領先汽車配件 (AAP) 2018 Q2 法說會逐字稿

Welcome to the Advance Auto Parts Second Quarter 2018 Conference Call.

Before we begin, Elisabeth Eisleben, Vice President, Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

Good morning, and thank you for joining us to discuss our second quarter 2018 results.

I'm joined by Tom Greco, our President and Chief Executive Officer; Jeff Shepherd, our Executive Vice President and Chief Financial Officer; Bob Cushing, our Executive Vice President of Professional; and Mike Broderick, our Executive Vice President, Merchandising and Store Operations Support.

Following their prepared remarks, we will turn our attention to answering your questions.

Before we begin, be advised that our comments today may include statements that may be deemed forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995.

While actual results may differ materially from those projected in such statements due to a number of risks and uncertainties which are described in the company's filings with the Securities and Exchange Commission and on our website, we maintain no duty to update forward-looking statements made.

Additionally, our comments today include certain non-GAAP financial measures.

Please refer to our quarterly press release and the accompanying financial statements issued today for additional details regarding the forward-looking statements and the reconciliation of non-GAAP financial measures referenced in today's call.

The content of this call will be governed by the information contained in our earnings press release and related financial statements.

Now let me turn the call over to Tom Greco.

Thanks, Elisabeth, and good morning.

Before I begin, as you read in yesterday's press release, I'm thrilled to announce Jeff Shepherd has been appointed Executive Vice President and Chief Financial Officer.

And I'm also very excited that Reuben Slone is joining our leadership team in October as Executive Vice President, Supply Chain.

I look forward to working with Jeff and Reuben in their new roles, and we'll provide further context on these exciting changes momentarily.

I'd like to begin by recognizing the hard work of the entire AAP team as well as our network of Carquest independents, who delivered strong, balanced performance in the quarter.

We are raising our game on execution, which is enabling us to win business, drive growth and significantly narrow the performance gap versus the industry.

In addition, our focus on cost control and working capital enabled bottom line growth year-over-year and a substantial improvement in cash flow.

In the second quarter, net sales increased by 2.8% to $2.3 billion and comparable sales were up 2.8%.

Our adjusted operating income margin of 8.8% increased 19 basis points compared to the prior year quarter, and our adjusted earnings per share increased 24.7% to $1.97.

Our free cash flow was $382 million through the first 6 months of 2018, an increase of $237 million year-over-year, more than 2.5x.

Our cash position is at the highest level since the 2014 GPI acquisition.

And as a result, Jeff will discuss our capital allocation plans, along with more details on our financials, later in the call.

An escalated focus on execution by our AAP team members and independent partners has enabled a significant improvement in relative growth on both the 1- and 2-year stack basis and resulted in increased units per transaction and increased ticket values.

In addition, following 2 consecutive years of particularly mild winters, we experienced a winter in which both temperatures and precipitation were closer to historical averages.

As we indicated on our Q1 call, the delayed start of our spring selling season hindered our sales performance in the latter part of the first quarter.

Early in Q2, however, we saw increased demand across many categories, which we believe will continue to positively impact AAP for the remainder of 2018 as our DIY business and Professional customers benefit from investments in previously delayed repairs.

From a category perspective in the quarter, we saw increased sales in brakes and batteries, which grew mid-single digits.

In addition, we delivered a substantial improvement in engine management and undercar versus previous run rates as we leveraged long-term vendor partnerships to help with the early deployment of the right inventory, leveraging new analytical capabilities.

Finally, due to the delayed start to spring, we experienced strong growth in spring-related categories such as maintenance, appearance chemicals and optics.

We saw improvement in nearly all of our geographic regions with accelerated growth performance compared to Q1, with the largest sequential improvements in the Midwest, Appalachian, Southwest and Gulf Coast regions.

Turning to the bottom line.

We remain disciplined in our approach to control expenses across the entire organization.

While our adjusted SG&A cost increased on an absolute dollar basis year-over-year, I want to recognize our field operations and store team members for their ability to leverage additional customer service hours with increased sales in the quarter.

Unlike in prior years, where we struggled to reduce our costs, we leveraged this large cost line in Q2 by establishing clear performance expectations, providing improved tools and training for our general managers and tracking results daily at a granular level to manage performance.

In total, our adjusted SG&A cost as a percent of sales were 35 basis points lower than the prior year.

As you'll hear from Jeff on our updated expectations for the year, we remain optimistic on sustaining our top line momentum in Q3 and Q4.

In addition, as evidenced in our Q2 results, our focus on cost control will help offset planned and unplanned headwinds impacting bottom line results for the balance of the year.

With that said, we remain committed to the execution of our long-term plan and have made headway on several initiatives.

In terms of our Professional business, we continued the rollout of our Professional e-commerce platform, Advance Pro, in the second quarter.

We've now converted all of our existing Professional Advance customers to this platform ahead of our initial plans and without disruption to our customer value proposition.

We've received positive feedback from customers that they love the new Advance Pro platform.

It's driving higher conversion rates and increased average dollars per transaction across our Professional business.

Our team members did a great job accelerating the rollout.

And with faster completion, we were able to sunset one system while simultaneously driving growth in our Professional business.

In addition, Q2 was the first full quarter since the rollout of cross-banner visibility was completed.

With an entire quarter of in-market accessibility, we saw positive trends and higher conversion rates, which enabled us to say yes and close the sale more often.

With cross-banner visibility, we expand the quality and breadth of assortment for customers, and I'm excited about what this means for our future growth.

For our DIY customers, Q2 was one of marked improvement in terms of both retail and online performance.

In our stores, our emphasis on improving the customer value proposition is taking hold among our team members, and we've seen improvement in key performance indicators.

In fact, we grew units per transaction in 10 of the 12 weeks in Q2, which drove increased average ticket value.

This enabled improvement in key categories that drive traffic like motor oil, batteries and appearance chemicals.

In terms of DIY omnichannel, we continue to gain momentum as visitors to our website grew significantly while sustaining our conversion rate.

This means we're bringing new customers into our improved online experience and driving loyalty.

Importantly, we expanded our ship-to-home coverage and made notable improvements to delivery speed, which is positively impacting our e-commerce growth.

Across DIY broadly, we're focused on providing a best-in-class omnichannel experience as we strengthen customer engagement, both online and in stores.

Moving to supply chain.

We continue to execute on strategic initiatives to streamline our end-to-end supply chain.

We're confident we'll achieve long-term cost reductions and efficiency and have deployed a detailed plan to optimize our distribution network.

To that end, as announced last quarter, we've begun the process of closing our Gallman distribution center and anticipate completing this by the end of the year.

Additionally, we recently announced internally that we'll be closing our San Antonio DC.

As with Gallman, we're committed to providing our impacted San Antonio team members with assistance during this transition.

Consistent with Gallman, we expect to close the San Antonio facility by the end of the year.

The implementation of our supply chain transformation is critical to our success, and we're pleased with our progress to date.

As announced yesterday, Leslie Keating will retire from Advance at the end of the year.

I'm confident in the robust supply chain strategy that she and her team have built and thrilled that Reuben Slone will be taking the lead in a seamless transition.

This plan enables us to maximize supply chain capabilities, improve customer service, reduce costs, and better leverage the resources and talents within Advance.

Leslie came to Advance following her retirement from a successful 30-year career.

I'm grateful for her leadership and expertise during this important part of our transformation.

Leslie joined Advance with 3 key objectives: lead the development of our end-to-end supply chain strategy; strengthen our supply chain leadership team; and assist in finding a world-class successor.

She has delivered on each of these objectives, and we're thankful for the tremendous work she has led to position us for future success.

While we wish her the very best in her much-deserved retirement, Leslie will stay on through the end of the year to ensure a seamless transition.

Reuben Slone will join Advance as Executive Vice President, Supply Chain in October.

Reuben is a well-respected supply chain expert with a proven track record and will be responsible for supply chain operations and our procurement function.

Having served on our board since 2016, Reuben is intimately familiar with our transformation efforts.

In addition, his background and experience is impressive and extremely relevant to our business.

He joins us from Walgreens where he served 6 years as Senior Vice President, Supply Chain, responsible for inventory management and replenishment, imports, transportation, distribution center operations and logistics.

Importantly, Reuben brings extensive omnichannel fulfillment experience.

This is very exciting for us as we continue to develop best-in-class customer engagement capabilities with best-in-class fulfillment.

As we prepare for Reuben's transition from our board to our leadership team, we're also pleased to announce Nigel Travis has joined our board.

Nigel recently retired after 9 years as CEO of Dunkin Brands and currently serves as Executive Chairman Of Dunkin.

We're thrilled to add a seasoned executive to our board who has diverse global experience.

Nigel previously served in a variety of C-suite and executive leadership roles and adds highly relevant experience to our board.

We really look forward to working with him.

Finally, we're encouraged by the current industry trends and outlook for our overall growth going forward.

We also believe that our efforts to improve and strengthen our business will enable us to drive market share in a strong, healthy industry.

With the improved performance across the enterprise, coupled with the confidence we have in our future, we're taking an opportunity to return a portion of our excess cash to our shareholders by buying back our stock.

In line with our strategic objectives and financial priority, our board has approved a new $600 million share repurchase authorization.

In summary, while Q2 represented another important step in the right direction for AAP, we're far from satisfied.

We remain focused on the relentless execution of our strategy and are confident in our ability to capitalize on the substantial opportunity ahead.

Before I turn it over to Jeff Shepherd, I want to take this opportunity to congratulate him on his promotion and thank him for the tremendous job he has done over the past 18 months.

After the completion of a thorough search, Jeff clearly emerged as the right person to take Advance to the next level, and I could not be more excited to announce his appointment to Executive Vice President and Chief Financial Officer.

Jeff brings an impressive global finance background, a deep understanding of our strategic objectives and is highly respected throughout Advance.

He has been an excellent thought partner for me during the past few months while playing a lead role in building a talented, highly cohesive finance team since he joined.

Jeff will play a critical role in unlocking our considerable potential.

With that, I'll turn it over to Jeff.

Thanks, and good morning, everyone.

I want to thank Tom, the board and the entire Advance team for their support as we continue working together to fully capture the vast opportunities ahead for Advance.

I'm honored to be part of such an impressive team of leaders and grateful for this opportunity during such an exciting time in the company's transformation.

Before I expand on our financial performance, I want to congratulate all of our team members for delivering a strong quarter of improved results and thank them for the hard work they do every day to enable our success.

In the second quarter, our adjusted gross profit was $1 billion, an increase of 2.4% from the prior year quarter.

On a rate basis, our adjusted gross profit margin of 43.7% was down slightly compared to the prior year quarter, primarily due to both planned and unplanned supply chain expenses, which in total reduced our gross margin by 35 basis points.

As we've indicated previously, expenses related to the 2 new distribution centers that were opened last year raised our cost base in the quarter versus the prior year.

Separately, rising transportation and fuel costs exceeded our forecast of inflation for these cost lines in the quarter.

Additionally, while we see positive top line results from cross-banner visibility, there are still significant opportunities to improve operational efficiencies as we fulfill new demand with a less-than-optimized fulfillment model.

At this stage, we're focused on ensuring the part is received in a timely manner.

And at times, this results in inefficient delivery.

While we know our cost structure is not optimized, we will continue to leverage cross-banner visibility to drive growth and expect to deliver improved cost as a percentage of net sales over time as we improve efficiency through the supply chain transformation.

Finally, despite the increased sales, our overall product mix was unfavorable.

Our top line benefited from outperformance of engine management and undercar, in addition to strength in HVAC and cooling chemicals.

However, these carry a lower gross margin rate.

These headwinds were partially offset by improvements in material costs, inventory-related expenses and defectives.

The combination of these factors contributed to gross margin contraction of 16 basis points in the quarter.

Adjusted SG&A was $812 million in the second quarter, an increase of $14 million year-over-year.

Overall, as a percentage of net sales, our adjusted SG&A improved by 35 basis points to 34.9%.

These improvements were driven by savings in labor and insurance expenses as we heightened the focus on safety throughout the organization.

These benefits were partially offset by an increase in bonus compared to the prior year.

This will continue to be a headwind for the balance of the year as our incentive compensation for corporate and field teams was much lower last year due to last year's performance.

Of course, this is also an important investment as we raise the bar on talent and performance and expect our people to succeed and achieve their goals.

In regard to adjusted operating income, we delivered an adjusted operating income of $205 million in the second quarter, a 5% improvement versus the prior year.

Our adjusted operating margin increased 19 basis points to 8.8% in the quarter.

We remain steadfast in our approach to managing cash and delivering on our capital allocation priorities.

Through the first half of 2018, our operating cash flow increased nearly $177 million to $444 million and free cash flow was $382 million compared to $145 million during the same period of 2017.

Because of our disciplined cash management and improving payment terms, our AP ratio increased to 70%.

We remain committed to progress on our AP ratio, and we're confident we will deliver steady improvement throughout the balance of 2018 and beyond.

In line with this focus, we've successfully reduced inventory year-over-year for 6 consecutive quarters while repositioning inventory throughout our network to enable us to say yes to the customer more often and increase inventory turns.

With that said, we remain committed to our customer value proposition, and we will not take actions in the short term that will negatively impact our customers.

We continue to focus on optimizing our inventory over the next several years while improving the assortment across the enterprise.

And given we are now growing, we're being thoughtful regarding our inventory plan for the balance of the year.

Moving to capital investment.

Due to the timing of certain projects and fewer store openings, our CapEx spend in the quarter decreased to $27 million compared to $57 million in the prior year.

In the quarter, our largest investments were related to supply chain as well as IT projects.

As Tom said earlier, we're seeing continued improvement in underlying industry fundamentals, and the benefit from our transformation actions are clearly beginning to take effect.

We believe we are poised to improve market share and make further progress closing the competitive performance gap.

Based on these factors, along with our results in the first half of 2018, we're pleased to update our 2018 full year guidance, increasing net sales and comparable store sales growth expectations.

We're increasing our net sales outlook from a range of $9.1 billion to $9.4 billion to a new range of $9.3 billion to $9.5 billion.

Our comparable store sales guidance is also increasing from down 2% to flat and is now expected to be flat to up 1.5%.

In addition, we are raising the low end of our adjusted operating income margin guidance from 7.3% to 7.5%.

It's imperative to note we're monitoring certain headwinds in the back half of the year, which will impact margin expansion.

This includes higher than originally planned inflation and transportation and fuel costs.

Further, we're pleased with the positive impact cross-banner visibility is having on our top line.

However, we have significant opportunities to improve overall efficiency and enable better margin flow-through.

This optimization effort is currently under way.

However, it is unlikely this will yield much in the way of benefit in the back half of 2018.

Finally, we're reviewing our plans for new Worldpac locations in the second half of the year and see potential to increase the number of branches we will open.

Year-to-date, Worldpac openings have been very successful in driving top line growth.

Depending on timing and the number added, there are potential margin impacts associated with the start-up costs required to open these branches.

These investments, however, will benefit our entire Professional network looking ahead to 2019.

While we're working diligently to minimize current and potential cost headwinds, we feel it is best to remain prudent in our expectations for the year and are therefore maintaining the high end of our previously provided adjusted operating income margin range at 7.8%.

Additionally, we're pleased with our ability to generate cash from the business, and our overall liquidity is much stronger than it's been in years.

Last week, our board approved a new $600 million share repurchase authorization.

This replaces the authorization put in place in 2012.

In line with our financial priorities of investing in our business and maintaining an investment-grade rating, we are targeting $100 million to $200 million in share repurchases through the end of 2018.

Turning to the last 2 items updated in our full year guidance.

We're decreasing our capital expenditure outlook to a range of $180 million to $220 million due to a combination of higher level of scrutiny on every capital project as well as timing expectations of certain projects this year.

In terms of free cash flow, we're pleased with the improvement in the first half of 2018.

As a result, we're increasing the low end of our outlook by $100 million to a minimum of $500 million for the full year.

We're confident the discipline we have put in place, the strategic actions we have taken will enable continued growth for 2018 and beyond.

With that, let's open it up to addressing your questions.

Operator?

(Operator Instructions) And our first question comes from Chris Horvers from JPMorgan.

And congratulations, Jeff, and for the hiring of Reuben.

So a few questions.

So can you talk about how DIY and the pro business performed relative to each other in the second quarter?

And can you talk about how they trended sequentially versus the first quarter?

Did Pro accelerate more?

Or did DIY accelerate more because of the seasonal shift?

First of all, they actually performed relatively close over the course of the quarter in absolute terms.

Within Pro, we saw real benefit from cross-banner visibility, as we spoke about in our prepared remarks.

So we saw a nice acceleration from -- for Pro.

And then on the DIY side, we actually had a greater sequential improvement from the first quarter, some of which was that shift that we talked about in -- on the Q1 call where a very soft April led to a terrific start to the quarter in May, particularly on the DIY side.

And very, very encouraged by the trends in DIY.

In the stores, we're executing better.

We're driving our units per transaction nicely.

That's helping our store performance.

And then, of course, the online piece continues to perform very well and accelerate.

So relatively speaking, in line with each other but sequentially a greater improvement in DIY.

Understood.

And then how you are thinking about your performance relative to the market?

You focus -- you mentioned 1- and 2-year stacks.

Should we think about the second quarter in thinking about looking at the stacks?

Or should we look at the first half given some of these shifts?

I think it's tough because, I mean, clearly, there is an acceleration in any industry in execution.

So just trying to get your thought there and on how you're thinking about in terms of the performance in the business on a stack basis.

Yes, I think in fairness, we would probably want to look at the full front half of the year, right, Chris?

I mean, just the timing shift from Q1 into Q2.

But if you -- even if you look at that, you'll see a nice improvement, relatively speaking, versus our primary competitors over the course of the last 3 years, if you look at '15, '16, '17.

And then contrast that to the front half of this year, you'll see a significant improvement on a relative basis.

But I think in fairness, you'd probably want to look at the front half.

Understood.

And then just one clarifying question.

As you think about the guidance and the raise of the comp guidance for the year, understanding that you talked about improving demand environment, but was essentially the comp raise only for the first half upside?

I think we've continued to see positive trends through the back half also.

So there was -- obviously, the front half performance was reflected.

But I think you're going to continue to see an improved demand environment for the industry.

We like what we're seeing.

Certainly, it's been very warm this summer, so we benefit from that.

And then from an execution standpoint, I really like the progress that our field team is making in terms of driving improved execution.

We're going to continue to stay focused on that every week.

So we're encouraged by that, and that's partly reflected as well.

And our next question comes from Matt Fassler from Goldman Sachs.

It'd be really helpful to try to get a sense from you as to the impact you think some of your self-help initiatives had.

You spoke about improved analytics and parts availability.

You spoke about the cross-banner initiative.

I know that it might be difficult to pinpoint the impact that they had on the business.

But while the industry got better, you had a very nice beat relative to expectations.

So any sense of how they're contributing would be terrific.

Sure, Matt.

And I think the -- again, splitting it out into the respective businesses, on the Professional side, there's no question that the work that Bob Cushing has led on cross-banner visibility has really helped us.

It gives our customers visibility to the breadth and assortment that we have across the enterprise as opposed to a narrower view.

And we're up to 40,000 customers that we've got on Advance Pro.

They're in a great position to see all the parts that we have, and they're ordering accordingly.

So there is clearly some incremental benefit we're getting from that, and that just keeps getting better each week as the learning curve improves on cross banner.

On the DIY side, for sure we're seeing progress on units per transaction.

Our field leaders, Mike Creedon, Maria Ayres, are driving UPT deep into the organization.

Mike Broderick conducts a call each week with the store operations leaders to focus on what are the -- what's the progress that we're making on UPT, how are we performing against very specific initiatives.

So we're seeing improvement there.

I think we were up 10 of 12 weeks on UPT.

There's still a lot of room to grow that one, Matt, but we feel good about it.

And then in terms of online, we look at our visitors to our website.

I think if you look at the most recent reports that have been out on that through June, our traffic was up over 90% in June, and we're amongst the leaders in all of retail in online visitor growth.

And the good thing about that is we've been actually been able to hold our conversion rate as our traffic's been going up.

So I think some of the things that we're doing online are helping as well.

So those are the big drivers from an internal standpoint that are helping our execution, and I think they play a role in not just us rising with all the boats within the industry but disproportionately doing so.

Just a quick follow-up on cross banner.

Jeff talked about some margin offsets associated with that.

So it sounds like the net economic impact this year probably is modest despite better sales.

Any way to size the margin?

Perhaps the sales impact, but if not then the margin headwind you'd expect from that initiative over the rest of the year?

Yes.

What's happening there, Matt, I mean, if you think about when we launched cross banner, which is really a strengthened engagement platform for our Professional customers, we want to make sure that we -- we wanted to make sure we knew what the impact of that was going to be before we started to make wholesale changes to our fulfillment structure.

And so now we've got a couple of months under our belt.

We're starting to get a sense for what are the products that are disproportionately improving.

Are there assortment changes we need to be making inside of our Advance stores or Worldpac branches?

How do we connect those in-market nodes?

All of those factors are being considered as we look at the balance of the year.

So we now have a couple of months under our belt, and we're very focused on a much more coordinated effort with our in-market nodes.

So you think about the HUB routes that we have that connect our stores to the hubs and the distribution centers.

You think about the routed delivery network that we operate through Worldpac.

What's happening now -- and Bob's leading a lot of this work in -- with Leslie at the moment and ultimately with Reuben, but how do we optimize a new -- more demand really coming into us and make sure that we're doing it in the most efficient way possible?

So that work is under way.

I just don't expect it to have a huge impact on the back half.

Our next question comes from Mike Baker from Deutsche Bank.

A couple questions.

First, on the comps.

Just using the midpoint of the guidance, it looks like you're expecting a similar back half comp versus the front half, yet you have about a 150 basis point easier comparison, and then you guys do look at that 2-year stack.

So why wouldn't we expect an acceleration in the back half versus the front half?

I think the thinking there is that just -- we're just early into the quarter.

We've still got a lot of time left in Q3, as a matter of fact, and also Q4.

So we just don't want to get out ahead of ourselves.

I think we really like the progress we're making.

You're absolutely right that we had a difficult Q3 last year.

We just want to make sure we're thoughtful as we look at this.

And we're really engineering our cost structure to a level that we can deliver on all the key metrics that we're accountable to.

So I think that's the point.

Okay, that's helpful.

And one more just on the margins.

You laid out some reasons why your sales increase is ahead of your margin increase.

A couple of follow-ups there.

One, you didn't mention specifically incentive comp or bonuses in there.

Is that a factor precluding you from raising the high end of your margin guidance?

And then secondly, you talked about inflation being a potential negative to margins.

Why wouldn't you be able to pass through cost increases?

I think historically, that's what this space has seen.

So why would that be a margin hit?

Well, let me try and give you a bit of sense for that, Mike.

First of all, we did mention bonus as a factor.

I mean, the bonus was a factor in the quarter.

It will be a factor full year.

So I'll try and give you a sense for how we're thinking about the full year.

Some of these items we called out in our prepared remarks that impacted Q2, and they will limit the margin expansion in the back half.

So within supply chain, which is the biggest one, we are seeing inflation in transportation costs that are in excess of our plan.

I just talked a little bit about cross-banner visibility, where the source and delivery costs are not yet optimized.

We talked about product mix in our prepared remarks, where we're selling more of certain products which carry a lower gross margin rate.

So if you think about those factors impacting Q2, we do see -- we have carried forward a little bit of that into our balance of the year forecast.

There's 2 other items that I draw your attention to balance of the year, and both of these are within SG&A.

First, we will be investing in the back half in marketing to drive traffic and customer loyalty.

We're really excited about a new advertising campaign that we're kicking off.

It'll be in full flight in September.

And we expect the ROI in this to be very positive, but more to come on that.

A very exciting new advertising for us.

It's been a long time since we've had effective advertising in this company, and we want to build our brand, build customer loyalty and drive traffic behind that campaign.

Secondly, we are opening more Worldpac branches in the back half.

There are short-term start-up costs associated with this that are above the prior year.

But we think both of these investments, the marketing and the Worldpac branches, will enable us to exit '18 and start 2019 with momentum.

So those are the things that went into the back half guidance.

And we're excited about the top line momentum that we have, and we want to continue that momentum into 2019.

And of course, we'll stay diligent on the cost side.

That makes sense.

One follow-up to all of that, if I could.

A quarter ago, you said gross margins would be up with end of year guidance.

Is that still the expectation?

Yes, for the year, we do expect the gross margins to be up, yes.

Our next question comes from Michael Lasser from UBS.

And congratulations to Jeff and Reuben on their new roles.

One of the elusive factors from Advance Auto Parts' model over the long run has been getting the sales and the margins to work together at the same time.

You saw a little bit of that again this quarter, Tom.

When do you think it's reasonable to expect that you can get sales, gross margin, the SG&A leverage all working together at the same time?

Yes, thanks for the comments.

I think that we're balancing those levers very thoughtfully.

We're actually in the middle of updating our 5-year strategic plan.

We shared a draft of that with our Board of Directors recently.

And I would say more than ever, we deeply understand the margin differential between ourselves and that of our peers.

And we're very clear on what I would describe as addressable opportunities on the margin line from structural opportunity.

So if you consider our year-end margin of 2017 of 7.3% and you contrast that to our primary competitors, we believe somewhere between 60% and 70% of that absolute margin gap is, in fact, addressable.

So what we're doing now, my leadership team and I, we're really fine-tuning the choices we need to make in order to balance that addressable margin expansion opportunity with the share growth opportunity because we also have a big share growth opportunity sitting here with what we believe is about 7% of the industry market share.

So how do you do that over a 5-year plan?

How do you drive shareholder value through a combination of top line growth, margin expansion and FCF improvement?

And I think you should see consistent progress on this from here on in to answer your question directly.

We believe we can drive our top line, improve share performance, increase margins and drive free cash flow throughout our 5-year plan.

And that's what we're -- how we're approaching it.

It's really a balance between all of those levers, and we're going to continue to stay focused on doing it in a way that's sustainable.

And my follow-up question is on how you measure your idiosyncratic improvement or what you have control over within the organization.

Because clearly, the industry environment this quarter was much more favorable than it was last quarter, particularly in the region that you're more levered to.

So can you give us some sense of what you think the weather catch-up from the first quarter to the second quarter contributed to your second quarter results?

Yes.

It's a difficult question, Michael.

But I think that, I mean, as I mentioned earlier, there's obviously an industry benefit that happened in the second quarter overall.

But we are seeing progress on some of the key metrics that we look at that say we're improving our competitiveness at the same time.

And those are all the internal input metrics that we talk about, whether that's units per transaction or online visitors or even DIY market share that we look at.

So I think there are some things that would say that our execution is driving disproportionate improvement.

And our next question comes from Bret Jordan from Jefferies.

A question on the leverage ratio.

I guess at 2.9x, it's still -- but implementing a share repurchase program, it sounds like you've talked to the ratings agencies and they will let you spend a couple hundred million without getting down to 2.5x first?

Yes, we do talk frequently with the ratings agencies.

I'm sure they'll be publishing something.

I'm not going to speak for them.

But we feel really comfortable with where we're at in terms of our cash balance and our ability to continue to generate cash on a sustained basis, Bret.

So we kind of factored all that in, in line with our cash priorities, which, as we've said before, maintaining that investment-grade rating is very important to us.

We want to continue to invest and reinvest in the business.

You can see we've got some back-half CapEx investments that are going to be taking place.

And having said all that, we feel like we've got the right level of cash, we've got the right discipline in place to generate cash sufficient that we feel like we can start returning cash to shareholders.

So we feel very comfortable with the positions that we're taking.

Yes.

And I think you commented that you expected your accounts payable ratio to go up in the balance of the year.

So I guess to some extent, is there a target AP-to-inventory maybe by the end of the year?

We expect it to continue to go up.

It went up a couple of points, I think, from Q1 to Q2.

And I would expect a similar trajectory.

But to be clear, Bret, it's going to take some time -- the initiatives that we have put in place.

Mike and his team, as they go through the negotiations with our vendors and getting the new terms, we have to lap those old terms, and those are going to take time.

And as we continue to improve on the top line execution, that, of course, will help move the needle as well.

But we want to do this in a very disciplined manner, so I would expect the trajectory to be very similar with first half.

Okay.

And then the question I always have to ask: Any update as where we are on IT and catalog consolidation?

Sure.

We're pretty excited about the work that Sri Donthi, who's our Chief Technology Officer, he's been here for about 3 or 4 months, Bret, is doing to really accelerate the work that needs to be done there.

He obviously was a part of the 5-year plan.

The -- that one-page cliff notes version of what he's talking about starts with the integration of the technology across all of our banners.

We know we have to simplify our systems and data architecture across all of our banners.

He's got significant experience with that.

He is working closely with Bob Cushing, with Mike Broderick, all of the key constituents, to construct a road map to get that done faster than it had been moving previously, and we feel very, very comfortable that we're going to get that work done.

So all of that is road-mapped, and the timing of it is coming.

Obviously, many of these things have to be tested, but Sri is going to make a big difference there for us.

Okay.

Any targets for when?

We absolute have targets against that.

We're not communicating that broadly, but we're going to continue to work it.

Our next question comes from Simeon Gutman from Morgan Stanley.

Tom, I wanted to ask you somewhat of a follow-up.

You were talking about the 3 year -- 3- to 5-year plan.

So does the margin performance this quarter inform you any differently about the potential for the future margin?

You mentioned you understand your issues better, and I think this quarter was probably the ultimate test given the strain on the supply chain.

But is the amount that you can get bigger than what you initially thought?

Does it take longer because you've identified other issues that came to bear this quarter?

We believe we can get to that mid-teen margins, Simeon, over time.

So, I mean, there's nothing that has changed our perspective there.

I think we understand it better, and we understand the sequencing of it, how quickly we can get there.

All of those things are clearer to us now as the management team has got deeper into it.

And again, I think it's important to note that the construction of this 5-year plan that we're in the middle of right now, everybody here was intimately involved in it.

I think the first time around, I've been here very briefly, we constructed it with a team that -- many of whom are not here anymore.

So I think everybody's got their fingerprints on this one.

We know the key levers and the timing of it.

We're not completed with it.

We had a draft we shared with our board last -- over the last couple of weeks, and we'll finalize that this fall.

But absolutely believe we can get to that mid-teens margin over time.

And will the sequencing -- the timing of it be shared with The Street?

And where I'm going, it sounds like in the back half, you're making some investment, which sound like they're prudent marketing around Worldpac, et cetera.

So I guess the timing of the sequencing versus how The Street is expecting it probably matters.

Curious if we'll learn about that over time.

Yes, we expect to finalize the plan by the end of the year, and we'll provide an update on the timing and the key initiatives once we've got everything done.

Okay.

And then my follow-up just on product margin.

You talked about inefficiencies in the supply chain and then mix shift just from some of the seasonal products.

I forget if you mentioned anything about promotion discounts or the override is still declining year-over-year.

Yes, no, we're -- we feel good about the override situation.

I mean, I think that we've had a lot of learnings there and now we're managing that much differently than we had managed it.

We look at it every week, both on the DIY side and the Pro side.

It's pretty small on the DIY side, as you know, but there's no major changes there year-on-year.

Our next question comes from Matt McClintock from Barclays.

Tom, I was wondering if I could take a different approach in terms of thinking about timing and sequencing, et cetera, and just say it wasn't that long ago you used to tell us and you used to caution us to remember that it's still very early stages in the broader restructuring of the company.

It seems now today, with a new share repurchase put in place, you're starting to get efficiencies out of the sales team, and you actually have cross-banner visibility, that we might actually be out of the early stages or the early inning of a broader restructuring of the company, clearly not within a 5-year plan but in the broader restructuring.

Could you maybe update us on your thoughts of where the company is today in terms of a stable platform for executing a -- maybe a more traditional 5-year plan?

Or more importantly, I'm just trying to get a sense of are we now in the more -- it could be the fourth inning or the fifth inning of what you thought this company could be when you joined?

Yes, a great question, Matt.

I think what I -- how I would react to that, first of all I would say that I've learned in my time here that there's nothing more important to a successful turnaround than the people and the culture.

And we've spent a great deal of time in the past 2 years how do we strengthen the talent in the organization.

We've got a lot of great people who have worked here for a long time that need to be developed.

We had to go outside and find people that brought new capabilities to Advance, whether that be in technology, in supply chain, in digital marketing, in many areas, and we've got -- we had to build the bench that we had because we didn't really have much in the way of bench.

So I think the answer I'd give is I feel dramatically better than I did 2 years ago in terms of the people and the culture.

Now it's early in that respect.

I mean, you're still -- we're still making a lot of changes, to be clear.

Our -- I'll use the field organization as an example.

We restructured the field about a year ago.

We've put 2 field leaders in place.

We've put 12 regional vice presidents in place.

I think they are now starting to get their stride.

It was a pretty dramatic change for that part of the organization.

We've subsequently paired up the supply chain field organization with that store operations organization.

So now those -- think of those as division business teams are starting to perform as much more of a cohesive unit.

I still believe there's an opportunity to tear down the silos that have -- that existed here for a long time.

I still believe there's a way for us to move faster and more efficiently.

I would say we're certainly out of the very, very early innings.

I feel much more confident in our ability to do something when we say we're going to do it now.

So I wouldn't say that everything is perfect by any stretch of the imagination.

We've still got a lot to do.

But we're in a much better position than we were 2 years ago.

So hard to put a number on it, but I think we're in a bit of a different phase than we were.

And then if I could have one follow-up.

Just with Reuben coming down from the board and given that he has maybe a little bit of a different background from a more traditional retailer, are there any changes in prioritization of your longer-term supply chain initiatives?

Or should -- or is the message here that it's just more of the same in executing what's already in place?

Yes, the great thing there, Matt, is that Reuben has been intimately involved with Leslie in the construction of that supply chain agenda, so he knows exactly what we're doing.

He's been very supportive.

He's actually been a very active board member.

He was a very active board member and very helpful for me over the last couple of years.

So he has been deeply involved.

He knows the leadership team well.

Leslie has built a very strong leadership team in the last few years.

That was one thing that we really had as a deliverable for her, to really strengthen that supply chain leadership team.

Reuben's been involved with that.

So the key initiatives that are within the supply chain are going to continue.

I think what Reuben brings is real strong background in the whole omnichannel world.

In fact, he was very involved in the construction of that omnichannel strategy with Walgreens.

So we're excited about him coming in.

He also brings what I would describe as a general management mindset to the role.

So I don't see any major shifts in direction on supply chain.

I just think we'll be moving faster than we have as he comes in here and starts to work closely with the rest of the leadership team.

Our next question comes from Greg Melich from MoffettNathanson.

I have a couple of questions.

One, if you look at the comp, Tom, and a nice improvement, was traffic actually positive?

Or it sounds like a lot of it was sort of ticket and mix may have been helping and units in the basket.

I'll split it up again, Greg.

On the Pro side, both were positive, transactions and average ticket.

On DIY, we saw a significant improvement in our store traffic.

It was not positive, but it was a significant improvement in our store traffic.

And average ticket was up, and then -- partly helped by UPT, as I mentioned earlier, of course.

And then, of course, our online traffic, I mentioned earlier, was through the roof.

Okay.

So for overall traffic, was positive with DIY a lot of the improvement, it sounds, that'd be fair?

Yes, if you put them together, yes.

Okay, great.

And was inflation significant or positive in the quarter?

Not a huge factor, Greg, under 1%.

Got it.

And then I was surprised we haven't had the China imports question with tariffs all floating around.

What percentage of your COGS are either directly imported from China or indirectly?

Yes, I'll let -- I'll kick this one over to Mike Broderick, Greg.

So Mike?

Thanks.

So Greg, this is Mike Broderick.

So from a COGS perspective, we don't really give out that number.

But at this point in time, everything that we're seeing from tariffs, it's very manageable.

We're working with our suppliers to find best country to provide from.

But at this point then, we've been able to pass it along into the marketplace.

So it's really been not much of an issue at this point in time.

All right.

So lots of space.

And just one last one.

Thanks for the 5-year plan, the talk about working on that.

If you think about getting to that mid-teens margin, Tom, is more of it supply chain?

It sounds like from everything you're describing, that the bulk of it would be supply chain.

Or am I missing something?

There's a couple of components.

Supply chain is probably -- is the biggest number on the page, but there are other -- there are 3 other variables in there that are opportunities for us that we can go after, and we're going after all of them.

It's just a question of sequencing and timing at this point and balancing that with the share growth opportunity that we have.

That's how we're thinking about it.

And our next question comes from Seth Sigman from Crédit Suisse.

So can you update us on store consolidations, how many you closed in the quarter?

Performance maybe your -- as you've started to close stores, just in general if you're learning anything new about the opportunity.

Yes, absolutely.

Really excited about what's happening there.

I mean, we -- I think we're at 35 on a year-to-date basis.

These guys will get me the number on the quarter.

20.

20?

It was 20 in the quarter.

Overall, the discipline that we're seeing in closing these stores is just -- it's hard to express how much different it is than it was.

In fact, we just went through some materials yesterday on some historical stuff that we had done and the assumptions that we had in there, which were, quite honestly, very optimistic in terms of what we could retain and we didn't actually retain.

This was literally a 2014 document.

Now we've got very clear deliverables surrounding how much Professional business can we retain, how much DIY business can we retain.

And then there's the team member piece, which is so important.

We measure, for every one of those 35 store closures, what percent of each one of those dimensions are being retained.

And there's accountability on the surrounding stores, on the district managers, on the region vice president.

There's discipline around capturing that -- those sales.

So it's not just to close the store and hope for the best, there's quite a bit of tracking and follow-up on it.

And we're exceeding our numbers there consistently in terms of what we believe we can retain.

We're actually retaining more than we thought we could retain.

In terms of retaining team members, we're retaining the key team members we need to retain.

And then, obviously, there's the outstanding lease obligation, which I think we're much tougher in the discussions surrounding that with our landlord.

So all of those variables going into a store closure, we make the decision based on a 5-year cash flow model, and we're exceeding all of those metrics.

So yes, we still have opportunities there.

I think all of you guys in the call know that.

We've got a lot of stores that are less than 1 mile apart, but we don't blindly close every store that's a mile apart.

We have a comprehensive multivariate model that we use to make those decisions, and we're going to continue to drive hard at optimizing our footprint.

And a minute ago, Greg asked about the variables that can help us improve margin.

Obviously, one of them is average sales per store.

So as we optimize the footprint, we can drive our average sales per store up, and that can also help us with that margin gap we have with our competitors.

Okay, great.

And just my follow-up question was around the gross margin and the outlook for the second half of the year.

You obviously highlighted a couple of incremental headwinds.

You did have some headwinds a year ago, including supply chain and also trade income, I believe.

So can you just remind us on what you're lapping from last year, some of those buckets I mentioned?

And then also, where are you guys in terms of the material cost reductions as you start to lap those gains from a year ago as well?

Yes, we did have some headwinds on supply chain a year ago.

I think what we're looking at this year is really related to fuel and transportation.

I mean, I think as we mentioned in our prepared remarks, I think everybody's talked about this.

We planned around 4%.

We're seeing diesel is upwards of 20% right now.

Our gasoline is about mid-teens.

So those are pretty big numbers for us.

We also talked about mix, Seth, that that's a factor for us because as we have this great warm summer, we really like it, some of the categories that surged just carry an absolute lower margin rate.

So that's also a factor that we're talking about.

So when we put it all together, you've got where we think this thing is going to come in, and we're going to continue to do our best to improve on everything that we're driving at.

The material cost piece, we continue to drive hard at that.

I think we're up to about 80% of the way through the categories now.

As I think we said previously, some of the benefits there don't come right away.

They come down the road because you have to obviously acquire the inventory, you have to put it in your system, then you have to sell the inventory just to get the full benefit of the material cost optimization, but Mike Broderick and his team are doing a really good job working with our suppliers on that journey.

And then as we move into the next round of it, we're thinking about it more as an enterprise approach because we haven't been doing that in that regard to date.

It's been primarily an Advance Carquest initiative, and we're broadening that across the enterprise going forward.

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

I know it's after 9, so 2 quickies.

First, can you specifically quantify what the gross margin headwind was from the cross-banner efforts?

And then similarly, can you tell us specifically what you experienced on the merchandise margin front?

Yes.

I mean, we're not breaking out cross banner, Scot.

It's not an insignificant number, though, so that's why we did call it out, and we do believe we can get those costs out of our system.

It's -- we just have to optimize those costs, and we got to get all of our supply chain teams together to make sure that we're delivering cross-banner product as efficiently as possible.

What's your other questions?

Sorry.

On the merchandise margin front.

You broke that out for us last quarter, The -- I think it was 82 or 86 basis points.

Yes.

Overall, we actually did see improvement in the quarter on the merchandise cost.

A couple of dynamics there.

Generally, what we would see in the past and what you saw last quarter was the MCO savings that we just talked to you about.

We continued to see that in the second quarter.

Largely, we were able to offset a lot of the supply chain headwinds that we've experienced in previous quarters, and we were largely able to do that.

Unfortunately, it was more than offset by the product mix.

So the combination of the headwind of product mix and supply chain more than offset the savings that we normally see in MCO.

And that's sort of the dynamic that you see this quarter, which is why we're calling out mix and supply chain on a go-forward basis.

So what would that improvement have been if you were just to isolate it?

Yes, we're not breaking that out.

But like I said, if you were to just take mix and MCO, it would have been a tailwind for us.

Our next question comes from Dan Wewer from Raymond James.

I'll ask something besides gross margin.

I wanted to ask about the ongoing transformation expenses.

Tom, I think we're what, in the fifth year now the GPC acquisition, and, what did we rank up almost another $30 million of transformation expenses, including $5 million actually in cost of goods sold.

I don't think you're running that a year ago.

I guess, first of all, why the cost of goods sold item for transformation expenses?

And then second, how many more quarters or years of these type of charges should we expect?

Yes, this is Jeff.

If you sort step back and look at what we're calling transformation, we've had the GPI consolidation costs going up for some time, those are significantly ramping down.

I think we were under $1 million for the second quarter.

And what we're doing now is we're really shifting towards the -- a more of a transformational enterprise look, so making sure that we're optimizing all of the assets and some of the more bigger-ticket focuses, such as infrastructure, IT, supply chain, those bigger investments to really make sure we can optimize the assets that we have in place.

Specific to your question on cost of sales, it's really a dynamic of the accounting.

We had some impairments associated with the 2 distribution centers that we are closing here in the second through the fourth quarter.

And those costs, for accounting purposes, have to be recognized in cost of sales rather than SG&A, which is normally where you see those costs.

So it was just a function of the accounting.

We want to highlight that as one of the impairments that we normally wouldn't have if we weren't closing distribution centers and closing stores.

So that's why you see the $5 million up there.

In terms of your question of timing, the transformation is going to take some time.

And as Tom said, we're going through the 5-year strategic business plan refresh.

This is all part of that, and it's going to continue to inform us in terms of what are the investments that we're going to have to make.

Clearly, it's going to go through the balance of the year.

We've given a range of $140 million to $180 million.

We're comfortable with that range for this year, and we're assessing it as part of our strategic business plan for the future.

And then just real quick question on the San Antonio distribution center.

Is this facility closing because it became redundant after you opened the Houston distribution center?

Or are we in the early process of unwinding from 50 distribution centers to maybe 20 someday?

It's really a function, Dan, of the intense supply chain work that was done that looked across our entire network of 54 DCs, and the decision to open Houston had already been made when we did that.

So it was really looking across the 54, and it is really the latter in terms of how you asked the question.

It's -- we're looking across our whole system.

We do not need 54 distribution centers, so we are gradually working through those changes, and we're doing it in a way that's not disruptive.

And I will say that both Gallman, Mississippi and San Antonio haven't been executed flawlessly by our supply chain team.

We've been moving the stores from those facilities to other distribution centers, and we really like the outcome that we're seeing so far.

So it really is part of the broader intense supply chain strategy.

Our next question comes from Seth Basham from Wedbush Securities.

My question is around integrator replenishment and the last mile delivery test in Raleigh.

Can you give us an update on how those are progressing and when you might be able to expand those to additional markets?

That would be helpful.

Sure, yes.

We're excited about we've started up.

And we're obviously trying to look for ways to really strengthen availability across the enterprise.

And you think about availability broadly in terms of assortment, in-market conductivity and execution.

So there's a lot of work going on with assortment.

I'll highlight a couple of things.

First of all, we talked about cross-banner visibility, but we're -- Mike and his team are also working through a transition to a dynamic assortment, which enables us to use artificial intelligence and machine learning tools to really assort differently.

And we -- we're in the early stages of that, Seth, in terms of how we're using that with a couple of categories.

I think by the time we get to the first quarter of 2019, we'll be in a real strong position to strengthen both the quality and breadth of our assortment across the system.

So that's part of the solution.

In terms of in-market connectivity, that's one of the things we are testing inside the pilot.

We're making sure that we're using all of the assets that Advance has inside of a market so that we can get the inventory we need to our customers faster than we had in the past.

And then execution is really about the measurements of the key factors.

How often are we able to say yes to the customer?

What's our order-to-delivery time?

Using our technology platforms to connect all of those things it is enabling us to really look at the different variables and how they can be improved.

So excited about the pilot, and we're going to continue to learn from it, but we're not -- where we see things that work, such as cross-banner visibility, we're rolling them out right away to make sure that we're driving progress.

And most of the key metrics that we measure on availability, close rate or delivery time, we're making progress on -- just through better execution.

So you're going to continue to see us focus on that.

Got it.

So as far as a broader rollout goes, with some of those initiatives beyond cross-banner visibility, would first half 2019 be the target?

Yes.

I mean, we're -- a lot of the things that we're doing, we're already doing, right?

Again, we -- for cross-banner visibility, we had success with, we rolled it out, the new Advance Professional catalog, we've rolled out.

We sunset a system.

So where we see something that works, that's low risk, high reward, we just go with it.

Where you're touching things that need to be validated, that may have customer impact, we're being more thoughtful about it.

So it really depends on what specific initiative we have.

Dynamic assortment is a good example.

We want to make sure that when we roll this and implement it in the stores and transition from the current methodology we use, that we're getting a lift from it.

And the early returns are good, but we want to continue to make sure that the data is clean.

We've got enough data behind it.

Any kind of AI tools require 6 to 9 months of that kind of validation, so we're making sure that we're doing it thoughtfully.

Fair enough.

And my follow-up question is around the online performance.

Where are we in terms of DIY sales online as a percent of the total DIY sales in terms of mix?

And the key drivers of the improvement there in traffic and maintaining conversion, can you pinpoint them?

Is it primarily related to assortment, promotion, transportation, I mean, delivery times or anything else?

Sure.

I mean, we don't break out the online component of our DIY sales.

I will say that the opportunity there for us is extraordinary, both on the ship-to-home and buy online, pick up in store.

We see a lot of wide-open turf there.

I think the work that's been done by Yogi Jashnani and his team has really centered on broadening the assortment, so offering more SKUs to our customers, increasing the delivery capability.

I think we're up to about 12 distribution centers now that are able to ship to home, which is a significant increase from where we were, and that's going to go -- continue to go up.

So obviously, as we get closer to our customers with our distribution centers, we're able to get the part there more quickly.

So you're reducing the amount of time it takes to get to the customer.

I think our engagement platforms have been very, very successful in terms of how we've cleaned up our website.

It's a much more -- the user experience is much better.

I think Yogi would say there's still a lot of work to do, there's still a lot of room for improvement.

But based on where we were, I think the user experience online is significantly better.

And we can see that in the things that we measure there.

We obviously measure visitors, but we also measure social media sentiment and like-to-dislike ratios, things like that associated with our website, and all of those are going into -- in a positive direction.

And our next question comes from Chris Bottiglieri from Wolfe Research.

First question is on private label mix.

I think, Tom, I think before you arrived, the previous team disclosed that at about 47% of COGS.

Can you give us a sense where that is today and where we'd like to take that mix over time?

And then is there a reason to think that this mix will be different than your international mix?

Sure.

First of all, when we look at private label mix or any mix now, we look across the enterprise.

So I think what you may have heard was a narrower view of that number.

We're in the mid-30s in terms of our private label mix, so it's -- I guess it's a little bit lower than maybe we had previously communicated.

And Mike and his team are doing a lot of work on the category management side, Mike Broderick.

And maybe I'll have Mike talk a little bit about how we're thinking about each category.

But that in and of itself is a big opportunity.

What we're doing is really combining that MCO work with market share aspirations, with our pricing, with our assortment within it.

So Mike, do you want to talk to -- a little bit of the category management work you're leading?

Of course.

It's Mike Broderick.

So you're right that we've disclosed in the past, I would say, that from an AAP/CQ view, we're still at that same number a high 40s, close to 50%.

It's about $3.6 billion of our business.

But when you look at the true opportunity from a private label, just to give an illustration, right now what we're in the path of actually rationalizing with Bob, and Bob's team from Worldpac is -- we actually have right now 3 different private labels which we're very much in the midst of really trying to rationalize so that we get the best use of our inventory dollars.

So that's just a good example of what we're going to do in the future.

Obviously, yes, we're still a big brand house.

We believe in our brands, we believe in our partners who have relevant brands for our Professional customers as well as our DIY customers.

But of course, we actually have to have a private label that's recognized in the marketplace, too, which is a big opportunity that we're going to be driving for the next couple of years.

As most of you know, it does take a little bit of time.

Got you, okay.

And then just as a follow-up on the supply chain.

Two DCs are consolidating now.

Can you maybe just give us some element of understanding of the operational and technical process you have to undergo to close the DCs?

And then as you kind of think of this bigger opportunity, is there a kind of limitation into the cadence of how many DCs you can close?

Or maybe just more broadly, if you can give us some overlap numbers or how you're thinking about the supply chain holistically, that'd be helpful.

Sure.

I mean, it's obviously a big undertaking, Chris.

You have to do it in a way that is not disruptive.

And in the case of Gallman, I'll use Gallman as an example, we had a couple hundred stores, and you're gradually moving them from that facility to Nashville and Houston, respectively.

So you're doing that -- you don't just kind of flip a switch.

It's over several weeks.

So we have a -- basically a close -- DC closure team that does that, that leads the work itself and makes sure that they work closely with the merchandising team, the replenishment team, the store operations team to seamlessly move stores from Gallman in that case to Nashville or Houston and do it in a way that's invisible to the customer.

And I can tell you that to date, that has been the way it's worked.

We've been very thoughtful about how we do it.

In the case of Gallman, we ran into a situation where we saw some -- our fill rates were getting below the prior year, so we immediately slowed down the stores that were being moved.

So you're going to do it in a way that is invisible to the customers as possible and visible to the stores.

So it's a very thoughtful process.

In terms of the overall cadence, you're right, and there's only so many you can take on in a year.

We're not going to flip a switch on this.

It's a gradual migration.

I've done it in a previous life where you've got a certain segment of the organization that's very focused on that change at one time and change management becomes the bottleneck.

You can't do it all at once sort of thing.

So there is a limit on how many you can do.

Obviously, we're doing a couple in the front half of this year, and I think that's probably -- that's how you should probably think about the long term.

And our next question comes from Ben Bienvenu from Stephens.

I wanted to ask about the labor side of your business.

You talked about your ability to retain talent as it relates to store consolidations.

I'm curious to hear about your ability to retain talent more broadly.

And then as it relates to your ability to attract talent, maybe how you're going about doing that.

Is it communicating the narrative of the turnaround and excitement at the organization?

Is it higher pay to attract talent?

Maybe just give us a sense of where you stand on that front.

Sure.

In terms of retention, we've talked, Ben, in the past about our frontline organization, which is so important to our success.

We're only as good as our interaction with a customer in a store right now.

So those big 4 jobs that we have out there in the field: the general managers of our stores; the commercial parts pros, who are so important to us on the counter; our district managers; and our customer account managers that call on professional garages.

Those 4 jobs, our turnover has dropped significantly versus where it was 2 years ago, and we're kind of holding at the current -- at the prior year rates.

We'd like it to be lower, but we're -- basically, our turnover is kind of flat this year year-on-year.

It had been going down, down, down, and now it's flat.

So we feel pretty good about that, and we're going to continue to focus on it.

We do have a significant stock ownership program that we have for our frontline associates where we've had literally thousands of our frontline leaders in those groups that have earned stock awards at Advance, and that certainly helps us retain that talent.

In terms of attracting, I got to tell you we spend a lot of time interviewing here.

I mean, I don't care what function it is.

People are accountable to build bench inside their organizations and strengthen the leadership team that they have and develop the people who've worked here for a long time.

Both of those are very important to me.

We spend a significant amount of time as the leadership team every quarter going through the leadership team and the big roles that drive value in our company.

And where we have gaps, we fill those gaps.

So we've actually been -- this is a great place to attract talent.

Raleigh, North Carolina has a terrific talent base.

We're in the research triangle.

I mean, depending on what you're talking about, I think Sri and Yogi would say the technology talent is robust here at the same time that the unemployment rates for technology talent are extremely low across the country.

So you have to be very competitive there.

But I wouldn't say that we're -- our overall approach is focused on compensation.

It's a very holistic brand proposition that you have when you come here, and there is tremendous upside.

I think, to your point, people can understand that the transformation opportunity here is substantially larger.

The growth opportunity is substantially larger here than it is in many companies, and that's really what we anchor in on.

We spend a lot of time on our brand proposition, if you will, to employees, and we'll continue to do that.

And I am showing no further questions in the queue.

I'd now like to turn the conference back over to Tom Greco for any closing remarks.

Well, once again, I'd like to thank all of our team members and independent partners for their dedication each and every day to drive improvement across AAP.

And thanks, everybody, on the call this morning.

We appreciate your support.

You can count on us to be absolutely relentless in moving the successful transformation of Advance forward and delivering value to our shareholders.

I'm very confident in the talented team we have in place.

We will fully capitalize on the robust opportunities ahead, and we look forward to discussing our continued progress with you on our third quarter call in November.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone have a wonderful day.