Advance Auto Parts Inc.

Welcome to the Advanced Auto Parts Third Quarter 2019 Conference Call. Before we begin, Elizabeth Eisleben, Senior Vice President, Communications and 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 Third 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'll 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 factor section in the company's filings 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 detail 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. And thank you for joining us today to discuss our third quarter 2019 results. I'm proud to report another quarter of good progress towards our long-term strategic objectives. This would not be possible without the relentless dedication of our more than 70,000 team members and network of CarQuest independents. I want to take a moment to thank them for their unwavering commitment and passion for the customers. In the third quarter, net sales increased 1.6% to $2.3 billion, and comparable store sales increased 1.2%. This is now our sixth consecutive quarter of revenue growth. Our two-year stack on third quarter comp sales accelerated to 5.8% and was the strongest we've delivered in eight years. We also expanded margins as our adjusted operating income margin of 8.9% increased 36 basis points compared to the prior year quarter. Our adjusted diluted earnings per share increased 11.1% to $2.10. Jeff will speak more about our financial results shortly. First, I'll highlight some details around our third quarter performance. Consistent with recent trends, our professional business was strong in the quarter. We grew in each of our professional businesses with Rolpac and our independent business leading the way. In addition to opening nine Rolpac branches and adding 29 net new independents over 2019, our dynamic assortment rollout is enabling top-line improvements. As a reminder, dynamic assortment leverages machine learning to better understand customer demand and improve the quality of our assortment. We marry lookups by location with several other variables, and we expect this will drive increased terms and profitability of our industry-leading assortment of national brands, OE products, and own brand private label. Dynamic assortment, together with advanced pro and cross-banner visibility, enable us to improve stock and close rates in the quarter in those categories that have been deployed. We expect to complete the deployment of our top 25 backroom categories by year end. Separately, we've implemented multiple enhancements to our online My Advance platform, including integrated promotions and connected customer service. This includes continuing improvements to Advance Pro, our catalog for pro customers within My Advance, which now has customized versions for strategic accounts. In fact, we saw double-digit increases in my advanced user sessions in the third quarter. While still early in implementation, the initiatives we've launched over the past several quarters are resulting in continued improvement in our ability to say yes to professional customers. Moving to DIY Omnichannel, we continue to deliver impressive sales growth in e-commerce with strong double-digit growth once again in Q3. We continue to see substantial increases in website traffic along with steady progress in conversion rates. We know speed and convenience are critical to the omnichannel customer and remain committed to delivering a frictionless experience. In Q3, we improved the customer experience for buy online, pick up in store. This included enhancements in the mobile experience, such as improved order status via text messaging. We also rolled out a standardized area for order pickup in stores close to the front door for easy access and convenience. As part of our DIY omnichannel strategy, we also made progress with our Walmart.com partnership. In Q3, we continued to build our assortment and are on track to enable additional customer fulfillment options. Since the launch of our partnership, Traffic, units, and sales have accelerated each month. Notably, the majority of customers who have ordered through the Walmart.com site are new to Advance. Our DIY retail business remains a work in progress. In Q3, we saw pressure in transactions, which were negative in the quarter, although improved versus Q2. In Q3, we rolled out our new Speed Perks 2.0 loyalty program, following successful pilots in two lead markets during the first half of 2019. Speed Perks 2.0 is an important platform to help us improve DIY performance both short and long term. Our goal here is to improve customer loyalty and share of wallet by leveraging first-party data to personalize our offerings. Prior to launch, Speed Perks transactions were approximately 25% of total DIY transactions. This is low versus loyalty programs across broader retail. In the third quarter, we began to address this by providing new and improved benefits for our DIY customers. In addition, Speed Perks 2.0 includes technology enhancements for our team members to see Speed Perk member status at the point of sale. Our team did an outstanding job launching the program, delivering an 80% increase in new member signups, 45% growth in the number of SpeedWorks transactions, and improved UPT performance versus year-to-date trends. These are all important elements to the long-term success of our loyalty program. In total, our Q3 launch resulted in sequential improvements, in DIY transactions and unit sales in Q3. As part of our investment in this new program, we also saw a significant increase in reward redemptions during the quarter. While this was expected, given our test market experience, the investment in our new loyalty program resulted in incremental coupon redemptions in Q3 and exceeded the lead markets. The incremental investment year over year was approximately $14 million in the quarter, impacting both net sales and gross margin. We expect this to abate over the next few quarters and believe this is a good investment to delight existing customers and attract new customers. I'm confident that as we sign up more Speed Perks members and increase Speed Perks transactions as a percentage of sales, we will leverage this first-party data to drive sales and share of wallet. While this was expected given our test market experience, the redemptions during our national rollout exceeded those of the lead markets and resulted in a coupon redemption headwind in the quarter, impacting both net sales and gross margin. We expect this to abate over the next few quarters and believe this is a good investment to delight existing customers and attract new customers. I'm confident that as we sign up more Speed Perks members and increase Speed Perks transactions as a percentage of sales, we'll leverage this first-party data to drive sales and share of wallet. To summarize our top line results by channel, professional and e-commerce continued to perform well. And while DIY retail improved sequentially, we're not satisfied at all with our results here and remain focused on addressing traffic, loyalty, and overall performance as rapidly as possible. All channels accelerated on a two-year stack basis, and at a category level, we saw the strongest growth in brakes and batteries with high single-digit growth, while delivering sequential improvement in cooling, optics, and engine management. From a geographic perspective, we saw the strongest growth in our Midwest, West Coast, and Appalachia regions. In addition to making important improvements in the customer experience, we continued our footprint optimization efforts in Q3 to drive profitability and cash flow as we closed or consolidated an additional 23 stores, bringing the total number to 82 stores year-to-date. We've made meaningful progress over the past 18 months to fix and or close underperforming stores and will continue to be very disciplined in optimizing our store footprint in a market-by-market approach. All of our top-line initiatives are focused on driving sales and profit per store, which is the first of four pillars in our margin expansion plan. In the quarter, we completed the rollout of My Day, enabling us to get to a single labor management system. This unified and improved system will help us staff our stores more efficiently to meet customer demand. In Q3, we also made great strides in our second margin expansion territory, supply chain. For the first time in eight quarters, we leveraged supply chain expenses as a percentage of net sales in Q3. We accomplished this while absorbing incremental costs attributable to the work stoppage in Kutztown. While we clearly did not plan for or want the work stoppage, ensuring our long-term supply chain cost structure is competitive throughout our entire network was a critical objective in our negotiations in Kutztown. We're pleased we came to an amicable resolution which enables this. Separately, the consolidation and integration of our multiple supply chains is well underway. In terms of advance and car quests, we're now in execution mode of cross-banner replenishment as we transition stores to the most freight logical distribution center in a disciplined market-by-market approach. Substantial savings are expected here as we reduce stem miles and further optimize our Advanced and CarQuest DC network with a completion date of mid-2021. In addition, the integration of WorldPak and AutoPart International is also now underway. Here, we expect additional savings and growth-related benefits to be fully captured by the end of 2020. Finally, Ruben Sloan and his team are laser-focused on improving operations across our supply chain. Execution is improving as we standardize processes, reduce turnover, and improve fill rates. As we build a performance culture throughout supply chain, we expect efficiency gains to drive cost savings. Moving on to our third pillar of margin expansion, we remain disciplined in our material cost optimization and category management efforts. Despite material cost headwinds this year from inflationary costs, we continue to work diligently with our supplier partners to mitigate increases and our pricing to cover inflation in a rational environment. We remain focused on increasing SKU count, including expanding our offerings for late model vehicle coverage. Additionally, we're making great progress on improving CarQuest private label offerings and increasing private label as a share of our mix. I'm confident these efforts will enable top-line growth on our well-respected CarQuest private label brand, as well as meaningful margin improvement over the next several years. The fourth pillar of our margin expansion strategy includes SG&A productivities. Jeff will expand on other cost savings we saw within SG&A in the quarter shortly. However, I want to highlight our performance on team member safety and the benefit this is delivering across our business. Our team has been incredibly disciplined in creating a safety-first culture, including building awareness through education and training programs to ensure our team members are empowered to do their job without incident and return home safely each and every day. The detailed focus of this team is benefiting all areas of advance, including significant improvements in our accident and incident rates. Our emphasis on safety has reduced our total year-to-date recordable injury rate by 11%, and our lost time rate improved by 14% this quarter. Importantly, our vehicle collision rate has improved by 19% year-to-date, surpassing our target for the year. More broadly, I'm very proud of the progress we've made in building a performance culture at Advance this year and confident we're creating an environment where team members can excel. We're improving our competitiveness every day with a stronger, more experienced leadership team and through innovative offerings such as our Fuel the Frontline program, which rewards top-performing frontline team members with advanced stock. We've also made important wage investments in our supply chain, which has dramatically reduced turnover to ensure we are as effective and efficient as possible within supply chain. The investments we're making in our team members, inclusive of ongoing training and development, is evidenced by the continued improvement in our overall annualized average turnover, which declined by 14% in Q3 compared to year-end 2018. I'm pleased with the progress we've made to date and look forward to sharing more details about our ESG focus as well as our People First culture when we publish our second annual Corporate Sustainability and Social Report in 2020. With that, I'll turn it over to Jeff for details on our financial performance.