Welcome to the Advance Auto Parts Second Quarter 2020 Conference Call. Before we begin, Elisabeth Eisleben, Senior Vice President, Communications and Investor Relations, will make a brief statement concerning forward-looking statements that will be discussed on this call. Please go ahead.

Good morning and thank you for joining us to discuss our second quarter 2020 results. I am joined by Tom Greco, our President and Chief Executive Officer and Jeff Shepherd, our 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 our remarks today may contain forward-looking statements. All statements other than statements of historical facts are forward-looking statements, including but not limited to statements regarding our initiatives, plans, projection and future performance. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information about factors that could cause actual results to differ can be found under the caption, forward-looking statements and risk factors in our most recent Annual Report on Form 10-K and subsequent filings made with the commission. Now, let me turn the call over to Tom Greco.

Good morning to everyone joining us today. Before we get to the specifics of our quarter, I want to start with an acknowledgement to our Advance team members and independent partners. They've shown incredible perseverance and support for each other and for our customers over the past few months. Never has the term essential business meant so much to us. Throughout Q2, our team members responded to the pandemic with an exemplary level of customer care. At the same time, our entire organization responded with a remarkable level of speed and agility. Every week, we hear stories from both customers and team members on how Advance has helped keep America on the road during this crisis, along with commendations on the safeguards we’ve put in place to protect them while in our stores. Our sincere thanks and appreciation goes out to every single AAP team member and Carquest Independent Partners, who delivered the strong performance we're about to review. Since the onset of COVID-19, we established three overarching priorities: First, prioritize the health and safety of our team members and customers; second, preserve cash and protect the P&L during the crisis; and third, prepare to be stronger following the crisis. At the beginning of the pandemic, we set up a team dedicated to the health and safety of our team members and customers. This cross-functional team organized daily standup calls throughout our organization, which allowed us to respond with a tremendous sense of urgency to help keep people safe and healthy. As example, we installed plexiglass care shields in our stores in a matter of weeks. We institutionalized entirely new standard operating procedures across our stores, and DC network. Our technology team enabled work remote capabilities for corporate functions and for our field team. We significantly increased communication through virtual…

Thank you, Tom, and good morning, everyone. We're certainly in an unprecedented time right now. And I truly hope that you and your families have stayed well during the past several months. Before driving into our Q2 results, I want to thank our team members for all we have accomplished over the last several months. It’s a result of their dedication that we're extremely pleased with what we delivered in the second quarter. In Q2, our adjusted gross profit was approximately $1.1 billion, which was an increase of nearly 9% compared to Q2 in the prior year. Adjusted gross profit margin improved 57 basis points year-over-year to 43.9%, driven by favorable channel mix and supply chain efficiencies. These were partially offset by inventory-related costs, due to a significant decrease in inventory, driven by an increase in customer demand. Our adjusted SG&A was approximately $818 million in Q2, nearly flat compared to Q2 2019. Adjusted SG&A as a percent of net sales improved 217 basis points compared to the prior year, primarily driven by cost controls we implemented in response to the pandemic in late Q1. These include reductions in labor costs as we leveraged store labor, while reducing medical claims. Further, we saw savings from lower delivery expenses to Pro customers in the front half of the quarter before Professional sales began to recover. Additionally, we saw favorability in travel and a reduction in insurance expenses. These costs savings were partially offset by investment in marketing expenses associated with the launch of our Advance Same Day campaign and the DieHard brand in the quarter. Import contracts related to IT solutions we have implemented since Q2 2019 were also a slight headwind in Q2. In addition, we incurred $15 million in COVID-19 expenses in the quarter, which partially offset the cost…

Thank you. [Operator Instructions] And your first question comes from the line of Michael Lasser with UBS. Please go ahead.

Good morning. Thanks a lot for taking my questions. As you look at it, how is your market share in both DIY and DIFM as you try and adjust for business mix and geographic exposure? And as part of that Tom, do you think that the customers in the DIFM segment you are levered to might be losing share within those markets?

Hey. Good morning, Michael. First of all, we absolutely gained share in the quarter. We can see from the syndicated data that inside of DIY, we gained share. And on Pro, we just look at what's been reported and we compare it to what we delivered. And we feel very confident that we gained share in DIFM also. So, you have to keep in mind that this is a pretty fragmented industry. In $150 billion segment, the big four players have $40 billion to $45 billion in sales, so roughly a third of the business. So, is it conceivable in the middle of the global pandemic that large scale players that have about a third of the business can take share from the smaller scale players that are two-thirds? I think we just showed that that's the case. Obviously, we've got capabilities that smaller players just don't have, a great online portal, omni-channel capability. We can turn on a dime and do curbside delivery or contact-free delivery, our supply chains are robust. So, we're confident that we gain share in the quarter and I think it's -- as you've been seeing, the larger players are going to be doing well in a quarter like this.

My second question is, you outlined some delays and initiatives that we're going to drive the margin inflection in 2021, but there's also some factors that are probably trending better than what you anticipated. So, as you net those out, do you believe that the magnitude and the timing of the margin expansion that you previously outlined for 2021 will be consistent with what you had previously expected, or should we, as we look out forward, start to recalibrate lower our expectations for next year? Thank you very much.

Well, obviously, there's a tremendous amount of uncertainty right now, whether it's the shape of the recovery, the impact of COVID, we've got an election coming up. So, we're still working through our upbeats, if we will, of our strategic plan, which will be a three-year plan when we discuss it later on in the year and into 2021. You're right, there's been impact to each one of the margin expansion initiatives that we have. At this point, we're not in a position to comment specifically on where we're going to be in 2021. It’s obviously very early at this stage. But, we feel very good about the progress that's being made, whether it's in sales and profit per store, where we had a very strong quarter. The team did a really, really good job managing payroll in the quarter. We're looking a little bit differently at our fleet, if you will, as we go forward, given the changes in the real estate environment and construction costs. Supply chain, we referenced in the prepared remarks, we still feel very good about our ability to expand margins through supply chain. We're rolling up in our own brand portfolio, which will drive margins and SG&A. We had a very strong quarter those initiatives are moving very well, and in fact, ahead of our expectations. So, there's puts and takes in there but I think it's a little early to speculate on 2021.

And your next question comes from the line of Seth Sigman with Credit Suisse. Please go ahead.

Good morning. This is Kieran McGrath on for Seth Sigman. Congrats on the great quarter. Two questions for me. Firstly, you discussed DIY’s trend continuing quarter-to-date. Does that tell you that stimulus was a smaller piece of the elevated DIY demand in the first half? And related, do you now think that that elevated demand is more durable than your initial expectations?

I'm sorry, Kieran. Can you repeat the first question? I'm not sure I understood everything.

Just regarding the strong quarter-to-date DIY trends -- obviously stimulus is now expired. Does that inform you that the stimulus was a smaller piece of that elevated demand in the first half? And then related, does that elevated demand now more durable in your opinion than your initial expectations?

Well, I think, the -- I guess, there's a lot of factors in there. I do think that -- we obviously benefited from stimulus and unemployment benefits but we know that in the back half we're going to get less benefit from that. That said, the strength is continued as we indicated. When you've got a challenged economy and when you have COVID and there's a number of things that work in our favor, we know we're going to have less new vehicle sales, that means an ageing fleet, that means more repairs, means more DIY work. We know that people are going to avoid mass transportation. We hear a lot about the cars is a safe place for people right now. So, they're choosing to use a personal vehicle. There's some people that are buying cars, because of that that have not used -- did not have a vehicle before, either buying a used vehicle to get around, when they had been doing nothing but ride sharing. So, that's going to help us. And the fact that people have time on their hands to do projects and spending less on travel, entertainment and those types of things, also benefits us. So, I think there are some macroeconomic factors related to the environment and to COVID that benefit us. And then, we do have a lot of confidence on our internal drivers, I mean, DieHard is launching, our field team is very, very excited about it, our marketing plans are kicking in, we're into our second year of Speed Perks. So, we believe regardless of the environment, we'll have strength in DIY in the back half.

Great. Thank you. And then secondly, regarding your category performance was that relatively broad based or was it led by maintenance and appearance? And then, what do you see in [indiscernible] category on the back of the miles driven trends that you discussed? Thank you.

Yes, sure. Good question. I mean, there is some impact on -- and the categories that really rely on miles driven. If you talk about things like brakes, to a lesser extent under car chassis, as the economy started to open back up, I mean, in the early part of the quarter, we were soft in those categories, particularly on the professional side, but we gained momentum throughout the quarter. And now, we're in the mid single digit land growth rate in those categories. So, the categories that are very reliant on miles driven, we've seen an improvement in the last couple of months. On failure, this intermittent driving that's going on obviously benefits certain categories for us, be that batteries or fuel pumps, there's others, where we're seeing very, very strong growth. AC bounced back nicely in recent weeks, it was obviously quite warm in our geography. So that came on very strong. And as you've heard from others, appearance, wash and wax, very, very strong performance, and that's also sustained. So, you've got the normal dynamics around miles driven and its relationship to the category. I don't think it as relevant -- it doesn't correlate as highly as we're seeing strength in certain categories that really aren't depending on miles driven.

And your next question comes from the line of Elizabeth Suzuki with Bank of America. Please go ahead.

Just following up on a previous question. I guess, looking at the cost reductions that were made in the quarter. And it sounds like a lot of it was labor expense that will likely come back as the sales environment is more favorable. But, at the same time, you have longer term cost savings initiatives that were delayed. So, as we think about the remainder of the year, we expect labor costs to come back, but then longer term you get the benefits of the larger initiatives over the next two, three years?

Yes, sure. Liz, this is Jeff. So, we had obviously a number of cost initiatives that we put in place at the end of the first quarter. They did start to manifest themselves obviously in the second quarter. And you hit on the main thing, payroll was a big driver; professional delivery as that segment was slower in recovering, we were able to see benefits there; and we saw benefits associated with costs we can control, like travel; and then, we saw benefits in areas like medical, because a lot of our team members are deferring elective procedures and even check-ups. So, as we look to the back half of the year, I think there's potential headwinds, there are some continued tailwinds, and then there's some that could go either way. So, as Professional recoveries, we are going to have additional Professional labor. We've got to deliver that part to the customer. And that just requires additional labor hours, driving and costs associated with that. We are going to continue to invest in our marketing in the back half. We've launched that both for DieHard as well as our Same Day. And it's something we believe in, which should obviously drive revenue. But that’s something we want to invest in. And then, the CapEx, the projects that we're starting -- that we're restarting that were paused, there's obviously OpEx related to that. And we're going to continue to make those investments. And then, obviously, the COVID cost and we're going to continue to prioritize people over profit. Having said that, we think there are some tailwinds as well. We're going to continue to control things like travel. And store payroll is another area we believe that we can continue to leverage. And we've got our labor tool that's been put in place, and we're seeing a lot of benefit from that. So, while we think there's going to be some additional labor associated on the professional side, we think we continue to control to our payroll. And then, there's a question mark with medical. Medical continued to be a tailwind, but it could also be a headwind at back half, team members are going to be more comfortable going into the doctor's office to get checkups or start to do elective procedures. So, those are sort of the costs that we're looking at in the back half. Obviously, we're still in the pandemic. There's still a lot of uncertainties, which is part of the reason why we don't have any guidance out there right now.

And your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

I wanted to start with a question on some of the DCs that you've begun to standardize. Can you talk about the sales and margin performance around those DCs or the areas in which they serve? I think, some of them may have been impacted just because of COVID and some of the Northeast, but curious since it's a building block of the transformation, how it's progressing and are you seeing real change as a stepping stone to margin?

Hey. Good morning, Simeon. Yes, for sure, out of the gate, we were really happy with what we were getting from the implementation of the new warehouse management system. The fill rates improved. The DC that we did was much more organized. The people there were trained and very excited about what was done. It was a material difference, I think, between what was there before. Obviously, the impact of COVID has been significant in -- throughout all of our DCs and in our stores. It's made it difficult to hire people. It's a challenging environment right now, if you have an infection in the DC. There's obviously things that we have to go through. We have to quarantine people. So, I think, it's a difficult time to really benchmark the success of the warehouse management system at this point. As we're starting to ramp back up and get people hired in our buildings, we just went through this yesterday. We are seeing progress and improvement on fill rates and how quickly we put things away and all of the things that go with running a DC successfully. So, the short answer is, we're highly optimistic that the warehouse management system implementation will enable a much more structured labor management system for our buildings and standardized our buildings and allow us to drive productivity. During the last several months, it was difficult to realize some of those benefits.

Okay. Thanks for that. And then, my follow-up is related to a couple initiatives in the do-it-yourself side. I think marketing was on the cusp of changing and being enhanced. And then, the DieHard battery, and I apologize if some of this was asked already, but curious where you are in these two initiatives and how you manage in this environment?

Sure. I mean, the marketing -- we repurposed from essentially a branded campaign to really lift up Advance, the name Advance, we’ve talked a lot about the low relative awareness of the Advance brands, and we remain committed to that. That said, as COVID hit, and speed and urgency of getting parts became paramount, we repurposed that advertising to the rally cry campaign that we've been running, which is Advance Same Day, and that has worked extremely well. It really drives home the speed and convenience and trusted advice that we can provide to our customers. It allows us to lift up Advance Same Day Curbside. So, if somebody wants to come into our store and just wait in their car, we can walk the battery out, install it and they don't even have to get out of their car. Advance Same Day Delivery, I think we're the only people in the industry doing that at this point, has been very successful for us. And it's driven our pickup in store business as well. So, we're happy with the way that campaign went. That said, we remain committed to driving awareness of Advance brand. In terms of DieHard, we couldn't be more excited about DieHard. I mean, we had -- we mentioned in our prepared remarks that we went out and did virtual market tours, we were in a lot of stores very quickly, we saw our execution against it. Our team members are so excited about this brand. They are -- they've lived with it their whole lives in some cases; in some cases, a team member remembers when they're five years old, and they went out and they bought their first battery, it was a DieHard battery. So, we've got a tremendous amount of energy and enthusiasm around it. The marketing plans are coming together for the fall. But we dialed the execution on this, and we created our field team. We wanted to launch it that July 4th weekend and we stuck the landing on that. The execution looks fantastic coast to coast on DieHard. So, more to come there, Simeon, but off to a great start, and we executed it well. And now, we've got to really get the pole going, so we can drive people into our stores.

And your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

So, based on the flat comp that you had in the first four weeks in the quarter, it looks like, comp side, you got kind of 10% to 11% or so in the last eight weeks of the quarter. So, Tom, when you talk about strong sales continuing so far in 3Q, does that mean we're still running at double-digit rate?

Yes. We're not going to give specific number Scot for it. But, I mean, we obviously -- we did end up running double-digit sales last couple of periods. And we've continued to see strength into the third quarter, which we feel good about. So, the category remains strong for some of the reasons I mentioned earlier. So, we feel good about it.

Got it. Okay. And then, when you talked about the 2,000 basis-point gap across some of these geographies, I'm assuming that was kind of full quarter commentary. But should we assume there's been a fairly meaningful narrowing in that performance gap in kind of July and August so far, just as consumer mobility has continued to improve? Are you still seeing the gap that lies?

Yes, good question. We are seeing it narrow. And we commented on the Northeast and Mid-Atlantic specifically where we've seen the most significant impact of COVID, and particularly on the Pro side, by the way. DIY, we're doing better there, but even there, you've got that differential that we're talking about, but it has narrowed as time’s gone on. And we are optimistic that we'll continue to narrow. It's just the people up in the Northeast and Mid-Atlantic have been just less mobile. And our overall performance up there has lagged. I mean, the center of the country was very, very strong throughout the entire quarter both on Pro and DIY. Mid-Atlantic and the Northeast challenged. West Coast, we did well on DIY. Pro was more challenged on the West Coast for us. So, that's kind of the geographic performance. But, we are seeing it narrowing, which is good for us.

And your next question from the line of Michael Montani with Evercore.

I just wanted to focus on two things. One was top-line and then a margin follow-up. So, just specifically as it relates to the top-line, I was just hoping for some extra clarification and color around the Pro side. Was that positive during the quarter? And then, anything you can share, Tom, in terms of traffic account versus ticket size for DIY and DIFM? And then, I just had margin follow-up after that.

First of all on Pro, we were down slightly in the quarter, overall. I think on ticket and traffic, very, very strong ticket performance on DIY, dollars per ticket up very strong. In terms of Pro, we measure accounts, right, Michael, on Pro, like how many accounts are we servicing. In April and into early May, that number dropped significantly, it was down 30% for a couple of weeks there as the garages were closed and some of these markets were shelter-in-place and very, very shut down. As the quarter progressed, the number of accounts we were servicing came back, back, and right up through the end of the quarter we started to approach here, the levels were still slightly negative, but were approaching year-ago levels. But our dollars per account surged. So, you're seeing some consolidation there a little bit. But overall, our pro business has recovered week-in, week-out, since this thing started and we're optimistic about that.

Okay, great. And then, just on the margin front kind of the two-parter, but one is on SG&A dollars. Jeff had some significant puts and takes there. But, if you think about the back half, can you kind of continue SG&A dollars to be more or less flattish with last year, even if the volumes remained strong, what should we think about there? And then, secondly on the gross margins firm, just wanted to see what kind of inflation you all are experiencing? And if you feel you can get it through, because as I recall, there's significant tailwinds from cycling the Speed Perks 2.0 launch, as well as supply chain leverage into 3Q that should be good for gross margin?

Yes, sure. Let me start with SG&A. As I said on a previous question, we certainly have some headwinds and we have some tailwinds. And if you kind of tick that through those, the headwinds are controllable. We have marketing, but if we need to scale it back, we can scale it back. The only thing we really can’t is COVID. I mean, we're going to spend what it takes to protect our people and protect our customers. If Pro labor doesn't continue to trend the way it has been, we're not going to have drivers in the store if there's no part to deliver. And then on the tailwind side, obviously, travel and payroll in a store, I feel really confident we can continue to leverage that. Not to mention the awareness that we're going to get from the marketing and the impact that we're going to get from DieHard that we really didn't see much in the second quarter. And then, medical, again, could go either way. In terms of gross margin, inflation was relatively low in the quarter. I think, we were right around 2%, maybe slightly under. And you're right, in the back half, there's two things we're going to be lapping. You touched on one of them, in terms of Speed Perks, and then also though, the full impact of the tariff. So, on a year-over-year basis, we should be able to see some benefit there, assuming we don’t get anything in the back half, associated with elections or anything else. So, yes, certainly some opportunity.

And your next question comes from the line of Daniel Imbro with Stephens, Inc. Please go ahead.

Hey. Good morning, guys.

Good morning.

Tom, can you update us on the status of the independent Carquest locations? Obviously they’re levered towards the DIFM market, which has underperformed. I know you added a few, but just any material change in the health of the independent landscape you're seeing, especially maybe August year-to-date, as we've seen the PPP funding kind of run out in late July, any change you're seeing out there that differentiates?

Well, first of all, it is changing. There's no question about that. But we grew in the quarter with our independents. We're really excited about that. I'd like to commend them. I mean, they did a phenomenal job amid tremendous challenges. I think, the team really banded together, the independents themselves, our field team, our pro team that supported them. We acted really fast. And a lot of our independent partners were able to just take all of the things we were doing inside of advance to keep their team members safe, leverage the PPP loans. They were able to roll out curbside delivery in conjunction with our AAP stores, which allowed them to provide essential parts and services to their communities. So, I think, more and more, we're able to move faster to enable our independents to do the things that they need to do to win in the marketplace. And that's why the Carquest program is growing. So, we feel very good about the progress that's been made there. And they had a strong quarter actually. So, we feel good about it, Daniel.

And then, Jeff, maybe one on gross margin as a follow-up. We're hearing from transportation companies, especially in truckload and LTL, rates are beginning to move a lot higher due to limited capacity. Can you remind us how much of your freight is exposed to third-party freight rates or contract rates? And then, how you're expecting that sort of maybe impact gross margin in the back half? Maybe as a follow-up to the last question on gross margin?

Yes. And we haven't broken out our third-party transportation, but we certainly do have exposure. A portion of it is third-party, a portion of it we do have internal. So, we do have exposure to it. But, we haven't seen a significant amount of inflation here in the second quarter. Doesn't mean, we won't get it in the back half. But what we've seen here in Q2, has been basically immaterial.

And your next question comes from the line of the Zach Fadem with Wells Fargo.

On the Do-it-for-Me, you mentioned performance was down slightly in this quarter. Curious if this was consistent across all the varying professional customer or commercial customer types, and whether you saw any disparities across kind of mom and pop garages or regional chains?

Well, the way we measure that Zach, is obviously we have our large strategic customers, we have our TechNet customers, we have the all other. What I can tell you is all of them have been bouncing back, as we mentioned in our most recent four-week period, which kind of is mid-June to mid-July. We were up very nicely in our professional business overall. And that really was across the board. Our strategic accounts are coming back. Our TechNet probably led the way, it did lead the way in the quarter. We added additional TechNets and our base TechNet customers perform very well in the quarter. And even the all other segment in the last four weeks, we grew. So, it was really a function of that first big change when COVID impacted the country in April when there was just people -- people closed down, and it was pretty uniform across our channels within Professional. And then, as the country began to open back up, we saw it improve. And they’ve experienced similar things to us. We looked at the geographic performance and I talked to the CEOs of these companies. We do the benchmarking. Everybody struggled in the Mid-Atlantic and the Northeast. Everybody had a huge growth rate in the center of the country. So, that's really what was going on. And I do think over time, as we said before, the large strategic accounts are going to continue to grow at an accelerated growth rate and where they have the scale, they're going to leverage that scale.

And then, on the gross margin line, again, how much of this 60 basis-point expansion would you attribute to DIY mix? And how would you quantify that relative to the impact of other factors, like LIFO and the supply chain leverage?

Yes. So, basically, in rank order, there were two major drivers to the gross margin expansion. The first actually being supply chain, we leveraged both in rate and dollars on a year-over-year basis. And then, the second item would be your -- the mix that you're referring to. And then that was offset by what we call inventory related, which was largely -- you think of it in terms of volume because we took the inventory down, so substantially, those capitalized supply chain costs worked their way through the P&L. The LFO impact for the quarter was a little over $3 million. So year-over-year, we actually saw that as a tailwind. But, it was a $3 million hit in the second quarter.

And your next question comes from the line of Bret Jordan with Jefferies. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

As you look at Duralast, at the -- sorry, DieHard with six weeks, I guess sort of history, how has the performance of the battery category been with that new brand? I mean, if you compare it to what you were doing with AutoCraft in the prior year in July, do you see anything that you can sort of measure the success with? And I guess, as you think about the DieHard brand for product expansion, are you going to keep that in battery or is that rolling out to broader categories?

Well, first of all, you've heard from others that batteries performed very well in the second quarter period for some of the reasons that we mentioned earlier, and that was fortuitous for us because obviously we're in the middle of a transition, and we wanted to sell through all of those AutoCraft batteries, but -- and that was a massive undertaking Bret for us. So, I mean, it enabled a very smooth transition. As I mentioned, every store in the country was full with DieHard in early July. We can see the share numbers, we like the share numbers a lot in batteries. And we're optimistic that DieHard is going to sustain that momentum. So, I think it's early to comment on the performance of it. But, there's no question that we are very bullish on our ability to drive market share gains in batteries in the back half of the year. And in terms of what we're going to do with the brand, more to come there. I mean, we want to be very thoughtful and deliberate about DieHard. So, you think about the big things that we're focused on there. We have to win in batteries. That's kind of job number one. We want to make sure that we're doing the job there, and not kind of moving on to something else before we've established ourselves within batteries. But beyond that, there's a lot of extension opportunities that we're discussing, but you're not going to see a lot there, over the next couple of months. I mean, right now we're focused on dialing the execution of the battery launch, marketing it flawlessly, making sure DIY consumers know that the only place they can get it is at Advance Auto Parts. And our Pro customers, we've got programs that we're launching there as well. And our team members, we want to make sure that our team members are really, really clear on the benefits and the features associated with DieHard. So, that's kind of -- the current focus is on really dialing the battery launch in the back half of the year.

Okay. And then, a quick question. You mentioned that you gained market share in the quarter. I guess, you have a feeling for where the share gains may have come from. I mean, you did comment some other online and non-traditional auto retailers deemphasize the category, or was it from smaller independents who were just sort of stressed with free care PPP funding.

Yes. I think, it's a combination of both from what we can see, Bret. There's limited information that you can see the true online performance that when we look at share of buyers or some of the growth rates that you can get surrounding the online players. We can see those games. And when we see our performance versus the market, we have to assume that some of those gains came from some smaller players also, which is not as clear to us, right. You can't see specifics there, you see us versus just the market. But I think it's a combination of both of those two.

And your next question comes from the line of Seth Basham with Wedbush Securities.

My first question is just surrounding pressure on miles driven and whether or not you’re seeing declines and failure and maintenance categories directly tied to miles driven, particularly in the regions where it has remained the weakest such as the Mid-Atlantic and Northeast. Can you provide a little bit more color there?

Yes. Honestly, Seth, on the -- it's impacted more the brakes, under car chassis categories. And again, I mentioned earlier that that was early in the quarter. So we saw -- as miles driven dropped to minus 40 and minus 50, right, it was just kind of the April numbers. And in particular, in the geographies you mentioned, we definitely saw a slowdown in brakes and to a lesser extent under car chassis. But that gained momentum as the quarter went along. And by the time we got to the end of the quarter and into the third quarter, this was largely a professional comment by the way. We were able to see that number come up and we're now growing mid-single-digits in those categories. In the failure related, particularly batteries, when you got intermittent driving, you're basically increasing the likelihood of failure. So, that has actually helped us and sales are up very strong in those categories. And we mentioned appearance and accessories, which people just have time on their hands, they're washing their own cars, they're detailing their own cars, they're not buying a new car, they're buying a used car that they want to work on and do some things. So, they're doing the things that people who have time on their hands are doing right now. So, DIY is a great time for DIY, because people have time on their hands. And they're going to do things at that time rather than just sit around the house, and get outside and do the things that people love to do. So, miles driven is normally very high correlation of performance in the category, but we're not seeing that same relationship that we've historically seen.

And then secondly, on cross-banner distribution, I know you've delayed some of the expected changes and benefits. But for DCs, where you have implemented it so far, can you provide a little bit of an update as to types of improved margin and improved performance that you're seeing?

Yes. We're right on the number in terms of the productivity we expect in the buildings that we've made the changes, Seth. So, we feel very good about that. We're continuing to roll it out. We delayed it. I mean, it was a difficult quarter. You're running through all the challenges that we were facing. Our e-commerce business surged significantly in the quarter. We had COVID incidents in our distribution centers, which caused us to have to slow it down, which we didn't want to do, but we had to. So, we're not going to realize the full benefits until the third quarter of 2021 as we indicated in our prepared remarks, which moves it back about a quarter. But, in the buildings and the stores where we've made the change, you're just taking stem miles spread out. So, it's just great stem miles savings. As fuel costs fluctuate, that's going to fluctuate. But, overall we're -- it's on track with the planned productivity respect.

Thanks a lot, and good luck.

And your next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead.

Hi. Thank you for taking my question. This is Chandni Luthra on behalf of Kate McShane. So, I’m interested in sort of thinking about COVID-related cost and you guys mentioned that you incurred $15 million of COVID costs in 2Q and part of it was one-time expenses, like plexiglass, et cetera. How should we think about this expense going forward?

Yes. It's a tough one, obviously, to predict. We're going to continue to pay whatever we need to keep our people safe. We had $16 million in the first quarter, we had $15 million in the second quarter. So, one could say that is a run rate. We did have some one-time costs. Well, we had that in the first quarter as well. So the question really becomes, is there a third quarter one-time cost, or is there a fourth quarter one-time cost, remains to be seen. Like we said in some of our comments, we put in the plexiglass, we continue with sanitation, masks, temperature taking, and then we did some support directly to our team members in the form of -- some one-time compensation. So, that’s sort of the dynamics of the first half of the year, a little bit difficult to predict what's going to happen in the second half of the year. But, we're certainly going to make sure we keep our people safe.

That is very helpful. Thank you. And if I could get a quick follow-up in terms of your inventory down slightly in the quarter, how should we think about the back half outlook for inventory? And are there any issues, in sort of sourcing in supply chain globally at this point is or everything pretty seamless right now?

Yes. In terms of sourcing, we've been very successful in working with our supplier partners across the globe, in terms of getting the SKUs that we need, we're -- we have some in-stocks that are a little bit lower in some of our lower -- slower velocity SKUs, but we intend to get that back -- back on track in the second half of the year. So, we're not anticipating any significant investments or any significant decreases in the back half as we sit here today. Again, if we get another surge, it could drive down our inventory. But right now, we're well-stocked, we're well-prepared. And we're going to keep working through that through the back of the year, as we make sure we can get the customers the parts they need.

And your next question comes from the line of David Bellinger with Wolfe Research. Please go ahead.

Hey. Good morning. And thanks for taking the question. May be just somewhat of a follow-up on the last question. Given the volatility in sales trends and a strong pick-up off the lows in late April, have you sort of come across any supply constraints, especially within the Worldpac business? Is that something we could see from the deploying more towards the later stages of the year?

We haven't, David, I mean, it's -- we've obviously are managing this daily. We get an update that's comprehensive, every Monday and every Friday, kind of lets us know where we are. It has been challenging, because there has been a significant surge in demand and you've got suppliers and manufacturers out there that are scrambling to source. But, we're well positioned. Our Worldpac team does a terrific job sourcing the parts that they get that are somewhat unique, a very long tail of OE parts and private label parts that they have, branded parts that they have. So, we haven't had anything specific that we would say we're in any way disadvantaged. I think we're actually very well-positioned versus the market.

And if I just follow-up on in terms of online. So, online growth has been significant with DIY channel. So, what do you think from a competitive standpoint now that this category seems to be gaining more traction online? Have you seen any other players get more aggressive in the states and how are you addressing it?

I mean, the big key here, David, is to make sure -- I mean, obviously, we've had some new customers come to Advance in the last several months, and we've talked a lot about that over the last few months. How do we make sure that somebody walks into our store for the first time or goes for online portal for the first time that we keep that customer? And obviously, Speed Perks is the vehicle to do that. We're very happy with the loyalty program that we have. We were very focused on that in the past 12 months. We indicated that the number of people year-on-year was up 30%. We also know that we're graduating people that were in Speed Perks to the higher tiers. We had a 24% increase in graduation rates in the quarter. So, somebody who was a club member is now a VIP or an elite. So, that tells us that that person is increasing their share of wallet with Advance, which is very, very important in this timeframe. You can't -- you don’t want us to be one and done, you want us to make it sticky. And we know that our average dollars per member is up significantly. So, that tells us we're driving share of wallets. So that's kind of how we look at it to make sure that these online purchases that they're making with us are translated into a great customer experience, whether that's online, on our app, by the way, which we launched in the quarter, or in our store. And I feel that we're making good progress there. There's a tremendous amount of runway there. We've now got that first party data, we've got an e-mail, we're able to personalize our offers. So obviously, other online players are going to do what they do. But our ability to know the category and provide the subject matter expertise and content knowledge that we have, along with the trusted advice and the speed and convenience of our stores, we feel we're well positioned to compete in that world.

And there are no further questions at this time. I will turn the call back over to Tom for closing remarks.

Well, thanks again for joining us today. And as you heard, we delivered strong results in Q2 and we're very optimistic about the second half of 2020. During this unprecedented time we’re all enduring, I'm incredibly proud of how our team has come together to serve our customers with care and speed while protecting the health and safety of all of our team members. I'm confident that the actions we're taking will allow us continue building on this positive momentum for Advance and enable meaningful top-line growth, margin expansion and significant cash flow generation. We look forward to talking to you again in November. Thanks again for your continued support and please stay safe.

This concludes today's conference call. You may now disconnect.