Advance Auto Parts Inc.

Welcome to the Advance Auto Parts fourth quarter and full year 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 fourth quarter and full year 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 include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. 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, and 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, and good morning. And thank all of you for joining us to discuss our Q4 and full year 2019 results. I want to begin by recognizing and thanking every single AAP team member in our network of Park West independents for their dedication throughout the year. With an unrelenting focus on delivering against our strategic priority, we made progress on many initiatives throughout 2019, and we plan to continue strengthening the company as we begin 2020. In Q4, we delivered our seventh consecutive quarter of top line growth with an increase in net sales to $2.1 billion and comparable store sales up slightly compared to the prior year. We also expanded our adjusted operating income margin rate by 106 basis points in the quarter. This focused effort to deliver margin expansion with lower than anticipated sales growth translated to adjusted diluted earnings per share of $1.64, an increase of 40.2% in Q4. In the quarter, we also completed our acquisition of the iconic DieHard brand, which we're excited to add to our industry-leading assortment of national brands, OE parts, and owned brands. For the full year 2019, our net sales increased 1.3% to $9.7 billion, with comparable store sales growth of 1.1%. We delivered adjusted operating margin expansion of 36 basis points year over year, adjusted diluted earnings per share growth of 14.9%, and generated $597 million in free cash flow. Following our second consecutive year of sales growth, margin expansion, and strong cash generation, as well as our confidence in ongoing improvements in 2020 and beyond, our board approved the first increase to our quarterly cash dividend since the 2014 acquisition. In fact, this was the first increase since AAP introduced its quarterly dividend in 2006. Before I turn the call over to Jeff for more details on our financial performance, I want to highlight the operational performance improvements we implemented in 2019, as well as several exciting new initiatives planned for this year, which we expect to enable ongoing top-line growth and adjusted OI margin expansion in 2020 and beyond. In Q4, our professional business led our growth rate. highlighted by WorldPack Canada and our CarQuest independent businesses. As we continue to bring all our professional assets under one roof, we remain focused on providing best-in-class parts availability, improving order-to-delivery speed and consistency, and strengthening our overall value proposition to our customers. This includes ongoing enhancements to our one-stop shop professional online platform, MyAdvance. as well as improvements to our best-in-class online B2B catalog, Advanced Pro. My Advance improves the customer experience with fully integrated access to promotions, product information, our Pro Rewards program, credit reconciliation, and key performance indicators. This enables us to leverage customer data to drive engagement, while improving visibility to enrolled promotions and customer involvement. Additionally, we expanded the categories included in the rollout of Dynamic Assortment, with 50 categories now rolled out across nearly 4,000 stores, representing over 50% of our backroom sales. Dynamic Assortment is continuing to improve stock and close rates in key categories. Once fully implemented, we expect Dynamic Assortment to drive top-line improvements through a better understanding of customer demand and utilizing multiple data points to improve availability and help ensure that we have the right part in the right place at the right time. In terms of our DIY omnichannel business, we had a challenging Q4, particularly in the north. That said, the heavy lifting we did in the back half of 2019 has resulted in a much stronger DIY plan for 2020, which we believe will build momentum throughout the year. There are four primary areas of focus here. One, launch DieHard. Two, build awareness. Three, drive loyalty. And four, execute with excellence. So first, we're very excited about launching the iconic DieHard brand throughout the Advanced Network in 2020. DieHard is the number one battery brand among all customers and presents us with several ways we believe we can differentiate our offering and drive increased customer traffic to our retail stores. Our goal with Diehard is to build on its strong reputation, creating a differentiated value proposition. While we're confident the addition of Diehard to our industry-leading assortment will drive incremental growth for DIY Omnichannel, We also see the potential to leverage DieHard with our professional customers and independent CarQuest partners. In the future, we also believe there's a significant opportunity for brand extension into other categories and geographic expansion of DieHard. Without question, both the advanced team and our CarQuest independents are very excited about DieHard. Second, we're focused on significantly improving awareness of advance. Our unaided awareness improved in 2019, but still lags our primary competitors by a wide margin. Our 2020 plans are highlighted by a new marketing campaign, including a significant increase in media, which we've sourced from pre-existing, lower-performing marketing spend. We're confident this new advertising will differentiate the advanced brand over time. Additionally, we're very excited to leverage our recently announced partnership with Penske Racing and our new driver, Ryan Blaney. We'll also continue to drive awareness by improving our digital experience, as we know that most transactions start online. Our DIY online business continued to grow traffic and transactions, resulting in double-digit e-commerce growth in both Q4 and the full year. Our team is also making progress on the expansion of product offerings on Walmart.com, including the addition of product reviews that facilitate a frictionless experience for our customers. Third, we continue to make progress on our loyalty program, Speed Perks, and we're excited about the launch of our new mobile app for DIYers in Q1. Our app will make Speed Perks and our mobile experience even more accessible to our loyal customers. When we relaunched SpeedPerks 2.0 mid-year, under 25% of our DIY transactions were SpeedPerks transactions at that point. We finished the year at close to 36%. This enables us to leverage first-party data to personalize our offering. In Q4, we added close to 1 million new SpeedPerks members, finishing Q4 at close to 12 million active members. In addition, We saw increasing graduation rates from one spending tier to the next. We'll continue to build loyalty behind Speed Perks by leveraging personalization and communicating directly with our customers. Fourth, our field team continues to improve on key execution metrics, including units per transaction, weekend coverage, and net promoter score. In 2020, we plan to improve both the quality and execution of our automotive training for our team members, while improving the customer experience for buy online, pick up in store. The fact that our turnover and frontline customer-facing roles declined in both 2018 and 2019 has helped us improve execution overall. In terms of category performance, our Q4 group was led by brakes, batteries, and filters. Due to a weak December, we underperformed on winter-related products, such as starters and alternators, as well as radiators. Geographically, our regional performance was highly varied, with our Midwest, West, and Central regions delivering mid-single-digit growth in Q4 and the largest sales increases on both a one- and two-year stack compared to prior years. These geographies significantly outperformed our weakest geographies in the quarter and with our Great Lakes, Northeast, and Mid-Atlantic regions trailing the top performing regions by over 600 basis points on average. To summarize our growth initiatives, we've elevated our focus on differentiating and improving the customer experience for both our pro and DIY omnichannel business. We remain relentlessly focused on delighting the customer across all of our businesses, Our pro business continues to build momentum across all banners, and we continue to integrate key platforms to simplify and improve the customer experience across Advanced Pro and MyAdvance. In terms of DIY Omnichannel, while it remains a work in progress, we have the strongest marketing calendar of activity on DIY Omnichannel in years, with our plans to launch diehard, build awareness, increase loyalty, and improve execution. Moving on to our key pillars of margin expansion for 2020 and beyond, our first priority is to improve sales and profit per store. This includes optimizing our existing footprint, expanding where we're underpenetrated, and closing unproductive or underperforming assets where appropriate. Starting with our largest business on the professional side, Our team continues to expand our professional footprint to drive share growth. In 2019, we opened 17 new WorldPAC branches and continue to add new CarQuest independent locations. In addition to the growth of our existing locations and sourcing new opportunities, our team has also started the consolidation of our WorldPAC and AutoPart International banners to deliver improved productivity and product assortment across our professional business. This effort will continue throughout 2020. In addition, behind consistent gradual improvements in execution across our advanced and car quest stores, our average sales per store has increased from $1.5 million at the end of 2017 to roughly $1.6 million per store at the end of 2019. We're confident we'll continue this growth and are on track to achieve our goal of $1.8 million per store over time. Separately, we continue to address more structural opportunities within our retail stores, which includes a strengthened store refresh program and the ongoing optimization of our store footprint. We expect the actions we're taking to improve sales and profit per store will benefit both DIY and pro. Our second margin expansion priority is within our supply chain and I'm pleased to say we're now in full execution mode on this critical area of our transformation. Our supply chain team has done a thorough review of our entire footprint and we're now executing plans that we believe will significantly enhance our enterprise-wide supply chain. With 50 distribution centers today, we have a clear opportunity to further rationalize our footprint over the coming years. Importantly, we'll work to optimize the network while improving our service to customers. It's imperative that our DCs have the right part in the right place at the right time so we win more often. One of our major supply chain productivity initiatives is cross-banner replenishment, which we began to deploy in late 2019. Following the successful lead markets, we're now beginning to scale this capability throughout our DC and expect to be completed by mid-2021. Once fully implemented, we expect we will improve product availability, drive turns, and deliver significant cost productivity. In addition, we are continuing to invest in the consolidation of several warehouse management systems, or WMS for short, the one system across our Advanced and CarQuest network, which, as you can imagine, is a significant undertaking. When we began our supply chain transformation, we were dealing with multiple WMS systems, along with extensive manual processes and high turnover in our DCs. Not only is our turnover down significantly in our DCs, our safety performance and engagement scores are now trending in a positive direction. While it took time to build the right team and stabilize operations before we introduced a new WMS system, I'm confident we now have the right team in place to help us further our transformation progress. Importantly, our team recently completed the first conversion to our new WMS platform in one of our largest DCs, and that DC is off to a terrific start. We expect this initiative, coupled with the implementation of a new labor management system, will allow us to run common across our DCs so we can provide better product availability at more optimal inventory terms and costs. We're currently on track with our supply chain agenda, and I'm excited for what this will deliver in 2020 and beyond. Our third pillar of margin expansion focuses on category management. Here, we've implemented a standardized approach across key categories to facilitate material cost optimization, own brand expansion, and unit and profit growth through strategic pricing. This has been a highly collaborative effort with our supplier partners. In terms of material cost optimization, while unplanned tariffs reduced the benefit of our performance in 2019, we made good progress on MCO both in Q4 and for the full year. For our own brand expansion, we began to roll out additional CarQuest branded products in the back half of 2019. We're working to ensure the highest up quality in our CarQuest brand rollout, as this brand resonates so strongly with our professional garages. In parallel, we've been exploring own brand opportunities for DIY with our suppliers, with Die Hard being the best example of this to date. Finally, we expect to deploy our new pricing platform by mid-year. This will enable single price execution across all channels to provide consistent and more efficient management of our pricing. A big benefit of this new capability will be the ability to centrally price right down to store level if needed. Finally, SG&A productivity rounds out the fourth pillar of our margin expansion. SG&A was a highlight of our 2019 performance as our team continued to make excellent progress in managing our costs. In the fourth quarter, we were able to leverage our labor-related costs, including store labor as a percent of sales, in spite of wage inflation and lower-than-expected sales. This was largely driven by the improvements from our new store-level labor management system, which we rolled out in Q3. Additionally, our diligent efforts to build a culture of safety is becoming ingrained in how our team members work, leading to a reduction in our liabilities and claims expenses across the organization, which benefited the quarter and the year. In fact, we lowered our total recordable injury rate by 8% in 2019, and our LTIR, or lost time injury rate, which represents the worst safety incidents, was reduced by an impressive 17% compared to 2018. Finally, we continued to make progress on rent in the quarter and in the year. For the full year, we leveraged our occupancy and base rent by roughly 20 basis points. To wrap up our SG&A performance, we made good progress across multiple lines, enabling us to leverage SG&A to drive margin expansion while at the same time we made significant investments in technology, e-commerce, and supply chain in 2019. In summary, 2019 was a year of continued progress for AAP as we registered another year of top-line growth and margin expansion while making important long-term investments. In terms of our outlook for 2020, we previously discussed that this year would be similar to 2019 in terms of investment requirements. With that said, some additional items for you to keep in mind. First, as you probably know, we've just experienced the warmest January in history, which is expected to impact demand in the front half of the year. From an AAP standpoint, we also expect the elevated coupon investment we're making in our loyalty platform to continue in the front half of 2020. On the positive side of the equation, Industry dynamics remain very attractive. This includes continued increases in the car park, miles driven, as well as an increase in vehicles greater than seven years old. All of these are projected to have a favorable impact on demand throughout 2020. Further, we also expect our pro and DIY initiatives to build top line momentum through the year. Finally, I'm confident in our team's ability to continue our margin expansion trajectory and deliver further progress against our strategic objectives in 2020. All of these factors are contemplated in the full-year guidance we introduced in our press release this morning. In summary, we remain very excited about the tremendous opportunity ahead to fully unlock the potential of AAP, and we're committed to driving consistent improvement across the enterprise over the next several years. With that, I'll turn it over to Jeff for details on our financial performance. Thank you, Tom, and good morning, everyone. In the fourth quarter, our adjusted gross profit was approximately $929 million, which was essentially flat compared to the prior year quarter. Adjusted gross profit margin of 44% declined 19 basis points from the prior year quarter, primarily driven by LIFO headwinds as well as the expected headwinds from continued investment in our enhanced loyalty program, Speed Perks 2.0. These headwinds were partially offset by pricing actions taken in the quarter. Our adjusted SG&A was approximately $779 million in Q4 2019, compared to approximately $802 million in Q4 2018. As a percentage of net sales, our adjusted SG&A expenses improved by 125 basis points, at 36.9%. I'm pleased with our team members' dedication to control costs throughout 2019, which enabled us to leverage expenses every quarter. In Q4, we leveraged labor-related costs and once again reduced our insurance and claims expense at key training programs and focus on safety drove improvements across the organization. Adjusted operating income in Q4 was $150 million, which improved nearly 18% compared to the prior year quarter. Our adjusted OI margin rate increased 106 basis points to 7.1% in the quarter. Adjusted diluted EPS for Q4 was $1.64. an increase of 40.2%. For the full year, net sales were $9.7 billion, an increase of 1.3% compared to 2018, and comp sales improved 1.1%. Adjusted gross profit for the year increased 1.1% to $4.3 billion, and adjusted gross profit margin decreased 12 basis points to 44%. Adjusted SG&A for the year was flat compared to 2018 at $3.5 billion. On a rate basis, our full year adjusted SG&A was 35.8%, which was an improvement of 48 basis points compared to the previous year. Adjusted operating income for the year was $795 million, an increase of 6% compared to the end of 2018. Our adjusted operating margin was 8.2% for 2019, which increased 36 basis points compared to the full year of 2018. Adjusted diluted EPS increased 14.9% to $8.19, compared to $7.13 at the end of 2018. Moving to free cash flow, we delivered $597 million in 2019, which was lower than our expectations. Factors negatively impacting working capital include higher-than-expected increases in both our receivables and inventory. We also realized an unfavorable payment term mix within vendor payables. This was driven by an increase in WorldPAC inventory associated with the opening of WorldPAC branches, which carry shorter payment terms, as well as an unfavorable mix impact within Advance and CarQuest vendor payables. These factors resulted in higher cash outflows at year-end than we previously modeled. Consistent with increasing capital spend throughout 2019, our CapEx in Q4 was $101 million, bringing the full-year spend to $270 million, an increase of 39.4% year-over-year. As we have previously discussed, our investments have primarily focused on information technology and supply chain projects. And in 2019, more than 60% of our capital spend was concentrated on these two critical areas. Our IT initiatives continue to address longstanding lack of investment in critical systems and back office integration, which we expect to continue in 2020 and beyond. Nearly one-third of our IT spend in 2019 focused on customer-facing systems, and I'm pleased with the near completion of our next gen store system upgrade across our footprint. In addition, throughout 2019, our team worked diligently on our finance ERP project, which integrates our back office finance systems. We went live with our first release in this new system at the start of our fiscal 2020, and I'm confident the continued rollout of this initiative will create significant efficiencies across our organization. In addition, our supply chain team worked relentlessly throughout the year to stabilize existing operations. We invested in DC improvements in 2019 with additional plans for 2020, including network upgrades and continued rollout of our single warehouse management system across our Legacy Advance and CarQuest network to enable improved accuracy and efficiencies within the distribution centers. In line with our financial priorities to maintain an investment-grade rating, invest in the business, and opportunistically return capital to shareholders, under our current share repurchase program, we repurchased nearly $11 million of advanced stock during the fourth quarter, and a total of approximately $487 million for the year. Importantly, we remain confident in our ability to generate meaningful cash from the business. As you saw yesterday, we are pleased to announce our board has approved a meaningful improvement to our quarterly dividend, which was increased from 6 cents to 25 cents. We're committed to a balanced approach in returning capital to our shareholders while making important investments to drive our transformation. As we begin 2020, we remain focused on our strategic objectives and discipline in our execution to deliver against our financial priorities. With that said, This morning, we introduced our 53-week full-year 2020 guidance for several key metrics, including net sales of $9.88 to $10.1 billion, comparable store sales growth of flat to 2%, adjusted operating income margin expansion of 20 to 50 basis points, capital expenditures of $275 to $325 million, focusing on continued IT and supply chain investments. A 2020 tax rate is expected to be 24% to 26%. And as we continue our disciplined approach to cash management, we expect to deliver a minimum free cash flow of $600 million. As a reminder, 2020 includes a 53rd week. Our financial outlook provided today includes an estimated $1. $125 to $150 million in net sales and approximately 10 to 20 basis points of margin expansion from the 53rd week contribution. In summary, I want to reiterate our gratitude that Tom began with today to all our team members and independent partners for their effort throughout 2019, which enabled our continued progress toward our transformation objectives. We remain committed to further improvements in 2020 and remain disciplined in our approach to capitalize on the significant opportunity still ahead for AAP. With that, let's open the call to address your questions. Operator?