領先汽車配件 (AAP) 2018 Q3 法說會逐字稿

Welcome to the Advance Auto Parts Third 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 discussed on this call.

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

I'm joined by Tom Greco, our President and Chief Executive Officer; Jeff Shepherd, our Executive Vice President, Chief Financial Officer, Controller and Chief Accounting Officer; Bob Cushing, our Executive Vice President, 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, please be advised that our comments today may include forward-looking statements as defined by 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 risk factors section in the company's filings with the Securities and Exchange Commission, we maintain no duty to update forward-looking statements made.

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

We believe providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results.

Please refer to our quarterly press release and accompanying financial statements issued today for additional detail regarding the forward-looking statement and reconciliations of these non-GAAP financial measures to the most comparable GAAP measures referenced in today's call.

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

Now let me turn the call over to Tom Greco.

Thanks, Elisabeth, and good morning.

First, I'd like to thank the entire Advance team and our network of Carquest independents for a strong quarter, characterized by progress on virtually every financial and marketplace metric.

It's because of their dedication and unrelenting focus on the customer that we were able to deliver our strongest comparable sales growth in nearly 8 years, which, in turn, led to improved market share performance.

It's clear that our transformation actions are beginning to take hold, driving meaningful improvements in execution, enabling us to earn more business with our valued customers.

In the third quarter, net sales increased by 4.3% to $2.3 billion and comp sales were up 4.6%.

Our adjusted operating income margin of 8.5% increased 62 basis points compared to the prior year quarter, and our adjusted earnings per share increased 32.2% to $1.89.

Year-to-date, our free cash flow was $576 million, an increase of $336 million year-over-year as we continue to drive disciplined cash management practices throughout the organization.

Our sales performance in the quarter is a testament to the hard work of our entire team, truly living our cultural beliefs and executing on our mission: Passion for customers, passion for yes.

Not only did we deliver the strongest comparable sales growth since 2010.

Our absolute growth in the quarter was above the industry average, driven by increased units per transaction and average ticket value.

Importantly, we strengthened our Customer Value Proposition and delivered balanced, consistent growth throughout Q3 in both our DIY omnichannel and Professional businesses.

From a geographic perspective, we saw improvement across all 12 regions.

Our Southeast, Midwest, Appalachia, Northeast and Mid-Atlantic regions led the way.

From a category perspective, we saw increased sales across nearly every category, with the strongest growth in brakes, batteries and optics, where we delivered high single-digit growth.

Without a doubt, we're seeing better coordination and planning across our merchandising, marketing and field operations teams, which is also contributing to our momentum.

Finally, we're leveraging supplier partnerships and improved analytical capabilities to ensure we have the right inventory in the right locations at the right time.

This is a work in progress and we still have significant opportunity, but we believe that the improvements made so far are helping our improved execution.

Going a little deeper in Professional, we saw improved performance across every AAP banner in the U.S., including Advance, Worldpac, Autopart International and importantly, both Carquest corporate and independent stores.

Our customers want choices.

And thanks to cross-banner visibility, we're doing a much better job of leveraging AAP's industry-leading assortment of brands to ensure our Pro customers have the option if they desire to meet the needs of their customers.

Through continued focus on our customer value proposition and direct feedback from our Professional customers, we recently launched myadvance.com.

This is an interactive, easy-to-use, mobile-friendly platform, where we've combined multiple online tools and capabilities into one place, including our Advance Pro online ordering platform.

On myadvance.com, Professional customers can access industry-leading cross-banner assortment as well as best-in-class shop services and solutions, such as an Expert Corner, featuring content-rich training and shop business solution advice from automotive aftermarket industry leaders.

These initiatives are driving incremental growth for our Professional business.

We're equally excited about the growth within our DIY omnichannel business.

In Q3, we saw increases in both DIY retail and DIY online, marking the second consecutive quarter with sales growth in both.

We launched our new advertising campaign, Think Ahead, Think Advance, and it's off to a great start.

We continued to invest in e-commerce, where enhancements we made to our website improved the customer experience, including reduced page load time and additional personalization modules.

In addition, while today the majority of our online orders are buy online, pick up in store, we've made progress on our ship to home capability.

Overall, our investments drove strong double-digit revenue growth in Q3.

While we're pleased that our improving execution is driving top line strength, we remain focused on controlling expenses across the organization.

I was delighted with our store team's ability to once again leverage additional customer service hours through increased sales in the third quarter.

In addition, we're seeing a noticeable shift in culture as safety has become a critical focus throughout Advance.

Importantly, our progress on safety initiatives enabled a reduction in liability and vehicle claims in the quarter, and we expect to see further benefits as a result of our safety initiatives.

Our investment in this critical area has paid off quickly, and I'm confident we're developing a true safety culture with heightened attention on team member safety throughout Advance.

Unfortunately, we did have team members and customers affected by the recent hurricane.

Our thoughts are with them as they work towards cleaning up after the damage.

I'm personally thankful for our entire organization and their willingness to step up financially while giving their time to help their fellow team members and community.

We remain committed to standing ready and working together as one team, leading by example and showing the true spirit of Advance.

As you'll hear from Jeff on our financial performance and updated expectations for the balance of the year, we're confident in our ability to maintain momentum into Q4.

We remain laser-focused on cost controls to offset expense headwinds.

As discussed last quarter, higher bonus for our team will impact our Q4 SG&A versus prior year.

And obviously, we're performing much better than last year.

In line with our long-term strategic objectives and building a best-in-class omnichannel experience for our customers, last month, we announced an exciting partnership with Wal-Mart.

With up to 100 million unique visitors to walmart.com every month, this partnership will enable us to reach a much broader group of DIY customers and help drive market share growth.

We're thrilled to begin the rollout of this partnership in the first half of 2019 when we'll be able to offer our extensive product offering and trusted advice with an increased number of DIY customers.

We also made progress on our end-to-end supply chain efforts in Q3.

I'm pleased with our team's execution throughout the year, and we're on track for closing our Gallman and San Antonio distribution centers by year-end.

In addition, we announced the closure of a third DC in Columbia, South Carolina, which we expect to close in the first half of 2019.

Consistent with our supply chain efforts, we remain focused on our store footprint optimizations.

And year-to-date, we closed and consolidated 81 stores.

We're approaching store closings very differently this year.

And as a result, we're seeing significant improvements in key employee and business retention.

In addition to the notable improvements I discussed earlier related to safety within Advance, I'm also pleased with the positive improvements we're seeing in our focused HR initiatives.

We've meaningfully reduced turnover in the past 2 years, and a recent review of our 2018 board health result continued to highlight positive trends versus prior years.

We remain committed to the growth and development of our team while providing competitive compensation packages and best-in-class training to ensure we're able to recruit and retain the best talent at Advance.

Finally, while we'll provide 2019 guidance when we report Q4 results, we're nearing the completion of our annual operating plan and longer-term strategic business plan update and remain encouraged by the macro indicators we see for 2019.

Notably, after 3 consecutive years of declines, the number of vehicles greater than 7 years old is expected to grow in 2019 for the first time since 2015.

This group of vehicles is one of the largest demand drivers in our industry, and we're confident this will enable continued industry momentum.

In fact, forecasts for the next 5 years show growth in the number of vehicles 7 years and older, and we expect that vehicle population will be roughly 10% higher in 2023 than it is today.

Back to 2019.

With GDP growth forecasted to be up 2.8% and total miles driven expected to be up 1.8% based on the Federal Highway Administration's 2019 outlook, we're excited about continued growth potential in the automotive aftermarket in 2019.

Importantly, we're also confident in our ability to improve market share performance.

We look forward to sharing our 2019 performance expectations with you in February.

With that, I'll turn it over to Jeff for details on our financial performance and outlook for the remainder of the year.

Thanks, Tom, and good morning, everyone.

I'm pleased to report further improvement and execution across Advance, which enabled our success in the third quarter while building on our capabilities to ensure future success.

In the third quarter, our adjusted gross profit was $1 billion, an increase of 6.3% from the prior year quarter.

On a rate basis, our adjusted gross profit margin of 44.3% improved by 86 basis points from the prior year quarter.

Drivers of this improvement include product mix in addition to benefits from our inventory efforts over the past several quarters.

Historically, we looked at inventory at a localized level, which led to purchasing inventory in certain parts of our network despite having that inventory elsewhere in the network.

This year, we've been far more disciplined in our approach to sourcing and utilizing on-hand inventory.

In addition, we saw margin benefits from continued material cost optimization efforts, which positively impacted gross margin in Q3.

Consistent with prior quarters, these cost benefits were partially offset by both planned and unplanned supply chain expenses, which reduced our gross margin by 39 basis points.

As expected, the 2 new distribution centers that opened last year raised our cost base in the quarter versus prior year and negatively impacted our margin.

Additionally, we continued to see transportation and fuel cost inflation higher than the third quarter of 2017 and what was originally forecasted.

In terms of tariffs, we see minimal impact related to the first 2 rounds that have gone into effect.

Importantly, through successful actions, we've been able to pass cost increases through price.

We remain diligent in our effort working with our supplier partners to mitigate cost increases where possible.

We're confident that in line with historical pricing trend, our industry will continue to pass along future tariff or other inflationary cost increases through pricing actions.

Moving to SG&A.

Our adjusted SG&A was $814 million in the third quarter, an increase of $38 million year-over-year.

As a percentage of net sales, our adjusted SG&A increased by 23 basis points to 35.8%.

This was primarily due to higher bonus, as we discussed last quarter, and increased medical expenses as a result of higher average dollars per claim, which negatively impacted our margin in the third quarter.

As Tom mentioned, we leveraged customer service hours in the store, offsetting some labor-related headwinds.

Overall labor-related expenses negatively impacted our adjusted SG&A as a percentage of net sales by 41 basis points.

We expect the bonus headwind will continue through the fourth quarter as our incentive compensation for both corporate and field teams was much lower last year.

Separately, while we're pleased with the top line results from cross-banner visibility, we have significant opportunities to reduce our in-market and last mile delivery costs for these additional sales.

It's far more important in the short term to ensure we are utilizing this capability to satisfy the customer and get the right part to the right place at the right time.

As we move forward, we have plans to streamline these initiatives to remove excess costs.

However, this negatively impacted our SG&A as a percentage of sales in Q3.

We remain focused on ensuring that parts are delivered in a timely manner while we work to optimize our last mile delivery costs over time.

SG&A headwinds were partially offset by lower insurance expenses, which improved by 37 basis points as we continue to focus on safety throughout Advance.

Regarding adjusted operating income, we delivered adjusted operating income of $194 million in the quarter, a 12.5% improvement versus the prior year.

Our adjusted operating margin increased 62 basis points to 8.5% in the quarter.

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

Through the first 3 quarters of 2018, our operating cash flow increased $280 million to $682 million, and free cash flow more than doubled to $576 million compared to the same period of 2017.

Through our focus on cash flow and payment terms, our AP ratio increased over 72% in the third quarter.

I'm pleased with our progress to date and confident we will deliver continued growth in these areas.

As I discussed earlier, we have made significant progress in our inventory efforts and our ability to reposition inventory throughout our network, and that is helping us say yes to the customer more often and increase inventory turns.

With that said, we continue to focus on optimizing our inventory over the next several years while improving the assortment across the enterprise.

As discussed last quarter, given the higher demand environment and working to optimize existing inventory without disrupting the customer, we expect we will end the year with slightly increased inventory on a year-over-year basis.

Moving to capital investments.

Our CapEx spend in the quarter increased $4 million to $43 million compared to the prior year.

In the quarter, our largest projects were related to IT, supply chain and new Worldpac branches.

In line with our financial priorities to invest in the business, maintain an investment-grade rating and returning capital to shareholders, we've previously announced our expectation to return $100 million to $200 million to our shareholders through share repurchases in the second half of 2018.

During the third quarter, we were able to repurchase $120 million worth of Advance stock.

As Tom said earlier, we're pleased with the continued improvements in industry demand and operational improvement throughout the enterprise.

We're confident we're taking the necessary actions to improve market share and deliver meaningful progress through closing the competitive performance gap.

Based on our results in the first 3 quarters of 2018 and our expectation that current trends continue through the balance of the year, we're pleased to update our full year guidance expectations.

We're increasing our net sales outlook from a range of $9.3 billion to $9.5 billion to a new range of $9.55 billion to $9.6 billion.

Our comparable store sales guidance is also increasing from a range of flat to up 1.5% and is now expected to be up 2% to 2.5%.

In addition, we're raising the low end of our adjusted operating income margin by 10 basis points to 7.6%.

While we remain disciplined in our approach to offset planned and unplanned cost headwinds, we also feel it's best to remain prudent in our expectations for the year in terms of our OI margin rate.

Therefore, we're maintaining the high end of our previously provided adjusted operating income margin range at 7.8%.

As we said on our Q2 earnings call, the incremental sales we're driving in the back half enables us to invest in information technology, e-commerce and Worldpac branches in the fourth quarter to unlock longer-term growth and margin expansion.

Due to adjustments in timing expectations, coupled with our continued discipline around our capital expenditure process, we expect spending toward the lower end of our previously provided full year CapEx range.

In terms of free cash flow, we're pleased with the improvement in the first 3 quarters of 2018.

And as a result, we're increasing our outlook from a minimum of $500 million for the full year to a range of $625 million to $675 million.

I'm pleased with the strength we have seen this year, and I'm confident the focus and discipline across Advance will enable further growth in the fourth quarter and beyond.

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

Operator?

(Operator Instructions) And our first question will come from the line of Michael Lasser with UBS.

Reinvesting some of the sales upside in the fourth quarter, and that's not -- and that's why your implied fourth quarter margins are where they are.

Is it also due to some of the incentive comp as well?

And when can we expect a return on those investments such as it provides us the shape of how the margins are going to unfold from here?

Because the consensus forecasts for next year implies that margins take a sizable step-up.

First of all, there's a couple of factors that are going to limit the margin upside in the fourth quarter.

I think we've talked about most of these.

But the first one is the higher-than-planned inflation in fuel and transportation.

We've also got the cross-banner visibility, which is causing a couple of -- which is -- there is some incremental cost associated with cross-banner visibility.

Eventually, we'll optimize those.

You mentioned the incentive compensation.

And then, finally, we're making some investments in the quarter to drive real long-term growth in margin expansion.

And very much in line with what we communicated previously, we're investing in marketing and e-commerce.

As you know, we launched a new campaign in the third quarter, Think Ahead, Think Advance.

It's off to a great start.

We want to keep driving that messaging out there in terms of an omnichannel media campaign.

And we're investing in e-commerce fulfillment and engagement.

So really marketing and e-commerce is a big area.

Secondly, in terms of technology, we're beginning to implement a number of large projects to really simplify the business and integrate it.

And you mentioned when we expect the return.

These are pretty exciting projects, which we are very confident are going to provide a return on investment.

We're standing up Workday in the first quarter, moving from multiple payroll systems to one.

We've kicked off our ERP to simplify our accounting processes across the company.

And we're also investing in our store network.

We're putting in a 4G network for the stores to really enable our team members to better serve the customer.

So some pretty exciting investments inside of technology.

And obviously, once those are made, eventually they roll off, and there's a very good return on those.

And then finally, we talked about Worldpac branches in the fourth quarter as well.

So in summary, we really like the top line momentum that we're having.

We're encouraged with the fact that we're leveraging the costs that are going to be ongoing within our P&L, be that customer service hours in the store and other costs.

And we're very confident in the long-term margin opportunity we've talked about in the past is available.

But we have to make the right investments along the way, and we'll take those costs out when we change the work and improve the efficiency throughout the organization.

And Tom, if I could just tie together some of the things you said.

A, you pointed out that you think the industry environment heading into next year will be favorable.

And B, you're experiencing some transitional costs this year for things like incentive comp and some of the investments, plus you're going to experience some savings as you consolidate your distribution centers.

So just directionally, next year, should we expect that your margin should inflect higher?

We definitely expect to expand margins next year, and we'll update you in February post our call.

Our next question will come from the line of Bret Jordan with Jefferies.

And I guess looking at the AP to inventory, a little over 72%.

Where do you think, now that you sort of had a little bit more time to look at it, you think you can take that number to?

Well, as we've said, Bret, in the past, we think over time, we can get it into the low to mid-90s.

We've got a lot of upside potential there as you're seeing throughout the quarter.

And we think that's going to continue to unlock as we solve for the inventory and looking at it at an enterprise level and really getting it to flow through as the negotiations continue with our vendors and we get the right terms in place for the payment of the payables.

That's all beginning to unlock.

It's something that takes time.

We've talked about lapping the existing terms.

We've talked about the existing inventory flowing through.

But we're seeing those unlock.

You're seeing it here in the first 3 quarters of 2018.

We're very confident that's going to continue into the future.

Okay.

And then one question on the walmart.com relationship.

Could you talk about the breadth of inventory that you're going to be showing through the Wal-Mart website?

I mean, obviously, you're not going to have commodity overlapping, but maybe a bit -- a prospective number of SKUs that you may be offering there.

Yes.

We're not disclosing that, Bret, but we're pretty excited about the Wal-Mart partnership.

I mean we've always built out our value proposition here to compete on availability, speed and convenience, trusted advice.

So essentially, this gives us an opportunity to extend that value proposition to many more customers.

And in terms of your direct question on the assortment piece, people can obviously go on walmart.com and view products that they can have shipped to home or potentially pick up in an Advance store and have many more fulfillment options they have today on walmart.com.

So in terms of the specific assortment, we're not breaking that out.

But we're pretty excited about the partnership and we're working through our plans right now.

Our next question comes from the line of Chris Horvers with JPMorgan.

The EBITDA is starting to grow nicely here.

I think we're projecting over $900 million of cash at the end of the year here with the inventory and AP to inventory.

So can you talk about how you're thinking about deploying that cash?

I know you said $100 million to $200 million here for the back of the year.

You got $120 million done.

Is there an opportunity to take that buyback higher?

And then how do you think about long term?

What are your views around unlocking the balance sheet?

Yes.

Overall, our capital allocation priorities haven't changed.

We want to maintain that investment-grade rating, reinvest in high-quality projects in the business.

Tom mentioned a few of those that we're -- we've already launched and we're focusing on right now.

There is certainly more work to do there.

And then returning excess cash to shareholders.

So those haven't changed.

We're not changing anything in terms of our buybacks.

We're still in that range of $100 million to $200 million.

As we build into 2019, as Tom said, we'll have the AOP for you in February, and then we'll talk about it a little bit into the future more post that earnings call.

Understood.

And then is there -- I guess, as a follow-up to that, is there a certain level or sort of minimum cash that you're targeting internally?

If I look back historically, it's sort of like the cash is low, it's sort of $60 million, $60 million to $100 million.

Is that a good guide as you look out to the future?

Because it's not like this -- the base of the business has grown all that much since then.

Yes, that's a decent guide.

I think we've got some opportunities with the cash that we have on hand.

Like I said, though, we're going to be very disciplined in how we approach this.

We've had a very significant change in how we do our capital allocation, specifically around CapEx.

It's a very formalized committee.

We look at the role of every single project.

We're making sure we're getting the right return for our shareholders.

Understood.

And then the last question is maybe some early thoughts from Reuben in terms of now that he's had a little bit of time looking at the supply chain, looking at the supply chain plans, any thoughts around sort of assets that you hold from a buildings perspective versus the technology enablers that you need to unlock the long-term margin story?

Sure.

Well, first of all, Reuben has really been an exciting addition to the team.

He's bringing a completely new dimension to our thinking, not just within supply chain but much more broadly given his substantial omnichannel experience with Walgreens previously.

I think the first priority is the one that we know is a big opportunity here, which is to dramatically improve the execution within our supply chain.

And we're talking about basic blocking and tackling here, Chris.

I think we've made a lot of progress on the store front, improving units per transaction, scheduling on the weekend, improving our close rate.

I don't think the supply chain has come along as quickly, and he certainly has jumped in with that perspective as well.

So he is very focused on -- with improving basic execution in the supply chain.

As it pertains to the longer-term supply chain agenda, he was intimately involved in that agenda and the construction of it.

So he's very familiar with the DC optimization that's going on, the store optimization, the in-market optimization.

He's very aligned with that.

I think the one thing that you'll see an elevation on is the execution metrics within the supply chain.

But no student body left or anything like that, but just an elevated focus on execution and continuing to help us think through how to take full advantage of the big asset -- the significant asset base that we have and leveraging them better.

Our next question comes from the line of Seth Sigman with Crédit Suisse.

My question is primarily on the gross margin.

Obviously, it was a little bit better than we expected, and it's ahead of the second quarter trend.

You discussed some of the headwinds, including supply chain, but results do seem to imply a pretty significant acceleration in some of the positive offsets.

So I'm just wondering, any more color on the components that may have driven that acceleration in those positive offsets?

Yes, sure.

Let me just kind of walk through it and just give you some color in addition to the supply chain that you mentioned and that we talked about in our prepared remarks.

We did have some additional headwinds in the commodities and tariffs.

Now tariffs were pretty immaterial in the quarter.

But just grouping those together, those were completely offset by MCO and pricing actions.

So we were able to cover those inflationary headwinds through those actions.

In addition, we had continued productivity efforts around shrink, defective and slow-moving inventory.

And these were really the catalysts for the improvement in our GM rate expansion.

So managing the shrink, managing those defective processes were just something we've been working on all year in addition to the slow-moving, which is really the result of looking at our inventory at a more macro level.

So those are the primary drivers for gross margin expansion.

We think we can continue to build on that.

And we also had positive product mix as well.

So the combination of all those are really the drivers.

Okay, great.

And then specifically, on the supply chain side.

I think you are lapping some higher costs from last year.

I realized there are some external pressures that may be new.

But just how are you thinking about that as you move into the fourth quarter and into 2019?

Sure.

So you're right.

As it relates specifically to supply chain, we are still lapping the start-up of the Nashville and Houston distribution centers.

That was about half -- actually, the majority was the inflationary pressures that we just saw in transportation and fuel cost.

So that was the big driver.

We're still going to see some of that start-up cost in the fourth quarter.

That's going to start to diminish here in the fourth quarter.

And then we should essentially fully lap it starting in 2019.

But I think that's the way you can kind of think through that.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

Tom, my first question on third quarter.

If you can isolate markets where maybe the weather helped more than others, I'm curious to get your opinion how much of the improvement was the backdrop, demand getting better versus some of the internal changes.

You mentioned I think the assortment helping as well.

Sure.

Well, first of all, we feel great about both the industry performance in the quarter and our competitive progress.

So if you think about the industry, we would put that number at about 150 to 200 basis points depending how you look at it, Simeon.

I mean, you've got growing GDP, reduced unemployment.

And really exciting for the automotive aftermarket, you've got an improving year-over-year trend in terms of vehicles in the sweet spot.

And as I said in my prepared remarks, that's a trend that's going to keep on going.

In fact, the vehicles 7 years and older are expected to grow for the next 5 years in a row, having declined for the previous 3 years.

So that's a pretty big swing and bodes well for the future for the entire industry.

I think I would also attribute some of our improvement in the quarter to the geographic footprint we have.

I would say we disproportionately suffered last year by having stores in the Northeast in the north central part of the country.

I think this year, we disproportionately benefited.

So call that 0 to 50.

I think somewhere around 200 basis points, you'd say, is kind of industry plus geographic footprint.

We improved about 400 points versus the year-ago performance in 2017 on a year-to-date basis.

So a 400 point improvement is compared to the industry at 200, so I would call the -- our improvement around 200 points attributable to the initiatives we have out there.

And that would include things like cross-banner visibility in Professional and accelerating trends in our DIY business driven by better execution in the stores and our omnichannel efforts.

So bottom line, we're really, really pleased with the improvement in the industry.

We're excited about next year and also the competitive progress that we're making.

So both of those were factors, and I think we've split them about equally.

Okay.

And on margins, you are making progress against the gap versus your peers.

Can you assess what you think, again, what's the biggest opportunity within the gap?

Is it too many touches of product, too much fixed cost?

And is the answer that you have today, is it any different than when you looked at this 1.5, 2 years ago?

Yes, it really isn't.

I mean, I think, first of all, we absolutely believe we can achieve the long-term margin goals that we've set.

We're finalizing our strategic plan right now.

We shared an update with our board recently.

If you consider our margin of 2017 of 7.3% and you compare it to our primary competitor's year-end margins in '17, we think about 60% to 70% of that absolute gap is addressable, with the balance being structural.

So we've got a couple of areas that we're very focused on.

There's 4 key areas.

We've got work streams against each one of those work streams.

And we're really fine-tuning the choices that we have to make to really balance the addressable margin expansion opportunities with the equally large share growth opportunities that we have.

So very excited about our ability to drive shareholder value through a combination of top line growth, market -- sorry, margin expansion and free cash flow improvement.

So we think we can do both of those, gain share and expand margins with the balanced ramp-up over time.

Our next question comes from the line of Scot Ciccarelli with RBC.

Scot Ciccarelli.

Clearly, you guys have made a lot of changes to the business.

I'm sure there's some difficulty in trying to isolate.

But it can't be coincidental, Tom, that comp trends have started to improve pretty meaningful since you rolled out cross-banner visibility.

So I was wondering if you might be able to help quantify specifically what the top line impact has been from cross-banner visibility.

And then related to that, how much of a margin drag that has been?

Even though you're trying to optimize it, obviously, it's not optimized at this stage.

Yes.

I'll give you a perspective on the second part of your question, then I'll flip it over to Bob to talk about how cross banner is impacting the top line.

On the margin drag, for sure, we knew that as we rolled this out, we were going to have to deliver parts to places that hadn't been planned before.

And we want to make sure that we know what the implications of cross banner are before we start turning our system inside out to start optimizing it.

So we've got a better idea of what that looks like now, Scott.

And we're starting to look at each DMA because the impact of cross banner varies pretty widely across the country based on the penetration that we have, our store density, the prevalence of Worldpac, and we will absolutely optimize that over time.

So I'll flip it over to Bob, and he can talk about how it's impacting the top line.

Thanks.

So certainly, from the cross-banner visibility at all markets, saying yes to our customers, certainly with our industry-leading portfolio of brands, again, that ties right into the other technology that we've developed.

As you know, Advance Pro, what we're seeing there, of course, this is our new B2B platform.

We're seeing higher transaction rates, higher order value, higher conversion.

And that's basically a result of also not only the technology infusion benefits in there, but certainly on a cross-banner side.

So we're seeing tremendous increase from the standpoint of our customers' adoption of it.

And of course, importantly, most recently, when we look at MyAdvance, the new single sign-on portal that we put out there, again, ease of doing business, has full access to cross banner across all banners.

So from our vantage point, cross banner basically is informing us on the assortment side of it, and we're building that assortment strategy down to the market by market at the store level, which is also, again, driving more cross-banner access.

So overall, we're seeing tremendous amount of improvement and basically saying yes to our customer day in and day out.

And there's more to come on that.

Yes.

One additional add here, Scot, that your question raises.

Every single banner inside the company grew in the quarter and so I think they're all benefiting.

So you think about Advance stores, Carquest stores, Worldpac, Autopart International, our independents had a great quarter.

So every banner is -- has access to cross banner now, and it's really helping us leverage the breadth of our assortment across the enterprise.

And again, I know it's not an exact science, but is there a way to kind of put a number on the impact that it's had?

Well, again, we spoke to about 200 points.

We believe our initiatives are driving progress.

We also believe our DIY omnichannel efforts are giving us incremental growth.

So it's -- we had kind of an evenly split improvement year-on-year in those -- between DIY and Pro.

So I mean, you can do the math.

I mean, we've got a number on cross banner.

It's a significant number.

And you're right, it has been a big impetus to our improvement.

So you can do the math off the 200 basis points that's attributable to our own performance.

Our next question comes from the line of Kate McShane with Citi.

My question is if we can go -- back up to the supply chain as well.

We're just wondering if you can walk us through what you are seeing with the store rationalization.

What are some of the metrics of the stores that have been closed and how much you think it's impacting margins?

Sure.

Good question, Kate.

We've been really excited about the improvement we're making there.

We were 81, right?

We were up to about 81 stores on a year-to-date basis that we've closed.

We're measuring very carefully, obviously, the transfer of sales.

I mean, that's the big question, right?

We've got a lot of stores, I think about 400 plus, that are within 1.5 miles of each other.

And when we close a store, we obviously don't want to lose the sales.

We just want to transfer the sales to one of the other Advance banners.

And to the earlier question, cross-banner is helping us with that because Worldpac plays a role.

And obviously, the other Advance and Carquest stores play a role in essentially capturing the sales that, that store that was closed had previously.

So we measure the sales transfer.

Obviously, the sales transfer on Professional is easier to get after than the sales transfer on DIY, although through omnichannel efforts, we can get at the DIY sales also.

And then the other thing that we measure is the employees, and we make sure that we are able to retain the very best parts people that we can when we make that change.

So we've got -- we feel really good about the improvement we've made in our team.

We're seeing turnover levels stabilize.

They're down significantly from where they were 2 years ago.

So when we close a store, we don't want to lose the key people that are -- that have a connection with our customers in that store.

And we've done a much better job retaining those employees than we did in the past.

And then the third thing is the lease obligation.

We want to make sure we minimize any costs in closing down the store where there might be an outstanding lease obligation.

But each of those 3 metrics is very positive, and we feel very good about our ability to drive cash flow with this initiative over time.

So those are the key things we look at.

That's helpful.

And then if I could just ask a follow-up question.

Do you have -- is there a way to quantify what you think that transfer rate is at this time?

Yes.

We don't break that out, but we're definitely exceeding the levels that we had planned, and we're far above what we'd had in the past.

We want to make sure that we're looking at stores where we can actually transfer the sales.

I mean, if you're talking about -- think about a store that's in rural America, where we may not have a store within 10 miles of it.

We've kind of learned from experience that closing that store, we can't expect those sales to show up in -- for the home team.

So we're making sure that when we close a store, it is transferable.

And we measure the cash flow outlook for that area, not just for the store, for that area, over the next several years to make sure that we're very much cash flow positive because as we reduce the costs in that area, less rent, less in-store cost, less inventory, all of those things, we're still driving cash flow.

And that's the metric we look at to make the decision to close or not.

Our next question comes from the line of Matt McClintock with Barclays.

I have 2 quick ones, and then I'll let you go.

The first one is just on Wal-Mart.

Can you kind of give me an idea of the customer overlap between advance.com and walmart.com for DIY?

And I'm just trying to understand why a customer would shop Wal-Mart or -- versus Advance.

Is that entirely an incremental or a new customer?

Sure.

First of all, the consumer profile for the Wal-Mart shopper and the Advance DIY customer is extremely similar.

So they are right on top of each other, Matt, so that was obviously some work we had done.

We looked at different alternatives with respect to building a strategic partnership, where our set of skills and assets could be complementary to someone else.

And with Wal-Mart having a substantial omnichannel effort out there, the most retail traffic in the nation, all of those things boded very well.

We absolutely believe there's incremental sales out there for us.

You think about 100 million people coming to that website every 4 weeks at Wal-Mart, we have not disclosed how many people come to our website every 4 weeks, but it is under 100 million.

So there is going to be some people that go to that Wal-Mart website that have not come to the Advance website.

And Wal-Mart's been a terrific partner on this.

We're going to have a Advance store within a store on their website.

We think it helps build our brand and awareness.

And it really helps Wal-Mart with some category expertise that we believe that, together, we can drive a lot of incremental sales with.

So very excited about the partnership and very much an aligned consumer lap -- overlap, rather, sorry.

And then my second question is, you did a great job of explaining the macro underpinnings -- the positive macro underpinnings for the next -- for the industry over the next couple of years.

And clearly, you've taken market share this year, which was pretty impressive.

I'm just wondering, with the pull-forward of some of those investments that you're talking about, launching a new marketing campaign, et cetera, are you starting to put your foot down on the pedal in terms of being more aggressive with going after market share?

Well, we definitely feel much better about the customer experience when they come in to our stores.

As they say, you don't invite somebody over for dinner at your house unless it's all clean and in a great spot.

And we wanted to make sure we were executing well.

And I will tell you that our field team is executing better than they ever have.

We had to restructure last year, as you know.

We went to 2 divisions and 12 regions.

We've got a terrific group of leaders out there.

They're now entering their second year.

They're very disciplined in their approach to drive the business.

So now when a customer comes into our store, they're going to have a much better experience than they had a year ago.

We're seeing that in metrics like Net Promoter Score, in the number of times we greet our customers.

All of the things that we measure on our mystery shop profile are much better, so you feel good about putting advertising on the air to invite people in.

So I think that's the difference.

So to that extent, we are going to invest in our omnichannel media efforts because we believe we've got a great proposition for our customers to come and visit our store.

Our next question comes from the line of Dan Wewer with Raymond James.

Tom, you had mentioned there are still 400 Advance and Carquest stores that are within 1.5 miles of each other.

What is your best estimate on of those 400, how many can be consolidated?

And then also, curious with the decision to resume the share buybacks.

How do you balance that against the opportunities to start opening new stores, particularly out west where you probably need more stores?

Yes.

Well, first of all, Dan, we definitely will continue to optimize the footprint.

I mean, if you guys know the average sales per store that we have, if you contrast that to our primary competitors, they do a much better job on average sales per store.

So part of that is we've got what you just described, stores that are really competing with each other for sales.

And where we see that, as I mentioned earlier, we're going to continue to optimize our footprint.

As we constructed our 5-year plan, we looked out over 5 years in every DMA in the country.

And as we do that, you're considering a whole bunch of variables.

But the net of it is when you've got a given market, you figure out how are you going to grow the business in that market and how are you going to optimize your costs in that market.

And because our footprint is somewhat varied, to your question about the west, across the country, our approach to each of these markets is going to be different.

And so where we've got a very concentrated footprint, a lot of density, that's where you'll see some of the optimization efforts that you asked about.

And where we've got a lack of a footprint, which, as you've mentioned, in the west, we're much less penetrated, we're going to take a very different approach to those markets.

So we are opening Worldpac branches, as we mentioned.

We're making sure that we're going to be consistently reliably driving comp sales with the stores we have first.

And where we have markets that are demonstrating that consistently, reliably and predictably, we will look at some openings.

But the bulk of our investment at this stage is in the -- our CapEx investment is in e-commerce and in technology.

And where we have opportunities to expand our footprint, we will.

But I think you see a different CapEx profile from us than you've seen in the past, where we were opening DCs and stores and -- throughout the country.

We shifted that profile and dramatically stepped up our investment on e-commerce and technology, and we believe it's paying off.

And then just a quick question about supply chain changes going forward.

Not to geek out on this too much, but when you look at the 3 facilities that you're closing in Texas, South Carolina and Mississippi, will the Carquest and Advance stores in those territories be now supplied by a common facility?

Well, first of all, we're pretty excited.

Our new Chief Technology Officer has come in and really helped accelerate a lot of the tech plans that we have inside the company.

And obviously, cross-banner replenishment is a big opportunity for us.

I mean, we're sitting here in Raleigh, North Carolina adjacent to a distribution center that today cannot ship to the Advance stores in this geography.

Those stores actually source product from another so-called [RAD] or advanced distribution center several hundred miles away.

So we are building the capability to cross banner replenish.

And of course, that's going to take stem miles out and obviously, improve the speed to get parts to our stores.

So that's an active project, and we expect to deliver against that sometime in the latter half of 2019.

But these 3 facilities that you've announced that you're closing, they're still just going to be shipping to either an Advance or a Carquest banner but not both?

Well, the 3 facilities we're closing are being closed.

I want to make sure I understand your question.

Yes.

Just curious as to which facilities are going to pick up the slack.

Okay, yes.

Well, today, because -- the ones we don't have cross-banner replenishment capability, we have to essentially point the stores at another comparable distribution center.

So in the case of Gallman, Mississippi, which was an Advance DC, we had to point the stores at Houston and Nashville, which are also Advance DCs.

In the future, as we optimize the DC footprint, we'll have the ability to do a much more effective design in terms of how do we optimize the distribution center network and DC to store stem miles.

Our next question comes from the line of Mike Baker with Deutsche Bank.

I wanted to ask you, you had said you have confidence in the fourth quarter that you continue the current trends.

Is that in reference to the trends in the third quarter or year-to-date?

And I guess, even more fine, can you give us any color on how the third quarter progressed by period?

Yes.

The third quarter was fairly evenly distributed, Mike.

We're very excited about the way it started, and we're excited about the way it finished.

So I mean, it was a pretty strong quarter across the board and -- again, as I mentioned in all of the banners.

And we're pleased with the way Q4 has started out.

So we're obviously not giving specific numbers on the fourth quarter.

We gave you a formulary number, and that implies a number, but we think the sales number that we have in the fourth quarter is one we can achieve.

And to follow up on that, you had said that the operating income or operating margin -- implied operating margin guidance for the fourth quarter was "prudent" in your words.

Would you say that the same store sales expectation is similarly prudent?

Yes.

Our next question comes from the line of Greg Melich with MoffettNathanson.

I do want to follow up on the improvement.

Tom, you laid it out nicely.

What was the breakdown on traffic on that?

In other words, if we did a 4.3% comp, was traffic positive or transaction counts?

And then I had a follow-up on the transformation actions.

Sure, Greg.

So on transactions, Bob did a great job describing it earlier.

We saw a nice uptick in transactions on the Pro side, and we also saw average ticket up on the Pro side.

So a lot of the good work Mike Broderick has been doing with the category teams, the merchant teams has really helped us on really both sides of the business.

But we are seeing growth in some categories that we haven't seen growth in for quite some time, and that is helping us on the transaction front.

But both of them improved on Pro.

On DIY, we measure DIY omnichannel, so we measure transactions across both e-commerce and retail.

We obviously saw an improvement in our retail transactions, and our online transactions continue to be up significantly.

Our online business has continued to flourish.

If you look back at some of the published reports on omnichannel, you'll see that the 3 months ending September 30, our online traffic was up 82%, which was right at the very top of 40 retail companies.

So obviously, that's translating to incremental transactions and -- in terms of our DIY online business.

Average ticket was up pretty significantly in DIY, partly because the online business is growing faster than the retail business.

But overall, we're very pleased with both transactions and tickets in the quarter.

And so just to make sure I'm very clear.

For the whole company, transaction counts were up, but they were up in Pro more than in DIY, and they might have still been down a little bit if you look at it holistically.

Is that a fair...

Yes, but overall up.

Right, overall up.

But DIY is much better than -- or much -- or DIY worse than Pro, which really improved a lot?

That's right.

Yes, DIY retail was the one -- yes, yes.

Yes, got it.

Okay, and then second was on transformation costs just because I know you -- thank you for continuing to break those out.

It looks like they're running around $100 million a year if you take out the amortization.

One, I just want to make sure that I'm thinking about that correctly.

And assuming those, you've mentioned that they'll go on still for some years.

Should we think of this year's transformation costs as above trend?

Or that $100 million a year should start to fade, and when should we expect that?

Yes, no.

I think for the year, you're right.

We gave you a range of $140 million to $180 million, and we do think we're going to come in to the low end of that range.

So if you back out the amortization, which is about $40 million, we would be trending at about $100 million for the year.

We think over time that's going to diminish.

It's going to take some time to do that.

But we think on a year-over-year basis, we're going to start to see a reduction in that $100 million.

Our next question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch.

This is Jason Haas on for Liz Suzuki.

I was curious if you could provide any color on how the economics of the Wal-Mart partnership would work.

Yes.

We're not breaking that out, Jason.

Again, we're pretty excited about what we're going to be doing with Wal-Mart.

It's a pretty unique partnership, but we're not going to break out the economics.

Okay.

And then any color on when that would come in?

I know you said the first half of '19.

But yes, just any more color on -- in terms of the timing on that?

Sure.

It's a phased approach.

I mean, this is one of those things that there's -- some parts of it are easier than other, and I'm not going to get into the specifics of the Gantt chart, if you will.

But I can tell you that we'll be rolling out in the first half of the year with part of what we're going to be doing with them.

Other parts of that have to be tested and validated.

We have to make sure that we're delighting the customer.

The beautiful thing about the arrangement with Wal-Mart is both of us are very focused on the customer experience.

And we want to make sure that our customers and the customer -- Walmart's customers are really excited about what we have to offer.

So as we roll out the parts that are a little more complicated and have a little bit of complexity to them, that we're validating that, that proposition is absolutely where it needs to be before we scale it.

So you'll see part of it roll out in the front half of '19.

It is a multiyear partnership, so we want to make sure we get it right.

So that's the answer.

Our next question comes from the line of Brian Nagel with Oppenheimer.

Nice quarter.

So I also wanted to ask quickly on Wal-Mart.

I mean, recognizing it's early and I know you're not providing a lot of details at this point.

But any initial thoughts on pricing between what you do in your stores, on your website and what will be done on Wal-Mart?

And then the second question, does this relationship that you have with Wal-Mart now, does it at all impact your plans for your own site?

I mean, does it replace your own site or is it simply an addition to what you're already doing online?

Well, first of all, Brian, we see this as an opportunity to extend the fundamental DIY value proposition we have to more customers.

And our value proposition has always been the best parts in the industry, the best assortment in the industry, speed and convenience.

You think about pulling in to an Advance store, you can get in and out of an Advance store.

We have free services.

We'll charge your battery.

We'll change your windshield wipers for free.

We have a number of speed-related and convenience-related benefits we offer to customers.

And then trusted advice.

I mean, we're investing in the training of our people.

Bob's really done a lot of work with Mike Broderick on the CarQUEST Technical institute and how we train not just our own team members, but our customers.

So it's an extension of that value proposition to Wal-Mart.

In terms of pricing, we control our pricing.

So we're going to offer a price.

And if we are able to get the sale on the Wal-Mart -- through the Wal-Mart website, we'll get the sale.

If we don't, we don't.

But it is an arrangement where we control our own pricing for the website.

As it pertains to our own site and our own online experience, we're doubling down on our own site.

We've made tremendous progress.

We meet literally every week on that topic.

And we're strengthening every aspect of our online experience, and we're going to continue to do that aggressively.

We believe it's extremely important to the long-term success of the company.

And the fact that we partner with Wal-Mart has -- there's really no impact on the fact that -- on what we're doing with our own site other than we're going to continue to strengthen it.

And we're going to learn from Wal-Mart in terms of how to strengthen it better than we have in the past.

So there's no plans to slow anything down on our own website.

If anything, we're actually accelerating it.

Got it, that's very helpful.

And then if I could just follow up with one other kind of bigger picture question.

Clearly, your results have accelerated a lot.

That has to do with internal initiatives, but you've also highlighted an improving demand backdrop.

Your competitors have done the same.

As you look at that, as you look at the sort of say the, I guess, the buying patterns of your customers, whether they be DIY or commercial, are there signals that what's happening now is truly a resurgence in demand?

Or is there a pent-up aspect to it, too, just given what we had with several quarters of weaker trends, whether that be due to the weather or just some of the car park issues?

Yes.

I'll let Mike Broderick speak to that a little bit.

I think that there's no question that vehicles in the sweet spot is a driver of demand.

I mean, we've stepped back and looked over really the last 16 years.

What are the things that correlate to demand the most?

It's GDP.

Well, GDP is improving.

That's great news.

It's the car park.

Well, we expect the car park to improve.

It's vehicle miles driven.

That's been improving, up about 1%.

The one that has swung, to your question, is this vehicles in the sweet spot, that was declining.

Now it's starting to turn.

We knew that turn was coming, and it's going to turn for the next 5 years in a row.

We think the vehicles 7 years and over, which is obviously where you have high levels of repairs, the cars are off-warranty, those vehicles are going to need to be repaired.

And that vehicle population is going to be up 10% 5 years from now.

So the unit growth in vehicles in the sweet spot is a significant driver of demand.

Mike, do you want to add?

No, that's -- you've said a lot.

But to go deeper into the categories, we looked at discretionary and nondiscretionary categories, and they're both up, which actually really bodes well for our industry as well as Advance Autopart.

And that's kind of how we focus.

We want both a very balanced approach across all 4 channels, and we're literally looking at it by category to make sure that we're getting our fair share of the growth.

Our next question comes from the line of Chris Bottiglieri with Wolfe Research.

I was hoping to dimensionalize DIY comps.

I know you kind of touched to this earlier, but if we take that 100 basis point benefit, it would seem to imply a little less than half of your sales, it's 2 points of growth to DIY specifically.

So I guess my question is, if you exclude the online sales, are the nononline DIY comps still positive at this point?

Yes.

They are?

Okay.

Yes.

Is there a way to frame the opportunity from here?

I guess, putting aside the Wal-Mart arrangement, when you lap this level of online traffic growth, do you think there's another leg up?

Like how are you thinking about this long term?

We definitely see a leg up, Chris.

I mean, we're seeing a significant growth in online and across the universe, right?

But within our own category, we've got a number that we see that the size of the category will be 5 years out.

We feel we can continue to drive, not just the ship to home business but the buy online, pick up in store business, where we can really leverage our asset base as others are doing.

So we're really investing in online capabilities, both desktop and mobile, making sure our team members are engaged.

We do compensate our team members for online business, so they're excited about building a relationship with the customer.

We're strengthening our loyalty program, which has implications for online.

So there's a whole bunch of elements that are coming together as we build out our customer experience.

I think over 70% now, it keeps going up, by the way, of the transactions that we have within DIY start with online, okay, whether that's a search, a mobile search for a part or some type of search for a store or something like that.

And we see that continuing to go up.

So it's not just about, hey, I want somebody to buy something online.

We want to strengthen the online experience overall because we also believe that, that halos over to our retail in-store experience.

Got you.

Then as you think about kind of the productivity in store, how do you kind of -- what are some of the efforts you're doing to maybe optimize labor as more of this -- I guess, more of the transactional element shifts online?

Well, we're obviously very focused on that.

I mean, everyone is talking about wage inflation.

And certainly, we're seeing that across our business, whether it's in our stores or our distribution centers for that matter.

But we have, I guess, a bit of a different starting point, Chris.

I think we have a much more opportunity to improve.

I think our field leaders have done a much better job managing full-time/part-time mix, which is a key driver of that cost per hour, if you will.

So that's an active project.

We've done a lot of work on ABC costing up and down the store in terms of what does each piece of our in-store environment, what is it costing us to do everything in there, and how do we change the work, so to speak, to improve the cost profile of the store.

As you see more orders coming in online in terms of DIY, that obviously can save time, instead of having to engage with a customer for 10 or 15 minutes, to the extent that we've got a very strong platform online that gives the customer the education they need and the information they need to make decisions, some of them just want to come in and out.

So I mean, we're routinizing that buy online, pick up in-store experience with our store team members, making it very easy for the customer to come in and get their part and leave.

So that part -- those things are natural tailwinds.

Similarly, on the Professional side, as Bob builds out our MyAdvance, he talked about it earlier, more and more customers shifting to buy online off of MyAdvance or Advance Pro.

Now they're no longer speaking to someone on the phone as they do -- many of them do today, and we're seeing that tick up each week.

So to the extent that you really build an omnichannel experience that is world-class for your customers, it actually can help you with the labor cost over time.

And our next question comes from the line of Seth Basham with Wedbush Securities.

First question is on e-commerce as well.

You mentioned some fulfillment engagement investments that might weigh on operating margins in the fourth quarter.

Can you provide a little bit more color as to what you're investing in now relative to what you've done year-to-date?

Sure.

I mean, we want to make sure that we're optimized there, Seth, and I would just tell you we're not optimized.

I mean, we're not shipping from as many buildings as we will ultimately do.

We've got many buildings across the country.

As you know, we got 50 million square feet of assets.

And as Reuben has come in, we're essentially [off-dating] that fulfillment part of our agenda.

How do we ship more efficiently when we ship to home, how do we make it much more easy for the customer to access parts, and how do we make it easier for our team members to get parts on the buy online, pick up in store dimension.

So honestly, there's a lot of work to be done there and a lot of opportunity for further optimization.

But right now, we're building the engagement part of it out pretty aggressively, as you know, and that's driven a lot of traffic to our website.

We're not going to slow down that piece of that because it's costing us too much in the short term.

Because we know we can ultimately optimize those costs, it's just a matter of some of the things that came up earlier, being able to ship from more buildings, cross-banner replenishment, cross-banner visibility.

All of those things will ultimately make it much more efficient for us to do what we have to do.

But right now, we're focused on delighting the customer, and that's helping drive our top line.

Got it.

And would you say that in terms of the pressure on operating margins in the fourth quarter from these investments, will they be higher than they had been in recent quarters?

I think, overall, they're in line with where they were.

In absolute terms, they're not all that different.

To be honest, we just have a lower top line number in the quarter, and that, as a percent of sales, has an impact, right?

But the absolute number is not that much.

I will say that the technology investments attract OpEx right away.

That we're making -- we make a CapEx investment on the technology side, it attracts OpEx right out of the gate, and that's part of the headwind.

Fair enough.

And my follow-up question is around tariffs.

Can you remind us what the mix of COGS you have exposed to the Chinese tariffs right now?

And how much do you expect to be able to pass along in terms of price relative to other mitigation strategies from the tariffs, particularly as we see a 25% scenario unfold?

Seth, this is Mike Broderick.

We are looking at 50-50 from a direct versus nondirect.

So that's kind of the number we're looking at.

And obviously, what we do to mitigate starts with the customer.

We actually review all 4 channels, both Pro, DIY, e-comm and our independents, making sure that we're relevant.

We actually then price match versus our traditional and nontraditional customers.

The last thing that we do is actually put pricing to the market only if we have to.

And that 50-50 direct/indirect, that's off of a percentage of COGS total of what?

Yes.

So I would say that's of our total COGS for the year, we're looking at about $4.5 million.

Our next question comes from the line of Daniel Imbro with Stephens Inc.

Just had a few follow-ups on the e-commerce front.

So you guys mentioned that over half of your online sales are still picked up in the store, but ship to home is obviously growing.

How do you think that trends over time?

Do you think we'll see further shifts towards ship to home?

Or do you think longer term, that the service levels in the store keep a majority of online orders being picked up in the store?

First of all, we've modeled ship to home to grow faster.

That's what we expect.

That said, that's at an aggregate level.

As we start to market pick up today, which is a great benefit for the customer, rather than having to wait a day to have something shipped home, you can get to one of our stores in literally 30 minutes and pick up the part.

So we're going to start to market that a little bit more, Daniel.

We think our own performance can continue to improve on the buy online, pick up in store, which we're going to brand Pick Up Today.

So that whole opportunity and improving the online experience from the mobile phone right into our store is a big opportunity for Advance.

But at the industry level, we would expect ship to home to grow faster.

That's helpful.

And then a quick follow-up on the Wal-Mart partnership.

Specifically, how do you think about potential inventory impacts?

To my understanding, a customer could pick up at an AAP store or a Wal-Mart store, but how do you plan on stocking that inventory?

Will it be stocked at a Wal-Mart store?

Or will you have to increase inventory on hand at a D.C. to fulfill those orders?

Yes.

Well, we've obviously got a lot to learn through this arrangement with Wal-Mart.

And as I said earlier, some things are easier to do than others.

So again, we're going to make sure that we delight the customer with this.

It's very important to the Wal-Mart team.

It's very important to us.

So as we go through this, obviously, a Pick Up Today order at Advance, which is generated through the Wal-Mart website, is easier for us to manage.

But keep in mind, we've got thousands of delivery vehicles.

So our ability to essentially provide same-day service to Wal-Mart stores, if they -- the customer decides they want to pick it up at a Wal-Mart store, we can enable that.

We just need to get that right, ensure that the operating procedures are standardized.

But all -- the omnichannel experience that we're cultivating is all centered around the customer and making it easier for the customer.

So we've got to make sure when that customer has the experience that they are absolutely thrilled with it.

Thank you.

I'm showing no further questions at this time.

I would now like to turn the call back to Tom Greco for closing remarks.

Well, thanks again for joining us today.

We're really pleased with the traction we gained in the quarter, and we're confident in our ability to execute our strategic objectives going forward.

I want to once again thank all of our dedicated team members and our independent partners for their focus on operational excellence and passion for customers every day.

We remain disciplined in our approach to ensure we're implementing changes that enable the long-term success of Advance and deliver sustainable value and growth for our shareholders.

We still have a lot of work to do, and we remain focused on capturing the opportunity ahead.

Before I conclude, with the celebration of Veterans Day this week, we'd like to express our sincere appreciation for all the members of our military for their service, including over 6,000 Advance team members.

We're incredibly proud of the work we've done at Advance in support of our veterans.

And we remain committed to continue support of organizations such as Building Homes for Heroes, who help improve the lives of our brave servicemen and women throughout the country.

We look forward to discussing our fourth quarter results and 2019 outlook with you in February.

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

This does conclude the program.

You may all disconnect.

Everyone, have a great day.