Advance Auto Parts Inc.

Welcome to the Advanced Auto Parts second quarter 2019 conference call. Before we begin, Elizabeth Eisleben, Vice President, Investor Relations, will make a brief statement concerning forward-looking statements that will be discussed on this call.

Good morning, and thank you for joining us to discuss our second quarter 2019 results. I'm joined by Tom Greco, our President and Chief Executive Officer, and Jeff Shepherd, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will turn our attention to answering your questions. Before we begin, please be advised that our comments today may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. While actual results may differ materially from those projected in such statements due to a number of risks and uncertainties which are described in the risk factors section in the company's filing with the Securities and Exchange Commission, we maintain no duty to update forward-looking statements made. Additionally, our comments today include certain non-GAAP financial measures. We believe providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results. Please refer to our quarterly press release and accompanying financial statements issued today for additional details regarding the forward-looking statements and reconciliations of these non-GAAP financial measures to the most comparable GAAP measures referenced in today's call. The content of this call will be governed by the information contained in our earnings release and related financial statements. Now, let me turn the call over to Tom Greco.

Thanks, Elizabeth. Good morning, everyone, and thank you for joining us today as we review our second quarter 2019. Before we begin, I'd like to thank our more than 70,000 team members and our network of CarQuest independents for their continued commitment towards our long-term goals. In the second quarter, net sales increased to $2.3 billion, and comparable store sales were flat. Our adjusted operating income margin of 8.4% decreased 40 basis points compared to the prior year quarter, and our adjusted diluted earnings per share increased 1.5% to $2. Through the first half of 2019, our net sales increased 1.6%, with comparable store sales up 1.5%. Year-to-date, our adjusted operating income margin of 8.3% increased 7 basis points, and our adjusted diluted EPS was $4.46, an increase of 9.6%. While our Q2 results were below our expectations, we remain confident in our ability to capitalize on the significant opportunity ahead. We're relentlessly focused on the disciplined execution of our long-term strategic plan to enable sales growth, margin expansion, and meaningful cash flow improvement. As you saw in our press release, we updated our full-year guidance ranges, slightly narrowing our sales and adjusted OI margin ranges while increasing our free cash flow expectations for the year. Jeff will provide further details of our financial results momentarily. However, I want to spend some time reviewing our performance both in Q2 and year-to-date. As we've said in the past, the spring selling season straddles our first and second quarter each year, which can impact performance between the two quarters. We saw this play out in our first half results. In contrast to 2018, when we had a soft finish to Q1 and a very strong start to Q2, the exact opposite occurred this year. In fact, during the last four weeks of our Q1 this year, comp sales were up mid-single digits. The week our Q2 began on April 21st, the weather turned cooler and wetter than historic norms and significantly cooler and wetter than 2018. As a result, comp sales during the first four weeks of our Q2 were down, driven entirely by DIY retail. In fact, our first full month of the quarter was one of the wettest Mays on record, with many parts of the U.S. also reporting below average temperatures. For these reasons, it's beneficial to consider our performance over the front half of the year to smooth out seasonal volatility from quarter to quarter. With this in mind, we delivered growth in the first half of the year, with net sales up 1.6%, well within our full-year guidance range. While this is the strongest first-half performance we've reported since 2015 on both a one- and two-year stacked basis, it's clearly below our internal sales expectations. As we look at the different channels of our business, our professional business delivered growth across all banners, as pro is less impacted by weather volatility. Compared to our stated goal of growing at or above market growth rates, our professional business performed well in both Q1 and Q2, and is building momentum. Importantly, professional grew in each of the three periods in Q2, and our two-year stack accelerated. Our team is focused on delighting the customer and driving continuous improvement every day. We have the broadest assortment of parts in the industry, including national brands, OE, and private label, which is critically important for our professional customers. Consistent with our ongoing integration efforts, we're strengthening the effectiveness of our enterprise catalog, Advanced Pro, leveraging cross-manner visibility and integrating our enterprise assortment. In addition, during the first half of the year, we continue to roll out dynamic assortment. All of these actions are enabling us to improve stock and close rates and reduce order delivery times and, therefore, say yes more often. This is evidenced by double-digit growth in both strategic accounts and TechNet customers in Q2. In addition to driving growth across our professional business, we continue to make progress on our DIY omnichannel e-commerce platforms. During the second quarter, we enhanced customer notification capabilities on order tracking and executed multiple website upgrades to further improve the usability and functionality of our website for our customers. This drove a substantial year-over-year increase in online traffic, improved conversion rates, and resulted in double-digit growth for both online transactions and sales. We're relentlessly focused on improving the omnichannel customer experience with further initiatives planned for the balance of the year. Stepping back to assess our DIY retail business, we're disappointed in our first-half performance. We attribute this to both external and internal factors. There's no doubt the weather trends had an impact on our second quarter performance in DIY retail. We finished the last four weeks of Q1 up mid-single digits and then gave nearly all of that back in the first four weeks of Q2. Demand remained soft throughout the balance of May, and therefore, we did not begin to recover from this until very late in the quarter. This was reflected in the performance of our regions. as our growth slowed significantly in Q2 versus Q1 in northern markets like the Northeast, Mid-Atlantic, and Great Lakes regions, where we have a disproportionate concentration of stores. Our strongest Q2 performance was in the Carolinas, Midwest, and West regions. From a category perspective, we saw the highest growth in brakes, filters, and batteries. Not surprisingly, cooling and engine management-related products were down significantly in Q2, particularly in those same northern geographies. These categories are already recovering in the third quarter, with extreme heat impacting a large portion of the U.S., and the very regions that slowed down in Q2 are leading the improvement we've seen in the early weeks of Q3. Given the improved demand we saw with more normalized weather late in Q2 and in the early part of our Q3, we expect comp sales growth in the back half of the year, resulting in an acceleration of our two-year stack. All of that said, there are some internal factors that need to be addressed in DIY retail. We believe there's plenty of room for improvement in our retail business that is not weather dependent, and we're committed to addressing those factors that are within our control. According to syndicated data, following a share gain in DIY retail in Q4 of last year, our share in the first half of the year was down slightly. There are a couple of drivers we've identified and are addressing. Part of our shortfall was concentrated in certain categories where our actions did not produce the desired results. Therefore, we've taken the appropriate steps to address these opportunities and have already seen improvements. In addition, we have a number of initiatives planned for both Q3 and Q4 to stimulate sales growth in DIY retail. First, we're laser focused on improving retail traffic to accelerate growth, which requires us to improve the effectiveness of our marketing. In line with this priority, I'm pleased to welcome Jason McDonald to the advanced team to lead our enterprise-wide marketing function as EVP and Chief Marketing Officer. Jason brings an extensive background in digital and brand marketing. He's already focused on driving traffic and improving the impact of our marketing investments. Secondly, we're standardizing and significantly improving our buy online, pick up in store experience by reducing friction for our customers who make purchases on our website and come to our stores to pick up parts. We know they want to get in and out of the store quickly. We expect to accelerate our buy-on-line pickup and store growth in the back half by providing a dedicated and convenient location in every store. A third element of our DIY plan in the back half is to drive improved loyalty. The key platform here is the launch of our new Speed Perks 2.0 program. Following considerable time listening to our customers and testing Speed Perks 2.0, we now offer the best rewards program in the industry. We tested our Speed Perks platform in two markets over a 20-week timeframe. In these lead markets, we delivered significant increases in both Speed Perks signups and average dollar spend per member versus control group stores. We recently launched our new program nationally, and our field team is executing very well, driving double-digit increases in Speed Perks signups. Finally, I'm pleased to announce that we launched the first phase of our partnership with Walmart.com late in the second quarter as planned. We're being very disciplined with this launch, which includes a select assortment of parts that will ramp over time to ensure all capabilities are functioning well and the customer experience is best in class. This includes standing up our online store within a store on Walmart.com. We expect our branded advanced auto parts store on Walmart.com will drive incremental growth for our newly formed partnership. In the second phase, we expect to enable additional customer fulfillment options, including in-store pickup at advanced locations. Together with Walmart, we have an outstanding team in place working collaboratively to deliver a world-class online shopping and fulfillment experience for our mutual customers. We're excited about our progress so far and will continue to strengthen our online platform to capture the omni-channel growth opportunity ahead. To summarize our top-line performance in the front half of 2019, we're pleased with our results on professional and DIY econ, with DIY retail a work in progress. We're in the process of executing several back-half initiatives in DIY retail that we expect will improve performance in an important channel for growth and profitability. Moving on to margin expansion, the entire AAP team remains focused on the unique opportunity we have to drive increased profitability and cash flow through the four areas we've discussed. First, in terms of driving sales and profit per store, we continued to optimize our footprint. In the second quarter, we closed and consolidated 21 stores, which brings our total to 59 stores this year. Over the past 52 weeks, we've closed and consolidated 125 stores. Consistent with previous quarters, we're also capitalizing on strategic growth opportunities, which includes opening four new WorldPAC branches in the second quarter, bringing our total to seven new branches this year. The WorldPAC team is executing very well, and Bob Cushing continues to leverage WorldPAC's industry-leading capabilities across all of AAP. In addition, I'm extremely pleased with our independent team's unrelenting focus on growth, and I'm excited to welcome 19 new independently-owned CarQuest locations in the second quarter. Our CarQuest independents have terrific momentum, and we continue to drive sales growth, leveraging many of the new tools and technology we're deploying across the enterprise. Overall, we made progress in the first half in improving sales per store as we optimize our footprint. One of our largest areas of investment this year is across our supply chain in D.C. wages, standardization, and new technology. Our cross-manner replenishment initiative will enable us to ship parts from our legacy red or blue D.C.s to either red or blue stores. We're now making daily replenishment deliveries to a group of CarQuest stores, including independent locations from a legacy advance or red D.C., as well as a select group of advanced stores from a legacy car quest or blue DC. We expect to scale these capabilities to other DCs and stores later this year in a market-by-market approach. Once this is fully rolled out, which we plan to complete by mid-2021, we expect improved product availability, increased inventory turns, and significant cost savings. As part of this, we're reviewing ways to improve delivery speed for all customers. While our in-store pickup option continues to be the preferred fulfillment method, we're committed to broadening our reach and reducing order-to-delivery times to further improve the customer experience. Rounding out supply chain, we announced that we will close our DC located in Armonk, New York, later this year. Our actions in supply chain are gaining momentum. and we expect to leverage supply chain costs in the back half of 2019. In terms of category management, our merchant team remains focused on material cost optimization, improving private label as a percent of mix, and the implementation of strategic pricing actions based on new analytical tools we've built in conjunction with dynamic assortment. Our supplier partners are playing a critical role as we execute this plan. Collaborating together, we expect increased sales, improved margins, and reduced inventory. Our fourth margin expansion opportunity is within SG&A, where we have several integration and cost-saving initiatives underway. A primary example here is the focus we've placed on building a safety culture at AAP. I'm thrilled that we once again reduced our total recordable injury rate by 15%. And our lost time rate, which measures our most severe injuries, improved 32% in the second quarter. Safety is just one example of how we're building a winning culture at Advance with a goal of being the employer of choice for our industry. Targeted investments in our people, highlighted by our unique Fuel the Frontline stock ownership program, best-in-class industry training, as well as new tools and technology, continues to reduce team member turnover. I'm particularly happy with the progress we're making across the enterprise on team member retention. Our overall annualized turnover declined by 29% compared to the end of 2018, which includes a 17% reduction across our supply chain organization. To summarize our performance in the front half of the year, the investments we're making to unlock long-term growth and margin expansion are on track. As we said before, this transformation will not be completely linear. We're laser-focused on executing our strategic plan, and as evidenced in Q2, we will not make short-term decisions that limit the long-term opportunity due to near-term volatility. We have a great team in place that's dedicated to the flawless execution of our strategy, building competitive advantage, and driving substantial shareholder value. With that, I'll turn it over to Jeff for details on our financial performance.