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?

Thank you. As a reminder, in order to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Our first question this morning comes from Simeon Gutman from Morgan Stanley. Please go ahead.

Thanks. Good morning, everyone. Thanks for the colour. My question is the industry looks like miles driven down 20 to 30 across the country. Your comps are flat quarter to date, and some states haven't reopened yet. How do you assess, how do you look at the sustainability of demand? I know there's a lot of factors at play, and you mentioned some of them, but how do you assess that in the current period? Thanks.

Yeah, sure. Good morning, Simeon. Good question. I mean, we're obviously experiencing a pretty unprecedented time, so I can tell you what we're seeing so far. Obviously, it's very difficult to predict what's going to happen in the future. But so far, I think there's some industry-related factors that are helping DIY. As you know, the industry in terms of DIY particularly has benefited in economic downturns. Any kind of unemployment pressure means more people are going to be doing work on their own vehicles. So I think that helps. The stay-at-home and social distancing mandates, are a factor. When we benchmark China, we talk about some of the trends that are going on in China. We do hear about an aversion to mass transportation, people more likely to using their personal vehicle. That's going to be a factor. We've also seen, because of social distancing and shelter in place, an increase in demand for items that degrade when they're not used, such as batteries. a couple of important industry factors. They're people at home, more time on their hands, doing do-it-yourself projects. So those are some things for the industry at large. In terms of advance, we did a tremendous amount of work to ensure that our stores were safe and kept our team members and customers healthy during this crisis. We've been on a multi-year safety journey, as you know, and The enhanced practices we put in place we think benefited us. We had the highest NPS scores we've had in a while during the middle of the pandemic, so that obviously we did a good job of preparing our stores. I think also the omnichannel capabilities that we've been able to bring to life have helped in terms of advanced same-day, the app that we spoke about. And then finally, we just launched our marketing campaign, which early returns are good. You know, when you look forward, are they going to continue the DIY trends? It's obviously difficult to say, but things to consider. For sure, the miles driven is the big unknown, right? I mean, you could make the case for reduced miles driven. You could make the case for more miles driven. We do know it's likely that the fleet is going to age because new vehicle sales are going to be down this year. I do think the mass transportation point is going to continue. Um, there's a whole question around vacations, you know, this weekend, you know, we expect to see a record number of cars on the road. People are not flying, but they're going to be driving to where they're going. Uh, so there are some very positive, uh, things going on from an industry standpoint, a bit of a silver lining, I suppose, for the, uh, DIY business, uh, through all this. Unbelievably difficult time. And then we're very optimistic about our marketing plans. You get the full impact of our, our 2020 advertising. You know, we're watching die hard. But, you know, I have to temper that with the unknowns that you referenced, which is, you know, are there going to be fewer commuting miles driven? Is there additional COVID impact balance of the year? You know, the degree to which unemployment affects people. Those are all on the con side. So that's kind of the lay of the land from our standpoint.

That's helpful. Just one follow-up is a little bit technical. Can you share supply chain costs within gross margin? What percentage are they of cost of goods?

Yeah, we didn't break out the individual components of supply chain or gross margin in particular, but we can give you some color around just sort of the gross margin rate, which I think is probably the question you're driving at, the Specifically, we had cost increases, which, as we've said previously, we're going to continue to see the headwinds from the full impact of the tariffs. That's going to subside in the back half of 2020, but Q1 and likely in the Q2, we'll continue to see that. Our cold weather-related categories were down significantly year over year, and that impacted our product mix. And then supply chain did deleverage, and that's directly associated with the $250 million revenue decline. On a dollar basis, the supply chain costs were actually improved on a year-over-year basis as we continue to take out costs.

Okay. Thanks, Jeff. Thanks, Tom. Take care. Thank you.

Our next question comes from Michael Wasser from UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. Do you think within your markets that you've been able to maintain your share of the DIFM business, particularly as you've consolidated some of your stores and closed your stores? And how have your time to fill rates trended over the last eight weeks during the core of this crisis?

Well, good morning, Michael. It's obviously difficult to always measure the share inside a professional. As you know, we don't get anything on that. We do get DIY share, which we actually feel really good about. But on the pro side, I do know that we had record membership increases on TechNet in the quarter. Bob has stayed extremely close to the largest customers on the professional side, as have I. I've been calling the CEOs of key companies. large customers and trying to stay connected in this difficult time. And what we're launching now with this on the pro side, which is really a fully integrated solutions package for our customers, MotoLogic, MotoVisuals, the CTI platform, we actually feel very good about it. I mean, it's going to be an interesting couple of months, to your point, on the professional side. You know, obviously the large strategic accounts, the big tech net shops for us, you know, we think are going to do well, you know, it's going to be probably a little more challenging for some of the smaller players. So in terms of share, it's difficult to say. You know, I do know that geography by geography, you know, we're measuring the sales per account and the number of accounts and all of those things you'd expect. The pro business is improving every week, and last week was the best week we've seen. So, you know, once shelter in place comes off, you know, I think we will see a recovery on the professional side of the business to the degree of which is still unknown. But, you know, we do expect it to improve from here.

And, Tom, my follow-up is do you think it's realistic for the auto aftermarket to plan for positive growth in the second half of the year?

Yeah, again, it's similar to Simeon's question. It's tough to say. I mean, there's a lot of things that are at play probably more than ever as I kind of rattled through the factors that we've looked at, Michael. I think, you know, on the DIY side, obviously, we're probably more optimistic just based on the way that, you know, the pandemic has played out and the consumer behavior changes that are out there. I mean, I think you're seeing customers are really up for grabs, you know, across broader retail. And whether it's lucky or timely, I mean, our advertising hit at the right time for us. I think we've got a lot of good initiatives on the DIY side. And I think the industry should perform well there. I think on pro, it really becomes a function of miles driven and, you know, what happens from here with – shelter-in-place orders in some of these key geographies.

Our next question comes from Matt McClintock from Raymond James. Please go ahead.

Yes, good morning, everyone. I hope you're all well, and your families too. Yeah, morning, Matt. So, Tom, I guess two questions the first one is just you know when you think about the longer term transformation that was underway prior to covid um maybe it'd just be helpful if you could kind of give us an idea of what initiatives you've actually accelerated during this time frame and what what initiatives have actually been pushed off um due to uncertainty or just um prioritization needs thanks

Yeah, sure. I mean, it's been an interesting case study, I think, for every company, Matt, to be born. I mean, when this thing hit, you know, we immediately, you know, all huddled in a virtual room and went through our list of priorities. And obviously, we established the three things that we talked about in a note, which was to certainly prioritize the health and safety of our people and our customers, number one. Number two, preserve cash and protect the P&L during the crisis. And then we wanted to have a few people that were thinking about, okay, what's going to happen post the crisis and how do we come out of this stronger than ever once the crisis is over? So those were the platforms that we established. And then we took every big initiative that we had, we put it through the lens, and we determined whether we were going to accelerate it, continue it, defer it or stop it altogether. And, you know, everything that we had was put through that lens and, you know, we put a decision around it. So the examples of the accelerates, clearly the advanced same day was an accelerate. You know, we saw that the consumer was going to need parts urgently. We were not going to have necessarily people leaving their home. There were shelter-in-place orders happening. So we stood up advanced same day, which had been in test in a market in the fourth quarter. And what was a protracted timeline to roll it out became a week, a matter of weeks. And now we're pretty much, I think we're up to about 70% of national with that capability. So that's an example of an accelerate. A deferred. would be something like the warehouse management system implementation on supply chain. And this is a great project for us. We love the project. Unfortunately, to stand up a distribution center and collapse all of the tech platforms in that distribution center and get the building operational, you need a team of experts that have to go into that building and help them organize things and set the building up and set up the new warehouse management system, so we had to defer that. Now, Ruben and his team are thinking through how do we do that in a virtual environment because we're definitely not going to stop doing that. We're going to do that, but it's delayed by a couple of months. That's really the process that we went through, and the narrowing of the priorities, the simplification of what we were trying to accomplish enabled us to move very quickly on things like advanced same-day or supply chain financing or the bond offering, which obviously helped us get secured on our balance sheet liquidity. Those are the things that we accelerated, and then the things that get deferred, we're evaluating startup timing from here.

Thanks. That's hugely helpful. And then a quick one, just you kind of implied this, but I wanted to make it more explicit. Consumer behavior changes regarding e-commerce. Historically, this has maybe been one of the lesser penetrated retail sub-industries from e-commerce, from an e-commerce perspective. Is that now changed completely? On the back end of this, are we likely going to see much more accelerated acceptance by the broader consumer of those channels? Thank you.

Sure. Yeah, I mean, I think we've been studying this at length, not just inside of auto parts, but more broadly across all of retail. I mean, a lot of experts out there would say that we just kind of moved three years at once in terms of omnichannel. You know, the people who perhaps have never ordered online groceries in their lives have now done so and become comfortable with it. So, you know, again, somewhat fortuitous. We launched our app right in the middle of it. We've been working very hard at our functionality on our mobile site. inside of our desktop site. Obviously the fulfillment options that we had ready to go helped us. So yes, I think that consumers are going to be more predisposed to order online and the investments that we've been making over the last several years, candidly, in our technology platform, in our catalog functionality, in our online experience, I think are going to help us going forward. So I do think that it's a kind of an acceleration of a trend that we saw coming. You know, we had a pace of change that was outlined in our five-year plan, and I think that just got accelerated.

Hugely helpful. Thanks a lot. Best of luck. Thank you.

Our next question comes from Kate McCain from Goldman Sachs. Please go ahead.

Hi, this is Chandni Luthra on behalf of Cake Machine. Thank you for taking our question. I guess what we wanted to understand was in terms of when you talk about traffic and ticket, and especially in more recent weeks when comps have sort of improved significantly, what are people buying really? You talked about batteries, but what else is sort of being looked at from people's basket standpoints?

Yeah, I think in the first quarter, as we highlighted, our tickets were down significantly. Dollar per ticket was up. I think as we move through the pandemic and start to see the changes in consumer behavior, you are seeing some of those failure-related categories come to light because people's cars are sitting in their garage and they're not being used and suddenly they go out and they try to start it and they find they need a new battery. So for sure we're seeing that. I think down the road you can see other brake fix categories that will come to light, you know, as people start to drive them. You know, to some degree we've seen some increase in project-related work, whether that's something as simple as washing your car. I mean, you hear people who haven't washed their car in 30 years that have decided to go go out and wash their vehicle with their son and teach them how to wash a car. Those are things that I think you are seeing a little bit more broadly across the consumer landscape where you've got people sitting in their homes and you can only watch so much Netflix and you decide what to do and you go outside and maybe you fix something in your yard or maybe you work on your car. So those are some of the things we're seeing.

That's also good. Thank you. And if you could please throw some light on, you know, the health of independence, what are you seeing there in terms of, you know, your 1,500 independent businesses? What are you seeing on those lines? Thank you so much.

Sure. You know, we feel great about our independence program. We've made tremendous enhancements in our technology platforms and our availability. We've really worked hard on our catalog to improve it for our independents. They're so important for us. The merchant team under Mike Broderick's leadership has really helped the inventory situation for our independents. There's a robust marketing plan this year for them that we haven't had in the past. So honestly, I think the interest in our CarQuest independent program is at an all-time high. And the person leading it is a great executive junior where he's got tremendous experience inside the company. I think we've provided an extraordinary level of support, and we've helped them with safety during this crisis, which has helped us. So we feel very good about it. You know, these are generational businesses, people who know the auto parts business cold, and we value them greatly.

Okay. Thank you so much.

Our next question comes from Brett Jordan from Jefferies. Please go ahead.

Hey, good morning, guys. Good morning, Brett. You mentioned in the prepared remarks that you continue to evaluate the footprint. Could you talk about sort of how you see that evolving, you know, store closures? And is there anything in particular, I guess, are the stores you're closing ex-CarQuest stores that might be physically smaller or any regional markets you're sort of favoring versus others?

Yeah, I mean, we're definitely going to put this through the COVID lens to your point, Brad. We had a plan of a certain number of closures. I think we closed 20-odd stores in the first quarter. But as we've said previously, that was sort of winding down. As we go forward, we're definitely looking at opportunities for to refresh our fleet and strengthen the brand itself and the appearance of our stores and the customer experience inside of the store. And once again, given the changes with COVID and what's happening and significant implications for real estate prices and construction costs and all of those things down the road, you know, we've got to put that through that lens because the world has changed a little bit in that regard. So more to come on that. We're not in any position to comment on that yet, but there's a lot of new information, I suppose, that's come to light in the last two months that is different than, you know, our original thoughts going into it.

Okay. And then I guess follow up. When you think about recent trends and, and, whether it was stimulus check driven or whether the unemployment bonus checks are helping. Do you see anything that would say that the improvement demand is sort of a sugar high on government subsidies, or is this real demand that you see continuing into the summer months?

Yeah, again, difficult to say. Obviously, the stimulus helped all of retail, but, you know, we can see proportionately auto parts versus more broad retail, at least DIY that is, right? So I think some of the factors I mentioned earlier, whether it's, you know, aversion to mass transportation or, you know, higher unemployment rates causing people to need to work on their own car or do at least some of the projects on their own car, until this thing is resolved with a vaccine, you know, I think that there's probably some temporary benefits for the industry.

Great. Thank you.

Our next question comes from Liz Suzuki from Bank of America. Please go ahead.

Great, thank you. Has there been a noticeable acceleration in the percentage of your sales that are taking place online, either by online pickup in store or shipped to home since COVID? And, you know, any numbers you can put around that if that's been the case?

Yeah, we've definitely seen an acceleration in DIY broadly, Liz. You know, I think that proportionately more in e-commerce, but much of the e-commerce, in fact, has been buy online, pick up in store, which is the majority of our sales. And I think, you know, we're very pleased with the improvement that we've seen there. So it's definitely not just a complete shift to home, which, you know, might surprise you. We have seen a significant uptick. I think the fact that we have the parking lot services and we'll install a battery for free and we'll install a wiper blade for free helps us in that regard. And when we started our advertising the week of April the 20th, we wanted to make it very clear to customers that that was a service that we had. And I think if you watch the advertising, you'll see that we make it very clear that we have that free parking lot services, which I think helps us with buy online, pick up in store, given the speed, convenience with which a customer can get their problems solved, and obviously the advice they get from our employees.

Great. Thank you. And is there any update on the partnership with Walmart that you can share?

We continue to work with them on the things that we've spoken about in the past. They're a great partner. You saw their performance this morning. It's a great organization. We're going to continue to add parts to their website. We said before that we're only going to do that when the experience is really, really strong and differentiated versus other alternatives people have online. Nothing particularly new to report there, but we're continuing to work very closely with them and grow this business. This is a long-term partnership that we believe over time can really, you know, give customers a differentiated experience versus, you know, the alternatives that somebody has.

Great. Thank you.

Thank you.

Our next question comes from Scott Ciccarelli from RBC Capital Markets. Please go ahead.

Good morning, guys. Hope everyone's well there. Given your comments previously regarding this significant sequential improvement every week of the quarter so far, and now that comps are about flat. I guess we can assume that comps have turned positive probably in the last week or two. So I guess the question is, can you help us better understand the slope of the curve? In other words, were you down 2% to 3% and now you're up 2% to 3% or was it a much greater magnitude than that?

Yeah, well, good morning. So I hope you're safe and healthy also. I think that we did report, week ending March 28th, week ending April 4th, that the enterprise, which of course includes all of our business, professionals, DIY, Canada, everything, was down 28% for those two weeks in a row. And that proved to be the absolute peak impact, if you will, of the pandemic. It was the low point for us in terms of, you know, decline. And then from there, it improved each week literally sequentially, including last week. So, you know, I think to the earlier question I think Brett may have asked, You know, we did see an increase on the week of the stimulus, but the week after the stimulus was better than, you know, the week of the stimulus. And then two weeks after was better than one week after. So, you know, we are seeing that sequential improvement. And I think it's more to do with the gradual relaxing of shelter-in-place orders. I mean, obviously, you know, I have gone to stores, I mean, at least here in Raleigh, And, you know, I see more cars on the road down here. I know it's very different across the country. I'm happy to talk about that geographically. But generally speaking, as more people start to get back on the road and get their lives back to, you know, some semblance of normalcy, I think you are seeing a benefit from that.

I appreciate that, Tom. I guess the question is, like, you know, you were going from down 28% and then you commented that, You've had that sequential improvement so far this quarter. If it comes to overall flat, that means the last quarter or two just had to be positive, and I guess I'm just trying to figure out how positive that might be.

The last couple, yes. The last couple of weeks mathematically have to be positive. You're right.

Okay. All right. Thanks, guys.

Our next question comes from Seth Sigmund from Credit Suisse. Please go ahead. All right.

Thanks, guys. This is Kieran McGrath on for Seth. There's two questions from us. So firstly, there's a lot of initiatives ongoing, including your diehard launch, your loyalty program, dynamic assortment, and obviously the Walmart partnership as well. I'm curious if the timeline for these have changed, which is your initial plan, and what is your ability to keep them on track amidst all these moving pieces we're seeing?

Well, I mean, to the earlier question, you know, we did put every single initiative through the COVID lens, and we made a determination, you know, accelerate, keep, defer, stop, you know, kind of categorizing them. So to some of the things that you raised, diehard, you know, we're moving rapidly, okay? Our team members cannot stop talking about diehard. They are so fired up about this iconic brand. that we are going to launch here. We believe it will drive people. Everything that we see says it will drive people to advanced auto parts. So, you know, there was no slowing down whatsoever with Die Hard, and we do plan to launch that brand with a fully integrated marketing plan this summer. You know, the equity that it has is reliable. It's powerful. It's high quality. It does a lot of really good things for advanced. So the majority of the bigger value-driving initiatives we have were either accelerated or were in line with the timeline. The things that we deferred are more longer-term things. We spoke about the warehouse management system implementation, which we know is going to take time. Now, that said... We talked about in the prepared remarks the cross-banner replenishment initiative, which is simply taking stem miles out of our supply chain and rerouting stores or pointing stores at a distribution center that's closer. You know, that's slowed a little bit, but we still feel we're on track to deliver that by the middle of 2021. So it does vary by project, but we put it through this prioritization process to determine what got accelerated, what got deferred, and what was continued.

Thank you. And then secondly, it's a bit more tactical. On the expense side, so you discussed there's more opportunity to reduce costs in Q2. Firstly on that, is that going to ramp during the quarter, and how should we think about these cost reductions going to 2H? And then on the $60 million PP&E cost, again, I assume that is going to go into Q2. And how should we think about these costs going to the back half? Thank you.

Yeah, sure. You know, as we think about the Q2 margins or even the balance of the year, it's, you know, obviously too early to provide any guidance, just given the amount of uncertainty we have in the current environment. But I can give you some color on what we see, you know, quarter to date. Based on the sales trends that we've talked about in our prepared remarks and Tom's commented on in earlier questions, we've seen this exponential improvement every week, and the overall comp sales are in line with the first four weeks of our last year's quarter. So we do expect that the actions that we took in the first quarter provide cost benefits through the balance of the year. In the second quarter in particular, there's going to be some offsetting headwinds to these cost savings. to the actions that we had in Q1 that are going to give us the savings in Q2. We're going to continue to prioritize the health and safety of our team members and customers. So we do anticipate those COVID costs to continue. This includes cleaning our stores, our distribution centers, providing the personal protective equipment to our frontline team members. And as I said, we expect that to continue throughout the year, the question becomes, of course, you know, how much will it be? A lot of it will vary state by state in terms of what the restrictions are, will continue to be, or sort of, you know, what is the new normal of retail is sort of the way to think about it. And then, in addition, you know, we deferred conserving marketing expenses in the first quarter, and we expect to invest in our advertising campaign as well as diehard in Q2. You know, we expect the marketing diehards, they're going to drive top-line benefits. in the back half of 2020 and beyond, but these factors will offset some of those benefits in the second quarter.

Great. Thank you very much.

Our next question comes from Michael Montani from Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking the question. I just wanted to ask two things. First was just on the top line front. Just curious to know at this stage, you know, how many of your stores or maybe what percentage of your markets are still operating with kind of shelter-in-place restrictions? And then secondly related to that was on the DIFM side, you know, you mentioned that overall comps had turned positive. Does that mean that the commercial side is now positive as well?

Sure, Michael. First of all, on shelter in place, as you know, it does vary by state and the phases are varied and then different companies have different policies surrounding whether you can return to work. I think we can safely say that at least the professional or lack of a better term, the white collar workforce across the country is still largely working remotely. There are some geographies that are much more impacted by COVID, though, as we called out in our prepared remarks. The Northeast, the Mid-Atlantic, the Great Lakes, where it's so much more real. For those of you up there, our hearts go out to you because you can just feel it when you're speaking to people that are up there. They know people that have been infected. They may know someone who's passed away. It's just very, very different there than it is in Mississippi and Alabama and other parts of the country that are less impacted. So, you know, from our standpoint, you know, those are big geographies for us. So we're looking forward to a relaxing of those measures. Obviously, you saw Governor Cuomo on CNN on the weekend talk about it. and what's happening in New York. So when those things come back, we're really excited that our teams up there will start to see some of the benefits we're seeing in other parts of the country. So that's kind of where it is on shelter-in-place. What was your second question again?

The second part was just to see if the commercial side had turned positive as well. I was thinking DIY might be up double digits, but I just didn't know if commercial was up.

Yeah, and we're still down on pro.

Okay. And then the last thing I had was on the expense side. You know, SG&A dollars have been down for three quarters in a row. It sounds like even though COVID expense, you know, is going to persist, that the second quarter SG&A dollars could be down more than the first quarter year over year. I guess is that kind of a fair way to think about it? And from a gross margin front, you know, can those start to actually stabilize and turn positive in 2Q? Or is it really more of a back half, you know, just given the tariffs?

Yeah, sure. So, you know, on the SG&A, you know, we do think we can continue to take costs out. As I said, there are going to be some investments in particular, but, you know, marketing and diehard. And then to your point, the COVID related expenses will continue to be a headwind throughout the year. Obviously, the question becomes how much. That one's a little bit more challenging to predict. But again, we took significant action very late in the first quarter. Unfortunately, we didn't see a lot of benefit, but we absolutely expect to get that in the back half of the year. Specific to GM rate or improvement there, like we said, In dollars, we improved year over year in our supply chain. We had less dollars. It was just the $250 million revenue decline we were deleveraging. And then some of it is mixed. As we said, the cold weather-related categories were down in the quarter, which had a pretty significant impact on product mix. If we start to see those trends changing, we could get some leverage in gross margin as well. And we will lapse the tariff increases in the back half.

Okay.

Thank you. Our next question comes from David Bellinger from Wolf Research. Please go ahead.

Hey, good morning. Thanks for taking my questions and hope everyone's staying safe. So given the volatility of sales trends and maybe some disruptions throughout the supply chain, Have there been any difficulties around parts availability and how are you managing delivery frequencies now? Have you been able to flex that quickly given the changes in demand?

Yeah, I've been amazed at how well our team has collaborated together, David. During this pandemic, the supply chain team, the inventory team, and the field, they've reacted just so quickly. You know, it's really galvanized that group in many ways. And as you know, we've had a lot of new people come into Advance over the last couple of years. And in some ways, this has really brought them together as a team. So, pardon me, the overall in-stocks on our primary SKUs have been terrific. And to your point, as we flexed hours of operation down, and adjusted replenishment frequency down. We moved quickly to do that, and as it's gone back up, we obviously used the data to make decisions on how to change that going back the other way and extend hours of operation and then increase replenishment frequency. Our in-market deliveries continue to help us. The availability of parts that we have across You know, all of our banners, including WorldPAC, Autopart International, CarQuest, Advance, you know, we're leveraging better than ever. So I think we look closely. I just met with the team yesterday on our assortment work and how we're doing on stock rates and those things given dynamic assortment, and we feel pretty good. So I think, again, speed and agility is kind of important right now to react to these ever-changing circumstances, and I think overall we've managed it well.

Yeah, that's very helpful. And maybe just following up on some earlier questions, can you elaborate on the trends you're seeing in the online channel? Anything surprising in the makeup of sales that has shifted online? And could you talk about how big, maybe as a percentage of sales, the digital business has become in recent weeks?

Yeah, we're not going to break that out, David, but I think from a trend standpoint, We definitely have seen, we mentioned batteries surging. We're seeing that inside of online. I think to some extent, given the prioritization that pure online retailers have to put on food and beverages and staples and things like that, if you go order something that's, let's call it part of the proverbial long tail, you know, those timelines for fulfillment are pushed out, which I think helps us, you know, as a, you know, pure play auto parts retailer, very focused with our expertise and what we're lifting up. So, you know, it's been pretty much across the board, but, you know, I think the general trends that we mentioned earlier, be that, you know, batteries or You know, wash and wax, some of those things that are project-related, we're seeing similar lists. But I don't think I've seen anything disproportionate to online, which I think is your question. I think, you know, all boats have risen here, and we're seeing it in our retail operations. We're seeing it in our same-day pickup and store, same-day curbside, same-day delivery. Got it. Thank you very much.

Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Hi, good morning. Thank you for taking my question. The first question I want to ask is, as we look at the recent sales trajectory, particularly the pickup and sales lately in the DIY side, given the data, your loyalty program, are you seeing indications of any benefits of a channel shift What I'm looking at there is clearly advanced, and your specific category has been designated as essential. But were there other venues that maybe have not been, and then those customers are transferring their purchase into your stores?

Yeah, that's a great question, Brian. It's obviously difficult to say, but I do think that retailers who have prioritized safety broadly um and again we've been on a multi-year safety journey we've got a world-class expert that we hired two years ago to help us with health and safety across the enterprise and when this happened he stood up a pandemic team across the enterprise that is on a call daily with our entire field organization seven days a week managing all of the things that are going on, making sure the plexiglass shields are going up, making sure the masks are getting to our people, making sure the independents have soap and hand sanitizers and all of those things that are necessary in this world. And I think that we communicated that broadly across our website weekly with written communication, in some cases video communication, So I think anybody that's doing that is going to benefit from it in the short term. I think separately to that, maybe underneath your question, the fact that we have a 7,000 square foot format with two to three experts working in the store might be more appealing than another box at this stage of the game for auto parts. But that's purely speculation. We've done some analysis on that. I can't tell you I've seen anything that says that's actually true. But that's somewhat speculative. But I think that's kind of where you're headed.

That's very helpful, Tom. The follow-up question I have, I mean, clearly, as we think about either Q2 or into the back half of 2020, there's a lot of moving pieces here given the COVID-19 crisis. But, you know, you had mentioned your prepared comments we discussed before, the impact of what proved to be a decidedly warm winter on sales. So as you look through the balance of the year, do you expect that we will continue to see the impacts of the warmer winter, or was that really isolated to the negative impacts isolated at the beginning of the year?

Well, for sure impacts, heavy, heavy impact in January, February. I mean, cold weather categories are much, obviously, more relevant in those months that is winter itself. You know, there are some residual things. You know, if there's not a lot of snow, we don't get plows on the road. They don't tear the roads up. There's not as many potholes. And that affects undercar in some of those categories. At the moment, you know, we do see some softness in some of those categories, but that's not a long-term thing. I mean, we would have experienced most of it by now. And as you get into June and July, that'll subside. And, you know, next year we'll see what happens.

We much appreciate it. Thank you. Thank you.

This concludes the Q&A portion of our call, and I would like to turn it back to Tom Gracco for closing remarks.

Well, thanks to everyone that joined us today. And as you've heard, we've tackled the challenges of the quarter head on. You know, we believe we're in a very good position to move to the next phase. of this pandemic and eventual recovery. No matter how challenging the last few months have been, we're steadfast in our vision of advancing a world in motion. And our vision is highlighted in our second annual Corporate Sustainability and Social Report that we published this morning. We're very proud of it. It's all about driving financial performance as we develop our people, reduce our environmental impact, and give back to our communities. And then finally, as we head into Memorial Day weekend, I want to take a minute to recognize and express our sincere gratitude for all our nation's heroes, especially those who paid the ultimate sacrifice defending our country. We're proud to be an employer of choice for so many military veterans, and we look forward to increasing representation of veterans for years to come. We're also committed to our longstanding relationship with Building Homes for Heroes. In 2020, we're celebrating 10 years of support. to this worthy organization whose mission is to gift mortgage-free homes to veterans injured while serving our country. We look forward to sharing more with you on our recovery efforts and the status of our business in August. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.