Advance Auto Parts Inc.

Welcome to the Advanced Auto Parts first quarter 2020 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. 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. Please go ahead, Ms. Eisleben.

Good morning, and thank you for joining us to discuss our first quarter 2020 results. I'm joined by Tom Greco, our President and Chief Executive Officer, and Jeff Shepard, 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 remarks today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information about factors that could cause actual results to differ materially from the forward-looking statements can be found under the captions, forward-looking statements, and risk factors in our most recent annual report on Form 10-K. filed with the Securities Exchange Commission and under similar captions in subsequent filings made with the commission and our quarterly earnings press release. Now, let me turn the call over to Tom Greco.

Thanks, Elizabeth, and good morning to everyone joining. I'd like to begin by taking a moment to acknowledge the COVID-19 pandemic and how it's affected each of us. No one asked for this crisis, and the stories of loss are incredibly sad. Most importantly, I sincerely hope you and your families are safe and doing well. While there's no playbook on navigating a crisis of this magnitude, our team members are doing extremely well to adjust to this environment. Over the last few weeks, we've urgently adapted to help safeguard our team members and their families, our customers, and our communities. I'd like to thank all of our frontline team members and independent CarQuest partners who are making tremendous sacrifices to keep our customers on the road. I also want to thank the many AAP team members who have turned on a dime to operationalize new ways of working and serving our customers during this time. Throughout COVID-19, we've been focused on three overarching priorities. First, prioritize the health and safety of our team members and customers. Preserve cash and protect the P&L during the crisis. And third, prepare to be stronger following the crisis. Allow me to provide a summary of how we've approached these priorities. First, while not a new concept, nothing is more important than the health and safety of our team members and customers. And we've gone to great lengths to help protect them. In our stores, This includes the implementation of social distancing and enhanced sanitation practices along with the installation of plexiglass barriers to name just a few. In our DCs, we made critical changes to how our team members operate. This also includes execution of social distancing, increased cleaning and sanitation, and implementing health check screens. Each initiative in both stores and DCs was supported with a robust training curriculum to help ensure safety procedures were enacted. We also sourced much needed supplies for our team members, including more than a million face coverings. All of this reinforces that when we say nothing is more important than the health and safety of our people and customers, we're supporting this statement with concrete action. Secondly, we're laser focused on protecting the P&L and preserving cash during this crisis. In a few minutes, I'll outline how the additional cost-production actions we've taken to reflect the short-term softness in sales augment pre-existing plans to expand margins. We've worked hard to reduce costs, strengthen our balance sheet, and improve cash flow in recent years. As a result, we believe we're in a great starting position to manage our way through this. Jeff will talk about the important steps we've taken to further solidify our cash position and liquidity to not only weather the storm, but to create an environment to positively recover. Importantly, we remain committed to the strategic return of cash to shareholders, evidenced by the meaningful dividend increase earlier this year and recent dividend declaration by our board this week. Finally, our recovery task force which includes experts both inside and outside the company, is working to help ensure that we're in an even stronger position to compete following the crisis. We've reprioritized initiatives, updated goals, improved collaboration, and increased speed of decision-making in spite of the environment. We're now more agile and responsive in deploying timely, relevant, and innovative solutions to help meet the rapidly evolving needs of our team members and customers. Now that many states have begun to gradually lift restrictions, we're helping pro customers ramp up and assisting DIY customers to get back to work and daily life. Our task force is looking at the very best way for us to serve our professional customers based on developing guidelines while being mindful of the ongoing need for safety and social distancing. For our store teams, we're adapting and updating our standard operating procedures for customer interaction, curbside delivery, and parking lot services. Historically, we know that industry has been counter-cyclical, and we're beginning to see signs of this. We're working hard to be ready to serve our customers better than ever, regardless of the environment. Shifting to our performance in Q1, our top-line sales were significantly impacted by COVID-19 in the quarter. While an extremely warm winter led to a softer start to the quarter, we saw sales improvement in early March. However, as COVID-19 stay-at-home orders were implemented broadly, we experienced significant reductions in both professional car counts and DIY retail traffic beginning in mid-March and impacting the remaining six weeks of the quarter. This led to fewer miles driven and as a result, our top line meaningfully declined as we detailed in our early April pre-release. Overall, in Q1, our net sales decreased 8.6% to $2.7 billion, with comparable store sales down 9.3%. As COVID-19 began to impact us, we quickly took steps to reduce operating expenses. However, the impact of these actions was not enough to offset the rapid decline in top-line sales late in the quarter. Our Q1 adjusted operating income declined by 57% to $104 million. Sales during the week ending April 4th were down 28%. On a positive note, this represented the low point of the pandemic's impact for AAP today, and our sales have been improving sequentially each week. Through the first four weeks of Q2, our comparable source sales are approximately in line with the prior year, and our DIY omni-channel business is growing double digits, significantly outperforming professionals. While there are a number of factors here, from an industry perspective, the DIY business tends to perform well during economic downturns. As unemployment increases, new car sales decline, the car park ages, and more customers do their own maintenance and repairs. We also believe the combination of stimulus benefits and the strong execution of our DIY marketing and sales plan have been two additional drivers helping our recent sales performance. In terms of geographies, our Q1 performance was heavily impacted in COVID-19 hotspots. The Northeast, Mid-Atlantic, and Great Lakes regions were all down double digits and particularly challenged in major urban markets. Puerto Rico, which is operating just six hours per week, and Canada also experienced large double-digit declines. Our strongest performance was in the Southeast, Carolinas, and Appalachia regions, which were much less impacted by COVID-19. The difference between low-performing and high-performing regions in Q1 was more than 1,000 basis points, representing the largest differential we've seen in recent memory. And this differential was well over 2,000 basis points during the peak impact of COVID-19. In terms of our professional performance, consistent with previous quarters, we delivered growth through mid-March. However, as the quarter progressed, this segment felt extreme pressure from stay-at-home workers. As a reminder, our WorldPAC and Auto Part International businesses are 100% professional, and tend to be in more urban areas. This contributed to drastic reductions in customer car counts, where we believe customers were more likely to adhere to stay-at-home orders. We took rapid steps to meet the needs of our customers and support them at this time of great need. For example, our CarQuest and WorldPack Technical Institute developed virtual, constructor-led training courses for repair shop owners and their employees. we introduced MotoVisuals, a best-in-class online platform mechanics can use to virtually explain complicated jobs to customers. Throughout the pandemic, our professional team has stayed extremely close to our pro customers, and we expect this level of support and adaptation will strengthen our relationships as stay-at-home orders are lifted and business recovers. In Q1, our DIY omni-channel business performed better than probes. with significant growth in our e-commerce business. Our team accelerated existing DIY omnichannel initiatives and set up several new ones that better serve our customers, both online and in-store. Consistent with our plan announced in February, we launched our new mobile app that is getting great reviews and feedback from customers. As an example of the team's agility, In March, we launched a suite of services we branded Advanced Same Day. This includes in-store pickup, curbside, and Advanced Same Day delivery, also offering contact-free fulfillment options. These initiatives were rapidly accelerated and include a fully integrated marketing plan to let customers know we're here for them. As we look to Q2 and beyond, we remain focused on four primary areas that build on current momentum within our DIY omnichannel business. These are, first, launch diehard. Second, build awareness. Third, drive loyalty. And fourth, execute with excellence. Let's start with diehard. Throughout the crisis, we've prioritized initiatives that we believe offer the potential for the best returns. One of those initiatives is the launch of the iconic DieHard brand, which is on track for this summer. We believe DieHard is a differentiator for advanced, and we already have customers asking for it. As customers literally restart their engines in the coming months, many will find they need a new battery. As the most trusted brand in the category, we believe DieHard will drive incremental growth across all channels. Second, we're committed to building awareness of events. Our advertising highlights the way we help motorists advance with care and with speed, and it features our very own team members. We're pleased with the feedback from our customers and the response to it. Third, in terms of loyalty, we relaunched our Speed First program last year and continue to see improvement in Speed First transactions. Through our new app, Speed Perks members can quickly view their points and available rewards and get exclusive deals and check out faster. We're also excited that despite our lower sales line, we saw double-digit increases in Speed Perks sign-ups year over year. At the end of Q1, we had more than 13 million active members, an increase of over 20% year over year. Finally, our fourth area of focus in DIY is beginning to deliver measurable growth as our execution continues to improve. This includes increases in both UPT and sales per ticket and reductions in average fulfillment time in Q1. In terms of ticket count, we saw extreme pressure on retail ticket count in the quarter due to COVID-19. However, our e-commerce business was strong. and we saw a double-digit sales improvement year-over-year in Q1. As we indicated, we've also seen a sharp uptick in DIY ticket counts both online and in stores recently. Now, as we move on to margin expansions for the overall business, COVID-19 has required us to reprioritize our plans. While there are still many unknowns surrounding the pandemic, I want to give you a brief update on our key pillars of margin expansions. First, as we look to improve sales and profit per store, we continue to evaluate our footprint. During Q1, we closed or consolidated 28 stores, all of which were planned prior to the onset of COVID-19, and we opened five net new independent locations. Additionally, we remain in full execution mode of consolidating our WorldPAC and Autopart international bands, and expect to complete this consolidation by year-end as previously communicated. Once complete, we believe we'll be able to offer a broader product assortment to our professional customers while reducing costs. We expect to realize additional savings this year in store labor and professional fees as a result of actions we took over the past few weeks. We expect that over time, we'll continue to improve our sales and profitability for stores. Our second margin expansion priority is supply chain. We continue to execute cross-banner replenishment, which was temporarily slow in Q1, but not stopped. We remain on track to complete this initiative by mid-2021. In terms of our warehouse management system consolidation, we completed our first implementation in one of our largest VCs to the new WMAT system earlier this year. This facility is already showing improvements in fill rate, on-hand accuracy, and other important service metrics. Due to travel restrictions and prioritization of critical projects related to our COVID response, we've temporarily delayed converting other DCs for now. Our team is focused on how we can further improve this process when the time comes to ramp conversions back up and complete this component of our transformation agenda. Our next pillar of margin expansion is category management. We increased our efforts even further throughout the pandemic to collaborate with our suppliers to help ensure consistent supply and optimize cost and terms. In addition to material cost optimization, we continue to increase own brand expansion, including CarQuest branded parts and the upcoming launch of Die Hard. I'm also excited to share that our new pricing optimization tool is on track to launch mid-year. Once completed, we expect this to give us much greater flexibility and agility, resulting in more effective and efficient management of pricing. SG&A productivity is our final pillar of margin expansion. During the quarter, we reacted quickly to sales declines with cost reductions. While these actions were insufficient to fully offset the sales declines in Q1, they will help us going forward. and we believe we'll see more significant benefits from them in Q2. In the first quarter, expense reductions included the continuation of our back office consolidations, which were planned prior to the outbreak, as well as the suspension of all travel and deferral of certain marketing expenses to later in the year. Related to the lower remaining capex, we reduced contractors and professional fees in Q1. Our safety focus continues and is delivering meaningful savings in our insurance and claims expense. I'm proud to share that we once again reduced our recordable incidents and collision frequency rates during the quarter by 30% and 14% respectively. Our team has done tremendous work to help keep our team members safe as part of our COVID-19 response. Despite the additional costs we've incurred related to these efforts, I know they are helping to protect our team members and customers and believe we will all come out of this stronger. As I said when we began today's call, there's no playbook on how to respond to a global pandemic. But in many ways, we've written a very good blueprint as we benchmark versus other companies. This includes everything from new safety measures in our stores and distribution centers to additional benefits for our team members the new industry-leading solutions for our customers. I'm incredibly proud of all of our team members. Because of their hard work, we believe we will emerge stronger, more innovative, and more agile than ever. With that, I'll turn it over to Jeff for details on our financial performance. Thank you, Tom, and good morning, everyone. Before I begin, I want to echo Tom's comments and extend my personal well wishes to everyone joining us this morning. I hope you and your families are safe and well. I also want to thank our approximately 67,000 team members and all our independent partners for their relentless dedication and resilience throughout the past couple of months. As expected, we experienced headwinds associated with the COVID-19 pandemic, and our first quarter results were below our expectations. In the first quarter, Our adjusted gross profit was approximately $1.2 billion, which was a decrease of nearly 11% compared to Q1 of the prior year, primarily driven by decreased sales. Adjusted gross profit margin of 43.5% declined 113 basis points from the prior year quarter due to supply chain deleverage, product mix, and tariff-related cost increases. These were partially offset from pricing and lower LIFO headwinds. Our adjusted SG&A was approximately $1.1 billion in Q1 and was relatively flat compared to Q1 2019. As a percentage of net sales, our adjusted SG&A expenses increased by 326 basis points to 39.6%. While we took several actions to reduce costs in response to the COVID-19 pandemic, the majority of the savings will be reflected in the balance of the year. Given our commitment to provide a high level of service for our customers, we did not deliver the amount of SG&A productivity that we have seen in prior quarters. In addition, as Tom said earlier, when the impact of the coronavirus became apparent, we took measures to help protect our team members and customers, including increased cleaning and sanitization of our stores and distribution centers, personal protective equipment for our frontline team members, and changes to our sick time policy. These actions resulted in approximately $16 million in operational costs. Adjusted operating income in Q1 was $104 million, which declined 57% compared to the prior year quarter. Our adjusted OI margin rate decreased 439 basis points to 3.9% in the quarter. Adjusted diluted EPS for Q1 was $0.91, a decrease of 63%. Moving to free cash flow in the first quarter of this year, this was an outflow of $72 million as compared to the inflow of $143 million in the same quarter last year. This was directly related to decreased sales and increased working capital. In addition, higher capital expenses were incurred prior to the pandemic in Q1. As we began the year, we planned higher capital expenditures and were executing on our projects as expected. Therefore, our CapEx increased 35% in Q1 to $83 million. We will continue to prioritize projects that we believe will offer the greatest return on investment. In addition, we've taken several other actions to improve free cash flow, including converting a greater percentage of our suppliers on the supply chain financing. Given the current economic situation and uncertainty around the full impact of COVID-19, we do not believe that it would be prudent to provide financial guidance at this time. That said, we remain committed to our long-term financial priorities to invest in the business, maintain an investment-grade rating, and return excess cash back to shareholders. As previously mentioned, we're continuing to invest in our business and intend to prioritize projects that yield the greatest return. Additionally, as Tom mentioned, we took steps in the first quarter to safeguard our balance sheet. This includes borrowing $500 million against a previously unused $1 billion revolver and issuing a new $500 million 10-year note at 3.9%. This strategic offering provides us with additional liquidity at a lower rate than our two outstanding notes due in 2022 and 2023, respectively. I'm extremely proud of the speed and agility our team demonstrated through this process to bolster our cash position and provide flexibility. At the end of the quarter, we had approximately $1.3 billion in cash on hand, including the impact of our financing actions in the quarter. In Q1, we repurchased approximately $29 million in our common stock. As announced previously, we suspended our share repurchase program given the current environment. Finally, as Tom mentioned, given the focus we have placed on our financial priorities and the work we've done to strengthen our balance sheet in recent years, we were able to significantly increase our dividend earlier this year. As you saw in our earnings press release, our board has approved our Q2 dividend of 25 cents per share. As we continue to manage the business through the COVID-19 pandemic, we remain committed to improving total shareholder return over time through a balanced approach of investing in our business and returning cash to our shareholders while continuing to strengthen our liquidity position. I want to reiterate what Tom said earlier. This is an unprecedented situation. and the uncertainty will no doubt continue for some time. The good news is that our team is really stepping up to the challenge. Across the company, our people are as committed as ever, going above and beyond as they respond to this crisis. I truly believe we have the best people in the industry and that we will come out of this stronger than before. With that, let's open up the call to address your questions. Operator?