Welcome to the Advance Auto Parts Third Quarter 2018 Conference Call. Before we begin, Elisabeth Eisleben, Vice President, 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 third quarter 2018 results. I’m joined by Tom Greco, our President and Chief Executive Officer; Jeff Shepherd, our Executive Vice President, Chief Financial Officer, Controller and Chief Accounting Officer; Bob Cushing, our Executive Vice President of Professional; and Mike Broderick, our Executive Vice President, Merchandising and Store Operations Support. Following their prepared remarks, we will turn our attention to answering your questions. Before we begin, please be advised that our comments today may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. While actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, which are described in a Risk Factors section in the company’s filings with the Securities and Exchange Commission, we maintain no duty to update forward-looking statements made. Additionally, our comments today include certain non-GAAP financial measures. We believe providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results. Please refer to our quarterly press release and accompanying financial statements issued today for additional detail regarding the forward-looking statements and reconciliations of these non-GAAP financial measures to the most comparable GAAP measures referenced in today’s call. The content of this call will be governed by the information contained in our earnings release and related financial statements. Now, let me turn the call over to Tom Greco.

Thanks, Elizabeth, and good morning. First, I’d like to thank the entire Advance team and our network of Carquest Independent for a strong quarter, characterized by progress on virtually every financial and marketplace metric. It’s because of their dedication and unrelenting focus on the customer that we were able to deliver our strongest comparable sales growth in nearly eight years, which in turn led to improved market share performance. It’s clear that our transformation actions are beginning to take hold, driving meaningful improvements in execution, enabling us to earn more business with our valued customers. In the third quarter, net sales increased by 4.3% to $2.3 billion and comp sales were up 4.6%. Our adjusted operating income margin of 8.5% increased 62 basis points compared to the prior year quarter. And our adjusted earnings per share increased 32.2% to $1.89. Year-to-date, our free cash flow was $576 million, an increase of $336 million year-over-year, as we continue to drive disciplined cash management practices throughout the organization. Our sales performance in the quarter is a testament to the hard work of our entire team, truly living our cultural belief and executing on our mission, Passion for Customers, Passion for Yes! Not only did we deliver the strongest comparable sales growth since 2010, our absolute growth in the quarter was above the industry average, driven by increased units per transaction and average ticket value. Importantly, we strengthened our customer value proposition and delivered balanced, consistent growth throughout Q3 in both our DIY omni-channel and professional businesses. From a geographic perspective, we saw improvement across all 12 regions. Our Southeast, Midwest, Appalachia, Northeast, and Mid-Atlantic regions led the way. From a category perspective, we saw increased sales across nearly every category with the strongest growth in brakes, batteries, and optics, where we delivered…

Thanks, Tom, and good morning everyone. I’m pleased to report further improvement in the execution across Advance which enabled our success in the third quarter, while building on our capabilities to ensure future success. In the third quarter, our adjusted gross profit was $1 billion, an increase of 6.3% from the prior year quarter. On a rate basis, our adjusted gross profit margin of 44.3% improved by 86 basis points from the prior year quarter. Drivers of this improvement include product mix in addition to benefits from our inventory efforts over the past several quarters. Historically, we looked at inventory at a localized level, which led to purchasing inventory in certain parts of our network despite having that inventory elsewhere in the network. This year we’ve been far more disciplined in our approach to sourcing and utilizing on-hand inventory. In addition, we saw margin benefits from continued material cost optimization efforts, which positively impacted gross margin in Q3. Consistent with prior quarters, these cost benefits were partially offset by both planned and unplanned supply chain expenses, which reduced our gross margin by 39 basis points. As expected, the two new distribution centers that opened last year raised our cost base in the quarter versus prior year and negatively impacted our margin. Additionally, we continue to see transportation and fuel cost inflation higher than the third quarter of 2017 and what was originally forecasted. In terms of tariffs, we’ve seen minimal impact related to the first two rounds that have gone into effect. Importantly, through successful actions, we’ve been able to pass cost increases through price. We remain diligent in our effort working with our supplier partners to mitigate cost increases where possible. We’re confident that in line with historical pricing trends, our industry will continue to pass along future tariffs…

[Operator Instructions] Thank you. And our first question will come from the line of Michael Lasser with UBS. Your line is open.

Good morning. Thanks a lot for taking my question. Jeff just mentioned that you are reinvesting some of the sales upside in the fourth quarter and that’s not – and that’s why your implied fourth quarter margins are where they are. Is it also due to some of the incentive comp as well and when can we expect to see a return on those investments? So just, provides us just the shape of how the margins are going to unfold for – from here because the consensus forecast for next year implies that margins take a sizable step up? Thank you.

Hey, good morning, Michael. First of all, there is a couple of factors that are going to limit the margin upside in the fourth quarter. I think we’ve talked about most of these, but the first one is higher than planned inflation in fuel and transportation. We’ve also got the cross-banner visibility which is causing a couple of which is – those are some incremental costs associated with cross-banner visibility. Eventually we’ll optimize those. You mentioned the incentive compensation. And then finally, we’re making some investments in the quarter to drive real long-term growth and margin expansion and very much in line with what we communicated previously, we’re investing in marketing and e-commerce. As you know, we launched a new campaign in the third quarter; Think Ahead. Think Advance. It’s off to a great start. We want to keep driving that messaging out there in terms of an omni-channel media campaign and we’re investing in e-commerce fulfillment and engagement. So, really marketing e-commerce is a big area. Secondly, in terms of technology, we’re beginning to implement a number of large projects to really simplify the business and integrate it and you mentioned, when we expect the return, these are pretty exciting projects, which we are very confident are going to provide a return on investment. We’re standing up work day in the first quarter, moving from multiple payroll systems to one. We kicked off our ERP to simplify our accounting processes across the company. And we’re also investing in our store network. We’re putting in a 4G network for the stores to really enable our team members to better serve the customers. So, some pretty exciting investments inside of technology and obviously once those are made, eventually they roll off and there’s a very good return on those. And then finally, we talked about Worldpac branches in the fourth quarter as well. So, in summary, we really like the top line momentum that we’re having. We’re encouraged with the fact that we’re leveraging the costs that are going to be ongoing within our P&L, be that customer service hours in the store and other costs and we’re very confident in the long-term margin opportunity we’ve talked about in the past is available. But we have to make the right investments along the way and we’ll take those costs out when we change the work and improve the efficiency throughout the organization.

And Tom, if I could just tie together some of the things you’ve said, A; you pointed out that you think the industry environment heading into next year will be favorable, and B; you’re experiencing some transitional costs this year for things like incentive comp and some of the investment, plus you’re going to experience some savings as you consolidate your distribution centers. So just directionally, next year should be back that your margin should inflect higher?

We definitely expect to expand margins next year and we’ll update you in February post our call.

Thank you so much.

Thank you. Our next question will come from the line of Bret Jordan with Jefferies. Your line is open.

Hey, good morning guys.

Good morning, Bret.

And I guess, looking at the AP to inventory, little over 72%; where do you think, now that you sort of had a little bit more time to look at it, you think you can take that number to?

Well, as we’ve said, Bret, in the past, we think over time we can get it into the low-to-mid 90%s. We’ve got a lot of upside potential there, as you’re seeing throughout the quarter and we think that’s going to continue to unlock as we solve for the inventory and looking at it at an enterprise level and really getting it to flow through as the negotiations continue with our vendors, and we get the right terms in place for the payment of the payables. That’s all beginning to unlock. It’s something that takes time. We’ve talked about lapping existing terms. We’ve talked about the existing inventory flowing through, but we’re seeing those unlock. You’re seeing it here in the first three quarters of 2018. We’re very confident that’s going to continue into the future.

Okay. And then one question on the walmart.com relationship, could you talk about the breadth of inventory that you’re going to be showing through the Walmart website? I mean obviously you’re not going to have commodity overlapping, but maybe a perspective number of SKUs that you may be offering there?

Yes, we’re not disclosing that Bret, but we’re pretty excited about the Walmart partnership. I mean, we’ve always built out our value proposition here to compete on availability, speed and convenience, trusted advice. So essentially, this gives us an opportunity to extend that value proposition to many more customers. And in terms of your direct question on the assortment piece, people can obviously go on walmart.com and view products that they can have shipped to home or potentially pickup in an Advance store and have many more fulfillment options they have today on walmart.com. So in terms of the specific assortment, we’re not breaking that out, but we’re pretty excited about the partnership and we’re working through our plans right now.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Chris Horvers with JPMorgan. Your line is open.

Thanks, good morning guys.

Good morning.

Good morning.

The EBITDA is starting to grow nicely here. I think we’re projecting over $900 million of cash at the end of the year here with the inventory and the AP to inventory. So can you talk about how you’re thinking about deploying that cash? I know you said a $100 million to $200 million here for the back half of the year. You got $120 million done. Is there an opportunity to take that buyback higher and then how do you think about long term, what are your views around unlocking the balance sheet?

Yes. Overall, our capital allocation priorities haven’t changed. We want to maintain that investment grade rating, reinvest in high quality projects in the business. Tom mentioned a few of those that we’re – we’ve already launched and we’re focusing on right now. There’s certainly more work to do there, and then returning excess cash to shareholders. So those – those haven’t changed. We’re not changing anything in terms of our buyback. We’re still in that the range of $100 million to $200 million. As we go into 2019, as Tom said, we’ll have the AOP for you in February and then we’ll talk about a little bit into the future more post that earnings call.

Understood. And then, is there – I guess as a follow-up to that, is there a certain level of sort of minimum cash that you’re targeting internally and if I look back historically, it’s sort of like – the cash is low at sort of $60 million, $60 million to $100 million. Is that a good guide as you look out to the future because it’s not like this – the base of the business has grown all that much since then?

Yes, that’s a decent guide. I think we’ve got some opportunities with the cash that we have on hand. Like I said though, we’re going to be very disciplined in how we approach this. We’ve had a very significant change in how we do our capital allocation, specifically around CapEx. Very formalized committee, we look at the role of every single project. We’re making sure we’re getting the right return for our shareholders.

Understood. And then, the last question is, maybe some early thoughts from Reuben in terms of, now that he’s had a little bit of time looking at the supply chain – looking at supply chain plans; any thoughts around sort of the assets that you hold from a buildings perspective versus the technology enablers that you need to unlock the long-term margin story?

Sure. Well, first of all, Reuben has really been an exciting addition to the team. He is bringing a completely new dimension to our thinking. not just within supply chain, but much more broadly given his substantial omni-channel experience with Walgreens, previously. I think the first priority is the one that we know is a big opportunity here, which is to dramatically improve the execution within our supply chain. And we’re talking about basic blocking and tackling here, Chris. I think we’ve made a lot of progress on the store front, improving units per transaction, scheduling on the weekend, improving our close rate. I don’t think the supply chain has come along as quickly and he certainly has jumped in with that perspective as well. So he’s very focused on improving basic execution in the supply chain. As it pertains to the longer-term supply chain agenda, he was intimately involved in that agenda and the construction of it. So he is very familiar with the DC optimization, that’s going on, the store optimization, the end market optimization. He’s very aligned with that. I think the one thing that you’ll see an elevation on is the execution metrics within the supply chain. But, no student body left or anything like that, but just an elevated focus on execution and continuing to help us think through how to take full advantage of the big asset – the significant asset base that we have and leveraging them better.

Thanks very much.

Thank you. Our next question comes from the line of Seth Sigman with Credit Suisse. Your line is open.

Thanks, good morning guys, nice quarter. My question is primarily on the gross margin. Obviously it was a little bit better than we expected and it’s ahead of the second quarter trend. You discussed some of the headwinds including supply chain, but results do seem to imply a pretty significant acceleration in some of the positive offsets. So, I’m just wondering, any more color on the components that may have driven that acceleration in those positive offsets? Thanks.

Yes, sure. Let me just kind of walk through it and just give you some color in addition to the supply chain that you mentioned and that we talked about in our prepared remarks. Yes, we did have some additional headwinds in commodities and tariffs. Now tariffs were pretty immaterial in the quarter, but just grouping those together, those were completely offset by MCO and pricing actions. So we were able to cover those inflationary headwinds through those actions. In addition, we had continued productivity efforts around shrink, defective, and slow-moving inventory; and these are really the catalyst for the improvement in our GM rate expansion. So managing the shrink, managing the effective process which is something we’ve been working on all year in addition to the slow moving, which is really the result of looking at our inventory at a more macro level. So those are the primary drivers of our gross margin expansion, and we think we can continue to build on that. And we also had positive product mix as well. So the combination of all those are really the drivers.

Okay, great. And then specifically on the supply chain side, I think you are lapping some higher cost from last year. I realize there are external pressures that may be new. But just, how are you thinking about that as you move into the fourth quarter and into 2019?

Sure. So you’re right. As it relates specifically to supply chain, we are still lapping the start-up of the Nashville and Houston distribution centers. And that was about half, actually the majority was the inflationary pressures that we just saw in transportation and fuel costs. So that was the big driver. We’re still going to see some of that start-up cost in the fourth quarter, that’s going to start to diminish here in the fourth quarter and then we should essentially fully lap it starting in 2019. So I think that’s the way you can kind of think through that.

Great, thanks very much.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Good morning. Tom, my first question, on third quarter, if you can isolate markets where maybe the weather helped more than others? Curious to get your opinion, how much of the improvement was the backdrop demand getting better versus some of the internal changes you mentioned, I think the assortment helping as well?

Sure. Well, first of all, we feel great about both the industry performance in the quarter and our competitive progress. So, if you think about the industry, we would put that number at about a 150 basis points to 200 basis points depending how you look at it, Simeon. I mean you’ve got growing GDP, reduced unemployment, and really exciting for the automotive aftermarket, you’ve got an improving year-over-year trend in terms of vehicles in the sweet spot. And as I said in my prepared remarks, that’s a trend that’s going to keep ongoing. In fact the vehicles seven years and older are expected to grow for the next five years in a row and having declined for the previous three years. So that’s a pretty big swing and bodes well for the future for the entire industry. I think, I would also attribute some of our improvement in the quarter to the geographic footprint we have. I would say we disproportionately suffered last year by having stores in the Northeast and the North Central part of the country. I think this year we disproportionately benefited. So call like zero to 50, I think somewhere around 200 basis points, you’d say is kind of industry plus geographic footprint. We improved about 400 points versus the year ago performance in 2017 on a year-to-date basis. So a 400 point improvement is compared to the industry at 200 basis points, so I would call the – our improvement around 200 points attributable to the initiatives we have out there. And that would include things like cross-banner visibility in professional and accelerating trends in our DIY business, driven by better execution in the stores and our omni-channel effort. So bottom line, we’re really pleased with the improvement in the industry. We’re excited about next year and also the competitive progress that we’re making. So both of those were factors and I think we split them about equally.

Okay. And on margins, you are making progress against the gap versus your peers. Can you assess what you think – again, what’s the biggest opportunity within the gap? Is it too many touches of product, too much fixed cost and is the – answer that you have today, is it any different than when you looked at this 1.5 years, two years ago?

Yes, it really isn’t. I mean I think, first of all, we absolutely believe we can achieve the long-term margin goals that we’ve set. We’re finalizing our strategic plan right now. We shared an update with our board recently. If you consider our margin of – 2017 of 7.3% and you compare it to our primary competitors year-end margins in 2017, we think about 60% to 70% of that absolute gap is addressable with the balance being structural. So we’ve got a couple of areas that we’re very focused on. There is four key areas. We’ve got work streams against each one of those work streams, and we’re really fine-tuning the choices that we have to make to really balance the addressable margin expansion opportunities with the equally large share growth opportunities that we have. So, very excited about our ability to drive shareholder value through a combination of topline growth, market – sorry, margin expansion, and free cash flow improvement. So, we think we can do both of those, gain share and expand margins with the balance ramp up over time.

Thanks.

Thank you. Our next question comes from the line of Scot Ciccarelli with RBC. Your line is open.

Good morning, guys, Scot Ciccarelli.

Hey, Scot.

Good, hi. Clearly you guys have made a lot of changes to the business. I’m sure there is some difficulty in trying to isolate, but it can be coincidental, Tom, that comp trends have started to improve pretty meaningfully since you rolled out cross-banner visibility. So, I was wondering if you might be able to help quantify, specifically, what the topline impact has been from cross-banner visibility. And then related to that, how much of a margin drag that has been, even though you’re trying to optimize it. Obviously it’s not optimized at this stage. Thanks.

Yes, I’ll give you a perspective on the second part of your question, then I’ll flip it over to Bob to talk about how cross-banner is impacting the topline. On the margin drag, for sure, we knew that as we roll this out, we were going to have to deliver parts to places that hadn’t been planned before and we want to make sure that we know what the implications of cross-banner are before we start turning our system inside out to start optimizing. And so we’ve got a better idea of what that looks like now, Scot, and we’re starting to look at each DMA because the impact of cross-banner varies pretty widely across the country, based on the penetration that we have, our store density, the prevalence of Worldpac, and we will absolutely optimize that overtime. So I’ll flip it over to Bob, and he can talk about how it’s impacting the topline.

Thanks. So, certainly from the cross-banner visibility in all markets, saying yes to our customers certainly with our industry-leading portfolio of brands, again, that ties right into the other technology that we’ve developed as you know, Advance Pro, what we’re seeing there, of course, this is our new B2B platform. We’re seeing higher transaction rates, higher order value, higher conversion and that’s basically the result of also not only the technology and futures benefits in there, but certainly on the cross-banner side. But we’re seeing tremendous increase from the standpoint of our customer’s adoption of it and of course, importantly, most recently, when we look at MyAdvance, the new single sign-on portal that we put out there. Again, the ease of doing business; has full access to cross-banner across all banners. So, from our vantage point, cross-banner basically is informing us on the assortment side of it and we’re building that assortment strategy down to the market by market at the store level, which is also, again, driving more cross-banner access. So, overall, we’re seeing tremendous amount of improvement and basically saying yes to our customer, day in and day out; and there’s more to come on that.

Yes, one additional – I’ll add here, Scot, that your question raises every single banner inside the Company grew in the quarter and so I think they’re all benefiting. So you think about Advance Stores, Carquest stores, Worldpac, Autopart International, our Independent’s had a great quarter. So every banner has access to cross-banner now and it’s really helping us leverage the breadth of our assortment across the enterprise.

And again, I know it’s not exact science, but is there a way to kind of put a number on the impact that it’s had?

Well, again, we spoke to about 200 points. We believe our initiatives are driving progress. We also believe our DIY omni-channel efforts are giving us incremental growth. So, we had kind of an evenly split improvement year-on-year in those – between DIY and Pro. So I mean you can do the math. I mean we’ve got a number on cross-banner, it’s a significant number, and you’re right, it has been a big impetus to our improvement. So you can do the math of the 200 basis points that’s attributable to our own performance.

Got it, thanks guys.

Thank you. Our next question comes from the line of Kate McShane with Citi. Your line is open.

Hi, thanks for taking my question. My questions go back to the supply chain as well. We just wondered if you could walk us through what you are seeing with the store rationalization, what are some of the metrics of the stores that have been closed and how much you think it’s impacting margins?

Sure. Good question, Kate. We’ve been really excited about the improvement we’re making there. We were 81 stores, right – we’re up to about 81 stores on a year-to-date basis that we’ve closed. We’re measuring very carefully that obviously the transfer of sales, I mean that’s the big question, right, we’ve got a lot of stores, I think about 400 plus that are within a 1.5 mile of each other. And when we close a store, we obviously don’t want to lose the sales, we just want to transfer the sales to one of the other Advance banners. And to the earlier question, cross-banner is helping us with that because Worldpac plays a role and obviously the other Advance and Carquest stores play a role in essentially capturing the sales that that store that was closed had previously. So, we measure the sales transfer. Obviously, the sales transfer on Professional is easier to get after than the sales transfer on DIY, although through omni-channel efforts, we can get at the DIY sales also. And then the other thing that we measure is the employees and we make sure that we are able to retain the very best parts, people that we can when we make that change. So we feel really good about the improvement we’ve made in our team. We’re seeing turnover levels stabilize. They are down significantly from where they were two years ago. So when we close a store, we don’t want to lose the key people that have a connection with our customers in that store, and we’ve done a much better job retaining those employees than we did in the past. And then the third thing is the lease obligation. We want to make sure we minimize any costs in closing down the store where there might be an outstanding lease obligation. But each of those three metrics is very positive and we feel very good about our ability to drive cash flow with this initiative over time. So those are the key things we look at.

That’s helpful. And then, if I could just ask a follow-up question, do you have – is there a way to quantify what you think that transfer rate is at this time?

Yes, we don’t break that out, but we’re definitely exceeding the levels that we had planned and we’re far above what we’d had in the past. We want to make sure that we’re looking at stores where we can actually transfer the sales. I mean if you’re talking about – think about a store that’s in rural America where we may not have a store within 10 miles of it. We’ve kind of learned from experience at closing that store, we can’t expect those sales to show up and you know for the home team. So we’re making sure that when we close a store, it is transferable and we measure the cash flow outlook for that area, not just for the store, for that area over the next several years to make sure that we’re very much cash flow positive, because as we reduce the cost in that area, less rent, less in-store costs, less inventory, all of those things, we’re still driving cash flow and that’s the metric we look at to make the decision to close or not.

Thank you.

Thank you. Our next question comes from the line of Matt McClintock with Barclays. Your line is open.

Hi, Yes, good morning everyone.

Good morning.

I have two quick ones and then I’ll let you go. The first one is just, on Walmart, can you kind of give me an idea of the customer overlap between advance.com and walmart.com for DIY. And I’m just trying to understand why a customer would shop Walmart versus Advance. Is that entirely incremental or new – new customer. Thanks.

Sure. First of all, the consumer profile for the Walmart shopper and the Advance DIY customer is extremely similar. So they are right on top of each other Matt, so that was obviously some work we had done. We looked at different alternatives with respect to building a strategic partnership where our set of skills and assets could be complementary to someone else. And with Walmart having a substantial omni-channel effort out there, the most retail traffic in the nation, all of those things boded very well. We absolutely believe there is incremental sales out there for us. You think about a 100 million people coming to that website every four weeks at Walmart. We have not disclosed how many people come to our website every four weeks but it is under a 100 million. So there is going to be some people that go to that Walmart website that have not come to the Advance website and Walmart has been a terrific partner on this. We’re going to have an Advance store-within-a-store on their website. We think it helps build our brand and awareness. And it really helps Walmart with some category expertise that we believe that together, we can drive a lot of – a lot of incremental sales with. So very excited about the partnership and very much aligned consumer lap – overlap rather, sorry.

Thanks for that Tom. And then my second question is, you did a great job of explaining the macro underpinnings – the positive macro underpinnings for the – for the industry over the next couple of years, and clearly you’ve taken market share this year, which was pretty impressive. I’m just wondering with the pull forward of some of those investments that you’re talking about, launching a new marketing campaign, et cetera, are you starting to put your foot down on the pedal in terms of being more aggressive with going after market share. Thanks.

Well, we definitely feel much better about the customer experience when they come into our store. As they say, you don’t invite somebody over for dinner at your house unless it’s all clean and in a great spot and we wanted to make sure we were executing well and I will tell you that our field team is executing better than they ever have. We had to restructure last year, as you know. WE went to two divisions and 12 regions. We’ve got a terrific group of leaders out there. They are now entering their second year. They are very disciplined in their approach to drive the business. So now, when a customer comes into our store, they’re going to have a much better experience than they had a year ago. We’re seeing that in metrics like net promoter score, in the number of times we greet our customers, all of the things that we measure on our mystery shop profile are much better. So you feel good about putting advertising on the air to invite people in. So I think that’s the difference. So to that extent, we are going to invest in our omni-channel media efforts, because we believe we’ve got a great proposition for our customers to come and visit us for.

Appreciate the color. Best of luck.

Thank you. Our next question comes from the line of Dan Wewer with Raymond James. Your line is open.

Thanks. Tom, you had mentioned there is still 400 Advance and Carquest stores that are within 1.5 mile of each other, what is your best estimate on those 400, how many can be consolidated? And then also, curious, with the decision to resume the share buybacks, how do you balance that against the opportunities to start opening new stores, particularly out West, where you probably need more stores?

Yes. Well, first of all, Dan, we definitely will continue to optimize the footprint. I mean if you – if you guys know the average sales per store that we have, if you contrast that to our primary competitors, they do a much better job on average sales per store. So part of that is, we’ve got what you just described, stores that are really competing with each other for sales and where we see that, as I mentioned earlier, we’re going to continue to optimize our footprint. As we constructed our five-year plan, we looked out over five years in every DMA in the country. And as we do that, you’re considering a whole bunch of variables, but the net of it is, when you’ve got a given market, you figure out how are you going to grow the business in that market and how are you going to optimize your cost in that market and because our footprint is somewhat varied, to your question about the West, across the country, our approach to each of these markets is going to be different. And so where we’ve got a very concentrated footprint, a lot of density, that’s where you’ll see some of the optimization efforts that you asked about and where we’ve got a lack of a footprint, which as you’ve mentioned in the west, we are much less penetrated. We’re going to take a very different approach to those markets. So we are opening Worldpac branches, as we mentioned. We’re making sure that we are going to be consistently, reliably, driving comp sales with the stores we have first and where we have markets that are demonstrating that consistently, reliably, predictably, we will look at, at some openings. But the bulk of our investment at this stage is in the – our CapEx investment is in e-commerce and in technology. And where we have opportunities to expand our footprint, we will. But I think, you see a different CapEx profile from us than you’ve seen in the past where we were opening DCs and stores throughout the country. We’ve shifted that profile and dramatically stepped up our investment on e-commerce and technology and we believe it’s paying off.

And then, just a quick question about supply chain changes going forward, not to geek out this too much, but when you look at the three facilities that you’re closing in Texas, South Carolina, and Mississippi, will the Carquest and Advance stores in those territories, base now supplied by a common facility?

Well, first of all, we’re pretty excited. Our new Chief Technology Officer has come in and really helped accelerate a lot of the tech plans that we have inside the Company. And obviously, cross-banner replenishment is a big opportunity for us. I mean we’re sitting here in Raleigh, North Carolina adjacent to a distribution center that today cannot ship to the Advance stores in this geography. Those stores actually source product from another so-called a red or Advance distribution center several hundred miles away. So, we are building the capability to cross-banner replenish and of course that’s going to take stem miles out and obviously improve the speed to get parts to our – to our stores. So that’s an active project and we expect to deliver against that sometime in the latter half of 2019.

But these three facilities that you’ve announced that you’re closing, they’re still just going be shipping to either an Advance or a Carquest banner, but not both?

Well the three facilities we’re closing are being closed. I want to make sure I understand your question.

Yeah, just curious as to which facilities are going to pick the slack?

Okay. Yes, well today, because the ones we don’t have cross-banner replenishment capability, we have to essentially point the stores at another comparable distribution center. So in the case of Gallman, Mississippi, which was an Advance DC, we had to point the stores at Houston and Nashville, which are also Advance DCs. In the future, as we optimize the DC footprint, we’ll have the ability to do a much more effective design in terms of how do we optimize the distribution center network and DC to store stem miles.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Mike Baker with Deutsche Bank. Your line is open.

Hi, can you guys hear me OK?

We can hear you, Mike. Yes.

Great. I wanted to ask you, you’ve said you have confidence in the fourth quarter that you continue the current trends. Is that in reference to the trends in the third quarter or year-to-date? And I guess even more fine, can you give us any color on how the third quarter progressed by period?

Yes, the third quarter was fairly evenly distributed, Mike. We are very excited about the way it started and we’re excited about the way it finished. So I mean it was a pretty strong quarter across the board, and again, as I mentioned in all of the banners. And we are pleased with the way Q4 has started out. So we’re obviously not giving specific numbers on the fourth quarter. We gave you a formulary number and that implies a number, but we think the sales number that we have in the fourth quarter is one we can achieve.

And to follow-up on that, you had said that the operating income or operating margin – implied operating margin guidance for the fourth quarter was prudent, in your words. Would you say that the same-store sales expectation is similarly prudent?

Yes.

Okay, I appreciate the color. Thanks.

Thank you. Our next question comes from the line of Greg Melich with MoffettNathanson. Your line is open.

Hi, thanks guys, and congrats on the quarter. I do want to follow up on the improvement, Tom, you laid it out nicely. What was the breakdown of traffic on that? In other words, if we did a 4.3% comp, was traffic positive or transaction counts. And then, I had a follow-up on the transformation actions.

Sure, Greg. So on transactions, Bob did a great job describing earlier, we saw a nice uptick in transactions on the Pro side and we also saw average ticket up on the Pro side. So a lot of the good work, Mike Broderick has been doing with the category teams, the merchant teams has really helped us on really both sides of the business, but we are seeing growth in some categories that we haven’t seen growth in for quite some time. And that is helping us on the transaction front, but both of them improved on Pro. On DIY, we measure DIY omni-channel, so we measure transactions across both e-commerce and retail. We obviously saw an improvement in our retail transactions and our online transactions continue to be up significantly. Our online business has continued to flourish. If you look back at some of the published reports on omni-channel, you’ll see that the three months ending September 30, our online traffic was up 82%, which was right at the very top of 40 retail companies. So obviously that’s translating to incremental transactions and in terms of our DIY online business. Average ticket was up pretty significantly in DIY, partly because the online business is growing faster than the retail business. But overall, we’re very pleased with both transactions and tickets in the quarter.

And so, just to make sure I clear that. For the whole company, transaction counts were up, but they were up in Pro more than in DIY. And they might have still been down a little bit, if you look at it holistically. Is that a fair?

Yes, overall up, DIY…

Right. Overall up, DIY much better than – DIY worse than Pro which really improved a lot.

That’s right, yes, DIY retail was the one.

Yes, DIY retail.

Yes, yes.

Yes, got it. Okay. And then second was on transformation costs, just because I know – thank you for continuing to break those out, it looks like they’re running around a $100 million a year, if you take out the amortization. One, just want to make sure that I’m thinking about that correctly and assuming those – you’ve mentioned that they’ll go on still for some years, should we think of this year’s transformation costs as a above trend or that $100 million a year should start to fade, and when should we expect that?

Yes. No, I think, for the year, you’re right. We gave you a range of $140 million to $180 million and we do think we’re going to come in to the low end of that range. So if you back out the amortization which is about $40 million, we would be trending at about $100 million for the year. We think over time that’s going to diminish. It’s going to take some time to do that. But we think on a year-over-year basis, we’re going to start to see reductions in that $100 million.

Got it. Thanks a lot. Good luck guys.

Thanks, Greg.

Thank you. Our next question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch. Your line is open.

Hi, this is Jason Haas on for Liz Suzuki, thank you for taking my question. I was curious if you could provide any color on how the economics of the Walmart partnership would work?

Yes, we’re not breaking that out Jason. And again, we’re pretty excited about what we’re going to be doing with Walmart. It’s a pretty unique partnership, but we’re not going to break out the economics.

Okay. And then, any color on when that would come in? I know you said the first half of 2019, but – yes, just any more color in terms of the timing on that?

Sure. It’s a phased approach. I mean this is one of those things that there is – some parts of it are easier than other and I’m not going to get into the specifics of the Gantt chart, if you will. But I can tell you that we’ll be rolling out in the first half of the year with part of what we’re going to be doing with them. Other parts of it have to be tested and validated. We have to make sure that we’re delighting the customer. The beautiful thing about the arrangement with Walmart is both of us are very focused on the customer experience and we want to make sure that our customers and the customer – Walmart’s customers are really excited about what we have to offer. So as we roll out the parts that are a little more complicated and have a little bit of complexity to them that we’re validating that that proposition is absolutely where it needs to be before we scale it. So you’ll see part of it rollout in the front half of 2019. It is a multi-year partnership, so we want to make sure, we get it right. So that’s the answer.

Great, thank you.

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.

Hi, good morning. Thanks for taking my question, nice quarter.

Thank you.

So I also wanted to ask quickly on Walmart, I mean recognizing it’s early and I know you’re not providing a lot of details this point, but any initial thoughts on pricing between what you do in your stores, on your website, and what will be done on Walmart? And then the second question, does this relationship with – that you have with Walmart now, does it at all impact your plans for your own site? I mean does it just replace your own site or is this simply an addition to what you’re already doing online?

Well, first of all, Brian, we see this as an opportunity to extend the fundamental DIY value proposition we have to more customers. And our value proposition has always been the best parts in the industry, the best assortment in the industry, speed and convenience, you think about pulling into an Advance store, you can get in and out of an Advance store, we have free services, we’ll charge your battery, we’ll change your windshield wipers for free. We have a number of speed-related and convenience-related benefits we offer to customers. And then trusted advice, I mean we’re investing in the training of our people. Bob’s really done a lot of work with Mike Broderick on the Carquest Technical Institute and how we train, not just our own team members, but our customers. So it’s an extension of that value proposition to Walmart. In terms of pricing, we control our pricing. So we’re going to offer a price, and we are able to get the sale on the Walmart – through the Walmart website, we’ll get the sale, if we don’t, we don’t. But it is an arrangement where we control our own pricing for the website. As it pertains to our own site and our own online experience, we’re doubling down on our own site. We’ve made tremendous progress. We meet literally every week on that topic and we’re strengthening every aspect of our online experience and we’re going to continue to do that aggressively. We believe it’s extremely important to the long-term success of the Company, and the fact that we partner with Walmart has – there is really no impact on the fact that – and what we’re doing with our own site other than we’re going to continue to strengthen it. And we’re going to learn from Walmart in terms of how to strengthen it better than we have in the past. So there’s no plans to slow anything down on our own website, if anything, we’re actually accelerating it.

Got it, that’s very helpful. And then, if I could just follow-up with another kind of bigger picture question. Clearly your results have accelerated a lot, that has to do with internal initiatives, which you’ve also highlighted an improving demand backdrop. Your competitors have done the same. As you look at data, as you look at the – sort of say the – I guess the buying patterns of your customers, whether they’d be DIY or commercial, is – are there signals that what’s happening now is truly a resurgence in demand or is there – is there a pent-up aspect to it, just given we had several quarters of weaker trends, whether that’d be due to weather or just some of the car park issues?

Yes, I’ll let Mike Broderick speak to that a little bit, I think that there is no question that vehicles in the sweet spot is a driver of demand. I mean we’ve stepped back and look over really the last 16 years on what are the things that correlate to demand the most? It’s GDP, well the GDPs improving, that’s great news. It’s the car park, well we expect the car park to improve. It’s vehicle miles driven, that’s been improving up above 1%. The one that has swung, to your question, is this vehicles in the sweet spot, that was declining. Now it’s starting to turn. We knew that turn was coming and it’s going to turn for the next five years in a row. We think the vehicles seven years and over, which is obviously where you have high levels of repairs, the cars are off warranty, those vehicles are going to need to be repaired and that vehicle population is going to be up 10% five years from now. So the unit growth in vehicles in the sweet spot is a significant driver of demand. Mike, do you want to add?

No that’s a – you’ve said a lot. But if you go deeper into the categories, we looked at discretionary and non-discretionary categories and they’re both up, which actually really bodes well for our industry as well as Advance Auto Parts, and that’s kind of how we focus. We want both a very balanced approach across all four channels and we’re literally looking at it by category to make sure that we’re getting our fair share of the growth.

Thank you. Nice quarter again.

Thanks.

Thanks.

Thank you. Our next question comes from the line of Chris Bottiglieri with Wolfe Research. Your line is open.

Hi, thanks for taking the question. Just hoping to dimensionalize DIY comps, I know you kind of looked at this earlier, but if we take that 100 basis point benefit seems to imply little less than half your sales, that’s two points of growth to DIY specifically. So I guess my question is, if you exclude the online sales, are the non-online DIY comp still positive at this point?

Yes.

They are? Okay, and then, is there a way to frame the online opportunity from here? I guess, putting aside the Walmart arrangement, when you lap this level of online traffic growth, do you think there’s another leg up? Like, how are you thinking about this long-term?

We definitely see a leg up Chris, I mean we’re seeing a significant growth in online and across the universe right. But within our own category, we’ve got a number that we see that the size of the category will be five years out. We feel we can continue to drive not just the ship-to-home business, but the buy online pickup and store business where we can really leverage our asset base as others are doing. So we’re really investing in online capabilities, both desktop and mobile, making sure our team members are engaged. We do compensate our team members for online business, so they’re excited about building a relationship with the customer. We’re strengthening our loyalty program, which has implications for online. So there’s a whole bunch of elements that are coming together as we build out our customer experience. But I think over 70% now, it keeps going up by the way, of the transactions that we have within DIY start with online, Okay. Whether that’s a search – a mobile search for a part or some type of search for a store or something like that and we see that continuing to go up. So it’s not just about, hey, I want somebody to buy something online. We want to strengthen the online experience overall because we also believe that that halos over to our retail in-store experience.

Got you. And then, as you think about kind of the productivity in store, how do you kind of – what are some the efforts you’re doing to maybe optimize labor as more of this, I guess, more of the transactional element shifts online?

Well, we’re obviously very focused on that. I mean, everyone is talking about wage inflation and certainly we’re seeing that across our business whether it’s in our stores or our distribution centers, for that matter. But we have, I guess, a bit of a different starting point, Chris. I think we have much more opportunity to improve. I think our field leaders have done a much better job managing full time/part time mix, which is a key driver of that cost per hour, if you will, so that’s an active project. We’ve done a lot of work on ABC costing, up and down the store in terms of what does each piece of our in-store environment, what is it costing us to do everything in there and how do we change the work, so to speak, to improve the cost profile of the store. As you see more orders coming in online in terms of DIY that obviously can save time, instead of having to engage with a customer for 10 or 15 minutes to the extent that we’ve got a very strong platform online, that gives the customer the education they need and the information they need to make decisions, some of them just want to come in and out. So, I mean we’re routinizing that buy online pickup in-store experience with our store team members, making it very easy for the customer to come in and get their part and leave. So that part – those things are natural tailwind, similarly on the professional side, as Bob builds out our MyAdvance, he talked about it earlier, more and more customer shifting to buy online off of MyAdvance our Advance Pro, now they’re no longer speaking to someone on the phone as they do – many of them do today and we’re seeing that tick up each week. So to the extent that you really build an omni-channel experience that is world-class for your customers, it actually can help you with the labor cost over time.

Makes a lot sense. Thanks for the help.

Thank you. And our next question comes from the line of Seth Basham with Wedbush Securities. Your line is open.

Thanks a lot and good morning. My first question is on e-commerce as well, you mentioned some fulfillment engagement investments that might weigh on operating margins in the fourth quarter. Can you provide a little bit more color as to what you’re investing in now relative to what you’ve done year-to-date?

Sure. I mean we want to make sure that we’re optimized their stuff and I would just tell you we’re not optimized. I mean we’re not shipping from as many buildings as we will ultimately do. We’ve got many buildings across the country. As you know, we’ve got 50 million square feet of assets. And as Reuben has come in, we’re essentially updating that fulfillment part of our agenda, how do we ship more efficiently? When we ship to home? How do we make it much more easy for the customer to access parts? And how do we make it easier for our team members to get parts on the buy online pickup at the store dimension? So, honestly, there is a lot of work to be done there and a lot of opportunity for further optimization. But right now we’re building the engagement part of it out pretty aggressively as you know and that’s driven a lot of traffic to our website. We are not going to slow down that piece of it because it’s costing us too much in the short term, because we know we can ultimately optimize those costs. It’s just a matter of some of the things that came up earlier, you know, being able to ship from more buildings, cross-banner replenishment, cross-banner visibility, all of those things will ultimately make it much more efficient for us to do what we have to do. But right now we’re focused on delighting the customer and that’s helping drive our top line.

Got it. And would you say that in terms of the pressure on operating margins in the fourth quarter from these investments, will they be higher than they’ve been in recent quarters?

I think overall they’re in line with where they were in absolute terms or not all that different. To be honest, we just have a – we have a lower top line number in the quarter and that, as a percent of sales, has an impact, right, but the absolute number is not that much. I will say that the technology investments attract OpEx right away that we’re making. When we make a CapEx investment on the technology side, it attracts OpEx right out of the gate, and that’s part of the headwind.

Fair Enough. And my follow-up question is around tariffs. Can you remind us what the mix of COGS you have exposed to the Chinese tariffs is right now and how much you expect to be able to pass along in terms of price relative to other mitigation strategies from the tariffs, particularly as we see a 25% scenario unfold?

Seth, this Mike Broderick. Good morning. We are looking at 50-50 from a direct versus non-direct. So that’s kind of the number we’re looking at and obviously what we do to mitigate starts with the customer, we actually review all four channels, both Pro, DIY, e-com and our Independents, making sure that we’re relevant, we actually then price match versus our traditional and non-traditional customers. The last thing that we do is actually put pricing to the market only if we have to.

And that 50-50 direct indirect that’s off of a percentage of COGS, total of – of what?

Yes. So, I would say that of our total COGS for the year, we’re looking at about $4.5 million.

Okay. Alright, thank you.

Thank you. Our next question comes from the line of Daniel Imbro with Stephens, Inc. Your line is open.

Yes. Thanks, good morning. Just had a few follow-ups on the e-commerce front, you guys mentioned that over half of your online sales are still picked up in the store, but ship to home is obviously growing? How do you think that trends over time? Do you think we see further shift toward ship to home or do you think longer term that the service levels in the store keep a majority of online orders being picked up in the store?

First of all, we modeled ship to home to grow faster, that’s what we expect. That said, that’s at an aggregate level. As we start to market pickup today which is – which is a great benefit for the customer, rather than having to wait a day to have something shipped home, you can get to one of our stores in literally 30 minutes and pick-up the parts. So we’re going to start to market that a little bit more, Daniel. We think our own performance can continue to improve on the buy online pickup in store, which we’re going to brand pickup today. So that whole opportunity and improving the online experience from the mobile phone right into our stores is a big opportunity for Advance. But at the industry level, we would expect ship to home to grow faster.

That’s helpful. And then, a quick follow-up on the Walmart partnership. Specifically, how do you guys think about potential inventory impacts? To my understanding, customer could pick up at an AAP store or a Walmart store, but how do you plan on stocking that inventory? Will it be stocked at a Walmart or will you have to increase inventory on hand at a DC to fulfill those orders? Thanks.

Well, we’ve obviously got a lot to learn through this arrangement with Walmart, and as I said earlier, some things are easier to do than others. So again, we’re going to make sure that we delight the customer with this. That’s very important to the Walmart team, it’s very important to us. So as we go through this, obviously pickup today, order at Advance, which is generated through the Walmart website is easier for us to manage. But keep in mind we’ve got thousands of delivery vehicles. So, our ability to essentially provide same-day service to Walmart stores, if they – the customer decides they want to pick it up at a Walmart stores, we can enable that. We just need to get that right, ensure that the operating procedures are standardized. But all of – the omni-channel experience that we’re cultivating is all centered around the customer and making it easier for the customer. So we’ve got to make sure when that customer has the experience they’re absolutely thrilled with it.

Thanks.

Thank you. I’m showing no further questions at this time. I would now like to turn the call back to Tom Greco for closing remarks.

Well, thanks again for joining us today. We’re really pleased with the traction we gained in the quarter and we’re confident in our ability to execute our strategic objectives going forward. I want to, once again, thank all of our dedicated team members and our independent partners, for their focus on operational excellence and passion for customer’s every day. We remain disciplined in our approach to ensure we’re implementing changes that enable the long-term success of Advance and deliver sustainable value and growth for our shareholders. We still have a lot of work to do and we remain focused on capturing the opportunity ahead. Before I conclude, with the celebration of Veterans Day this week, we’d like to express our sincere appreciation for all the members of our military for their service, including over 6,000 Advance team members. We’re incredibly proud of the work we’ve done at Advance in support of our veterans and we remain committed to continue support of organizations such as Building Homes for Heroes who help improve the lives of our brave service men and women throughout the country. We look forward to discussing our fourth quarter results and 2019 outlook with you in February.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.