The paragraph is an introduction to the Advance Auto Parts First Quarter 2025 Earnings Conference Call. Lavesh Hemnani, the Vice President of Investor Relations, introduces the call participants, including Shane O'Kelly, the CEO, and Ryan Grimsland, the CFO. Lavesh mentions that the call will include forward-looking statements and references to presentation slides available online. Shane O'Kelly expresses gratitude for the team's efforts and reports better-than-expected first-quarter results, highlighting a recovery in demand led by the Pro business after a challenging start to the year.

In the reported quarter, Pro sales in the U.S. showed consistent growth, contributing to a stronger profitability with near breakeven adjusted operating margins, and the company expects to achieve positive operating margins by Q2. The full-year 2025 guidance is reaffirmed, considering tariffs and mitigation strategies. The aging vehicle fleet and nondiscretionary auto part spending position Advance and the industry well in a volatile environment. The company completed a strategic milestone in optimizing its store footprint, with 75% of stores in key markets, and plans to open over 100 new stores in the next three years to capture a share of the $150 billion market. Strategic initiatives are focused on merchandising, supply chain, and store operations to improve performance.

The company is enhancing its operational capabilities to drive sustainable growth and shareholder value, focusing on merchandising improvements. They piloted a new assortment framework in one market to optimize parts availability and rebalanced inventory to meet market needs. This resulted in a significant increase in sales, especially in high-demand categories. Encouraged by the positive feedback and sales growth, they expanded the framework to 10 more markets with promising results and are accelerating the rollout to cover the top 50 markets by the end of 2025, with 30 markets going live by August, ahead of their previous schedule. They are also using technology to automate processes to aid this acceleration.

The paragraph discusses the company's efforts to enhance its SKU assortment framework and increase SKU depth across stores, which has led to improved store availability metrics. This improvement helps the company sell complete assortment bundles and application job quantities, benefiting customers and driving repeat business. With a strong industry standing and extensive store network, the company is positioned to capture more market share. It also highlights ongoing efforts to narrow the merchandise margin gap through vendor partnerships to secure cost-effective, high-quality products, aiming for significant cost reductions by mid-2025. The company remains committed to cost reduction and strategic vendor collaboration to drive growth. Lastly, the paragraph acknowledges the supply chain team's significant efforts in the first quarter.

The team successfully completed an asset optimization activity amidst complex challenges, including relocating significant inventory, adjusting replenishment routes, and supporting new merchandising efforts in multiple markets. Their efforts maintained safety and operational continuity, leading to the planned closure of 12 distribution centers this year and a transition towards operating 12 large DCs by 2026. This strategic consolidation is aimed at improving labor productivity, with early improvements already visible. The company plans to continuously enhance productivity by developing new operational standards, measuring workflows, and investing in system upgrades to efficiently support over 4,000 stores with a streamlined approach.

The paragraph outlines the company's strategy to enhance cost efficiency and market presence. It details plans to optimize replenishment order routing and product movement between distribution centers and stores, expecting cost savings to commence by late 2025. The company is expanding its supply network with new market hubs, aiming for 60 by mid-2027, which should strengthen competitive positioning and improve same-day parts availability. Initial performance data shows a positive impact on sales. The Pro channel's sales recovery, driven by transaction growth, suggests successful efforts to better serve professional customers, partly due to updated sales team incentives and resources.

The paragraph discusses the positive results from investments in the Pro channel, leading to improved delivery times and customer service, targeting a consistent 30 to 40-minute parts delivery window. A test of a standardized store operating structure is underway in 10% of stores, with plans for broader implementation. In the DIY segment, trends improved in the latter half of Q1, especially in maintenance-related categories, but volatility persists due to potential inflation impacts. The company is focusing on aspects within its control, such as training programs and role reallocations, to enhance customer assistance.

The company's efforts to enhance the in-store experience are starting to yield positive results, as evidenced by an increase in units sold per transaction, stabilizing after a previous decline. A new marketing campaign is reinforcing the brand's message, emphasizing accessible store locations, reliable inventory, expert advice, and high-quality brands. The company remains committed to operational improvements and turnaround efforts. Financially, Ryan Grimsland reports a 7% decrease in first-quarter net sales to $2.6 billion, primarily due to store optimization activities completed in March. Comparable store sales dropped by 60 basis points. Initially, sales were weak but began recovering in late February, aided by reduced weather disruptions and steady tax refunds, with a strong performance in the Pro business through consistent inventory and service improvements.

In Q1, the company experienced growth in its Pro channel while the DIY channel saw a decline. Despite a low single-digit drop in transactions, average ticket value increased. Gross profit was $1.11 billion, reflecting a margin contraction due to liquidation sales and inventory purchases ahead of tariffs, which is expected to normalize. Adjusted SG&A was $1.12 billion, leading to deleverage primarily due to labor-related expenses and a previous asset sale gain. As a result, the company posted an adjusted operating loss of $8 million. However, a strong top-line performance improved operating margins compared to the previous quarter.

The company reported an adjusted diluted loss per share of $0.22, contrasting with $0.33 earnings per share from the previous year, while GAAP earnings per share were $0.40 due to a significant tax benefit following a transaction. Negative free cash flow was $198 million, impacted by cash expenses for a store project and inventory investments. Despite these figures, the fiscal 2025 guidance remains unchanged. The company is focused on strategic initiatives and adapting to tariffs by partnering with vendors to manage product costs and considering price adjustments. They are evaluating cost drivers and assessing inflation, demand, and competition while planning for various scenarios to handle cost increases, aligning with their year-long expectations.

The paragraph discusses the company's financial strategy amidst the current economic conditions. They plan to maintain financial flexibility and aim for a steady build-up of benefits from strategic actions over the next three years. For the current year, they expect net sales between $8.4 billion and $8.6 billion, with comparable sales growth of 50 to 150 basis points. Sales improvement is anticipated in 2025, particularly in the second half, due to enhanced parts availability and service levels. They project a flat comparable sales growth for Q2 and expect new stores and an additional sales week to contribute significantly to net sales. Adjusted operating income margins are expected to be between 2% and 3%, with progress anticipated in operating margins throughout the year, especially in the latter half, driven by gross margin improvements through product cost savings and supply chain efficiencies. SG&A expenses are expected to decrease year-over-year.

The paragraph discusses the company's financial expectations and strategic activities. It mentions that SG&A costs will be impacted by wage inflation and other investments, but will benefit from labor productivity and indirect cost savings. The company expects $70 million in annual cost savings from optimizing stores and distribution centers, contributing to better margins in the latter part of the year. Adjusted diluted EPS is projected to be between $1.50 and $2.50, with free cash flow ranging from negative $85 million to negative $25 million. The company also revised its cash expense guidance for store and DC optimization to $150 million, down from $200 million, due to better lease disposition costs, though this is offset by inventory purchases due to tariff concerns. Shane O'Kelly thanks team members for their work, recognizing their achievements and inviting questions from analysts. Simeon Gutman from Morgan Stanley is queued up with the first question about the company's comp performance mix.

The paragraph discusses a performance update from Ryan Grimsland and Shane O'Kelly regarding their company's expectations for the year based on first-quarter results. Ryan indicates that current trends align with their expectations, with the DIY segment remaining pressured and the DIFM segment expected to drive performance. Factors like tariffs and scenario planning are noted. Shane adds that external factors such as consumer sentiment and credit card data suggest possible challenges for consumers, but the company is focusing on maintaining its relevance with DIY customers through marketing, promotions, loyalty programs, and employee training. Simeon Gutman then asks a follow-up question about the company's full-year guidance, referencing improvements in gross margin due to reduced liquidation impacts.

In the paragraph, Ryan Grimsland discusses the company's outlook on operating income and cost management. He emphasizes that operating income growth will mainly come from gross profit increases, particularly in the latter half of the year. The company has already achieved cost reductions, contributing to improved margins. SG&A expenses are expected to decline year-over-year due to store closures and enhanced productivity in stores and the supply chain. These efforts will allow the company to leverage sales volume increases anticipated in the back half of the year. Despite not changing their guidance, Grimsland suggests that the guidance range appropriately reflects these factors, including any potential upside drivers.

The paragraph discusses the company's growth expectations, emphasizing that the primary growth in gross margin is expected in the latter half of the year. Bruce leads the merchant team in managing costs and vendor relationships. Shane O'Kelly mentions that they have considered various factors, like tariffs and consumer volatility, in reaffirming their guidance. In response to Seth Sigman's question from Barclays about improved comparables, Ryan Grimsland clarifies that closing certain underperforming stores did not substantially impact overall comparable sales. However, there was a planned and successful transfer of sales to remaining stores, particularly in the Pro segment, which was anticipated and met expectations.

In this paragraph, Shane O'Kelly and Seth Sigman discuss the efforts of the Pro team in successfully transferring Pro accounts to new stores and overcoming early challenges. They highlight the impact of weather volatility, tax refunds, and consumer pressure on sales, but note a recovery in the last eight weeks of the quarter and the positive effect of initiatives related to Pro accounts and store efficiency. Additionally, O'Kelly mentions the organizational uncertainty caused by this transition and emphasizes the company's focus on strategic growth moving forward. Sigman then inquires about the impact of tariffs on financial guidance, to which O'Kelly acknowledges the volatility of the situation and passes it to Ryan for further details.

The paragraph discusses the impact of tariffs on a company's operations and their mitigation strategies. It describes the complexity of tariffs, considering factors like product, origin, and tariff magnitude. The company's current blended tariff rate is about 30%, with 40% of sourced products being potentially affected. To mitigate tariff impacts, the company pushes back on cost increases, seeks alternative supply sources, and passes on costs through pricing when necessary. Ryan Grimsland highlights efforts to reduce dependency on Chinese imports, aiming to source over 50% of these imports from other countries by the end of the year. The overall strategy involves spreading costs across the supply chain, including vendors, suppliers, retailers, and consumers.

The paragraph discusses the company's efforts to adapt to a changing tariff environment, with the pricing cost team and merchants exploring alternative sources to find the best costs. Shane O’Kelly highlights the aim to maintain rates and manage operating profit by considering elasticity units and margins. Bruce Starnes leads the team in analyzing the portfolio to manage each category accordingly amid the volatility. Chris Horvers from JPMorgan inquires about the impact of tariffs and inflation. Ryan Grimsland responds that the inflation impact in Q1 was minimal, with guidance scenarios indicating low to mid-single-digit inflation. He mentions that the scenarios consider different tariff-related outcomes, noting they are only halfway through a 90-day pause period for some tariffs.

The paragraph discusses the impact of LIFO (Last In, First Out) accounting and inventory management on financial outcomes. While there was a minor $4 million LIFO favorability in Q1, proactive measures, such as managing weeks of supply and not immediately cutting new purchase orders, are minimizing early impact. Forward buying before tariffs also helps. Shane O'Kelly emphasizes the importance of inventory management and vendor negotiations. Christopher Horvers notes that these actions contribute to maintaining gross margins in the mid-40s range towards the year's end.

In the paragraph, Ryan Grimsland clarifies that the $70 million in cost savings is related to COGS (Cost of Goods Sold), rather than SG&A (Selling, General and Administrative expenses). He mentions that Q1 is challenging due to sales liquidation impacting the $70 million savings, and this primarily affects gross profit. For the remainder of the year, Grimsland anticipates a decrease in SG&A year-over-year, targeting a mid-40s margin rate. He also addresses tariff considerations, emphasizing a focus on improving operating profit by managing elasticity and operating income. The guidance provided considers various possible outcomes, factoring in tariff complexities across different byproduct categories. The next question comes from Michael Lasser of UBS.

In the paragraph, Michael Lasser questions whether Advance Auto Parts can achieve its 2027 margin goals if DIY sales per store remain flat, given the company's historical struggles in this area. Shane O'Kelly responds by highlighting the company's efforts to engage the DIY customer, emphasizing strategic vendor partnerships aimed at mutual revenue growth, and marketing campaigns. O'Kelly asserts that Advance Auto Parts remains a significant player in most markets and is focused on initiatives to maintain a strong DIY presence. The conversation then shifts to Ryan Grimsland for specific details on the 2027 forecast.

The paragraph discusses the company's expectations for achieving a 7% growth target, primarily driven by internal factors such as merchandise excellence, supply chain productivity, and store performance, rather than large top-line growth. Michael Lasser asks a question about needing business acceleration to achieve flat comp in the second quarter, given that the DIY segment is volatile while the Pro segment is performing as expected. Ryan Grimsland responds by stating that the company is currently in line with its guidance and does not require a change in momentum, as they expect growth from ongoing initiatives and easier comparisons in the latter half of the year.

In the paragraph, Shane O'Kelly discusses strategic initiatives aimed at improving the company's operations. He illustrates this through a story about streamlining supply chain processes by working with vendors to adjust purchase order (PO) sizes and frequencies, which can lead to significant cost savings. This involves shifting to case-pack quantities to reduce costs. Meanwhile, the company is also closing distribution centers (DCs), opening market hubs, and updating product assortments. These changes are part of a long-term plan stretching into 2026 and 2027. The paragraph ends with a transition to questions from Zack Fadem of Wells Fargo, specifically inquiring about expectations for non-GAAP adjustments for the remainder of the year, following store optimizations.

The paragraph discusses financial and operational expectations for a company, focusing on SG&A (Selling, General, and Administrative expenses) of around $100 million for the quarter and mentions some GAAP versus non-GAAP considerations. The company has had a $150 million cash expense this year, with $90 million already accounted for. It is not providing specific GAAP guidance but refers to a tax benefit in Q1. The conversation then shifts to vendor relationships, discussing the uncertain outcomes of inflation, tariffs, and supplier negotiations. The company is considering strategies to manage these challenges, aiming for margin improvement, and is monitoring industry scenarios. They are cautious about forecasting inflation impacts, suggesting a low single-digit outlook, but acknowledge the situation remains volatile with potential changes over the next nine months.

In the conversation, Ryan Grimsland discusses that there hasn't been a significant change in vendor financing, with current usage at about $3 billion out of a $3.5 billion capacity. Long-term expectations are to maintain usage between $2.8 billion to $2.6 billion, fluctuating quarterly. Grimsland mentions that procurement cost savings will be modest, around 50 basis points, due to the timing of contract implementations. He highlights that gross margin improvements are expected from reduced SG&A expenses, enhanced by increased volume in the latter half of the year, and benefits from store closures that had previously hindered business performance.

The paragraph discusses the company's efforts to improve its gross margin through cost of goods sold (COGS) improvements and supply chain leverage, which are expected to provide a sustainable run rate with future growth potential. In the context of improving business performance, Shane O'Kelly mentions observing improvements in the Pro side of the business despite challenges earlier in the year. The company is focused on its Pro initiatives, which involve an outside sales team and in-store commercial parts pros. These efforts include refining incentive plans, recruitment, and training programs to enhance overall execution and align with the fundamentals of the auto parts industry.

The paragraph discusses strategies and improvements in call planning and customer interactions for a business dealing with professional clients ("Pros"). The company has invested in its team and processes to become more relevant and efficient, notably improving response time and product availability for customers. This involves detailed analysis and adjusting pricing strategies. Additionally, they have enhanced their delivery service by reducing wait times. Although market forces impact business, internal improvements are enhancing relevance with customers. In discussing future expectations, Ryan Grimsland notes the uncertainty and volatility in demand due to tariff influences and anticipates continued trends in the do-it-for-me (DIFM) market, without providing specific guidance on second-quarter transaction and ticket trends.

The paragraph features a discussion centered around a company's strategy to improve its service model amidst a volatile environment with tariffs. Shane O'Kelly, addressing the effectiveness of their approach, emphasizes the valuable feedback provided by their independent owners, who are aligned with their Pro universe focus. This feedback helps them gauge their performance, especially concerning product availability for customers. An example of improvement is mentioned by an independent owner noticing better access to necessary parts. The conversation shifts to Steven Forbes from Guggenheim asking about labor scheduling and asset allocation models, noting that 10% of stores have implemented these models. He queries Shane O'Kelly about the observed improvements in key performance indicators (KPIs) within these stores.

In the paragraph, the speaker describes an initiative to optimize vehicle allocation across company stores by reallocating vehicles based on actual usage and demand. This involves analyzing and adjusting the number of vehicles each store has, ensuring sufficient driver hours are paired with each vehicle. The project is still in its early stages, but preliminary results are promising, indicating potential benefits for the company. Additionally, Shane O’Kelly addresses a question about store density, emphasizing the significance of having 75% of stores in areas where they are ranked #1 or #2 in density, although he does not provide specific market share data.

The paragraph discusses the strategic advantages and challenges of participating in certain markets for a company. It highlights the importance of market legacy, proximity to customers, logistical capabilities, and career opportunities for team members. The speaker emphasizes the significance of market density for effective service, noting past difficulties in less dense, competitive areas. The company currently focuses on core markets using a specific store framework, with 4,100 stores and 750 independent operations in the U.S. The CEO then thanks the team for their efforts in a successful quarter and indicates anticipation for the next call in August, after which the call concludes.

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