Welcome to the Advance Auto Parts Fourth Quarter and Full Year 2021 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.

Good morning, and thank you for joining us to discuss our Q4 and full year 2021 results as well as our 2022 outlook that we've highlighted in our earnings release yesterday. I'm joined today 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, projections, 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 captions 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.

Thanks, Elisabeth, and good morning. We delivered a strong fourth and final quarter in what resulted in a record breaking 2021 for Advance Auto Parts. We closed the year with record top line sales, Advance’s highest annual adjusted operating income margin expansion since our first year as a public company in 2002 and record adjusted diluted earnings per share. In addition, we returned over $1 billion in cash to our shareholders through a combination of share repurchases and our quarterly cash dividend, which is also a record. Last April, we provided a strategic update focused on our long-term plans to deliver top quartile total shareholder return or TSR, and we delivered on this objective in 2021. In discussing our Q4 and full year performance, as well as our outlook for 2022, Jeff and I will reference the same four drivers of this TSR performance we outlined in that meeting. First, build an ownership culture; second, grow faster than the market; third, capitalize on our unique margin expansion opportunity; and fourth, return a substantial amount of cash to shareholders. I'd like to begin by thanking the entire Advance team and Carquest Independent for helping us build an ownership culture and delivering the strong results we're about to review. As we look back on the past two years of managing through a global pandemic, nothing has been more important to us than the health, safety and wellbeing of our team members and customers. The investments we've made enabled us to keep infection rates at AAP below the national averages. In addition, we believe that consistency of our words and actions managing through COVID-19 enabled us to build trust during a defining moment for companies. Improving organizational health has never been more important amidst a labor market where people have more choices than…

Thanks, Tom, and good morning. I'd also like to thank our team members for their dedication this past year to care for our customers and each other, and deliver record results. Before I review our financial results, I also wanted to remind you 2020 included an additional week. To provide a better year-over-year comparison, the impact of this additional week has been excluded from our discussion of previous year. Please refer to our earnings release for the full impact of the additional week in 2020. In Q4, our net sales of $2.4 billion, increased 8.6% compared to Q4 of 2020. Adjusted gross profit margin expanded 145 basis points to 46.8%, driven primarily by improvements in category management, led by strategic pricing, inventory related and own brand expansion. This was partially offset by ongoing inflationary costs, lapping shrink benefits in q4 2020, and unfavorable channel mix. Same SKU inflation in Q4 2021, increased 5%. Additionally, despite today's inflationary environment and global supply chain pressures, we're pleased that we delivered a slight supply chain leverage in Q4 and for the full year. Our Q4 adjusted SG&A was $946 million, or 39.5% of net sales. This compares to 39% of net sales in Q4 2020. Late Q3, this was primarily driven by inflationary headwinds within labor, as well as increased incentive compensation behind the record setting results our team delivered. As expected incremental costs associated with the opening of our California stores ahead of planned revenue continues to be a headwind to SG&A in the quarter. These headwinds were partially offset by a year-over-year decrease in COVID-19 related expenses. Our Q4 adjusted operating income was $177 million, an increase of 24.8% compared with Q4 2020. Our Q4 adjusted OI margin improved 96 basis points to 7.4%. Our adjusted diluted earnings per share of…

[Operator Instructions] Your first question comes from the line of Chris Horvers from JPMorgan. Your line is open.

Thanks. Good morning, everybody. Talking about your guidance, the 1% to 3% comp, that's bracketing the low-end of your 2% to 4% multi-year algo and you're flowing through 50 basis points at the low end of that two-way -- I felt it would have been like more like closer to 100 basis points. So, is there something that's changing in the environment to your competitors' pricing commentaries? Is it conservatism? Is it changing in terms of your ability to pass through inflation? So I want to get your thoughts on that.

Well, hey, good morning, Chris. First of all, give you some color on the sales guide and then Jeff can chime in a little bit on the margin piece. First of all, we're continuing to target growth above the market in ’22. Our sales guide for the year reflects an estimated lower industry growth, certainly -- versus 2021. We're going to see less growth than we saw last year. As we said in our prepared remarks, on the one hand, we see tailwinds for the industry. You've got an aging vehicle population with several million vehicles right there in the sweet spot. The new cars are very difficult to get, the availability lags historical trends. And we do expect a gradual recovery in miles-driven, which still have not reached 2019 level. At the same time, we're cognizant of potential headwinds for the industry. Following last year, which was record breaking across the board, it's difficult to predict what the ‘22 growth rates going to be this early in the year. As you know, we've seen an acceleration of broad-based inflation across the economy, which recently reached a 40-year high last week, basically. So we're also going to have less than U.S. dollars in ‘22 versus ‘21. So I'll flip it over to Jeff to talk a little bit about how that translates through to margin. Jeff?

Yeah. So just taking that, top line sales guide, in terms of our margin expansion, Chris, first of all, our margin expansion initiatives remain on track. But as we talked about in our prepared remarks, the inflation that we're seeing right now is substantially higher than when we develop that strategic plan. So in this early stage of the year, we’re mindful of the impact that this will have, not only on the industry demand, as Tom said, but also our cost base. So the cost within the P&L and the impact that inflation could have on all of those various line items in 2022. So right now, our plan is to execute our margin expansion initiatives in a disciplined manner. And then as we get further into the year, we'll have a better handle on the impact of the inflation on both industry, industry demand our consumers, as well as our cost base.

So then, as a follow up. As you think about that, 10.5% to 12.5% operating margin in 2023, is your commentary inflation more saying, hey, guys, more likely to be at the low end of that range, or is your commentary more like it's just too early in the year, let's not get ahead of ourselves, given the uncertainty that lies ahead?

Yeah, it's really the latter. We remain confident in delivering the long-term targets we provided last April. We talked about what the ‘22 guide background was. Long-term, industry and fundamentals are attractive. We're innovating and positioning AAP for long-term success. And we still have a significant TSR opportunity for us. So it's really the latter.

Thanks very much. Best of luck.

Thank you.

Your next question comes from the line of Michael Lasser from UBS. Your line is open.

Good morning. Thanks a lot for taking my question. With two of your large competitors making price investments to gain market share in the commercial sector and your comps trailing behind this peer set, how much do you need to invest in price above and beyond what you originally expected in order to sustain your market share?

Hey, good morning, Michael. Well, we've been talking about our category management initiatives for a couple of years now. And strategic pricing, along with increasing own brand penetration and strategic sourcing are key elements of this plan. So let me provide some color on how we’re thinking about our pricing strategy in a professional channel. Three things. First of all, we've been conducting a survey most of our professional customers for many years. And just to give you a data point from last year’s survey, the top three variables were availability, ease of doing business and speed of delivery, they were all ranked ahead of price. At the same time, we know competitive pricing is important and our strategy is rooted in how the Pro customer makes decisions. We incorporate an extensive assessment of competitive pricing for each of the Pro channels we compete in by category. And the reason we expanded our lower price point, higher margin owned brand portfolio was to provide more value price options for our customers. Secondly, during our Investor Day, we highlighted our approach to meeting the unique needs of different Pro customers by leveraging our diversified go-to-market asset base. This includes Advance stores, Carquest Independents and Worldpac, which as you know, is an entirely professional or pure play WD. It's important to note that Worldpac has competed with WD’s for many years and already has very competitive pricing, which informs our enterprise Pro pricing strategy. Worldpac has a different Pro model than conventional retail parts stores. And we're keenly aware of the competitive landscape within Pro, which is usually very different by category and in some cases, even by part type. Finally, we've been investing in improving the customer experience through a single parts look up, technical training, and digital assets to improve speed and visibility of delivery. We also provide customized service models where relevant. So in summary, Michael, our comprehensive approach is tailored to the unique needs of what's most important to each customer and our strategy is working. We grew double digits within Pro last year, and we continue to believe our differentiated strategy will deliver profitable growth and margin expansion.

Okay. And my follow-up question is on the inflation discussion. Jeff mentioned that part of the reason why you guided like you did for this year was because of cost inflation. Your SG&A dollars grew 9% in 2021, Advance had already been experiencing significant operating expense inflation and now you're suggesting you're mindful of that continuing into 2022? Shouldn't this be more than covered by price increases, as the industry historically has typically priced to a full margin to why would you not be able to recover the cost increases now, whereas the industry's been able to do that in the past?

Yeah, sure. Well, I think, Michael, you're right. The industry has been incredibly rational over periods of inflation. And we have been able to cover cost inflation as it relates to maintaining gross margin rate. As we talked about in our prepared remarks, and as I mentioned earlier, that we're seeing record inflation across the P&L. So it's not just product cost inflation, it's not just commodities. Just to give you a couple of data points, our two largest items on our cost base are product costs and wage inflation. And as we sit here and look at that today, we're expecting those to both be in that mid-single digit range for 2022 on top of what we've already seen in ‘21, Product cost is on the same SKU basis, as you know, but that that's fairly significant. So right now, we don't have a model that says our pricing will cover -- inflation to cover the entire P&L. We're confident that pricing, along with our other category management initiatives, will more than offset a gross margin and then our SG&A initiatives will offset that inflation down in SG&A.

Just to clarify, what does your model suggest that Advance will be a contribution from same KSKU inflation in 2022?

Mid-single digits?

Okay. All right. Thank you very much.

Your next question comes from a line of Liz Suzuki from Bank of America. Your line is open.

Great, thank you. Just a question on the DieHard brand. You're expanding into new categories? And what do you think is the ultimate total addressable market for DieHard? How many categories can you expand into and what percentage of your sales do you think that could represent?

Well, first of all, we're thrilled we crossed a billion dollars. I mean, it's not every day that build a billion dollar brand in a single year. I mean, the brand had really languished lives, as you probably know. And we're getting new customers, we're engaging younger consumers. We're seeing really improved awareness amongst all demographics with DieHard. And we've been gaining share within batteries. Had a terrific two years and we've got a lot of runway yet. So how we look at DieHard is we -- obviously the core equity, the bull's eye if you will, is an automotive battery, but as you extend out in the concentric circles around it, there are ancillary categories where we can extend the brand. And we talked about Power Tools and Hand Tools. More to come there, but we believe that DieHard brand is one that we can build out and be a very strong differentiator for us. Our Pro customers love the stocking program that we've put in place for DieHard batteries. We're continuing to build that out. So lots of room to run with DieHard and more to come on where else we can extend.

Great. And just that one quick follow up. What percentage of your sales do you estimate are for brake fix or general maintenance purposes versus more discretionary categories? And, the reason I asked is as you look at 2020 and 2021 and just the strength in DIY, a lot of which was people spending more time at home, people having stimulus dollars. How much do you think that DIY strength was bolstered by discretionary categories like accessories?

Well, first of all there's no question when people have time on their hands. They were doing more with their cars and when they're at home they basically couldn't, couldn't sit at home and watch their computer screen and Netflix all day. So, we did see a surge there. But I can tell you, the resiliency of what we saw at the height of the pandemic within DIY right up until the fourth quarter has been very encouraging for us. And we're continuing to be pleased with our DIY omnichannel business and we're going to continue to drive and grow that business. Obviously to your earlier question, DieHard plays a key role there. If we can draw people into our stores with a differentiated brands such as DieHard we can grow the DIY business. So the first part of your question, we look at the customer journey as it pertains to DIY. And they really do vary. I mean, my car won't start is the journey for batteries. My brakes are squeaking is the journey for brakes, all of them have various degrees of urgency. So we're very focused on the specific drivers of choice within each one of those journeys. And that's how we build out our business.

Great, thank you.

Your next question comes from a line of Seth Basham from Wedbush. Your line is open.

Thanks a lot. And good morning. My question is also on the inflation environment and the impact on potential demand destruction. Are you seeing any of that occur now? And I don’t know, if you built into your plan for 2022?

Well, in terms of demand specifically, Seth?

Yes, exactly.

Yeah. We haven't seen it yet and to be clear. I mean, we are not seeing trade down, we're not seeing deferred maintenance. It's just a question of -- we've got 10 and a half months of the year left. And the inflation is pretty significant across all categories, fuel prices, et cetera that that's what we're mindful of. And, as the year unfolds, we'll be in a better position to see the full impact of it. But it's really a case of making sure that we're looking at all potential outcomes for the industry for the year.

Understood. And what have you built into your comp sales plan for ’22 from that effect?

Well, our guide is to at the midpoint.

Understood, but does that include some demand destruction assumptions for the balance of the year?

I'm sorry, can you repeat that?

Does that include some pressure from demand destruction associated with the inflation that the core customer is experiencing for the balance of the year?

Yeah. Yes, it does. I mean, we're assuming coming off the year when the ACA would say the industry grew high-single digits in 2021. I mean, that's the latest information we have from Auto Care Association. We're assuming, low-single, even 1 to 2 for the industry overall. Now, given all the tailwinds that could be a very low estimate, we acknowledge that. But it's just -- it's an unusual sign. We've got an unprecedented level of inflation. We've got 10 and half months to go. So that's really the thinking.

Understood. Thank you so much.

Your next question comes from a line of Greg Melich from Evercore ISI. Your line is open.

Hi, thanks. Just want to make sure I got the guidance right. The mid-single digit inflation implies that that basically units would be down this year. And did you expect the Pro and DIY split to be similar to last year to narrow or widen?

Yeah, good question, Greg. So obviously, given the guide we are assuming DIY transactions, which is well over half of our transactions. Obviously, the dollars per transaction is lower on DIY. We expect the ally transactions to be down. That is embedded in our guide. We do expect growth in Pro transactions. So overall positive growth on transactions and average ticket in Pro transactions down in DIY. We're assuming some level of growth in DIY, however and Pro outpacing DIY for the year as really has been the case for the last couple of quarters.

Great. And then secondly, could you update us on where you are in the brand strategy? You gave a billion for DieHard. When you add in Advance and Carquest, are we 40%-50% of the mix now?

Yeah. We've said in the past Greg, we started out this journey in the high-30s, in terms of our percentage of owned brand penetration. And we've moved that up nicely. We're well into the 40s now in the most recent quarter into the higher-40s. And we still believe we have room to grow there. So we're very pleased with the strength of our owned brand. As we've said many times, it carries in general a lower price per unit, certainly in the higher hard part segment than the national branded competitors. But the quality is very good. Our return rates are much lower than they've been in the past. And our in stocks improved on all of the categories in the fourth quarter. So pleased with the owned brand penetration and relative to others, we still got opportunities there.

And then last, if we look at the guidance for the adjusted margin expansion, so just over 10%. Is that -- should that be equally between gross margin and SG&A leverage? Or how should we think about that margin expansion?

Yeah, we think we're going to grow our margins in ’22 coming both from gross margin improvement as well as SG&A improvement. The gross margin improvement is going to benefit from the things we've been talking about our category management as well as our supply chain initiatives. And SG&A is going to benefit from the strategic initiatives we outlined last April, which is to reduce SG&A costs and improve our sales and profit per store.

That's great. Good luck, guys.

Thanks, Greg.

Your next question comes from a line of Scot Ciccarelli from Truist. Your line is open.

Good morning, guys. Scot Ciccarelli. So get given the lower price points on your own brands, can you guys quantify for us the impact of the headwind to both comp and gross profit dollars from that mix shift?

Yeah, we don't break that out, Scot. But I mean, obviously it varies by product and category made absolutely as a lower price point. It is a comp sales headwind, if you sell an equivalent amount of units, obviously our goal is to accelerate the unit because as we said, we're providing a more value priced option for our customers. And that gives us a lower absolute price point for our professional customers. And as we ramp it up the unit growth should offset that. But I can also tell you that in many cases, the gross profit dollars are higher. So we're very pleased with the owned brand performance. It was a significant driver of our margin expansion in 2021. And it will be for the next couple of years.

Okay.

Just to remind everyone, it’s very significantly better. The margin rate is significantly better on those categories.

Yeah. I guess I've been under the impression that the branded products still typically generate more gross profit dollars, which is more -- hence the question.

Yeah, not necessarily.

Got it. Okay, and then switch switching gears for a second. The last time you guys enhance your Speed Perks benefits. We had some pretty notable gross margin headwinds with the new gas rewards, like is there anything we should be wary of as people start to utilize that and what appears to be a very high gas price environment?

Yeah, we're going to get back on our front foot on Speed Perks, Scot. I mean, we did through the pandemic just the level of demand that was coming into our stores was substantial. And we wanted to make sure we took care of the customers and obviously having conversations with our customers about a loyalty program. It takes time and we subjugated that. There's no financial consequences at all for gas rewards. We've engineered it in such a way that it will be a real positive candidly, for us. We think it drives share of wallet, in a time of rising gas prices as just out in California, it's almost 6 bucks a gallon. You've got a situation where consumers are getting going to be really mindful of what they're paying at the pump. And we're enthusiastic about how our team is engaged with this gas rewards program. We're going to be working really hard in the stores, signing up new members and graduating members. So this will be a nice little boost for us on DIY in 2022.

Got it. Thanks a lot.

Thank you.

Your next question comes from a line of Simeon Gutman from Morgan Stanley. Your line is open.

Hey, good morning, everyone. You mentioned that you achieve supply chain leverage this quarter. Can you talk about the puts in the takes? I think I'm sure some of your initiatives are helping it and versus labor and transport which would have been a headwind. So can you maybe tell us I guess what the headwind was, so we can quantify how good you're doing underlying lift?

Yeah, if we were just to strip out the inflation, we'd be talking about the supply chain tailwind being a much more meaningful number. Say it another way, Simeon our initiatives and supply chain are on track. I think we talked about this in the third quarter, but we completed the cross banner replenishment. We're on track with our WMS and LMS to be done by 2023. And those are providing the benefits we had anticipated. It's just -- once you factor in the inflation, although we did leverage, it was just small because of the inflation. And the labor inflation has been acute specifically in that supply chain kind of warehouse employee, the battle for that talent is just intense. And then you also see it in the areas that you pointed out transportation, fuel, what have you those all built in there as well.

Thanks. And then Tom, you clarified that the industry is expected to grow this year, do you have a range or a sense of you can tell us. And then I expect you to take -- do you expect to take market share this year?

Absolutely. We do expect to take market share. We have a model a low number Simeon, as we explained earlier for overall industry growth we make sure we're [indiscernible] and we don't get surprised by something as the year unfolds, given the unprecedented levels of inflation. But what we showed back in April was as an estimate for ‘22 to ‘23 was 2% to 4%, if you recall. And we believe it's going to be at the lower end of that for all the reasons we explained. If that is somewhat ends up being something different and the industry proves to be as resilient as it's been in the past 2009-2011 most notably where it was performing extremely well in a recessionary time, that'll be good news.

Thank you. Good luck.

Thank you.

Your next question comes from the line of Michael Baker from D.A. Davidson.

Hi, thanks guys. A couple of follow-ups. One -- well, first of all, let me ask about the hiring and the labor situation. Is that as bad as it was? Is it getting worse? Is it getting any better now that some employment benefits have rolled off? Any sort of end in sight in terms of that pressure point?

Yeah. Good question, Michael. I mean, we are really happy that we're starting to go the other way. In both the distribution centers and the stores, we measure turnover very, very closely. The stores did not jump up as much. I mean our unique stock ownership program, where we've invested over $60 million in our frontline team members over the past couple of years has helped us there. We've been able to retain our general managers, our commercial parts pros, et cetera. And then in the supply chain in the DC, it peaked really around the third quarter of last year in the summer and started to come back down. It's still not back to where it was pre-pandemic, I can tell you that, in the DCs. But we are coming back down. And as you said, the applicant pool is starting to open up. People have fewer options, and we're -- we've obviously had to invest in compensation in our supply chain, but that's -- much of that is behind us at this stage. And we've got plans this year to see that turnover continue to come down in both the stores and in the DCs.

Okay. Thanks. That's good news. Also, I want to follow up on the pricing question and really to Mike Lasser's question earlier. The way I interpret your comments is, some of your competitors, including O'Reilly last week, had a pretty -- I thought a pretty interesting announcement. You're saying no change in your strategy. You're happy with where your pricing is because you compete with the private label, that sort of is your answer to them, and AutoZone reducing prices. Is that the right way to think about it?

Absolutely. We're incredibly focused on the pro customer and the competitive environment within the Pro customer. We look at it every week. We look at our price comparison across the market. I'm sure our peers do the very same thing. So we're very familiar with the broader competitive landscape. I mean, the wholesale distributors, the specialty players, the -- and they're a big factor in large urban markets. Worldpac has competed with them for 20 years plus. So we know that there are pure plays out there that have lower prices on very specific products. And we organize our enterprise pricing strategy around that. So no change in our pricing strategy going forward.

One more quick one, if I could, sorry, is -- can you talk about the private label penetration within the Pro business versus the DIY business? I know in the past, maybe Pros didn't like private label as much, but it sounds like DieHard is being well accepted by the pro customer. Can you sort of flesh that out a little bit?

Sure. I mean, well, DieHard and Carquest. I mean, Carquest is a powerful brand in the professional sales channel. Carquest Brakes is a leader in the professional channel. They're high quality. Our customers request them. And as we extend, Michael into engine management, undercar, some of these other categories, Carquest is being very well received. So in part, because it doesn't have a brand name on the front door of a retail store. So that's part of the reason why. But it's equally powerful there. If you've got a high-quality owned brand product that carries -- that's good value for our customer and you can get it to them quickly, they're going to be very supportive. But just to reinforce, national brands play a key role in our portfolio also, and we're partnering very closely with our national brand suppliers to make sure that we're lifting up their brands at the same time.

Makes perfect sense. Thank you for color.

Your next question comes from the line of Kathleen Brenneck from Goldman Sachs. Your line is open.

Hi. It's actually Kate McShane from Goldman Sachs. I just wondered if we could just go back to your comment on the quarter-to-date running above the 3% or the high end of your full year guidance. Can you talk a little bit about what's the primary driver of your outperformance? And what kind of comp we're facing quarter-to-date versus last year?

Sure. Good morning, Kate. Well, first of all, it's always interesting the way the big seasons kind of straddle quarters, right? The spring selling season straddles Q1 and Q2. The middle of the winter straddles Q4 and Q1. We have a very large presence in the Northeast. I think, obviously you know that. It was a pretty mild December in the Northeast. It got cold in the first period of the year. So that swings business out of the fourth quarter and into the first quarter for us. The West was really cold in December. We had very strong growth in the West and the Southwest in December, not so much in the Northeast. So I mean, what we've seen so far, we're very pleased. We like the fact that we've had a pretty harsh winter so far across the country. That should be good for us. In the second quarter also, we've had a lot of snow. We love those big, heavy machines, tearing up the roads up in New York and Detroit, and up in those markets where we're in. So hopefully, that creates a strong tailwind for us in the second quarter. So it really is -- there's been favorable weather in the first quarter. And as you talk about the compares, we're starting to look at 3-year stack, obviously. I mean, the 2-year stack will become officially irrelevant by the second quarter, right? So we'll start to look at 3-year stack, and the 3-year stack looks good on a year-to-date basis.

Thank you.

Thank you.

Your next question comes from the line of Zach Fadem from Wells Fargo. Your line is open.

Hey. Good morning. Tom, do you think elasticity in the industry has changed at all for the do-it-for-me customer? And given the importance of service and availability, why do you think peers are having -- or seeing success lowering price? And to what extent do you even view pricing a needle mover when you go head-to-head with peers and WDs?

Well, I mean, as we said earlier Zach, there are other variables that are more important to our pro customers. And I speak to them all the time, whether that's the CEOs of the company or in the garages themselves. And when you have the part and you're able to get it to the customer quickly, that's by far the most important variable. Now there are certain categories where the time to repair is longer. There are pure play operators in markets who specialize in something like AC as an example or radiators. When you have those types of jobs, price becomes more of a factor. And we're very aware of that. Those are not new dynamics. Those dynamics have existed for a long time, and we obviously compete in that environment. So it's really a question of, in our case, we're focused on what's important to the customer and improving our fundamental value proposition. And we're going to drive top-line growth, but it's also vitally important for us to ensure that, that growth is profitable and that results in big earnings growth. And we put up 48% earnings per share growth last year. We want that to translate into cash generation that we can return that money back to our shareholders. So our focus is to make sure that we are driving profitable growth, and that's what you're going to see us do. The competitive environment is clearly something we pay attention to, but we're very thoughtful about how we approach it.

Got it. And for Jeff, what are you assuming for LIFO this year? And as we bridge the gap your big-picture 2022 outlook to your 2023 margin guide of 10.5% to 12.5%, do you still expect equal parts expansion in both '22 and '23 in each year? Or should we contemplate a step-up in '23 as we move past some of the '22 headwinds like inflation?

Yeah. So starting with the LIFO question, we certainly think it's going to be a sizable this year. Early estimates to be -- I think we finished this year at $122 million. We're estimating -- '20 -- I'm sorry, last year $122 million; this year, as much as $100 million. What's important to know on that is the LIFO cost that we experienced last year are beginning to manifest themselves in the P&L this year. So we're starting to see that, and that's already built into our model for '22. As we move into '23, we know some of that will move into that year. But having said that, we're very confident in our margin expansion initiatives. And we think we can continue to grow both in gross margin and in SG&A in '23 as we get into that 10.5% to 12.5%.

Got it. Thanks for the time today.

Thanks.

Your next question comes from the line of Daniel Imbro from Stephens. Your line is open.

Yeah. Hey, good morning, guys. I wanted to follow up on private label fill rates. Tom, I think you mentioned in your prepared remarks that the undercar categories improved through the quarter, but where are those fill rates maybe relative to your desired levels? And if there are any, where are the bottlenecks today in the supply chain as you move more of those categories kind of in-house and away from other brands?

Sure. Well, first of all our fill rate overall, I mean, we still have pockets of difficulty there, Daniel, full disclosure, whether that's a result of a supplier's inability to get people in to work, whether that's related to the global supply chain, which is still not back to where it once was. In terms of the transition to owned brands, it's improved materially from where it was last summer. We're still -- I would say, a couple of hundred basis points off where we want to be, but we're much better off than we were last summer. And that -- it was almost 40,000 SKUs. It was a huge undertaking, but we're thrilled that we've got the changeover of those SKUs largely behind us, and we see lots of upside going forward as a result of it.

Got it. That's helpful. And then I want to follow up on Zach's questions just on LIFO benefits, so we can be clear, Jeff. If you saw $122 million of benefit in '21, I think you said you're guiding to $100 million of LIFO benefit in '22. If prices plateau into '23, does that create a gross margin headwind? And it seems like just numbers-wise, that would be sizable. So can you maybe walk through the puts and takes? Or are you guys thinking pricing doesn't plateau? Just trying to understand how, if we have that big of a cumulative LIFO benefit, how or when that unwind through the P&L and away from gross margins.

Yeah. So first of all, it's unwinding now. We're already starting to see it, and we're going to see it throughout '22. And that's embedded in the model or the guidance that we're providing yesterday. So we turn about 1.35 times a year. That translates into about 10 months, rough math tells you that's when it starts to come back to you on the P&L. So again, we plan that for '22. We're going to be planning that as we move into '23. If everything else were to remain completely static, you're right, in absolute terms, it would be a headwind, and that's something we're contemplating. And that's why we're really excited. We have the margin expansion initiatives that we have because we're confident we can overcome that.

Got it. Thanks very much for the color. And best of luck.

Yeah. And Daniel, I just want to clarify one thing. On undercar we're pretty close to our in-stock goal. On engine management, that's the one that I was referencing. And I think you asked undercar, so just to clarify. We're pretty much where we want to be on undercar.

Thanks, Tom.

And your final question comes from the line of Brian Nagel from Oppenheimer. Your line is open.

Hi, good morning. Thanks for slipping me in here. So I know there's already been a couple of questions, a few questions maybe on the whole pricing dynamics, so I apologize. But the question I want to ask is, Tom, from your vantage point, recognizing you're very close to your commercial customers and you're watching your competition, are you seeing some of the lesser known competitors maybe in the WD space actually move price at this point? Or maybe not take price amid broader-based inflation? Is there some change in dynamic there within that cohort?

You know what, we really haven't. And I think that from our vantage point, they operate very rationally, right? I mean, these are in many cases, private companies. They don't have retail stores. They're in a warehouse that doesn't pay the same rent. They don't have some of the cost base within SG&A that you have with a traditional retail parts store. I mean, it's just that simple. So their prices tend to be lower. Their gross margins tend to be lower, and their SG&A tends to be lower. So they operate in a very rational basis. They priced typically below what the retail parts companies do, and that's why Worldpac and our diversified asset base helps on because we already have that arrow in our quiver. And Worldpac has expanded parts significantly over the past several years, and we are very thoughtful about how we price in accordance with that. We're growing the Worldpac business substantially. It's integrating with Autopart International, and we're growing margins at Worldpac. So it's a very good story for us in that regard, and we obviously want to maintain our competitiveness, but we've got some things in our tool bag that helps us there.

Got it. That's very helpful. And then my follow-up question, just with respect to demand. Clearly, you ended the year very strong, and given your commentary, it seems like the strength persisted here into the New Year. As the economy potentially once again begins to pull away from the COVID crisis. Are you seeing greater variability market-to-market depending on where each market is relative to the pandemic?

Well, that's a good question. I mean, we're definitely -- I'll use miles driven as the proxy here. And we just need everybody to do what Microsoft did in the last 24 hours as everybody go back to their offices. I'm joking, obviously. But the reality is the number of people going back to offices in particular in large urban markets is still below where the line. And if you look at the miles driven it has recovered in parts of the country, almost to 2019 levels. If you look at the Southwest or the Southeast, you've seen that miles driven recover. The Northeast is still almost 10% below where it was two years ago if you look through the tail end of last year on the miles driven. Now it's coming up, but it's still below. So I think you will continue to see that miles driven improve. The information we have says it's down still versus '19. We expect that to continue to improve.

Yeah. Very helpful. Thank you.

There are no further questions at this time. Mr. Tom Greco, I turn the call back over to you for some closing remarks.

Well, thanks for joining us this morning. And as you've heard throughout the call, we remain confident in the strategic plan we're executing and in our ability to deliver top quartile total shareholder return through the four TSR drivers we discussed today. We plan to build on our 2021 results and leverage strong industry fundamentals and continue to strengthen our customer value proposition, deliver against our margin expansion initiatives and return substantial cash back to our shareholders. We remain committed to the execution of our strategic initiatives while driving innovation to position Advance for long-term profitable growth. And we look forward to sharing more of our progress throughout the year.

This concludes today's conference call. Thank you for your participation. You may now disconnect.