領先汽車配件 (AAP) 2014 Q2 法說會逐字稿

Welcome to the Advance Auto Parts second-quarter 2014 conference call.

(Operator Instructions)

This conference is being recorded.

If you have any objections, you may disconnect at this time.

Before we begin, Zaheed Mawani, Director of Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

Good morning, and thank you for joining us on today's call.

I'd like to remind you that our comments today contain forward-looking statements we intend to be covered by and we claim the protection under the Safe Harbor Provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements address future events, developments or results.

And typically use words such as believe, anticipate, expect, intend, will, plan, forecast, outlook, or estimate, and are subject to risks, uncertainties and assumptions that may cause our results to differ materially.

Our comments today will also include certain non-GAAP measures.

Including certain financial measures reported on a comparable basis to exclude impacts of costs that were incurred in FY14 in connection with the integration of General Parts International and BWP Distributors.

Please refer to our Earnings Release and accompanying financial statements issued today for important information and additional detail regarding these forward-looking statements, and the reconciliation of the non-GAAP measures referenced in today's call.

The Company intends these forward-looking statements to speak only as of the time of this conference call, and does not undertake to update or revise them as more information becomes available.

For planning purposes, our third-quarter 2014 earnings release is scheduled for November 6th before market opens, and our quarterly conference call is scheduled for the morning of Thursday, November 6, 2014.

To be notified of the dates of future earnings reports, you can sign up through the Investor Relations section of our website.

Finally, a replay of this call will be available on our website for one year.

Now let me turn the call over to Darren Jackson, our Chief Executive Officer.

Darren?

Thank you, Zaheed.

Good morning, everyone.

Thank you for joining us, and welcome to our second-quarter conference call.

I'd like to start off by thanking all of our team members for their continuing commitment to better serve our customer, which resulted in a very good Q2 performance.

Joining me on the call today is our President, George Sherman, who will update you on our business operations and Mike Norona, our Chief Financial Officer, who will update you on our financials.

We are pleased with the operating results from our second-quarter, as we continued to build on our momentum from our first-quarter performance.

Overall, we are on track in terms of the base business objectives, integration milestones, and our financial performance.

Our team members remained focused on our three key outcomes, and continue to drive improvements into the business.

These base business improvements, along with our ongoing benefits from favorable Winter weather, enabled another strong quarter.

Our total sales grew 51.5% in the quarter, compared to the second-quarter of 2013, primarily as a result of the acquisition of General Parts and our comparable store sales increase of 2.6% in the quarter.

Our second-quarter comparable cash earnings-per-share of $2.08 was an increase of 30%, versus our second-quarter last year.

Driven by both the acquisition of General Parts, and the improving base business result.

Despite the relatively cooler start to the Summer season, we delivered strong comparable store sales gains in our commercial business.

While our DIY business was essentially flat, driven by lower sales and seasonal categories versus our first-quarter.

The sequential acceleration in our commercial business was lead by our Northeast, Great Lakes and Mid South regions.

We experienced increases in both traffic and ticket, lead by strong sales gains in ride control, climate control, and the brakes category.

Further, our momentum continued with national accounts, which delivered double digit growth within the quarter.

Overall, our comp trends were relatively stable throughout the quarter, with some moderation experienced towards the end of the quarter.

Consumer confidence continues to trend slowly in the right direction.

The combination of relatively stable fuel prices and improving employment condition lays the ground work for optimism with the consumer.

However, we are still guarded in our view of the consumer, given spending constraints in the lower and middle income customers.

During the quarter, both our gross profit rate and our comparable SG&A rate declined.

Gross profit rate declined 505 basis points to 45.2%.

The SG&A rate improved on a comparable basis 358 basis points to 34%.

Again, this was primarily due to the acquisition of General Parts, and was in line with our expectation.

Mike will be discussing the financials in more detail shortly.

We are encouraged with the progress of our key priorities.

Looking at our base business, our results built on the momentum coming out of the first-quarter, our commercial sales improvements drove our growth.

The business remains on track, with our profitability goals, including our focus on expense control, including solid progress on our cost of an [hour] initiatives.

Our customer service focus remains top of mind.

Our DIY and commercial mystery shops are providing key insights to improve the quality and consistency of our service.

The outcome is building deeper relationships with our customers through improving our execution and customer experience.

Turning to our integration, we remain on track against our plans.

We are now moving from the planning into the execution phases.

The cross-sourcing initiative continues to deliver positive results, as we leverage our leading inventory availability.

We continued our expansion of WORLDPAC Access with another 600 Advance stores in the quarter.

We also announced the consolidation of 100 Car Quest stores into Advance stores beginning in August, and completing by the end of 2014.

These consolidations will allow the combined store to have increased inventory coverage and team member support to serve our customers better.

We will be in a stronger position to grow our combined business volume in that consolidated store.

The commitment to enhance capabilities and simplify the support structure included announcing the closure of our Minneapolis office, as we rationalized our corporate centers down to two.

Roanoke, Virginia, our existing support center, and Raleigh, North Carolina, which is the former Carquest headquarters.

The relocation of the Minnesota office will transition over the next 12 months, and we are pleased that all of our senior leaders have chosen to relocate with their families and continue to be a part of the Advance team.

Additionally, we completed plans for Advance stores to enter the Dallas market beginning in Q3.

The Advance branded stores in this market will utilize the Carquest distribution center that already has daily delivery capabilities.

This is an example of our new combined capabilities that will allow us to accelerate our base business, as we grow our presence and establish a base stores in our Dallas market.

Importantly, as a result of all the hard work of our integration teams in the quarter, I am pleased to say we remain on track to achieve our 2014 synergy and integration cost commitments.

Overall, we are satisfied with our outcome in the second-quarter and first half of the year as a combined Company.

I continue to be encouraged by progress we are making with our operational execution.

Foundationally, we are getting better, and are focused on continuous improvement in delivering consistency quarter to quarter.

I am very proud of the entire team for delivering a solid first half of the year, and remaining focused on the base business outcomes.

Our integration process to date continues to be on plan, and is early proof point demonstrating we have strong starting point organizationally, underpinned by the diversity of the experienced teams, and the outstanding leaders coming together to successfully integrate this Company.

Our growth and profitability is on track.

Our second-quarter comparable results generated a 30% comparable cash EPS growth, another step in the right direction.

Looking ahead, despite the moderate start to the Summer season, we remain positive about the back half of the year, and continue to be encouraged by the momentum and sustained execution of our team.

I'd like to close once again by thanking all of our team members for their tremendous hard work, and a good start to the first half of the year.

I will now turn the call over to George Sherman.

George?

Thanks, Darren, and good morning, everyone.

First, I too would like to thank all of our team members for their contributions to customer service in the quarter, and doing all the right things to show our customers that we put them first.

At the heart of executional excellence is customer service, and our team members drove our success this quarter through their commitment to the customer.

In my prepared remarks this morning, I'll provide a view on our second-quarter business performance, followed by a business update, including key priorities within the quarter.

Looking at sales, we are pleased with our performance in the second-quarter.

As the team delivered a comp store sales outcome of 2.6%, a sequential acceleration of 310 basis points on a two-year basis.

Our positive sales performance was once again attributable to solid execution by our field, merchant, and supply chain teams.

Combined with a continued momentum from customer demand that carried over from the first-quarter.

Overall, we are satisfied with our sales performance in the second-quarter, and we are progressing against our goal of continuous improvement and more consistent comp sales outcomes.

We're certainly moving in the right direction.

As a result of the acquisition, our newly combined commercial mix now stands at 57%, with our commercial business continuing to show consistent growth.

We generated solid comp acceleration in our commercial business, with the Northeast market leading the way, followed by our Great Lakes and Mid South markets, with our commercial business benefiting overall from both transaction and ticket growth in the quarter.

Our B2B business continues to perform very well, with approximately 40% growth in the second-quarter versus the previous year.

Additionally, I would like to call out the early yet strong progress we are making with our CTI program.

We launched CTI with Advance in late April.

And to date, already have approximately 700 shops signed up.

To put this into perspective, Advance trained approximately 500 shops all of last year.

Carquest Technical Institute will continue to be a differentiator for us, and help our customers grow their business.

Looking at our DIY business, as referenced earlier, our DIY performance was essentially flat.

We saw slightly lower demand this quarter in categories such as batteries and antifreeze versus our first-quarter, when the Winter demand for those categories was at its peak.

Offsetting the lower demand was a sequential acceleration in our dollars per transaction from our first-quarter, and consistent strong growth from our B to C channel.

As I previously mentioned, and will continue to stress, we're focused on three outcomes: sales, great customer service, and profitability.

I talked earlier about our focus to consistently drive a better sales comp.

I can tell you that we now have a very healthy intolerance for a poor sales day.

We are building the expectation of winning, and embedding the good behaviors of urgency and accountability that underpin consistent sales outcomes.

We are relentlessly focused on maintaining our team member training.

It's about building our muscle at the counter, and measuring ourself on how well we can engage with our customers.

We've been able to talk to our customers about their projects and understand what they are looking for.

It's about building a competency and confidence in our team members and the customer respectively.

We are clearly beginning to see the benefits of our training investments, as they begin to drive outcomes validated by our customer feedback.

Our move to a more field centric organization has put more control in the hands of our stores, giving more responsibility to our leaders that are closest to the customer.

We have previously mentioned relying more upon local leaders to make decisions, such as labor decisions.

And we're already seeing benefit of that through improvements in our overall cost of an hour.

We're also engaging our field leadership in decisions related to our real estate planning and help source strategies, driving more ownership locally.

And in turn, our team continues to be more engaged and outcomes-focused.

Turning to our integration, I'll build on Darren's comments, and share a few additional insights from an operational perspective.

As mentioned, our integration efforts are under way, and we are progressing as expected.

We've had some very good early wins, and I think it's a very top of the list would be our retention outcomes.

We are pleased with our talent retention at our stores, the sales teams in the field, and key leadership positions.

In the spirit of retention, the same thing has been true with our independent customers, as we continue to focus on their business outcomes and helping them continue to grow their business profitably.

Overall, we are very pleased with the retention of our independent customers.

Our second source initiative continues to show our team some proof points of what this partnership can be.

Where we have locations in similar geographies, Advance and Carquest stores can source from each other.

We also now have a total of 800 Advance and AI stores cross-sourcing with WORLDPAC.

We continue to build local scale, and drive efficiencies within our network.

But more importantly, being able to say yes more often to our customers.

The integration of our merchandising teams is in progress, as we make our way towards centralizing our merchandising capabilities in Raleigh.

Once complete, we will have our merchandising organizational center of excellence, and a team that will be more efficient and effective.

In the midst of this change, I'd like to say how proud I am of our team that continues to execute day in and day out, and build with the best business outcomes and ensure our stores are not missing a beat.

Lastly, I'd just like to say how excited we are to have entered the Dallas market, just six months into the integration, by capitalizing on the Carquest distribution center, store systems, POS systems, and processes in many cases as we open our Advance footprint and enter new high potential DMAs using our combined enterprise capabilities and assets.

Moving on, I want to update you on our supply chain initiatives.

We have been methodically progressing against our supply chain objectives.

We continue to progress our daily delivery capability, with approximately 550 Advance stores now receiving daily delivery from our Remington, Lakeland, and Kutztown distribution centers, with a majority of Carquest stores also receiving daily delivery out of the 34 Carquest DCs.

Second, we continue to drive improvements of in-market availability through our hub store strategy.

During the quarter, we added five hub stores through a combination of new stores and upgrades of existing stores, including the opening of our first Canadian hub in Ontario.

At the end of the quarter, our hub store count was 410, an overall increase of 56 from the second-quarter of last year.

Third, as we look at inventory, our inventory growth was up over 60% year-over-year in the second-quarter, primarily due to the General Parts acquisition, inventory upgrades and our increase in new stores and hub stores.

Inventory levels were slightly higher versus our first-quarter, as a result of new stores added during the quarter.

We continue to be focused on our goal of having superior availability, the deepest assortment, and investment in our strategy to get the parts closest to the customer.

Looking at our new store growth, during the quarter, we opened 28 new Advance, AI, and Carquest stores and closed 15 stores, including planned consolidations of 11 BWP stores, bringing the total Company operated store count to 5,289.

We also added one WORLDPAC branch in the quarter, bringing our total branch count to 106.

We are progressing as expected, and continue to pace our new store openings to be in line with our guidance of between 120 and 140 new stores this fiscal year.

As I close out my remarks today, I'd like to share how proud I am of the entire team.

The base business improvements are contributing to our outcomes, and laying the groundwork for an operating model that strives for and delivers consistent outcomes.

Our integration program is progressing nicely.

We have fully integrated leadership teams, and we could not have asked for better cultural consistencies between the teams coming together.

While we are satisfied with the execution momentum and our business performance in the first two quarters, we are by no means content.

Looking to the back half of the year, we remain positive in our outlook.

And we will continue to stay focused on our plan showing patience when required, and accelerating when we see opportunities to serve our customers better than anyone else.

Now I'd like to turn the call over to Mike Norona, our Chief Financial Officer.

Thanks, George, and good morning, everyone.

I'd like to start by thanking all of our talented and dedicated team members for their commitment to serving our customers in the quarter, and helping our Company again deliver strong financial performance in our second-quarter.

I have planned to cover the following topics with you this morning: one, provide some financial highlights from our second-quarter of 2014; two, put our second-quarter results into context with our expectations and key financial priorities that we use to measure our performance; and three, provide some insights on the remainder of 2014.

Before I begin my remarks about the quarter, I would like to remind everyone and unless otherwise specified Advance will present its financials and supporting commentary on a consolidated enterprise basis and will also discuss results on a comparable basis, which excludes the impacts of one-time integration expenses related to the acquisition of both General Parts and BWP, along with any amounts related to the amortization of intangible assets resulting from the acquisition of General Parts.

As mentioned on our first-quarter call, we began the work of integrating the companies and initiating the purchase accounting assessment, including the preliminary valuation of the balance sheet and conformity of the accounting policies.

In the first-quarter, we referred to a conformity reclassification of approximately 70 basis points of supply chain costs from SG&A to gross profit, and provided a preliminary estimate of the impact to the remaining quarters to be approximately the same 70 basis points.

As we progressed through our assessments, we determined the impact of the supply chain reclass to be closer to approximately 85 basis points.

This updated assessment of approximately 85 basis points applies to both the second-quarter and to the remaining quarters of 2014.

Moving on to our second-quarter operating results, we are pleased to report a second-quarter comparable cash EPS of $2.08, a 30% increase from our second-quarter of 2013.

The second-quarter results reflect a continuation of the sales momentum from our first-quarter.

Included in our comparable cash EPS result in the quarter was $0.09 in synergy realization.

On a GAAP basis, our second-quarter EPS was $1.89.

which include $0.08 of intangible assets amortization associated with the acquisition of General Parts, $0.08 of one-time integration expenses and costs to achieve synergies related to the integration of General Parts, and $0.02 in one-time costs associated with the integration of BWP.

Turning to sales, our second-quarter net sales increased 51.5% to $2.35 billion, compared to our second-quarter of 2013.

The sales growth was principally driven by the acquisition of General Parts, our comparable same-store sales increase of 2.6%, and the addition of new stores.

For comparison purposes only, net sales for General Parts in our second-quarter after adjusting for selling days and holidays this year versus last year.

Increased approximately 3.8% to $737.1 million based on 82 days this year versus 90 days last year.

Our positive same-store sales were driven by our commercial growth, and strong execution from our field and supply chain teams.

Year-to-date, our total sales increased 49.2% to $5.3 billion.

Turning to gross profit, our gross profit dollars in the second-quarter increased 36.3% to $1.06 billion from $779 million in our second-quarter of 2013.

Our gross profit rate of 45.2% was down 505 basis points, compared to the second-quarter of 2013.

This year-over-year rate decline was primarily due to the acquisition of General Parts, resulting in a higher mix of commercial sales that has a lower gross profit rate.

Included in our gross profit results this quarter is the approximate 85 basis points conforming impact that I mentioned earlier.

Which was partially offset by 35 basis points of synergy savings in the quarter.

Year-to-date, our gross profit rate decreased 472 basis points to 45.4% versus 50.1% over the same period last year, as a result of the General Parts acquisition.

Turning to SG&A, our comparable SG&A rate was 34% in the quarter, which was down 358 basis points compared to our second-quarter of 2013.

This year-over-year rate decline was the result of the acquired General Parts business having a lower SG&A cost.

SG&A also reflects the approximate 85 basis points of conforming impact mentioned earlier, and cost leverage from our 2.6% comp store sales increase.

Partially offset by higher incentive compensation, due to our better sales performance.

Year-to-date, our comparable SG&A rate decreased 373 basis points to 35.1%, versus 38.9% over the same period last year, again, principally due to the General Parts acquisition.

All-in, our second-quarter operating income dollars on a comparable basis increased 34% to $262.7 million.

And our operating income rate decreased 146 basis points over the same period last year to 11.2%, primarily as a result of the acquisition of General Parts.

Year-to-date, the company's comparable operating income rate was 10.3%, versus 11.3% during the same period last year.

Operating cash flow through the second-quarter was $320.6 million versus $310.1 million in the prior year.

Free cash flow through the second-quarter improved to $214.3 million, versus $198.2 million in the prior year.

Our AP ratio for the quarter was 77.6%, versus 85.1% last year.

This decline was expected due to the acquisition of General Parts.

And as previously shared, we see continued opportunities to improve our AP ratio as a combined Company.

At the end of the second-quarter, we had roughly $1.87 billion of debt on our balance sheet.

And our adjusted debt to EBITDAR was 2.9 times, and was in line with our expectations.

During the quarter, we paid down approximately $200 million of debt.

And remain focused on our commitment to quickly pay down debt with our free cash flow to get back below the 2.5 times leverage ratio, and maintain our investment grade ratings.

We continue to measure the financial performance of our business, and prioritize our investments to achieve growth, profit, and value creation.

Our growth engine continues to be our commercial business, which delivered solid growth in the second-quarter, helping us deliver our third consecutive quarter of positive comps.

As George mentioned, we are investing in several key areas to improve our service and business performance to maintain our growth momentum.

Turning to profit: we are pleased with our 34% comparable operating income dollar growth versus the previous year, and the 11.2% comparable operating income rate that we achieved in our second-quarter.

We see continued opportunities to improve our profitability, as measured by operating income dollar growth through consistent sales growth, leveraging our size and scale, and improving our cost efficiency.

We also remain on track to achieve our year one cost synergies of $45 million to $55 million on our way to achieving the total expected cost synergies of $160 million over the next three years.

With respect to value creation, the acquisition of General Parts provides us a compelling opportunity to drive shareholder returns through incremental earnings and strong cash flows.

We saw this in our second-quarter, with a 30% increase in our comparable cash EPS.

We continued to be focused on improving our free cash flow through our disciplined capital deployment, consistent operating results, and working capital management, primarily in the areas of inventory management and AP ratio.

We are pleased with the progress we made in these areas in the quarter.

Our focus on free cash flow is enabling us to pay down our debt to get back to our previously stated leverage ceiling of 2.5 times by the end of 2015.

Once our debt is paid down, we will continue to optimize our capital structure to maximize shareholder value.

Turning to the balance of the year, we are pleased with our outcomes during the first half of 2014, and the momentum we have built heading into the back half of the year.

I would like now to share two updates to our 2014 full-year outlook.

First, based on the sales comp performance in the first half of the year, we expect our full year comp store sales to be in the low single digits.

Also, as we shared in our press release, we have raised our full-year annual consolidated comparable cash EPS outlook to now be in the range of $7.50 to $7.60.

Despite the moderate start to the Summer selling season, we are building momentum as a combined Company.

And maintain a positive outlook for the back half of the year, given our ongoing base business improvements, integration progress, and steady industry fundamentals.

Turning to phasing in the back half of 2014, we continue to be on pace to deliver against our first year cost synergy expectations.

However, we expect the balance of our cost synergies this year to be weighted more towards the fourth-quarter.

In closing, we are satisfied with our performance in the quarter and the first half of the year.

Our focus is still squarely set on two key priorities of delivering on our base business outcomes, and successfully integrating General Parts.

We continue to be pleased with the improvements our teams continue to make each quarter with our execution in the spirit of driving consistent sales, service, and profit outcomes.

The integration is progressing as expected, with the team delivering the early quick wins and planned synergy benefits.

I want to once again thank our over 74,000 talented team members for what they do each and every day to serve our customers, inspire our team, and grow our great Company.

Operator, we are now ready for questions.

Thank you.

(Operator Instructions)

The first question today is from Gary Balter with Credit Suisse.

Hello.

First of all, congratulations on a good quarter.

Thanks, Gary.

Rather than ask a question that builds on the good stuff going on, I'll ask the tough question.

What's not working?

You have a whole game plan, and you have an awful lot going on in terms of WORLDPAC AI integration, testing Dallas.

It's all the cost savings that Mike talked about.

What are the areas that you're finding are a little bit more challenging, and how are you dealing with those?

Hello, Gary.

This is Darren.

I would say a couple things.

What is keeping me awake at night right now is that we just haven't had a bump in the night.

That's to be honest.

I would say the places that are most complex for us, and it's predictive of these type of acquisition, is systems.

Lining up the systems are going to be complicated.

We've had some quick wins on systems.

But as I look out, I think that's an area that most companies, as ourselves, underestimated some of the complexity.

That's not going to keep us from achieving our synergies or achieving our targets.

But I see that as an area we're going to have to double down more efforts as a Company.

I'd say the second one is, and we said this in the script.

The planning process, even building out the process steps, I think as a Company we're pretty good at that.

We're now moving into the execution part of the integration work.

And that is the things we talked about: the 100 store conversions, the supply chain work, we're moving.

Essentially, we're touching three corporate offices.

That's a lot of moving parts, to be honest.

And so it is going to take our entire team even doubling down that more in terms of our focus with the team members to keep us powering through this work.

That's the only way you can do it, is just power through it.

I can see that as we're into the back hall of this year and next year, there are just going to be a little more ups and downs with the execution type of work.

But to date, we haven't had a bump in the night.

What we can see, the complexity is really lying in the systems in terms of some of what we originally planned.

And probably more importantly, the work right now is entering execution.

And that, just by its nature, tends to be more up and down.

I had a follow-up -- or not a last follow-up.

But you've mentioned a few times the slowdown in July, the more recent period of time.

Anything other than what you're seeing seasonally that would concern you in terms of either pricing or maybe end roads that are happening in Florida from O'Reilly?

Or do you think it's very much seasonal?

Yes, Gary, it's Charles.

Primarily, we're seeing it from a seasonal perspective.

We had a very strong Q1 in our battery business, and we're seeing some slowing there.

And you wake up in Raleigh and it's 58 degrees, when it's normally 90, AC business.

So some of the seasonal businesses are impacting it.

But we aren't seeing anything from a pricing perspective that would drive any concerns in terms of how that's impacting the trend on our business.

And we've got good core continuing growth in our under car businesses and our brake businesses.

And we're continuing to see great strength going into Q3 there.

Gary, it's George.

I'd add to that.

We saw strong commercial comp performance in our commercial business throughout the entirety of the quarter.

We saw some slowing toward the end in the heat-related DIY categories that you'd expect.

So that underlying strength in commercial gives us confidence for the remainder of the year.

Thank you very much.

The next question is from Greg Melich with ISI Group.

Thanks.

I wanted to get into the synergies a little bit, just to understand how you're on path.

It seems, if I back out the $0.09, it's about $10 million or $11 million of synergies at the EBIT level.

Mike, is what you were suggesting that we're still going to get to the $50 million-ish, but maybe the third-quarter looks like the second-quarter and then we have a big step up in the fourth-quarter?

Yes, hello, Greg.

That's exactly right.

We delivered a little over $11 million in synergies in the second-quarter, about $8 million in the first-quarter.

And we're pleased with that; we're right on path.

I think you saw we took our outlook up.

I think as we gain more confidence, as Darren and George said, we feel more confident in coming in at the high end of the synergies.

That said, the phasing is going to be more weighted towards the fourth-quarter.

So I would think that one-third/two-thirds for the balance of the year of the remaining synergies will fall third quarter/fourth quarter in that one-third/two-thirds.

Got it.

And then a follow-up.

I think, Darren, in your comments, you talked about the 100 Carquest consolidations into Advance stores.

And that they could be in a strong position to grow the actual combined sales of the stores when you consolidate.

Is that just saying that the sales loss from a closure are less than you expected?

Or you actually think that when you put them together you end up with a bigger pie, and that's not just 80% or 90% that you keep?

Greg, it's George.

We think it's closer to the latter.

First of all, we're confident in our ability to retain sales.

But by consolidating the stores, we believe that we're building a stronger commercial capability store by store that going to enable us to go out and gain more sales.

So on the commercial side, do you have any evidence of a dozen stores where this has actually worked and you end up with more commercial sales?

Well, we do, Gary, in terms of BWP.

So that's what we talked about before.

We've got to try before we buy.

And I'd say what you have to think about is that it's different for DIY than it is commercial.

So when we consolidate something, those stores had some DIY business.

A lot of that DIY business doesn't necessarily transfer down the street.

The commercial business, it has a two-fold impact.

George is right.

What we're seeing is we're holding on to the team members; that's important.

There's better inventory availability in the consolidated store.

And what happens is that the existing store base ends up with a benefit too because you can provide a better service level.

You just have better coverage.

And so that's what we're seeing.

What we saw, I would say, in the BWP process, is that as we got better at perfecting it, what we're seeing -- and, George, you tell me.

I think we're just a few stores into the 100 at this point.

Yes, we're two stores in.

We converted one at the end of July and one yesterday.

So we are just getting started.

All right.

Good luck, thanks.

Thank you.

The next question is from Matthew Fassler with Goldman Sachs.

Thanks a lot and good morning.

Hello, Matt.

My question relates primarily to revenue.

You talked about the pro business gaining momentum, despite a lack of weather tailwinds.

Can you talk about the degree to which that relates to revenue synergies associated with the transaction?

And related to that, you talked about the expansion of WORLDPAC access and being able to bring some of that product to your Advance customers.

Any quantification or qualitative or quantitative rundown of how that has actually progressed?

Yes, Matt, it's George.

We certainly think it helps, and it has certainly allowed us to leverage some market strength.

So it really is getting the yes, as you know, with the commercial customer.

And it doesn't matter if it's a 2005 F-150 or a 1970 Chevelle.

We've got to have the part and get to yes quickly on that question when it's asked.

So it has helped us.

Now, it is not in our comp.

And maybe Mike will build on this a bit.

Those inner-Company cross-source sales are backed out of our comp and not reflected in there.

But it certainly is building a better capability for us; a better commercial capacity for us; and, we think, a very good parts authority at the local level.

Maybe building on that, a couple other things, Matt, is that we're very early.

But there are hundreds, not thousands, at this point in terms of Advance stores that have sold TechNet relationships.

And those TechNet relationships, as we talked about, one of the benefits from Carquest is that what Advance lacked in that space some of the traditional programs that the traditional players had, TechNet being one of them.

And so we're starting to see initial traction in terms of TechNet.

We're seeing traction in terms of the CTI, the Carquest Technical Institute investments.

What we're also seeing is we have just a lot of terrific national accounts, including CarMax.

We're able to provide better coverage.

So where Carquest couldn't reach certain national accounts because they simply didn't have a store, and we do.

That's one of the benefits that we're seeing in terms of better coverage in the commercial space.

And probably the most fundamental thing that we're seeing is at a local level.

The Carquest team and the Advance teams -- and I would say this fits into exceeding my expectations -- are working together nearly seamlessly.

It's really been a terrific and pleasant surprise culturally.

And when they're working together, the customer benefits.

That is good to hear.

Thank you so much.

The next question is from Dan Wewer with Raymond James.

Thank you.

Darren, there are a lot of terrific things that took place in the second-quarter.

But one trend that I'm not real excited about is the 60% increase in inventory only generated a 36% increase in gross profit dollars.

So I was curious as to where you are in your product line reviews and eliminating redundant SKUs between the Carquest and Advance organizations.

And how you think that inventory growth may change during the balance of the year.

Yes, Dan, I appreciate you asking a tough question.

I'd say the way we've guided the teams early on is that we've used an approach that says -- Let's get it integrated first and optimize it second.

The integration, the way we've prioritized that, is make sure that customer service levels do not experience any degradation, that they only get better.

And so a choice that we had to make in the inventory side of it is that we could go into optimization.

And as I said earlier, part of that will require systems work.

And so we made a deliberate decision early on in terms of hubs, super hubs, and level of investment, plus we have inventory coming on for Hartford.

That in all cases, early on in this acquisition, we want the customers -- the independent customers, our core customers -- to experience the benefit of the service level.

Recognizing that the good news about this inventory, it's not fashion.

It doesn't go out of style.

And that the teams, as they come together in Raleigh and work as one team, we will have a run rate and maximize what I'll call the balance between service level and getting the inventory dollars out.

There's no doubt that there's a big value pool in terms of absolute inventory for us.

But in the early days, we don't want that to come at the expense of customer service.

Charles, anything you'd add?

Yes, I think a couple of things, Dan.

As we look at the work that we're doing inside the AAP network, to Darren's point, we're waiting for systems integration across both brands.

We see moderation in the AP inventory as we move through the balance of this year.

And that is work that the teams are continuing to drive out.

We've finished the product integration planning work.

And now we're going into that phase in the beginnings of the consolidations of looking at the rationalization of inventory between both brands.

And as we start to go into our DC conversion strategy into next year, we'll start to see where we drive simplification through the assortment that will have impact on the overall inventory.

But we won't, and I want to reiterate that, we won't do that at compromising service levels.

As we grow in the commercial space, the expectation of our commercial customers is very high around super availability.

And our teams are being charged and doing a good job in driving that superior availability protection into our market, as well as looking at where we have unproductive inventory that we can better utilize either out of the network in partnership with our vendors or elsewhere through the network and consolidation.

And then, Mike, if you want to add anything?

Dan, I wanted to connect two things.

First of all, we expect the inventory growth to moderate as we get throughout the year.

We're also focused on reducing our owned inventory because that's important to drive our cash flow.

And then I wanted to connect your point around the gross profit rate.

We're actually right on plan with respect to our gross profit rate.

And maybe let me remind you.

At the beginning of the year we said we took 2013, we blended the companies together and said that the gross profit rate for 2013 would be somewhere in the 45.5% to 46% gross profit rate.

And that didn't include synergies.

But if you do the math, on a year-to-date basis, we're tracking at 45.4%.

You back out about 30 basis points of synergies; that takes you about to 45.1%.

And then you add back the supply chain reclass, and we're close to 46%.

So we're almost -- we're right in the range.

And we said that the gross profit rate would be modestly up this year.

So we're tracking right at where we said we would be.

Great.

Well, that's certainly a lengthy question or answer to my question.

Just as a real quick follow-up, when you're talking about closing and consolidating a Carquest store into Advance, and that potentially the combined commercial revenues could be more than 100% from where they were running prior due to better parts availability.

What does the inventory growth look like in that combined CarQuest Advance location?

That's going to vary based on markets and the market potential.

If you look at our Southern markets, and as we've looked at inventory, we see gaps where we can actually add inventory.

There are other markets where the inventory is actually flat.

And so, on average, when I look at the first grouping of stores that we're doing today, the inventory is just moderately up.

And that's based on the geography of where those stores are, and the benefit those stores can take by adding superior availability into those stores.

Great.

That's very helpful, thank you.

The next question is from Simeon Gutman with Morgan Stanley.

Thanks, good morning.

Just one follow-up on inventory, and then my main question.

Would you say that Advance or Carquest, either of the companies, has a superior ability to forecast either the fleet or the breakage within a market?

And then that will help you improve just the inventory allotment per store in general.

Simeon, this is Darren.

In forecasting the inventory around the store -- we've talked before -- we have the custom mix tool.

It's not rocket science in terms of vehicles and operation around the store, and we've been using that for years.

Now, I think that tool will further help us in the Carquest forecasted inventory.

I think where we see an advantage, to be honest, and Carquest had this advantage, is that what WORLDPAC allows us to do.

WORLDPAC is selling a lot more late-model coverage vehicles.

And so they are getting a better sense early on in the cycle, principally around the import vehicles, which we've said have really taken over in terms of the growth and the car part the last several years.

And that will better inform our overall mix of inventory, principally in the import space, and principally in late model coverage.

And we tend to think of that as a benefit that is still ahead of us.

Today, we respond to that benefit by ordering from WORLDPAC.

In the future what you could see, and what we could see in Carquest, is that ideally what you're doing is for a portion of that product putting it in your own DC.

That's a much more profitable transaction, when you've got to just deliver it out of your own network.

Okay.

And then my main question is on the industry and the tone of business.

A couple of suppliers talked about weather-related replacement activity and that there are still pockets of pent-up demand.

And you mentioned end of the month was a little soft.

So from your vantage points, and I guess this is the age-old question, is do we root for hot weather now the rest of this season?

And do we see that pent-up demand?

Or now do we roll back into the winter and hope for extreme cold?

How much of this is still to come, and does this roll forward to next year at this point?

Simeon, weather always evens out.

That's what I would say.

What we root for is internally, we don't spend our time rooting around the weather.

What we do is we spend our time saying to the teams -- You've to got to get out there and take market share.

What you have to do is every customer in front of you, you've got to serve them better than anybody else.

What we do internally is we train our teams.

We have put an enormous amount of training -- as a matter of fact, AAIA will recognize us as the best training group this year, and that's what we're committed to.

The weather is going to go up and down.

That thing will even out.

That's what showed up in our guidance at the beginning of the year when we said low single comps.

We anticipated weather would help us.

We anticipated that usually there's the other side of it.

And so I think we've built a set of responsible plans that reflect that.

And to our team, we want to just stay focused on going out there and getting share and just serving the customer better than anybody else.

Okay, thanks, good luck.

Thanks, Simeon.

The next question is from Scot Ciccarelli with RBC.

Hello.

Quick clarification -- hopefully quick -- and then a question.

Your comments on the GPI sales growth in the quarter, up 3.8%; that's on a per day sales basis.

So that's kind of like a true apples-to-apples run rate?

Yes, that's exactly right.

Got it, thank you.

And then you talked about some of the experiences that you had with the BWP consolidations.

And let's call it the north of 100% kind of retention because of the additional market share.

Given your fixed cost infrastructure, can you give us an idea of the impact that has on the profitability of that store?

Scot, this is Darren.

So a couple things.

Think about an overall store.

We're able to better leverage probably about two-thirds of the payroll in that store.

Because essentially, what we're transferring is a combination of a few counter people, and we're transferring a few drivers down to that store.

So it has a very nice flow through in terms of the fixed costs.

And we get to lead the fixed costs of the closed location behind.

I want to just make this point quickly, as you would say, is that I wouldn't want people running off and writing down 100% plus on every store.

Because in some of those consolidations, the other factor you have to take in is that if they're a mile away, we're in real good shape.

If they're multiple miles away, we do lose a higher percentage of that business because we're just further from the shops.

So what we're seeing is we are very pleased with the transfer that we're seeing.

We're seeing places that we are getting plus 100%.

But we're also seeing places that are coming in underneath; principally, there is distance involved too.

Yes, and, Scot, I think our focus -- we always want to improve our profitability.

We don't think about -- we're not going to start reporting out on stores.

But the big value there is when we consolidate, we get a better pool of inventory; we can improve our service levels; we get better delivery, more trucks serving the customer.

So we're really focused on the top line too of those consolidations.

Got you.

All right.

Thanks a lot.

Thanks, Scot.

The next question is from Michael Lasser with UBS.

Good morning.

Thanks a lot for taking my question.

I wanted to connect some of the points you made on the gross margin side.

You mentioned that the gross margin was down, due primarily to the inclusion of General Parts.

And then it sounds like it was also due to the reclassification.

Was there anything else in there that caused the gross margin pressure that you would highlight?

No, there were three big drivers.

There were two primarily that took it down, and one that actually helped it.

The two that took it down are the two you mentioned.

And the one that helped it is actually our synergies -- primarily driven by our purchasing synergies.

But those were the three big drivers.

Okay.

And then on the performance of the GPI businesses, it seems like you're talking a lot about the benefit that the legacy Advance stores are seeing as a result of the integration.

But it seems like the GPI businesses also accelerated a bit from the first to the second quarter.

Maybe you can discuss what's happening, what benefits those segments are seeing from the combination as well.

Or is there something else going on there?

I think they're very much the same, Michael, in many cases.

Just as Advance is benefiting from the inventory position of Carquest, so too is Carquest from Advance.

So on a market-by-market basis, they're experiencing better inventory availability.

I also think just at a cultural level, the team is pretty fired up about the integration.

Darren mentioned this.

When you think about integration -- and he gave the example of systems being one of those things that kind of you hit a period where it's a longer, drawn out project that you go through.

The one that we focus on the most in terms of a successful integration is cultural overlay, which has been fantastic.

So I think the teams are aggressive out there on the Carquest side.

But they too see better in-market availability.

And I think the other thing I would add to that is, we were pleased with the Carquest growth.

In terms of our Canadian business was strong; independent business was strong; WORLDPAC business was strong.

And I think the word we would use, we're seeing steady improvement and momentum.

Okay, thank you very much.

Our final question today comes from Seth Basham with Wedbush Securities.

Good morning.

Good morning, Seth.

My question revolves around the base business, which we haven't spoken too much about on the Q&A here.

Could you give us an update on some of the key metrics that you're tracking in terms of customer satisfaction scores, training completed, attachment sales, rates, et cetera?

Yes, sure, Seth.

Really all of the above.

I think if you look at the DIY business -- and Darren really said this -- we can't control weather.

But we can control what the interaction looks like between the customer and our team when they walk in a store.

And that really is focused around that heavy-duty DIY, where we're selling the entire project to them.

And that really was the impetus behind automotive systems training.

We're pleased with how that's progressed.

It is a very comprehensive, 18 modular training program.

It takes some time.

It's difficult.

It's meant to be that way.

But we track completion rate on that one and are pleased with how that's moving along.

We also look at that individual interaction with the customer and whether or not we sold the entire project.

On the customer service side, we look at a number of metrics.

One of which is likely to recommend, and are very, very pleased with the outcome there.

That's been strong, and it has remained strong for a couple of quarters now.

And then we are also beginning to have more of a focus around commercial customer feedback.

Really talking to our best customers, doing an anonymous survey, and just getting feedback on the core components of a great relationship and how well we're helping them to grow their business.

That's very new for us.

That's off to a very nice start as well.

So those really are.

We're going to be a field-led, customer-centric organization; and metrics like that are at the heart of it.

That's great.

It seems like you have some real momentum there.

As you think about your comp performance for the last couple quarters and the progress you're making with these initiatives internally, how much of that comp lift that you've seen do you think has been driven by some of these initiatives relative to the benefits you see from weather, et cetera?

Yes, I think a large part of it -- the weather is out there and it works both ways and we know that.

What we like about the sequential comp improvement is that we see our core commercial business getting stronger and stronger along the way.

And we think we control that.

We think that's execution.

We think that's the evolution of a commercial value prop.

We think it's better infield execution by our teams and, frankly, we think it's better confidence among our team.

Great, thanks so much, and good luck.

Thank you.

Thank, Seth.

Thank you.

I would now like to turn the call over to Zaheed Mawani for any final comments.

Thank you, Wendy.

And thanks to our audience for participating in our Second-Quarter Earnings conference call.

If you have additional questions please call me at 952-715-5097.

Reporters, please contact Shelly Whitaker at 540-561-8452.

That concludes our call.

Thank you.

That concludes our call today.

You may now disconnect.

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