ADVANCE AUTO PARTS INC Q3 FY2024 earnings call

Strategic Path Forward - Completed Worldpac transaction, outlined financial position of RemainCo. - Plan to deliver adjusted operating margin of ~7% by year-end 2027, driven by merchandising excellence, internal supply chain transformation, and store efficiency. - Key drivers include being a leading player in the auto aftermarket, getting back to retail fundamentals, strong leadership team, operational productivity review, and goal to deliver 7% adjusted operating margin by 2027. ### Store Closures - Decided to close more than 500 Advance stores and exit over 200 independent locations, with 75% of revised store footprint in strongest markets. - Evaluated store profitability, DC productivity, and operational execution. ### Supply Chain Optimization - Consolidating DC infrastructure to 13 DCs by 2026, building multi-echelon DC store hub network, and optimizing transportation routes. - Market hubs are improving comps relative to markets without hubs. ### Merchandising Initiatives - Focus on blended box, pro and DIY customers, with merchandising excellence, end-to-end supply chain capabilities, and store operating model changes. - Redesigned incentive structures in pro sales team and invested in DIY stores, training, and e-commerce.

Net sales from continuing operations were $2.1 billion, a 3% decrease compared with Q3 last year. Comparable store sales declined 2.3%. Gross profit from continuing operations was $908 million or 42.3% of net sales, an improvement of approximately 540 basis points over the prior year. Adjusted SG&A from continuing operations was $891 million or about flat year-over-year. Adjusted operating income from continuing operations was $16.7 million and 80 basis points as a percent of net sales compared to negative 3.3% last year.

2024 Guidance - Net sales expected ~$9 billion, including comparable store sales of ~negative 1%. - Adjusted operating income margin between positive 25 basis points and 75 basis points. - Adjusted diluted EPS in range of loss $0.60 to flat. - Free cash flow expected flat, including cash outflow from store closures. ### 2025 Outlook - Net sales expected ~$8.4 billion to $8.6 billion. - Adjusted operating margin planned 2% to 3%, with savings from store closures and merchandising activities. ### 2027 Goal - Aim for approximately 7% adjusted operating margin, driven by operational efficiencies in merchandising, supply chain, and store initiatives.

• Economic uncertainty and macro headwinds impacting consumer spending. - Risks associated with execution of strategic actions like store closures and supply chain changes. - Impact of atypical events like hurricanes and CrowdStrike outage on results.

Q: How much reinvestment have you assumed to make from cost savings into the business over the next couple of years and about vendor financing program?

A: On supply chain finance, targeting $2.8 billion. Reinvestment includes CapEx, with incremental CapEx of at least $300 million in 2025.

Q: Philosophically, how is Advance expecting to compete with the plan?

A: Focus on being number one or two in 75% of markets post store closures, leveraging density to win.

Q: Are there one-time costs in 4Q non-GAAP that aren't recurring?

A: 125 basis points of atypical items in 3Q won't necessarily repeat, Q4 has some disruption from store closures but gross profit traditionally low.

Q: Break down COGS improvement drivers?

A: From merchandising excellence, including vendor partnerships, pricing, and promotional improvement, with supply chain consolidation as a longer tail.

Q: Confidence in gross margin improvement?

A: Confident due to leadership changes and retail fundamentals focus, seeing initial impacts of changes.

Q: Market growth rate for next year and where to take market share?

A: Progress in both pro and DIY, pro has growth from parts complexity, aftermarket resilience, and efforts in pro sales and parts availability.

Q: Free cash flow and levers to protect cash flow?

A: Operating cash flow to fund CapEx, levers include store closure execution and focus on key metrics.

Q: Store closures criteria?

A: Evaluated store profitability, DC productivity, operations, real-estate, and rent horizon.

Q: Confidence in fixable plan?

A: Confident as plans are under management control, with metrics and leaders driving progress.

Q: Margin expectations if comps flat?

A: Margin expansion from cost-oriented actions under management control, not reliant on outsized sales growth.

Q: Deployment of Worldpac cash and debt payment?

A: Flexibility to pay down debt at maturity or before, managing liquidity during turnaround.