領先汽車配件 (AAP) 2016 Q1 法說會逐字稿

Welcome to the Advance Auto Parts first-quarter 2016 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 brief statement concerning forward-looking statements that will be made on this call.

Good morning, and thank you for joining us on today's call to us discuss our first-quarter results.

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

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 the protection 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, 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 costs 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 forward-looking 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 Tom.

Thanks, Zaheed, and good morning, everyone.

I'm delighted to be here with you on my first call since joining the Advance Auto Parts Team.

Since I walked in the door on April 11, I've been working very closely with the Leadership Team.

Importantly, I spent most of my time out in the field, speaking with customers and team members to get a deeper understanding of our capabilities, challenges, and opportunities.

I've been in my role for just over a month, so admittedly, it's very early.

Having said that, based on what I've seen so far and what you saw in today's earnings release, it's clear we're facing real challenges.

The good news is I have tremendous confidence that we have an extraordinary opportunity to create value going forward, even more than I thought before I joined the Company.

On today's call, I'll share my initial observations on the business and the quarter.

Then I'll turn the call over to Mike to address first-quarter performance before coming back to discuss the overarching themes that will guide our path forward.

We'll leave plenty of time at the end for questions.

Allow me to start with a bit of context on why I decided to join Advance.

I wasn't looking for just any CEO position as I transitioned from a great role in another great company.

I was looking for a CEO position in a company with scale, a company in a growing industry, and a company filled with potential.

A company with a terrific opportunity where I could help dramatically improve performance and value.

Without question, Advance hits on each of these objectives.

First, scale.

Not only is Advance a large company based on revenue and market cap, we also have over 70,000 team members and a comprehensive North American footprint.

Over the past few weeks, I've been consistently impressed by the quality and commitment of our Field Team, in both our store support center and in the field.

Given this context, Advance provides the opportunity for me to do what I enjoy most -- lead a large team and put tremendous focus on meeting the needs of our customers, engage directly with team members to develop and execute plans to meet those needs, and ultimately to drive financial and marketplace performance as well as shareholder value.

Secondly, growing.

We operate in a very large and attractive $100-billion-plus industry with strong growth rates.

Candidly, there are very few industries that offer the compelling growth rates that exist in our space.

And finally, filled with potential.

As many analysts have delineated, Advance has enormous upside potential.

In particular, we have a tremendous opportunity to improve our customer service and competitiveness in the marketplace to accelerate growth.

In addition, I know we can drive significant productivity and capability improvements in our supply chain and throughout Advance.

And without question, we can do a better job of attracting, developing, and retaining talent in our Company.

Each of these by themselves will contribute upside in our performance.

Together, in the context of a large and growing industry, they'll generate meaningful value for shareholders.

The past several weeks have fully validated the perspective I had as I was considering the opportunity.

There's no question, we have work to do.

But it's clear the Board and my Leadership Team are prepared to take decisive actions on a number of fronts to create real value for shareholders over time.

Allow me to briefly touch on our Q1 results and outlook.

Our comp performance in the quarter was disappointing.

We continue to experience shortfalls on execution, driven by availability and service levels.

From my perspective as a new CEO coming to Advance, it's clear these challenges are within our control and can certainly be addressed.

We've been outflanked on supply chain, outperformed on core productivity metrics, and out-executed on customer service.

As a result, our growth rate and profitability have been below that of our peers for several years.

Recently, this is partly due to our focus on the Carquest integration.

The integration has been a necessary but distracting agenda for our entire team.

It's caused us to be internally focused, versus externally focused.

The sum of all of this resulted in continued challenges in Q1, with negative comp sales of down 1.9%.

While these results are unacceptable from our standpoint, the entire Advance Team and I are excited by the areas where we see room for substantial improvement.

We can and will make the necessary changes that will improve our value proposition and service levels for our customers.

Clearly, we are not where we need to be in terms of competing at the highest level to earn more trust from more customers to accelerate growth.

My team and I are in the midst of a deep dive on our business and current performance.

While we still have work to do, we have a view of the challenges facing the business and where we've fallen short.

We've developed short-term action plans to address these challenges, and that begins with consistently meeting the needs of our customers.

In fact, we're all very passionate about this.

In order to return the Company to a substantial growth trajectory, we must deliver improved fill rates, availability, and in-stock.

In addition, we need to dramatically simplify the business and remove obstacles for our field teams so they can execute with excellence.

These focused plans are now in motion.

The reality is, performance improvement won't happen overnight.

Our Q1 comps were down primarily due to the internal challenges I outlined a moment ago, notably, our shortfalls with availability and service levels.

We also experienced accelerated declines on demand, particularly in our colder weather markets late in Q1, and that has continued into Q2.

Based on this trend, we believe it's prudent to take a conservative approach and revise our assumption for annual comp sales to range between down 3% and down 5%.

In addition, we're no longer targeting the 12% adjusted operating margin rate for 2016 that we previously communicated.

Make no mistake, we can and will do better.

But we must be thoughtful regarding our expectations to ensure we set ourselves up for long-term growth and margin expansion.

Right now, we're maniacally focused on what we can control: availability, customer service, productivity, and performance.

We're redoubling our efforts around accelerating growth, reducing cost, and driving efficiencies throughout the organization.

At the same time, we're confident in our business, our people, and the opportunity that lies ahead.

In fact, we see significant sales growth and operating margin expansion opportunities over time.

We're going to be very disciplined about how we drive growth and profitability.

I've tackled this kind of challenge more than once in the past, and I'm extremely confident this business can deliver operating margins well above 12% over time.

The reality is, that achieving the target this year would prevent us from creating the platform we need to enable sustainable growth and operating leverage.

For the balance of the year, we'll sharpen our focus on execution and ensure we're responding to customers by delivering the parts they want, where they want, and when they want them.

While it won't take place overnight, we're committed to making significant improvement on this critical metric.

In a few minutes, I'll highlight three overarching themes that will guide our path forward.

Before I turn the call over to Mike for some brief comments on the quarter, I want to say a few words about the CFO transition we announced earlier today.

First, I want to thank Mike for his eight years of strong financial leadership during a time when the Company more than doubled its market cap.

Mike has played a key role in developing a strong finance team and building a capital structure to support our future growth.

I'm very appreciative of Mike's willingness to support our transition with his leadership, passion, and experience.

We've commenced an external search for a new CFO and have agreed with Mike that he will stay on until a successor has joined and an orderly transition has taken place.

We've not set a time frame to complete the search as it has just begun, but we'll move as expeditiously as possible to bring in the best person for the role.

With that, let me turn it over to Mike.

Thanks, Tom, and good morning everyone.

Before I get into my comments on the quarter, I want to say it has been an absolute pleasure to be part of the Advance Team for the past eight years.

While I have decided that now is a good time to make a transition, I remain confident in the Company's future and look forward to working with Tom and the rest of the Team to ensure we have a smooth transition.

Now, turning to the quarter.

We delivered adjusted cash EPS of $2.51 for the first quarter, primarily driven by softer-than-expected sales.

Turning to sales.

Overall, as Tom said, we were disappointed with our results as first quarter comparable store sales were down 1.9%.

These declines were partially offset by positive growth and comp performance from Worldpac, Carquest Canada, and from our store conversions and consolidations.

As Tom touched on, top-line performance reflect continued challenges with availability and lack of execution to improve service levels.

We are intensely attacking these areas with urgency to make the needed improvements.

With regards to external factors, we saw a continuation of the milder winter weather that we experienced in Q4 that negatively impacted our sales with lower demand towards the end of the quarter as we experienced a late start to spring, primarily in our colder weather markets, where approximately 40% of our stores are located.

Seasonal categories, with the largest impact during the quarter, was seen in batteries and hard parts categories which were partially offset by continued strong results in our brake business across both commercial and [NDIY], which saw high-single-digit growth during the quarter compared to mid-single-digit growth in the third and fourth quarters of 2015.

In our commercial business, the comp sales declines were more pronounced in our Northeast and Great Lakes markets.

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

We continue to expand our customer base with our national account business in TECHNET, which partnered with independent repair shops, also continuing to add new members in the quarter.

Within NDIY, we continue to see strong brake results, but that only partially offset softness in our battery and battery accessory as well as other seasonal categories.

Our gross profit rate decline of 58 basis points was primarily the result of supply chain expense deleverage due to the comparable store sales decline.

Our first-quarter adjusted SG&A rate decreased 100 basis points year over year, driven by our continued cost reduction initiatives and disciplined efforts to lower administrative and support costs, offset by fixed cost deleverage of our comparable store sales decline.

All in, first quarter adjusted EPS increased 5% compared to last year, and adjusted operating income increased approximately 2.2% to $315 million, and adjusted operating margin increased 43 basis points over the same period last year to 10.6%.

Operating cash flow for the first quarter was approximately $75.3 million, versus $102.2 million last year, driven by a decrease in our AP ratio to 74.8% versus 76.5% last year.

This decrease was principally driven by transitional inventory growth resulting from strategic investments in availability, the new Worldpac DC, and lower-than-expected sales.

Our adjusted debt to EBITDAR was 2.5 times at the end of the quarter, and we remain at our maximum stated leverage ratio of 2.5 times.

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

Turning to the balance of the year.

As Tom mentioned, we now estimate our annual comparable store sales to be in the range of negative 3% to negative 5%.

Our highest priority and focus is to accelerate our top-line sales momentum.

Despite deferring our 12% target, we remain committed to improving our profitability, which must be driven by sales growth, and also continuing to simplify our business and remove costs furthest away from our customer, allowing the organization to be more efficient and effective.

As outlined on our fourth-quarter call, our integration activities this year are focused on two main areas.

One, development and testing work to enable us to combine our AAP and Carquest supply chain and store systems into one network.

And two, the continued execution of Carquest market conversion programs.

With that, let me turn it back to Tom.

Thanks, Mike.

I'd like to provide some perspective on the path forward based on what I've seen and heard over the past few weeks.

There's three themes which come to mind as I reflect on this.

Appreciate the past, acknowledge the present, and anticipate the future.

Let me start by appreciating the past.

I spent considerable time with the people who built this business over the years.

These leaders have provided me with some timeless fundamental principles that remain true to this day.

The late Arthur Taubman started Advance Auto Parts way back in the 1930s in the middle of the Great Depression.

I've watched videos and read speeches he delivered.

He had a simple mantra.

Trust and listen to your customers and treat your employees like family.

His son, Nick Taubman shared some of his perspective on Advance with me directly.

Perhaps the most inspiring was when Nick told me the best part of the Advance Auto Parts story is ahead of us.

Temple Sloan, Jr.

was way ahead of his time when he founded General Parts, and ultimately, Carquest.

He decided to focus on the independents and major in the commercial parts business back in the 1970s.

His son, Temple Sloan, III, met with me recently and reinforced the key levers of success on the commercial side.

Making the right merchandising decisions, gaining acceptance and trust of commercial people in our stores along with the owners and technicians they serve, and taking care of our people.

Both Nick and Temple were maniacally focused on serving their customers and enabling their people.

I could not agree more with the advice I've received from Nick and from Temple.

In addition, I'd like to personally thank the Taubman and Sloan family for being so incredibly welcoming to me as I've assumed this responsibility.

Others, like Jim Wade, Garnett Smith, and Darren Jackson, can could not have been more accessible and helpful in my on-boarding.

I intend to keep the communication lines open with those who built this business.

While it's important to know where we've come from to intelligently plan for where we must go, it's also clear that we must be willing to continue to adapt and improve.

Turning to the present.

Make no mistake, I entered this role with eyes wide open and an expectation that there were going to be many areas for improvement.

As such, I'm going to call it as I see it.

There are many areas that need attention and have substantial room for improvement.

That's what got me excited about this opportunity, and I believe that our near-term challenges provide an even greater mandate to materially improve the business operations.

We're in the midst of a deep dive on operational diagnostics and areas for improvement.

Over the next few months, we'll be highly engaged in a thorough assessment of our business and current opportunities.

My intention is to come back to you later this year with our long-term vision for the Company along with specific goals and strategic imperatives necessary to achieve our vision.

We're very hard at work.

We need to understand precisely what's working, what's not working, and the lessons learned surrounding our performance over the past few years.

In the short term, we'll ensure all of our team members are taking actions that propel our business forward.

With an appreciation for the past and an acknowledgement of the present, our focus is on anticipating the future and the role Advance will play in shaping our industry and delivering results going forward.

Allow me to [reinforce].

We have a tremendous opportunity to create value at Advance, much more than I envisioned when I joined the Company.

Over the coming weeks, we'll construct a multi-year strategic business plan to get after our biggest opportunities.

This process is well under way, and I already know one thing.

Our framework will contain three primary chapters.

First, growth.

We'll develop a demand-based growth strategy that puts the focus squarely on customers and getting the right parts to the right places at the right time, predictably, reliably, and consistently.

Secondly, productivity.

We'll instill a relentless focus on productivity while ensuring that we build new capabilities as we reduce waste and cost in our system.

We'll reinvest some of these cost savings in future growth, with much of the savings also dropping to the bottom line.

People and culture.

Our people strategy will support our business strategy and foster a diverse culture which mirrors the market and empowers our people to win in the marketplace every day in every way.

Allow me to provide a little more detail.

On growth, everything we do starts and stops with the customer.

We're going to make certain we understand precisely what's important to commercial customers and to DIY customers.

To improve our customer service, we need to elevate our operating intensity and customer responsiveness.

We also need to increase the pace at which we make decisions and execute them.

Bottom line, we need to become much more externally focused, and in doing so, we'll get the right part to the right customer faster and more efficiently.

This leads to my second point around improving productivity.

A relentless focus on productivity necessitates establishing a clearly defined productivity pipeline that will reduce cost and remove waste while building new capabilities.

This pipeline will be built around investing in those tasks that matter most in meeting customer needs and eliminating those that do not.

We'll also focus on a thorough assessment of our DC network, fleet, procurement, store productivity, and zero-based budgeting.

Productivity will be the engine that fuels our growth.

Finally, nothing is more important than mobilizing our team members across all of Advance.

We have an incredibly talented and committed team across the country, and we must listen to them, much more than we have, empower them to act, and provide them with the tools and technology they need to win in the marketplace.

Our team members, who are closest to the customers, know them best.

When we empower them and provide them the right tools, they can make decisions that improve execution and drive sales.

We're a company comprised of 5,200 hyper-local businesses.

In any given market we're only as good as the talented district managers, general managers, commercial parts pros, and commercial account managers, and the rest of our team members in each market that help serve our customers every day.

We intend to meet the needs of our local teams in delivering for their customers.

Our field teams have told us that Advance has been too reliant on the store support center to make decisions and instill processes.

We're listening.

George and the rest of the Advance Team are implementing a much more field-centric organization where our team members are empowered to make decisions and held accountable for their actions.

I know this by itself will expedite our transition as we provide local leaders the tools, training, and technology required to succeed and win in the market place.

In closing, I'm humbled and honored to lead this great organization.

We have a strong foundation upon which to build, to grow, and to thrive in a terrific industry.

We're in the early days of developing and implementing a disciplined and comprehensive path forward, and you'll see more later this summer.

Until then, our organization remains focused on delivering near-term commitments and business initiatives.

Without a doubt, we have a lot of work to do.

At the same time, I have tremendous confidence that over time, we'll deliver superior execution for our customers, an outstanding environment for our people, and ultimately, we'll drive increased profitability and shareholder value.

Before we open it up to questions, I'd like to thank a minute to thank all of our team members for building this business to what it is today.

I'm excited to work together with my new team to help Advance reach its full potential.

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

Operator?

Thank you.

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

(Operator Instructions)

Our first question is from Simeon Gutman of Morgan Stanley.

Your line is open.

Thanks.

Good morning.

Welcome, Tom, and best of luck, Mike.

My first question, Tom, I know it's early and you haven't laid out a strategic plan yet, but in assessing capabilities and diagnosing some of the service availability issues, any way you have an instinct whether there's more of as process issue or an infrastructure issue at Advance?

Good morning, Simeon.

I think my first reaction -- I've been around to several distribution centers, meeting with people in the field and our stores.

I think it is more execution related.

The key metrics that are important to drive growth for us, availability, fill rate, customer service, those are the things where we're not entirely happy with the metrics surrounding those, and we're going to be very focused on improving those key metrics.

I don't know that it's something that will take place overnight, but we clearly can address them, and we're going to focus on making real progress on that over the next couple months.

Okay.

And my follow-up regarding the comp forecast, I'm just curious how much it reflects the exit rate of the business, whether there was some national account noise in there, or is it this further disruption that you expect the business to be under just from some of the changes that are going to take place?

We obviously spent a lot of time debating that.

I've been here for five weeks, and our business in the last six weeks has been a step-down without really an obvious reason.

It's possible that the tail end of an extraordinarily mild winter, we feel we may have pulled forward some of the business earlier in the year, resulting in less hard parts business in the spring.

I won't blame it on the weather or count on the weather to help us.

So I see a lot of areas inside our business where we aren't performing, executing, or strategizing as well as we should, and certainly not as well as I expect.

So we're going to act and plan to improve our business and execute better to improve our performance with an even greater sense of urgency.

It could be that this is a short-term blip versus a trend, but we're not going to count on that, and we're going to run our business based on the guidance that we gave you.

We can't just hope for the weather to get better.

Hope is just not a strategy.

It doesn't sound like, then, there was a big account loss at the national level causing some of the extra disruption or choppiness.

No, there was not.

Okay.

Thanks.

Best of luck.

Thank you.

Thank you.

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

Your line is open.

Good morning, guys.

Just following up on Simeon's question.

Tom, just to clarify, are you assuming that weather is not impacting the business and the 3 to 5 negative comp is just -- if you just ran the current run rate through the balance of the year?

I'm not going to say that it's not impacting it.

I do think that some business may have been pulled forward earlier in the quarter and we smoothed it out, obviously, over the entirety of the first, I'll call it, 20 weeks of the year.

So it's clearly impacting, but it's short term.

This is a short-term up and down associated with weather.

It happens in many industries, and certainly in ours.

But the ongoing trend that we see is the one that we guided to, and we obviously hope to improve on that as we go through the balance of the year, as we start to get focused better on execution and improve the metrics that we control.

But we want to be conservative in our estimate as we indicated in the release.

To get to the midpoint of the negative 3 to 5, you basically have to run negative 5 for the balance of the year, and I suspect that the business is probably comping down 5 now.

Are you assuming it just runs at that same run rate for the balance of the year and there's no improvement?

That's what I'm trying to figure out.

You'll be able to do the math.

The net of it is we're being conservative, and we're going to make sure that we focus on the execution drivers that will drive our business forward.

We don't -- we're not counting on an overnight fix, though, Scot, on some of these things, and that's why we've been conservative.

Having said that, the entire Leadership Team, George and our Field Team is focused on beating that forecast by the widest margin possible.

But for the purposes of our guidance, we want to make sure that we're reflecting trends that we see at the moment.

You're new in the seat, so that makes sense.

Thanks, Tom.

Our next question is from Chris Horvers of JPMorgan.

Your line is open.

Thanks, and good morning.

Tom, was curious, if you could compare the culture that you've seen at Advance versus what you experienced at Frito-Lay and Pepsi, what do you think are the big gaps, and do you think there's a culture gap between what you see at the corporate support center and what you've seen in the stores?

First of all, the culture here is really an impressive one.

It's a proud culture.

It's a winning culture.

Historically, it's one that served customers and been incredibly focused on customers.

We've got the -- we want to inspire our people out there in the field.

We're trying to grow our business.

I will say that -- and George has been addressing this over the last several months.

We've got to a point where the center is making many more decisions than we feel is appropriate.

I think the biggest contrast would be the front-line organization at Frito-Lay, the front-line organization here is essentially how we drive our business.

If the front line is delivering out there in the marketplace, we're going to win every day.

I would say that at Frito-Lay, we do engage and allow the front line to make more decisions than they do here, and that's why George has evolved this model to more of a field-centric or more customer-centric model.

I think that's the biggest difference.

And I think over time, we can certainly address that.

We've got great field leaders.

We have no lack of talent out there.

But we've got to remove obstacles for them to compete and win in the marketplace, and we're very, very focused against that.

Understood.

So the follow-up.

Playing he devil's advocate, it sounds like you broadly think it's, as someone else mentioned, a process challenge, not necessarily a strategy challenge.

Is that because you haven't had the time to actually get into the details of what the supply chain strategy is, what the integration strategy is, what's going on at Carquest?

Or is it truly your perspective that we just need to come in here and basically work harder and enable the stores to drive the business?

Well, I think, Chris, there are strategic opportunities.

Let me be clear with that.

I think that a better, more clear assessment of prioritization and the demand itself that's out there in the market, and finding better ways to meet the needs of our customers through a more holistic integrated supply chain strategy is all part of our agenda.

We've already kicked off our strategic planning process, as I mentioned in our prepared remarks.

The Leadership Team is excited to go through a deep dive, looking at the future, anticipating where we think the industry is headed, and really looking to better meet the needs of our customers going forward.

So I wouldn't say it's all process.

There are significant strategy opportunities, and it will enable us -- just back to your earlier question -- remove some of the activities that we're doing out there in the field and ensure that we're very focused in our agenda.

So it is a combination of strategy and execution.

I don't want to just tie it all up to operating opportunities, although that's where we're immediately focused, but we're going to do a deep dive on the strategy part of the business and make sure that we're really, really starting to impact things that matter most to our customers going forward.

Thanks very much, and best of luck.

Thank you.

Thank you.

Our next question is from Seth Sigman of Credit Suisse.

Your line is open.

Thanks.

Good morning, guys.

A question regarding the 12% target previously.

There were a number of drivers to that, mostly on the cost side, and it seemed like a lot of that was in motion.

Obviously, we saw good SG&A leverage in the quarter.

As you think about the outlook you now, shortfall seems mostly related to sales, but is there a component here where we should be assuming higher spend going forward to address some of the issues you mentioned earlier?

I don't think it's possible for me to answer that question right now, Seth.

I think it's still early.

We're still going through how we're going to manage out the rest of the year.

Obviously, we want to take a very close look at the cost line.

If we really believe this 3 to 5 outlook, which is what we've guided to, we're going to have to look very diligently at the cost and make sure that we maximize our profitability in the short term without compromising customer service.

Okay.

Got it.

So that means -- there was a comment earlier that you remain committed to driving profitability this year.

Is there anything more you can he provide on that comment as we think about modeling out the rest of the year?

Yes, Seth, maybe let me give you a little color.

I think Tom has been very clear, and the Management Team is very focused on the first (inaudible) priority is we've got to get the sales line going because that will help the bottom line.

We're really pleased with the progress we're making on cost, and we're going to continue to look at cost to make ourselves more efficient and simplify the business.

Those are things we can control.

The challenge we have, one we don't have at the top line cooking, is we've got a pretty high fixed-cost model, and when have you a high fixed-cost model, when the sales come in softer, you just deleverage.

So I think those two work together.

You get the top line going again, and we expect to see better leverage on the bottom line.

And the other fact is, is while we're going to continue to take costs out, there is going to be some reinvestment required as we look at different parts of the business and re-igniting our sales base.

So there will be a balance there.

But I think the primary focus is getting sales going.

That will give us the leverage to improve our profitability.

Thank you.

That's helpful.

One more follow-up if I may.

As you think about the store footprint over time, I realize it's early, but any thoughts on how the complexion of the top line needs to change over time to improve profitability, i.e., closing stores and how we should be thinking about that?

Yes, Seth, it's George.

We continue to keep everything on the table.

So we clearly look at store opportunities, whether it be closings or new store openings.

You're well aware we closed roughly 80 in the fourth quarter of last year.

That's was what we thought was the initial opportunity.

We'll continue to look at profitability store by store.

From a portfolio standpoint, we'll continue to move into more new markets like Dallas and getting further west.

Thanks for that.

Good luck.

Thank you.

Our next question is from Matthew Fassler of Goldman Sachs.

Your line is open.

Thanks so much.

And good morning.

I've got two questions, and the first, Tom, is for you.

At this point, you're the third CEO in the past 10 or so years in addition to two interim CEOs.

I know that everyone has meant well in terms of their intentions for the business.

If you -- put in the uncomfortable position about talking about yourself a bit.

If you think about how you think you're coming at this differently and what you're bringing to bear that you think perhaps the organization has lacked in the past to help it fulfill its potential, it would be very helpful.

Well, I think, Matt, I've had experiences like this in the past.

I've been assigned to essentially three underperforming businesses in the past 15 years with my previous company in both Canada and the US.

When I started each of those roles, the businesses lacked growth, we were losing share, and we did not have a robust productivity pipeline.

When I left each one, we were growing faster, we were gaining share, and we had a very robust productivity pipeline.

We also had a great leadership team in place that continued the business on.

So I actually feel very good about this position.

Now that I've been here for a month, I think the opportunity is far greater than I thought even when I got here.

So I can't speak to my predecessors, but I'm very confident that over time, we will grow faster, we will gain share, and we will build a robust productivity pipeline that drives margin expansion over time.

I have no doubt about that.

That's helpful.

And then my second question is a bit of a financial question.

I know you pulled the free cash flow guidance for the year.

Obviously, this business should still generate cash.

How are you all thinking about allocating cash flow at this point in time as you think about opportunities like debt paydown, like share repurchase, any other uses that you contemplate?

Thanks, Matt.

So first of all, the first big driver of free cash flow is getting our business going.

When we think about our EBITDA and EBITDAR and our leverage ratios, the biggest contributor -- there's a couple of big contributors there -- is getting our business going.

So that's first and foremost.

Tom has talked about that on this call in his remarks, so that's the first one.

The second one is managing our working capital.

That's the second big driver in this industry, as you know,.

And you saw our inventory grew higher than we would have anticipated in the first quarter.

The three big drivers around that were, one, Worldpac was -- their inventory was up I want to say close to 11% because we're opening a DC, so that one, we're going to continue to do.

The other big driver is the Carquest inventory was up quite a bit as we invest in availability in that business.

It was starved prior, and we did a lot of investments last year.

So we're going to continue to invest in inventory.

But we anticipate by the end of the year, the inventory growth is probably at low single digits versus where it was.

And the or big driver was we delivered lower sales.

So that drove the inventory up.

So we're going to be focused on improving our earnings and improving our working capital, and that's what we're going to be focused on.

And then in relation to the deployment of capital, as you know, first and foremost, getting the earnings going, that's first.

And then as we think about that, as we think about buyback, maintaining our leverage ratio is important to us so we maintain our investment-grade ratings.

That's a priority.

And then after we've done that -- and we've done a great job paying down our debt, which gives us the flexibility to allocate capital to investing in the business or doing share buyback.

We currently have $415 million on our open-to-buy for our buyback.

Thank you so much, Mike.

Appreciate it.

Best of luck to you.

Thank you.

Our next question is from Seth Basham of Wedbush Securities.

Your line is open.

Thanks a lot, and good morning.

My first question is just near-term one on the quarter's results.

If you could help us, Mike, in disaggregating the comp performance by region.

You mentioned 40% of the stores in the Northern regions, a big step down there in the last six weeks.

Maybe some color there would be helpful.

Hey, Seth, it's George.

I'd say that broadly, if you look at our results, we did see a demand drop late in the quarter, and I'd say that was most pronounced in the Northeast.

On the flip side, our best performance was in the Northwest and the Southwestern markets.

Any sense of the gap between the performance between the Northeast and those other regions?

Good size outperform in the Northwest and Southwest.

Okay.

And then moving on, bigger-picture question for you, Tom.

As you think about the integration of Carquest with the Advance business, a key step in that process is supply chain.

I know there's a strategy that's been laid out supply chain-wise.

You mentioned a holistic view of the supply chain strategy.

Is, therefore, the integration of the supply chain being put on hold at this time?

Well, first of all, just a comment on the integration, Seth.

I think any time -- I've been involved in a couple of these where either an acquisition, an integration, some type of large-scale structural change, the complexity associated with a change like this is significant.

And I think that in my brief time here, it's clear that the complexity was significant with this change.

I think it's been distracting.

It's caused us to be internally focused.

We've put obviously necessary resources against it.

As we go forward, as we move out of this era, I feel terrific about getting focused on the customer and making sure that we deliver the right part to the right customer at the right time reliably, predictably, and consistently every single time.

And Charles and the Supply Chain Team are doing a lot of work right now to really elevate our capabilities there.

I think we're moving into a very focused agenda on the supply chain side.

We're asking a lot of questions.

We're turning over every rock.

We're trying to make sure that we simultaneously provide better customer service and improve the cost structure of the business.

Got it.

Maybe as a corollary to that, is there a time frame hat had in mind to complete the integration of Carquest?

Well, the integration is ongoing.

We still have work to do there.

But I think we are definitely at the tail end of the integration, and we're more focused on the supply chain itself and the strategic plan itself to make sure that we've got a very clear agenda going forward across our whole business, not just on the supply chain side from a strategy point of view.

Very good.

Thank you, and good luck.

Thank you.

Our next question is from Greg Melich of Evercore ISI.

Your line is open.

Thanks.

I want to just get a little more clarity on how the business is trending now, and then I had a follow-up on strategy.

The 3 to 5 guide, I understand it was worse towards the end of the quarter.

Could you help us understand the progression on DIY versus do it for me, and if the step function change you thought was less spending from customers you have on the do it for me side, or were you losing some of your first-call accounts?

Thanks.

Greg, we don't think we're losing first-call accounts.

We've seen, again, that drop-off across both businesses, a bit more pronounced on the DIY side.

As you again move into the Northeast, it was deepest in that part of the country.

And again, both businesses, but a little bit of a deeper impact on DIY.

As far as our customers, if you look at our trends by product category, we'd again point toward all brake categories as a particular strength of ours, which tells us that we're talking to our primary commercial customers day in and day out still.

Great.

Thanks.

And more for Tom, understanding it's too early to have too much specifics around it, but if you think about the levers you can pull, what do you think is the bigger opportunity to get the customer back and re-engaged.

Do you think it is inventory investment?

Do you think it's labor investment?

Do you think it's capital?

Is there any -- can you steer us in one -- where you think the biggest opportunity is over the next year or two?

I think, Greg, we're going to take a look at everything, to be clear, and I don't know that I can give you much specificity right now.

I know the end result, and the end result I'm working back from there, right?

In the end, we're in a garage, delivering a part, right?

And then working back from there through the delivery itself, the taking it into the store, the fill rate from the distribution center, those handoffs, how do we reduce those handoffs, how do we make sure we have the right assortment in the stores themselves so we get the right part to the right customer, how we interface with the customer.

We're looking at every single aspect of how we drive growth.

And we are going to look for ways to think differently about the supply chain, leveraging tools, leveraging new processes, leveraging technology to get at that.

So I'm very excited about it.

The team is focused on it.

We've kicked off the work, and we're going to take a very close look at how we get a lot better at the execution side.

But it is going to require a very deep dive on where we think the future of this industry is headed, where we think demand is going, which geographies are going to grow faster than others, and integrating that into the supply chain strategy itself.

That's great.

Well, good luck.

Thank you.

Thank you.

Our next question is from Michael Lasser of UBS.

Good morning.

Thanks a lot for taking my question.

Good luck, Mike, and welcome, Tom.

Tom, my question relates to some of the conversations that you might have had with the Board on managing expectations for how long it will take to effectuate a sustained improvement in the business.

Can you help characterize that timeline for us?

Well, first of all, I feel great about our Board.

As you saw yesterday, Jeff Smith is now the Chairman.

I've gotten to know Jeff over the last several weeks.

He's got great instincts on both the business and the people.

He's available 24/7, and he's incredibly engaged in our business, as is our Board.

We just had a full-day meeting.

George was there with his Division Presidents walking through the plans.

They obviously ask tough questions and really engage in trying to help us think through the journey ahead.

So they're very, very involved is the first point you should know.

In addition to that, they understand the challenges we face.

Clearly, as all of you on the phone recognize, there's a step function improvement that's required for our business, and we're all committed to the achievement of that, and we're going to lay all that out in the strategic plan.

We're going to move as rapidly as you humanly possible to get to that level of success, and accelerated growth, reduced cost, and much more engaged people out there in the marketplace.

So we have a timeframe in mind to get our strategic plan done.

It should be done by August.

We'll talk about it in the fall.

And we'll take it from there.

But based on your initial observations and some of your diagnosis, do you think that this is something we can expect to see improvement in the second half of this year, or is it more like next year and the year after that where the bulk of the acceleration and the better outcomes are going to happen?

Well, obviously the focus on execution should impact immediately.

Clearly, I don't expect the entire business to change overnight, though.

We've got some big challenges that have to be addressed.

I can tell you, we're going to be maniacally focused on availability, on fill rate, on speed of delivery, and on customer service, and George and his Team are all over that.

We're totally aligned on what the metrics that matter most that we're going to be deep on right down to store number 5,000.

So we're very clear on that part.

It's just a question of the bigger strategic opportunities that we can unlock as a company that will really start to accelerate our growth and get us the kind of market share gains that we're looking for long term, while we're taking costs down and expanding margins.

I don't have enough information for you to be specific on that at the moment.

We should in a position by the fall to talk more about that.

Okay.

And let me ask my follow-up question, which is as you've been able to do an initial assessment on the business, I think the conventional wisdom is that part of what has ailed Advance Auto is inferior systems, inferior store operating model, and (inaudible) formula.

To make changes with a long-term view in mind, it may require some sacrifice in the near term.

How much sacrifice might you be willing to make in order to generate a better result over the long run?

Thank you so much.

Well, again, the compass is going to be our customer, and in the end, we're going to engineer our solution based on the absolute best possible experience that our customer can have out there in the commercial side, and in fact, on the DIY side.

So whatever it takes to engineer that, we're going to do it.

We're going to pull full back from there and look at the experience they have with our people in the stores, with our commercial parts pros on phones, with their experiences online, and really try to elevate our focus on improving that experience and earning their business over time.

That's not easy.

But I do believe that being clearer about what that end state is is going to help guide us in terms of what those investments are going to need to be across our supply chain, across to our technology and information systems, and across our people, and then the training that's going to be required to get our people into a place where they're really, really focused on the customer.

Okay.

Thanks again.

Thank you.

Thank you.

Our next question is from Dan Wewer of Raymond James.

Your line is open.

Thank you.

Tom, inventory levels have been elevated for a couple of years.

I think we finished this quarter up about 12% per location.

I'm having trouble reconciling that against your comments about parts availability problems.

Is it a question that there's a lot of inventory but it's just in the wrong products or in the wrong locations?

Well, Dan, that's a good question.

We've looked very carefully at that, and we're going to look much more carefully at that.

Intuitively, your question is spot on.

And we've got to take a close look at our days on hand across our system, across every part that we sell, across all of our distribution centers, across all of our stores, and make sure that we're balancing our inventory levels with availability.

The second question I had, in looking at your contract when you joined the Company, it talked about you have 12 months to present a plan to the Board of Directors.

Do you really think it will take that long to devise a new strategy?

No.

What do you think?

More like, six to nine months, or do you have a sense that the --?

We're working on it right now, and we certainly expect to be exiting the year with an aligned position on a strategic business plan for the next five years.

So let's call it September, October as the latest that I would see getting alignment to that plan.

And then the last question I have for you revolves around Jeff taking over as Executive Chairman.

I know that he's been a proponent of selling Worldpac.

I know that Jack disagreed with that view when he was Executive Chairman.

Do you think that with Jeff taking over that position, that Advance will reconsider its thought on Worldpac and perhaps putting that up for sale as a way to generate shareholder value?

Well, first of all, Jeff has been very, very engaged in our discussion around the strategic plan.

Worldpac is a big part of our growth agenda.

So that's new to me.

I've not heard that, to be candid.

And we're very excited.

Bob is doing a terrific job out there at Worldpac.

We're very excited about the prospects for that business.

It's growing nicely for us.

It's got great potential.

We're very -- we just opened a you new distribution center in Dallas, just met with Bob yesterday, very, very exciting.

So I don't know that whatever you may have heard, Dan, is still the case.

Well they (inaudible) when they were putting together their white paper back in September, in looking at potential catalysts for the stock, called out potentially selling Worldpac.

That's the reason I was asking.

No, he wants to maximize shareholder value, and I think Worldpac is a key component in our ability to do that.

Okay.

Thank you.

Thank you.

Our next question is from Bret Jordan of Jefferies.

Your line is open.

Hi, good morning.

Following up a little on that last question, some of your suppliers in the second half of last year were saying there were some in-stock issues that they were seeing, and that comes back around to if you have the right inventory in the right places.

Could you talk sequentially whether your availability improved or deteriorated in the first quarter from the fourth quarter, maybe as an ability to say yes when you get an order to find the part in the store?

I can tell you our availability deteriorated in the first quarter, and it deteriorated verse the fourth quarter, and it deteriorated versus year ago, and that's why we're very focused on improving it going forward.

Okay.

And then a follow-up question on the supply chain.

I know at the end of the year you were thinking about a web-based POS system maybe in the second quarter and then working on the IT to consolidate the distribution software in the second half.

Is that still a time frame to think about for those particular projects, or is that going to be pushed out just given the new eyeballs on it?

That's correct, Bret.

We have successfully piloted the new POS system and the new catalog in a couple of stores.

Early on, like the initial results, and we remain on track as far as the deployment of that POS system and catalog, and that leaves us on track for the back half of the year trying to align around the distribution centers.

Okay.

Great.

Thank you.

Thank you.

Our next question is from of Gabelli.

Your line is open.

Hi.

Thanks for taking my questions.

So regarding some of the higher inventory that we spoke of earlier in the call, as you rework that, do you see any opportunity to work with your suppliers to extend terms and maybe grow your AP-to-inventory ratio towards more similar to peer averages?

Well, first of all, Carolina, I poured through your report on the weekend, and it was great.

Appreciate the note.

Clearly, we want to figure out how to get our inventory levels down.

It's always a challenge.

Getting a availability up and getting inventory down is something that you're always going to focus on, and that's one of the big strategic challenge as we construct our demand-based strategy that informs the supply chain.

And on the payables front, I'll let Mike maybe speak to that question.

You want to talk to that, Mike?

Yes.

Maybe just related to your question, we have return rights with our vendors.

We have credits that we get from our vendors in terms of reserves that we have.

So we feel good about that, and competitively, we feel good there.

Our focus is improving our availability and making sure we have the right part in the right place at the right time.

It's a localized model that we run.

So when Tom talks about availability, that's what we're focused on.

And then you know what?

We know we have some inefficiencies in our inventory.

Tom just talked about them.

So we're going to work with that, make sure that we have the right inventory, and that we think there's a an opportunity.

I think the greatest opportunity to improve our AP ratio will be in our inventory management.

We've done a great job with our terms.

I think we're competitive on that front.

But the bigger driver will be as we manage our inventory.

And I would anticipate this year, I shared it with you earlier, we expect our inventory to be up low single digits, but 2017 is really a year that we would expect to see some real improvements in our inventory.

Great.

Thank you.

Thank you.

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

Your line is open.

Thank you for taking the time.

Tom, the question I have for you is, I know you don't want to give too much the way of a timeline or how you're assessing things, but if you could draw upon your experience of similar situations that you've been in with the complexity of this sort of integration and such that's going on today, what was the average time it took for you to accomplish your goals and get to the level of profitability that you ultimately wanted to achieve?

Obviously, Tony, it varied.

But I think the question for me here is given the starting point, can we move faster.

That's the big question.

And given 30 days on the job, it's difficult for me to provide that at this point.

But I can tell you that I think the opportunities here are far greater than I've seen in the previous three times that I've been challenged with this type of situation.

So I do believe there's a possibility that we'll be able to impact it quicker.

As George mentioned, we're really focused on driving those customer service and execution metrics right away.

But we want to make sure we get the strategy right, and that's why you're seeing the numbers that you're seeing from us.

The strategy and driving the value of this Company through the roof over the next five years requires us to have the right approach for multiple years.

And that's why we're being very thoughtful, deliberate, and disciplined about how we approach the short-term guidance, and then also our strategic plan, which is going to be, as we said earlier on the call, completed sometime in the fall, which will give me a much clearer idea of what we're speaking about here.

The ability to impact Q2, Q3, I don't know at the moment.

We talked about our sales trends.

We talked about the need to improve execution.

How quickly that will impact short-term results is an unknown for me right at this point.

But I do know the strategic plan that we pull together for the fall will be something that will enable us to really unlock big growth, big productivity, and really get shareholder value moving.

That's good color.

What I'm trying to understand is, is this any different from a complexity standpoint that could say, hey, this might be a two- or three-year strategy that we may see this fall, versus historically, you've seen things either turn quicker or take a longer period of time?

I'm just trying to get a baseline for how this may differ from what you're used to in your past experience.

I would say that it is not different.

And if you look up, which you could, past experience, it was not two years.

I would see us impacting much before that.

Thank you very much.

Thank you.

Thank you.

At this time I will turn the call back to our Management, as our CEO has a few closing comments.

So obviously, I want to thank all of you for your questions.

In closing, allow me to reinforce, we're extremely well positioned.

We have tremendous scale as a Company.

We've got a passionate and motivated team.

There's no doubt we've got many areas to improve, but the exciting opportunity ahead is to transform this business into the leader it should and needs to be.

You can count on us to listen to our customers.

You can count on us to be a customer-driven culture.

You can count on us to enable our team members to win in the marketplace.

And ultimately, we're all very confident that this will lead to increased value for all of our shareholders.

So thank you for joining us today.

And this concludes our call.

That concludes our call today.

Thank you.

You may now disconnect.