領先汽車配件 (AAP) 2015 Q4 法說會逐字稿

Welcome to the Advance Auto Parts fourth quarter 2015 conference call.

(Operator Instructions)

This conference is being recorded.

If you have any objections, you may disconnect at this time.

Before we begin, Zaheed Mawani of Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

Good morning.

Thank you for joining us on today's call to discuss our fourth quarter results.

I'm joined this morning by George Sherman, our President and Interim CEO, and Mike Norona, our Chief Financial Officer.

Before we begin, I would like to remind you that our comments today contain forward-looking statements we intend to be covered by and we claim to protect and under the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements address future events, developments, or results, and are subject to risks and uncertainties and assumptions that may cause our results to differ materially.

Our comments today will also include certain non-GAAP measures, including certain financial measures reported on a comparable or adjusted basis to exclude the impact of cost in connection with the integration of General Parts International and the recurring amortization of General Parts intangible assets.

Please refer to our earnings press release and accompanying financial statements issued today for important information and additional detail regarding these forwarding statements and the reconciliation of the non-GAAP measures referenced in today's call.

The Company intends these forward-looking statements to speak only as of the time of this conference call, and does not undertake to update or revise them as more information becomes available.

Now let me turn the call over to George Sherman, our Chief Executive Officer.

George?

Thanks, Zaheed.

Good morning everyone.

We'll take a different approach on today's call.

First, Mike and I will briefly address fourth quarter performance.

Then I'll share my perspective regarding our outlook and how we plan to drive improved execution and results going forward.

We will leave plenty of time at the end for your questions.

Let me get right into it.

Mike will address our fourth quarter results in more detail in a moment, but at a high level, our worse-than-expected topline performance reflected both the negative impact of warmer weather and a continued impact of our efforts to move quickly to capture efficiencies for integration which inadvertently led to disruption in servicing our customers and supporting our stores.

This combination of factors resulted in negative comparable sales of 2.5%.

We are not satisfied with these results.

We have, however, made considerable progress and believe many of the major execution challenges are behind us.

That being said, we still have more to do to drive efficiency across the Company.

As I say that we have made progress, let me be clear that we fully understand that we are in improvement mode.

Several big part of integration are now completed including corporate consolidations, the integration of our field teams, and pricing alignment work.

In addition, we have completed the first major tranche of the Carquest market conversions and substantially all of our product alignment work.

We also made significant progress in our cost-cutting initiatives in 2015, delivering over $50 million in incremental cost synergy savings and driving efficiency by closing approximately 80 underperforming stores.

Through actions to date, we have mitigated the disruption caused by integration work and we are moving ahead with our plans to deliver improved and more consistent performance.

Going forward, we will focus on continuing the Carquest market conversion program and building on our prior success which has enabled us to deliver mid-single-digit comps across multiple markets where convergence has already taken place.

We're also doing the work to align our supply chain store systems.

As we exited 2015, we began to see improvement in our store level availability.

In the field, our teams are refocusing on our base business and away from the integration efforts that dominated much of 2015.

We're clear-eyed about the work that lies ahead, but confident in our ability to enhance our efficiency, performance and profitability.

In a few moments, I will talk about our plans to implement a more field-centric organization, drive additional cost reductions, and relentlessly pursue opportunities to increase efficiency across our operations.

But first, let me turn it over to Mike to provide some brief context for on the quarter.

Mike?

Thanks, George.

And good morning, everyone.

We delivered comparable cash EPS of $1.22 for the fourth quarter despite the softer-than-expected sales.

This result included a $0.03 hit from foreign currency and a $0.03 benefit from the incremental synergy realization.

Fourth quarter net sales declined 2.6% with comparable sales down 2.5%.

Comparable store sales were negatively impacted by approximately 90 basis points due to the timing of the New Year's Day holiday which was in our 53rd week last year and 46 basis points of negative foreign currency impact, partially offset by favorable impact from our Carquest Store consolidations.

The unseasonably warm start to winter impacted both our commercial and DIY businesses, particularly in batteries and cold weather-related hard parts categories such as starters, alternators and related products.

With fewer customers seeking cold weather parts, this also resulted in lower add-on sales.

Partially offsetting this performance was continued strong results in our brake business across both our commercial and DIY businesses.

In our commercial business, performance was primarily driven by mid-single-digit sales declines in our Great Lake and Plains cold-weather markets while the mid-South and Southeast fared better.

This softness in seasonal category sales was partially offset by a modest increase in our commercial ticket size and the strength I noted in our brake business.

Nonetheless, we continue to expand our customer base with our national accounts business growing in the mid-single digits and TECHNET, which partnered with independent repair shops, adding 600 new members in the quarter.

Within DIY, strong brake results only partially offset the softness in battery and battery accessory sales as well as other winter seasonal categories, resulting in a sequential decline.

Despite the softness, we continue to expand our Speed Perks Program, which now has over 10 million members and will be an important driver of our ability to increase customer loyalty going forward.

Our gross profit rate decline of 15 basis points was primarily the result of supply chain expense deleverage due to comparable store sales decline, partially offset by lower shrinkage expenses.

Our fourth quarter comparable SG&A rate increased 33 basis points year over year, primarily due to the expense deleverage from the comp store sales decline, partially offset by our continued cost reduction initiatives and disciplined efforts to lower administrative and support costs.

All in, fourth quarter operating income, on a comparable basis, decreased 8.2% to $157.6 million, and a comparable operating margin decreased 48 basis points over the same period last year to 7.7%.

Free cash flow for 2015 was $454.9 million versus $480.5 million last year, driven by a decrease in our AP ratio to 76.7% versus 78.6% last year.

This decrease was principally driven by transitional inventory growth resulting from our product integration work, the Carquest consolidation store work, and the growth in Worldpac branches.

Turning to the balance sheet and leverage, adjusted debt to EBITDAR was 2.5 times at year end.

During the quarter we repaid $80 million in debt and we remain at or below our maximum stated leverage ratio of 2.5 times.

We are committed to preserving a balanced and disciplined approach to capital allocations to drive shareholder value while maintaining our investment grade ratings.

We remain focused on taking the actions required to achieve our 12% adjusted operating income margin target.

To reach this objective, we will deliver improved gross margins and reduce cost by approximately 100 basis points through a combination of G&A reductions and improve store productivity.

This includes capturing the remaining $50 million of our previously disclosed $160 million in cost synergies.

Before I turn it back to George, let me touch briefly on the remaining integration initiatives we are pursuing in 2016.

We are focused on two areas, one, continued execution of Carquest market conversion programs, and two, development of testing -- to development and testing to enable us to combine our AAP and Carquest supply chain and store systems into one network.

We are also pursuing supply chain optimization work, including the closing of our Sutton, Massachusetts distribution center.

In conjunction with these efforts, we expect to incur additional one-time costs of $75 million to $90 million in 2016, including $65 million to $75 million related to ongoing interrelation efforts and $10 million to $15 million related to supply chain optimization work.

We are pleased with our progress in our Carquest conversion markets, nearly all of which are expensing comp increases which average in the mid- to upper single digits in the fourth quarter.

This year, we plan to exit the year with approximately 350 market conversion projects.

In terms of our store network and supply chain projects, we expect to begin in-store system pilots by early quarter two and supply chain pilots in early quarter four.

As previously indicated, full-scale roll-up is expected to be in 2017.

With that, let me turn it back to George to discuss our plans for 2016 and beyond.

George?

Thanks, Mike.

We have a tremendous platform across commercial and DIY.

And I'm confident in our ability to drive improved profitability and generate the increased shareholder value.

As I noted at the outset, our plans include implementing a more field-centric organization, to drive increased customer satisfaction and improved repeat business and revenue while reducing cost and relentlessly pursuing opportunities to drive additional operational efficiencies.

We are a Company made of approximately 5,300 hyper-local businesses.

In order to be successful, we must meet the needs of our customers at a local level by aggressively empowering our teams to make decisions in their local markets and providing the appropriate operational infrastructure to execute against those decisions.

Developing a field-centric system is not of concept; it is something that we are in the early stages of executing.

There our three key pillars that underpin our objectives as a field-centric organization.

One, providing superior availability to ensure we deliver the right part in the right place at the right time.

Two, providing the right infrastructure to achieve outstanding customer service with flawless execution.

And three, providing the right tools and incentives to develop focused and inspired teams with the desire to win.

Let me share a few insights on each.

Superior availability.

Having the right part in the right place at the right time is essential to winning a great commercial business, and also benefits DIY.

Because we run approximately 5,300 local commercial businesses, serving the customer requires input from and empowerment of local store teams.

Trying to manage those 5,300 businesses from a central office is both inefficient and ineffective.

We are changing that.

In order to drive more effective local execution, we are investing to improve inventory coverage to support our stores while simultaneously developing a field-centric process that empowers the general managers of the stores to make decisions and tailor their inventories the best serve the unique local customer base.

We are piloting this process in five regions and while it is very early in the program, we are seeing high levels of store engagement and believe it will translate to improve commercial sales over time.

The goal is clear: having the right part in the right place at the right time.

We will continue to leverage our in-market hub and superhub stores and expand delivery frequency to stores from our DCs but we will do so on the most efficient basis.

We're making sure that we think our supply chain and delivery frequency by first determining the best answer for each store and its customers.

A combination will provide the best in stock and availability and therefore, the best overall service for our customers.

After we determine the optimal goal for the stores, we can then determine the most effective and efficient supply chain delivery process and system.

That means where it makes sense to have daily delivery, we will have it but daily delivery is not an answer by itself.

Delivery scheduling is a means to provide the stores with what they need to satisfy the customers.

Daily delivery will not be justified for every store.

We're looking at delivery frequency, in-market availability, outgoing frequency and evaluating which combination is the best local market answer to enable us to serve our customers most effectively.

Second, outstanding customer service.

We are laser-focused on achieving excellence in commercial through flawless execution.

Unlike the retail side of the business, our interactions from commercial customers take place on a daily basis.

We believe we do a great job focusing on commercial and will naturally build the availability and the can-do attitude in the stores which will also help retail.

With average commercial sales of approximately $730,000 per program, we are already among the industry leaders.

We can do more as we shift our identity from a retail culture to a commercial focus.

We know that as we do a better job of servicing our Commercial customers, we will then drive frequency.

To be clear, while we will be a commercial force organization, we will not lose focus on DIY.

Commercial is our most significant growth opportunity.

But we believe our commercial focus will have synergistic benefits to DIY because the same fundamentals apply across the businesses.

We continue to focus on growing our Speed Perks Membership program and satisfying our DIY customers through our knowledgeable Team Members and well-placed locations.

In 2016, we will be investing to further develop great commercial field and store teams, deliver focused sales and service execution, and scale key programs such as our strategic accounts and membership programs like TECHNET and Pro Rewards.

Our third pillar, having focused and inspired teams is about inspiring and empowering those teams by providing them incentives and support that positions them to win.

Our first step is to provide our teams with broader authority as business owners.

We are improving our communication approach to support a sales organization versus an operational organization.

As part of this, I engage directly every quarter with our field organization leadership to address business priorities, field-centric leadership, and changes throughout the organization in an unfiltered manner.

I want to make sure they hear directly from me about our goals, expectations and challenges as we develop greater accountability and transparency across the organization.

In addition, we are positioning our stores to have a simplified and customer-focused operating model.

We are also working to limit disruptions across the system so our stores and regions can focus on the vital business priorities we have ahead of us this year.

We are also testing new compensation approaches to support a field-centric ownership mentality.

As we execute against these three pillars, we are focused on continuing to drive improvements across the organization to deliver profitable growth.

Let me be clear, though we see opportunities to take cost out and improve efficiency, that does not affect the customer's experience.

We will move in an aggressive pace and prioritize our actions accordingly.

This means not only capturing the remaining cost savings synergies we've highlighted but continuing to look for other ways to further reduce costs.

It means examining structural changes to optimize our supply chain, such as our plans to open a new DC in Nashville, Tennessee, and close our DC in Sutton, Massachusetts.

We will continue to focus on improving productivity and profitability across our store base.

We are now applying a higher threshold of performance acceptability to stores and continue to look at all parts of our business to improve returns.

We expect to take further actions to address underperforming assets and unnecessary costs.

We'll make sure to analyze all customer base and cost savings opportunities with a strong balance toward improving service levels.

We are looking at all areas and want to make the best decisions possible.

This work does not happen overnight, but we will follow the analysis where it leads and take the appropriate steps to continue to improve performance and drive value.

The bottom line is clear: we must drive improved profitability as we grow our topline.

Our comps will go up when our customers can rely on us to get them the parts they want when they want them.

We must execute flawlessly for the customer by becoming a commercial-first business with a leading product availability, great teams and efficient operations.

Turning to our outlook for 2016, we expect modest topline growth, driven by comparable store sales in the low single digits.

We also expect to open 65 to 75 new stores, including four to six Worldpac branches and one new Worldpac distribution center.

At the same time, we are maintaining tight control over cost.

And we are laser-focused on achieving our stated 12% adjusted operating margins goal for 2016, which is not changed.

In closing, the changes we are making to our organization are both real and substantial.

We've begun to make the shift to operating our businesses more locally and we'll keep advancing that agenda.

Our teams know our customers best and they are embracing their new responsibilities as we drive more local decision-making.

I have been equally impressed with the pace and commitment with which our store support center teams have enthusiastically shifted decision-making.

I see the responsibility in some cases while accepting greater accountability in others, with a singular focus on winning the market.

I'm also encouraged by the ability of our organization to learn and adapt, ensuring we don't repeat mistakes of either action or inaction.

We are making the right decisions to change our profit formula to yield better outcomes.

Finally, before we open it up to your questions, I'd like to take a moment to thank all of our team members for their continued focus and commitment to customer service.

With that, let's open up the call for questions.

Operator?

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Simeon Gutman, Morgan Stanley.

Your line is open.

Thanks.

Good morning.

First question is, can you comment on how Q1 is running and if you're seeing some improvement?

Is that attributable to weather getting better or something strategic, meaning execution is starting to get better?

Simeon, good morning.

If you look at Q1 so far, sequentially, we have seen some progress but it is not up to what our expectations are right now.

We're started out flat.

We are actually in a period where we're going up against our strong comps from last year.

We are seeing some movement.

We expect more.

We have a plan that we intend to execute throughout the year so we're not sitting back hoping for the weather to change.

We are executing fundamental execution issues that we think will affect our business, really around the availability and service areas.

So early on, really premature call, again we're only a period or so into the year but we have every expectation that we're begin to get them up to our expectations.

Okay.

And I will ask my follow-up and just a clarification on what -- on that as a question.

The improvement you're seeing in -- or you said flat but not up to your expectations.

Is that in weather markets getting better or did you see maybe something that at the margin on execution get better?

And then my real follow-up, is if you talk about the distribution model the supply chain, do you feel any different about how it positions today or in its functionality versus when you bought it?

Anything having to do with capacity, how it's set up geographically your ability to service the entire store base?

Yes, I will start with the sales, Simeon, and say that just broadly, again, we are seeing obviously pockets of strength and pockets of weaknesses, as we always do.

So there's always going to be some variability geographically, but broadly, still not where we want it to be.

Still working on improving it overall.

From a supply chain standpoint, the biggest change we've seen so far and we've mentioned this is obviously, we have 1,300 stores now from Advance that are on multi-day delivery and we've made changes to the upgrades to the AP network in terms of DCs.

We've also put capacity adjustments in for some of the Carquest distribution centers as well.

Okay and just to clarify, if I'm not cut off, then back to the comp question.

As you note, comps are to be expected to be flat -- I'm sorry, positive low single digits by the end of the year.

Is it a sequential ramp or is it very back-end loaded by the way you guys are modeling it out?

No, it's not back-end loaded.

It's a sequential improvement along the way.

It has to do with obviously some of the trends from last year that we're going up against but it has more to do with it -- initiatives we are executing.

Okay.

Thanks.

Our next question comes from Michael Lasser of UBS.

Your line is open.

Good morning.

Thanks a lot for taking my question.

It's going to be about bridging the margin from the 10.2% that you achieved in last year to the 12% in 2016 so you're going to need about 180 basis points of expansion.

It sounds like you're going to get 100 basis points from the cost reduction initiative, another 50 basis points from the synergy realization.

And then are we to assume the last portion is from gross margin expansion and how visible is that SG&A improvement that you are expecting for 2016 so if your sales fall short of your expectation, what's the sensitivity to your margin if that happens?

Michael, good morning.

Obviously, our plans for 12%, which we recognize we're clearly improvement mode on.

So it requires a combination of working the cost lever, working gross margin and clearly, there's a leverage component to it as well.

We've gone to great efforts to work hard on the cost components of this and we're working equally or doubly hard on sales right now.

Costs, we can control right away.

So we made some improvements and you are right.

We are going to take a big chunk out of our cost structure and we're going to continue to look for ways and begin to find more and more of it so we are not stopping at 100 basis points or stopping at any one fixed number.

We keep looking to find more and more cost to take out to streamline this operation, build efficiency and really, frankly, limit the amount of work load that it gets sent on to our stores.

So we will make adjustments on a lower comp, if that in fact is what happens.

We do clearly have expectations around leverage as part of this -- a part of 12%.

And George, it sounds like it's part of the margin expectations, you are anticipating some benefit from a change in the store operating model and the pilot of the change in store compensation model.

What have you seen already from those tests and how quickly do you expect that you will be able to roll them out?

From a store operating model standpoint, Michael, we are beginning to see some change, especially from the empowerment initiatives.

So I think one of the biggest themes we are working on right now is a quick move towards field centricity.

We recognize that we want very, very local businesses and they're all unique in their own way.

We feel that we can get things 90%-plus right out of the support center but we are empowering our teams to take up the right -- rest of the way to 100%.

So they now have more and more autonomy over adding SKUs to their assortment, adding more product to the supply chain system.

We think that will have some of the most immediate benefits.

The single selling model is we are in sustain mode on that one.

The team is becoming more and more comfortable with and we believe that fundamentally, it's the right thing to do, is serve all customers that walk in or call our stores.

And as a business that's been quite outspoken about being commercial first, everyone needs to be willing and able to pick up the telephone and help a commercial customer or hop in the truck and make a delivery.

So we're pleased with that aspect of it.

The compensation pilot is just that.

It's a pilot in a limited amount of stores that is not having much impact nor is it intended to right now across the entire chain of stores.

It's a learning event for us right now and my focus is to get the empowerment to the field that allows for a true sense of business ownership before putting in a compensation system that rewards business ownership.

Okay.

Thank you so much.

Our next question comes from Seth Basham with Wedbush Securities.

Your line is open.

Thanks a lot and good morning.

Just to follow-up on some of the earlier questions to make sure I understand your bridge from where you're running right now with comp store sales-wise to a low single digits.

In terms of the largest drivers of that improvement, does it have to do with how you're going about changing the SKU availability to the stores or are there other support initiatives that you had that you think will be the key drivers here?

Good morning, Seth.

It's a combination of both.

So if you ask, is it SKU availability, we're going to absolutely say yes to that question every time.

Our business fundamentally is quite simple.

Our customer asks us if we have the part and can we get it to them quickly and that is how we operate and that's how we run and that's how we will drive comps over time.

So yes, to having a part is absolutely critical for us and getting availability right and we feel that we made some good progress on that is absolutely job one for us.

That being said, there are other initiatives that have an impact on comp sales during the course of the year.

Certainly, our consolidation of Carquest Stores will impact our comp sales.

The Speed Perks Program at 10 million members will impact our comp sales.

More investments in inventory and hubs will affect our comp stores and the move to multi-day delivery will affect comp sales as well.

So we have a waterfall of activities that we've built out that we think will drive comp sales methodically but clearly, it starts with availability.

Okay.

Good.

Thank you and just a follow-up to that.

Do you think about your progression in comps in 2015 and the deterioration over the year?

When you diagnosed that, how much of it is due to lost customers on the commercial side and where do you think your ability us to win back of those lost customers?

Well, I'd probably make a distinction, Seth, and say that it's lost business on the commercial side as opposed to lost customers on the commercial side.

Did we lose some?

Of course we did.

We know that.

But we point to categories like our strength in brakes has indicated that we still have a healthy base of commercial customers who are still buying from us.

We still need to sell them the entire car.

So going back and just trying to reestablish connections with customers is difficult but trying to expand your base of business with existing customers is a more attainable objective, certainly.

Great.

Thank you very much and good luck.

Our next question comes from Scot Ciccarelli of RBC Capital Markets.

Your line is open.

Good morning, guys.

So last quarter, you guys referred to roughly 10% of your sales base comping down over 10%.

That was the 120 basis point drag you referenced and I think the suggestion was those stores were undergoing significant changes but you've also referred to stores in markets that comp in the mid- to upper single digits where they have undergone all the changes and the businesses had a chance to settle into a natural rhythm.

I guess what I'm curious about is better understanding the cadence of sales changes in a specific market.

In other words what happens to comps when the changes first start?

How long do these disruptions last?

And then when do you start to see the improvements?

And I know that there's a bunch of different items that have been obviously along the way.

Thanks, Scott.

Good morning.

Let me try to take that in sequence.

I think if you look at, first of all, our comments around what you're describing our outlier stores, which was a group of stores that disproportionately affected our sales miss, a comment -- a couple of actions there.

Number one, as we previously mentioned and mentioned in the script, we closed some stores during the course of the fourth quarter.

You can fully expect that they were among those bottom 10% performers.

So that's a small group of stores and that's not the entire difference.

We also are moving into a period right now where we're currently executing accelerated consolidations of poor-performing stores.

So in this case, specific Carquest Stores that were not meeting our expectations that we've now begun to consolidate into Advance Auto Parts stores and that will solve for another tranche of the stores.

There are still outlier stores and there will be so our field teams continue to work on the performance of some of our outliers.

As you look at the consolidation, the market conversions and look at results, we're generally pleased and we're pretty much pleased across the board.

So that number, that initial number that you refer to is clearly inflated due to the Carquest conversions.

So once the market begins to undergo conversion, there is, as you would expect, a negative sales impact.

And it really lasts for anywhere from five to six weeks.

So we see this period of about a month to month-and-a-half when there's actually physical construction going on in the stores, team members are changing, parts are changing in some cases, that we see comps go down and then we see it ramp back up.

And our effort has been to take that time period and compress it as much as possible and we have.

So in the early consolidations, it was a longer period of time.

So we've seen that narrow down pretty nicely over time to the point where and obviously, we'll work to continue and improve that to be shorter and shorter.

But it's about five to six weeks that there's a negative impact and then the store begins to emerge with better results and that generally shows up in the form of double-digit comps, showing up in clearly consolidations and anywhere from single -- mid-single to a high-single to double-digit comps in our convergence stores.

And so are there any, George, are there any markets where you have done the convergence but haven't seen that kind of result?

Of all the conversions that we've done there are one, maybe two markets where it's been strictly limited to just conversion.

Not consolidating two boxes but just conversion that we've seen flattish results and that we're working to improve.

By and large, the overwhelming majority of the markets have had the kind of results that we wanted.

Got you.

And understood.

And then secondly, payables to inventory ratio; it's obviously a huge cash flow driver for your industry.

You guys are still performing well below your direct peers.

What's the right way to think about that kind of ratio going forward and the impact on the cash flow?

Thanks.

Yes, look, we obviously want to work to continue to drive our AP ratio.

We will focus on taking inventory out.

We do have some specific vendor focuses.

So as you look our AP ratio, you look at our base of business, we have a fairly targeted list of those that we're negotiating with to make some changes on AP ratio.

At the same time, we're being very clear that availability is job one.

So we don't want to send mixed signals to our team.

We've got to be in stock.

We've got to have the parts that the customer wants when they want it.

Okay.

Thanks a lot, guys.

Our next question comes from Dan Wewer of Raymond James.

Sir, your line is open.

Thanks.

George, on the sales lift in the conversion stores, I guess you're calling it out 5% to 12% increases.

Is that primarily the do-it-yourself revenues kicking in with the availability of the advanced do-it-yourself assortment in those Carquest Stores or is it the commercial revenues picking up?

It's a combination of both so when we talk about a conversion store, we're simply rebranding.

We're going into Carquest, we're making it a Advance Auto Parts stores.

We are enhancing the sales floor in those cases.

So we do see and we do expect to see a DIY lift in those stores and we have been seeing it.

That said, that brings an additional commercial business as well so we've been pleased on both fronts.

But you're right, that as we converse stores, our real expectation is around trying to bring a little bit of a DIY to a store that's historically not had it.

And on the consolidation, so are you still seeing 70% to 80% of the commercial business in that consolidated store transferring to the remaining Advance store?

Yes, we are Dan.

70% is closer to the right number.

And of the 325 to 350 consolidations and conversions for this year, how does that split out between the two?

I know the economics are very different between a consolidation and a conversion but so how would that split out between those two types of projects?

Roughly 50/50.

50/50.

And then the last question I have.

On the expense reduction goal of 100 basis points, and then if you assume that, that 50 basis points of the synergies, maybe that flows into expenses as well.

That would imply that expense dollars are roughly flat, it looks like in 2016 compared to 2015 adjusting for the 53rd week.

How much of that is already been achieved through closing the 80 underperforming stores through the consolidations at the corporate office.

How much of that expense savings has already been achieved and how much of it has yet to be achieved?

Dollars are actually down so not flat but down to last year and we continue to accelerate on that and look for more opportunities.

So I want to be clear, we won't do things that's caught in the sales muscle.

So when we talk about SG&A, we're primarily talking about G&A and we continue to look for more and more opportunities but if we make substantial progress, dollars will be down.

So the biggest variable in achieving the 12% EBIT rate, whether or not you achieve that, really is a function of whether or not the comps are flat or maybe up 2%.

And then to a lesser extent, whether or not you can deliver on the gross margin gain.

It sounds like the cost reduction, therefore that's -- there's really -- there's no way that you can miss on that.

Look, we know the size of the improvement that it represents, 10% to a 12% and it certainly would be aided quite a bit by the topline that we expect.

So the leverage portion of this is important but we've clearly overindexed on the expense side.

Right.

Okay, thanks.

Good luck.

Thank you.

Our next question comes from Greg Melich of Evercore ISI.

Your line is open.

All right.

Thanks.

Good morning.

I wanted to make sure I understood the charges, Mike, that you outlined and sort of what's incremental and what was in the plan and what I should compare that to.

So the incremental $75 million to $90 million of charges, would that compare to what was $127 million in 2015 and $82 million in 2014?

Yes, so Greg, we gave an outlook of $75 million to $90 million, and $65 million to $75 million of that would be comparable to the last year portion of those relate to the market conversions and the IT projects around that catalog and the store systems.

So those are primarily the drivers as we think in 2016 and those are comparable to the one-time costs we would have came last year.

And then the $10 million to $15 million is our supply optimization work.

That really gets going this year and that's a big driver of that is the Sutton DC that we're going to be closing down this year.

Got it.

And I did -- my follow-up will be going back to the sales trend, George, which is, do you have a -- what really happened with DIY versus do-it-for-me in the quarter?

You gave some nice category issues in some of the regions but if you look at basically what were the two sides of the business or what were the sales, however you want to cut it.

Really, we had softness in both sides of the business and when we talk about weather, which we don't like talking about that, that clearly represents more of an impact on DIY and specifically a category like that.

So we had some great strength that we went up against in batteries and we didn't see the cold time around and that, just based on that one line alone, has a pretty significant impact on the DIY business.

But it was both parts weather on the DIY side.

And, Mike, just to follow-up to the previous one, just do you have an EPS range guidance that falls out of this?

I mean, if you just take the margin and the comp, you get to something like $9.50, at least that's my back-of-the-envelope math.

(multiple speakers) Am I still missing something there?

Yes, so I'm not going to comment on that, Greg, but what I will tell you is we gave to the -- we gave in the release our assumptions and they reflect the most important outcomes that we're focused on this year which is improving our profitability and improving our sales and we remain committed to our 12% target.

Given the variability in the range of our comps and trying to predict where we will fall in that range and as we're building momentum, and also, the structural moves that we're going to continue to do to improve to move to a field-centric and localized business, we have chosen not to try to predict an outlook range.

But we think we've given you the assumptions that reflect the outcomes that we are expecting this year.

Great.

Thanks.

Good luck.

Our next question comes from Tony Cristello of BB&T Capital Markets.

Your line is open.

Thank you.

Good morning for -- thank you for taking my questions.

The first part is a bigger picture.

You talk about the field-centric approach, and two of the categories being availability and infrastructure.

And what I'm wondering is how much does 2016 cover for those two buckets versus how much will be left to get you where you really want to be in 2017 and 2018?

And I'm just trying to understand.

Is this a shift in terms of trajectory of where you were taking your business and is it now another two or three years to get you where you need to be?

No, Tony, it's George.

I would call it a stair-step approach.

I mean, we've been talking about customer, our field-centricity for well over 18 months now.

We've just accelerated our pace pretty substantially.

So I would not look at this as a multi-year rebuilding process but I would look at it as an evolution that's already begun and that we've taken very substantial steps towards accelerating in the past quarter.

So it really is -- we're not trying to flip how we buy or inventory merchandise.

We are simply giving our team in the field an ability to take a limited portion based on what they see as specific need for their customers and get it right.

And we just don't feel like 5,300 times over.

We can have a level of exactitude out of this office that reflects what's happening in the field.

And we want to empower our field team to make -- to put in those difference makers to get it from maybe 90% to 100% correct.

So hyper-local business, especially for commercial and we feel like the team needs to have a say on how they are assorted, what their quantities look like because they know changes to the business faster than our systems are able to detect them.

And then on that, it sounds like the systems, going into next year should be in place for what you need?

Yes, I mean, I think the systems are very quickly falling into place right now.

So we are moving very, very fast on this but again, we do not look at this is a multi-year project.

We look at this as a shift in some decision rights.

We look at this as being a more effective listening organization and we think it properly orients around -- our whole team around what matters most which is our customer and our store teams.

Okay.

And then I guess the one follow-up here is on the infrastructure.

Do you have an update on how you would see this infrastructure best in place to meet the needs of fulfilling and availability?

I mean, what changes still remain in order to get you the fill rates that you're still not at?

Tony, I mean if you look at the multi-day delivery, for instance, we said I think that we would try to tailor that to our specific customers' needs.

And there is a formula in every market that we think gives the right outcome that's best to serve our customer.

That affects -- that may be 5X delivery; that could be 3X delivery.

That may be five hub runs a day, that may be seven hub runs a day.

That may be an in-market superhub, may not be.

So it is just -- it is calibrating our market needs to the needs of the customers, the pace of the commercial business and making sure that it's right.

So we still continue to work to the formula.

We feel great about some markets.

We clearly recognize that we have opportunities in other markets.

Okay.

But you have enough distribution capacity in place?

It's just re-working that or do you still think you're going to need to be adding as we move forward?

We have the infrastructure in place.

We'll upgrade three DCs in 2015 so we will begin to add further capacity to those facilities.

We'll also add seven new superhubs in 2016.

So we will look and we will find those market opportunities where they exist and we will make those changes but largely, we feel we have the infrastructure in place.

Okay.

Great.

Thanks for your time.

Our next question comes from Matthew Fassler of Goldman Sachs.

Your line is open.

Thanks a lot.

Good morning.

My first question is just to quantify the number of stores that are in that -- in the conversion markets that are generating those mid-single-digit to high single-digit increases?

And then just to quantify the number of stores that you would expect to enter similar stage of integration or emerge from the similar stage of integration in 2016?

Matt, we've touched roughly one-third of our stores with the conversion consolidation relocation activity.

So about a third of the Carquest Stores that needed to be addressed.

We will hit 350 more this year and as we've -- as I mentioned earlier, about a 50/50 split between conversions and consolidations.

So some of those will just merge with an Advance store and drop out of the system.

So the rough number of stores that's comping up mid- to high singles, are you saying that's a third of the Carquest stores?

It's not that quite high of a number.

It's -- remember we had done 100 early consolidations.

Then we did 150 during 2015 and we will do about a 175 more in 2016.

These are convergences.

So is about 150 of the stores in the chain, not those numbers.

Yes.

Okay and then my second question, just big-picture philosophically, you seem to have two big efforts happening simultaneously.

The first the conversion of the Carquest chain and then the upgrading of execution on a number of levels and the second is an effort to take out costs.

Now understanding that you've got an SG&A ratio opportunity versus some of your peers, it seems like those two efforts are somewhat or can be somewhat an opposition.

It's certainly much harder to improve execution and generate topline as you're taking cost out of the business.

Is there a thought to focusing on the operational improvement to stabilize the topline prior to accelerating those cost reductions?

Matt, there's an effort to separate the taking cost off from affecting the topline.

So we're looking very much at non-customer focused activities.

So take things like indirect procurements, areas of the business, like that.

Looking at the store portfolio and as we've done, take out ineffective assets along the way.

We are laser-focused on improving topline performance.

That is absolutely job one.

And we feel that we have our field team on the point for that.

Field team drives the sales improvement and the corporate team is here to support.

On the cost out side, we've gone more towards G&A and the corporate team has taken more of a lead in that activity.

So we think that they're compatible.

We absolutely will not let ourselves cut in the muscle that affects sales ability.

Got it.

Thank you so much, guys.

The next question comes from Chris Horvers of JPMorgan.

Your line is open.

Thank you, good morning.

So first, a clarification question on the comp side.

So you mentioned the cadence.

Curious if the New Year's and leap day -- New Year's shift and the leap day affect the first quarter?

And then I have a deeper question.

They don't.

They don't.

They offset each other's so the low single digit for the year don't include any benefit from the calendar?

That is correct.

Okay.

And then you mentioned the geographical dispersion in comps.

For the Southern and Southeast markets and broadly, the non-cold-weather markets, did they actually comp positive?

And how was the sequential performance in those markets relative to the third quarter because it sounds like in the in-store inventory availability did get better, certainly from a very low point earlier in the year.

If you look at it, I think we call that our strength areas, but certainly, the Southeast was among our stronger markets.

If you look at areas like Charlotte, Atlanta, Tennessee, some were better performing markets.

As for the improvement in availability, we talked about adding inventory on our last call, which was to happen during the course of Q4.

So from a sequencing standpoint, I wouldn't look at it as though it dramatically improved the moment we said it.

But that over the course of the three months between calls, you saw more and more inventory come into the system.

Okay.

And then as a follow-up, if you go back to what it sounds like Carquest was comping or growing sales at on a per store basis prior to the acquisition, it sounded like they were -- it seems like they were ones and twos and certainly since this acquisition, it seems like that's deteriorated.

So can you talk about -- that sounds like shared loss.

So is there something structural about Carquest that's driving that share loss that part of the investments that you're making into those stores and into the supply chain are meant to fix?

Thanks.

Yes, I would call the trend of Carquest pre- and post integration to be relatively comparable.

It's about the same as it was before.

There are many Carquest stores that we're not investing in at all yet.

There's still work down the road.

So I don't believe that there's anything that's caused any meaningful kind of change in Carquest trajectory by virtue of the integration.

Clearly, there are stores that we've gone in and done physical construction in so those convergence stores did see that the six-week impact on sales that I mentioned earlier.

But then a lift afterwards.

But as far as a broad-brush trend of Carquest stores having lesser performance than pre-acquisition, that's not the case.

Okay, but I guess the relative performance to what your commercial experience was or what Auto Zones or O'Reilly are not that it seems like they were underperforming so it was -- was it the lack of DIY, was it the lack of investment by the prior management team?

What would you diagnose that underperformance in that in those stores relative to the industry?

Yes, I call it the latter.

II think if you look at their performance pre-acquisition relative to the main competitors, that is correct and that there was certainly particularly, in the couple of years prior to acquisition, some reduction in investment.

Understood.

Thank you.

Our next question comes from Daniel Hofkin of Robert W. Baird & Company.

Your line is open.

Good morning.

So just a couple clarification questions to what's already been asked.

As you are looking at 2016, can you discuss what you expect the trajectory to be for comps in both segments of the business?

Seemingly, the commercial business was -- would be very -- if it has more room for improvement.

Do you expect that to outcomp DIY in 2016?

Just give us kind of a relative sense for how those fits against that low-single-digit overall comp.

And then can you just, based on the low single digit, obviously that is a range.

I get that but what does that imply for total sales as a range, total sales dollars given that you're going to be opening and consolidating a bunch of stores?

We're not going to comment too much on mix between DIY and commercial but I will just reiterate that commercial is going to be our primary sales driver.

So no question that it's slanted more toward an investment and the focus around our commercial business, while trying to maintain as much DIY as we can.

And then I just -- I may have missed it earlier.

I don't know whether you addressed this.

Is there any update at this point on the search for a permanent CEO?

There is not an update.

The Board is diligently doing what they consider to be one of their primary roles which is the CEO search and it's going on.

And here at Advance, we're driving ahead with the business and there's no question about leadership.

So no comment regarding expected timing of an announcement in either way?

Correct.

Okay.

Thanks very much.

Appreciate it.

Thank you.

Our next question comes from Mike Baker of Deutsche Bank.

Your line is open.

Thanks.

I want to ask about the 12% operating margin so I guess it's going to be one question in three parts.

First, so you first talked about that 12% margin I think on the second quarter call this year.

I think since then, the last two quarters haven't been great quarters.

So I guess where are you right now in the progression to that 10% to 12% margin versus where you thought you would have been when you first talked about it six months ago?

Mike, we made progress on the cost area for sure.

So if you want to look at the primary area that we've shown traction on, it's cost reduction, part of which was reflected in some of the Q4 results which we weren't happy with.

But we are making progress in our cost structure.

We have instruments in place on margin and we certainly intend to change the comp trajectory and that last part is absolutely job one.

So is the cost savings enough to offset the sales weakness such that at the end of 2015, you were where you would have thought you would been or does the weakness in second half of this year require an even better 2016 then you would have thought six months ago?

Yes, the weakness in 2015 gives us a little bit more of a target.

That's just the fact of the matter.

So we have a little bit more work to do.

A little bit more wood to chop on it but the same principles remain, meaning it is taking aggressive cost out in the right places, accelerating our comp sales, and expanding our margins.

(multiple speakers) We've got a little bit more to do.

Understood.

Part two, that was only part one.

Part two would be, how should we think about this quarterly?

I mean, it's 180 basis points . That's a big number.

Do we expect to see some of that in -- as early as this current quarter or is it going to be not as much improvement earlier in the year and then hundred of basis points in the back half of the year?

Yes, Mike, we will build throughout the course of the year.

With that said, our quarters aren't equal.

So obviously, if you look at a quarter like Q2, that is a critical quarter for us relative to Q4 which is less so.

Okay.

But again, should we expect to see some improvement, at least close to that range as related to this current quarter?

Yes, you should.

Okay.

Last one.

This is just a clarification because I think people have said it differently in some questions so I just want to make sure.

The SG -- sorry, the synergy-saving of $50 million, that's part of the 100 basis point cost savings or that's in addition to the 100 basis points of cost savings?

It's part of the cost savings.

Okay.

So it's 100 basis points on SG&A and presumably 80 basis points on gross margin.

Is that right?

Not exactly.

I think, George, if you look at what we've said before, I think George said it earlier.

100 basis points of SG&A and roughly in that 50 basis points and then a little bit of leverage is what we said.

But we haven't given a specific on gross margin but we have given a specific on SG&A, which is a 100 basis points range.

Okay.

Okay.

Thanks.

At this time, there are no further questions.

I will turn the call back to Zaheed Mawani for any final comments.

Thank you, Cheryl.

Thanks for our audience for participating on our fourth quarter call.

That concludes our call.

Thank you.

That concludes our call today.

You may now disconnect.

Thank you for joining us.