The operator welcomes participants to the Advance Auto Parts' Fourth Quarter and Full Year 2023 Conference Call. Elisabeth Eisleben, Senior Vice President, Communications and Investor Relations, makes a statement regarding forward-looking statements. CEO Shane O'Kelly thanks the team for their dedication and discusses his recent travels meeting customers and team members. He praises the team's work ethic and commitment to customers.

The article introduces the new Chief Financial Officer, Ryan Grimsland, and discusses the company's recent actions to turn around their business. These actions include focusing on selling auto parts, eliminating distractions, analyzing past performance, and initiating sales processes for certain branches. The company also plans to reduce costs and make organizational changes for success. Two additional actions have been introduced, including assessing asset productivity and consolidating the supply chain.

The company has taken decisive actions to improve its business, including initiating separate sales processes for Worldpac and Canada, implementing cost reductions, and launching an initiative to reduce indirect spending. They are also investing in frontline team members and are committed to building a cost-conscious culture. These actions have already shown improvement in turnover reduction and will result in at least $150 million of SG&A savings in 2024. The company is focused on only investing in initiatives that support their commitment to improving the fundamentals of the business and serving their customers.

The company has made significant changes to its management structure and leadership team in order to drive collaboration and accountability. This includes hiring new talent, such as a new CFO, Chief Accounting Officer, and Chief Data Officer. The company has also made changes to its organizational structure, with pricing now being part of merchandising and a consolidated real estate team reporting directly to the CEO. The company is also working on implementing a new merchandising and inventory system to improve ordering and fulfillment processes.

The fourth decisive action is to improve the productivity of all assets in the company, including company stores and independently owned Carquest locations. This includes terminating agreements with over 100 independently owned Carquest stores and making improvements to the IT department and store systems. The fifth decisive action is to consolidate the supply chain into a single unified network by implementing a warehouse management system and converting smaller legacy DCs into market hubs. This will improve the company's cost structure and inventory availability. The first step will be completed by the end of the year and the second step is already underway.

The company is leveraging its current distribution centers to move faster and more cost-effectively. This will also help reduce costs and improve inventory productivity. The macro environment remains strong, with increasing average age of vehicles and miles driven, as well as growing demand for Do It For Me services. The CFO, Ryan Grimsland, thanks the team for their dedication and discusses changes made to transform the finance function, including the appointment of a new Senior Vice President, Chief Accounting Officer, and Controller. He also mentions the remediation of a previously disclosed material weakness related to internal control.

The speaker is committed to providing strong leadership and ensuring the company has the necessary resources to become a top retail organization. They have made changes and are working to improve the company's fundamentals and internal processes. However, there have been challenges, including turnover in accounting personnel and the need to address a material weakness related to people. The company has also identified issues with previously reported financial results and will be correcting them in their upcoming Form 10-K. They have filed for an extension to finalize their assessment of internal control over financial reporting. The financial results discussed in this meeting will be compared to the corrected results for prior periods.

In the fourth quarter of 2023, the company's net sales and comparable store sales decreased due to softness in DIY and unfavorable weather in certain regions. However, there was strong performance in the pro category. Gross profit margin also declined due to various factors, including inventory related issues and hiring an external firm to recover vendor incentives. SG&A expenses also increased, leading to a deleverage.

In the fourth quarter, the company incurred $8 million in restructuring expenses and $5 million in accounting resources. This was not indicative of their desired operations, and they are working to reduce expenses. Operating income margin decreased by 679 basis points, and diluted loss per share was $0.59. For the full year, net sales increased by 1.2%, but comparable store sales decreased by 0.3%. Gross profit decreased by 8.3%, primarily due to inventory, cost increases, and the recovery of vendor incentives. SG&A expenses increased by 3.5%, and operating income decreased by 82.9%. Full year earnings per share were $0.50 compared to $7.65 in the previous year. Capital expenditures for 2023 were $242 million.

The reduced capital expenditures in 2024 are primarily due to fewer new store openings and IT expenses. The company is committed to a disciplined capital allocation strategy and expects to focus on IT enhancements and supply chain optimization. They have taken steps to simplify the business and are working on improving store productivity and implementing cost-cutting measures. The company's 2024 guidance includes net sales of $11.3 billion to $11.4 billion, comparable store sales of 0% to 1%, and a minimum of $250 million in free cash flow.

The speaker is confident that with decisive actions and a focused team, the company can return to profitable growth in 2024. They mention the company's 90-year legacy, a re-energized frontline team, and a leadership team committed to a comeback. The speaker then opens the call for questions, with the first question being about the changes in inventory and vendor incentives in the fourth quarter. The response mentions shrinking out of inventory, changes in excess and obsolete calculations, and challenges in recovering incentives from businesses they no longer work with.

The company's new CFO and CAO are working to improve the business's methods of estimating profits and expenses. Last year's initiative to review vendor income had a positive impact that will not affect this year. Around 157 basis points of atypical items are not expected to impact next year's gross margin, and $12 million in SG&A expenses are related to severance and remedial measures. The company is aiming for a sustainable operating margin in 2025 and beyond, potentially building off the 2024 levels.

The company is working towards improving their business and will release a multi-year perspective later this year. They are focused on making incremental improvements every day and gaining credibility with their 2024 year guidance. The company expects a 157 basis point impact from atypical items this year and has a modest margin rate expansion. They will provide more information on the sale process in the second quarter, but it will not be a fire sale as Worldpac is a good business with a good team. The company is balancing maximizing the value of their assets with the need for resources to improve the business, as their credit rating has been downgraded and they have factored receivables.

The company is not under pressure to sell, but they believe selling Worldpac is the best strategic move. There is significant interest from potential buyers and the process is expected to be completed in the second quarter. The company has already started thinking about what to do with the proceeds, including paying down debt and accelerating key initiatives. The CEO is not ready to give a clear picture of what the company will look like without Worldpac, but more information will be available as the sale process progresses.

Ryan Grimsland and Michael Lasser discuss the company's focus on selling auto parts out of a blended box. They also mention the reinvestment of cost savings into the frontline and managing inflation in SG&A to reach their guidance of 0% to 1% growth in the top line. Simeon Gutman asks about the guidance and Ryan explains the reinvestment in the frontline and managing inflation as factors in reaching their target.

The speaker welcomes the audience and discusses a cost cut of 150, resulting in 400 team members being let go. They mention a renewed focus on customer service and acknowledge that the company has been lacking in this area. The speaker believes that the key to success lies in empowering frontline employees and shifting the focus from headquarters to the field. They also mention the importance of listening to customer feedback.

The company has shifted its focus to the blended box model and is looking to sell certain business units. The guidance does not include any potential sale proceeds. The company will provide more details on the sale in Q2. The CEO has taken steps to stabilize the business and has spoken to employees and customers.

Shane O'Kelly, a representative from Advance, discusses the company's focus on improving their service to customers. This includes investing in frontline employees, such as increasing wages and providing training, as well as improving product availability and reducing turnover. The company is also working on better communication and coverage with their outside sales team to meet customer demand.

The company's pro efforts were previously divided within the organization, but now they are consolidated into one team. The company is also reaching out to vendors to ensure cost, product availability, and innovation. Feedback from vendors has been positive and there is a collective effort between vendors, frontline employees, and customers to support the company. The company is expecting a 1% inflation rate as they reinvest in inventory. The supply chain initiative, including the implementation of a new WMS, is expected to be completed by the end of the year.

Shane O'Kelly, in response to a question, explains that the company will have its WMS system in place this year and will use smaller DCs as forward inventory. They plan to create a national network of larger DCs and additional market hubs to unify their supply chain. This will require additional investments in building more large DC infrastructure, with the exact number to be determined in the coming months.

Shane O'Kelly discusses the company's plan to unify its supply chain, which involves consolidating multiple supply chains into one. He mentions that this will result in cost savings and improved product availability for customers. He also mentions that the company may use proceeds from a potential asset sale to accelerate this process. The timeline for completion of this initiative is multiyear and may be impacted by the outcome of the asset sale.

The company plans to improve its efficiency and profitability through various initiatives, but this will take time and may not be fully implemented until 2026. The first market hub conversion is underway and is expected to have a positive impact. The company also saw a $5.2 million LIFO income in the fourth quarter, which is expected to moderate in 2024. The comps for the quarter were down 1.4%, but the company is seeing a wider dispersion in performance across the store base, indicating that some early initiatives may be working.

The availability of inventory has improved, leading to better performance in the pro sector. However, DIY sales are still under pressure, offsetting some of the pro performance. The company expects to see further improvement in the pro sector as availability improves and DIY pressure decreases. The gap in profitability compared to other companies is due to a combination of factors, including supply chain conversion, mix of products, and areas for improvement in merchandising. The company is focused on closing this gap, with the main focus being on supply chain conversion.

The speaker discusses the importance of focusing on the blended box and increasing revenue per store. They mention the need to do both online and in-store sales and the goal of being incrementally better every day. The speaker also mentions inventory adjustments and changes in estimates, clarifying that these are not expected to be reversed in the future.

The company has divested from around 100 independent businesses that were not profitable for them. This move will result in a margin saving and may lead to the closure of some Carquest distribution centers. However, the company still values independent businesses and this was not a complete exit from the independent arena. The decision has been well-received by both the company and the independent network. The divestment is expected to bring in a net positive of $3-4 million in operating profitability.

Seth Basham from Wedbush asks about the balance sheet leverage going forward and the implications for the vendor inventory financing program. Ryan Grimsland, the operator, responds that they plan to delever the balance sheet with proceeds from the sale of Carquest and continue to work towards a better leverage target. As for future capital expenditures, the focus will be on IT and supply chain. Shane O'Kelly adds that the supply chain transformation is a big one and they may raise their guide for 2025 if the business performs well. Michael Baker from D.A. asks the next question.

During a conference call, Michael Baker asks about the distribution centers (DCs) mentioned by Davidson. He wants to know the breakdown of the 38 DCs and how many are considered bigger or smaller. Ryan Grimsland clarifies that the 38 DCs are specifically for Advance and Carquest, but the total DC network is about 50 including Worldpac. Shane O'Kelly adds that they will provide a complete breakdown in the future, but for now, they are hesitant to be more specific due to team members in the DCs. He also mentions that the larger DCs from the Advance model are appropriate for the market hub conversion for Carquest. Michael Baker asks if the number of large DCs needed is already met from the Advance network, and Shane O'Kelly confirms that they believe they have the necessary number of large DCs, but may refine it in the future.

Shane O'Kelly and Ryan Grimsland discuss the company's plan to create a nationwide distribution network using their current assets. O'Kelly mentions his past experience working with firms that set up national infrastructures and believes that an appropriate range for this project would be 8 to 14 new facilities. Grimsland clarifies that they are leveraging their current assets and trying to do this efficiently and quickly. O'Kelly also mentions that they found an additional $50 million to invest in frontline employees, which is part of the $150 million they took out for wages, bonuses, and training.

The speaker discusses the company's plans for increasing profits by implementing supply chain improvements and reallocating funds towards bonuses and training. They also address concerns about maintaining market share in a competitive industry.

The company has released a modest guide and is focused on growing its market share. They believe in having a single national distribution network and using market hubs to get products closer to customers. This is in response to increased customer expectations for fast delivery. They are confident in their growth potential and are not concerned about competition.

The speaker discusses the cost takeout of $150 million and how it was achieved through cuts in all functional areas, with a focus on reducing bureaucracy and empowering the front line. They do not believe this will negatively impact sales and there are no further restatements expected for historical results.

The company has seen a 200 basis point improvement in their in-stocks, but there is still room for further improvement. They are working on it in real time and the new inventory system will help in this regard. Customer feedback has been positive, but there is still work to do in different geographic regions. Overall, there has been significant improvement, but more progress is expected.

The speaker discusses the importance of private label brands and the need to ensure high-quality products are available in sufficient quantities. They also mention the importance of pricing in relation to customer feedback and the need to balance it with availability and speed of service. The speaker states that they will be where the market demands in terms of pricing.

The speaker is excited to update the listeners on the progress of their actions in May and the call is now ending.

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