領先汽車配件 (AAP) 2020 Q4 法說會逐字稿

Welcome to the Advance Auto Parts fourth quarter 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.

Good morning, and thank you for joining us to discuss our Q4 and full year 2020 results as well as our 2021 outlook 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 will 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 facts are forward-looking statements, including, but not limited to, statements regarding our initiatives, plans, projections 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.

Thank you, Elisabeth, and good morning to all of you joining us today. I hope you and your families are healthy and safe amid all that we've endured over the past 12 months. Here in Advance, we're incredibly grateful for the way our entire team persevere. When the reality of COVID-19 descended on our communities in March of 2020, we found ways across AAP to meet new, unfamiliar challenges with innovation and agility. I'd like to thank all of our team members as well as our independent partners for their commitment to safely serve our customers. As an essential business, their efforts have been critical to keep America moving during a time of great need.

As you've heard from us throughout this pandemic, we remain focused on 3 overarching priorities: first, protect the health, safety and well-being of our team members and customers; second, preserve cash and protect the P&L during the crisis; and third, prepare to be even stronger following the crisis. Our results in Q4 and for the full year demonstrate that our unwavering focus on these priorities has enabled meaningful progress towards our long-term goals.

From the beginning, we've invested in compensation for our frontline and distribution center team members, enhanced benefits, cleaning, personal protective equipment and innovative ways to serve our customers. This helped ensure that our team members and customers feel safe coming into work and to shop. Our store and distribution center team members continuously stepped up throughout the year, and they are the true heros for us. In spite of many obstacles for our team, we saw significant improvement in organizational health and increased engagement scores throughout the year.

Fundamentally, we are building trust in the Advance brand at an enduring time for the world and one that our team members and customers will always remember. We're confident our COVID-19-related investments, which we believe will subside over time, are strengthening our employment brand, our customer brand and our corporate reputation for the long term.

In Q4, we delivered comparable store sales growth of 4.7% and margin expansion of 17 basis points. This includes an 82 basis point headwind related to COVID-19. Adjusted diluted EPS improvement of 14% to $1.87, including a $0.22 headwind related to COVID-19. For the full year, we delivered top line growth, resulting in record net sales of $10.1 billion; adjusted operating income improvement of 4.1% to $827.3 million, including a $60 million headwind related to COVID-19; record adjusted diluted EPS of $8.51, including a $0.66 headwind related to COVID-19; and we also returned $515 million to shareholders through share repurchases and our continued quarterly cash dividend.

Jeff will cover more of the details of our financials shortly. But first, let's review our operational performance. COVID-19-related factors continued to affect channel performance in Q4 across our industry. DIY omnichannel led the way as it has since Q2. It's well documented that consumers are spending more of their time at home, likely contributing to the shift in discretionary spending from services to goods. Given economic uncertainty and elevated unemployment, many consumers are choosing lower-cost options for vehicle repairs and maintenance, benefiting our DIY omnichannel business.

Our Professional business continued to recover, with positive comp sales in both Q3 and Q4. Miles driven remain below prior year, in particular, for higher-income workers working remotely, who generally take their cars to Pro shops. This has limited growth in certain Professional sales channels and in key categories like brakes.

Geographically, all of our 8 regions posted positive comps in the quarter, led by our southernmost regions, including both the Southeast and Southwest. Meanwhile, our Mid-Atlantic and Northeast regions remained below our reported growth rate. As previously discussed, large urban markets in these regions have been more impacted by COVID-19, with the most significant decline in miles driven. The good news is that while there remains a gap between our highest- and lowest-performing regions, that spread continues to narrow. We're cautiously optimistic this will further narrow in Q1 based on improving trends and more favorable winter weather early in the year.

As we highlighted in our earnings release this morning, through the first 4 weeks of Q1, our comp sales were trending in the low double-digit range, with strength across both DIY and Professional. With respect to categories, DieHard is driving record battery sales and led our growth in Q4. In addition, appearance chemicals remain strong, a trend that began with the stay- at-home orders last April. Across our Professional business, our team continues to leverage our industry-leading assortment of national brands, OE parts and owned brands. For Pro customers, there's nothing more important than having the right part in the right place at the right time. To enable this, we continue to strengthen our dynamic assortment tool, which is now live in all our corporate stores and more than 700 independent locations that have opted in. This machine learning platform has enabled significant improvements in product availability, helping to drive over a 60 basis point improvement in Q4 close rates.

In addition, we continue to make enhancements to our online portal, MyAdvance. The ease of access and wide array of resources available now includes features like virtual training, which has been essential during the pandemic. The resources we provide through our Carquest and Worldpac technical institutes allow our Pro customers, including all technicians within their shop, to attend interactive virtual training.

Additionally, we continue to update our comprehensive catalog of technical service bulletins through our MotoLogic platform. We believe Pro customers are recognizing and appreciating our investments to improve parts quality, product availability, delivery speed and the digital experience, resulting in higher enterprise Pro online sales and share of wallet.

These actions have also enabled growth of our TechNet customer base, with approximately 1,400 new TechNets added in 2020. Finally, we continued increasing our Carquest independent locations in 2020, welcoming 50 new stores. Our independents remain a valuable component of our overall strategy, and our team remains focused on further expansion.

Moving on to DIY omnichannel. We've gained share in every region and across most categories in both Q4 and for the full year based on the syndicated data available to us. We believe our share gains are the result of our focus in 4 areas: first, the launch of DieHard; second, building awareness in regard of Advance through differentiation; third, improving customer loyalty through Speed Perks; and fourth, improving store execution.

Starting with DieHard. Despite the challenges of the pandemic, our team successfully launched DieHard as planned and executed a marketing plan unlike anything we've ever done before at AAP. Our #DieHardisBack campaign featuring Bruce Willis, let consumers know that the iconic DieHard brand was back, and they could now buy DieHard at Advance and Carquest. This campaign is already improving top-of-mind and unaided awareness for DieHard.

Our Speed Perks program is an important tool to drive customer loyalty. Our team continues to invest in personalization for Speed Perks members, driving higher engagement, long-term loyalty and increased share of wallet. In 2020, we grew our VIP members, those with an annual spend of $250 to $500, by nearly 15%. And our elite members, those with annual spend of more than $500, by more than 20%.

To wrap up the discussion on DIY omnichannel, we continue to see improvement from our initiatives, including our Net Promoter Scores. This gives us confidence that we're on the right track to sustain sales and share momentum in 2021.

Moving on to an update of our 4 pillars of margin expansion. I'll begin with sales and profit per store. As a reminder, following 3 consecutive years of declining sales per store, we finished 2017 at approximately $1.5 million per store. Over the last 3 years, we've been optimizing our footprint, including the closure of 273 underperforming stores. Our sales per store have now grown for 3 consecutive years, and we finished 2020 at nearly $1.7 million per store.

We're also executing a focused agenda to leverage payroll while reducing shrink, returns and defectives to drive 4-wall profit per store improvement. In addition, the ongoing focus on team members is enabling us to attract the very best parts people and to reduce turnover. Our team members are a differentiator for Advance. And 4 years ago, we made a commitment to dramatically improve retention.

Continued investment in our unique Fuel the Frontline program with more than 22,000 stock grants awarded since inception is creating an ownership culture. In the current environment with an increased competition for talent, we're reducing store turnover and enhancing our employment brand. We now have 3 straight years of comp sales growth and the closure of underperforming stores behind us. We're excited to announce that we plan to expand our store base and geographic footprint this year and expect to open 50 to 100 new stores.

Our second margin expansion pillar is supply chain. While we paused our cross-banner replenishment and warehouse management system initiatives early in 2020, our team found ways to innovate and make progress on this productivity opportunity later in the year. The expansion of cross-banner replenishment is on track with the timing we communicated in November, as we finished the year with just over 40% of the originally planned stores completed. We are on track to complete the originally planned stores and DCs by the end of Q3 2021, and the full run rate of savings will come beginning in Q4 2021.

In addition, the implementation of our new warehouse management system, or WMS, continued in Q4. We converted our fourth DC by year-end as planned, and we're on track to complete our largest buildings this year. We believe we can capture roughly 75% of the savings from this initiative in 2022.

Moving on to category management. The expansion of our own brand assortment is a key component. This includes an increase of Carquest-branded assortment in engine management and undercar. Carquest has an excellent reputation with installers, and new products have been very well received by both Pro customers and Carquest Independents. In 2020, we also launched our strategic pricing initiative to enhance our capabilities while incorporating customer decision journey insights into price and discount decision-making.

Finally, our fourth pillar of margin expansion involves reducing and better leveraging SG&A. The successful execution of our field restructure, back office consolidations and safety initiatives benefited SG&A in the quarter and will enable further improvement in margin expansion going forward. As we called out in November, SG&A was elevated in Q4 primarily due to COVID-19-related expenses and other factors that Jeff will detail shortly.

To summarize, we're now in execution mode on our key growth and margin expansion initiatives. Our mission is passion for customers, passion for yes, with the goal of serving them with care and speed. We've made many necessary changes at AAP in recent years. But one thing that has not changed is the content knowledge, the passion and the commitment of our team members and independent partners. Our actions have strengthened Advance, enabling us to compete more vigorously.

Finally, we're very excited to share our third sustainability and social responsibility report next month. And we'll be providing a strategic update of our long-term plans on April 20. With that, I'll pass the call to Jeff to discuss our financial results in greater detail as well as our 2021 guidance.

Thanks, Tom, and good morning. I, too, would like to begin by expressing my gratitude to all our team members for the extraordinary focus and effort throughout 2020 despite the unprecedented times. Our entire team adjusted, adapted and continued to execute our priorities. In Q4, our net sales of $2.4 billion increased 12%. Adjusted gross profit margin expanded 192 basis points to 45.9%, driven primarily by inventory-related items, cost and price improvements as well as supply chain leverage. As our primary focus throughout the year was on the health and safety of our team members and customers, we temporarily paused our physical inventory counts earlier this year. When we resumed these in Q4, our actual shrink rates were far better than we have anticipated. This resulted in a benefit in inventory-related costs due to a reduction in the reserve to reflect the positive result.

LIFO-related impacts were a tailwind this quarter versus prior year. This will be the last quarter we include the LIFO impacts in our adjusted financial results as we will begin reporting in Q1 2021, excluding any benefits or expenses from LIFO in our adjusted financial measures. We believe this adjustment creates a more accurate picture of our operational results and is more in line with industry practices.

Our Q4 adjusted SG&A expense was $913.5 million. On a rate basis, this represented 38.6% of net sales compared to 36.9% in the fourth quarter of 2019. The single biggest driver of this increase was $19 million in COVID-related costs directly attributable to the unanticipated spike in case rates. We also incurred higher Q4 medical claims as a result of lower claims during the prior quarters. In addition, our short-term incentive compensation for both field and corporate team members was higher than prior year.

Separately, we invested behind the launch of the #DieHardisBack campaign. We also incurred lease termination costs related to the ongoing optimization of our real estate footprint. We believe these expected investments in DieHard and lease optimization will result in top and bottom line improvements.

Despite higher SG&A expenses, adjusted operating income increased 14.6% in Q4 to $171.8 million. On a rate basis, our adjusted OI margin expanded by 17 basis points. Finally, our adjusted diluted earnings per share was $1.87, up 14% from prior year despite a $0.22 impact in the quarter from COVID expenses.

For the full year, which includes an additional week versus 2019, we delivered record net sales of $10.1 billion, which increased 4.1%. The 53rd week added approximately $158 million to sales. Our adjusted gross profit increased 5% year-over-year, and adjusted gross profit margin expanded 38 basis points.

Adjusted SG&A expense for full year 2020 increased 5.2% from 2019 results. This is primarily the result of COVID-related expenses discussed earlier as well as the 53rd week. We estimate the additional week resulted in a headwind of approximately 1.5% to our SG&A costs in the year.

Our adjusted operating income increased 4.1% to $827.3 million. And our OI margin was 8.2%, flat compared to prior year. Adjusting for the $60 million in COVID costs, our adjusted operating income margin expanded 59 basis points. Our full year 2020 adjusted diluted earnings per share was $8.51, which is a new record for Advance and includes a headwind of $0.66 related to COVID costs. We estimate the impact of the 53rd week with a tailwind of approximately $20 million to our adjusted operating income and a benefit of approximately $0.23 to our reported adjusted EPS for the year.

Our capital expenditures in Q4 were $75 million for a total investment of $268 million for the year and in line with our previously stated expectations. As we've noted, some of the critical transformational investments we expected to make in 2020 were paused for a portion of the year. As a result, we expect our capital spending will increase this year compared to 2020.

Our free cash flow for the year was a record $702 million compared to $597 million in 2019. This increase was driven by several factors, including efforts we have made to improve working capital. We made meaningful progress on our AP ratio in 2020, delivering 300 basis points of improvement and ended the year at 80.2%. This, in addition to a $76 million tailwind associated with the CARES Act, resulted in a significant improvement in our cash conversion cycle.

Our strong cash flow generation allowed us to continue our share repurchase activity in Q4. For the year, we repurchased more than $458 million of Advance stock. And including our quarterly cash dividend, we returned $515 million to shareholders.

Our team remained disciplined throughout 2020 to ensure adequate liquidity, protect the P&L during the pandemic and strengthen our balance sheet. This resulted in a meaningful improvement in our cash position, resulting in $835 million in cash on hand at year-end. Further demonstrating our confidence in the long-term strength of our business and commitment to return cash to shareholders in a balanced approach, utilizing both share repurchases and dividends, our Board recently approved the continued payment of our quarterly cash dividend.

Turning to 2021. While uncertainty remains in the current environment, we believe that we can continue to carry the momentum we have seen in the back half of 2020 forward. As the economy continues to recover and with our planned new store openings, we expect to deliver increased net sales and additional margin expansion. Importantly, we expect miles driven to continue improving throughout 2021, which should enable year-over-year growth in our Pro business.

We're encouraged by trends through the first 4 weeks of 2021. With strength across our DIY omnichannel and Pro businesses, we delivered double-digit comparable sales growth to start the year. We recognize the importance of transparency. And based on what we know today, this morning, we introduced our 2021 outlook. Despite continued uncertainty, we're pleased to provide our 2021 guidance. Based on the assumptions we outlined in our earnings release, our 2021 guidance includes net sales in the range of $10.1 billion to $10.3 billion; comparable store sales growth of 1% to 3%; adjusted operating income margin rate of 8.7% to 8.9%, which includes margin expansion of 60 to 80 basis points as compared to the 2020 adjusted operating income margin, excluding the $20.1 million benefit from the 53rd week; income tax rate of 24% to 26%; capital expenditures of $275 million to $325 million; and a minimum of $600 million of free cash flow.

Finally, as Tom mentioned, following several years of closing underperforming stores and focusing on the improvement of operations across our footprint, we're excited to begin actively growing our store base and expanding existing and new geographies. For the first time in 4 years, we're guiding to new store openings of 50 to 100 locations. I once again would like to thank the tremendous efforts of our team members in meeting the challenges of COVID-19 while still executing our strategic plan. We look forward to sharing more on those plans in the investor presentation we'll publish in April.

Now let's open the call for your questions. Operator?

(Operator Instructions) Michael Lasser with UBS.

If we take the midpoint of your operating margin guidance for this year, it implies that you'll have achieved around 30 basis points of annual margin expansion between 2019 and 2021. Recognizing that there's some COVID costs in there, but why wouldn't there be more margin expansion given the investments you've made, the store closures and the year has started off strong with double-digit comps so far this year? And if you could also talk about the flow of margins over the course of this year, it would be very helpful.

First of all, yes, we're very excited about the start of the year. In terms of the overall margin expansion, our long-term goal is to dramatically accelerate our margins as you know. We're pretty excited that we're going to share an update with you on our long-term plans on April 20. 2020 was our third consecutive year of comp sales and operating income growth. And we have said, as you highlighted, that 2021 and beyond is going to have a significant acceleration of margin expansion, and it's going to come from a number of areas that we've talked about before. So we're going to talk more about that on April 20.

I mean I think the biggest factor in what you described is the COVID-related costs that we still have embedded in our annual guide this year. And that remains an unknown at this point. We still have some uncertainty out there regarding COVID-related costs. And we saw that late in the year. It spiked significantly as infection rates across the country went up. And we remain very focused on accelerating margin expansion. Once that comes out, as we said, it's $60 million for the full year, that'll be a big number for us to expand our margins with.

Okay. And my follow-up is of you, Tom, you have the advantage of having more exposure to markets that were hit harder in 2020 as well as exposure to recovery in the Professional market, which has been slower to improve thus far. So as you think about 2021, compared to your peers, how much of a gap are you expecting that your sales should improve more than the industry this year? Admittedly, you're recognizing that you had guided to 1% to 3% comp, but that seems pretty modest in light of these benefits that you'll have, especially relative to the rest of the industry.

Well, for sure, we definitely saw that difference last year. If you look at the miles driven, which is the most -- one of the significant drivers of demand in our industry, miles driven were down the most in the Northeast and Mid-Atlantic regions. The Southeast and Southwest were down the least. And then on the other hand, from a channel perspective, we know that DIY outperformed Pro. So both of those things, we start to lap in April and May. And we do expect the Northeast and Mid-Atlantic to come back strong. It's obviously, once again, a function of how quickly the economy returns to those markets, how quickly people start to return back to work. But there is an expectation that those markets will outperform and that Pro will outperform DIY this year. So we feel we're very, very well positioned in that regard, and we're going to watch it very closely. We've looked at the full year, the lapse for each geography and each channel. And we feel very good about how we're positioned to take advantage of that resurgence in demand in the Mid-Atlantic, the Northeast and our Professional business.

Seth Sigman with Crédit Suisse.

I wanted to just follow-up on that guidance for the full year for next year. Jeff, on the 8.7% to 8.9% EBIT margin, I assume that excludes the impact from LIFO. Can you just confirm whether LIFO was expected to be a headwind or a tailwind in '21? And just so we're all comparing apples to apples, if you exclude the LIFO benefit in '20, are we looking at EBIT margin in '20 more like 8%? So effectively, you're guiding 70 to 90 basis points of expansion? I just wanted to confirm those numbers.

Yes. Sure. First of all, we did exclude LIFO from the guidance that we provided in 2021. So we had that as a slight headwind as we were modeling it, but it's not in the AOP that we put out or the guidance that we put out today. And then you're right. As it relates to 2020, you would have to back out that $14 million that we had in favorability in LIFO in 2020. So that gets you closer to an 8% on a 52-week basis.

Okay. Great. So effectively guiding a little bit more than that improvement. Okay. And then just on the gross margin, if we look at the drivers this quarter, LIFO was a factor. But can you just help us better understand some of the fundamental drivers that are supporting this improvement? And sort of within that guidance we just talked about, what are you assuming for gross margin and sort of the phasing of the benefits related to supply chain and some of the other initiatives?

Yes. Sure. Our initiatives are really beginning to take shape. So as it relates to category management, for example, we saw improvements in both product costs as well as improvements in price. And then we once again leveraged supply chain as the initiatives around cross-banner replenishment are continuing to remove costs, and we're taking advantage of that. So in addition to shrink and the LIFO, as you just called out, the channel mix was also positive. Although I will tell you that, that was offset by product mix, which is related to categories such as brakes, wipers and lighting, similar to what we saw in the third quarter.

Now looking forward into the guidance into '21, it's a lot of those same initiatives. And those are the reasons that gross margin is going to be the driver for our margin growth when we look at '21 compared to '20. So the strategic pricing, we've got it in place. We're starting to implement that. We're already starting to see early results. And similar to the category management, we're changing over into private label. And we're going to start to see the impact of that early on and then throughout the year. So those initiatives that are in place, where we're taking the actions now and we're going to see that benefit going into '21, and those are going to be the drivers that lead our gross margin.

Chris Horvers with JPMorgan.

So I guess the -- a couple of questions on cadence. How are you thinking about overall same-store sales cadence over the year? And any additional detail on how you're thinking about Pro versus DIY?

The cadence is much more volatile than historic, right? We're going to be -- pardon me, we're going to be lapping a minus 9 in the first quarter, and then we go to a 7 plus and a plus 10 and then there's variation across the channels and there's variation across the geographies. So we've done a tremendous amount of work on this to try and understand what to expect for the year. Clearly, the first quarter will be very strong. We highlighted low double-digit growth quarter-to-date. And that's prior to the widespread shutdowns that happened late period 3 and into period 4.

Period -- sorry, the second quarter, you'll recall the Professional business was still challenged, DIY surged. That, we're factoring in, et cetera. So think about looking at the 2-year numbers, I mean, that's what we're looking at closely. Obviously, the 2-year numbers to kind of factor out the volatility of last year. But even there, you've got to put some judgment against it. But we obviously expect to get off to a great start and build on the momentum. We're excited about the way the year has started off, and we're going to continue to build from here.

Got it. And then similar question on the margin. Given that the supply chain and WMS completes over the year or at least the supply chain and then WMS. Does the gross margin expansion weight more to the back half? The inverse of that is the SG&A. Our SG&A dollars were flat in the first half, but up very high in the back half. So is there some inverse going on between gross margin and SG&A over the year?

There'll likely be some, Chris. The gross margin, we -- to your point, we continue to see improvements. Cross-banner replenishment is a great example of that. As you take out those stem miles, you get that savings immediately. We'll be completed with the first set of stores that were identified in the end of the third quarter so you get that full run rate in the fourth quarter. So we'll continue to see that improvement throughout the year. SG&A, again, that's a little bit more tricky, just with the COVID costs that almost all of them are in SG&A. That one is a little bit more difficult to predict. Certainly, we saw a surge here late in the year and then early into '21. But as we said, we are modeling less COVID costs in '21 as compared to '20. When that happens remains to be seen. And then we will be lapping some difficult dollars in SG&A in the second and third quarter around payroll.

So we had -- we were taking hours out. We were reducing time. We were closing early and we're going to be returning to normal ideally. And we'll have full store hours, which requires the store labor, requires the training, it requires the normal replenishment and stocking and all the other types of things that we had to pause in the second and third quarter. So you're going to get some volatility throughout the year.

Seth Basham with Wedbush Securities.

My question first around the fourth quarter inventory shrink. Did you call out how much shrink helped gross margins in the fourth quarter?

We didn't call out the number. It was a significant number, which is why we wanted to call it out. It's a bit of an anomaly. Normally, what happens is we do these physical inventory counts throughout the year. And what that does is it informs you what we call our shrink rate, which then drives the type of reserve that you need on your balance sheet for the estimated shrink that's out there. Because we were pausing that, as I just mentioned, in the second and third quarter, we had to catch all that up in the fourth quarter. It was a positive adjustment, but it took what we probably would have recognized in the second and third quarter and pushed it all into the fourth quarter.

So on balance, we still saw improvement on a year-over-year basis. We just saw that primarily in the fourth quarter. And we're going to continue to -- our efforts around shrink. We're very pleased with the results, although it was -- all came in the fourth quarter. We're going to continue with those standard operating procedures and hope to get further benefit in shrink going into 2021.

Okay. So how material was shrink as a benefit for the fourth quarter and the year? And do you expect it to be a benefit in your margin guidance for 2021?

It was a benefit, for sure, in the fourth quarter and the full year. As I said, we haven't called out exactly what the number is. For the full year, as I said, it was also a benefit. And we expect to get a further benefit in 2021. It won't be as significant. I wouldn't expect it to be a primary driver when you compare it to all of our other initiatives in gross margin, especially around category management and pricing and the efforts that were going into our supply chain initiatives.

Okay. Got you. And just to think through the outlook on gross margins in 2021 a little bit more. Can you rank order the drivers of gross margin expansion in 2021 with pricing at the top of the list or with supply chain? How do we think about the most important drivers?

They're both very big. The category management initiative has the own brand expansion and the strategic pricing which we're really getting traction on. And then the supply chain has some big initiatives in there that we're getting traction on. They're relatively close in size, so they're not that different. They're both meaningful. And we've got benefits from both of them this year, and that's why our margin expansion this year will be more gross margin related than anything else.

Scot Ciccarelli with RBC Capital Markets.

So I wanted to follow up on the shift towards store expansion. Basically, Tom, why do you think now is the time to shift towards expansion from your prior consolidation efforts?

Yes. We really feel good about how the stores have come along. And the leadership team, the field organization is -- it's put much more discipline into how we're running the stores. The say/do ratio is very strong. We've had 3 straight years of basically closing stores, as we highlighted, about 260 stores closed. So we sort of optimized the underperforming stores inside of our fleet. And meanwhile, we've had comp sales growth in the same time frame. So we feel confident that we can start opening stores. We did open stores last year. We've got some experience back in doing so. We're ahead of our targets on the stores that we've opened, and the field is extremely excited about store openings.

So we do feel it's the right time for us to inflect. We've got a lot of opportunity geographically to expand our footprint. We're advertising DieHard nationally. We're advertising Advance. These are things that we scale. Our omnichannel catalog is available throughout the country. And providing not just a storefront, but a fulfillment node in these new geographies, is something that we feel can allow us to grow. It's still a very fragmented industry as you know. Clearly, we're in a position to gain share within the industry as I think the other players have done for a period of time. And then finally, the commercial real estate market is pretty attractive right now. So there's a number of factors that have led to this decision. But we're very excited about it, and it will help us add revenue growth on top of the comp sales growth.

I appreciate that. And then what geographies might we see prioritized?

We're not going to break that out. But we've got a pretty disciplined architecture in terms of how we look at the North American landscape, and each one of them presents a different opportunity. So more to come. We'll share a little bit more on April 20 on that, Scot.

Greg Melich with Evercore ISI.

I'll just start on looking back at, how much was inflation a factor last year? I remember we had tariffs the year before and some of that flowed through. Just sort of as what it was last year? And in your guidance this year, what you're expecting on the inflation front?

Let me start, Greg, and I'll let Jeff get the inflation number. But what we saw last year was a big uptick in average price per transaction. We really did see a significant uptick there, and some of that was category related. So as we saw migration to categories like batteries here, your average selling price goes up pretty significantly, similarly in some of the hard parts category. So we did see ASP go up quite a bit. On unit-per-unit basis, Jeff?

Yes. 1.5% was the total for the year. And that's about what we're modeling for 2021. We're seeing some headwinds early on as we start the year here. We're seeing some pressures around commodities, currency and transportation. So we know we're going to get some early on headwinds. But for the year, we're sort of modeling between 1% and 2%, so 1.5% at the midpoint. The key component to remember to that is we always try to negotiate the best cost possible. When we do have to take on a cost, we've been relatively successful in passing that along to the consumer in the form of price. That's obviously what we want to do last, but we have been successful in doing that, and 2020 was no exception.

We have some of the (inaudible) last year that we heard from some of your competitors that intend to maybe get a little more promotional in certain categories to keep some of the traffic, one, on DIY. How would you guys describe the promotional environment and how you're thinking about it currently and into this year?

Two things there, Greg. First of all, I would say it's been rational. We obviously look at competitive price indices across all our categories routinely. I would say this is one of many areas where we're catching up. I mean our level of sophistication in pricing is just below that of our peers, to be blunt. And we're beginning to take some actions there that I think are going to really help our margins. We haven't seen any kind of unit fall-off as we started to initiate some of these pricing actions. We're getting more version. We're getting more regional on pricing. We're getting smarter about how we leverage coupons. And all of that are things that we believe that over time can help us drive not just margin expansion, but unit growth is what we're seeing. So we haven't experienced any major competitive dynamics. We haven't seen any major competitive dynamics category by category.

Great. And then last, just want to clarify. Did you guys say that Pro is now running as strong as DIY? Or that's your expectation for this year? In other words, the year-to-date, Pro caught up?

Yes. The year-to-date, we're off to a very good start on Pro. I mean we did see it begin to improve late in the year, in December. We're off to a very good start. It's still underperforming DIY, but it's off to a very good start. And beginning in period 4, period 5 of this calendar year, that's where we expect to really inflect because that's when the installer base that we serve essentially shut down as it pertains to remote work. And then that continued on, Greg, for several periods. And we started to recover in the third quarter, but we see lots of upside in Pro. There are a lot of people that are not driving as much as they did. If you look at the major metro markets like New York and Boston, you're still talking double-digit miles driven down, and we expect to start lapping that in period 4, 5, which should be very good for our industry and very good for us.

Kate McShane with Goldman Sachs.

Just a quick housekeeping question. I think you had mentioned that there was maybe some deferred CapEx and that CapEx would be a little bit higher in 2021. Can you remind us what that number is and what it means for any additional OpEx as a result of that deferred CapEx from '20 to '21?

Yes. What we had said previously is '19 and '20 were going to be our big investment years, and then we would start to see a reduced level of CapEx. Obviously, that was a comment pre pandemic, and as a result of having to temporarily pause many of our programs for several months, that's pushed it into 2021. So we're guiding $275 million to $325 million. We do think it will continue to attract a certain amount of OpEx. It's not the levels that we have seen in the past. I think we have done $80 million to $100 million in the past. It certainly won't be to that level. But the 3 -- I'm sorry, $275 million to $325 million prior to the pandemic, we would have expected it to be something lower than what we were experiencing guiding for '20. So when we were at -- if we were at $300 million, we would have been something lower. Now we think we're going to be in that consistent range to get caught up.

Simeon Gutman with Morgan Stanley.

My first question is on the adjusted operating margin guidance for '21. Did you say -- I know you said most of it is going to come from gross margin. Can you tell us what you're assuming for lower year-over-year COVID costs? And then second of all, I realized it's not in the guidance and it's not a reconciliating item, but the LIFO, can you say what the slight headwind? Can you quantify that, what you're assuming for '21?

Yes. I'll start with the LIFO. I mean it was -- it is a small number, and it's really just based on the fact that we were looking at what we think our inventory was going to do from a year-over-year basis. And we're -- at this point, we're assuming slightly down. There's always factors that can change that quite dramatically. I mean we saw that we were up here at the end of the fourth quarter, end of the year in terms of our inventory balance, but it would have been single-digit million, something like that.

Going back to the COVID, we're not going to guide on our COVID. We obviously believe it's going to be significant. We are saying it's less than what we incurred this year, which was $60 million. This is just an assumption we're making that certainly, in the first half of the year, we're going to continue to incur COVID costs and they could likely be meaningful. We could be drastically right or drastically wrong. And we don't really want to put guidance out there and be held to that because I don't think anybody really knows where this is going to take us into '21.

Yes. Fair enough. My follow-up is on the top line. I think Tom mentioned in the prepared remarks that the spread -- I forget if it was between DIFM and DIY or the spread between markets that were more impacted by miles driven was starting to narrow. My question is on geographies and some of the assumptions that are embedded in your 1% to 3% comp outlook. Can you talk about that mix? And I know, Tom, you mentioned you'll start to face easier compares in period 4 or 5. But if you see a complete narrowing across markets and you see miles driven recovers in some of those more impacted regions, I'm trying to understand the conservatism in that 1% to 3%, if we can see a comp that's even better than that range.

Well, we certainly -- it's very early in the year, right, Simeon? I mean that's the short answer. But there's no question that we believe the Northeast and Mid-Atlantic, which are huge geographies for us, very important geographies for us, we believe will accelerate in the second quarter and then balance of year.

The narrowing that we referenced, I mean, if you think back, the second quarter of last year, I think we called out roughly 2,000 basis points gap and then it narrowed to about 1,000. And it's continuing to narrow. So you're talking about meaningful differences in geographic performance, at least for us, and from everything we can see from syndicated data really for the entire industry. Pro versus DIY, you can look at the reported results of the major players and infer from that. So is there upside? Possibly. But it's February right now, there's still uncertainty out there. We're off to a terrific start. We've actually got a winter this year. I mean across the country, if you look and see what's going on, it's very different than it's been the last 2 years. So there are some things that would lead you to believe there could be upside there, but it's early in the year and we want to be thoughtful about the uncertainty that's there. And we feel very confident in our guide at this point.

Brian Nagel with Oppenheimer.

I appreciate all the guidance. So my first question is on the guidance and maybe, I guess, a little more qualitative in nature. But clearly, your sector benefited to a certain extent. You capitalized well upon improved DIY demand early in 2020. So as you look to 2021, how are you thinking about just the sustainability of that, either from a new customer acquisition standpoint or look in the other side, just the potential fade as consumers potentially get back to doing normal habits once COVID-19 headwinds or disruptions begin to abate here?

Yes. Good question, Brian. We obviously have done a lot of work on the customer base that's been coming into our stores. Fortunately, we have a loyalty platform, Speed Perks. We mine that data. We're trying to continue to learn from the new customers that are coming in. And we've sort of outlined a number of reasons that have driven this, everything from people looking for more efficient ways, inexpensive ways to repair their -- and maintain their vehicles, the fact that people have time on their hands, the mass transportation version that's going on there, people are not necessarily going to larger boxes. There's a number of factors that are out there. And the question is how sticky are those factors? And what we're trying to do is engage very closely with our customer base. What we know is that the new customers that have come in are a little bit younger than our traditional customers. They spend more time online. They're a little more affluent. We've got a pretty good idea of how to engage those customers, and personalization and leveraging first-party data is very important for us. So our goal is to drive share of wallet. Again, pretty fragmented industry, lots of opportunity for us out there. If you look at the broader DIY market, we're only roughly about $4 billion in sales in a market that's close to $60 billion. So we do see lots of upside for us on DIY yet, even though there was a surge last year and a pretty disruptive shift in consumer behavior.

That's helpful. I appreciate it. My follow-up question, I guess, near term in nature but you talked a bit about or a lot about the uptick in sales trends here in early 2021 so far. So what are the actual drivers? Is it -- I mean I guess, let me ask another question. To what extent are easier comparisons to then the weather helping to drive out other factors at play?

Well, certainly, we believe the industry is off to a good start. The weather was not favorable in January of last year. I think it may have been the warmest and wettest January in many, many years. So that's been favorable overall for the industry. Stimulus happened early in this year, so there was money that came into the market. From our vantage point, we see market share data, and we like our market share data in the first part of the year. We advertised DieHard very deliberately in the fourth quarter knowing that that's going to build into the early part of the year. And we're continuing to advertise DieHard this week. We had a pretty significant cold snap across the country, which should drive battery failure. So we're pretty confident that the DieHard advertising is resonating with our customers. It's bringing new customers into our stores. We know that. And that's going to help us drive market share and traffic beyond the first quarter. So building awareness of the Advance brand is something that was very important to us. It's a key objective for us, and you're going to continue to see us focus on that.

Bret Jordan with Jefferies.

You talked about your merchandising or your supply chain initiatives around engine management and undercar. I guess is this the shift to private label? And will you be using the DieHard brand there? If you could maybe give us some feeling for size of those 2 categories and the margins you might pick up with this supplier shift?

First of all, we're going to continue to have a pretty balanced approach in this area. National brands are very important to us. And we engage with our national brand suppliers routinely and we're working very collaboratively with them to help build their brands. So it's a balanced approach. Now there are some categories where we saw an opportunity for owned brand penetration. Clearly, engine management was one of them. Suspension and ride control is another area of focus for us. And we're not going to give you the exact numbers, but there is a significant difference in the margin profile of those categories from a branded perspective versus owned brand. And we continue to work with the suppliers. We'd obviously like to continue to sell the national brands. But where it's an obvious economic gap for us, potentially due to pricing across other channels, we're going to make those decisions. It's a gradual migration over time. This is not a light switch. You've got to gradually make these changes. But I think our merchandising team is doing an excellent job transitioning where we are making those changes across categories. And it's driving not just margin expansion, but unit growth because our customers voting with their clicks, and they're voting for Carquest. They love the Carquest brand. It's a great brand. It's got a great reputation with installers, and you're going to continue to see us grow it.

Okay. Great. And then you commented, you picked up about 50 new Carquest Independents in '20. Is there a particular distribution network you're picking up independents from? Or is it just random?

It's definitely not random. It's a very focused approach. We've got a very wide funnel at the top, and we put every one of those potential new independent partners through that funnel. But I think the ones that have decided to come to Carquest are really happy with what they've decided, but it's really across a blend of various alternative banners. But the cool thing that our Head of Carquest Independents, Junior Word, who's doing a terrific job, he and his team have done is they've engaged the independents in the journey. We've got an independent advisory council they meet with routinely. They are part of the solution. They're helping us get better as a company, and they work very closely with them to construct their plans and, by the way, help them strengthen their technology backbone in their operations. So it's a number of things that we leverage to make those changes. But there's a lot of independent auto parts stores out there, and you're going to continue to see us grow that business.

Elizabeth Suzuki with Bank of America.

Great. Just how does your e-commerce mix shake out for the year in terms of what percentage of customer orders were placed online and then what the year-over-year growth was in those orders? And then just a percentage of pickup in store, buy online, pickup in store, if you could share that.

Sure. First of all, it was quite a year on that front, Liz. As you recall, there was an early surge, a massive surge in March and April, a little bit into May when people were just -- they just didn't go out, and they were afraid to go into a store. We jumped on that. As you'll remember, we launched Advance Same Day suite of fulfillment services. We offered curbside pickup. We offered Same Day delivery. And that enabled a surge in our e-commerce business in that time frame. The good news is, as time went on, those customers started to migrate into our stores. And we've been increasing -- our store traffic has been increasing since that point through the year. The online order piece is still a substantial part of our business, but it is largely pickup in store. Even though we have Same Day delivery, ship-to-home is a relatively small part of our overall business. And that's because the customer likes to come in and get the trusted advice from our team members who have been out there throughout the global pandemic, making sure that America is on the road. We've got a terrific set of general managers out there who engage with the customers, and they prefer to come into our stores and get the trusted advice they need to repair their vehicle.

David Bellinger with Wolfe Research.

So your guidance embeds an expectation for miles driven to improve, but remain below 2019 levels. So can you walk us through how you get there? Is there a way to quantify how much lower miles driven are versus 2019 levels in your forecast? And do you -- are you expecting a faster pace to recover in the Northeast and Mid-Atlantic, but overall miles in those regions to continue to lag other regions of the country?

Sure. I mean it was a pretty rigorous process we went through. We did our best, David, to reach out to whatever industry sources we could to get a sense for this. And I'll caveat all of this with it's -- this is an estimate at this point, and there is a lot of uncertainty out there. But if you look at what happened last year, the year-to-date numbers at the kind of October, November time frame, which is based on the sources we have, are the most relevant or most accurate numbers that we can get. They would show the Northeast and Mid-Atlantic down the most, as I said, like high double digits in that case. And the Southeast and Southwest are down 13%, something like that. And then the aggregate number is kind of in between.

So you start to lap that as you get into April, May, and we do believe that it edges back up. In other words, if you say the year is down double digits, it's not going to get back to the level it was in 2019, but it's going to be greater than it was in 2020. That's the fundamental assumption. How much comes back? We've got an estimate in there. We're not going to put that out there, but it is improvement over 2020 as people gradually start to return to work. We look at the return-to-office metrics, which are readily available out there, and you can see that people are gradually returning to office. Now many people are talking about hybrid approaches. People are talking about remote work, but there are more people coming back to the office now than there were at the height of the pandemic. So that's really the key assumptions underlying our estimate.

Okay. And my follow-up on wage rates. Just remind us here, how much exposure do you have to a nationwide increase of $15 per hour? What actions have you taken over the past year or so to sort of offset that? And also talk about your guidance. I believe it doesn't include any impact at this point. But how much of a swing factor is going to see on operating margins going forward?

Yes. I mean certainly, we would be impacted by a federal minimum wage. I think we would see more of an impact on the stores, so SG&A versus the gross margin or supply chain. We've invested heavily in supply chain. It's been highly competitive over the last year. And in order to be competitive, we've had to keep up with, among other things, increased wages in the DC. So it would largely be in the stores. Obviously, there's a number of factors. We're assuming wage inflation anywhere from 2% to 5%. So we're going to continue to increase wages this year with or without a federal minimum wage.

So the big factor, it really depends on a couple of things. First, obviously, it has to pass and then how that looks in terms of how it graduates over time. Is it $1 a year? What is it going to be to get to $15? So there's a number of variables there. It's clearly -- it's not in our guidance, but we're thinking about it and we're continuing to make investments. And I guess the only other comment I would make is it's going to be a level playing field. This is going to impact the entire industry. It's going to impact our competitors the way it's going to impact us. So we're monitoring it very closely. But to be clear, it is not baked in there that we will be paying everybody $15 an hour.

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

So last year at this time, you expected to spend about $90 million to $100 million for OpEx investments like IT and marketing in 2020. And now that the year behind us, could you talk about how much of this planned spend was completed? Does any get shift to 2021? And can you walk us through any new OpEx investments planned this year?

I mean many of the OpEx investments are going to be similar. It's largely attracted by the CapEx investments that we have, whether it be IT, supply chain, stores. We did not -- we came in under the guidance, largely because we had to pause those programs. So we came in under that guidance that we put out there last year. We don't anticipate that we're going to have that level going into '21. So it was certainly going to be south of that, and it's really just a continuation of those projects. We don't have anything new that we haven't spoken to you about other than new store opening. That's probably the only thing that's different that obviously attracts some CapEx and a little bit of OpEx. But our initiatives, our growth initiatives remain unchanged. We're laser-focused on them. And those are going to continue to be the drivers for both CapEx and OpEx.

Got it. And then assuming at least 50 new store openings this year, it looks like you are guiding SG&A per store to be down year-over-year or maybe up slightly ex the extra week. Just wanted to confirm that, that's accurate.

I'm sorry, the SG&A for 2020?

Yes.

For 2020?

For 2021, SG&A per store, what the guidance implies?

It would be down slightly.

Our final question comes from the line of Michael Baker with Davidson.

Okay. Two quick ones because it's getting late. One, I appreciate that you're not guiding to COVID costs specifically, but those are ongoing in the first quarter, I assume, and maybe even who knows how the vaccines roll up, but maybe into the second quarter. So is it fair to say you're not assuming that, that $60 million from last year goes to $0, is that right? So you're going to save some money, but not the full $60 million. Is that right? And that's within the guidance?

That's right. We -- it is still going to be a meaningful number in '21. There's -- it's not $0. It's not $60 million, but it's going to be a meaningful number based off what we're estimating.

Yes. I mean we said, Mike, that we're going to prioritize the health, safety and well-being of our team members and our customers, and that doesn't change. Clearly, we want to build trust. And we're very excited that our team members are appreciative of everything that we've done. Our org health scores are up. Our turnover is down. Our customers are rating us higher on Net Promoter Scores. So we want people to feel safe coming in to work, and we want our customers to feel safe coming into shop. So this is something that we've got to continue doing. Now over time, we do expect this to go away. We hope it goes to 0. It's just a question of when.

Yes. Okay. That makes sense. One more, and I hate to ask a bigger picture question at 9:10, but hopefully, it's not too long of an answer. But it does seem perhaps that this whole industry will shift a little bit more towards DIY because some of those trends you talked about, people being averse to public transportation. A lot of people think those will be with us for a while even when a vaccine rolls out. On the other hand, a lot of people will do hybrid or work from home for those higher end, those DIFM customers might just drive less permanently or at least for a number of years. So have you thought about that? And how does that impact any of your ongoing strategies or anything like that if the whole world does go a little bit more towards DIY versus DIFM versus pre COVID?

We have. And the reality is we agree with your statement that it doesn't go back to the way it was. I mean that's underpinning your statement. Now how far does it go back to the way it was? Because it does -- it's not going to -- we don't think it's going to be like it was in 2020 either, right? So somewhere between what we saw last year and what we saw in 2019 is the answer to the question. But the reason why we're planning on opening 50 to 100 stores is because of the reasons I said earlier, and we do believe DIY is going to have some legs in the near term for sure, and this is an opportunity for us. We've got DieHard, which is -- participates in the largest category for DIY. We're advertising this brand, so we're going to continue to drive it. And DIY is a great business. It's a very profitable business. It's a margin-accretive business and one that we're going to continue to stay focused on.

Well, thanks again for joining us this morning. We're gaining a lot of confidence regarding our initiatives. Obviously, we're respecting the economic and operational landscape that we're competing in. And as increasing COVID-19 vaccinations happen throughout the year, we expect the stability to continue to improve. We're looking for continued recovery for critical factors such as miles driven and further increases in the average age of the car part. Operationally, we've narrowed and sharpened our focus on the most important initiatives to accelerate margin expansion and deliver increased value for our customers and for our shareholders. And we look forward to publishing our third sustainability and social responsibility report next month and sharing additional details on our strategic efforts at our upcoming investor event on April 20. Thanks for joining.

This concludes today's call. We thank you for your participation. Have a wonderful rest of your day.