Welcome to the Advance Auto Parts Second Quarter 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 second quarter 2022 results. I'm 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 will 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 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.

Thanks, Elisabeth, and good morning, everyone. Before we begin, I'd like to thank our entire Advance team and Carquest independent partners for their dedication throughout Q2. Thanks to their relentless focus on improving the customer experience and disciplined execution of our strategy, we delivered double-digit adjusted diluted earnings per share growth in the quarter. I'll begin my remarks today with a review of our Q2 performance, as well as the factors that led to the revisions made to our full year guidance outlined in our press release. I'll then discuss the consistent progress we're making on our primary strategic initiatives before turning it over to Jeff to review our Q2 financial performance, including an update on cash returns to shareholders. In the second quarter, we remain focused on the execution of our strategy. Consistent with this, we delivered another quarter of growth in net sales and adjusted operating income, underscored by adjusted operating income margin expansion. Q2 2022 was our ninth consecutive quarter of year-over-year adjusted diluted EPS growth, including a 10% increase versus Q2 2021. Notably, Q2 adjusted diluted earnings per share of $3.74 was a quarterly record for Advance Auto Parts, and grew 72% on a three-year stack when compared with Q2 2019. We continue to invest in our business while returning approximately $700 million in cash to our shareholders in the first half of 2022. Our comparable store sales declined by 0.6% in Q2, while increasing 12.7% on a three-year stack. As we're now opening new locations to expand our footprint, our net sales grew faster than comp sales and were up 0.6%. Our deliberate move to increase own brand penetration, which carries a lower absolute price point, reduced both net and comp sales by approximately one full point with a disproportionate impact to Professional. Moving to…

Thanks, Tom, and good morning. I would also like to thank all our team members for their ability to quickly adapt in this unique environment. In Q2, our net sales of $2.7 billion increased 0.6% compared to Q2 2021, driven by continued growth in our professional business and new store openings. Our comparable store sales declined 0.6%. As Tom mentioned, both net and comp sales were reduced by approximately 100 basis points due to increased own brand penetration. Adjusted gross profit margin expanded 166 basis points to 48% through the combination of our strategic pricing actions and the benefit of higher margins associated with owned brands. These improvements were partially offset by continued product cost inflation, which was an 8.8% increase on a same SKU basis in the quarter, along with headwinds associated with product and channel mix. While we realized planned cost savings in supply chain, these were more than offset by wage and transportation inflation. Our Q2 adjusted SG&A was $967 million or 36.3% of net sales. This compares to $926 million or 35% of net sales in Q2 2021. Our largest headwind to SG&A in the quarter was higher inflation in wages and fuel. Additionally, we incurred anticipated start-up costs related to our California expansion. However, with over 50% of our locations open, they are now contributing incremental revenue and operating income. Finally, costs related to our anticipated channel mix shift to professional were higher than a year ago. These SG&A costs were partially offset by favorability in incentive compensation as we lap higher bonuses resulting from our strong performance last year. We also saw improvements from last year's productivity efforts related to our corporate restructuring and reducing our office and store footprint along with lower COVID-19 related expenses. As we look at SG&A going forward, we're…

[Operator Instructions] Your first question comes from the line of Christopher Horvers with JPMorgan.

So my first question is, can you talk a bit more about the cadence of the quarter? You've given some -- provided some granular detail in the past. And as gas prices have receded, did you see a return to positive comps? And then can you give some color on what you've seen quarter-to-date?

Chris, as we talked about in our remarks, DIY was really the driver of the performance in the second quarter. We've been looking at our sales on a multiyear stock basis for quite a while. And early in the quarter, our three-year stack and one-year comp sales were the strongest in the quarter as we went further into it, our top line slowed. And it was really DIY that was the majority of the shortfall versus expectations in that time frame. We expected the three-year stack for DIY to be similar to what it was in the first quarter, and it just wasn't. And we attribute that primarily to the broader consumer dynamics that you've heard from many others. Significant inflation, rising fuel prices, which really pressured lower income consumers and caused them to make some choices on discretionary purchases, and we saw that. We saw discretionary categories like appearance chemicals and accessories were very soft for us in the quarter. So really with DIY that was the driver, and that's what changed as the quarter went on. We're not going to talk about specific numbers quarter-to-date, but what we have done is embedded our quarter-to-date performance into our full year guidance, which you saw in the back half is minus two to zero for the back half of the year.

You mentioned DIY. It was down low single digit. Presumably, that's a comp. On a three-year basis, it looks like DIY actually improved, whereas do-it-for-me decelerated, and that would put the do-it-for-me up low single digits, and that's well below what others are posting in the industry and the structural growth rate of the industry. So I'm just curious, can you expand more on what you were referencing earlier around the pricing efforts? And it sounds like basically, you're eliminating unprofitable customers, and that's what's driving the relative performance in do-it-for-me.

Yes, I think you have that right, Chris. I mean we -- I think the short answer is we're executing a very different strategy right now. And our strategy is essentially to grow above the market and expand margins at the same time. We talked about the fragmentation in the industry many times. We believe there's lots of room for us to grow above the market in the coming years. But right now, the biggest opportunity we have at Advance is to complete the integration of the Company and improve our margins, which is unique to us, I think. In the back half of the year, that means, we're going to execute our category management plan, which includes a deliberate intentional move to increase own brand penetration. And we talked about this opportunity we have with strategic pricing. We built a terrific team there. We stood the pricing software package up about a year ago. We knew we could get to localized pricing in DIY, and ultimately, into DIFM. We're now leveraging the full capabilities of that tool, and we are removing unprofitable discounts really in all trade channels. But inside of Pro, this particular action may mean we can at least have some unprofitable sales on the table in the back half. So, we firmly believe this is the right strategy for us. We recognize that we didn't grow above the market in the quarter, but we did grow margins to a quarterly record and we grew earnings per share by 72% on a three-year basis. So our long-term goal is to grow above the market and expand margins, and that's what we're executing right now.

My final question is just as you think about your -- the three-year plan that you laid out and your thoughts on getting to that 10.5% to 12.5% in delivering the total shareholder returns that you've laid out. How are you thinking about your ability to get into that range next year?

Yes, well, right now, obviously, we're focused on finishing 2022 and beginning 2023 as strong as possible, but let me react to the specific targets we laid out. The short answer is, based on what we know today, yes, we believe we can get inside the ranges that we laid out. We laid out goals for '21 through '23, as you remember, for net sales, for earnings per share, for margin rate and a number of other financial metrics. We believe we can get inside the range on all of those key metrics. We do see the margin rate. At this point, it's going to be the most challenging given the inflationary environment that we're dealing with, but we still believe we can get inside of that range. And we're excited about continuing to execute our plan to do that. So I will reinforce, this is obviously a point in time assessment. We've got a lot of volatility in the current environment. There are several factors out there that are difficult to predict at the pace of 2023 right now. We plan to provide annual guidance as we usually do next February in 2023, and we'll have a lot more insight into just exactly where we're going to finish within the framework we decided. The one thing I would add, Chris, is we also believe that beyond 2023, there's continued opportunity for growth and margin expansion for us beyond that.

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

So your adjusted operating margin and gross margin were up but your GAAP gross margin was down. Can you explain why that was the case and your free cash flow was under a significant amount of pressure, suggesting that the GAAP gross margin is more a reflection of what's happening with the cash flow. So can you explain that as well?

Yes, sure, Michael. Let me start with the GAAP margin. If we were to include the LIFO expense into our adjusted results, we would have deleveraged 30 basis points versus last year, which I think is what you're focused on. And just in terms of context, from a dollar standpoint, the LIFO benefit from an adjusted standpoint was $92 million this quarter versus last year when it was $39 million. So you have that increase of $53 million. But let me give you some context around this. It's really important that we frame LIFO into our broader gross margin plan. And what I mean by that is we've got a very comprehensive strategy to improve our gross margin rate over time. So the execution of our strategic pricing initiatives, we talked about a lot of that in our prepared remarks, the expansion of our own brand portfolio, optimizing supply chain. And these were all the contributors that drove our 166 basis points of adjusted gross profit. Now looking forward, as it relates to LIFO, we know the products, we know the categories, we know the SKUs that are driving these inflationary costs that are sitting on our balance sheet. And we're able to model how and when these costs come off the balance sheet, whether it's a FIFO basis or whether it's a LIFO basis. So, we've incorporated these inflationary costs and the related headwinds into our guide. And that includes these higher product cuts coming off the balance sheet. And it's important to note, Michael, that we're already seeing that today. This is not something that's looming, this is not something that's late '23, '24. We're experiencing in Q2. We're going to experience it in Q3, so forth and so on. So that's all very much contemplated in what we've done in the back half guide and then once we guide in February for 2023. Now as it relates to free cash flow, specific to the guide, it's really attributable to the top line guidance that we provided yesterday. It's important to keep in mind, in the first quarter, we had free cash outflow of $170 million. And we outlined all of the factors that went into that largely anticipated. If you look at our free cash flow discretely in the second quarter, significant improvement, we had free cash inflow of $267 million. And we do anticipate that the back half to be more in line with the second quarter, which gives us the basis for our revised guidance of $700 million. So we believe our receivables, we're going to be collecting on those. We believe our inventory is going to be coming down in the back half. And those factors along with the revised guidance is it's why we have minimum of $700 million of free cash flow.

So my follow-up question is, Jeff, would you expect the LIFO gross margin to turn positive this quarter or in the next few?

Over the back half, it's very difficult to say. We are -- we continue to believe we're going to be in an inflationary environment in the back half. Sequentially, we think it's going to moderate, but year-over-year in the back half, we think inflation -- including product cost is going to be higher. So if we think about just LIFO, for example, we've had 170 -- about $175 million in LIFO expense in the first half of the year. We're thinking it could be 250 million, 275 million. So it could be another $75 million, $100 million more in the back half.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

Tom, I wanted to ask about strategic pricing. I wanted to ask if you, I guess, accelerated the strategy in the last, call it, quarter? And in the past, it feels -- it felt like you've done it in a way to minimize the elasticity. It sounds like the stuff that's happening now and maybe into the back half is having a greater impact than what we thought, or maybe it's just a timing thing?

Simeon, I think what we laid out in our Investor Day about 1.5 years ago was the plan for strategic pricing over time. We talked about life cycle pricing, we talked about how we were going to approach it, we talked about the ability to localize, and essentially priced literally by channel, by store, by customer, et cetera, et cetera. And it took us a while to stand up those capabilities. We were able to get to that on the DIY side in the early part of this year, and we knew that DIFM was going to be in the back half. These are difficult decisions, obviously, to your point, when we looked at it. Obviously, the environment has changed versus what we anticipated heading into the year. But for us, if the right strategy is to make sure that we are spending money very wisely as it pertains to discounting in the professional sales channel. Our biggest opportunity is to get those margins up. And we've obviously looked at the competitive landscape of what's going on by product type and where there's pressure. For us, this is the right strategy for us to execute, and it's definitely the long-term play. Separately, we're continuing to build out our value proposition in Pro in those areas that we think matter most to the customers, which I'm happy to speak to, but that's really the approach.

That's helpful. And then just a follow-up. Private brand penetration, if we heard it right, was 200 basis point year-over-year growth in the quarter. And is the spread between the private brand gross margin and national, is it about the same? Can you quantify it? And then maybe can you just quantify the contribution it had to overall gross margin in the quarter?

Yes, we're not going to break it out specifically, but what I can tell you is within category management, we outlined three broad territories, strategic pricing, own brand penetration and sourcing in that order. So own brand penetration is a significant contributor. We basically laid out 180 to 200 basis points of margin expansion on our Investor Day presentation. So it's the second largest. And we clearly see further runway there. I mean we're definitely getting meaningful contribution to margin expansion today with our own brand expansion. We expect that to continue in the back half. It's going to continue into '23 and candidly will continue into 2024. It's going to take a while, and we're continuing to improve. The overall impression of those brands, DieHard is doing well, Carquest is doing well on the professional side. So we're very excited about it, and we're going to continue to execute against it.

Your next question comes from the line of Bret Jordan with Jefferies.

On the second quarter and then I guess the outlook for the second half. What does that comp I guess, explain inflation versus units? What was the price contribution? Because I guess, obviously, own brand is lower price point. So maybe adjusting for mix, how did that shake out?

Yes, well, units for everyone in the industry are down, primarily driven by DIY, Brad. As I think we called out at the beginning of the year, DIY is about 60% of our units, right? And those lower price per unit items in DIY tend to drive that number. But Jeff called out our cost inflation in the quarter, which was 8%, 8.8%. So you should assume our pricing was slightly above that because we are essentially pricing to at least keep rate neutral or better. So, that's kind of where it is.

And I guess on the second half outlook, the minus two to zero. I think you're lapping harder inflation compares in the second half of last year.

Yes, that's factored in. We recognize that. We looked at the broader industry, the retail landscape in total, which, as you know, is we're not seeing consumption growth in the broader industry. I mean everyone is seeing units down. And all of the growth in retail is coming from pricing at this point. We looked at the industry performance, we can only see DIY and when our peers report, but we expect that transactions and units will continue to be below a year ago in the back half. And then obviously, our own initiatives, and in our case, we've got a particular initiative on strategic pricing that's going to impact our top line a little bit, but it's going to drive our margin performance. So that's -- those are the factors that went into it.

And I guess the outlook on payables ratio in the second half as a contributor to cash flow. Where do you see that? I mean I think you were running in the 80s, but not significant expansion on the second quarter, but how do you see payables growing? And is that going to be impacted by the private label owned brand strategy? Is that more or less likely to get extended payables?

Yes, just from an overall payable ratio, in Q1, we did some forward deployment related to inventory. So, it was less impacted by payables, is more impacted by the increase in the inventory as we did the forward buys to avoid disruption, primarily related to China lockdown. We talked about the Olympics. We talked about Chinese New Year. So that's really what's kind of pressured our AP ratio. We did improve from Q1. We expect that to continue to improve. It's going to be a combination of both payables and inventory because we expect inventory to come down in the back half. And that, coupled with our ongoing efforts in AP, we expect to see improvement over the back half in our AP ratio.

Your next question comes from the line of Scot Ciccarelli with Truist.

Scot Ciccarelli. So you guys talked about significant softness in your discretionary DIY sales. Can you guys help provide some color on how big that segment is as a percent of mix?

Well, first of all, just to make the point, I think you know, Scot, the non-discretionary categories are much larger, right? So we're talking about our business. That's what we love about the auto parts industry, batteries, brakes, failure-related parts are much larger. But at the margin on the DIY side, things like accessories and appearance chemicals are pretty sizable. And certainly, certain points of the year, they're bigger than others, in fact, in Q2. So we definitely saw softness in those discretionary categories. I think -- what's happening is the low to middle income customer, you've heard about all these quintiles and things like that from others, these customers are obviously paying significantly more for food, they're paying significantly more for gas and they're making choices about where they spend their discretionary money. What's a little bit difficult to tease out the last couple of years was related to people being at home and having time on their hands we believe. But that will moderate as we get into the back half. So, obviously, very important categories for us, we're going to continue to stay focused on them. They've been soft for the entire industry. But over time, that's going to normalize.

But Tom, just to clarify for everyone. So the overall DIY, including the failure-related parts, everything was negative with particular softness on the discretionary side. Is that the message we should be walking away with?

Yes, I mean the non-discretionary were up, but the discretionary categories pulled the number down because they were down pretty significantly.

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

This is Nathan Friedman on for Seth. My question is following up on the 2023 operating margin target question. You initially provided some building blocks and category management, supply chain, SG&A and the negative impact from inflation relative to 2020. Can you possibly quantify what you realized to date relative to these targets, how much higher inflation is relative to this plan? And what, if at this point in time?

Well, I'll let Jeff speak to how much ahead of plan inflation is, but I mean, the biggest variable is inflation. I think in terms of us executing our targets, Nathan, we are executing our plan. The category management initiatives are very much on track. We still see further upside with category management. As we said earlier, we're starting to execute that more version strategic pricing platform. We're going to continue to drive own brands. In terms of supply chain, we're making a lot of progress. I mean we are in a position where we're now opening brand-new distribution centers that are much more modern. The team's doing a terrific job transitioning very old, I would say, antiquated facilities. As an example, Riverside, California, we moved into a brand-new building in San Bernardino, California, up near Toronto. We've moved from a very integrated building in Rexville to a new building in Bolton. Both of those are going to be operational in the fourth quarter. So, that's going to really help us improve our service to customers and reduce our cost over time. So, we are executing against the supply chain initiatives also. And then within SG&A, we're executing against those initiatives. So, we're going to continue to execute the initiatives what has been the wildcard is the inflationary cost in things like fuel and wages, which I don't know if we can quantify it, Jeff, but it's a very big number versus what was anticipated.

I can give you some color. In the Investor Day in April, we said 280 to 290 basis points which was largely covering non-product inflation, we said that was embedded in our category management. And just some data points, fuel is up 50%. So, we certainly didn't contemplate that wage mid-single digits. So 2x, 3x what we had anticipated, we did not anticipate 5%, 6%, 7% wage inflation. We did not anticipate 50% inflation in fuel. And so, if we were to redraw that chart, that last red bar that we had there in April would certainly be bigger. And so with the green bars to the left of it to overcome that so we can still hit our 10.5 to 12. 5.

And then my follow-up is just on the SG&A near-term guide. You mentioned expectations for 3Q deleverage but I believe second half overall leverage, if I heard this correctly. Just curious if you could provide a little bit more color on these expectations and some of the drivers just beyond the prospectively lower sales outlook.

Yes, what we said originally was first half was going to be heavily driven by gross margin, and that certainly was the case. Second half, we're going to continue to see benefits from gross margin. As it relates to SG&A, our goal is to leverage SG&A in the back half, but there's some puts and takes there. And so let me just give you a little bit of perspective. So, it looks a little different relative to what we expected in our full year guide in February. And what we just talked about first, while inflationary costs and store payroll and fuel, they're moderating sequentially, but these costs are much higher than what we originally expected. And look, we've got to pay. It's important that we stay competitive in wages, in our stores, for example, make sure we're fully staffed, serving our customers. Now what we can do is to continue to leverage our demand-driven labor tool that we call MyDay, to help offset this cost per hour inflation. And then, we still have the tailwinds. We're going to get the benefit from last year's corporate restructuring. We had the rent reduction initiatives, and we're lapping -- in the second half, we're lapping last year's investments in our California expansion, and we're opening more of these stores. So the sales from the stores are beginning to help offset the costs that we're incurring. And then, we do expect to benefit from last year's higher incentive compensation. So, we've taken all of these factors along with the moderation of our top line and incorporated it to our updated guidance.

Just a quick follow-up on that. When will you be opening all of the California stores?

We're pretty excited about the performance out there, Nathan. We're focused on hitting the 125 to 150 guide in total. So, we are balancing some of the new store openings we have around the country with the store openings in California. We're going to get as many of them open this year as we can. Some of them may move to the first quarter, but overall, very pleased with the performance out there. We were out there recently. We've got a partnership with the Dodgers that has really resonated with the Hispanic community. We can see our market share gains out there. We're making a lot of progress out there. I feel really good about our performance, and we're going to stay focused on that market. It's a very important market, as you know. It's one where we have very little penetration. We've got nice overall professional business with Worldpac. So that's where we're going to leverage our enterprise assets to bring that whole package together. So the DIY business that we're getting from the converted stores but also a very, very large professional opportunity in Southern California. So on track to get these stores open soon. And as I mentioned earlier, the San Bernardino DC, once it's fully operational, is going to help us immensely out there.

Your next question comes from the line of David Bellinger with MKM Partners.

So, on the impact of sales and comps from the owned brand shift, how long can that pressure linger? And should this be the peak of the impact in terms of magnitude at about 100 basis points? And if you could share with us anything that's embedded in the back half guidance?

David, I think it's -- we don't see it as linger. We see it as a good thing. I mean the performance of these brands drives our margins. And it has a lower cost per unit than the alternatives that are out there. So in this environment, where our customers are looking for value, and particularly the professional garages are looking for value. This is something that they want. So now it pulls the comp sales number down for sure because you have a lower price per unit. You sell 100 units the alternatives that we have are priced at a higher price per unit than the own brands. But we see that, honestly, potentially accelerating in the back half and then into 2023, and then it will moderate over time. But we've said before that the own brand penetration that we have is below what we're targeting over time, and we believe below what our peers have already done for many years. So we're going to continue to focus on that and continue to forge stronger relationships with our national brand suppliers because they're very important to us, too. We have a very wide selection of national brands and OE parts that are extremely important to our overall value proposition. So it's a balanced approach, but the success of DieHard and Carquest is something that will really help us deliver on our goal of profitable growth.

And my second question, you mentioned a couple of times the better matching labor with in-store traffic and demand. So what's the time frame for getting that system fully in place? And how do you size the potential labor savings attached to that?

Well, I'm really pleased with how our field team is managing this, David. I mean, we stood up the tool, Jeff mentioned it, we call it MyDay, we were a little bit, I would say, we had a pretty good sized opportunity in terms of how we staffed. And once again, we're rebuilding a lot of things in the Company with really great leaders with improved technology and improved processes around it. We've got a great field leader. The person that runs this side of the business just came out of a region Vice President job. He's got extensive experience in this area. And we're using the technology tool the way it's been designed, which is to really look forward at the transaction outlook. And obviously, the lower the transactions, the less hours you need. When you need more, when you see more transactions coming, you have to increase hours. So, we're matching that up against the hours that we're issuing and then we measure, obviously, our performance of issued hours to scheduled hours and the like, so much more rigor around it, much more success around it. Our field team is doing a really good job executing it. Obviously, when we get past the back half, we want transactions to go back up. But it's just a temporary situation where the DIY business, in particular, we expect to be soft on transaction in the back half, and that enables us to offset cost per hour inflation, as we said.

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

Two questions, one short term, one longer term. Just to confirm if you said it, I apologize, but the DIFM business, it seems like -- I think it was positive, you said. But where was it relative to plan? How did that perform versus your expectations?

Yes, DIFM was relatively close to plan in the second quarter. DIY was the driver of our shortfall versus expectations. And part of that was we knew what we were going to be doing in DIFM. We are executing a different strategy, as I outlined earlier. And as we look at the back half, that's when we really fully implement what we're talking about here in terms of version, more localized pricing and elimination of what we would say, unprofitable discounts in the professional channel.

And then I guess it's a longer-term question to follow up on that. Doing away with those unprofitable discounts in DIFM, so presumably, you're giving up share to someone. As you've done this, any idea, who's coming in and taking that business that you're giving up?

That's a very difficult thing to say. We're obviously very aware of the competitive landscape. And we obviously look at it by category. We look at it by product. We look at it by geography. So those are the big things and by channel. So, we know from an internal perspective, we balance, right, the share of wallet opportunity we have with each customer on the professional side with the return on investment we get. In some cases, our large strategic accounts, our large TechNet accounts, we lean in heavily with those accounts, and we're very, very mindful of what's going on there. And our goal, obviously, is to continue to better serve those customers and drive share of wallet with those customers. What we're talking about here is at the margin, discounts that we're offering to very low share of wallet customers where we don't have a large presence. And by strengthening our value proposition and focusing what we're doing in Pro on those things that matter to those customers in those areas, we believe we'll be able to grow faster long term.

Okay. That makes sense. But if I could follow up, and maybe you can answer this, but if you're giving up that business, why would someone else come in and take that business? Is it in your view, is it that they're willing to take a lower margin, or does someone else have a lower cost to serve for some reason? Do you have any view on that?

Yes, that's obviously difficult thing to say. I mean, we don't look at it in isolation though, I want to reinforce that. I mean it's not just about, well, this particular discount or deal that we're offering doesn't provide the adequate return. We look at it with our longer-term objective. We have to set priorities. These are difficult decisions. They're tough decisions. But we all looked at this, again, multiple times this year as we went through the year. And we believe this is the right strategy for us.

Your next question comes from the line of Emily Hyde with Evercore ISI.

It's Greg Melich from Evercore. My question is really twofold. One is on Pro and then the Pep Boys stores. So first, on the Pro units, were those up in 2Q given inflation was probably less in Pro?

Units were down in Q2, Greg. I think that's been a bit of a multiyear trend. The units were down. Part of that is just the price per unit. The average selling price per unit is up significantly, as you know. So units were down.

And your second half guide, would Pro units also be down?

Yes.

And then the second question was on the converted stores. I think it was like 100 some leases that you got from Pep Boys. How many of those are actually converted now? Is that all in the 125 to 150 this year?

Yes. We incorporate what we're going to open in the 125 to 150. I think we gave the number year-to-date, over half. And in total, we're at 78, I think -- yes. So, I mean, our year-to-date new store openings are on track to get to the 125 to 150, so yes.

Got it. And then remind me, when you open those, are those -- those aren't in the comp. Those are -- do they stay out of the comp for 13 months when you...

Yes, 13 periods, roughly a year, but our 13 periods. And then once it hits that 14 period, it then goes into comp.

So I guess maybe a follow-up on those. I mean, how are those going when you get them opened? It sounds like what sort of lift are you seeing? What's the mix of business showing you?

Yes. We still have a big opportunity on Pro, Greg. I think you know that the stores themselves were primarily DIY, which is great. So the DIY business is somewhat established by Pep Boys previously. So the DIY business is still the majority of the sales, which is different for us. Typically, in Advance store more 50/50, but these are much higher as a percent of sales on DIY, and that's the biggest opportunity for us. We've got our large national accounts that are out there that are really excited that we're opening the stores. So, now we're able to service them in Southern California, which we have not been able to do in the past. So, that's going to be the big opportunity for us as we get the stores open. And part of it is just getting density in Metro LA and some of the other urban markets, San Diego, et cetera, that we have out there. Once we get the larger number of stores open, we have more density, and then we can get more parts to the customer.

Got it. And then I think it's hopefully a quick follow-up. You talked about how inflation was more than the product cost inflation in the second quarter. We know you are cycling more inflation back half last year. Should we expect year-over-year inflation to sort of decelerate to mid-single digits in the back half? Is that what's in your guide?

Yes, that's a good way to think about it. That's how we're looking at it. It's as we said, sequentially coming down, but year-over-year is still up.

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

Can you refresh us on your take for industry growth rates in '22 for DIY versus Pro and how that evolves since your initial expectations? And then as we look ahead, do you think DIY and Pro units can both grow in 2023?

Zach, I mean, originally, when we did our Investor Day, which, again, was 1.5 years ago, we had DIY low single. Obviously, as the year went on, it was a stronger year in 2021 for DIY than we'd originally anticipated. So that's when in February, we said, boy, we don't know on DIY in 2022. It could be more challenging. So I think relative to our Investor Day '21 better, '22, probably slightly below. Obviously, we look at the reported numbers of peers and we look at the syndicated data, which don't exactly match up, I can tell you. So that's the short answer there. But I think DIY in the back half of this year, knowing all of the things we know today. The inflationary pressures, we think that there's going to continue to be pressure on the discretionary income, and that's going to put pressure on DIY in the back half. Sorry, remind me your second question again.

Do you think units can grow in 2023?

Units, yes. Units is a tricky question. I mean, transactions, we do think transactions can grow. Units is a function of the complexity of a vehicle and how difficult to repair is and how parts change over time. Sometimes, you need fewer parts to do the same job, but it's higher revenue for the job, right? So but we are focused on transactions there and driving transactions, and we do think they can grow in '23.

And then, Jeff, you had called out about a $20 million SG&A drag from the Pep Boys start-up costs in Q1. Can you talk through how that trended in Q2 and the deleverage impact and how you expect the drag to trend as we move through the second half of the year and the stores start to open?

Yes, so in the second quarter, it was not as high as what we saw in Q1. Obviously, as we open those stores, they're not start-up costs anymore and we're getting revenue associated with those stores. That revenue associated with those stores. That trend is going to continue into Q3 and into Q4. And while we expect to have start-up costs, they're going to be significantly lower than what we saw in the back half of 2021. So net-net, it will be a tailwind because we won't have as much start-up cost in the back half of this year as we saw last year because we really didn't have that many stores open in California last year. So that's sort of how we're thinking about that.

At this time, there are no further questions. I'll turn the call over to Tom Greco for any closing remarks.

Well, thanks to all of you for joining us this morning. As we move into the back half of the year, we remain committed to the disciplined execution of our long-term strategic plan, including profitable top line growth and sustainable margin expansion. In turn, we're confident that we'll be able to return meaningful value for our shareholders. Importantly, while we're focused on transforming Advance and completing the integration, we also recognize the importance of giving back to ensure we're leaving the communities we live and serve better for generations to come. This includes the kickoff of our American Heart Association fundraising campaign in stores tomorrow. Our '21 campaign was a record fundraising year for us, raising nearly $1.7 million to support the critical mission dedicated to fighting heart disease and stroke. We're incredibly grateful for the generosity of our team members, our partners, and our customers who are giving back. And I'm really excited to get back out into the stores next week and kick off this year's campaign. I'd like to wish everyone a safe and healthy end of summer and look forward to sharing more in November. Thanks for your support of Advanced Auto Parts as we navigate the current environment while continuing to deliver on our long-term strategic priorities.

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