Release Date: May 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Professional business saw low single-digit improvements in both comp and transactions.
- Decisive actions to simplify the business, including the sale process for Worldpac and cost reductions, are underway.
- Achieved $150 million in annualized savings and reduced SG&A by $21 million year-over-year.
- Successful implementation of a new merchandising system, adding 130,000 SKUs in Q1.
- Progress in consolidating the supply chain with a unified network plan involving 14 large DCs and market hubs.
Negative Points
- Q1 performance was lower than expected, with comps down 20 basis points year-over-year.
- Gross profit margin declined by 82 basis points due to cost pressures not fully offset by price.
- Continued pressure on DIY segment, resulting in low single-digit negative comparable store sales.
- Weather and macroeconomic conditions negatively impacted sales, particularly in the Mid-Atlantic, Southeast, Texas, and Florida regions.
- Q2 is expected to be the toughest margin quarter of the year due to pricing actions taken last year and ongoing consumer uncertainty.
Q & A Highlights
Q: Can you talk about the cadence of the first 5 months that gives you comfort in your maintaining the comp guide for the year?
A: Yes. I think the cadence, I think we started out a little bit slower due to weather, but started to pick up throughout the quarter. I think Q2, we're seeing similar trends from Q1, but really expect the back half of the year we'll have more favorable compares and, some of the initiatives we're putting in place, Bret, we are expecting to see that continue to bear fruit, especially as we've seen in the Pro business coming out of Q1.
Q: The challenging outcome with DIY, how are you thinking about that segment over the course of the year? And what are going to be the key drivers that improve the performance of DIY sales from here?
A: So I think there's a macro story here, and Michael, that affects where the consumer goes. I think the U.S. consumer, the good news is there's a needs-based function for our business. And so those staples where you can't put off doing things, EG, my car won't start and needs a new battery. So we'll continue to see those kinds of plays. But there's also a tendency now for consumers to defer maintenance, if they can, as they wrestle with their checkbooks at the end of the month. I don't see anything changing that in the near term. And so I think the trend that we see continues.
Q: Is there any risk that the Worldpac sale won't close or won't be announced in the second quarter? And can you give us some sense of what your guidance might look like for this year, if you were to close the deal before the end of the year?
A: Yes. So great question, Michael, and certainly understandable that you'd want to get behind that. We don't do segment reporting, and I've used an expression in the 40 acquisitions that I've done, deal is not a deal until a deal is a deal. So when we have something to announce, we will absolutely announce it. But I'll just go to the big picture, which I think is important for everybody, just got to respect the process. So we're very happy where we are. We're in the middle of it. We believe we'll have it wrapped up before our next earnings announcement, and that's what we've got. And as soon as something is different, EG, we complete the transaction, we'll let you know, and then we'll look to Ryan to pick what remainder company looks like.
Q: Can I ask, is the decision to sell Worldpac still the decision is the right one for the business? Or is it price dependent? And then connected to that, the positive low single digits that I heard for commercial debt, I assume, does that include Worldpac?
A: Yes. So Simeon, I appreciate that. We're not going to speak about Worldpac versus the rest of the business at this time. We are in the midst of working through the process here. So we'll keep that off the table until we have something where we can't speak to them. We are happy with our Pro business. We are happy with the process and where it's at to date, and we'll be able to give you more updates as we actually affirm something up. The decision on this one is still, from a strategic standpoint, we still have the same strategy. We're focused on the blended box, and Worldpac is not necessarily tied to that decision, that' why are exploring this opportunity, and we'll continue to explore. We're happy with the where it's at right now.
Q: Can you provide any more color on the amount of margin pressure you're expecting for 2Q, just given the moving pieces out there and then help us understand the bridge to getting to better margins in the back half?
A: Yes, absolutely. So we are going to see a little bit more pressure in Q2. Some of these pricing actions we've taken are going to cycle a full quarter, and there's probably some more that we need to take to get competitive across the board. So we'll take additional pricing actions where it makes sense to be competitive in the marketplace. So we expect to see margin rate decelerate in Q2. Also we're cycling last year where price was a lever that was pulled last year in Q2. And so we're cycling that. So it's not as much about, a, we're just bringing prices down, but it's also about the comparison year-over-year.
Q: Are you thinking about what structural gross margins might look like any differently now that you're investing in price or presumably this has been part of the plan and you still have visibility to eclipsing that 42% over the near and medium term once you recapture some of the onetime costs from last year?
A: Yes. This is definitely part of the plan as we continue to investigate competitively priced, and we still are committing to our guide for the year, and we still have line of sight to that. So we're still comfortable with where we believe we'll end the year given the macro backdrop. But this is part of the plan, and we're going to invest where we can to be competitive.
Q: Can you talk a bit more about the game plan for market hub conversions? You mentioned some successful pilots. Curious what you saw that gave you confidence? And any early color you can share in terms of what you would expect in terms of lifts on the Pro or DIY customer?
A: Yes. So -- and I think you see this elsewhere in the industry. But the premise is that if you have parts closer to customers and you're more responsive, you get more orders. And so what we did is we looked at how we fit in that regard in terms of what can we get you in 30 minutes, what can we get you in 2 hours, 4 hours, same day, next day. And we found there's a significant shortfall in the number of parts that we can get you at those requisite time frames. So we said, well, how do we accelerate that? How do we be more competitive? And so what a market hub does is it pushes parts closer to the customer to where we can get it to other hubs or stores, where it would otherwise have to come from the DC. And our DC works in 2 ways. We have replenishment orders, which go to stores with some frequency. We also have developed a parts delivered quickly program for one-offs, which was expensive and time consuming.
Q: Can you speak to a competitive environment and progress you're making your up and down the street accounts? And then what are some of the key initiatives besides price? And how should we think about the cadence of acceleration as the year goes on?
A: Yes. So if you look at our 92-year history, I think throughout Advance's history, we
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
