領先汽車配件 (AAP) 2021 Q1 法說會逐字稿

Welcome to the Advance Auto Parts First Quarter 2021 Conference Call.

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

Please go ahead.

Good morning, and thank you for joining us to discuss our Q1 2020 results that we highlighted in our earnings release this morning.

I'm joined by Tom Greco, our President and Chief Executive Officer; and Jeff Shepherd, our Executive Vice President and Chief Financial Officer.

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

Before we begin, please be advised that our remarks today may contain forward-looking statements.

All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding our initiatives, plans, projections, guidance and future performance.

Actual results could differ materially from those projected or implied by the forward-looking statements.

Additional information about factors that could cause actual results to differ can be found under the caption, Forward-looking Statements and Risk Factors, in our most recent annual report on Form 10-K and subsequent filings made with the commission.

Now let me turn the call over to Tom Greco.

Thanks, Elisabeth, and good morning.

First, I'd like to thank our independent partners and Team Members all over the world for their passion and commitment to serve our customers throughout the pandemic.

We also hope that you and your families are healthy and safe.

The health and safety of our Team Members and customers has been a top priority over the past year.

As you saw earlier this morning, our final Q1 financial performance exceeded the estimated results we provided on April 20.

With strength across all channels, we delivered comparable store sales growth of 24.7% and margin expansion of 478 basis points versus the prior year.

On a 2-year stack, our comp sales growth was 15.4%.

Adjusted diluted EPS of $3.34 represented an all-time quarterly high for AAP and improved more than 230% compared to Q1 2020.

Free cash flow of $259 million was up significantly versus the prior year.

And we returned over $203 million to our shareholders through a combination of share repurchases and our quarterly cash dividend.

In addition, we recently announced an updated capital allocation framework, targeting top-quartile total shareholder return, highlighted by operating income growth, share repurchases and an increase in our dividend.

This further reinforces our confidence in future cash generation and our commitment to returning excess cash to shareholders.

As outlined in April, we're building an ownership culture as well as a differentiated operating model at Advance.

Over the past few years, we've made substantial investments in our brands, our digital and physical assets and our team.

These investments, along with external factors, enabled us to post a strong start to 2021.

Clearly, the federal stimulus package, along with our first real winter weather in 3 years, was a benefit to our industry.

From a category perspective, net sales growth was led by batteries, appearance chemicals and wipers.

Geographically, all 8 regions posted over 20% growth.

Importantly, over the past year, the Northeast, our largest region, had been below our overall reported growth rate and well below that of our top-performing regions.

In Q1, the gap narrowed.

And in recent weeks, the Northeast has been leading our growth.

This was in line with our expectations as mobility is increasing in large urban markets in the Northeast, which were disproportionately impacted by COVID-19 last year.

Both DIY omnichannel and professional performed well, delivering double-digit comp sales growth in the quarter.

We saw strong increases versus year ago, with a double-digit increase in transactions and high single-digit increases in dollars per transaction in both channels.

In terms of cadence, DIY led the way early in Q1.

As the country began to reopen later in the quarter, professional came on strong, resulting in pro growth of over 20% in Q1, with continued momentum into Q2.

The changes in channel performance highlights the importance of flexibility in our operating model as we adapt to rapid shifts in consumer behavior relative to 2020.

Throughout AAP, our merchant, supply chain and store operations teams have been extremely agile in adjusting to this evolving environment to ensure we take care of our customers.

Within the pro sales channel, our overarching focus remains to get the right part in the right place at the right time.

This enables us to compete on availability, customer service and speed of fulfillment, which are the primary drivers of choice for pro garages.

To achieve these goals, we continue to strengthen our value proposition through improved availability as well as our Advance Pro catalog, featuring tools like MotoLogic and delivery estimates.

As vaccinations roll out across the country, mobility is increasing across all income strata.

As discussed in April, this is very good for AAP as our diverse set of assets within pro is uniquely positioned to capitalize on this trend.

Specifically, Worldpac led our professional growth in the quarter.

With a customer base that serves higher-end installers and more premium vehicles, Worldpac gained momentum throughout Q1.

This is because middle to high-income motorists are becoming increasingly mobile.

And in some cases, they are now returning to daily commuting.

Stated simply, they're driving more than they did a year ago.

Secondly, we're seeing benefits from the owned brand product offering expansion with the integration of Autopart International.

Further, we believe our independent Carquest stores are also well positioned.

They're leveraging our enterprise assortment and have excellent relationships with customers.

These relationships have been strengthened over the past year given the support we provided to both independent and our pro customers during a difficult time.

We continue to grow our independent store base through a combination of greenfield locations and the conversion of existing independent locations.

Today, we're extremely excited to announce that we're adding 29 new independent locations to the Pacific Northwest to the Carquest family, the single largest conversion in our history.

Baxter Auto Parts announced that they will bring over 80 years of automotive aftermarket experience and strong customer relationships to the Carquest banner.

This is a testament to the strength of the Carquest independent program, including product availability, differentiated brands, technology platforms and robust marketing plans.

We also grew our TechNet program across all pro channels.

TechNet enables independent service shops to create their own national network.

We now have over 13,000 North American members, and we'll continue to leverage TechNet to differentiate our pro offering and build loyalty.

In summary, we expect that as our pro installers recover, our industry-leading assortment, customized pro solutions and dedicated pro banners will enable us to drive market share gains in a growing segment throughout the balance of the year.

Meanwhile, our DIY omnichannel business led our growth for the fourth consecutive quarter.

Stepping back and as a reminder, there was a significant increase in DIY penetration across the industry beginning in Q2 2020.

According to syndicated data, an estimated 4 million new DIY buyers were added.

Spend per buyer for 2020 grew close to 9%, led by online spend per buyer.

DIY growth was led by project, recreation and more discretionary categories as people worked on their vehicles or even learned how to work on their vehicles.

These trends generally continued through Q1, and the industry is now beginning to lap the significant increase from prior year in Q2.

From an Advance standpoint, we grew share of wallet and overall market share in Q1, led by DieHard batteries.

DieHard continues to have strong momentum, and our advertising is clearly resonating with customers.

We plan to continue to invest behind this powerful brand in 2021 to further build awareness and association with Advance.

Our loyalty program remains focused on attracting, retaining and graduating Speed Perks members.

Our loyalty program enables us to provide personalized offers and increased share of wallet as we leverage our customer data platform.

In Q1, this helped drive growth in our VIP members by approximately 14% and our Elite members by 30%.

Consistent with broader retail, during Q1, we began to see a shift back to store sales from e-commerce given the outsized growth of the online business during the onset of the pandemic in 2020.

Our investments in digital and e-commerce have been another differentiator for our DIY business.

We continue to strengthen our online experience on desktop, mobile, and with our app, which recently crossed nearly 1.3 million downloads.

The integration of our digital and physical assets is communicated through our Advance Same Day suite of services.

This enables DIYers to find the right part from our industry-leading assortment, order it online, and either pick it up in one of our stores within 30 minutes or have it delivered in 3 hours or less.

Finally, we're very excited about our footprint expansion and new store opening plans for the year.

We're targeting between 100 to 150 new stores in 2021.

This includes the Pep Boys leases we're executing in California.

The opening of the California locations will ramp up during the back half of the year and finish in 2022.

Now I'd like to transition to the unique opportunity we have to significantly expand our margins.

As we outlined in our strategic update, there are 4 broad initiatives: leveraging category management; streamlining our supply chain; improving sales and profit per store; and reducing corporate SG&A.

Our largest margin expansion initiative is leveraging category management to drive gross margin improvement.

This involves 3 components: material cost optimization, owned brand expansion and strategic pricing.

Material cost optimization and strategic sourcing has been an ongoing effort for us and will continue to be a focus.

Given the current inflationary environment, we are leveraging these capabilities to push back on cost increases to keep our price to the customer low.

We'll continue to work collaboratively with our supplier partners on managing input costs.

Owned brand expansion as a percent of our mix is an important contributor to margin rate improvement.

However, growing our DieHard and Carquest brand is not just about margin.

It's also about differentiation.

Our merchant team is building out capabilities and sourcing to develop high-quality products, leveraging our strong supplier relationships.

Two recent examples include our DieHard robust enhanced flooded batteries and our Carquest hub assemblies.

Once equipped with a differentiated product, our marketing team is building the awareness and the reputation of our owned brand, as evidenced by our DieHard is Back advertising campaign.

Finally, we supplement innovative, quality parts and breakthrough marketing with an improved online experience and extensive Team Member training.

This includes enhanced part, product and brand training to ensure our store Team Members are well positioned to provide our customers with trusted advice and an excellent in-store experience.

So we're not only on track with margin expansion behind owned brands.

We're also leveraging these brands to enhance differentiation and improve store traffic.

Our extensive research around customer journeys highlights the role that brands play in customer purchase decisions.

When a customer's car won't start, we want them to think of DieHard first, such that this becomes a reason that they come to Advance.

This is why collaborating with our supplier partners is so important to ensure high quality for our owned brands.

We're confident as we continue to invest in product quality, building our brands and training our Team Members to drive owned brands as a percent of mix, we will further deliver growth across AAP.

The final component of our category management initiatives is strategic pricing.

By investing in new tools, we're now able to competitively price on a market-by-market basis, using detailed analytics to improve rate.

We're also realizing success in reducing discounts online through a rapid test-and-learn approach, which is driving significant margin expansion in key categories.

In total, our category management initiatives are currently on track to deliver up to 200 basis points of margin expansion through 2023.

As we look beyond 2023, we plan to continue building out customer data and personalization platforms to further enhance the customer experience and expand margins.

Staying with gross margin, we once again leveraged supply chain in Q1 versus both 2020 and 2019.

Despite the current environment, We remain focused on executing our primary margin expansion initiatives, while working to mitigate the impact of global supply chain challenges.

We expect to complete our warehouse management system implementation in 2022, with the majority of our largest buildings converted this year.

In conjunction with WMS, we're also rolling out our labor management system, which allows us to implement common standard operating procedures across our DC network.

This will also enable us to incentivize hourly Team Members based on their performance.

In terms of cross-banner replenishment or CBR, we've converted over 70% of stores to date and expect to complete the remaining stores we originally planned by the end of Q3.

CBR significantly reduces our miles driven, which is even more important today given rising fuel and labor costs.

More importantly, CBR will complete the integration of the Advance and Carquest supply chains and enable us to service our approximately 4,800 corporate Advance stores and 1,300 independent Carquest stores from a single supply chain.

We also continue to integrate the dedicated professional supply chain within Worldpac and Autopart International.

In the quarter, we converted another 5 AI stores to the Worldpac system and are on track to complete this integration by the end of Q1 2022.

In April, we discussed 2 additional supply chain initiatives, building on what will soon be a more streamlined supply chain network.

This includes tiering our supply chain and transforming in-market delivery and customer fulfillment.

Our tiered supply chain pools the slowest moving SKUs into 4 strategically located regional DCs.

This will allow us to make room for faster-moving SKUs and ultimately improve the availability of our higher-turnover products.

Our second new initiative is transforming in-market delivery and customer fulfillment to improve service and productivity.

The new delivery management system will select for multiple modes of transportation to move and deliver parts at lower costs.

Both of these initiatives are in their early stages.

And we are targeting completion of these in 2023 and 2024, respectively.

In terms of SG&A improvements, our store operations team is executing initiatives to increase sales and profit per store.

We've now increased sales per store for 3 straight years, and we're on track to get to our target of 1.8 million average sales per store by 2023.

In Q1, with strong top line growth and disciplined execution, we leveraged store payroll versus both 2019 and 2020.

We've also made improvements in scheduling and task management to drive efficiency, which helps with our customer experience as it enables us to schedule our most tenured and knowledgeable Team Members when we may need them most.

We continue to invest in our store Team Members in terms of training, technology and in compensation, including our unique Fuel the Frontline stock ownership program.

We believe these investments have enabled us to attract the very best parts people in the business and are enabling continued improvement in primary execution metrics, like Net Promoter Score, units per transaction, and ultimately, sales and profit per store.

Finally, we took steps to reduce corporate and other SG&A costs in the quarter.

This includes 3 broad territories: integration, safety and new ways of working.

In terms of integration, our finance ERP is near completion, and we continue to build proficiency in our global capability center at Hyderabad, India.

I'd like to take this opportunity to recognize our India team who stood up an entirely new operation literally in the middle of a global pandemic last year.

We've been working hard to support them as COVID-19 infection rates have risen in India over the past few weeks.

The GCC team, including IT, finance and HR Team Members today has certainly enabled us to reduce costs, both in terms of CapEx and OpEx.

In addition, the IT team brings new skills in the area of software engineering, data analytics and artificial intelligence.

These critical capabilities will help enable the successful implementation of our many tech initiatives.

Secondly, our safety performance continues as field leaders across Advance hold their teams accountable as we build a safety culture.

We delivered a 9% reduction in our total recordable injury rate compared to the previous year and reduced our lost time injury rate 2%.

By focusing on people, behavior and continuous improvement, we're reducing claims and overall costs.

Third, we recently completed a thorough review on the ways we work in our corporate offices and incorporated key learnings from working remotely for over a year.

The objective was to ensure our corporate team is focused on our highest-value priorities while eliminating less productive work.

From this work, we announced a restructure of our corporate functions and the reduction of our corporate office footprint.

This will result in savings of approximately $30 million in SG&A, which will be realized over the next 12 months.

We also believe this streamlined approach will be more effective to supporting our field and supply chain teams.

While we're pleased with our Q1 performance, we're confident that there is so much more opportunity ahead.

To fully realize our potential, we plan to continue to invest in our brands, the customer experience, our Team Members and market expansion to drive top line growth above market.

Our entire team also remains focused on the execution of our margin expansion initiatives.

We're energized and focused on building on the momentum we saw in Q1 to execute our long-term strategy in the months to come.

Now let me pass it over to Jeff, who will go into more details on our financial results.

Thanks, Tom, and good morning.

And thanks to everyone joining us today, especially our Team Members who continue to work tirelessly, which has contributed to the results that we're reporting today.

In Q1, our net sales increased 23.4% to $3.3 billion.

Adjusted gross profit margin expanded 91 basis points to 44.8% as a result of improvement throughout gross margin, including supply chain, net pricing, channel mix and material cost optimization.

These improvements were slightly offset by unfavorable inventory-related costs, product mix and headwinds associated with shrink and defectives.

Our Q1 adjusted SG&A expense was $1.2 billion.

On a rate basis, this represented 35.8% of net sales, which improved 387 basis points compared to 1 year ago.

The improvement was driven by sales leverage in both payroll and rent as well as lower claim-related expenses from the company's emphasis on safety.

We discussed our labor management system previously, but we really saw the benefit this quarter as we staffed our stores based on customer needs, utilizing nights, weekends and an improved mix of full and part-time schedules.

In addition, our ongoing focus on Team Member safety will always remain one of our highest priorities.

The savings were partially offset by an increase in field bonus costs related to our improved performance.

In addition, as Tom outlined earlier, we invested in marketing during Q1, primarily associated with DieHard.

This lapped marketing cuts the previous year, which were made at the onset of the pandemic.

We also saw an increase in third-party and service contracts related to our transformational plans, primarily within IT.

Related to the increased COVID-19 cases we saw late in 2020 and early 2021, we incurred approximately $16 million in COVID-19 costs during the quarter, which was flat to the prior year.

While the future impact of COVID-19 remains unknown, we expect these costs to subside throughout the year, assuming infection rates continue to decline.

Our adjusted operating income increased from $113 million last year to $299 million.

On a rate basis, our adjusted OI margin expanded by 478 basis points to 9%.

Finally, our adjusted diluted earnings per share was $3.34, up from $1 a year ago.

Our free cash flow for the quarter was $259 million, an increase of $330 million compared to last year.

The improvement was primarily driven by year-over-year operating income growth as well as improvements we achieved from working capital initiatives, including higher utilization of our supply chain financing facilities that we began to see during the pandemic last year.

Our AP ratio improved by nearly 1,000 basis points to 84%, the highest we've achieved since the GPI acquisition.

A portion of the improvement is attributable to the actions we took during the pandemic and the continued partnerships we have with our suppliers.

In the quarter, we spent $71 million in capital expenditures versus $83 million in the prior year quarter.

We expect to be within our guidance for capital expenditures as we continue to invest in our transformation initiatives.

During Q1, we returned more than $200 million to our shareholders through the repurchase of 1.1 million shares and our quarterly cash dividend.

We expect to be within our 2021 share repurchase guidance of $300 million to $500 million.

Additionally, as you saw during our investor presentation in April, our Board approved our quarterly shareholder dividend of $1 payable on July 2.

As outlined in our press release this morning, we've seen continued momentum in the first 4 weeks of Q2, with our 2-year comparable store sales growth rate in line with the 2-year stack we reported in Q1.

Miles driven are beginning to grow for the first time in over a year.

And historically, this has been an overall positive for our industry.

In addition, our professional business is accelerating, and we expect pro to outperform DIY for the balance of the year.

For these reasons, we're raising our comp sales guidance to up 4% to 6%.

We're also cognizant of several macroeconomic factors.

This includes inflationary costs in commodities, transportation and wages, along with currency headwinds.

As a reminder, our industry has historically been very rational and successful in passing on inflationary costs in the form of price, and that is our intention this year as well.

Also, our pro business carries a lower-margin rate than DIY, which may partially offset the gains we expect to see in sales.

As a result of our top line strength and current cost assumptions, we're updating our adjusted OI margin range to be between 9% and 9.2%.

Our guide for comp sales is now up 3 full points.

And our adjusted OI margin rate is now up 30 basis points compared to our initial guidance provided in February.

We remain committed to delivering against the strategy we laid out in April and are confident in our ability to execute our long-term strategic plans to deliver strong and sustainable total shareholder return.

Now let's open the call for your questions.

Operator?

(Operator Instructions) Your first question here comes from the line of Christopher Horvers from JPMorgan.

So a couple of questions here on the top line.

Overall in 1Q, did pro outperform DIY?

And can you talk about how that -- those 2 channels look on a quarter-to-date basis, i.e., is sort of DIY still positive?

And then more broadly, on a quarterly basis, how are you thinking about cadence of comps for the balance of the year?

Chris.

So first of all, on the first quarter, DIY outperformed pro.

And as we outlined in the prepared remarks, it was really early in the quarter, a continuation of what we've seen all of last year, strong performance from DIY, pro lagging.

And then obviously, as we got towards the end of the quarter, that started to change.

And this is beginning to lap the unusual events of last year.

Clearly, April and May was the low point for professional sales last year when the pandemic hit and work remote orders were put in place.

And you really saw a difficult environment for the installer community.

And I'm really proud of what we did at that point.

I mean we stayed with it.

We supported our pro installers.

We didn't have anybody furloughed or anything like that.

People are out on the street, helping them out.

And that's really helped us through the year last year and into this year.

And so now as we start to lap those results, pro is significantly outperforming DIY, and we expect that to continue for the balance of this year.

So we're very excited about that, obviously, given that 60% of our business is pro.

And then in terms of the cadence, we're obviously early on in the year.

We know there was a huge surge on DIY in 2020.

We talked about that throughout the year last year.

There's some trends that -- some of which could be stickier than we initially thought when we planned the year, people with time on their hands.

There's the stimulus impact last year.

There was shift from big box.

How is it all going to unfold for the balance of the year is difficult to say.

But clearly, we're off to a good start in Q2, and we'll keep monitoring it as the year goes on.

Got it.

And then as a follow-up, can, Jeff, can you talk about what the unfavorable inventory costs are?

And do you expect that to continue?

And more broadly, what are you seeing in the pricing environment from your peers?

Are costs being passed through at this point?

Or is there pressure on having to hold back?

Sure.

First, on the inventory related, that's really the capitalized supply chain costs.

And we had a really interesting phenomenon this quarter that we typically don't have in previous quarters, where our inventory was down substantially over $60 million in the first quarter.

And when we do that, we recognize the capitalized supply chain costs that are associated with that sitting on the balance sheet.

If you contrast that to last year or even 2019, it's generally inventory build.

We're building inventory in the first quarter as we prepare for the spring selling season.

In 2020, inventory was up over $90 million, and if you want to go back to 2019, it's up over $70 million.

Now the good news, Chris, is that translates into very favorable free cash flow, which you saw in terms of the good operating cash, over 300 -- almost $330 million in operating cash, $259 million of free cash flow.

So realizing that is very favorable for our cash balance.

In terms of pricing, we took a number of pricing actions during the end of last year, beginning of this year.

We're seeing it flow through.

We haven't seen any resistance there from a pricing standpoint, so we feel really good about that.

We know there's some inflationary factors that are coming, and we're planning to address those.

But for the quarter, our pricing actions took hold, and we were really pleased with the results.

Your next question comes from the line of Michael Lasser from UBS.

On the capitalized inventory costs, have you been able to clean up some of your inventory such that this is going to be less of a factor moving forward and could actually put the bias to upside?

Just some of your long-term gross margin expectations.

Yes.

Over time, we'll see improvement.

I wouldn't expect it this year.

I think we're going to continue to see this over the course of the year.

It's an area that's going to be a little bit fluid, which -- part of the reason we didn't change guidance associated with free cash flow is our inventory levels are down significantly compared to the end of last year.

So we want to make sure we have the in-stock availabilities, the most important thing in this industry, making sure we got the right part at the right place at the right time.

And so we're looking at our in-stocks across the organization, making sure that this inventory is forward deployed.

So there's really going to be some puts and takes throughout the year.

But over time, Michael, to your point, we do think those costs will come down as we take overall cost out of the supply chain.

Okay.

My follow-up question is, do you expect that we're going to see greater spread of your outperformance versus the industry in the back half of the year, given your lean toward the DIFM segment and the Northeast, which had underperformed?

And if DIFM outperformed for you in the back half of the year, how is that going to impact your gross margin given the relative margin differential of those 2 segments?

Sure.

Michael, I'll comment first on your previous question.

I think the one thing I would add on the inventory is we're going to see a bit of an uneven recovery across the country.

We're seeing it now.

Geographically, we're seeing it differently -- played out differently by category.

We're seeing it play out differently.

So we're obviously making some bets on inventory to make sure that we're able to delight the customer when they need us.

In terms of the performance in the back half, yes, I mean we are a professional organization.

With 60% of our business in there, we definitely would see us continuing to benefit from that trend in the back half of the year overall.

Geographically, absolutely, we called out in our remarks that the Northeast was leading the country quarter-to-date.

We haven't seen that in over a year.

So those are 2 big factors that help us out.

And obviously, we're excited about both of those trends.

We've got multiple banners on the professional side that are all cranking right now.

Our installers are covered up.

We've got cars waiting out there to be repaired.

People are getting back on the road.

Miles driven are recovering.

So all of those things are very positive.

And we fully contemplated the impact on gross margin.

We obviously recognize that the pro margins are lower than that of DIY, and that's fully contemplated in the guide.

So we'll continue to focus on expanding our margins with the initiatives we outlined in April.

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

My first question is on the guidance raise.

Can you talk about what you flowed through?

It seems like there is the first quarter upside, maybe some incremental in the second quarter.

And then did anything change with regard to the back half of the year?

Yes.

There's really 4 things that we were contemplating when we were taking another look at the guide.

Obviously, it's a very fluid situation given that this is the second time we've raised our guidance in the last 45 days.

But the first is really what Tom mentioned, is really getting a better understanding of that shift from DIY to pro.

That's number one.

The second and third is exactly what you just mentioned, Simeon, which is the clarity we have on Q1 in terms of the beat.

Beat coming in at 9% versus the 8.5% to 8.7% that's modeled in.

And then the upside that we're seeing early on in Q2, we've modeled some of that.

And then the last one that I would throw in there is our assessment around inflation.

We're seeing inflation in a number of different categories.

And so while that would benefit the top line in the form of higher comps, we wouldn't see that flow through as much.

We generally, we and the industry, price to maintain margin rate.

So those are the 4 things that we contemplated that were, quite frankly, different 45 days ago and why we thought it was prudent to update guidance now.

Okay.

That's helpful.

And then a different topic, maybe for Tom.

This is going back to margin opportunity over the next few years.

And it seems like a lot of these initiatives or these transformations are starting to take hold.

My question is the dependence on sales to drive margin is something we've talked about in the past.

Do you feel better?

I don't think you'd be satisfied if sales aren't growing, and I think that's the ultimate essence of transforming the business.

But can you talk about how dependent your margin goals are on sales?

Is there some portion of margin that you think this business can achieve without seeing consistent sales growth?

And again, I'm not saying that's the goal, but curious if you can separate the 2.

Sure.

Well, the 4 territories that we talked about, Simeon, really the one that is most sales dependent is obviously sales and profit per store.

There is a leverage component to that in our outlook.

I mean we talked about 240 to 440 basis points of margin expansion.

And the range of revenue growth that was contemplated was 3% on the low end and 6% on the high end, if you remember.

So obviously, the one that swings the most is that particular one.

Now there are pure cost-out initiatives in there, without question, return, shrink, defectives.

We've got ways of improving profit per store without sales.

But that is the one that has a dependency there.

Supply chain, the vast majority of the supply chain initiatives are not sales dependent.

These are just pure productivity opportunities.

You're familiar with the cross-banner and warehouse management system implementation, but also the 2 new ones that Reuben outlined in the April presentation.

Neither of those are sales dependent.

Those are just improving our current efficiency and how we get product from distribution centers to the stores and how we move product in market.

Category management is a pure rate play.

There is really no sales dependency on category management.

And then, obviously, the SG&A moves in the ERP implementation, the new ways of working, those are all -- none of those are sales dependent.

So the majority of the initiatives we have are not sales dependent.

Obviously, the more sales we have, the more we get, not just leverage on those that are contemplated in the initial low end of the guide, the 220, but we get leverage on other fixed costs, which takes us up to the 440.

Hope that helps.

Your next question comes from the line of Kate McShane from Goldman Sachs.

I was curious about the news with regards to the Pacific Northwest.

I wonder if you could remind us of your exposure to the region before the new stores and what the opportunity is for expansion there.

And then in the same vein, in terms of geography, I know you're in the process with the Pep Boy stores, converting them and they're opening in 2022.

But is there a time frame in 2022 when they'll all be open?

Kate, first of all, we have limited exposure on the West Coast, is the short answer.

And this is a huge opportunity for us.

Essentially, we've been working at strengthening our core value proposition here for several years now, as you know.

And the investments we've made in that value proposition are now yielding comp sales performance at the kind of levels that we aspired to from the beginning.

We've had 3 straight years of comp sales growth, and we would say we've earned the right to expand and take that proposition elsewhere.

You think about bringing the work we've done on availability, making sure that our industry-leading assortment of parts is available to people in Portland just like it is in Boston.

Bringing DieHard to the West Coast is a huge opportunity for us.

Our team was on the ground the week we announced the Pep Boys leasing arrangement.

And the first thing people talked about in the stores when we went out there was DieHard.

They were very excited to hear that they'd be selling DieHard batteries.

All the digital investments that we've made in our online platform, whether that's the B2B website that Bob Cushing leads with Advance Pro, the B2C website that Jason leads, and our app, we bring that to these markets.

We're able to supplement our pro customers who are out there today, our large professional customers that we sell to nationally but cannot sell to in those geographies because we don't have the presence to do so.

So we're able to integrate the digital and physical asset piece.

So we're very excited about the announcement with Baxter.

They're a terrific organization.

They've got a tremendous track record.

And they're very excited about converting to the Carquest banner here soon.

And then in terms of southern California, as we -- as you heard, we have 109 locations.

We're going to start converting those soon, and we expect to complete that in 2022.

So that's really a quick rundown of what we're doing out there.

I got to tell you, our team is so excited about being able to open new stores after a couple of years where we were closing them.

And clearly, that's something that brings in new energy to the organization overall.

Your next question comes from the line of Greg Melich from Evercore ISI.

I guess 2 follow-ups.

One was on the 2-year stack trend of 15%.

Could you break that down to DIY and pro?

I assume that on a 2-year, DIY is still outperforming pro.

And do you think that's going to flip in the second quarter?

First of all, yes, DIY is still outperforming pro on a 2-year.

The expectation is that, that will start to moderate.

Obviously, Greg, as we go through it.

I mean the peak of the DIY surge, if you will, was kind of right now, right through the end of July.

And through the end of the year, it didn't stay at these levels.

But we're about to see year-over-year, June and July, just to be clear, the full year number through the syndicated data that we can see is 6.6%.

So there is quite a variation in the categories within DIY.

Those categories that rely on miles driven, they didn't do that well even inside of DIY.

I mean better than historical, obviously, but nothing compared to batteries where intermittent driving causes failure.

So we expect pro to outperform.

I think as we get towards Q3 and Q4, you'll see those 2-year stacks start to come closer together.

But in general, the DIY business tends to be a little bit more volatile, as you know.

Sure.

But the gap is still like 1,000 basis points on a 2-year.

Would that be fair?

It's -- we haven't broken it out.

It's still a pretty significant 2-year gap.

Okay.

Great.

And then second was on inflation.

I know we asked multiple ways, but I just want to make sure I got it right.

The comp guide increase was a lot of inflation, or at least that was a chunk of it versus a few months ago.

Is -- how should we think about that as a holistic number?

I think when we had the China tariffs a few years back, it got up to around 3%.

Then maybe it was 1% last year.

Are we back at sort of a 3% number or still more in between 1% and 3%?

Yes.

So when we put out our original guidance in February, we had contemplated an inflation range of, call it, 1% to 2%.

And as we're seeing some of the inflation coming in, whether it's the product cost, freight or labor, we're modeling an additional 1% to 2%.

So you could take the 3% as the midpoint, and that's sort of the way we're thinking about it right now.

And that's for calendar '22 or run rate going forward.

Yes.

For calendar '21.

For '21, yes.

Your next question comes from the line of Bret Jordan from Jefferies.

Question, I guess, on supply chain.

It does sound like we've got some, I guess, disruption around availability, whether it's shipping or materials or labor.

How are you seeing in-stocks?

And when you think about the cadence of supply chain disruption, are we on sort of an improving trend as far as availability of inventory?

Or are we still sort of challenged there?

Yes.

For sure, Bret, we have seen some slippage on in-stocks, unfortunately.

The peak of the, let's say, the more global impact of disruption was probably 2 months ago.

So we're not necessarily seeing what we saw 2 months ago, but we're still seeing some suppliers.

And it's not necessarily that they're not trying to get us the product.

They just can't -- they can't load a container or something like that in their location.

They can't get people.

You're familiar with the shortage of labor.

So it's things like that, that are causing the disruption.

We're gradually picking it back up, I think.

We're very thankful our suppliers have really done everything they can to keep us in stock.

We feel like we're well positioned competitively.

We don't think this is a competitive disadvantage at all.

If anything, we've got an advantage relative to some of our peers in -- or some of the key competitors in the professional side of the business, but it's definitely improving, and we're continuing to work closely with our suppliers to close any gaps.

Okay.

Great.

And then one question, we can't leave without mentioning price investment.

I guess when you think about the cadence or the performance of the pro business, are you seeing any outperformance versus national accounts versus the independents?

And do you see any changing level of competition from peers relative to those pro accounts?

We are seeing a huge surge in pro in general, okay?

So there is strength across all of the professional sales channels.

And some of the strategic accounts last year, I would say, took a little bit more drastic actions at this point in time than some of the independents, and that's contributing to the lap being a little bit lighter, I guess, on that side of the house.

So we are seeing a surge there.

But we work really closely with our strategic, Bret, as you know.

They're very important to us.

We continue to see them growing in importance.

And we make sure we're taking care of them, and we're going to continue to do that.

But I do think, as we look to the balance of the year, some of those strategic accounts that took some pretty significant actions last year could outperform.

Your next question comes from the line of Zach Fadem from Wells Fargo.

I just wanted to clarify some of the moving parts on the outlook.

It looks like the higher end of the 4% comps on the prior outlook is now the low end.

But if you look at the EBIT margin on the 4% comp, down from 9.1% to 9%.

I'm hoping you can walk through the change in flows through assumption here in a little bit more detail in terms of whether this is more the pro mix and inflation factors you mentioned.

Or is there any offsetting SG&A component as well?

No.

It's exactly what you just said.

It's really given us some better color on the shift from DIY to professional, which, as you know, carries an overall lower margin.

And in addition to that, it really is a better understanding of what we were just talking about, which is the inflation.

And we believe, we know through past experience that we've been able to maintain rate, but we're not going to improve rate through pricing.

So we feel that those 2 items, while it gives you a good top line, it doesn't necessarily translate to the bottom line.

We just have better insights into that.

In addition to that, we are cognizant of the potential for consumers to shift into more value categories.

So that was a factor we considered as well.

Now if those things go the other way, we're not going to be near the low end.

We're going to be closer to the high end, but those are the types of things that we considered when we took another look at the guidance.

Okay.

So just to make sure I understand.

You're sizing all of those factors as about 10 basis points, correct?

Yes.

Yes.

Okay.

Perfect.

And then in terms of the restructuring costs, can you talk a little bit more about what drove the step up here in Q1?

And what you're now embedding going forward for the year?

Yes.

The Q1 was simply a function of the voluntary retirement program that we talked about during our Investor Day.

Actually, our non-GAAP or below-the-line number would have been lower had it not been for that.

And then we expect it to be consistent with last year going forward.

Next question comes from the line of Brian Nagel from Oppenheimer.

I've got a couple of questions.

I'll kind of merge them together and then -- first off, I know we've talked about inflation ready, but clearly, inflation has become more of a factor in your business, in your sector broadly.

As you look at the data, as you understand your consumer, is there a point at which the consumer would sort of say, pushes back and the ability of Advance to pass these costs along is no longer as significant or no longer is, I guess, relevant?

And then the second question I have, yes,l with regard to the updated outlook here, and clearly, it's extraordinarily fluid, a lot of factors.

But as you think about this, what could be the bigger surprise factors to the upside or downside as far as the end of the year in the guide in that results are different than what you expected?

Where would that variance, you think, likely come from?

Yes.

First of all, in terms of what point could inflation or pricing actions start to impact consumption, I think is your question, Brian, right?

Right.

Yes.

I mean we really measure that by customer journey, if you will.

If you look at a battery failure, as an example, my car won't start as compared to my brakes are squeaking as compared to -- I would like to accessorize my car or something like that, there's obviously different elements there of whether or not somebody is going to defer anything.

The reality is on failure-related items, it's unlikely that it's going to have a big impact.

It certainly hasn't had a big impact historically.

And as long as we're competitive, we'll continue to see growth there.

There may be some things that end up getting deferred based on the job type.

But in general, this industry has been incredibly resilient at being able to pass on pricing, and I think that's what you're going to continue to see.

Your second question was on the outlook.

I think the short answer is we've obviously contemplated some level of pricing in the outlook.

And we've also contemplated how much of that's going to flow through all of the variables there.

If the pricing flows through at what we've guided, we'll obviously be right there in the guide.

If it's better than that, we'll be better.

That's really the answer.

It's -- that's probably the biggest variable that's out there.

All the rest of the stuff is fully within our control.

But to your point, on the consumer receptiveness to pricing, we'll see.

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

Tom, I want to start on the gross margin line.

You mentioned continued success, graduating loyalty tiers, moving customers up.

Can you talk about the gross margin implication from that graduation?

Will it be a headwind due to higher kind of earned customer rewards as we move through the year?

And is that potentially another headwind as we move through the year and think about the gross margin trajectory?

Sure.

Well, first of all, our Speed Perks platform, which is our loyalty program, is extremely important for us.

We think we've got tremendous runway.

We're still transacting in the mid-30s range.

And best-in-class would say that number could be dramatically higher than that.

There are some retailers that are north of 80%.

So it's a platform that we're going to use to personalize our offer and use first-party data to get much more relevant with how we engage our customers.

Obviously, we do have discounts in there, but we manage that holistically.

We manage that across the broader portfolio.

And as people migrate up to these higher levels, that's fully contemplated in what discounts we use and how we offer value to those customers.

So we won't see any kind of degradation on gross margin as we migrate people to up to these higher tiers.

What we will see is higher share of wallet, which is what the aspiration is so that we can move from -- like in the case of VIPs, you're significantly underpenetrated with your most loyal customers.

So you want to increase that share of wallet significantly.

And that first-party data that we get from them enables us to get much more relevant.

We know their vehicle.

We know the weather patterns in their geography.

We know their driving patterns.

That allows us to personalize.

Helpful.

And then you mentioned also marketing being a focus for your owned brands and the growth we've seen there.

Obviously, it's been higher given the DieHard rollout.

That should presumably moderate from here, given DieHard's getting more known.

I guess, one, is that a correct assumption on marketing expense?

And then secondly, as industry demand does slow from these higher levels, do you think increased marketing will be needed or increased promotions will be needed to keep those sales rates up?

Or how do you think the industry responds from a marketing or promotion expense -- or promotional outlook as comps slow?

Sure.

Well, let me distinguish between those 2 because I see them very differently.

Promotions or pricing is very easy to replicate, right?

Somebody drops their price.

Somebody else drops their price.

I mean it's -- we measure our competitive price index literally every day.

So we're looking at what's going on inside of our industry, and we have algorithms that help us determine how we're going to price what category in which geography and those kinds of things.

Marketing is an investment.

I mean marketing is an investment in driving margin expansion.

When we invest behind a DieHard marketing campaign, as we did last fall and in the first quarter, the intention there is to build loyalty, to build equity in the DieHard brand, to build awareness of the fact that DieHard is available at Advanced Auto Parts.

And when we do that, what we find is we actually are able to reduce our promotional discounting and build the strength of that brand because it's trusted by the customer.

So they're very different.

And one of them is relatively easy to replicate.

The other one is more difficult to replicate.

And that -- we'll invest in marketing when we get a return that expands margins.

That's the focus of our marketing dollars.

Your next question comes from the line of David Bellinger from Wolfe Research.

So you and your larger competitors have all gained a significant amount of market share in the past, say, 18 months.

So my question is, what would really change that?

Is there anything you're currently monitoring within the marketplace?

Or is it simply the new dynamic we're in and the payoff from all the investment spending over the past few years?

Maybe just talk about the sustainability of the elevated share gains as well.

Yes.

I think it's a pretty unique time, David.

I mean, obviously, we talked about this in our April presentation that this is a very fragmented market, particularly on the professional side.

And right or wrong, last year was a highly disruptive time for, well, everything, but certainly our industry.

And at the time, if you think back to the second quarter, a lot of companies took some pretty drastic actions with their workforce and how they approach the pandemic.

And we stayed with it.

We stayed with it.

We had people on the street, as I mentioned earlier.

We had our training programs.

Our people put on a mask every single day and went out there and served our customers.

And being an enduring time for the world, I mean, I think those pro installers have remembered that.

And so I do think that it's conceivable that the larger players who behaved in that manner could see share gains, outsized share performance for a period of time as a result of that.

And when the larger players are a fairly small slice of the overall pie, and we have scale, we have parts availability, we've got great brands, we think that we can continue to show outsized performance relative to the industry for a period of time.

Yes.

Yes.

That's a fair point.

And I just want to follow up.

So you talked a lot about private label.

Can you size the potential for your owned brands and give a percentage of sales and what that could go to over time?

And how do you balance that opportunity with your core consumers and pro accounts.

Who place a lot of value on branded OEM parts?

Just help us bridge that gap.

Well, 2 things.

First of all, let me start with the fact that our national brand suppliers are extremely important for us.

And they play a key role in our assortment and our availability.

We have the largest number of stock parts in market of anyone in the industry.

Terrific relationships with our national brand partners, terrific relationships with the OE suppliers that we have out there.

So that gives us a competitive advantage.

And we are going to continue to offer those brands where it makes sense for our business.

This is about choice, not necessarily about an either/or.

It's a bit of an and.

So that said, where we have a category where we can bring the Carquest trademark into that category, offer it to our customers, with very, very high quality, and I want to really emphasize that.

Our Carquest parts are OE quality.

It's got a tremendous reputation.

The Carquest brand has been around for a very long time.

The professional installers love the Carquest brand.

And our merchant team goes out and works very closely with our suppliers to make sure when we put the Carquest name on that box, it's going to be OE quality.

So we offer that.

If the customer chooses on the lookup that they want Carquest, they choose Carquest, great.

If they choose the national brand, they choose the national brand.

Now having said that, as we brought strength to some of these categories with Carquest, we are seeing our customers choose Carquest, which -- back to your initial question, we are roughly -- we think we're about 10 points underpenetrated versus our potential.

And while we won't get there in the next 3 years -- 2023 is obviously the strategic plan time line we outlined in April.

It's a pretty significant number in the 200 basis points of margin expansion we expect from category management.

So that's fully contemplated.

And as we roll out all the SKUs, we'll be in great shape to capture that margin opportunity.

Your next question comes from the line of Seth Basham from Wedbush Securities.

Tom, if you could remind us what you see as the biggest contributors to margins improving on an underlying basis this year?

And which ones you have the most confidence in?

That would be great.

Sure.

Well, I think we've said previously that gross margin is going to be the bigger contributor on a full year basis.

Very confident in the category management initiatives.

We'll leverage supply chain.

There's obviously some things with supply chain this year.

We are seeing some wage inflation on supply chain that we didn't plan, if you go back to last fall.

But we still believe we've got an opportunity to leverage supply chain based on the initiatives that we have there.

As you go into SG&A, I mean we're going to execute the initiatives we have set.

So we've already done the restructure.

And I think the restructure, just to be clear, it wasn't just a cost play.

We've been able to really organize our corporate team around the highest-value priorities.

We streamlined and simplified the work.

We've given more responsibility to the top people in this company.

And yes, we saved what we outlined in the April meeting, about $30 million, which we'll realize over the next 12 months.

So that's a AAA bond.

We'll get that.

There are some offsets though inside of SG&A this year, as you know, that we're -- that will minimize that benefit, I guess, that we're getting out of SG&A.

But that's a quick run through.

More from gross margin, not as much from SG&A.

Got it.

So it seems like there's a high degree of visibility for the margin improvement this year and really over the next couple of years, of course, depending on the sales outlook.

Is that the appropriate assessment?

Yes.

Yes, absolutely.

And there are no further questions.

I will turn the call back over to Tom Greco for closing comments.

Well, thanks to all of you for joining us this morning.

And as you've heard, we're incredibly proud of how the AAP team continues to execute against our long-term priorities, while serving the customer every day with care and speed.

We're very confident in the strategic plan we outlined in April, and importantly, in the team we have here at AAP to deliver growth above the market, to capitalize on the unique margin expansion opportunity, and to return a significant amount of cash to our shareholders, which over the next few years, is going to enable us to achieve top-quartile total shareholder returns.

Before we let you go, having just celebrated Memorial Day this week, I'd like to take a moment and recognize and honor all the brave men and women who paid the ultimate sacrifice defending our country.

On behalf of the entire Advance family, I'd like to express our sincere gratitude for their service and all they've done defending our freedom.

I hope that you all continue to be healthy and safe.

And we look forward to speaking with you again in August.

And this concludes today's conference call.

Thank you for participating, and you may now disconnect.