Advance Auto Parts Inc.

Good morning, and thank you for joining us to discuss our Q1 2023 results. I'm joined by Tom Greco, President and Chief Executive Officer, and Jeff Shepherd, 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, future performance, and leadership transition. Actual results could differ materially from those projected or implied by the forward-looking statement. 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 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. I'd like to start by thanking our entire team for their relentless focus on serving our customers. The dedication of our frontline team members has been a hallmark of the company for many years, and we're grateful for their ongoing commitment. I'll review a couple of themes today in providing an update on our performance in the first quarter and outlook for the balance of the year. First, we're putting the customer and our team members first in every decision we make. While our financial results in the first quarter were well below our expectations and there is still work to be done, our customer-focused investments in parts availability and price competitiveness resulted in improvements across key relevant performance indicators. We're executing our plan to drive continued improvement in our transactions with pro customers, highlighted by increased parts availability, sustaining competitive price targets, and improved execution across the board. Secondly, as we look to the outlook for the balance of the year, we expect the competitive environment in the pro channel to remain very challenging. As you saw in our release, we're reducing our annual guidance based on the shortfall we experienced in Q1 and our updated balance of year outlook. Additionally, we believe it's prudent to enhance financial flexibility, and we've made the difficult decision to reduce our quarterly cash dividend. We remain committed to executing against our key initiatives to drive top-line growth and improve operational performance. In terms of our top line, Q1 net sales increased 1.3%, while comparable store sales decreased 0.4%. New stores contributed to net sales growth in the quarter, inclusive of the 21 stores and branches we opened in Q1. We saw net sales growth in both DIY Omnichannel and DIFM, with DIY Omnichannel slightly outperforming DIFM, driven by a double-digit sales increase in our e-commerce business. In terms of cadence, we believe that lower tax refunds pressured our business in March. From a category perspective, motor oil and brakes led the way as a milder winter impacted cold weather category sales in some of our geographies, particularly in some of our northern geographies. On a regional basis, our sales growth was led by the West. Overall, both net and comp sales growth were below our expectations for the quarter, driven primarily by our professional business. As I mentioned, we saw improvements in the KPIs we tracked to measure parts availability. In collaboration with our vendor partners, our supply chain fill rates improved in the quarter. In terms of availability, our on-hand rates improved by approximately 50 basis points in the quarter. In terms of competitive pricing, we've talked in the past that based on our research, the most important criteria for an installer to make choices about their parts supplier starts with availability, followed by consistency of delivery and relationship. Pricing has historically been the third or fourth criteria for an installer. However, if the gap between our price and competitors becomes too wide, price becomes a bigger factor. Last year, we saw a relative price position within Pro climb to unacceptable levels as a result of changing competitive dynamics surrounding price-related investments. We've done considerable work testing different price points across categories and geographies to determine the best approach to drive increased transactions and growth in our Pro business. This work helped us refine price targets for each category relative to competition, be it a traditional competitor or wholesale distributor. As a result of improved availability, along with the investments we made within Pro to achieve competitive price targets by category, we saw improved performance in both transactions and units relative to the fourth quarter. This was more than offset by less year-over-year growth in average selling price relative to the fourth quarter. In order to sustain our targeted competitive price position in Q1, we had less price realization than planned, which put substantially higher pressure on our product margin rate. Our gross margin rate declined 162 basis points, with the single biggest shortfall versus expectations being less than planned price realization within product margin. Separately, we also experienced a mixed headwind within product margin, which Jeff will explain in more detail shortly. These two primary headwinds within gross margin more than offset the benefits we saw from both channel and own brand mix. In terms of SG&A, we incurred a headwind associated with a prior year adjustment which Jeff will discuss further. The combination of gross margin and SG&A deal leverage resulted in an operating margin decline of 339 basis points in the quarter. As we look to the back half of 2023, we're urgently focused on operational improvement. On the top line, we're continuing to drive our DIY omnichannel business behind the strength of DieHard, our Speed Perks loyalty platform, and strong growth in our e-commerce business. In terms of pro, we're focused on improving top line sales and driving gross profit dollars. This is highlighted by a back to basics approach and a heightened focus on execution across the board. The first big driver here involves further optimization of our inventory and parts availability to improve on hand rates. In some cases, we plan to sell through owned inventory at discounted rates to transition to new, higher margin alternatives. The second driver involves our plans to sustain competitive price targets to ensure we close the sale. On the margin front, we've talked about strategic sourcing within category management in the past. We're now taking a much more holistic approach, starting with the latest customer and category insights. and updating the rule of each category within our business. We then apply a very disciplined approach to determine sourcing, distribution, shelf space, pricing, and promotion. Our category management process involves the engagement of our strategic suppliers with an overarching goal of accelerating our mutual sales growth and margin expansion. We're addressing opportunities here on a category by category basis. with continued work plan balance of year and into 2024. In addition, we also executed a corporate restructuring in the first quarter, which will provide savings balance of year within SG&A. In terms of our balance of year outlook, we continue to be mindful of macroeconomic uncertainty and potential pressure on consumers. For our industry, the primary drivers of demand remain positive, including an increasing car park, an aging fleet, and a modest increase in miles driven compared with one year ago. Our overarching goal for the balance of the year remains to improve operational execution to regain top line sales momentum, particularly in the professional sales channel. Regaining our share of wallet with existing customers has been challenging. However, we're elevating our focus on parts availability, sustaining competitive price targets, and improving field execution. Jeff will cover more details surrounding our revised guidance later in the call, but given what we've experienced year-to-date, we expect that sustaining our competitive price targets by category will require higher-than-planned price investments in pro, and we've factored this into our full-year guide. Before turning the call over to Jeff, I want to talk briefly about the newly expanded role of our independent board chair, Gene Lee, and provide a quick update on the CEO search process. As you saw in our release this morning, Gene is now serving as interim executive chair and will be providing additional operational oversight and support to our management team during this time. I look forward to working with Gene and continuing to leverage his experience as we work to deliver operational improvement in the business while helping to ensure a seamless CEO transition. With respect to the CEO search, following a very thorough vetting and selection process, We've retained a leading independent search firm to assist with this work. Our succession committee is comprised of board members with significant experience in retail, automotive, industrial, and multi-unit operations. The committee is evaluating internal and external candidates and remains committed to identifying a candidate who's exceptionally fit for the role. With that, I'll now turn the call over to Jeff to review our first quarter financials in more detail and provide our outlook for the full year.

Jeff? Thanks, Tom, and good morning. I want to reiterate our gratitude for our team members and the ongoing commitment to putting our customers first while navigating a difficult quarter. In Q1, net sales of $3.4 billion increased 1.3% compared with Q1 2022, driven by new store openings. Comparable store sales decreased 0.4%. Gross profit margin was 43% compared with 44.6% in Q1 2022. In terms of gross margin, we experienced headwinds associated with targeted price investments, which were above expectations due to the current competitive landscape. It's important to point out that as we remain committed to maintaining the competitive price targets we've established and have now attained in key categories, we were unable to price to cover product costs in the quarter. Product costs were up mid-single digits compared with the prior year, which exceeded our year-over-year price realization. In addition, unfavorable product mix and increased supply chain costs also contributed to gross margin deleverage. In terms of product mix, we routinely see variations which can be influenced by several factors, including macroeconomic conditions and weather. As you know, we had a milder winter in the quarter, which impacted battery and wiper sales in Q1. This, coupled with an increase in motor oil, which carries a lower margin rate, had an unfavorable impact on product margin. While we had channel and own brand mix tailwinds, product mix headwinds more than offset these benefits. The combination of inflationary costs in our new DCs in California and Toronto as well as lower than expected sales resulted in supply chain deleverage. This more than offset productivity gains from our supply chain initiatives. SG&A in the quarter was $1.4 billion compared with $1.3 billion the previous year. As a percent of net sales, Q1 2023 was higher than planned due to the softer top line and was 40.4% compared with 38.6% in the prior year. We incurred approximately $17 million in SG&A costs in the first quarter. As a result of management's review, it was determined these amounts were paid in 2021 and 2022, but not correctly expensed in those years. We've concluded these costs were not material to prior years, and therefore, we recognize the adjustment in Q1. In addition, our SG&A deleverage was also due to inflationary headwinds associated with labor and benefit-related expenses. We incurred costs associated with new store openings, which were partially offset by a reduction in startup costs we incurred in 2022 related to our California expansion. Our Q1 operating income was $90 million, compared with $203.3 million the previous year. On a rate basis, Q1 was 2.6% compared with 6% the previous year. Diluted earnings per share was 72 cents compared with $2.26 in the previous year. Q1 capital expenditures were $85 million compared with $114 million the previous year. The year-over-year reduction was primarily attributable to the completion of certain IT-related investments from the prior year and lower new store and branch openings in Q1 2023. Free cash flow with an outflow of $468 million in the quarter, with the largest contributor being the timing of payables. As you saw in our release this morning, and as Tom mentioned, the board made the difficult decision to reduce our cash dividend to 25 cents this quarter. Given our recent performance and balance of year outlook, we believe it's prudent to retain financial flexibility. Given the factors discussed, we are updating our full year guide to include net sales of $11.2 to $11.3 billion, comparable store sales of negative one to flat, gap operating income margin of five to 5.3%, income tax rate of 24 to 25%, diluted earnings per share of $6 to $6.50, capital expenditures of $250 to $300 million, a range of 200 to 300 million in free cash flow, and 40 to 60 new store and branch openings. With that, let's open it up for questions. Operator?