Welcome to the Advance Auto Parts' Fourth Quarter and Full Year 2024 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President of Investor Relations.

Good morning, and thank you for participating in today's call. I'm joined by Shane O'Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides which are available to view via webcast. The slides have also been posted to our Investor Relations website. Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, guidance and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under Forward-Looking Statements in our earnings release and Risk Factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and our strategic priorities. Later, Ryan will discuss 2024 results and 2025 guidance. Following management's prepared remarks, we will open the line for questions. Now, let me turn over the call to our CEO, Shane O'Kelly.

Thank you, Lavesh; and good morning, everyone. I would like to begin today's call by thanking our entire team for their continued dedication and hard work during a difficult year. 2024 was pivotal for Advance. We reinforced our commitment to the blended box by taking transformative actions to divest non-core operations and optimize our asset base for growth. We have rebuilt the organization under a leadership team that blends deep automotive knowledge with fundamental retail expertise. Most recently, we are excited to have Shweta Bhatia join as Chief Technology Officer and Jeff Vining join as General Counsel. We are operating the company with a customer-first mindset and our field and corporate teams have been empowered to prioritize actions to serve our customers' needs. In November, we introduced a three-year strategic plan with a focus on executing the basics, which will enable us to deliver adjusted operating margins of approximately 7% in 2027. We ended the year with liquidity to fuel our initiatives and I remain optimistic about the future of advance and our opportunities for value creation. Moving to our results. Our fourth quarter and full year financial performance was broadly in line with the range of revised expectations we shared in November. We reported an improvement in comparable sales during Q4, although profitability was impacted by transitory costs related to our strategic actions. We are in the early stages of stabilizing our operations and expect results to gradually improve as we move through 2025. Ryan will provide details later. Along with announcing our results this morning, we reiterated our three-year goals and provided additional detail on our first quarter expectations. As we execute our strategic plan, we expect to get back on the path of delivering positive comparable sales growth and delivering more than 500 basis points of improved…

Thank you, Shane; and good morning, everyone. I would like to thank the Advance team for their hard work over the past year and especially over the last few months as we began executing our three-year plan. I also want to thank our frontline team for their dedication to serving our customers every single day. As indicated last quarter, we made certain changes in the presentation of our financial statements. First, our results show a breakdown of continuing operations for the Advance business, excluding discontinued operations related to the sale of Worldpac. Second, to provide a better understanding of our performance, we report select financial measures on an adjusted non-GAAP basis to exclude the impact of certain items. Our guidance and financial plan for the next three years is based on these adjusted financial measures. Lastly, we are providing detail on atypical items that impacted performance. These items include transitory costs and expenses associated with our strategic actions. In our view, looking at our reported results through this lens will provide a helpful understanding of our underlying performance. Now let's turn to our results. As Shane mentioned, we moved with urgency to execute store closures. As a result, our fourth quarter and full year financials include costs associated with these closures, although comparable sales exclude closing store locations. Fourth quarter net sales from continuing operations were $2 billion, a 1% decrease compared with Q4 last year. Comparable stores declined 1% and exclude closing store locations that generated $74 million in liquidation sales. Our comp performance was stronger in the second half Q4 and especially in December as extreme winter weather conditions drove demand for failure related items, such as batteries. In terms of channel performance, our pro comp was slightly negative and outperformed DIY, which declined in low single digit…

Thank you, Ryan. In closing, I want to thank everyone for joining our call today. And in particular, I want to thank our team members once again for their continued dedication to serving our customers. We have charted a path forward for our turnaround and the entire team is energized and focused for our execution against our priorities. With that, let's open the call for questions. Operator?

Thank you. [Operator Instructions] And the first question comes from Bret Jordan with Jefferies. Bret, your line is open. Please go ahead.

Good morning, guys. Shane O’Kelly: Good morning, Bret.

Could you talk about the new merchandise -- hey, good morning -- the new assortment, I guess, impacting 70% of your volume. Could you sort of give us more detail? Is that skewed towards private label or branded? Is it consolidating existing suppliers and, I guess, some more color? Shane O’Kelly: Yes. The way I think about it, there's kind of two bodies of work that inform this. The first is how we look at what we should have in our stores based on the vehicles in operation, the car park in and around stores. And in the past, we tended to index too heavily on what we physically sold vice what was in and around the -- in the car park. Secondly, as we've looked at what we put in the stores, we tended to let stores self-solve a little bit. So we would consider parts available in the market as counting as being in stock. And I'll use an example. Let's just say you need spark plugs for a vehicle. If a store only had four and you needed eight, we would let the stores self-solve between stores to get the eight that you needed. And we really needed to focus on being able to complete the order at an individual store level. That's a store based availability. So Smriti Maheshwari, who's running our inventory programs has been pretty dedicated in looking at those two factors, looking at the car park and then looking at the individual stores to solve it. And as you see what's in stock in the stores, we found that in common examples there'll be several hundred SKUs that need to come out of a store and several hundred stores -- products that need to go into a store, which means we can say yes to an order more frequently at that store level without having to go anywhere else to take care of the customer.

The next question comes from Chris Horvers from JPMorgan. Chris, please go ahead. Your line is open.

Thanks. Good morning, guys. So my question is, I guess, can you talk about the reporting dynamics of one-time versus not one-time? It looks like inventory liquidation is being backed out, but you have this what you're describing as transitory costs. So like what makes one able to back out versus not being able to back out? And since it's an accounting question, I would just add can you talk a little bit about the cadence of the year after your expectation in the first quarter on the comp side? Thank you.

Yes. Thanks, Chris. I'll answer that question there. So the kind of, A, what we call atypical items are items that happen within the quarter, not really tied to our strategic objectives and initiatives, but they're items that take place within the quarter. And this past quarter as we were closing significant number of locations, divesting Worldpac, we also were doing work on our balance sheet to ensure our inventory assumptions, estimates, everything else was appropriately reflecting the RemainCo going forward. So the adjustments to our non-GAAP are really tied specifically to those actions we're taking on our strategic initiatives large scale. The atypical ones are items where they come up in the quarter, but we wouldn't expect that to be reflective of the ongoing business going forward. And that's how I kind of phrase that. For the sequence of the quarters going forward, we would -- I would expect sequential improvement every quarter going forward as our initiatives start to take hold. Q1 obviously we gave expectations, because it is messy quarter with the store closures taking place, we're going to close 500 locations and another 200 independents within the quarter. That's going to have a pretty meaningful impact on the quarter. But as these initiatives take hold and as we start to roll these out, the assortment work that we're doing that takes time to roll out over 50 DMAs. The work merchandising is doing on merchandising excellence, the timing that that starts to hit COGS really push us forward. Also our assumption around the macro environment, the macro environment, consumers still being a little bit pressured in the first half where we expect the macro to improve a little bit in the back half of the year, that also is implied within our guidance. So I just expect sequential improvement over the quarters going forward.

The next question comes from Simeon Gutman from Morgan Stanley. Simeon, your line is open. Please go ahead.

Good morning, everyone. I wanted to ask the 7% 2027 goal, the EBIT margin. You kind of laid out comps grow, I don't know, I use 3% mid-single. Can you talk about leveraging SG&A in there, or is it a lot of gross margin improvement maybe back to the mid-40s? And then as part of that question Shane, I want to ask the importance I get of setting a strategic goal for the company versus not setting that guidance at all and maybe allowing the business to over-deliver. And I know I'm speaking looking backwards, where there's some bad memories of old guidance numbers, but -- or is there just something here, an unlock of gross margin that the business will naturally get such that that target is very attainable? Thanks.

Yes. I'll start, Simeon. Appreciate the question, and I'll let Shane jump in. From a 7%, where we're getting it from? Mid-40s margin rate is about what we're targeting there and below 40% on the SG&A rate as a rate of sales. That's how I would think about modeling that to get to the 7%. When we look at our initiatives, specifically merchandising excellence work that we're doing, that pillar is going to drive significant COGS improvement as well as the supply chain productivity consolidating those DCs down, getting productivity there. We -- with store improvement we will get productivity out of our stores. You'll see that in even our guide for this year, where we will get productivity that will offset the inflationary impacts on SG&A. And we'll continue that work over the next couple of years as well. But from a rate perspective, lower than 40% on SG&A, mid-40s on margin rate would be the assumption. Shane O’Kelly: Yes. And Simeon, on the other part of your question, fair push. Ryan and I have been reticent to put out broader long term guidance. And we effectively took a year before we did it. And as we thought about the 7%, obviously aware that getting over our skis and putting numbers out there that would be difficult to attain could create issues that the company's seen in the past. But the way we thought about it is, where we're looking to take the company, we view as a very reasonable trajectory. We think that for a company of our size in the industry that it's in with the characteristics that are part of what goes on in aftermarket auto parts, that getting the 7% over a three-year period is appropriate both externally, but also internally in terms of how we grade and hold our team accountable. The idea that we're doing it over a period of years, the idea that we were willing to do the very tough foundational items to get there and think about that in terms of selling Worldpac and doing store closures, the residual business that we have and the pillars that we've outlined, we think put us on a path that make us comfortable articulating that 7%.

The next question comes from Kate McShane from Goldman Sachs. Kate, your line is open. Please go ahead.

Hi. Good morning. Thanks for taking our question. It sounds like the vendor feedback has been solid certainly since the meeting that you just highlighted in your prepared comments. How much progress are you making in improving your costs with the vendors and what will that look like as we go throughout the year? Shane O’Kelly: Yes. So, I'll let Ryan talk about how it layers in over the year. But I'll comment on just the high level perspective. When we got together in January at our Accelerate event with 400 vendors, first we hadn't done an event of that scale in a decade. And letting our vendors interact with all of our leaders and outside sales team members, they have clear energy to see us succeed. I think having another leg of the stool makes the industry better from their perspective, and -- both in terms of a growth outlet and just in terms of the number of healthy players that they participate with. And that was reciprocal by the way. Our sales team, eager to be with vendors, learn about new products, understand approaches that we can collectively take in the market. So that theme has been consistent since my arrival here to see it viscerally and to now see that coming into play when we have discussions both in terms of where we can grow together, where we can be effectively positioned from a cost perspective, where we can jointly take costs out in terms of how logistics flow, how we order products, where we can take advantage of new offerings relative to what we have today. All of those are now moving forward and, I think, with enthusiasm from both us and the vendors.

Yes. And Kate, I'll just add from a numbers perspective. We're very pleased with what we're receiving in that partnership and how we're working through that. It's both a cost and improving our cost in terms, but also improving our promotional pricing. That also has an impact on the COGS this year, but we are seeing positive movement there on the cost perspective. You'll see that play out sequentially quarter-over-quarter as those costs start to come through is some of that work we did in 2024 and that'll start to come through in Q2. And in Q3 and Q4, you'll start to see a lot of that work really start to show up in our rate. Remember though, from a leverage/deleverage, just a reminder, in Q1 we're cycling the price investments. So from a leverage/deleverage, you'll see an impact just as we cycle that. That'll start to dissipate as we get closer to the back half of the year and then we'll be cycling over it and you really start to see the change in leverage/deleverage in the back half of the year. But I would expect that the benefit from that work the merchants are doing with our vendor partners to be a sequential improvement throughout the year and more in the back half.

The next question comes from Steven Forbes of Guggenheim. Steven, your line is open. Please go ahead.

Good morning, Shane, Ryan. I was hoping to maybe explore the critical metrics that you're referencing behind the initiatives. And so maybe for my question, if we could focus on the time to serve, curious, Shane, if you could sort of talk about how much variability there is in this metric today across the core DMAs you serve? Meaning are there any DMAs where the target time to serve is consistently being achieved? And if so, can you frame up for us like how the current comp performance of the business compares between those DMAs where you're hitting those delivery time windows versus where you're currently not? As we think about like what the real opportunity is from a productivity standpoint as we look ahead to the years 2026 and 2027? Shane O’Kelly: Yes. Great question, Steven. I'm going to come up for just a second and then burrow into your question. As we develop these three pillars, these pillars are around helping us be successful and sell more products. And as we looked at what was preventing that, we found that we didn't always have the right part. So that's -- think about -- that's Bret's question around what are we doing to make sure we've got the parts physically in stores that a customer wants.

Yes. Shane O’Kelly: The right place refers to how it flows there in terms of what we're doing in our supply chain effort. And then the right service. And this is everything from who picks up the phone and what their expertise looks like. But then importantly, as you've noted on the critical metric, it's how long it takes to get there. And in the pro world, when you have a car on the lift and you've diagnosed what the issue is, and sometimes there's a customer in the waiting room. When we get the call, hey, do you have this part, yes or no. The next question is, when can I get it? And it needs to be within the time frame that helps that shop both get the car on and off the lift for the customer, but also keeping their techs productively employed. And so what we found was before we really measured it, we would lose orders, because we get calls from shops, they'd say, hey, we like you, Advance. We'd give you this order. But I can't afford to wait, pick the time frame, two hours. I can't wait until tomorrow. I need that part now. And so as we looked at the aggregate measurement, which we've talked about today, which we think is -- it's higher than where we want it. We put out 30 to 40. There is a broad spectrum across stores. We have stores where we're adjacent to a customer. We can literally walk them -- we can walk a part across the street, and we absolutely get more sales from customers when our time to serve is lower than both that aggregate time frame at a shortened basis. And so we see that. And so we want to replicate that across the network, because we know it makes a difference. And from a common sense perspective, that's exactly what you'd want to see. But pro customer knows reliably that when a car is on the lift, they get a part from us and they get that car service quickly, we're more likely to get more orders.

The next question comes from Seth Basham from Wedbush. Seth, your line is open. Please go ahead.

Thanks a lot, and good morning. Good to see the progress resetting the business. My questions are around the first quarter in terms of the volatility you're seeing. What's driving that? Is it weather? What's tax refund season's early read? And as we think about atypical costs in the quarter, can you help us quantify those? Thank you.

Sorry, can you repeat the last part of that question on atypical, Seth? Sorry.

Yes. Quantifying atypical costs that aren't backed out of adjusted results.

Oh, yes. Absolutely. All right. So first, the volatility. A lot of it is weather related also in the quarter. We see week-over-week volatility, one week doing great, one week down. We see a lot of weather. It's been colder in different areas. So we have seen weather impacted. We have noticed, we have been tracking tax refunds. I think last week, they were down 50% year-over-year in distribution. So it looks like the refunds are slightly delayed in the quarter. But we track that regularly. We're ready. We believe the stores are prepared. We've got the right inventory levels prepared for as the season breaks. When the weather does break, we're ready to capitalize on it. So that's driving some of the volatility. We also think the consumer is still a little pressured as well. And so the consumer is pressured right now, especially the consumer at our cohort. We feel like there's a lot of pressures around that from inflation and other things that are still impacting their ability to purchase discretionary items, make trade-offs. And so we're monitoring that and how the consumer reacts in this environment. Confidence report came out yesterday, not favorable. So we're monitoring that to see how much of that has impacted some of the volatility in the quarter as well going forward. As far as atypical items. So atypical items in Q4 specifically was about 280 basis points on gross margin, about $0.68 on EPS and the adjusted EPS. On a full year basis, that was about, let's say, full year was 90 basis points on gross margin, 60 basis points on operating income margin and about $0.64 on the EPS. And I think in the slides that we provided give you a good depiction of those impacts.

The next question comes from Greg Melich from Evercore ISI. Greg, please go ahead.

Hi. Thanks. You mentioned a little bit of ticket growth, average ticket. How much of that was inflation and how much of that might have been mixed or items in basket? And just curious where you feel about your price gaps now in the market?

Yes. Great question. We actually feel our pricing is in a good place, very competitive now. Again, where a rare strategy of just having a competitive everyday price. And that $100 million investment, I think, put us in a good position, both on the DIY and on the pro side. Inflation is about 1%. Shane O’Kelly: And Greg, obviously, we'll keep an eye on what the market is doing, and that could be on inflationary trends. We'll keep an eye on what the market is doing as it relates to tariffs. We're a rational actor where there's an opportunity to pass along pricing, we're going to pass along pricing.

The next question comes from Michael Lasser from UBS. Michael, please go ahead.

Good morning. Thank you so much for taking my question. In light of your DIFM business being down slightly in the fourth quarter, it does seem like there were some share losses. So where do you think those share losses occurred in terms of the type of customer? Also are you seeing any evidence that the store closures and the restructuring plan are having an impact on the psychology of your DIFM consumer where they might be pulling back because of some of the uncertainty with the transformation? And then lastly, it's totally understandable that Advance has a lot of opportunity to improve its KPIs versus where it's been. But is improving versus where it's been enough given that your competitors during this time are also going to make advancements that may keep the performance gap where it is? Thank you very much. Shane O’Kelly: Hey, Michael, thanks. A lot to unpack there. Let's start in the middle on store closures and psychology. Obviously, in the moment when you first unveiled a store closure action of that magnitude, I think everybody pauses for a second and say, hey, how do I think about this? For us, there's some good news in that the closures for the West Coast were complete in the sense that we exited the market in total. So there's not a residual psychology to worry about. On the East Coast, because the closures were not holistic markets, but rather individual stores, we still have and maintain a very prominent presence in those markets. And so we don't see a psychological impact from that. I'll give you an example. I talked to one of our field leaders about the number of closures. And I said, how many do you have? He goes, well, I have a couple in…

Final question we have time for today comes from Michael Baker at D.A. Davidson. Michael, please go ahead.

Hi. Thanks. Quick two-parter. One, if you could talk about the comp lift that you're seeing around the hub stores, similar to what others have asked about what you're seeing with the merchandise assortment and the time to serve. Just curious what kind of improvement you're seeing there? And then secondly, your guidance assumes the economy gets better in the second half of the year. We're all sort of amateur economists here. But just curious what you're seeing or what led you to believe that the economy will get better in the second half of 2025? Thank you. Shane O’Kelly: Yes Great question, Michael. Thanks for asking. I'll take the first part on the hub stores, and Ryan can jump in on the guidance. What we did on the hub stores is we set up test and control groups. So we measure the hub store and then we measured the radius of impacted stores and see what the comp sales is versus control. And we are seeing both broadly and in terms of the number of hub stores and across time that when a hub store is there, there is a positive impact to comp relative to control for hub stores, by the way, and the hub store itself grows, because now that's a large skewed facility that functions as a store, but also a positive comp relative to control for the service stores. And it makes sense. It makes sense because you've seen this market paradigm in other players in the market. It makes sense, because everything else being equal, you've now put an 85,000 SKU facility that can service these stores, sometimes as quickly as within the hour for parts that they otherwise wouldn't have been able to get. And so we're pleased with that, and we are going to continue to roll forward with the market hubs. We've got 19 open. We'll get 10 more this year. And then we'll continue and we put out 60 as our next sort of guidepost for that by mid 2027. On the guidance, Ryan?

Yes. As far as the back half of the year, we're not saying significant improvement. We're saying normal market conditions in the back half, which would be a slight improvement from the front half where the consumer is pressured. I think that's consistent with what external market forecasts are for us and what others in the industry are predicting. And obviously, we'll monitor the consumer, monitor the changes in that environment and update accordingly as that progresses. Shane O’Kelly: Okay. I'm going to close with a quick comment for everybody. First, thanks for joining the call. As we go on this turnaround journey, Ryan and I have been at it with the team for just over a year. If you look at the strategy going with the blended box as our approach. And as you think about our willingness to do the hard things that we need to do to get this company on the right trajectory, selling Worldpac, closing stores, combining the supply chain, cutting costs, restructuring the organization, we're doing all of those things. We have firm footing in terms of we're in a good industry. We have a great cash position. And so those put us in good stead. And then we've got great people. And I want to end by thanking all of the men and women at Advance every day who've continued through these tough moves and, by the way, endorse the moves in terms of putting Advance on a footing to be in the auto markets industry as the player that our legacy harkens back to. We've been around for a long time. We look forward to being around. And thanks, everybody, for joining the call today.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.