Elisabeth Eisleben welcomed listeners to the Advance Auto Parts' Second Quarter 2023 Conference Call and discussed the forward-looking statements that would be discussed on the call. Gene Lee then took over the call to address the new leadership and strategic and operational review the company announced, as well as provide his own perspectives on the business and the actions they are taking. Tom Greco and Tony Iskander will then review the second quarter results and outlook for the remainder of the year.

The Board has appointed Shane O'Kelly as President, CEO and Director of Advance Auto Parts, effective September 11. He has extensive experience in operational, strategic development, integration and complex supply chain and is coming from HD Supply, where he served as CEO. Tom will remain President and CEO until Shane's start date and then serve as an advisor to ensure a smooth transition. Tony Iskander has been appointed as Interim CFO.

Tony brings 25 years of finance and accounting experience to the role of Interim CFO, and will be on the call today to review Q2 results. The Board is conducting an operational and strategic review to develop a long-term strategy to deliver best-in-class shareholder value. The company is providing updated full-year 2023 guidance and Gene will work closely with Shane when he joins next month to ensure the company capitalizes on its near-term and long-term potential. Tom Greco expressed his appreciation for the Board's support over the last seven years and looks forward to working with Gene, Shane and Tony to enable a seamless transition.

In Q2, Advance implemented compensation increases for key roles in stores and supply chain, and made investments to retain high-caliber talent in their Customer Support center. Net sales saw growth in both DIY omnichannel and DIFM, with motor oil, batteries, brakes and engine management leading the growth. However, financial metrics remained challenged.

DieHard saw a 0.6% decline in comparable store sales in Q2, primarily due to Pro, but saw sequential improvement in each period. The West led sales growth and the company delivered low-single-digit comparable sales growth during the first four weeks of Q3. Initiatives to improve transactions in both DIY omnichannel and Pro, such as improved availability, competitive pricing, and customer activation plans, helped to drive sequential improvement in transactions in Q2 compared to Q1.

In Q2 of 2022, DIY omnichannel transactions were down slightly from the prior year, but the average ticket was up mid-single-digits. The Speed Perks program grew by 15%, and transactions hit 48%, a 420 basis point increase from the same time last year. Transactions for Pro improved versus Q1, but average ticket was down slightly. TechNet grew to almost 17,000 members. Net sales increased 0.8%, and comparable store sales decreased 0.6%.

In Q2, gross profit margin deleveraged 174 basis points due to higher product costs and supply chain deleverage. SG&A deleveraged year-over-year due to labor related inflation, resulting in a 256 basis point operating income margin deleverage and a $1.43 diluted earnings per share. Free cash flow was an outflow of $309 million, with a cash balance of $277 million and $95 million outstanding on the revolver. Outlook for net and comparable store sales has been increased, however, operating income margin rates, diluted earnings per share, and free cash flow have been reduced due to commitments to maintain competitive price targets and the expectation that channel mix will remain a headwind.

Tom Greco discussed how Worldpac has been integrated into Advance, including integrating Auto Part International into Worldpac and making the enterprise catalog visible to customers. He also stated that while the business is integrated, it is still run relatively independently and is performing well.

Simeon Gutman asked Gene Lee what the biggest priority for enhancement is in merchandising, supply chain, and operations. Lee suggested that the new leadership should prioritize initiatives that will give the biggest payback as quickly as possible. Tom Greco then answered Greg Melich's question about inflation assumptions and payroll growth, saying that they expect low-single-digits on the pricing front and mid-single-digits on wage inflation.

Tom Greco explains that Advance Auto Parts had to lower its prices in the back half of last year to be in line with the market. This price correction has been sustained through the year, and they are also selling down products that are transitioning to the Carquest brand.

Michael discussed two major factors that will affect pricing in the back half of the year: the transition to higher margin products and the competitive nature of the industry. Tom Greco clarified that SG&A will be a slight headwind to margin in the second half of the year, but that cost savings and investments in people could partially offset this. He also noted that as own brands become a larger percentage of the total, it could result in gross margin expansion in the years ahead.

Tom Greco reports that DIY and Pro businesses have seen improvement in the past eight weeks, with Pro improvement being more disproportionate. DIY has seen its third consecutive quarter of growth in comp sales, and e-commerce is performing well. The national accounts and up and down the street businesses of Pro are both improving, as is TechNet. The field is doing a good job of executing the necessary actions to win the business of both national accounts and up and down the street installers.

Gene Lee and Tom Greco discuss the strategic relevance of Worldpac and its role in the organization. Tom explains that Worldpac provides a broader assortment than any other in the industry, including national brands and their own brand line-up. Ultimately, Shane will decide whether to integrate it or run it as a separate business.

Tom Greco discussed the Carquest private label strategy and how it has been losing commercial market share in the last quarters. He attributed the share loss to availability issues, but believes that the availability improvements they have made will be beneficial in the back half. Greco also discussed the professional installers' love for the Carquest brand and how their brakes are the best in the business.

Tom Greco explains that when transitioning from a national brand to Carquest, they factor in all changes, such as the margin rate, quality, and vendor, when making the decision. Tony Iskander adds that the accounts payable ratio is expected to continue to increase as investments are made and replenished.

Tom Greco explains that the company has seen its pricing increase above the market in the back half of the year and is committed to a holistic solution to improve availability, visibility of parts, service, delivery, and to sustain the price index. He also mentions that freight will be a tailwind in the back half of the year, as well as category management initiatives, and that price versus cost is not as punitive as it was in the first half of the year. This will lead to a lower EBIT margin outlook for the second half of the year.

Gene Lee believes that the business should return to profitable growth in less than one year due to the actions being taken to improve operations, supply chain, and the top 4000 products that are "never out". He also believes that the price-to-inflation gap will continue to grow, and that the gross margin line will not suffer from deleverage.

Gene Lee explains that Darden Restaurants is conducting a comprehensive and strategic review that includes evaluating the productivity of all their assets, including Worldpac. Additionally, they are focusing on improving operational processes and procedures to create cost savings. Lastly, they are working with an outside consultant to improve their category management, which is expected to have positive results in 2024.

Tony Iskander explains that the reduction in spending plans from the start of the year is due to fewer store openings, and that a strategic review will help to determine the go-forward spend rate. Tom Greco states that inventory levels are currently satisfactory.

Advance has seen an improvement in sales recently, and it is difficult to determine how much of this is due to their own efforts and how much is due to a solidifying backdrop in the sector. Advance has seen strength in DIY, heating, and cooling categories due to the hot summer, and they are waiting to see how their peers will perform before they can know the full extent of their success.

Gene Lee and Tony Iskander discussed the shift in the debt covenant they made, which provided more financial flexibility. Brian Nagel asked about the extent of this adjustment and if there could be other similar changes to the debt structure of the company. Tony Iskander explained that they had adjusted the interest coverage ratio to provide relief due to the higher interest expense earlier in the year, but did not adjust the leverage ratio. Scot Ciccarelli asked why they would raise the full year comp estimate despite posting negative comps in the first half; Gene Lee and Tony Iskander responded that they had seen positive results from the actions they had taken and felt good about continuing to execute them.

Tom Greco and Tony Iskander discussed the momentum seen in recent weeks and the expectation of sales growth. Tony Iskander also mentioned that there is no targeted ratio for the end of the year for accounts payable to inventory ratio, but they expect to see improvement. Seth Basham asked if there is more gross margin rate pressure in national accounts or up or down the street customers, to which Tom Greco responded that they are matching with their targeted in each of those channels. Finally, Gene Lee mentioned that they are in active dialogue with the credit rating agencies about the decline in free cash flow.

Tom Greco discussed the company's up and down the street business, stating that they are seeing progress in terms of customers and dollars per customer. He believes that the larger strategic accounts will grow faster than the up and down the street business. He then discussed the company's advantages and disadvantages in serving particular customers, such as their enterprise assortment, great footprint, high quality parts, availability, visibility, service, and delivery.

Gene Lee explains that the structural differences between their margin structure and their competitors are due to the mix of their business, as well as the fact that they rent more stores than their competitors. He adds that there is a lot of room for improvement in their asset productivity, and that they need to go through an operational review to understand what the true opportunities are in order to provide the best service to their customers.

Gene Lee states that the biggest factor impacting margins is asset productivity, which is currently at 1.7 boxes per box compared to other companies at 2.3-2.4 boxes per box. He states that improving asset productivity is the first priority and it will have the greatest impact on margins. He then explains that Shane O'Kelly was chosen for the role due to his comprehensive set of experiences, which was established through a comprehensive search.

Shane O'Kelly was identified as the best candidate for a leadership role due to his educational background, strong discipline, and focus on customers. His leadership style is perfect for the company's current situation, and the succession committee did a fantastic job in finding him quickly. The internal actions of the company are driving improvements in sales, especially with availability, and they are seeing a broader acceleration in sales which may be due to better weather.

Tom Greco provides insight into the turnover rates of their stores and supply chain. He explains that turnover was high when he started, but has since come down significantly in the last year and a half. Greco attributes this to the efforts of their new head of supply chain, Steve, and notes that when turnover decreases, their ability to execute improves.

Daniel Joe spoke about the company's improvements in their supply chain and stores, and their commitment to retaining frontline talent that serves customers. Elisabeth Eisleben concluded the call by thanking everyone for joining and looking forward to welcoming Shane and speaking with them again in November.

This summary was generated with AI and may contain some inaccuracies.