Advance Auto Parts Inc.

Welcome to the Advanced Auto Parts fourth quarter and full year 2021 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 Q4 and full year 2021 results, as well as our 2022 outlook that we highlighted in our earnings release yesterday. 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 remarks today may contain forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements. including, but not limited to, statements regarding our initiatives, plans, projections, and future performance. 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 can be found under the captions forward-looking statements and risk factors in our most recent annual report on Form 10-K, and subsequent filings made with the Commission. Now, let me turn the call over to Tom Greco.

Thanks, Elizabeth, and good morning. We delivered a strong fourth and final quarter in what resulted in a record-breaking 2021 for Advance Auto Parts. We closed the year with record top-line sales, Advance's highest annual adjusted operating income margin expansion since our first year as a public company in 2002, and record adjusted diluted earnings per share. In addition, we returned over $1 billion in cash to our shareholders through a combination of share repurchases and our quarterly cash dividend, which is also a record. Last April, we provided a strategic update focused on our long-term plans to deliver top quartile total shareholder return, or TSR, and we delivered on this objective in 2021. In discussing our Q4 and full-year performance, as well as our outlook for 2022, Jeff and I will reference the same four drivers of this TSR performance we outlined in that meeting. First, build an ownership culture. Second, grow faster than the market. Third, capitalize on our unique margin expansion opportunity. And fourth, return a substantial amount of cash to shareholders. I'd like to begin by thanking the entire advanced team and CarQuest Independence for helping us build an ownership culture and delivering the strong results we're about to review. As we look back on the past two years of managing through a global pandemic, nothing has been more important to us than the health, safety, and well-being of our team members and customers. The investments we've made enable us to keep infection rates at AAP below the national averages. In addition, we believe the consistency of our words and actions managing through COVID-19 enable us to build trust during a defining moment for companies. Improving organizational health has never been more important amidst a labor market where people have more choices than ever in terms of where, when, and how they work. We fundamentally believe that when we take care of our team members, they in turn will take care of our customers, resulting in strong shareholder returns. Our team members are critical to our customer value proposition. they build enduring relationships with customers. They work together as a team across markets to serve customers. And throughout the pandemic, they fulfilled surging demand for customers. They also navigated this challenging environment to welcome new customers, grow our business with existing customers, and train new AAP team members. Meanwhile, because our team members are so vitally important to our long-term sustainable growth at Advance. We continue to invest in them and in our business despite the pandemic. This includes investments in our differentiated Fuel the Frontline stock ownership program, IT infrastructure, supply chain, stores, independent partners, and in leading digital capabilities to help our team better serve customers in the future. In summary, We're incredibly proud and thankful for the progress our team members and independent partners made throughout the past two years to strengthen and build an ownership culture here at ADNAN. Shifting to our Q4 results, and as a reminder, we were lapping a 53rd week in the previous year. In our press release, you'll find detailed summaries of our 2021 results compared with 2020 on a like-for-like 12- and 52-week basis. In our remarks today, we'll be measuring our performance apples to apples. In other words, Q4 2021 will be compared to the relevant 12 weeks in 2020, and the 52 weeks of 2021 will be compared with the relevant 52 weeks in 2020. In Q4, we were liable to once again comp the comp. delivering comparable store sales growth of 8.2%, or 12.9% on a two-year stack. Our adjusted operating margin rate expanded 96 basis points in the quarter, and adjusted earnings per share grew by 35.4% to $2.07. For the four-year, we delivered double-digit comp sales growth of 10.7%, and 13.1% on a two-year stack. Adjusted operating income margin rate of 9.6% was up 159 basis points, resulting in adjusted EPS of $12.02, which increased nearly 48%. Shifting to the second TSR driver we outlined last April, grow faster than the market, We've said many times that the key to this business is to ensure we have the right part in the right place at the right time to deliver on the benefits of availability, care, and speed. To build competitive advantage, we ask ourselves, how do we leverage our diversified asset base? What can advance offer that sets us apart? In terms of availability, It's about leveraging our industry-leading assortment of national and OE brands while building powerful, trusted, owned brands like Die Hard and CarQuest. When we talk about care, it's about how we provide a superior and more personalized online, in-store, and in-garage experience for customers. In terms of speed, it's about integrating digital and physical assets to serve our customers quickly through our advanced, same big suite of services. Delivering speed now includes opening new stores on the strength of an improved customer value proposition. We made progress in each of these areas in Q4, and our category sales growth was led by brakes, motor oil, and filters. Regionally, our performance was once again led by the southwest and west regions, which led our growth most of the year. In terms of channels, Professional led the way once again in Q4 with double-digit comp sales growth, with DIY Omnichannel delivering mid-single-digit comp growth. Throughout 2021, our professional customers continued to navigate significant COVID-19 labor and global supply chain challenges. As a result, our team stepped up to help them in a time of great need. This includes providing world-class training from our CarQuest Technical Training Institute by delivering virtual courses in 2021 in an innovative format that provides technicians a live, interactive learning experience. In terms of sales growth, our strategic accounts led the way in Q4. In addition, we crossed 14,000 TechNuts to close the year, and improvements made in our MyAdvance digital platform led to the highest online B2B penetration rate ever. We expanded own brands with great customer acceptance, including a significant increase in distribution of diehard batteries in pro garages throughout North America. Our car quest independence also had a very strong year. In 2021, we welcomed a record 75 new independent locations and remain excited about the continued growth of this business. Our track record of growing sales and profitability for independents continues to attract new partners to the CarQuest program. Turning to DIY Omnichannel, our success was led by the strength of DieHard. Following the launch of DieHard in mid-2020, DieHard crossed $1 billion in annual sales in 2021. Through effective marketing and PR, we ensured that consumers knew that Die Hard was back. Not only did they know Die Hard was back, consumers recently rated Die Hard as America's most trusted battery brand. Behind the success of Die Hard, we've demonstrated our ability to build brands. By strengthening the Die Hard, Advance, and CarQuest brands, we not only build customer loyalty, but we also build pricing power. In addition, we're beginning to increase diehard product offerings with diehard power tools launched in Q4 and diehard hand tools in the front half of 2022. We're also focused on leading in product innovation. As an example, we were first to market with an enhanced flooded battery in 2021, which carries an attractive four-year warranty. And yesterday, we announced the exciting news that DieHard has received formal certification from UL as the first automotive battery to achieve one of their distinguished validations. UL is a globally recognized nonprofit organization dedicated to the advancement of a safer and environmentally sustainable future. DieHard AGM batteries are now the first and only global automotive battery to receive UL validation within the circularity or closed loop or closed cycle space. This notable validation is the result of years of work between Advance and our strategic manufacturing partner, Clarios. Our disciplined execution of battery core returns along with the proprietary manufacturing process allows for continual reuse of environmentally sensitive raw materials. Simply put, this means that new Diehard batteries come from recycling old Diehard batteries, which contributes to a circular economy and environmental sustainability. Diehard is America's most trusted auto battery, and not only is it reliable, durable, and powerful, but it also stands for innovation. While we're pleased with our early success behind DieHard, we're just getting started on building and strengthening this powerful brand. We also made progress driving DIY loyalty through Speed Perks. We added new Speed Perks members throughout the year, finishing at 12.6 million while increasing loyalty and share of wallet with existing customers. To further strengthen loyalty, we recently announced a new benefit for Speed Perks members. Gas rewards. Fuel savings has been a request of Speed Perks customers and we're delivering. Partnering with Shell to help customers save at the pump while driving further brand loyalty and share of wallet. Finally, our execution in stores continues to improve and we remain focused on strengthening the customer experience and increasing net promoter score. Behind a strengthened customer value proposition, we opened 31 stores and eight WorldPAC branches in 2021 as we began to ramp market expansion. This includes our first seven stores converted in California and after some disappointing delays due to COVID-19. As you saw in our release yesterday, we expect to open an additional 125 to 150 new stores and branches in 2022. In terms of our third TSR driver, We believe our opportunity to further expand margins is unique within our space. Our Q4 operating income margin expansion was led by gross margin improvement driven by category management. This incorporates strategic pricing, own brand expansion, and strategic sourcing culminating in a disciplined execution plan. Our strategic pricing capabilities have improved considerably following the implementation of a new technology platform in 2020. Our new tools enable us to eliminate unproductive discounts and react quickly to cost increases related to inflation. We incorporated advanced analytics, competitive intelligence, price elasticity, and customer segmentation into our category plans. Increased own-brand penetration also played a meaningful role in the quarter, driving margin expansion. We transitioned tens of thousands of SKUs within undercar and engine management, with our in-stock improving throughout the quarter. Separately, we continued to transform our enterprise-wide supply chain infrastructure. We made further progress on integrating the assortment, supply chain, and technology platforms within WorldPAC and AutoPart International during Q4. By year end, we consolidated 55% of AI locations onto the WorldPAC tech stack. Getting to a single supply chain and tech stack for our pure play professional business improves customer service, drives incremental sales, and increases margins. We expect this transition to be completed by mid-year. In terms of the integration of our Advance and CarQuest supply chains, we completed the rollout of cross-banner replenishment. Our entire Advance and CarQuest network of stores are now serviced by a freight logical distribution center, which reduced our annual mileage driven from DC to store by approximately 14% in 2021. Our next big step is to get to a single warehouse management system, or WMS. As of December 21, we've transitioned 44% of our distribution center network as measured by unit volume to the new WMS. As we complete WMS in the D.C., we followed up with the implementation of our labor management system, which drives further savings through enhanced performance pay. The full run rate benefits of WMS and LMS remain on track to be realized by the end of 2023. Finally, we continue to look for ways within our supply chain to optimize and modernize our network. We're excited about the transition to our new San Bernardino and Toronto DCs that we announced last quarter. Once fully operational, San Bernardino will be the central location for supplier shipments and help facilitate rapid store and e-commerce delivery in the western United States. As we ramp the opening of this new DC, we recently announced to our team members that we'll be consolidating operations from our much older Riverside DC to this new facility. Similarly, our Toronto DC enables the consolidation of two distribution centres, one Carquest and one Woolpack, to a single and much larger facility. This will significantly improve our availability in the very large Ontario market. Shifting to SG&A, we're pleased to report that we exceeded our previously stated goal of $1.8 million in sales per store in 2021. As we move into 2022, we plan to build on this achievement behind continued improvement in sales per store, along with the disciplined execution of profit per store productivity initiatives. This includes automating tasks in stores to enable more customer-facing time and leveraging technology that integrates internal driver availability with the gig economy. In addition to improving sales and profit per store, we completed our finance ERP integration. The health of our balance sheet has improved, and we expect to realize the full run rate of savings in 2022. We'll continue to build on this integrated platform to deliver further improvements in the customer experience and reduce cost. Finally, We're building an enviable track record on team member safety. For the full year 2021, we saw a 10% reduction in our total recordable injury rate versus 2020 and our lost time injury rate reduced by 20%. Our frequency rate on both metrics is now close to one half of what it was five years ago. In summary, Advance is a very different company than we were several years ago. We've strengthened our core customer value proposition, integrated many parts of the company, enhanced our diversified asset base, and significantly improved execution. During 2021, we also conducted our first materiality assessment to sharpen our focus and prioritize our ESG agenda. We'll share additional information about the results of this assessment in our upcoming corporate sustainability report. While we're proud of our 2021 performance, we see plenty of runway in 2022 to further drive total shareholder return. As you saw in our press release yesterday, we introduced our 2022 guidance. This contemplates the continuation of our top-line growth and margin expansion initiatives, as well as the following external tailwinds. An aging vehicle population with several million vehicles entering the sweet spot as availability of new cars continues to lag historical trends. An ongoing and gradual recovery in miles driven, which has still not reached 2019 levels. And the outperformance of our professional business compared to DIY for reasons we've discussed in the past. Our guide also takes into consideration certain factors that have changed since we initially share our three-year strategic plan. This includes the acceleration of broad-based inflation across the economy and the lapping of significant stimulus dollars, both of which could negatively impact our core customer. Within our industry, inflationary pressures across commodities, wages, and transportation. Overall, we're very encouraged by the resiliency of our industry in 2021 and the momentum we're building behind the disciplined execution of our strategic plan. Jeff will now go deeper on our financials, provide an update on our fourth TSR driver, the substantial return of cash to shareholders, and discuss our 2022 guidance. Jeff? Thanks, Tom, and good morning. I'd also like to thank our team members for their dedication this past year to care for our customers and each other and deliver record results. Before I review our financial results, I also wanted to remind you 2020 included an additional week. To provide a better year-over-year comparison, the impact of this additional week has been excluded from our discussion of previous year. Please refer to our earnings release for the full impact of the additional week in 2020. In Q4, our net sales of $2.4 billion increased 8.6% compared with Q4 of 2020. Adjusted gross profit margin expanded 145 basis points to 46.8%, driven primarily by improvements in category management, led by strategic pricing, inventory-related, and own-brand expansion. This was partially offset by ongoing inflationary costs. lapping shrink benefits in Q4 2020, and unfavorable channel mix. Same skew inflation in Q4 2021 increased 5%. Additionally, despite today's inflationary environment and global supply chain pressures, we're pleased that we delivered slight supply chain leverage in Q4 and for the full year. Our Q4 adjusted SG&A was $946 million, or 39.5% of net sales. This compares to 39% of net sales in Q4 2020. Like Q3, this was primarily driven by inflationary headwinds within labor, as well as increased incentive compensation behind the record-setting results our team delivered. As expected, incremental costs associated with the opening of our California stores ahead of planned revenue continued to be a headwind to SG&A in the quarter. These headwinds were partially offset by a year-over-year decrease in COVID-19 related expenses. Our Q4 adjusted operating income was $177 million, an increase of 24.8% compared with Q4 2020. Our Q4 adjusted OI margin improved 96 basis points to 7.4%. Our adjusted diluted earnings per share of $2.07 increased 35.4% compared with Q4 2020. For the full year, our net sales were a record $11 billion and increased 10.6% compared with 2020. Our adjusted gross profit increased 14.9% and adjusted gross profit margin expanded 175 basis points. Adjusted SG&A expenses for the full year 2021 increased 11% compared with 2020. On a rate basis, adjusted SG&A deleveraged 16 basis points to 36.4% of net sales. While we reduced our COVID-19 related expenses by $28 million in 2021, we continue to prioritize the health and safety of our team members and customers. Our full year 2021 adjusted operating income increased 32.5% to $1.1 billion. On a rate basis, our adjusted OI margin expanded 159 basis points to 9.6%. In addition, we delivered record adjusted diluted earnings per share of $12.02. Our 2021 capital expenditures were $290 million. Our free cash flow for the year increased $121 million or 17.2% year over year. to $823 million driven by improved operating performance. As Tom mentioned, we completed our finance ERP implementation in 2021. We began to see some benefits in 2021, which partially contributed to the approximately 400 basis point improvement in our AP ratio year over year. We expect to begin seeing the full run rate of savings this year. To close out our discussion on our TSR drivers, we return a record $1 billion in 2021 to our shareholders through a combination of share repurchases and our quarterly cash dividend. In line with our capital allocation priorities and confidence in the continued robust cash generation of our business, our board recently approved a 50% increase to our quarterly cash dividend to $1.50 per share. This supports our stated objective of a 35 to 45% dividend payout ratio. In addition, our board also approved an additional $1 billion authorization to our existing share repurchase program, which at the end of 2021 was $545 million. We're confident in our ability to generate meaningful cash flow and committed to a balanced return of excess cash to shareholders. In consideration of the factors Tom discussed surrounding our 2022 outlook, our guidance includes net sales of $11.2 to $11.5 billion, comparable store sales of 1 to 3 percent, adjusted operating income margin of 10 to 10.2 percent, an income tax rate of 24 to 26 percent, adjusted diluted earnings per share of $13.20, to $13.75, based on our outstanding share count as of yesterday. Capital expenditures of $300 to $350 million, a minimum of $775 million in free cash flow, share repurchases of $500 to $700 million, and 125 to 150 new store and branch openings. We're encouraged that through the first four weeks of 2022, Our comp sales are running above the top end of our full year guide. Finally, our guidance for new store openings includes the California stores that were delayed last year, primarily due to permitting challenges resulting from the pandemic. This guidance includes new locations across all banners in both the U.S. and Canada, but excludes independent locations. Once again, I'd like to thank our team members for their continued dedication as we build on the momentum of our 2021 results. With that, let's open the phone lines to questions. Operator?