improvement in our retail business that is not weather dependent and we are committed to addressing those factors that are within our control. According to syndicated data following a share gain in DIY retail in Q4 of last year our share in the first half of the year was down slightly.
There are a couple of drivers weve identified and are addressing.
Part of our shortfall was concentrated in certain categories, where our actions did not produce the desired results. Therefore, we've taken the appropriate steps to address these opportunities and have already seen improvement.
In addition, we have a number of initiatives planned for both Q3 and Q4 to stimulate sales growth in DIY retail first we're laser focused on improving retail traffic to accelerate growth, which requires us to improve the effectiveness of our marketing.
In line with this priority I'm pleased to welcome Jason Mcdonald's to the advance team to lead our enterprise wide marketing function as EVP and Chief marketing Officer, Jason brings an extensive background in digital and brand marketing.
He's already focused on driving traffic and improving the impact of our marketing investments.
Secondly, we're standardizing and significantly improving our buy online pickup in store experience by reducing friction for our customers, who make purchases on our website and come to our stores to pickup parts.
We know they want to get in and out of the store quickly.
We expect to accelerate our buy online pickup in store growth in the back half by providing a dedicated and convenient location in every store.
A third element of our DIY plan in the back half is to drive improved loyalty.
The key platform here is the launch of our new speed Perks Twod Auto program. Following considerable time listening to our customers and testing speed perks to the auto we now offer the best rewards program in the industry, we tested our speed perks platform in two markets over a 20 week timeframe.
In these lead markets, we delivered significant increases in both speed perks sign ups and average dollar spend per member versus control group stores.
We recently launched our new program nationally and our field team is executing very well driving double digit increases in speed perks sign ups.
Finally, I'm pleased to announce that we launched the first phase of our partnership with Walmart Dot Com late in the second quarter as planned.
We are being very disciplined with this launch which includes a select assortment of parts that will ramp over time to ensure all capabilities are functioning well and the customer experience is best in class.
This includes standing up our online store within a store on Walmart Dot com.
We expect our branded advance auto parts store on Walmart Dot Com will drive incremental growth for our newly formed partnership.
In the second phase, we expect to enable additional customer fulfillment options, including in store pickup at advance locations.
Together with Walmart, we have an outstanding team in place working collaboratively to deliver a world class online shopping and fulfillment experience for our mutual customers were excited about our progress so far and we'll continue to strengthen our online platform to capture the omnichannel growth opportunity ahead.
To summarize our topline performance in the front half of 2019, we are pleased with our results on professional and DIY econ with DIY retail a work in progress.
We're in the process of executing several back half initiatives in DIY retail that we expect will improve performance in an important channel for growth and profitability.
Moving on to margin expansion the entire HCP team remains focused on the unique opportunity we have to drive increased profitability and cash flow through the four areas we've discussed.
First in terms of driving sales and profit per store, we continued to optimize our footprint.
In the second quarter, we closed and consolidated 21 stores, which brings our total to 59 stores this year.
Over the past 52 weeks, we've closed and consolidated 125 stores.
Consistent with previous quarters.
We're also capitalizing on strategic growth opportunities, which includes opening four new worldpac branches in the second quarter, bringing our total to seven new branches. This year.
The Worldpac team is executing very well.
And Bob Cushing continues to leverage worldpac industry, leading capabilities across all of a copy.
In addition, I'm extremely pleased with our independent teams unrelenting focus on growth and I'm excited to welcome 19, new independently owned Carquest locations in the second quarter, our Carquest independents have terrific momentum and we continue to drive sales growth leveraging many of the new tools and technology, we are deploying across the enterprise.
Overall, we made progress in the first half and improving sales per store as we optimize our footprint.
One of our largest areas of investment this year is across our supply chain in DC wages standardization and new technology.
Our cross men, a replenishment initiative will enable us to ship parts from our legacy red or blue Dcs to either red or blue stores.
We are now making daily replenishment deliveries to a group of Carquest stores, including independent locations from a legacy advance or Red DC.
As well as the select group of advance stores from a legacy Carquest for Blue DC.
We expect to scale these capabilities to other Dcs in stores later this year in a market by market approach.
Once this is fully rolled out which we plan to complete by mid 2021, we expect improved product availability increased inventory turns and significant cost savings.
As part of this we're reviewing ways to improve delivery speed for all customers.
While our in store pickup option continues to be the preferred fulfillment method, we are committed to broadening our reach and reducing order to delivery times to further improve the customer experience.
Rounding out supply chain, we announced that we will close our DC located in Armonk, New York later this year.
Our actions and supply chain are gaining momentum and we expect to leverage supply chain costs in the back half of 2019.
In terms of category management, our merchant team remains focused on material cost optimization, improving private label as a percent of mix and the implementation of strategic pricing actions based on new analytical tools, we've built in conjunction with dynamic assortment.
Our supplier partners are playing a critical role as we execute this plan.
Collaborating together, we expect increased sales improved margins and reduced inventory.
Our fourth margin expansion opportunity is within SGN, a where we have several integration and cost saving initiatives underway.
Our primary example here is the focus weve placed on building a safety culture at ETP I'm thrilled that we once again reduced our total recordable injury rate by 15% and our lost time rate, which measures our most severe injuries improved 32% in the second quarter.
Safety is just one example of how we are building a winning culture at advance with a goal of being the employer of choice for our industry.
Targeted investments in our people highlighted by our unique fueled the frontline stock ownership program best in class industry training as well as new tools and technology continues to reduce team member turnover I'm, particularly happy with the progress we're making across the enterprise on team member retention.
Our overall annualized turnover declined by 29% compared to the end of 2018, which includes a 17% reduction across our supply chain organization.
To summarize our performance in the front half of the year the investments, we're making to unlock long term growth and margin expansion are on track.
As we said before this transformation will not be completely linear.
We are laser focused on executing our strategic plan and as evidenced in Q2, we will not make short term decisions that limit the long term opportunity due to near term volatility we have a great team in place Thats dedicated to the flawless execution of our strategy building competitive advantage and driving substantial shareholder value.
With that I'll turn it over to Jeff for details on our financial performance.
Thanks, Tom and good morning, everyone.
In the second quarter, our adjusted gross profit was $1 billion, a decrease of nearly 1% from the prior year quarter.
On a rate basis, our adjusted gross profit margin of 43.3% declined by 42 basis points from the prior year quarter.
Driven by product margin, which is primarily related to lower DIY mix as well as planned investments in supply chain wages.
These were partially offset by improvements in utilization and management have on hand inventory.
We also saw higher costs related to inflation and tariffs.
Which given our LIFO accounting methodology requires us to absorb these costs increases as soon as we receive the product at the higher price.
The good news is we've been successful in passing through these increases to date through price and the LIFO impact on cost evens out overtime.
Since we have been anticipating the tariffs for months, we've been working collaboratively with our suppliers to mitigate these cost increases.
Where possible, we're using on hand inventory in lieu of purchasing at higher costs.
Year to date, our adjusted gross profit was $2.3 billion.
An increase of 1.7% from the prior year quarter.
On a rate basis, our adjusted gross profit margin of 44% was in line with the prior year.
Our adjusted SGN, a was $813 million in second quarter, an increase of $1.4 million year over year as our productivity efforts offset investments, we're making this year.
As we said previously our primary investments are in technology.
Specifically professional services related to ongoing integration efforts and in marketing, which includes e-commerce investments.
On a rate basis, our adjusted as DNA was flat compared to the prior year quarter at 34.9%.
Our adjusted EPS Gionee through the second quarter was $1.9 billion, which increased 1.5%.
On a rate basis, our year to date adjusted EPS DNA improved by five basis points.
Adjusted operating income in Q2 was $196.4 million.
A 4.3% decrease from Q2 2018.
Our adjusted Oi margin decreased 40 basis points to 8.4% in the quarter driven by lack of sales growth.
As well as the channel mix headwinds, we face in gross margin, which we highlighted previously.
Year to date, adjusted Oi was $440 million, an increase of 2.5% compared to the first half of the prior year.
On a rate basis, the year to date adjusted Oi margin of 8.3% was up seven basis points compared to the prior year.
Adjusted diluted EPS for Q2 was $2, an increase of 1.5% and our year to date adjusted diluted EPS increased 9.6% to $4.46.
In terms of capital spending we invested $50 million in Q2, an increase of nearly $23 million compared to Q2 of the prior year.
Our largest investments were related to our next Gen network.
As well as other IP initiatives to improve productivity within our stores as well as our customer support center.
Such as our finance ERP is expected to be completed in 2020.
Year to date, we've increased our capital spending nearly $50 million to $111 million.
As a reminder, many of our capital investments this year have corresponding operating expenses, which today are in line with our expectations for the full year.
Moving on to working capital, we made significant progress on our key ratio.
Notably our APC ratio at the end of Q2 was 75.8% an increase of nearly 600 basis points compared to the prior year quarter.
This continued progress together with our disciplined working capital improvements enabled free cash flow for the first six months of $381 million.
This was essentially flat year over year as improvements in working capital or entirely offset by the planned increases in capital spending.
Consistent with our capital allocation priorities of maintaining an investment grade rating.
Reinvesting in the business.
And returning excess cash back to shareholders.
I'm pleased with our leverage ratio of 2.1.
Building on our confidence to continue generating significant cash flow from the business, coupled with disciplined capital allocation priorities Im pleased to announce a new $400 million share repurchase authorization.
As Tom mentioned, we remain incredibly disciplined in our approach to delivering our long term goals.
As we begin the third quarter, we are seeing an improvement in seasonal demand and our team is capitalizing on this everyday to delight our customers.
In the short term, we're absolutely determined to deliver the highest possible growth expand margins and drive free cash flow without compromising the long term success of our transformation.
Which is why we provided heighten transparency on our plans for this year.
We remain confident in our ability to deliver results within the full year guidance ranges that we originally provided earlier this year.
However, we recognize the top end of the comparable store sales and adjusted Oi margin expansion may be challenging to achieve.
Therefore, we slightly lowered the top end of our ranges.
Our updated guidance includes net sales in a range of $9.65 billion to $9.75 billion.
Comparable store sales range of 1% to 2% and adjusted Oi margin expansion of 20 to 40 basis points for the year.
However, with the continued strength of our working capital efforts, we increased our free cash flow guidance for the full year and expect to deliver a minimum of $700 million in free cash flow in 2019.
With that let's open it up to addressing your questions operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your touched on telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key again, that's star then one to ask a question in the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Chris Horvers with JP Morgan. Your line is now open.
Thanks, and good morning.
Okay. So so first on the guide so Jeffrey essentially keeping the back half relative to where.
You had on sort of embedded in the lowering is really related to the second quarter and then related to that I think one of the big questions is obviously Easter down this harder comparison in the third quarter. So.
It looks to me like June July was probably two two and a half are we breaking two year stacks de look at it that way when you look at on a three year basis.
What's really driving the confidence.
And to that guidance for the back half.
Yes, good morning, Chris Let me, let me give you some color on on the guide we have a number of initiatives in the back half that are that are incremental to the front half that gives us a lot of confidence that we will deliver the full year results in our range.
Let me talk salesperson and for sure you already called that out but.
The one and the two year stack side, obviously, we're looking at but we do think it's relevant to look at the three year stack given.
What happened in the back half of 2017, so for sure now we expect an acceleration in those two year stacks in the back half.
We indicated earlier that our pro and DIY E. Com businesses are performing well they have been building momentum throughout the year on both a one year two year stack basis, and we expect that to continue.
In addition, DIY was the big challenge in the second quarter, and we've got a number of new tools in our tool box for DIY their incremental for the back half, including speed perks to Dato, which we're really excited about.
An improved customer experience for in store pickup and the launch of the online store within a store at Walmart. So given these initiatives along with what we're seeing as an improved demand environment that we're already seeing in DIY, we expect to see that improve as well in the back half.
Secondly in terms of gross margin.
As you know we've been we've been aggressively going after DC optimization, we're going to have some benefit for that in the back half of the year, we expect to leverage supply chain in the back half. We've also got new managing the cost increases associated with commodities in tariffs very closely we're watching that very closely but the gross margin line. Obviously will we will have some differences, particularly because of supply chain and then in terms of SGN, a well we're continuing to invest in initiatives that will help unlock our long term margin expansion. We do have some things that will benefit from that in the back half that are incremental.
We've got a new labor management tool rolling out in our stores, you'll see reduced rent and occupancy costs due to our ongoing footprint optimization and continued momentum on safety. So the net of it is as we look at our stacks on sales.
We expect to build momentum there and that combined with additional productivity, particularly in SDMA is going to budget position us to be well within our guidance for the year.
Understood and maybe a little bit on the gross margin in terms of the follow ups. So.
And gross margin being down and I understand the mix component, but can you maybe delve into how much LIFO was a headwind.
And how you expect that to play out over the year.
As you look forward and underneath that is there some sort of hand off like last year and earlier this year, yet material cost optimization benefit shed some shrink kind of hit so are we just do we entered as valley in terms of some of the cost of goods synergies and now it's being passed off to the DC optimization and that Reaccelerates.
Yes, let me just give you kind of some color in general in terms of what happened in the second quarter related to gross margin, we saw benefits and MTO. Unfortunately, these were offset by other factors in the gross margin line, Chris the single largest impacting the quarter was that was actually mix. It was an 80 basis point headwind in the quarter.
And in particular, we said this in our prepared remarks, but our DIY business was soft during Q2 in particular late April and Almay, We're just terrible.
This impacts gross margin not only from a rate standpoint, but just lack of sales leverage in general.
Your question on on tariff and commodity related headwinds these were actually more than offset by pricing activities and as you pointed out with our LIFO accounting requires us to recognize these cost increases right away.
So we are covering these costs with pricing actions, but it makes it more challenging to expand margins in the shorter term.
And then we do also have the continued supply chain wage investments in the second quarter and as Tom said, we expect to see benefits from that in the back half. So we actually think we will be leveraging in the back half which be the first time in many years.
So you're expecting gross is up in the back half.
In the back half I think the way to think about it is first and foremost nothing really changes for our long term margin expansion plans were confident our ability to capitalize on all these opportunities.
We're focused on both gross margin and as seen a improvements and I'm pleased with the continuing investments this year and we're delivering better cost leverage within SGT than originally planned which we now believe could drive the majority of our margin expansion I expect we're going to continue to drive cost savings in the back half in the areas within Labour management rent and occupancy and safety, which Tom mentioned.
So in terms of gross margin in the back half of 19, we're going to expect to leverage supply chain, which as I said first time in many years that we've incurred incremental cost increases or passing those on but we need to monitor them very closely because these are meaningful increases for our customers, especially in the short term for the more cost conscious BDI wires.
So all that said, we look at the back half today, we remain incredibly disciplined in executing our long term strategic plan, we're focused on delivering overall NOI margin expansion for the full year and this includes leveraging the cost that we can control.
Understood Best of luck guys. Thanks. Thanks.
Thank you and our next question comes from Michael Lasser with DBS. Your line is now open.
Good morning, Thanks, a lot for taking my question. It is evident that the real swing factor in your quarter to quarter results in your longer term transformation is your DIY business.
And you've long ceded the units per transaction is where you lag behind your competitors. In this regard also it seems like you I traffic is a source of challenge recognizing that you're working on your loyalty program and your your dot com business, but is that really enough to address the shortcomings.
Also isn't improving the segment really the key to unlocking year long run margin opportunity.
Hey, good morning, Michael.
First of all you've identified a couple of things that were obviously remain focused on you BT is critically important for us we're going to continue to drive at that.
The transaction was the big driver of DIY shortfall in the quarter. If you go back.
2017, 2016, 2015, we were losing a significant amount of market share in DIY in those years.
100 to 200 basis points every year.
Last year, we started to make progress and by the fourth quarter of 2018, we actually gained share which was the first time, we've gained share in DIY as you recall, we did launch a new advertising campaign.
That helped us.
In the first half of this year.
We declined marginally I want to emphasize that it was a marginal share loss in the first half of this year.
Jeff mentioned it earlier, but the last week of April and all of May was just terrible I mean, it was a very difficult period for all of DIY and in that timeframe, we were down pretty significantly in terms of our transactions. So the focus for US is obviously to continue to strengthen our overall value proposition in DIY and that includes the effectiveness of our marketing we brought Jason and I'm highly confident he is going to have a big impact on improving the effectiveness of our marketing.
Improving our loyalty speed perks to the auto is off to a great start we were into our second last week was our second full week, we're signing up more people our average sales per speed perks members going up our team is really excited about it and then there's some other initiatives as I mentioned in terms of taking friction out of the buy online pickup in store experience that we're working on so we've got a lot of things going on in DIY I would still describe it as a work in process.
We've got to continue to strengthen our overall messaging and drive traffic into our stores, but theres a lot of opportunity for us in DIY still out there.
With that being said, Tom how long, it's going to take to generate in improvement in DIY traffic in have you already started to see that early in this third quarter.
Yes, certainly relative to what we experienced in the second quarter, we absolutely have seen an improvement in traffic and I think you will continue to see that through the back half of the year. The loyalty program that we launched was thoroughly tested we had it in two markets for 20 weeks that we've got a pretty clear idea on how that was that what thats going to do in terms of impact on our business.
By early September will be standing up a standardized.
In store pickup location in our store will be communicating that and messaging that to our.
Customers, we believe we can get a much higher share of wallet of our most loyal customers. So we believe we should be able to see some impact in the back offline on DIY retail.
And then just a quick follow up on the gross margin given how relatively early on in the transformation how much opportunity you have it would seem like the bias is still to the upside in yet given some of the normal.
Challenges and fluctuations in the business the gross margin being down.
Would provide evans.
To counter that view too is this just now kind of a steady state gross margin for the business over the long run.
We definitely see an opportunity to expand gross margins, Michael I think the big items in there our supply chain, obviously, we've talked a lot about supply chain.
We've got to optimize the network, we're going to start to see benefit from that in the back half of this year.
We're rolling out across banner replenishment, which as we've said previously is about.
A year and a half of piece of work. If you will so we're really working out one hard rubens driving execution in the supply chain, we've got opportunities in last mile delivery that were working so all of that is very robust, but there are some lumpy things that happen there as we get into 2021 from DC closures et cetera.
The other big one is the category management piece.
We feel we have the best assortment in the industry we've got.
A great lineup of National brands, our national branded suppliers play an important role for us.
OE parts private label parts in our category teams are building plans that are multi year to really get after the improved margin opportunity that exists there, but it's that that will be a more gradual build but clearly as we look at our long term plan gross margin plays a meaningful role in our overall plans to.
Accelerate our margin expansion.
Great. Thank you very much.
Thank you and our next question comes from Scot Ciccarelli RBC capital markets. Your line is now open.
Good morning, guys.
I think we probably all kind of understand that the weather challenges in the quarter, but you did underperform your competitors who have already reported.
Calendar, probably play to have devereaux, there, but you Tom I think you also mentioned there were some internal issues in the quarter, Doug I guess I was hoping you could elaborate on what some of those issues, where maybe easing example, and why you think you take some of those issues.
Sure.
First of all if Theres no question, we had some opportunities of our own Scott to your point I mean, we again, we really look at the front half and we don't want to just get hung up on the second quarter, given the timing of our quarter versus others, but if I look at the front half and say we grew 1.6%.
Our aspiration as we've said many times is to be at or above the market, which we believe is in the three range. So.
The part that we can control largely DIY retail as I just mentioned.
There were a couple of things some categories inside of our DIY retail business underperformed and as I said, we lost share in those categories I'm not going to go into a lot of detail on the specifics, but they were more assortment related decisions. We made in certain categories around good better best style ill leave it at that but weve corrected those opportunities already and we have seen improvement from that.
The second thing that I mentioned was the effectiveness of the marketing, we're seeing benefits on awareness and some other consumer metrics, but thats not necessarily translating to the traffic improvement that we'd like to see so those were the big areas of opportunity from an internal standpoint, and I'm confident that we've taken the right steps to address them.
And Tom on the eight bit category.
Shifts that you've made with good better best.
How quickly does it how quickly can you notice that there is a a changing a change is warranted in terms of the current merchandising strategy.
Well honestly DIY retail it's fairly easy if it is measured as you probably know.
The syndicated data does not measure everything in DIY retail it measures 29 categories, but if it happens to be in one of those 29 categories, which it is it was.
We can see it so we will stratify that category will look at how we're performing in each of those segments and we did see an opportunity there and we subsequently addressed it. So you can see it fairly quickly kind of once a period sort of thing.
Got it thanks guys.
Thank you.
And our next question comes from Seth Sigman with Credit Suisse. Your line is now open.
Hey, guys. Good morning, Thanks for taking the question I wanted to follow up on the full year guidance. So your EBIT margin now up 20 to 40 basis points sounds like the composition has changed a bit with M&A may be tracking better versus expected to be flat for the year previously.
It doesn't sound like you're really pulling back on investments, but may be gaining more traction with some of the cost initiatives can you just elaborate on that where are you seeing some of that traction and then just given where you are in the improvements story. How do you think about reinvesting that redeploying that into some of the initiatives. Thanks.
Yes. Thanks for the question I think we're seeing a lot of initiatives around the safety, we've talked about that for a number of quarters now we continue to see improvements in that area.
In terms of the claims the severity of the claims the frequency of the claims are all.
Improving favorably and we've really instituted a safety culture and thats paying off and we think thats going to continue to pay off into the back half.
We've been very judicious in the way we have been closing down our stores. We've closed over 50 stores in the first half of the year and we've got a much better discipline around that process of not only closing the store, but making sure we're getting it sublet and minimizing those costs and thats seeing a lot more benefit.
We've also implemented a new software solution for our labor management called Myday, and we expect to get leverage out of that in the back half. So those are a lot of the improvements that we're seeing.
As far as the investments we're very much on track.
Again for those three areas.
In marketing and people.
We continue to make those investments both on the Capex side on the Opex side, and what we're going to continue to see those improvements.
As we unfold those programs. So for example, the the Nexgen store network will rock. We're on track, we expect all of the Red stores to be completed by the end of the year US. We're very excited about that it's going to lower our team members to do their job a much more efficiently.
Our ERP that we're putting in for our back office. So we go from four sets of books down to one we expect that to be stood up in 2020, all very much on track.
And then the investments that we've made in wages some of it's in supply chain. Some of it's in stores, but we're beginning to see those improvements as well. So we want to continue to do that we're not going to take any short term actions, that's going to inhibit our long term expansion growth.
Okay. Thank you for that and if I could just clarify you had talked about this year being an investment year next year also of being an investment year, but maybe seeing a little bit more margin expansion just based on the performance year to date I guess, what you're saying there's no reason to believe that the investment plan really needs to change at this point.
Is that fair, absolutely not absolutely not and how the investment plan Doesnt change were exciting excited about the investments that we're making while we have a very rigid structure in terms of the investments that we approve all of them have a high ROI see we look at these every other week, we're tracking them. We're on not only the progress of implementation, but post implementation, making sure. We're getting the right returns with the investment dollars that we make we think we're making the right investments into our stores into IP into supply chain, that's going to yield the long term improvements over time.
Okay, great. Thank you and then just my follow up question is on the DIY business.
Tom maybe can you talk a little bit more about the performance. After the first four weeks of the quarter. How do we think about how that business may have improved in the latter parts of the quarter and a lot of focus on the internal issues, but can you talk a little bit more about the external factors and your confidence level that it is just weather versus maybe sensitivity to price increases or something else more about the consumer. Thanks.
Well.
As I said, Seth I mean that May was.
An extremely difficult month.
At least for US I think the whole industry similar so again certainly in those northern geographies. So we saw it just double digit declines in refrigerants and.
Appearance and the bait the big categories that are impacted by rain basically it was a very rainy month right. It was also a lot cooler than last year. So once we got past that we started to see improvement and as we got into the into July when we've had a heat wave kind of cross the U.S assets. It's responded very nicely. So actually I think you've heard from others and her historically the professional business is much more smooth it's much less impacted by this this type of swings and seasonal.
Whether trends the DIY businesses is is is much more impacted so.
For sure we've seen improvement in into July and into the third quarter. So we feel it's it's back on to the more normal pattern that we would expect.
Got it thank you.
Thank you.
And our next question comes from Gregory Melich.
Evercore ISI your line is now open.
Hi, Thanks.
Yes.
One question on the actual corridor in the comps what was the overall traffic and ticket and is it fair to say that DIY was probably down two or three and then pro is was running up similar or slightly better amount then I had a follow up on capital allocation.
Yes, good morning, Greg Your your your numbers are in line with where we were I mean, the transactions where the big.
Driver of the DIY mass average ticket was up.
But your numbers are pretty much in line.
Got it and sort of an average ticket and DIY was up a little bit so even if DIY comps were down two to three the traffic might have been a little worse like.
Basically I'm trying to get to inflation was inflation 100, bips on the comp or.
Yes, I mean again, it's tricky with inflation because of.
All the factors there we look on it.
Per unit basis, right like units, Greg So we take a basket of similar units and that number was in the 2.9 range for the quarter.
Got it and and maybe as a link to that and Jeff you talked about how your LIFO and some other costs come in now, but the pricing goes through is it fair to say that that what we're seeing now is the full impact of the 10% tariff.
But presumably the 25% is something that comes in in the second half.
Well I think we would have seen a little bit of both for sure. We saw the full 10%, but we did see aspects of the 25 and let me give you a little bit of color on what we are trying to do there we really want to make sure we're working collaboratively with our supplier partners.
Two.
Look for other sourcing arrangements, we were looking to exhaust the existing inventory that we had on hand, because once we start buying it again under our LIFO methodology. It requires us to recognize the full cost.
Upfront so to your point, yes for sure on the 10% on the 25%.
Accuse me it did begin to bleed in but we could see some additional impacts that as we go through the balance of the year.
Got it and then lastly on capital allocation, the new 400 million authorization.
How are you thinking about that 2.1 times leverage ratio does that you do not want it to go under a certain level like too.
The cash flow 700 million.
Should we think about that all coming back.
Dividends go up a lot how are you guys thinking about it.
Yeah, you noted that obviously when we we've talked about our capital allocation priorities. We stated 2.5. There are some contributing factors thats why were under we're using a different debt number versus the the six times rent expense with the new lease obligations that are on our balance sheet that was a contributing factor and then we did buy back the debt.
$300 million right now, we did get the new authorization for the $400 million of.
Share repurchase we don't currently have this in our forecast and we're not really going to comment on the repurchases throughout the year, but we are going to be very opportunistic in repurchasing shares when we feel that the stock price is undervalued and that's our focus right now.
Got it thanks good luck.
Thanks, Thank you.
Thank you and our next question comes from Chris, particularly area with Wolfe Research. Your line is now open.
Hey, thanks for taking the questions.
I wanted to dig in a little bit on the channel shift comment to 80 basis points I would imagine it's more than just DIY versus commercial and maybe includes online at Worldpac mix.
Just want to confirm that visit each store and some math it seems like it seems it would imply like tens of basis points of difference sorry, 10 points of like tensions of points of difference in DIY and DIFM gross margins I want to see to comment on that and that too theres a rule of thumb. We can use for the difference in gross margin rate between.
Commercial and DIY.
Well first of all obviously worldpac is a professional business right for us. So we do look at that as part of a channel mix shift.
We are opening up worldpac branches, which are very success have been very successful overall that drives our profitability on the whole PML. So.
The biggest impact as we said was it was channel mix shift that we saw in the quarter, we didnt see that in the first quarter. Obviously you saw the numbers in the first quarter and as the DIY retail business comes back to a more normalized level, we expect that that will be improved.
Im sorry, the second question again can you repeat it.
Yes, I was just like kind of quantifying the difference in gross margin rate between DIY and commercial this latest Bakken at math. It seems like your mix of change at most a point or two between DIY and commercial. So this seems like an 80 basis points just seems extreme so I was hoping to identify that.
Yes, I mean.
And just looking at gross product I mean, we sort of have a 15% change from from DIY to pro so fit if you know 15% lower than.
Approach, 15% lower than DIY.
Got you that's helpful.
Okay, then just like want to clarify that.
Impact of tariffs slick.
It makes sense for you are doing trying to use an existing inventory on hand to defer this but.
Maybe just stepping back is this another way of saying that like gross margins will go down once you buy new inventory or do you expect to push through pricing as you plenty of inventory.
Well, we've always been very successful in passing on price to the consumers. It's not something we want to do we want to find alternative methods to keep the prices lower for our customers.
We don't see any concerns around being able to pass that price not we were successful in the first quarter. We were successful in the second quarter.
As I said there were other factors primarily mix, which we just discussed.
But I don't we don't see any concerns right now in the back half that would suggest we can't pass on price.
Got you that makes sense all right. Thank you Michael.
Thank you.
And our next question comes from Seth Basham with Wedbush Securities. Your line is now open.
Thanks, a lot and good morning.
My first question is just making sure we have some clarity around the moving pieces gross margins, reaching a lifestyle.
What was the impact in the quarter and how are you thinking about the LIFO impact for the balance of the year.
Yes, so the impact for the quarter in dollars was 16 million dollar headwind.
You'll see that come out when we publish our.
Our Q2 later this afternoon for balance the year, we expect is going to continue to be a headwind.
We were still taking on the cost of these tariffs were seeing other commodity cost increases.
For non tariff products and so for all those reasons, we think we're going to continue to see a LIFO headwind through the back half of the year.
Got it.
As it relates to capitalize supply chain costs was that a moving piece to your gross margins this quarter and how do you frame that up for the back half team.
On the the the actual capitalized costs themselves.
Correct.
Yes, so we did actually see some benefit from that on a year over year basis, where we are seeing improvements there as we said.
You know in the back half when you look at supply chain in total we do believe we're going to get leverage in the back half, where we're seeing the productivity efforts the investments that we've made in wages.
The consistency that Rubens put into the the various supply chain Dcs themselves are all beginning to bear fruit and so we think we're going to see benefit in the back half.
Got it so putting that gross margin picture and perspective, then and it began the year at it seems like you are expecting more improvement for 2019 and you now do is the primary thing simply the second quarter mix shift from DIY to and from DIY to commercial or are there other things that are moving to eliminate year conference and improving gross margins as much as you did earlier in the year.
Well, we've talked about supply chain as a difference in the back half sets. So for sure we're going to see benefit there were also monitoring the cost increases that we're passing on very closely.
We've got some meaningful increases for our customers this year.
As a result of coming to some degree commodities, but certainly because of tariffs then we're just going to monitor those very closely we want to make sure that we're being competitive in the marketplace and.
That is a very much a short term situation given the LIFO accounting rules that we have here, we want to make sure we're competitive so.
Really nothing's changed in terms of our long term ability to go after that gross margin opportunity through supply chain and category management, we are getting benefits out of that DNA that we're in and we're going to capitalize on so thats really whats happened in the back half.
Got it thank you.
Thank you.
And our next question comes from Daniel Ambre with Stephens incorporated your line is now open.
Yeah. Good morning, Thanks for taking the question.
Tom I wanted to follow up on some written answers I think earlier, you mentioned that inflation was up 2.9% on a basket of goods. One did I hear that right and then to understanding the timing difference that seems higher than some of your public peers are reporting are discussing so as you think about the competitive landscape has anything changed from a pricing standpoint competitively or is it promotional landscape changing at all how do we reconcile the differences. Thanks.
Yes, again, I think everybody looks at it a little differently Daniel I mean, we look at a like basket of items. So it's the same item you can't just look at average price per unit, because as job complexity evolves and different technology advances are made in repairing of vehicle sometimes the just the pure average price per unit is a little bit misleading, it's been going up for a couple of years by the way across the whole industry. So.
Started in 2017 again in 2018 in the front half of 2019, we see average price per unit, increasing in both the DIY and the pro side of the business. So the way we look at it is we take the same break rotor and the same brake pad whatever whatever is comparable year on year and we look at the year on year inflation on that and that's that's what we get at the 2.9% so whether that's.
At or above our competition all I can tell you as we measure our competitive price versus our competitors every single week. So we we know how we index versus the new versus their pricing and that hasn't changed a whole lot, but our inflation on a per unit basis looks like 2.9% in the quarter.
Thank you that's helpful color and then just wanted to touch on the supply chain consolidation you guys are talking about you're expecting to see leverage in the back half how successful. So far have you guys been at retaining those sales dollars and in stock levels. When you are closing stores are you running into any issues. There and is any kind of feedback early learnings from those initiatives as we think about gaining supply chain leverage in the back half.
Sure I mean, I think we've got the.
Closure of DC, Daniel down pretty well I think weve hard in the process and when we close this would be the physical DC, we gradually migrate the stores over to the catching DC. So we've not seen any impact on.
Fill rates or anything like that when we close the Dcs in terms of store closures that keeps getting better I mean, our improvement on.
Closing a store and retaining importantly, the customer base that we have in that store. When we closed that is really the key to our success and what is driving some of the cash flow improvements that you're seeing for us. So.
Now we measured out on a sales and profit per store basis, and we are seeing our sales per store go up that's a big opportunity for us to close the margin gap and we will continue to execute against that so.
I think we're executing those initiatives very well.
Hi, Thanks, guys best of luck.
Thank you.
And our next question comes from Brian Nagel with Oppenheimer. Your line is now open.
Hi, Good morning, Thank you for taking my questions.
Good morning, first question I wanted to ask and I know, we spent a lot of time on this call talking about whether the weakness in sales that occurred in April and May but the question I have there is as you look at that business. So the weaker sales how much of that business and your view was.
Loss versus simply pushed back and we havent seen it yet and then also to what extent did that whether we're discussing particularly the rain actually could that actually helped business.
Either now or in coming weeks on some of the potential blockbuster cars.
Well first of all in terms of how we looked at it we're not happy with our Q2 results to be clear Brian .
We're focused on our 2019 goals without compromising the long term success, we modified the top end of our sales and margin guidance directly as a result, the Q2 and we believe it's very much a short term challenge so.
We havent factored in recovering the Q2 shortfall.
Into our updated guidance I think you Didnt ask that question directly, but I think thats, what you're getting at so I mean, it really does reflect.
The Q2 shortfall and otherwise we expect to be on our plan balance a year, which we feel very good about as we look into the third and fourth quarter.
In terms of impact on the vehicles themselves and does rain drive incremental sales.
It obviously doesn't in certain categories like wipers, but historically for our business, it's not necessarily a good thing you could miss a maintenance cycle you could miss a cycle for appearance chemicals, when that happens and Thats why we havent necessarily factor that into the balance of year.
Got it thank you.
Second question I have.
Tom in your prepared comments, you discussed sales, but in particular, if I heard you correct.
A shift in market share from from the end of last year into this year were advance was gaining share and then start to lose share per some data so I want to make sure.
I understood that correctly, how should we think about you look at your business. The drivers of that that 2018 2019 shifts that happen before what we're discussing now in the second quarter.
Sure I mean, we obviously had been seeding market share to be clear Brian prior to that time frame in 18. So we've been building up as you know we are building building building here, where we're trying to build a very strong customer value proposition at better in store experience for our customer a better online experience for our customer we have done a number of things or did a number of things in the early part of 18 to enable that our net promoter scores started to improve our website traffic started to grow we saw our awareness go from 28% to 32%. So we were seeing progress I would say in the fourth quarter as we come into this year.
That moderated with so rather than gaining share first quarter, we kind of slowed down a little bit and if I look at the front half.
We lost it wasn't a lot of those its about 20 basis points of market share in the front half of the year and we attribute that to some things that we did we talked about some categories. In the prepared remarks, you heard us talk a little bit about the effectiveness of our marketing and those are the things that need to be shored up to to regain our share momentum.
The idea is how do we gain share as we improve our efficiency and our footprint. So essentially in the fourth quarter last year, we gained share with fewer stores, which were very proud of and Thats. What we have to continue to do.
Got it thank you very much.
Thank you.
And our next question comes from Bret Jordan with Jefferies. Your line is now open.
Hey, good morning, guys.
Good morning, Brian just to follow up I guess on the DIY a share loss you commented on and we've started beating this a couple of different ways, but is it product our price related in that period items you talked in your prepared remarks about some strategic pricing pricing actions and is there is there are some increased competition in the market or was it just an assortment.
On a temporary basis that impacted you.
Well just to.
Cover off the pricing actions, Brett and we as you know we're rolling out what we call dynamic assortment, which is a machine learning tool and it's an excellent tool that we're using to help manage our assortment obviously not just in the in the in the front room, but more so actually in the backroom. So when we see our.
Close rates starting to be.
Either higher or lower we can we can make.
Bats, if you will on pricing actions to improve our sales. So thats essentially we were talking about there.
I think in terms of the DIY side of the business and the share impact that we experienced we attribute that to a couple of categories, where we did some things that you know we've had to refine and I would just leave it at that.
Okay, and then I guess on Walmart Dot com launching in the second late in the second quarter could you give us a perspective, maybe how many skews or what percentage of your SKU count are available through that site.
Yeah, we were up.
Continuing to expand you know every week bread on this one I think we're up to somewhere in the 10000 range.
We're very focused on on breaks you'll see breaks called out.
Carquest, particularly as a great brand, we've got a great product on Carquest, It's a private label product that we can we can put on the Walmart website and they can go go ahead and sell we're seeing some.
Some really good improvements on how that website looks it's going to be it's going to be an ongoing journey. There we're going to continue to strengthen the impact of that online store within a store walmarts been a great partner so more to come we havent really factored in a considerable sales number for the back half of this year, we've got to get the customer experience right.
Before we really start opening up the marketing and everything that we're going to do around that but we're excited about it.
Okay, great. Thank you.
Thank you.
And our next question comes from Kate Mcshane with Goldman Sachs. Your line is now open.
Hi, good morning, Thanks for taking my question.
Just trying to reconcile some of your comments around market share and marketing.
Just with regard to your spending on marketing during the first half versus maybe the back half of last year and how should we think about maybe a new marketing campaign.
Under the under the new hire you just made.
Sure I mean first of all we did say we are investing in marketing K, which we have been.
Not just in the campaign, but in other online related e-commerce related.
Activities Omnichannel, if you will and you should expect us to continue to do that we've got to build our brand.
We've got to be smart about how we do it obviously, we've got to improve the effectiveness of our marketing, but we're going to continue to build our brand we only have 32% awareness nationally in fact.
One of the things that happened recently as we.
Opened up our Walmart Dot Com site, we had a person order about $600 worth of parts.
Off the Walmart website, a week, we actually called the person to talk to the person to see what they'd ordered and better understand them and they were in one of our markets and they'd never heard of US. So we've got to get our name out there and really start talking about advance auto parts and Jason is an expert at that he is going to come in he is looking at all aspects of our marketing mix. He is looking at all of the brands that we have and I am confident in east can have a meaningful impact on our business.
Relatively soon so marketing is an important part of our agenda.
We've got to build our brand we've got to differentiate our brand and we've got to drive traffic to our stores and all of those are driving traffic is number one on his list right now.
Okay. Thank you and if I could just follow up on your comment about benefiting from reduced rent and occupancy costs in the second half is this incremental to what you did in the first half.
Yes, I mean it is.
As we I think a year on year in the back half will be down over 100 doors right Jetta indicate as we can do we're continuing to close stores as you know so we announced.
Our our overall.
Footprint optimization early part of this year. So as we continue to close underperforming stores I think we're down to about 300 that are less than a mile. Apart from each other so we saw some work to do there.
But the team is getting very good at retaining those sales as we say and obviously, we get out of the rent obligations great.
Thank you.
Thank you.
Thank you.
And our next question comes from Simeon Gutman.
Morgan Stanley Your line is now open.
Thanks, Good morning, Hey, Tom I know, we talked a lot about whether in good parts of the quarter and the tougher ones did you quantify can you quantify what you think the weather impact was so we can get a sense of what the underlying run rate would have been and then related to comps.
I Wonder how you think about them longer term the mic.
Whatever number you think you can grow at whatever its two or three what do you think the right level of growth is or expected growth from your commercial side and your growth from your do it yourself side.
Sure well first of all if I look at the syndicated data Simeon and that's really all I can do to give you the.
How much of it is is us versus the the market. The syndicated data would say that the industry comps slowed by about 400 basis points in our Q1 and Thats an important point. Our Q1 started April 20, Onest. It did not start April onest.
The first three weeks of April were gang Busters. So April 20, Onest from then on to the end of our Q2. The overall syndicated data says 400 basis point deceleration. So.
We that's why we look at the front half right and then we say how much of it is really us versus you know external factors in the front half and we've got our own part of the front half performance, 1.6% is not where we want to be which leads me to your question.
We we want to be at or above the market. So our goal is to be north of 3% over time.
Now clearly we think.
That professional is going to outperform DIY and the marketplace. We think we're well positioned in professional Bob's got a lot of great things going on there to accelerate our performance and drive margin expansion inside of the professional business as we grow that that said we want we also want to see DIY growing and obviously, we look at that as an omni channel.
Business. So it's not just DIY retail, but but DIY omnichannel in total so north of 3% professional higher than DIY.
Okay. That's helpful.
My follow up is on gross margin and I wanted to put it to you. This way. If you knew ahead of time and I'm not saying you did but if im telling you that you knew ahead of time do it yourself would have had a tough quarter and that the mix could have gone against you is there anything you could have done different on gross margin to mitigate the impact that that was that was had this quarter.
Yes, I don't know that we would have no not altered our.
Our plan, knowing that theres going to be one bad month in the second quarter I mean clearly.
Our our overall agenda is to make sure that we are building. This thing for the long term and we're driving.
Significant improvement in our comps were mean more competitive we're expanding our margins and we're generating a lot of cash. So I don't know that knowing that may was going to be the way. It was we might have done a few things a little bit different I can't imagine that it would have made a material difference other than what I've already said, what those categories inside of DIY, where we lost share we probably would have done something different there.
And just to clarify because someone mentioned online mixes.
Posted as a question is that that's not part of the channel the channel mix as well or was it a headwind. The fact that because you mentioned that the big DIY E Commerce did well relatively well was that not a headwind as well.
Well I did relative to retail it it is lower so it is a headwind and as part of the headwind.
Fair enough okay. Thanks.
Thank you.
And I'm not showing any further questions at this time.
I would now like to turn the call back over to Tom Greco for any closing remarks.
Well, thanks again to everyone for joining us this morning, as you've heard from US today, we're very committed.
To our long term strategic initiatives I'm very proud of the work that our team has demonstrated in our transformation. Thus far we are building the best team in the industry are in advance and I'm confident that we're going to deliver value for our shareholders on a personal note I'm very appreciative of all the support we've received for our American Heart Association campaign. So far this year team advance will once again be leading the triangle heart walk here in Raleigh, and we look forward to once again exceeding our fund raising goals for this important cause I look forward to sharing more on the success of our campaign together with our third quarter results in November have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect everyone have a wonderful day.
And.
No.