ADVANCE AUTO PARTS INC Q1 FY2025 earnings call

• Store footprint optimization: Approximately 75% of store footprint is in markets where they hold #1 or #2 position based on store density; embarked on store expansion to open over 100 new stores in 3 years.
• Merchandising: Expanded assortment framework, piloted in DMA, expanded to 10 additional DMAs, saw ~50 basis points uplift in comparable sales growth, store availability KPI in mid-90s.
• Product costs: Worked with vendors on line reviews, expect >50 basis points annualized cost reductions starting H2 2025.
• Supply chain: Completed store optimization, closing 12 DCs this year, opening 2 greenfield market hubs, targeting 60 market hubs by mid-2027, saw ~100 basis points comp uplift from market hubs.
• Stores: Pro channel led comp sales recovery, frontline sales team compensation/incentive structures revamped, delivery time shaved by ~10 minutes, testing standardized store operating structure in 10% of stores.
• DIY: DIY trends improved in H2 Q1 but still volatile, maintenance categories performing better, addressing with training, marketing campaign, reallocation of store roles.

For the first quarter, net sales from continuing operations were $2.6 billion, a 7% decrease compared to the prior year. Comparable store sales declined 60 basis points. Pro grew in the low single-digit range, outperforming the DIY channel which declined in the low single-digit range. Gross profit from continuing operations was $1.11 billion or 42.9% of net sales, resulting in a gross margin contraction of 50 basis points. Adjusted SG&A from continuing operations was $1.12 billion or 43.2% of net sales, resulting in deleverage of 180 basis points compared to the prior year.

• Net sales expected in range of $8.4 billion to $8.6 billion, comparable sales growth 50-150 basis points on 52-week basis, sequential improvement with stronger growth in H2, Q2 expected flattish comparable sales growth including Easter shift impact, 53rd week to contribute $100M-$120M.
• Adjusted operating income margin expected in range of 2% to 3%, sequential progress in operating margins, Q2 tracking in line with full year range, further improvement in H2.
• Adjusted diluted EPS expected in range of $1.50 to $2.50.
• Free cash flow expected in range of negative $85 million to negative $25 million at year end, guidance includes $150 million cash expenses for store and DC optimization.

• Tariffs: Volatile impact on product costs, variability by product, country of origin, tariff magnitude; need for mitigation strategies including pushing back on cost increases, seeking alternative sources of supply, passing on costs to price.
• Consumer spending: Volatility in DIY trends due to potential higher broad-based consumer goods inflation impacting household budgets; uncertainties in consumer sentiment and credit card data/default rates.

Q: About comp mix and store closings, how much impact did closing stores have on comps?

A: Comp difference between closing stores and remaining stores wasn't material; some transfer sales in Pro area planned and achieved.

Q: On tariffs, how much inflation impact in Q1 and future acceleration?

A: Inflation impact in Q1 was immaterial; scenarios in guidance contemplate different tariff outcomes, still early with much to play out.

Q: On store optimization and non-GAAP adjustments, color on rest of year?

A: Not guiding GAAP specifically, cash expense for store optimization $150M this year with $90M already done.

Q: On vendor financing and industry inflation, update?

A: Vendor financing use at ~$3B of $3.5B capacity, industry inflation scenarios varied with guidance range; no material change on vendor financing impact to COGS.

Q: On Pro growth vs industry reset, role of Pro initiatives?

A: Pro growth due to team efforts, outside sales team, commercial parts Pros, incentive/compensation plans, training, call planning, and DMA availability work making them more relevant to Pro customers.

Q: On store servicing model and market share with 75% in top 2 markets?

A: Store servicing model testing ongoing with positive results in asset allocation and driver hours; 75% in top 2 markets means right to participate and win, with legacy, proximity, and logistics advantages to serve customers effectively.