Advance Auto Parts Inc.

Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the first quarter and provide an update on 2025 guidance. Following management's prepared remarks, we will open the line for questions. Now, let me turn over the call to our CEO, Shane O'Kelly.

Thank you, LaVesh, and good morning, everyone. I want to take a moment to express my gratitude for the hard work, unwavering commitment, and dedication of the advanced team. I am pleased to report that our team delivered better than expected first quarter results. After a challenging start to the year for the industry, we began to see demand rebound in late February, led by our pro business. For the quarter, Pro grew in the low single-digit range, including eight consecutive weeks of positive comparable sales growth in the U.S. This positive momentum in Pro has continued during the first four weeks of Q2, driven by our focus on providing exceptional customer service. In addition to better-than-expected top-line results, we also reported stronger profitability with near break-even adjusted operating margins. and we're on track to deliver positive operating margins starting with Q2. Based on our performance to date and expected progress on our initiatives for the remainder of the year, we are reaffirming our full year 2025 guidance. Ryan will provide additional details later, and I want to note that our guidance also considers the impacts of tariffs currently in effect along with our planned mitigation strategies. We believe the combination of an aging and growing vehicle fleet in the US, coupled with the relatively non discretionary nature of auto parts spending puts advanced and the industry in a favorable position to navigate through a volatile environment. We participate in a discipline industry that has always operated rationally and we would expect that to continue. In March, we reached a significant strategic milestone with the completion of our store footprint optimization program. Approximately 75% of our store footprint is now concentrated in markets where we hold the number one or number two position based on store density. We have also embarked on an ambitious new phase of store expansion aimed at further strengthening our presence in these regions to capture share in the more than 100 $50 billion total addressable market. Over the next three years, we expect to open more than 100 new stores with plans to further accelerate that pace of growth in the future. Our team is focused on implementing initiatives across the strategic pillars of merchandising, supply chain, and stores to drive improvements in operational performance. These efforts are designed to strengthen our operational capabilities while building a robust foundation to deliver sustainable, long-term profitable growth and enhanced value for our shareholders. Next, I will provide an update on each strategic pillar. Let's begin with merchandising. The team has made good progress in expanding parts availability and securing quality products at a competitive cost. Last quarter, we piloted a new assortment framework in a single designated market area, or DMA, to improve parts coverage at the store level. We created a top-down assortment plan for each store, hub, and market hub in this DMA, which led to the rebalancing of hundreds of SKUs to align the inventory to market-specific needs. The new framework is enabling us to increase coverage in prominent hard parts categories, many of which are frequently in demand by our pro customers. During Q1, we expanded this framework to 10 additional DMAs, and in the first nine weeks following the rollout, we have observed an estimated uplift of nearly 50 basis points in comparable sales growth within these DMAs. Encouragingly, we are observing increased sales in categories where additional SKUs have been introduced, while sales in categories with reduced SKUs have remained relatively stable. Looking ahead, we anticipate gradual improvement in sales as increased parts availability translates into higher transaction volume. Feedback from stores has also been positive, which has motivated us to accelerate this program. With our recent learnings, we are expediting the implementation and are now using technology to automate key processes. As a result, we plan to complete the rollout in the top 50 DMAs by the end of 2025, with 30 of the 50 markets expected to be live by August. This is faster than our prior 12 to 18 month timeline, which stretched into 2026. While this new assortment framework enables us to align SKUs to market requirements, we are also prioritizing the improvement of SKU depth across all stores. We are measuring this through our store availability KPI, which is now in the mid 90 percentage range. Notably, this KPI improved by approximately 200 basis points sequentially and compares to the low 90% range recorded last year. Strong coverage depth is enabling our store teams to sell complete assortment bundles and full application job quantities, which is critical for our customers and helps create repeatable pro business. Advance is a leading player in the industry with a 93-year legacy and a growing store footprint that currently spans more than 4,000 stores. Having the right part at the right place in our network gives us the opportunity to capture our fair share of the market. Next, let's turn to product costs. As we have indicated previously, the gap in merchandise margin is among the largest drivers of our operating margin gap compared to the industry. Over the last year, our team has partnered with vendors to conduct line reviews with the goal of securing high-quality products at a competitive cost. This work is expected to continue through mid-2025, and based on our progress thus far, we have visibility to greater than 50 basis points of annualized cost reductions that will start to flow in the second half of the year. We will continue to pursue further cost reduction efforts while also investing time to develop strategic business plans with our vendors to drive mutual revenue growth. Our customer-first approach and disciplined execution on core retail fundamentals continues to resonate with our vendor partners, giving us optimism in our ability to deliver additional future value. Next, supply chain. I want to start by acknowledging the tremendous effort of the supply chain team during Q1. This team played an integral role in successfully completing our asset optimization activity despite the complexities involved in the execution. Their work included relocating hundreds of millions of dollars of inventory across the network, rerouting replenishment routes to align with our revised store and DC footprint, and supporting the merchandising team to launch the new assortment framework in 10 markets. Importantly, they achieved this while maintaining high safety standards and smooth day-to-day operations. Having participated in multiple supply chain transformations in my career, I can attest that the team's accomplishments were no small feat. We are on track to close 12 distribution centers this year, with six completed to date. We expect to end the year with 16 DCs Mike Nygren, Making our way towards the goal of operating 12 large dcs by the end of 2026 with each averaging approximately 500,000 square feet. Mike Nygren, As we complete the consolidation of these dcs flow higher volume and optimize our inbound and outbound processes, we expect to drive incremental Labor productivity. We measure this with product lines per hour, which improved in the low single-digit percentage range during Q1 compared to last year. We are targeting continuous improvement in this metric through the development of fresh operational standards for our DCs. For example, since we started moving more volume through our large DCs, we are evaluating daily workflows, such as measuring the time to pick apart and comparing that against benchmarks to determine where our process needs to evolve. Ultimately, we are building a foundation to efficiently support over 4,000 stores through 12 large size DCs operating on a single warehouse system versus the previous model of 38 DCs of varying sizes with disparate systems. To do this successfully, we are investing resources to upgrade our operational standards to improve productivity. In conjunction with consolidating DCs, we plan to drive cost efficiency by optimizing both the routing of replenishment orders from DCs and the movement of products between hubs and stores. To achieve this, we plan to implement a new routing framework in stages throughout this year. We anticipate that the combination of improved DC labor productivity and optimized routing will begin delivering cost savings by late 2025 with a larger benefit accruing later. In May, we entered a pivotal phase in the development of our multi-echelon supply network with the opening of two greenfield market hubs in the Midwest. We now operate 21 market hubs and continue to target 10 market hub openings this year, while simultaneously building the pipeline for 2026 and 2027. We remain committed to our goal of establishing 60 market hubs by mid-2027 to strengthen our competitive position. A market hub with 75,000 to 85,000 SKUs expands same-day parts availability for a service area of about 60 to 90 stores. Based on the aggregate performance of the market hubs in operation through Q1 and the stores being serviced by these hubs, we have observed an estimated comp uplift of nearly 100 basis points in those markets. These results reinforce our confidence in the path forward, which we expect to further improve as the new assortment framework developed by the merchandising team is fully implemented across the market hubs. In our stores, the team is focused on improving service levels to drive repeatable business and gain market share. The Pro channel led the recovery in comp sales in the second half of Q1, This improvement in the pro was driven primarily by transaction growth, which we view as a leading indicator of our effort to move up the call list with pros. You may recall early this year, we revamped the compensation and incentive structures for our frontline sales team and equipped them with additional tools and resources to better serve customers. We are seeing the results of these investments in the pro channel, which makes us optimistic about the opportunity to capture additional wallet share of the pro. Our store team is focused on exceptional customer service and was able to shave off approximately 10 minutes in delivery time compared to last year. This reduction is being achieved through a combination of training enhancements, better in-stocks, and increased accountability in the field. Our goal is to consistently deliver parts within 30 to 40 minutes. Ensuring this consistency helps our pros turn their bays faster and elevates Advance's reputation as a dependable and timely provider of parts. We are encouraged by the progress thus far and are confident in the team's ability to deliver on our service commitment. To support this, we are also testing a standardized store operating structure to guide our teams on store labor scheduling and to provide an effective mechanism to allocate resources such as delivery trucks and driver hours. This test is now live in about 10% of our stores. Learnings from this test will inform our view on the standardized structure, which we expect to launch company-wide later this year. Shifting to DIY. During the second half of Q1, we saw an improvement in DIY trends, although the weekly volatility continues to remain high. Maintenance-related categories such as fluids, chemicals, and oil are performing relatively better, suggesting that DIY consumers remain cautious in their overall spending. As we look ahead, we expect the DIY environment to remain challenged due to the potential for higher broad-based consumer goods inflation impacting household budgets. Despite the sales choppiness, we are proactively addressing areas of the business that are within our control. This includes enhanced training programs for our store teams to deepen product knowledge, as well as a reallocation of key store roles to better assist customers. Our efforts to improve the in-store experience are beginning to deliver positive proof points as we are seeing an improvement in units being sold per transaction. This metric has stabilized after declining for most of last year. From a DIY communications perspective, we are also strengthening our brand message through a new marketing campaign with the theme right around the corner and ready to help. This campaign showcases Advance as a leading destination for automotive parts that offers convenience store locations, strong inventory availability, expert advice, free services, and high quality brands. I want to underscore our commitment to advancing the turnaround and ensuring accountability. We are making traction on operational improvements for the business, and I am optimistic about the opportunities ahead. Now, let me hand the call over to Ryan to discuss our financials.

Ryan? Thank you, Shane, and good morning, everyone. I would also like to thank the advanced team for their commitment to serving our customers while continuing to make meaningful strides in our turnaround efforts. For the first quarter, net sales from continuing operations were $2.6 billion, a 7% decrease compared to last year. This decline is mainly attributed to the store optimization activity completed in March. Comparable store sales declined 60 basis points during the 16-week period in Q1 and excludes locations closed during the quarter, which generated $51 million in liquidation sales. During Q1, sales started off soft, declining in the low single-digit range in the first eight weeks. Demand started to recover in late February, aided by less weather volatility, normalization of tax refunds, and consistent positive performance in our pro business. Initiatives to improve inventory in stocks and service levels for customers led to eight consecutive weeks of positive probe comps in the U.S. through the end of the quarter. Separately, Q1 also benefited by the shift in timing of Easter into our fiscal Q2, which we estimate added approximately 20 basis points to comps. In terms of channel performance, probe grew in the low single-digit range, which is an acceleration compared to Q4 and outperformed the DIY channel, which declined in the low single-digit range. Our pro comp also accelerated on a two-year basis and was positive for the third consecutive quarter. Transactions declined in the low single-digit range during Q1, with pro down only slightly. Average ticket grew in the low single-digit range and was positive in both channels. From a category perspective, we saw strength in batteries, wipers, and fluids and chemicals. Gross profit from continuing operations was $1.11 billion, or 42.9% of net sales, resulting in gross margin contraction of 50 basis points compared to last year. The year-over-year deleverage was largely driven by approximately 90 basis points of margin headwind associated with liquidation sales related to our store optimization activity. During the quarter, gross margin also benefited from favorability on capitalized warehouse costs related to a pull forward of some inventory purchases ahead of tariffs. We estimate this added approximately 80 basis points of margin and is expected to normalize during the year. Adjusted SG&A from continuing operations was $1.12 billion, or 43.2% of net sales, resulting in deleverage of 180 basis points compared to last year. A portion of the deleverage was driven by the comparison to a gain on asset sale from last year. Adjusting for this, SG&A would have deleveraged approximately 110 basis points, mainly due to higher labor-related expenses. As a result, Adjusted operating loss from continuing operations came in at $8 million, or negative 30 basis points of net sales. A healthier top-line performance helped us deliver better-than-expected operating margins, with operating losses narrowing significantly compared to last quarter. Adjusted diluted loss per share from continuing operations was 22 cents, compared with earnings per share of 33 cents in the prior year. On a GAAP basis, we reported earnings per share of $0.40 due to a net discrete tax benefit of $126 million associated with capital loss deductions following the WorldPAC transaction, which was factored into our forecast for the year. We ended the quarter with negative free cash flow of $198 million compared with negative $49 million in the prior year. Free cash flow includes approximately $90 million in cash expenses associated with the store optimization project and approximately $100 million of additional inventory investments, which was planned for later in the year to support the accelerated rollout of our store-based assortment framework that Shane referenced earlier. For fiscal 2025, we have reaffirmed the guidance established in February We remain focused on executing and tracking the progress of our strategic initiatives to develop a strong foundation for the long term. Before discussing items within the guidance, let me provide our perspective on the current tariff environment and how that is influencing our outlook for the year. We are collaborating with our vendor partners to address the challenges posed by elevated product costs and evaluating each cost driver before accepting any increases from vendors. Our approach to navigating tariffs is expected to be measured as we make tariff-related price adjustments. We will continually assess inflation and demand elasticity, and we'll monitor competitive response while executing our plan this year. Within the current tariff landscape, we are planning for a range of scenarios and feel strongly about our ability to navigate through the rising cost environment. These scenarios are in alignment with our full-year guidance, reinforcing our expectations for the balance of the year. The complexities of the current economic landscape also warrant an appropriate sensitivity to financial flexibility through the turnaround. We will continue to monitor and assess our debt capital structure with the goal of ensuring maximum financial flexibility for the business. We believe we have the right strategy rooting core retail fundamentals to achieve our financial objectives and the benefits of our strategic actions is expected to build steadily over the next three years. Next, let's discuss our expectations for this year. Starting with net sales, we expect net sales in the range of $8.4 to $8.6 billion. Comparable sales is expected to grow in the range of 50 to 150 basis points on a 52-week basis. We expect sequential improvement in comparable sales during 2025 with stronger growth in the second half supported by our focus on improving parts availability and elevated service levels. For Q2, we currently estimate flattish comparable sales growth, including the impact of the Easter shift from Q1. During the quarter, we will also fully cycle through the $100 million of price investments from last year. Net sales also include contribution from new stores planned to be open this year, and we expect the 53rd week to contribute approximately 100 to 120 million into net sales. Moving to margins. Adjusted operating income margin is expected in the range of 2 to 3%. We expect sequential progress in operating margins this year, with Q2 expected to track in line with the full year range. and further improvement expected in the second half. Gross margin is expected to be the primary driver of operating margin this year, driven by a combination of product cost savings and supply chain cost leverage, with an improvement in sales. We expect SG&A expenses to be down year over year, with margin in the range of flat to slightly down. SG&A includes the impact of annual wage inflation and other field investments offset by favorability from labor productivity and indirect cost savings. Additionally, we expect to save approximately $70 million in annual operating costs related to our store and DC optimization activity. These savings will begin in Q2 and contribute to margin favorability for the balance of the year. Moving to the other items in guidance, adjusted diluted EPS is expected in the range of $1.50 and $2.50. We expect free cash flow in the range of negative 85 to negative 25 million at the end of the year. Our guidance now includes cash expenses of approximately 150 million associated with store and DC optimization activity, which is below our prior estimate of 200 million. reflecting favorability and least disposition costs. This benefit was offset by opportunistic inventory purchases ahead of the tariff implementation earlier this year. In summary, we are pleased with our progress thus far and remain resolute in controlling the aspects of our business within our control while navigating a volatile macro environment. I will now hand the call back to Shane. Thank you.