The paragraph is an introduction to the Advance Auto Parts' Fourth Quarter and Full Year 2024 Earnings Conference Call. Lavesh Hemnani, Vice President of Investor Relations, introduces the event, mentioning the participation of CEO Shane O'Kelly and CFO Ryan Grimsland. The call includes references to online slides and forward-looking statements with potential risks. Shane O'Kelly thanks the team for their efforts during a challenging year and discusses strategic moves in 2024, including divesting non-core operations to focus on growth with a new leadership team combining automotive and retail expertise. After the presentations, there will be a Q&A session.

The company recently appointed Shweta Bhatia as Chief Technology Officer and Jeff Vining as General Counsel, emphasizing a customer-first approach. A three-year strategic plan aims for a 7% adjusted operating margin by 2027, with a focus on fundamental execution. Despite challenges affecting profitability in Q4, financial performance met revised expectations. As the company stabilizes, improvements are anticipated by 2025, with goals for sales growth and a 500-basis-point margin increase over three years. Progress is tracked through KPIs, and the company is motivated by positive changes, reinforced by the Accelerate 2025 leadership meeting focusing on connection and advancement.

The paragraph discusses an event attended by nearly 1,500 team members and over 400 vendor representatives, aimed at training field leaders on new products and recognizing top performers. It highlights the company's three-year strategic plan focused on improving operations and ensuring access to the right parts with quality service. The feedback from vendors emphasizes appreciation for the company's renewed focus and partnership approach. The strategic plan is based on three pillars to ensure consistent, profitable growth, with specific plans being implemented by functional teams across merchandising, supply chain, and stores. Critical performance indicators have been assigned to track progress, aiming to enhance customer, team, and vendor experiences and ultimately increase sales and profitability. The paragraph closes by mentioning significant progress in merchandising, specifically in conducting line reviews to procure quality products at optimal costs.

The paragraph discusses a partnership with vendors to select products and find growth opportunities, aiming to realize significant cost savings by the latter half of 2025. The merchant team is using analytical strategies to optimize inventory planning based on car part characteristics and insights, enhancing parts availability at stores. A New Assortment Framework was piloted in a Southeast DMA, replacing hundreds of SKUs, which improved store performance. Encouraged by these results, the company plans to roll out the framework across the top 50 DMAs, covering over 70% of sales within 12 to 18 months. This will enhance part access, improve store stock levels from low-90s to high-90s, and support quicker customer service, boosting repeat business.

In 2024, significant advancements were made in transforming a multi-echelon distribution network, including starting a consolidation project that reduced the number of distribution centers (DCs) in the U.S. from 38 to an expected 16 by the end of 2025, with a goal of operating 12 large DCs by 2026. This is anticipated to enhance labor productivity by optimizing processes and collaboration. Simultaneously, market hub stores expanded, with 17 out of 19 opened in 2024. Although fewer hubs will open in 2025 due to supply chain priorities, the pace is expected to accelerate in 2026, aiming for 60 by mid-2027. These hubs support service stores, improve same-day parts availability, and showed strong sales growth through 2024.

The company is optimistic about its strategic direction and expects stronger sales in the future by optimizing supply chain operations and improving service speed in stores. They are working on a new routing framework to enhance product delivery efficiency and expect these improvements, along with increased DC labor productivity, to reduce supply chain costs and improve gross margins by late 2025. The focus in stores is on speeding up service times, especially for pro customers, and enhancing asset utilization to improve labor productivity. They've started testing a new store operating structure to enhance resource allocation and have seen promising results, despite being in the early stages of refining product assortment.

During the first quarter, the company plans to expand a new operating model to additional markets, aiming for full implementation by year-end to improve resource allocation and efficiency in hiring, staffing, and scheduling. This model is expected to enhance training, customer service, and transaction volumes. In 2025, the company anticipates improved service levels and better expense leverage due to sales growth. Additionally, after assessing post-Worldpac sale opportunities, the company decided to close around 500 corporate and 200 independent stores, executing this through a structured process involving communication, liquidation, lease termination, and closures. Progress in these activities is on track, with inventory liquidations nearly complete and favorable lease negotiations for over 250 stores.

The paragraph outlines the company's accelerated plan to close stores by the end of March, ahead of the original mid-2025 timeline, to streamline supply chain logistics and reduce costs. It highlights the cessation of services to independent stores, primarily in the West, and proactive efforts by the pro sales team to assist affected customers by redirecting them to nearby stores. The company acknowledges the team's efforts in managing these closures to focus on long-term improvements. The paragraph then shifts focus to Ryan Grimsland discussing financials, noting changes in financial statement presentation to distinguish continuing operations from discontinued operations related to Worldpac's sale, and the use of adjusted non-GAAP measures to provide clearer performance insights.

The paragraph outlines the company's financial performance and strategic decisions, highlighting the impact of store closures on their fourth-quarter and full-year financials. Although net sales from continuing operations decreased by 1% compared to the previous year, the company identified an increase in demand for certain items due to winter weather conditions. The pro channel performed slightly better than the DIY segment, with average transaction size increasing modestly. Despite a decline in overall transactions, categories like filters and fluids showed strength. The adjusted gross profit was $779 million, equating to 39% of net sales, resulting in a 170 basis point decrease in gross margin, attributed to temporary factors that were excluded from non-GAAP adjustments.

The paragraph discusses financial challenges faced by a company in Q4, highlighting a 180 basis point headwind from inventory adjustments and a 100 basis point headwind from liquidation sales. These factors, along with a decline in sales volume and higher labor costs, led to an adjusted operating loss of $99 million and an adjusted diluted loss per share of $1.18, compared to $0.45 the previous year. The company ended the year with a negative free cash flow of $40 million, which, after adjusting for store closure expenses, would have been positive. Unusual factors negatively affecting gross margin and operating margin contributed significantly to these results. For the full year 2024, net sales decreased by 1% to $9.1 billion.

The full-year comparable store sales declined by 70 basis points due to a softer consumer spending environment, affecting DIY sales more than professional sales. Transaction volumes fell slightly, while the average ticket value increased. Strong sales were seen in batteries, filters, and engine management, but discretionary categories underperformed. Adjusted gross profit was $3.8 billion, with a gross margin of 42.2%, benefiting from reduced inventory headwinds but partially offset by $100 million in price adjustments and lower sales volume. Transitory factors like inventory adjustments and store closures created around 90 basis points of headwinds not included in adjusted results. Adjusted SG&A expenses, totaling $3.8 billion, represented 41.8% of net sales, increasing by 50 basis points due to higher labor costs, consistent with expectations for the year.

The paragraph discusses the company's financial performance and strategic actions. Adjusted operating income was $35 million, a decrease in percentage of net sales compared to the previous year. The adjusted diluted loss per share slightly increased to $0.29. The company resolved all material weaknesses by the end of 2024, crediting their finance and accounting teams. Michael Beland was introduced as the new Chief Accounting Officer. Atypical items negatively impacted operating margin and EPS. The company has $1.9 billion in cash following proceeds from the Worldpac sale, which netted $1.45 billion and resulted in a lower-than-expected tax liability. The company is also anticipating $300 million in aggregate expenses for store and distribution center closures, aligning with previous estimates.

The revised financial outlook for 2025 includes several key factors, such as favorable lease negotiations and lower than expected closure costs, which helped improve the company's cash position and balance sheet. The financial guidance for 2025, a 53-week fiscal year, anticipates net sales between $8.4 billion and $8.6 billion, reflecting a 5% to 8% decline due to store closures. Comparable sales growth is expected to improve throughout the year, with stronger growth anticipated in the latter half, aided by a strategic focus on parts availability and customer service. The first half will see pressure on comparable sales due to $100 million in prior price investments. The sales forecast includes contributions from newly opened stores and the additional 53rd week, expected to add $100 million to $120 million. Adjusted operating income margin is projected to be between 2% and 3%, influenced by several factors, including cycling through intercompany margin post-Worldpac sale.

The paragraph outlines the company's financial expectations and strategic initiatives. They anticipate saving $60 million to $80 million in operating costs by closing certain store and distribution center locations, with the full benefits expected in Q2, contributing to improved margins. Gross margin expansion is projected to be the main factor for year-over-year improvement, supported by cost savings in products, supply chain, labor productivity, and transportation. SG&A expenses are expected to decline slightly, despite wage inflation and other investments, due to labor productivity and indirect cost savings. While operating margin guidance varies based on strategic activities, Q1 expectations include net sales of around $2.5 billion and a comparable sales decline of 2%. Profitability is projected to show a negative 2% operating margin in Q1 due to closure costs, with gross margin expected to improve from Q4 but remain down year-over-year. SG&A expenses are anticipated to drop slightly from the previous year, factoring in closure costs.

The article discusses financial expectations and challenges for the company. Despite lower sales impacting expense leverage, the Q1 operating margin is expected to improve compared to Q4. The company predicts adjusted diluted EPS between $1.50 and $2.50, including interest income and a contribution from an additional week. They project a year-end free cash flow ranging from negative $25 million to $85 million, influenced by $200 million in closure-related expenses. Excluding these costs, positive free cash flow is expected. The company plans $300 million in capital expenditures on strategic initiatives. They aim to improve their leverage ratio to between 3.5 and 4 times by 2025, driven by better operating performance. While reaffirming their 2025 guidance, they remain cautious of potential impacts from external factors such as consumer spending changes, tariffs, or macroeconomic conditions. The company is focusing on strategic initiatives, acknowledging some unpredictability in the timing of benefits. Sales have been weaker than anticipated, influencing their Q1 outlook.

The paragraph outlines the company's strategy to address a challenging sales environment, focusing on solid retail fundamentals and accountability. The plan aims for improved performance and reduced leverage ratios, aiming to decrease debt leverage from over 4 times to 2.5 times by 2027. They plan to repay debt and cut lease obligations to meet this target. There is a current supply chain finance program with a capacity of $3.5 billion, which was adjusted after a credit rating downgrade. The company is working with banking partners for flexibility. The closing emphasizes the company's confidence in its strategic plan to enhance performance and shareholder returns while maintaining a strong balance sheet and liquidity.

The paragraph discusses the company's strategy to improve its merchandise assortment, which influences 70% of its volume. The focus is on aligning inventory with the vehicles in operation near their stores and enhancing product availability at individual locations. Previously, stores were allowed to solve stock issues independently, sometimes resulting in incomplete orders. To address this, the company is emphasizing better stocking to ensure complete order fulfillment at each store, with Smriti Maheshwari leading the inventory program efforts to achieve this goal.

The paragraph discusses how a company differentiates between one-time, atypical items and ongoing operational costs in their financial reporting. They highlight that atypical items occur during a specific quarter and are not aligned with long-term strategic objectives. In the past quarter, the company dealt with store closures, divestitures, and balance sheet adjustments to accurately reflect future business operations. These atypical items are excluded from non-GAAP measures as they are not expected to recur regularly, distinguishing them from ongoing business activities.

The paragraph discusses expectations for sequential improvement in business performance each quarter as certain initiatives take effect. In Q1, there will be a significant impact due to the closure of 500 locations and 200 independents, making it a challenging quarter. The company anticipates improvement as new assortments and merchandising strategies roll out. The assumption is that the macroeconomic environment, which is expected to be challenging in the first half of the year, will improve in the latter half, contributing to the guidance. Simeon Gutman from Morgan Stanley asks about the 7% EBIT margin goal for 2027, seeking clarity on whether it will be achieved through SG&A leverage or gross margin improvements, and the importance of setting strategic goals. Ryan Grimsland begins to respond to this question.

The paragraph discusses the company's strategic targets and financial goals, focusing on achieving a 7% improvement over a three-year period. They aim for a mid-40s percentage margin rate and keeping the SG&A cost below 40% of sales. Key initiatives contributing to these targets include enhancing merchandising, improving COGS, streamlining supply chain productivity, consolidating distribution centers, and boosting store productivity to offset SG&A inflation. Leaders Shane O'Kelly and Ryan have been cautious in providing long-term guidance to ensure realistic and attainable goals, considering the company's past challenges and industry context. They believe the 7% target is reasonable and aligns with both external expectations and internal accountability.

The paragraph discusses the company's strategic approach over several years, including selling Worldpac and closing stores to focus on foundational elements for growth. During a meeting with 400 vendors, the company emphasized collaboration, which has led to mutual enthusiasm for success. Vendors are interested in the growth opportunities and competitive benefits, and the company's sales team is eager to learn about new products and market strategies. This collaboration has improved cost management and logistics, helping to streamline operations and introduce new offerings.

The paragraph discusses a business's financial strategy and its anticipated impact over the year. Ryan Grimsland provides an update on a partnership with vendors, highlighting improvements in costs and promotional pricing, which will positively affect the Cost of Goods Sold (COGS). This financial benefit is expected to manifest quarter-over-quarter from Q2 onwards, with significant improvements in Q3 and Q4. He also notes the impact of cycling price investments on leverage/deleverage, which will dissipate towards the year's end. The paragraph concludes with Steven Forbes asking about variability in the time to serve across different markets and whether target times are consistently met in any specific markets.

The paragraph discusses the importance of delivering car parts promptly to auto shops to maintain business and improve productivity. Shane O’Kelly highlights the development of three pillars aimed at enhancing product availability, supply chain efficiency, and service quality. A critical metric is the speed of delivery, which impacts auto shops' ability to keep vehicles on and off lifts and maintain productivity. The company identified that delays in delivery times led to losing orders, as auto shops require parts within a specific timeframe to avoid prolonged downtime and ensure efficient operations.

The article discusses an effort to improve sales by shortening the time to serve customers, noting that proximity to customers leads to better sales outcomes. This strategy is supported by the experience of customers who receive quicker service, particularly in automotive contexts. The paragraph ends with a Q&A session, where Seth Basham from Wedbush asks about first-quarter volatility, attributing it to weather variations and delays in tax refunds. Ryan Grimsland confirms that week-over-week performance is affected by colder weather and delayed tax refund distributions, which are down 50% year-over-year.

The company believes its stores are well-prepared with the right inventory levels for the upcoming season, despite some market volatility and consumer pressure from inflation affecting discretionary spending. They are monitoring consumer reactions and the recent unfavorable confidence report. Atypical items impacted their Q4 and full-year financials, affecting gross and operating income margins, and EPS. In response to a question from Greg Melich regarding ticket growth and pricing, Ryan Grimsland stated that their pricing is competitive due to a $100 million investment, and inflation has been about 1%. Shane O'Kelly noted that they will continue to monitor market conditions and inflationary trends.

In the paragraph, Shane O’Kelly addresses concerns about the impact of store closures and restructuring on their DIFM (Do It For Me) business and customer psychology. He acknowledges there might be initial concerns when announcing such closures but assures that the complete market exit on the West Coast eliminates residual psychological effects. On the East Coast, despite individual store closures, the company maintains a strong presence, minimizing any negative psychological impact. He shares an anecdote from a field leader to illustrate the relatively small number of closures in some markets. Michael Lasser's initial question related to apparent market share losses and the need for the company to improve its key performance indicators amid competitive advancements.

The paragraph discusses the closure of underperforming stores, which was viewed positively by field-level staff as an opportunity to eliminate poorly located stores while maintaining their sales team in the market. The industry is described as thriving, with the possibility for the company and its competitors to succeed simultaneously, indicating that growth does not require the failure of others. Store location losses do not stem from a specific issue but reflect a general challenge across the professional landscape. The paragraph ends with a question from an analyst, Michael Baker, asking about the improvements observed at hub stores in terms of merchandise assortment and service time, and also about the economic predictions for the latter half of the year, which the company's guidance suggests will improve.

In the paragraph, Shane O’Kelly discusses the positive impact of establishing hub stores, which serve as large facilities offering a wide range of products to surrounding service stores. This approach has shown positive comparative sales results. The company plans to open 10 more hubs this year and aims for 60 by mid-2027. Ryan Grimsland addresses expectations for the economy, predicting slight improvements in the second half of the year, aligning with market forecasts, although consumer pressure remains a concern. The company will continue monitoring market conditions and adjust its guidance as needed.

The paragraph is a closing statement from a conference call, where a company leader thanks participants for joining and acknowledges the team's efforts in the company's turnaround strategy over the past year. The strategy includes selling Worldpac, closing stores, combining the supply chain, cutting costs, and restructuring the organization. The speaker emphasizes the company's strong position in a good industry, a healthy cash position, and the support of dedicated employees. The speaker expresses optimism for the company's future in the auto markets industry and concludes the call. The operator then closes the call.

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