Advance Auto Parts Inc.

Hello and welcome to the Advance Auto Parts fourth quarter and full year 2022 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. You may now begin.

Good morning and thank you for joining us to discuss our Q4 and full year 2022 results. I'm joined by Tom Greco, President and Chief Executive Officer and Jeff Sheppard, 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 remarks today will 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, everyone. Before getting into the details of the fourth quarter, and full year 2022 results, I'd like to begin by addressing our CEO succession news announced this morning. After months of deliberation, I've informed the board that I plan to retire at the end of the year. I believe that now is the right time to begin transitioning leadership for Advance's next chapter, not only for my family and me, but for the business for two important reasons. First, We're in the final year of our three-year strategic plan and are in the process of updating our next multi-year strategy. The timing will help enable my successor to play a role as we undertake this work to ensure the long-term success of ADVANCE. Second, the timing of this leadership transition will allow ample time for me to work with the board succession committee to identify my successor. The committee will be conducting a thorough and comprehensive search that considers both internal and external candidates and facilitates a smooth transition. We're focused on finding a candidate who can ensure that we continue to deliver for customers and drive long-term shareholder value. In the meantime, I'm committed to the execution of our 23 plans to ensure Advance will continue our trajectory and capitalize on the significant opportunity ahead. With this in mind, We have a lot to cover on our call today, so let me provide the key themes you'll hear from us. First, while we're not happy with our overall results in 2022, the decisive actions we took in the latter half of the year led to improved performance in Q4, and we expect that to continue into 2023. Second, after several years of significant investments and complex transformation initiatives, and with the majority of the integration behind us, we're now able to focus more time and resources on improving execution. Third, we remain focused on our plan to drive long-term shareholder value behind our four TSR drivers. This includes leveraging our differentiated professional assets to accelerate sales and profitable growth in our largest sales channel. So let's get started. Well, 2022 was a challenging year for AAP and our overall results did not meet expectations The hard work and dedication of our team members helped us end the year on a more positive note. We delivered improved top-line results in the fourth quarter as we expanded our footprint, increased customer loyalty, and leveraged the diehard brand to gain DIY market share. We continued to execute the disciplined inventory and pricing actions we discussed last quarter. These actions contributed to stronger results, and we expect to improve parts availability throughout 2023. which we believe is the single most important driver to accelerate top-line growth. We also finished the year with expanded, adjusted operating margins and returned more than $930 million in cash back to our shareholders in the form of share buybacks and dividends. Looking at our Q4 performance, net sales increased 3.2% and comparable store sales increased 2.1%. Q4 was led by mid single digit comp sales growth in DIY Omnichannel. Our professional business was slightly positive for the quarter. As we continue to expand our footprint, our new locations are providing incremental revenue growth. In 2022, we opened 144 new stores and branches, including most of our planned California locations. Looking at our sales performance in Q4 from a category perspective, Growth was led by continued strength in batteries behind Diehard with a double-digit increase compared to Q4 last year. We also saw strength in fluids and motor oil. Regionally, the West, Florida, and Mid-Atlantic outperformed our other regions. It's important to note we gained DIY omnichannel share in the quarter based on syndicated data. In Q4, we expanded adjusted operating income margin 146 basis points Adjusted diluted earnings per share increased by 39.1%, primarily driven by the increase in operating income margin and inclusive of a benefit from the functional currency change of one of our subsidiaries outlined in our press release. For the full year, net and comp sales results increased 1.4% and 0.3% respectively. Turning to margins and profitability, adjusted operating income margin expanded 24 basis points and adjusted diluted earnings per share grew 8.5%. As we discussed throughout 2022, one of the most significant SG&A headwinds we faced was related to our California expansion. Our startup costs for these new stores were significantly above our initial expectations for the year, which Jeff will discuss further. As you know, we've gone through a complex transformation spanning several years of significant investment. With the majority of this effort behind us, we're now able to focus more resources on driving execution and operating performance, including the opportunities discussed last quarter. First, we made targeted investments to get more SKUs closer to the customer. It's important to note that in-stock rates for front-room categories were strong in the quarter, as evidenced by sales growth and DIY share gains within diehard batteries and motor oil. inventory investments were concentrated in backroom hard parts categories. As expected, we saw modest improvements in our in-stock levels and performance in Q4 across these categories. We're continuing to work in close collaboration with supplier partners to ensure our in-stock levels within these categories continue to build in Q1 and throughout the balance of the year. Second, we continue to execute our category management strategy. an important driver of gross margin expansion for us. This strategy focuses on own brand penetration, strategic pricing, and strategic sourcing. In terms of own brand penetration, we ended the year at 50.5% of mix, which increased 210 basis points compared with the prior year, behind the strength of diehard and car requests. Own brands continue to be an important differentiator for us and provide a mix of good, better, and best options. Last quarter, we also talked about plans to leverage new capabilities to make surgical price investments. Through detailed reviews of our performance, we've made targeted investments and will closely monitor and adjust pricing as needed given industry dynamics. Beyond these initiatives, I want to mention a couple of other action items we believe will add value and help drive growth in 2023. First, we remain focused on building our brands to drive distinction and pricing power. We recently launched our Die Hards Choose Die Hard, a 60-second documentary-style video campaign featuring Kirstie Ennis, a former Marine sergeant and world-renowned climber who is the embodiment of Die Hard's attributes of reliability, durability, and power. Titled The Climber, this campaign is appearing on Advance's social media pages and debuted in theaters. We're confident this campaign will continue to help build awareness of both diehard and advanced. Second, we continue to expand our customer loyalty program, Speed Perks, to increase share of wallet with DIYers. In 2022, we increased membership by nearly 1 million members and our percent of transactions grew by 100 basis points year over year. We finished 2022 with 13.6 million active members contributing to our strong DIY performance in the court and view this as a continued growth driver for our company in 2023. Third, we continue to invest in digital capabilities in both DIY and pro. On our B2C website, we improve shopability to drive higher conversion and growth. We also continue to invest in our mobile app, including homepage design with a better user dashboard for Speedfrix members and optimized placement for featured products and promotions. Within professional, we integrated the advanced pro platform into new shop management and procurement systems. This drives efficiency and ease of doing business by providing more professional customers with delivery estimates. In addition, We improved our B2B online experience, which resulted in a significant increase in digital penetration. Now let me speak to our longer-term strategy to grow our professional business, where we start from a position of strength. As we said previously, we're the only major company with a pure-play professional model behind WorldPAC. Now that Autopart International has been fully integrated into WorldPAC, we have 316 existing locations that are dedicated to serving the professional customer with significantly more hard part SKUs than a traditional retail store. We also have nearly 330 advanced hubs and super hubs, which offer a broad range of parts. These assets allow us to better serve the needs of our professional customers with a comprehensive lineup of national brands, owned brands, and OE parts focused on what the pro customers need. We're now well positioned to execute the next generation of our strategy to profitably grow our professional business by getting the right part in the right place at the right time. Ultimately, this will involve positioning our enterprise-wide assortment as close to the customer as possible, ideally under one roof, to provide consistent and reliable delivery of the entire job. As an example, in Toronto, we recently combined two distribution centers into one with our enterprise assortment located in a single building. We're pleased with the early results we are seeing in Toronto and believe a similar approach to this has the potential to provide a superior customer experience in other markets across North America. For years, WorldPak has leveraged online ordering from its customers to determine assortment and to ensure we have the right part utilized a singular demand signal to position inventory in the right place, and provided a clear window for delivery so the installer consistently gets the part at the right time. Five years ago, we had four disparate supply chain and technology platforms. However, today, our systems are much better connected and enable us to take learnings from WorldPAC and apply them across all of our pro business. Our vision here is to leverage the entirety of our enterprise assets to provide a superior customer experience within Pro as we accelerate growth and profitability. We look forward to sharing more in the next evolution of our strategy. Before I turn the call over to Jeff, let me speak briefly about how we're thinking about 2023. As the final integration and amortization costs wind down, we've made the decision to shift to GAAP results as our guidance metric. JEP will provide further rationale for this, but we're excited to see our broader integration costs coming to an end, culminating in the exhaustion of GPI amortization costs in 2025. As we begin the year, we remain cautious surrounding the macroeconomic backdrop, including the potential for ongoing pressure on low to middle income consumers. However, our 2023 guidance is underpinned by continued industry strength with the drivers of demand remaining positive. Further, we expect the strategic inventory investments we began in the second half of 2022 will help drive growth in 2023. In terms of our expectations for the year, we're guiding to growth in net income sales as well as GAAP operating income margin expansion. I'll now turn the call over to Jeff to review our Q4 and full year financials in more detail and provide our outlook for 2023. Jeff?