ADVANCE AUTO PARTS INC Q4 FY2024 earnings call

Strategic Pillars - Merchandising: Conducted line reviews, partnered with vendors, piloted new assortment framework in a DMA and plans to roll out to top 50 DMAs to improve store in-stock depth. - Supply Chain: Consolidated DCs from 38 to 16, expects to close 12 more in 2025, ultimate goal 12 large DCs by 2026. Expanded market hubs, with 19 open, planning to open 10 more in 2025. - Stores: Focused on speed of service, tested standardized operating structure in test stores, planning to expand to all stores by end of 2025. ### Store Closures: Closed ~500 corporate stores and 200 independent locations, made progress in liquidation, lease negotiations, and transitioning pro customers to alternate locations.

Fourth quarter net sales from continuing operations were $2 billion, a 1% decrease compared to Q4 last year. Comparable stores declined 1%, excluding closing store locations. Adjusted gross profit from continuing operations was $779 million, or 39% of net sales. For the full year, net sales from continuing operations were $9.1 billion, a 1% decrease. Adjusted gross profit was $3.8 billion, or 42.2% of net sales. Gross margin was impacted by transitory costs such as end-of-year inventory adjustments and liquidation sales.

Net Sales: Expected $8.4 billion to $8.6 billion in 2025, a 5%-8% decrease year-over-year due to store closures. Comparable sales growth expected 50-150 basis points. ### Margins: Adjusted operating income margin expected 2%-3%. Factors include cycling intercompany margin, savings from store/DC closures, gross margin expansion, and SG&A expense changes. ### EPS: Adjusted diluted EPS expected $1.50 to $2.50, including interest income and 53rd week contribution. ### Free Cash Flow: Expected negative $25 million to $85 million, primarily driven by closure costs; excluding these, positive free cash flow. Q1 net sales expected ~$2.5 billion, comparable sales decline ~2%, operating margin ~negative 2%.

• Execution risks of strategic initiatives, such as rolling out new assortment frameworks and supply chain consolidations. - Volatility in sales performance, particularly in Q1 due to factors like weather and consumer spending. - Impact of macroeconomic factors, including consumer spending trends and potential tariffs, on financial results.

Q: Could you talk about the new merchandise assortment impacting 70% of your volume?

A: Shane O'Kelly discussed focusing on car park analysis and store-based availability, with efforts to improve store-level part availability by addressing what's in the car park and ensuring individual store-level stock to fulfill orders locally.

Q: Can you talk about the reporting dynamics of one-time versus not one-time?

A: Ryan Grimsland explained that atypical items, like inventory adjustments and liquidation sales, are excluded from non-GAAP adjustments as they are transitory and not tied to strategic initiatives.

Q: The 7% 2027 goal, EBIT margin. Talk about leveraging SG&A...

A: Ryan Grimsland stated mid-40s gross margin and sub-40% SG&A as key to reaching 7% margin by 2027, with benefits from merchandising excellence, supply chain productivity, and store improvements driving margin improvement.

Q: Progress in improving costs with vendors...

A: Shane O'Kelly and Ryan Grimsland mentioned positive vendor feedback and cost improvements, with benefits from joint efforts in product selection, cost reduction, and promotional pricing expected to show in later quarters.

Q: Time to serve metric...

A: Shane O'Kelly discussed the importance of time to serve in pro customers, noting variability across stores and the impact of shorter time frames on increasing sales by enabling quicker car service for shops.