Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Advance Auto Parts, Inc. (AAP)

April 10, 2013 8:30 am ET

Executives

Joshua Moore - Vice President of Finance & Investor Relations

Darren R. Jackson - Chief Executive Officer, President and Director

Michael A. Norona - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Assistant Secretary

Charles E. Tyson - Senior Vice President of Merchandising & Marketing

Analysts

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Michael Baker - Deutsche Bank AG, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Gregory S. Melich - ISI Group Inc., Research Division

Denise Chai - BofA Merrill Lynch, Research Division

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Joshua Moore

Good morning, everyone. Can I have everybody's attention? Good morning. I'm Joshua Moore, I'm the Vice President of Finance & Investor Relations. And I just want to thank everybody to our Investor and Analyst Day. Glad to have everybody here. Before we begin, I want to just quickly introduce the panel that we have here for everybody in the room and everybody in the webcast. And everybody in the webcast, thank you for attending as well.

Here, I have Darren Jackson, who is our Chief Executive Officer. He is going to take some time this morning to go over our strategic overview and update. Mike Norona, our Chief Financial Officer, will provide a brief financial overview. And then, we also have Charles Tyson here, who will participate in the Q&A portion of the webcast and of this section of our -- of the event.

I want to remind everybody before we get into the details of the presentation, that there'll be some comments that we make here today that will contain forward-looking statements. I'm not going to read that whole thing on the slide, but you guys can review that. But just know that there will be forward-looking statements, and we're not liable to anything that we say here.

So we'll have some brief remarks and go through prepared remarks. And after that, we will open things up to Q&A. So at this time, I'd like to turn it over to Darren Jackson.

Darren R. Jackson

Thanks, Joshua. So I'm going to walk down -- so I'm going to walk down here because when I sit up here and talk to the group, it feels like I'm in church and it's going to be a sermon, that wouldn't be good for you or me.

So for those of you that are not familiar, and I assume most of you are, with Advance Auto Parts, here's just a little background. So we're into our 80th year now. Advance Auto Parts was $6.2 billion last year, approaching 3,800 stores. We will go over 4,000 stores this year, as many of you know. Nearly 90% of those stores, as we've talked about, are still east of the Mississippi. I would say, as we look forward, part of what I want to talk about today is just what the growth profile of the company is. And in addition, what we're focused on in terms of our strategic priorities to get there.

I thought I would start with the industry. The industry, we still see, is strong with many key fundamentals. It starts with the 240 million cars that are out there on the road. But the thing I'd focus here on at the top left is the salvage rate. One of the things that we're seeing is that salvage rate is -- scrappage rate is maintaining its 5% level or 13 million cars, which is having those cars stay longer on the road.

The other thing that we're seeing is the age of vehicle. That age of vehicle to the right, you can see the profile, it's 77% of those vehicles are -- 77% of those vehicles are 5 years or older, which is coming into our sweet spot.

One of the things that I thought would be helpful in our industry to understand is how complexity plays into the sales process. I don't know if you've seen this before, but we just went back and looked at parts, for example. And when you look at the parts, we pulled NPD parts data for the last 4 years. And you can see that the average complexity and the inflation in the parts part of our business has been growing 5% to 6%. And that's one of those underlying trends in the industry that's been with us for years, and we would expect that to continue as time moves on. It's that whether it's the batteries; whether it's the starters, alternators; whether it's the fact that, that electrical system and mechanical system continues to evolve at a rate that complexity will continue to drive the underlying sales process.

And last is that bottom right, which is deferred maintenance. That deferred maintenance number, you can see this year that we're going into, it has reached an all-time high at $68 billion.

So when you put those things together, the combination of the 240 million vehicles, that steady salvage rate that's in the industry, the mix of cars that are out there in terms of the aging process and our sweet spot, the growing complexity and how that's priced into the components of our business, combined with that growing deferred maintenance bill, we see a longer-term, fundamentally solid industry.

We've shown this for years. One of the things that back in 2007, we said, "Well, where is Advance Auto Parts going?" And overall, we served 2 customers, the DIY customer and the commercial customer. When we think about markets, we think about the addressable market. And then the red, we said for years, we believe that the auto parts segment that we serve is roughly $20 billion, growing 1% to 2%.

Now within that 1% to 2%, clearly, some are growing faster, some are growing slower. But our focus has been that commercial market, which is roughly $40 billion in terms of our addressable market. What we've seen as we look out, we said addressable market growing another $10 billion over time, again, driven by many of those strong fundamentals and increasing complexity.

So many of our strategies, back in 2007 and forward, are to: how do we capitalize on that commercial market? How do we grow in that space and position our company? Because structurally, the business is changing.

Here's just a way to think about our focus as a company over the last 5 years and in the next 5 years. So the first 5 years, and it's probably better looked at this way, is that we focused on many of the key fundamentals and capabilities to get into the Commercial Business. And it began with the most fundamental, which was availability and getting the right brands. And that, for us, was MOOG and Wagner, but it also included many of the key pricing capabilities that we built into the business and many of the key custom mix capabilities. We built on that, and Charles Tyson will talk about it in a minute in terms of how we built sourcing, whether that was our Taipei office or our e-commerce capabilities. Up and through this past year, you can see we've have been very busy, whether it's been building out Remington, which you'll see today; our commercial credit capabilities or acquiring BWP, which I'll talk about.

And more recently, we focused our development efforts in terms of brands, in terms of Wearever Platinum brakes. As we look forward, probably what changes for us as we look out, is that over the last couple years, what hasn't changed is our strategies, that focus on service leadership and superior availability.

Now those priorities, we've narrowed down to just a few, and so how do we continue to grow that Commercial Business at an accelerated rate? How do we move our focus in terms of in-store execution, which we've talked about a few times. And then, how do we do it in a more efficient operating model when you have a DIY and DIFM business working together. And I'll talk about the priorities underneath that, that we're driving, in a minute.

And as we look out, availability is key. So how do we enhance that availability through some of our local market availability efforts, which we'll talk more in detail today in terms of Charles' presentation. And then, we see an opportunity as we've reconfigured, redesigned, repositioned our new stores to drive those stores with more 70% parts distribution and 30%, we'd say, more of the DIY distribution in the future.

So as we look out the key 5 initiatives drive these priorities for us, we've been relentlessly focusing on what our customers told us is most important. And that's delivery, speed and reliability. And so each one of our stores today were able to, through our electronic delivery board, tell our customers and measure each one of the deliveries that we're getting to our customers as we roll out our Find It Fast, Get It Fast[ph] parts catalog later this year, we'll be able to give our commercial customers and quote them delivery times.

So how do we move to the next level from simply measuring to being able to make a promise and deliver around delivery times each time that we're talking to a commercial customer. One of the other efforts -- and when you see our proxy next year, as we focus our team, we're spending a lot more time focusing them on customer, commercial customer retention. So we'll evolve from simply measuring satisfaction with our customers to incenting our team, particularly on our largest customers to improve week in, week out, year in, year out our commercial customer retention rates.

The other piece that we have focused on in commercial growth this year and invested in is national and regional accounts. So if you look at the mix of customers that are out there today, roughly 78% of the garages are 3-plus bay and larger. Our percentage penetration in those garages is in the mid-60s. So what we have focused our team on is investing and growing that national and regional account. Some of our largest accounts were in Las Vegas, with a group of us 2 weeks ago. So whether that's Sears or Monroe, we are spending time working with those customers to figure out how we more deeply penetrate them but more importantly, grow that portfolio of national and regional accounts as we go forward.

We also are recognizing that in this dual model in terms of our in-store execution, we're spending more time with our labor systems, positioning those systems to better serve commercial customers. Our DIY business, we've been running for 80 years, we're pretty adept at running that. But getting the schedule right in terms of delivery drivers and delivery execution has been a key. One of those things, again, that will help is our Find It Fast, Get It Fast later this year and our enhancements to our new labor model.

Inventory accuracy, you've seen a little bit of this in our shrink results this past year. What we talked about, it shows up in shrink but we've developed a more intense focus across all of our stores in terms of in-store availability. Charles will talk about, in terms of that inventory accuracy, too, how we're investing in terms of more SKU count and the redesign of our back rooms in order to both improve the availability at the local store level and execute it in a way that we can be sure that we're in stock on the most important items.

We spent more time in execution this year, working with our DLs, our general managers and our CPPs on what we call the Triangle team[ph] process. And that's really helping our DLs, many of which who grew up our division managers in a retail environment, know what their roles are in terms of serving commercial customers and commercial customer relationships. So each week, we will work with those teams on customer feedback and customer engagement to help them be a bigger part of the selling process than they've been in the future -- in the past. So in the future, they'll be able to affect more of those commercial relationships.

On the efficient operating model, Mike will talk a little bit about that in his remarks. But part of what we're doing, too, is we look at our hub brands and so we look at our in-store labor, just trying to balance in terms of the cost structure of the business, how we're taking cost out farther away from the customer and investing those costs into delivery capabilities and commercial capabilities.

As we look out, a couple of the key growth areas of our business, and we'll spend a lot of time on this today in Charles' presentation, is that we've recognized this local market availability. And being able to say yes at the local store has been a key focus for us. The easy things to focus on, we'll spend time on today is Remington, but we've had a concerted effort, over the last several years, to grow our local hubs and grow that hub penetration market by market. I think Mike will take you through the actual growth rates of those hubs over the last few years.

And then finally, we have been investing more in terms of our custom mix capabilities, improving those and targeting the inventory upgrades, all in an effort to keep driving up that percentage of stores, delivering out of the store the full order each time.

Lastly, last year was the best year of our new store opening process. And as I talked about earlier, we spent a lot of time reconfiguring the stores that we're opening, focusing more on the Commercial Business and the commercial backroom. And what we can see, that was our best group of stores, probably, in the last decade in terms of performance, in terms of weekly sell-through rates. What we see is that opportunity, and I'll take you through it in a minute, is to leverage that as we look west and grow our store portfolio into the future.

And lastly, late last year, the last day of last year, we completed the acquisition of BWP, and I'll talk about that in just a minute here.

So one of the things -- you'd say, "Well, what do you focus on to know that you're pointed in the right direction?" And what I put up here is that quarter in and quarter out, we use IMR to survey a few thousand garages on the measures that we think are most important to our commercial strategy. And what this shows is that over the last 2 years, just some of the key metrics that we're paying attention to from a customer point of view, and it starts with parts. Do I have the parts and are they in-stock? And you can see across-the-board last year, we had our single largest improvement in parts and even stock and really led the industry. And probably the most important thing, we think our customers, whether it's DIY or commercial, are interested in "Do I have parts in stock?"

We also looked across, "Do I have the right breadth of products?" So do I carry the wide selection? Again, we made tremendous progress last year and are near the top of the industry in the breadth of products.

Probably about 4 years ago, partly through our AI efforts, but partly through a focus on where is the customer going and how are the cars evolving, we put a big effort in terms of import parts. And I would say we're only second to CARQUEST, and that's probably WORLDPAC in terms of import part business. And so from a customer point of view, and I think some of you have done -- in the room, have done your own surveys and recognized that we've made quite a bit of progress in terms of parts availability.

We recognize you have to have the parts, but you also have to be competitive on price because it's pretty consistent, again, with many of the surveys that are out there, but you can see that we've made quite an impression to not just in having the part but in terms of the industry also projecting the value image that we want to project, not necessarily cheap, but competitive in terms of pricing.

The other places that we've said we must differentiate is delivering the part fast. So whether it's our electronic delivery board or whether it's how we've positioned our hub network or how we've positioned our delivery fleet. Again, last year, we led the industry in terms of parts delivery in terms of speed.

Finally, we knew that there were a couple of areas of the business that we were just behind on. So 3 years ago, we didn't have a B2B website. So you can see that's reflected in terms of as we exited 2011 and as we began this year, our parts website, overall website, has grown immensely to lead the industry, virtually lead the industry in terms of capabilities.

And finally, late last year, we brought online our commercial credit capability. So as we looked across -- and you can see, we're very proud of just the response to that credit capability in terms of what customers are seeing, relative to their other choices.

So when I back up and think about over the last 5 years, we have been very focused on how do we build the set of capabilities as we look out because structurally, we believe longer term our business has to first achieve a 50-50 mix and then, go beyond that in terms of -- and then go beyond that in terms of our commercial penetration. How do we start with a set of capabilities? And then, transition into the next 5 years, and I want to talk about some leadership changes we made last week because they were actually leadership changes that we've been contemplating more in terms of a year or quarters as we turn and focus more on the execution of the business versus the capability build.

And so we feel like we're in a very good position in terms the teams that we've built. We feel like we're in a very good position in terms of our trajectory of capabilities that we've built to participate in terms of where the business is going. And so we made some -- why don't I just -- so last week, we made some announcements, where George Sherman will be joining our company as President. But I thought before I get into George, I just take you through a little bit of our organization before and what our organization is after.

So for 5 years, we have been focused on building a set of capabilities principally driven through Kevin Freeland, our COO; across Jim Wade, who heads up -- works with me on our strategy efforts to the company, still will work with me. Kurt Schumacher and Donna Broom, who run the execution or field parts of our business, and then, Mike Norona, who you'll hear from today. But we had, basically, across that set of responsibilities, mixed some of the strategy development, some of the sales activation.

And in part, we were trying to cover a lot of ground over the last 5 years in terms of building those capabilities. As I look out over the next 5 years, under Mike's leadership as our CFO, under Georgia's leadership as our President; under Tammy Finley as our HR leader and then, Jim Wade who reports to me in the strategy efforts, we will streamline the management team in a way that our sales activation efforts will all be under the President of our company from availability to our field operations, to commercial sales, with a mission that the work tends to be more of a -- driving the culture around commercial execution, sales and store ops as a company end-to-end in terms of -- from the availability efforts to the store execution efforts, to our people efforts, where I'll focus more of my time on in terms of the recruiting, development, succession planning of the company and strategy efforts with Jim Wade, who was really integral on our BWP acquisition earlier this year.

Finally, Mike will lead our finance efforts as he has, and our IT efforts. So all of our support functions from finance, legal, comp and benefits to IT, will all be under Mike's organization. So in many ways, last week's changes were really to drive 3 outcomes: one was to align with the next 5 years in terms of the focus around customer and execution; two was to simplify, to simplify our organization's structure in a way that day in, day out, there's more clarity in terms of the outcomes to drive; and then three, what it allows us to do is to make sure that we're also peering out in the way in terms of the strategy of the business because what we can see, particularly in the commercial market this past year, is I do think that we're seeing a little bit of that evolution of the small mom-and-pops. Our acquisition of BWP, it's probably been one of the more robust years in some of these smaller players coming up for sale, and just understanding how the market in the industry is going to evolve as the complexity evolves and quite frankly, as more of us focus on how we're going to grow the business going forward.

So with that, I'm going to have Mike Norona come up and talk a little bit about, over the last 5 years, what has our journey been in terms of -- and how has it translated to the financials of the business.

Michael A. Norona

Thanks, Darren. Good morning, everyone. So what I'm going to do is I'm going to translate the strategies that Darren talked about into the measures we used to track our performance and the progress we've made. And we're going to talk about over the last number of years, I'm going to touch on our outlook. We shared some news yesterday, so I'm going to give you a little context for that. And then, we're going to talk a little bit about the road we see ahead and the opportunity we see to both grow our business and improve our profitability.

So we've seen some solid progress in the strategies that Darren talked about in the last number of years. As we've invested significant amounts in commercial, availability and as Darren referred to, building a lot of capabilities in our company. And you can see from a commercial standpoint, the resources that we put in and you can see, the number of commercial programs are up 25%. You can see we have 3,000 more delivery trucks, so over 8,000 delivery trucks. We've doubled our sales force, over 430 sales people out there on the street, helping us drive our Commercial Business.

Our B2B sales penetration is 10%. And as Darren alluded to, 3 years ago, we didn't have a site. And it's a great way in order to -- when people use our site, we have better retention, better sales, better service.

And then, our sales per program, and this is something we're extremely proud of, the growth of our commercial sales per program, which is -- which now stands at $638,000 per store, it's up 45% in the last 5 years.

And another thing that we're proud of is how many ASE certified team members we have in our organization, over 8,000 of them. And really, that's a great measure of the training we're doing to put knowledgeable people around parts in front of our customers and talking to our customers. And again, these are the some of the progresses that we've made to really drive our Commercial Business.

And as it relates to availability, we have 3x more hubs than we had 5 years ago. And again, hubs are a critical part of our availability strategy to improve our coverage and in-market availability. It's absolutely critical.

Our inventory per store is the highest in the industry, at $609,000 per store. I think last year, in 2012, our inventory was up 13%. The year before, it was up 9.6%; the year before that, it was up 14.2%. So we've been investing a lot in the inventory. You have to have inventory. You have to have parts in this business. We've been funding that, as you can see, through the reduction on our owned inventory, and our AP ratio currently stands at 87.9%. So we've been funding that growth in the inventory.

And then, our SKU count per store is up from -- 16,000 SKUs per store to 18,000 SKUs per store. Again, another key measurement of the improved coverage and the number of parts we have available for our customers.

As we look at our financial performance, we've also seen accelerated performance. And I wanted to highlight a couple of things. One is, 2012, we didn't hit our expectations from both the top line and bottom line perspective. We had some real challenges in our colder-weather markets, it's been well documented, which created some challenges in our business from a top line perspective. And that was driven by the colder weather. It was also driven by a tougher consumer environment as we saw the demand for aftermarket auto parts slow a little bit in 2012.

As our typical consumer, that hasn't seen their disposable income change over the last number of years, driven by some of the unemployment and some of the other economic factors, have to make different trade-offs. Darren alluded to a number -- the deferred maintenance is at record levels, that's a great indication that people are just holding off. And we saw that in some of our maintenance categories.

And then, in terms of -- so although there was softness there, as Darren says, the fundamentals of our business are good. We believe in the future of things like Commercial, availability is going to drive that. So we're very confident, but we did see softness.

The second thing I wanted to cover is just the sequential improvement we've seen in the things that we measure from a financial perspective. We kind of focus on 3 things: growth, profitability and returns.

So when we think about growth, it's that sales per store growth, and you can see there, our sales per store have grown about 9% over the last 5 years, obviously driven by our commercial growth. We've also seen our gross profit rate -- and Charles have talked a little bit about this, grow over 300 basis points. We're very proud of that. And then, we've seen our operating income rate grow 200 basis points. I'm going to give you a little bit more context of where we think that can go. But the 200 basis points we're proud of over the last 5 years. And then, we've seen our EPS more than double over the last 5 years, obviously, driven by the growth in Commercial and the improvements that we've made in some of our gross profit rate.

Turning to returns, it's something that's very important to our company in order to build a solid financial foundation with which to grow for. We've really improved our balance sheet. We've improved our working capital, and we've improved our capital structure. So we really positioned the company to have a solid financial footing to grow from. And some of the measures that we look at there, obviously, our return on invested capital is up 540 basis points over the last 5 years. We've watched our free cash flow almost double when you net out the in-sourcing of our credit receivables that we did last year. And then, our leverage ratio was at 2.2x and again, that's very important for our capital structure, very important for our investment grade, it helps us with things like our AP ratio.

So when you look at these metrics, we've seen sequential improvement, and it gives us just a solid financial footing to grow from.

I wanted to touch a little bit on the outlook. So as you remember on our fourth quarter earnings call, we talked about -- in the first quarter, that we expected our operating income to decline mid- to high-single digits. And some of the drivers around that is we anticipated that we would have some of the impacts, the environmental impacts that we saw in 2012 would carry over into our first quarter. Our top line and bottom line comparisons to Q1 last year were the most challenging, so we knew that would be a headwind. Some of the stores that we opened last year, the new stores, we had a larger openings in the end of 2012. So the annualization of that would be a headwind for us. And then, last year, we didn't pay back -- we didn't pay much incentive compensation because of our performance. So as we build in now a more normalized incentive compensation, that would be a headwind in Q1.

So that was the outlook that we had provided. You saw that we released some statements yesterday and we wanted to be transparent with you, that we did expect Q1 to be choppy, to be challenging. And we said that in our remarks. It's been more challenging than we expected, primarily in the areas of DIY. Some things that we didn't -- we just didn't have visibility to, when we reported that we have seen challenges in, is obviously, the delays in tax refunds has had an impact on our consumer. The higher payroll taxes has had an impact, and just the slower start to spring. We haven't seen spring. What is optimistic is when we do see glimmers of spring, and we haven't seen much of it, but when we do see days of spring, the business is out there. So that's encouraging for us.

We're not going to provide, today, any further numbers in relation or comments to our first quarter numbers because we are still in our first quarter. I did want to give you a little bit of context, though, to our annual outlook that we put up here. And just to remind you, we haven't changed our annual outlook, we're still early enough in the year. We need to see when that spring comes, and so we haven't changed our annual outlook at this particular juncture.

And just to give you a little bit of context, we are expecting low-single digits driven by Commercial. As Darren alluded to, we've upped our new stores this year in the range of 170 to 190 new stores. And then, the addition of the BWP stores, they're not included in our comp, but they'll be included in our sales results and our operating results.

We've planned for a modest improvement in gross profit, in our gross profit rate this year. And then, we expect our SG&A to grow 3% to 5%, and I wanted to give you a little context for that as a reminder. If we didn't buy BWP, that number would be 1% to 3%, so the growth in SG&A. And the primary drivers of that are 2: our new stores and a more normalized incentive compensation.

And then, when you layer in BWP on top of that, and there's 2 aspects: you're putting a new organization on top of that. And then, we said that we're going to have $0.15 to $0.20 of integration costs, so that's included in the full 3% to 5% and in the SG&A per store.

We expect our capital expenditures to be $275 million to $300 million, again, investments and availability and supply chain, new stores, store systems.

And then, from a free cash flow perspective, we said that we would be a minimum of $375 million, and that excludes the BWP acquisition. And as a reminder, the BWP acquisition was completed at the start of 2013.

And then, EPS outlook, we said would be the range of $5.30 to $5.45. And that does include the onetime BWP integration costs.

So I want to now turn about what we see ahead. So Darren talked a little bit about the strategies, and what we want you to hear there is they're not changing, and we have a real commitment in our company towards growing our Commercial Business, maintaining our DIY business and really improving our availability, which helps both those businesses.

We -- more recently, we haven't met our own internal expectations from a top line perspective and a bottom line perspective. Over the last number of years, we're pleased with the progress we've made. But what we wanted to share with you today is our recommitment to getting to 12% operating margins. So you would've seen recently, we did a special grant to our officer team, which was focused on 1 performance measure, it's getting to 12% in 3 years. Our company is firmly committed to doing that.

In the proxy that Darren referred to that you'll see next year for 2013, so you'll see it in 2014, you will see that our short-term incentives, so our bonus program, 80% of that is driven off of our operating income growth. So again, another "what gets measured gets done." And as an organization, we know we have to improve our profit model, and we're committed to improving our profit model to 12%. And really, there's really 3 dimensions of getting to 12%, because sometimes when you hear getting to 12%, people hear cost cuts and hear reductions. The first thing we want to share is growth is critical. We have to grow our business. And there's 3 dimensions: we've got to ensure that we continue to grow our Commercial Business, we continue to improve our availability because it drives both our Commercial Business and our DIY business. And we're going to improve our store footprint, and we're going to have more stores. So growth is paramount.

The second dimension is profitability. The profitability and the pathway to 12% is going to be modest gross profit improvement and a much better cost structure, much more efficient cost structure, much better execution.

3 big drivers around that will be improvements in our labor productivity. We've invested in a number of tools. One of them is a tool that allows us to measure our productivity for every team member in our company that works in a store. So we can now measure productivity and do performance management in order to improve our dollars per transaction.

So we expect to see better labor productivity.

The second area is building a more flexible cost structure. We have a high fixed cost model, so the more of our cost that we can variable-ize, the better our costs will flex as our business flexes.

And the third dimension is cost furthest away from the customer. We have opportunity to take those out. Whether it's professional services, whether it's support costs, whether it's occupancy costs, those are a few examples.

And then, the third dimension to getting to 12% is returns. We have to make sure that we continue the disciplined approach we have with our financials, with our balance sheet, with our working capital. And some areas that we're focused on there, obviously, is ensuring that we continue to make sure we make investments in things that give us good returns, continue towards improving our AP ratio. We've shared that we are committed to reducing our owned inventory and our AP ratio and get to 100%.

And then, the third thing is -- and very important to us as well, is to improve shareholder returns. We're going to do that in a couple of ways: one is improving our operating performance. That's where we're always focused first, investing in the business and growing our earnings.

And the second is things like share buyback. And we shared at the beginning of this year, last year, we didn't buy back any shares because we looked at sales growth opportunities. And we said this year, we're going to get back to historical levels of share repurchases. We have a disciplined approach and an opportunistic approach, some of you may have seen in the proxy, our updated share count. And I wouldn't read any -- I wouldn't read how much shares we've bought in the first, a little bit of this year. We always measure our share repurchases over the year and over years. And we're committed to getting back to historical levels of share repurchases.

So I'm going to turn it back to Joshua to kick off the Q&A but what we wanted you to hear is, we're firmly committed to the strategies, things like commercial availability. We're firmly committed to improving our profitability and our top line, and we're firmly committed to continue to drive shareholder returns. Thank you.

Joshua Moore

Thank you, Mike. Thank you, Darren. We are going to transition to the Q&A section. What I want you to do. We are going to have 2 mics, we're going to kind of split the room in half here. And we have plenty of time for Q&A, so everybody will be able to get into the queue, everybody within the queue, we'll be able to get to you. And what we want you to do is definitely speak into the mic. This is the webcast, we want everybody on the webcast to be able to hear your questions. Please also state your name and the firm that you're with, so we can hear that loud and clear as well.

Question-and-Answer Session

Joshua Moore

Let's go right over here. Yes?

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Colin McGranahan at Bernstein. Clearly, Commercial is a big part of the strategy here, both from a growth and returns perspective. Sales per program is pretty healthy relative to the competitors. And it seems like, really, the growth strategy is to penetrate those 3 big garages more. I may be jumping the presentation a little bit here, but I was hoping you could talk a little bit more what the strategy is to try to go after some of those larger garages and get on those call lists of the more sophisticated customers?

Darren R. Jackson

Yes, thanks, Colin. So I'd say 3 things. As I talked about earlier, if you think about how we progressed over time, if you look back far enough when our business was 80% DIY, your natural next step was a 1- to 2-bay customer because that customer looks a lot like a DIY-er. And so what we've done over the last several years, by just getting what we referred to as table stakes, the trucks, the sales people, the Parts Pros, we've been able to grow our penetration of 3-plus bay to mid-60s. This year, we made a decided effort to invest in the national accounts team, a regional accounts team that is a dedicated team to go after those garages. Probably, our largest customer today is Sears and Monroe. And we've been investing in -- our view has been with MotoLogic, with DriverSide, with KeyLink. We bought some key services to also think about those larger garages. Part of their needs, going forward, would be not just parts needs, diagnostic needs and also educational needs. So those teams are also challenged with, "What can we do beyond the traditional parts delivery in terms of those larger garages in order to meet their needs?" And the other thing that we're learning, taking the Northeast, is that we're able to use the assets of BWP, use the assets of AI and use the assets of AAP in a way that, if you look at national accounts in particular, what they're seeing in their business is that -- in our meetings with them last week, their Saturday and Sunday business, some of them Sunday has become the fourth largest day of the week. And so how we begin to use our assets, our combined assets that we can be first call, second call and third call in those key markets, the Northeast being the easiest. But we have many other markets where our density and our proximity, I think, allows us to serve those garages more consistently. Now to be fair, one of the challenges that we're seeing is that we now have to figure out, as I talked about scheduling effectiveness, how you staff the stores with the right commercial parts pros and delivery support to make sure you can capitalize on those parts of the day and weekend schedules in order to serve those larger accounts. We're being forced by their customers to offer different types of hours and different types of service. So to summarize, we've made a decided investment. This is just part of us growing. We still don't have a fleet business per se, we only have a government business. National and regional accounts is the next logical place for us to invest and to grow our capabilities and credibility with those accounts.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

And on that 60% that you have penetrated, do you find -- the 60% that you've penetrated, do you find you're in a different position on the call list, farther down on the call list with those larger garages than you are on the 1- and 2-bay guys? And is it part of the strategy to kind of further increase your penetration with the guys you're already in?

Darren R. Jackson

Yes. So we are farther down on some of those lists, not clearly not Monroe, clearly not Sears. But what we've been able to do, really, through part of our analytics is to know that some of our biggest opportunity is to climb into that second- and first-call position with some of these larger accounts. And that's -- probably the other thing to mention is that we knew we had a gap 3 years ago because many of these larger, more sophisticated garages, we were required to have B2B capabilities. And literally, we've gone from 0 to 10. We believe the industry outside of WORLDPAC is closer to 18%. So we've made up a lot of ground in a short period of time. I would expect that the other piece of the business that we recognize, that we were a little deficient in, in terms of service levels was our credit capabilities. And so part of the investment to take the next step in terms of servicing those 3-plus bay garages was to do it in a way that we could be in much better control of the service experience from a credit point of view, as well as a B2B point of view and in parts availability. But it works -- it's a connected system because the hubs connect into that, the daily replenishment center connects into that. We find that those largest accounts, quite frankly, are more persistent users of the longer tail of our inventory, than the fast-moving parts of the inventory as well.

Michael Baker - Deutsche Bank AG, Research Division

Mike Baker from Deutsche Bank. So my question is on sales trend, and maybe more for Mike, I figured, presumably, negative in terms of your comp this quarter, but the guidance gets positive for the year -- I'm sorry. All right, so the guidance is -- gets positive. I guess, the question is what happened -- all right, for the third time. We'll try again. So it's Mike Baker from Deutsche Bank. The question is on change for sales trends, presumably negative in the first quarter, guidance is that it gets positive for the year. Is it really just a matter of easier comparisons? Is that what is built in there? Or is it a lot of your company's specific initiatives kicking in? Do you see the economy getting better, maybe as we get further away from the tax refund delays? Just wondering, what's baked into that estimate for the full year?

Michael A. Norona

Yes. So just as a reminder, we showed you a slide that said, that we expect our Q1 operating income performance to be slightly worse than what we anticipated in our annual outlook. And typically, we don't give quarter information. But we thought it was just prudent, given last year Q1 was our strongest quarter. So definitely, the compares get easier. So that will be one aspect. Probably the biggest thing we're waiting for is for spring. Typically, we typically have a pretty decent -- historically had a decent first quarter because it's our 4 periods. And spring usually hits during that, and we haven't seen spring yet. So obviously, spring -- and it's important that spring gets back. The deferred maintenance that Darren talked about, we had the lingering impacts of last year's, just no winter in 2012. So consumers -- we sell failure and maintenance. And in Q1, some of our seasonal categories have been down when we look at our wash and wax, we look at our AC business, we look at our brakes. So we're expecting to see some bounce back in some of those parts of the business. As Darren also talked about, as we improve our retention of our Commercial customers and Darren alluded to the fact that we were just with some of our best customers at a -- we do an annual event with them every year, and I think we were all expecting that there a lot of pent-up demand with this deferred maintenance. Darren, anything else?

Darren R. Jackson

Yes, I think that's right. So Mike, maybe a way to answer that is that when we built the guidance for the year, we probably saw 3 key things. Certainly, we were going to anniversary some lower comps. That's helpful to know, but I get underneath and say, well, what should drive it? I think this year, right around April, we'll be anniversary-ing some of the impacts of Wal-Mart's reentry into the business. And that was April of this year. Two, we knew we were up against some pretty big inflation, still principally in the oil categories, as we were going through Q1. That begins to abate in the final 3 quarters of the year. And so those are -- think about those as external events. And then internally, we are anniversary-ing in terms of, we got a much larger store pipeline that just keeps building and anniversary-ing in the comps. That should help us. Two, the hub store expansion and the availability efforts that we've been building over the last, as Mike said, 3 years. But principally in the last 4 quarters, that effort, a lot of it was continuing through the first quarter, and this year should help the back end of this year as well. And the wildcard for us, as we said on the fourth quarter call, the other thing I pay attention to is how do you think gas is moving? I would have said on the conference call, it seemed like it was moving against us. Today, it seems like it's stabilizing with us, so I like that trend. I don't like the trend of the payroll taxes, I don't like some of the underlying trends I talked about on the call in terms of the pressure on our consumer. But I think those will be outweighed by the other factors we talked about.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Good morning. It's Matt Fassler from Goldman Sachs. You spoke about a lot of evolving strategic initiatives today and you have, as you said, a pretty fundamental change in the structure of your team and to some degree, the personnel of your team. We don't know George Sherman very well yet, but if you could talk about how you think the change in structure and the change in people will enable some of the initiatives that you spoke about today?

Darren R. Jackson

Yes. Thanks, Matt. So probably, the simplest thing to know about George is he grew up in a small town in upstate New York, at 25,000 people, and his mom instilled a great set of values in him, and his dad instilled a great set of values in him. He was in the Air Force for 7 years as an officer, before he left the Air Force to join the Target organization, where he was there for 15 years. He started out as a Store Manager and grew all the way to the RVP ranks, before Bob Ulrich picked him out and put him into Mervyn's to run that store organization as they were trying to fix it. As Marvin Ellison gravitated to Home Depot, George spent a number of years at Home Depot, working in that organization, from store operations to store support to home services. I can't tell you how many great references at Home Depot that I received. And if you think about what we're trying to do strategically, and I've said this to some in this room, is that the next 5 years, I see different than the last 5. And it really is driving more of the cultural parts of the business, the sales, the execution, and lining up the teams that include everything from our availability and supply chain efforts that include Charles Tyson, who will talk later today, to store execution, which is Kurt Schumacher, our Commercial Business, which will be led by Jim Durkin, our support -- field support business led by Bill Carter. And that team, along with Scott Bauhofer, who runs our e-commerce business, is literally now all aligned in one organization, driving one outcome, which in a simple word, manage sales activation, customer activation of the business. A few quarters ago, the HR function, which reported to me, quite frankly, Mike took it over for a period of time as we refocused our effort on sales. That was never a permanent structural change for us. I'll go back to focusing on the people and the succession planning. Jim Wade, which many of you know, has been in our industry for 20 years. Jim works with me today on the strategy of the business. He's very instrumental in BWP. So that will, again, allow me to take some of my time, which was dedicated to Commercial sales and operations. And there are certain things I do well, but to be honest, I didn't grow up in a field organization. And one of the changes here that we're trying to effect in our Senior Leadership Team is to add that field customer execution part of the business, aligned in one organization to drive out the strategies. And so part of it, many times in leadership changes, we'll think about the people, but you got to put the people in the context of where the business is and what you're trying to accomplish. And over the next 5 years, I see more value coming out. And that consistency of the customer field and store execution, it's not that they're bad today, but organizationally, that focus within one part of our organization, I think is more critical than spreading it across the organization. So that, I'm hopeful, gives you a little bit of context as to where we're going, and I hope the -- use the organization chart to help -- also help you understand the simplification of our organization and the structure, too. Because part of it is speed and focus that I'm looking to get out of this as well.

Unknown Analyst

Good morning. It's Bill Fins [ph] from Citigroup. I have 2 questions. One, Mike talked about pursuing a more flexible cost structure going forward. Does this involve more part-time employees, or what else does this entail? And the second question is in regards to the chart on Page 6 of the customer survey, where Advance seems to rank highest than just about every other competitor. Sales productivity, meanwhile, is in the mix. Where's the disconnect between what the survey is telling us and what the productivity is telling us?

Darren R. Jackson

Yes. So maybe I'll do the last one first and I'll have Mike talk about the cost structure pieces of it. I think, Bill, part of it is that if we were here 5 years ago, I think we're 4 40 a program going to 6 40. If we're here 10 years ago, we're a fraction of that. I think the Commercial Business is different than a typical retail business that you turn on with retail promotions or price change or what-have-you. Commercial Business is you turn on through relationships. And they grow more through a step function than they do a linear function. And so, if you think about that chart in many ways, it reflects the work of the last 5 years that the customers are certainly noticing and maybe to Colin's question, that may have got us to -- from third call to second call. So how do you get from second call to first call? In many ways, it's building those relationships and consistently and reliably executing, which goes to Matt's question, what are you focused on over the next 5 years, is that how do I align the organization? And it's not a good or bad, it really is kind of an evolution in terms of the context of what we're trying to achieve is that, that report card for me says that from a customer point of view, and I think those are 12,000 shops that said, you've come a long way in the last 5 years in your parts availability to your website to your credit. Now you have to activate, build the relationships. And even if you do that, you have to consistently and reliably deliver every time I put an order in. I think that's our work right now, is to capitalize on what the customer is recognizing in terms of our journey. And so the positioning of the team, the focusing on building the national and regional accounts are to do just that.

Michael A. Norona

And then, the first part of your question. Is this on? The first part of your question -- is that working? Yes, is around the more flexible model, and we're not going to get into the specifics of some of our initiatives, obviously, because of some of the competitive nature of them. But I'll give you an example. During quiet times of the year, we'll be operating at minimums, and whenever you hear that term, it usually means you're not leveraging your cost structure. So with -- whether it's our incentive programs, that business performance and management tool that I talked about, is now we can see the productivity by team member, where we schedule people, how we schedule people, how we design our incentive programs to make them scale with volume and performance, are ways in which you could make your model more flexible. I think the other thing, and it gets back to a question that was answered earlier, I think, around the structure. I think when we started in Commercial, it was more -- we started as a retailer. And then we've really grown this Commercial Business and now, it's 38% of our business. And we think there's then opportunity for it to grow to 50% of our business. We need to have 54,000 team members, thinking about Commercial. And as we look at our store teams, as we look at our sales teams and as we look at all our company and support teams, we all have to be committed to growing Commercial. So I think as we look at the roles within the field and how the sales force integrates with the store and with the DLs, I think there's lots of opportunity to leverage our resources across the pools in which to grow the business and make our model a little bit more flexible and a little bit more fluid.

Michael Lasser - UBS Investment Bank, Research Division

It's Michael Lasser from UBS. My question is about the industry over the next 5 years. There's been a lot of debate about what's transpired in the last several quarters, whether it's weather, whether it's something more. If once the comparisons ease and things across the industry don't improve, maybe it's because new car sales are on the rise, longer-term as the cohort of vehicles that were sold in 2007, 2008, start to graduate in the sweet spots of the industry, and things just are a tougher slog from here, how's -- a, what's your view on that? And b, how is that going to influence your plans, and what can you do to respond to that?

Darren R. Jackson

Yes, it's a great -- it's a question that we study obviously a lot, in light of -- we've had challenging weather for a year. But that's going to go away. I mean, it's a tempo -- I mean, it's out of our control. As we study the 240 million vehicles out there, one of the things we do see, and you saw on my slide, is that we've really seen a shift from the 0 to 5, to the 10 and out in terms of what's out there. But the other small thing you got to pick up on, is that the absolute number of vehicles, if you go back 10 and out and say, how many 10 and out vehicles are out there? And I think it's up 12% in the last 5 years. So the absolutes hang out there, the scrappage rates are changing. And one of the things we see underneath, and maybe Charles has a perspective on this, is that failure rates are moving out, too. So the import failure rates are not -- they don't fail at the same rate as a Dodge. And so part of what's pushing kind of that timeline out, in terms of our business, too, is just kind of the extension of the failure rates in some of the key -- whether it's under car or engine management, or whatever, is just pushing out the aging cycle of that vehicle. What I don't see is that -- and this is probably where the debate would be, is when we look at that $68 billion, if we went back 2 more years on the slide, you would have seen an enormous build in deferred maintenance, and then in '08 and '09 and '10, we saw that deferred maintenance came down again. So part of our discussions, internally, is the consumer, we tend to think about are they thinking about new cars, is that slowing down the investment cycle? Probably a little bit, we believe that. Are they thinking about their home? And so did they defer on the home for a period of time, and are they investing in the home? We think that's a little bit, in terms of what's going on. So this business, the good news is it doesn't appear to be in a cycle that others experienced in '08, and '09 and '10. When we didn't experience it, it's a much more stable industry. But you can have choices with our consumer who is so cash-flow constrained, that they might be putting a few more dollars in the home. They might be putting a few more dollars, just a few more because the percentages are inconsequential on the new cars, just it's inconsequential. But it doesn't change in terms of their cash flow statement. So we might be riding a little bit of a cycle, and we've seen this probably more in our Eastern markets than other markets, that it's timing. So it doesn't mean bad industry, it just means point in time in terms of how the consumer is choosing to spend.

Gregory S. Melich - ISI Group Inc., Research Division

Greg Melich with ISI. You gave some -- a 3-year target of 12% operating margin. I think we've talked about that in the past, but there was never a definitive target. And then now, incentives are aligned to that. Could you give us what the sales targets are for incentives because obviously, if you just target margin, there is always the risk that people will chase what they're paid to do, as opposed to what's also important to get there. So what sort of top line algorithm are you thinking about in terms of store openings or sales productivity improvement that's consistent with that 12%? And then I had a follow-up, which was I think in your prepared remarks, you mentioned that incentive compensation for Commercial customer retention is something that's a real focus. I'm just curious, how are you even defining that? Is it -- do you have to be first call, how do you even define first call?

Darren R. Jackson

So I agree with you, Greg, that if we just said, go hit a rate, you could end up -- if we hit a rate and comps grow at minus 5 the rest of the way, that's bad outcome. So we didn't give out sales targets that go with that per se. But I think you can look at our view of how the industry should progress over the next several years and what we said to the team, we actually dollarized that outcome for the team. So we said there, if we look at the cumulative OI dollars that we have to achieve over the next 3 years, let's put a cumulative OI dollar target out there that we can go get. And within industry, kind of views of how sales growth should be, if we balance those 2, I think we get the right behavior towards -- I certainly don't want an organization that prides itself in going backwards, but ultimately, measures itself in terms of getting good profitability rates, measured by achieving those OI profit dollars. So that's question number one. On Commercial customer retention, so you'll see it -- it's a year from now. As Mike said, 80% of the incentive for next year is achieving an OI dollar target. 20% of it is Commercial customer retention. Historically, the way we've done that, is that you have to both retain what we call our focus customers. So I know many of you visit our stores. If you go back to our CPP desk, you'll ask them, how's your focus customer list today? So everybody has a focus customer list. They have their top 20, they have their weekly, 4-week, 12-week trends. There's a group of customers that we call focus. So what we're measuring is that, did you both retain those customers and did you grow them? So it's not a case that you can just retain them. You have to retain and grow in order to be a retained customer in our book. So years ago, as part of the capability builds, we chose Salesforce.com. We're now into that generation of down-to-a-local-store level, the CPP, the GM, the DL, the salesperson versus just the salesperson owning a group of focused customers, and then incenting those teams to both achieve retention of those customers. Now you can just retain them like, they can't be $1,000 going to $100 account. They have to be $1,000 going to $1,001 account in terms of our definition of Commercial customer retention.

Gregory S. Melich - ISI Group Inc., Research Division

Those focus accounts, so it would be typically a top 20?

Darren R. Jackson

Yes.

Gregory S. Melich - ISI Group Inc., Research Division

What percentage of the business would they typically account for?

Darren R. Jackson

Well, we've said, generally speaking in this business, your top 20 to 25 are going to account for 80% of your business. But that becomes a slippery slope, too, because there's many outside of that 20% that have higher potential. So I'm back to -- if we're second call, and that represents still 80% of the business, what we're challenging the teams to do and that's why retention works on growing your share with those customers versus just maintaining them.

Michael A. Norona

And Greg, I also -- so Darren, on your first question, Darren is exactly right in terms of we've assumed more historical growth rates for both DIY and Commercial. And also, with respect to our new stores, they're going to be more consistent with what you're seeing this year versus what you've seen in the last 5 years from us. So a little bit more store openings, more consistent with this year, 2013.

Denise Chai - BofA Merrill Lynch, Research Division

It's Denise Chai of Bank of America-Merrill Lynch. I had a couple of questions. You said that you plan to maintain DIY and grow Commercial, so can you give us a bit more color on how you plan to expand the -- modestly expand the gross margin. What are some of the levers that you can still pull there? And just secondly, you said that your inventory per store is the highest in the industry. So how should we think about that going forward? As you build out more hubs, will inventory per store kind of top out? Or what do you see is the optimal level?

Darren R. Jackson

So I think there's 3 questions in there. Charles, you may want to just talk a little about as you look at margin going forward, what are the key drivers in margin? And then there's always the headwind we have with the higher Commercial mix penetration, too.

Charles E. Tyson

Yes. So we still continue to see benefit, and I'm going to talk about it later and what we're doing around our private brand development and our global sourcing. With some of the changes that we've seen with the consolidation with our supply chain team and then with my replenishment team and my market availability teams, we see a lot of value to be driven out through our vendor integration programs, working with our suppliers, to drive out more efficient -- more efficiency on how they service us. We're still working through some price optimization from a cost perspective as well. We're still on that journey, and we've seen, as we've improved our margins over 300 basis points over the last 5 years, price optimization has been a valuable part of that tool. So at a slower rate, we obviously had some pretty dramatic improvement in the margin rates, but there are still levers that we see in terms of our ability to build and optimize our margin, even though we're going to get some headwind, obviously, as we see our Commercial mix growing and the contributing margin that comes from the Commercial mix plus with the DIY mix.

Darren R. Jackson

Yes. Well, and more recently, maybe the 2 other parts of the question is, more recently, the availability efforts and shrink efforts has been -- brought our shrink levels to record levels. And I go back to what shrink generally means or availability, it's like the canary and the coal mine, is that when you get that right in terms of shrink, what you're really getting right in terms of the customer is availability on the shelf. And so shrink in those efforts continue to be structural improvements to our business, that we see even going through this year as we go forward. I think it's the DIY share, and if I'm in the audience, I'm thinking I don't know that I heard anything about DIY in this presentation. And we're somewhat purposeful in terms of how we see the future of the business, having to get to 50-50, 60-40 and 70-30 over time. We think that's just structural and driven by the customer. It doesn't mean we're abandoning DIY, in terms of DIY profitability. And what you learn about DIY is 83% of customers make their choice on DIY around one key driver: Location. And so the share losses that we experienced, probably beginning in '11 and '12, the last 3 months in particular, have turned around quite a bit. And it's because we started to grow stores again. So we purposely made a decision for 5 years to hold back on store growth until we got to a prototype that met our Commercial objectives, while achieving the DIY profitability that helps the whole model go forward. So when we see share improvements, as Mike talked about and we talked about earlier, we do see a much clear pathway now to growing our stores into the future. We do see the results in our NPD market shares that -- of those stores, adding accretively both to share and profitability and to returns. If we don't see that working in the future, we'll adjust again. But we do see that working today, and that will be part of the key in terms of the DIY share gains going forward, because it's still a large market, very profitable. We're just trying to make sure we have it positioned correctly for the future of our enterprise. And the last question…

Charles E. Tyson

Availability, it's -- so your question around inventory, and I'll cover that in the next section. But the answer is yes, we're going to continue investing in SKU count. At the local market, we're going to continue investing in hub upgrades. When we start to talk about Remington and what capability that gives us in the market, in terms of expanding our availability, that means we will continue investing in inventory per store. And I'll go through that in more detail in the next section.

Michael A. Norona

Yes, and from a DIY perspective, as well, I mean, I think we -- I don't think the story has changed around the transaction -- we see in the transaction to clients in DIY. And that tool that we spoke about earlier, that allows us to measure our performance, I mean, we -- the opportunity is to capitalize on the business is coming into the store and some of the initiatives that we have, and we've talked about them, is how do we improve our dollars per transaction and the basket? And the attached that we have with the existing customers coming to the store because that, and I think Darren has talked about it at length, the transaction is going down. The way you can think of that is how do you get the ticket up? And that's the way you get the ticket up.

Charles E. Tyson

Yes, just let me add one more, through. When we talk about our DIY business, and Darren mentioned it, when we look at our find-it-fast, get-it-fast initiative, and then EPC, that's rolling out, we're going to put technology in front of our team members. That's going to enable them to drive a better solution. So it's going to be easy for them to look at what else gets added into the basket. And when think about turnover across our industry, in terms of alley associates and their parts knowledge and the work we have to do at getting them parts knowledge, we got to figure out how to use technology versus just assuming we're always going to build or hire somebody. Particularly in the part-time space, it's going to have that knowledge. And so the investments we're building and the training that we're working on, how do we link the technology with the dollars per transaction, the units per transaction, how they think about solving the customer solution? There's going to be a lot of work, whether we're going to drive out over the next 12 months, as we rolled out that EPC.

Darren R. Jackson

Yes, that's probably -- that's an excellent point, Charles. I'd say, imagine our EPC is better than a decade old -- we'll actually flash forward to something that looks more like our website, that will give those that don't come with automotive knowledge the ability when a break job is in front of them, what's required and what's recommended, and we'll be able to then coach those team members to, what was the opportunity that we missed. So today, one of our deficits in-store, I'd say, is that we've got a reasonable EPC, where the EPC moves over the course of the balance of, probably the second half of this year and into next year, is that how do we use technology to help guide someone who may not come with all that automotive knowledge in that space, with that consumer we’re required and recommended, are a part of the both of the training but also built into the selling process through the technology.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Dan Wewer, Raymond James. Darren, in the past, you've talked about the potential of generating $1.9 million or $2 million per store. And that the next $200,000 or $300,000 would come from Commercial. When you think about the part of the possible, with this Commercial or this national account effort, how much of that $200,000 or $300,000 could come from national accounts? And then also, if you could talk about the profitability of that category, how much lower margins than the bread-and-butter DIFM customer, and then I would assume a lower cost structure?

Darren R. Jackson

The support...

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

The national accounts, but if you could talk about that as well?

Darren R. Jackson

Yes, Dan, so we still see that $2 million in-store. Part of it will be mix of stores, too. So as we look out, our view of hubs in terms of the mix of our business, so if a standard store does $1.5 million, and the hub does closer to $2.5 million or greater, part of the work that we've been doing, just over the last several years, been driving our hub strategies, is how do we better position those hubs to be a larger part of the mix, more hard-parts intense. And so part of what will drive the store averages, in totality, is that we just see a much larger percentage of the stores being hub-level opportunities for us, based on customer opportunity, not just based on where the stores lay in the system today. Two, in terms of those large accounts, you're right. They come with a lower gross margin, but they come with a higher average, what we'll call DPT, dollars per transaction. So the profit per truck roll, in terms of dollars, is much better than those smaller-bay garages. Some part of what you're trading in terms of the business is, one, they have a fundamentally healthier business, in terms of those large national or regional accounts, and they have a fundamentally healthier DPT, dollars per transaction. So the overall dollar productivity of a truck roll is much more efficient going to those customers, and the profitability is much more attractive, viewed over the course of a year. So that will certainly be a piece of it as well. So I'd think about the mix of business in terms of the stores that we're putting out there to serve customers, and regional and national accounts being a piece of that as well.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Let me ask the question this way. What's the addressable market for national accounts?

Darren R. Jackson

Well, there's national and then there's regional accounts. And so I don't know if we’ve quantified that for the team out there at this point. But I'll get Joshua bring that back for the group.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

It's Aram Rubinson at Nomura. A question around the 12% goal, and then I've got 2, kind of housekeeping questions. But what role does depreciation play in there? Because you guys kind of over punch your weight in D&A, you seem to depreciate your assets in a much, much faster rate than some of the peers. So just curious if things like that are going to help? And then on the overhead side, where is overhead now as a cost? Where should that be? And I guess, that brings up a point of thinking about the various headquarters in the move, I guess, that Georgia [ph] [indiscernible] will be to Roanoke? Is there going to be a condensation of the headquarters out there? What should we think that's going to look like over time? And then I had just 2 and they're big follow-ups.

Michael A. Norona

So maybe I'll start here and you can build. So we don't -- I don't anticipate depreciation is going to be a big contributor to us getting 12%. One of the reasons that our depreciation is a little bit higher is people like me and our team study that ad nauseam, and the comparatives is, we do a little bit more leaseholds than some of our competitors that have shorter depreciation life. So -- and some of the other ones have different distribution strategies, more DCs, what you can do to depreciate over a longer period of time. But depreciation is not going to be a big contributor. In terms of our overhead -- and we don't break -- I won't give you the specifics. But one of the big areas that we think -- that are going to help, is reducing our support costs and our cost for just to wait on the customer. Embedded in getting the 12% is still investing in more stores, in more availability, and the supply chain strategy that Charles is going to talk about. So there's investments in there, so that 12% is a net number. And in order for that to be a net number, then we've got to be more prudent with our support costs. And those include our -- all our costs at the Support Center. And ones that I would call furthest away from the customer, I think it was in 2011, we did a rationalization of our officers and took our officers' account down quite a bit. And we see some opportunities with professional services, occupancy, some of the other things that -- functional costs in line. And again, we'll measure that over contributions. One of the things I think we've done a good job, in the new dollars that we put into the systems, whether it's in global sourcing or dot-com or Commercial investments or availability, have given us good returns. You can see that on our ROIC. One of the things that we haven't spent a lot of time on is going into the rest of the SG&A, and we've been spending more time recently doing that. And we see some opportunities to take overhead out. And then, I did want to comment on our offices. So our main office is in Roanoke. So that's where our Support Center is. Now so it's very logical that the President would be in Roanoke because most of his direct reports staff will be in Roanoke. So that's the same for Jim who's going to be running our Commercial Business, and that's the same for George. We maintain an office in Minnesota, and there's no plans to change that. If you remember, one of the rationales for doing that is we run our front-room merchants out of there, and we were able to attract some people into that market. And we're very pleased with their performance, that reports up to Charles, and there is no plans to change that. Currently, we run our dot-com out of San Jose. I don't think anyone has made more investments or more progress in their dot-com, and we attribute that to that team and that -- the team that we built out there. And we could move very fast. And we have a global sourcing office in Taipei. I think all companies are always looking at their costs, they're always looking at their structure, and they're always looking at the position. So could things change in the future? Absolutely. I think, as a good prudent management team, you're always looking to do that. But at this particular juncture, as we sit here today, we're pleased with those offices. And if we have any changes going forward, there'll be because they help the business versus anything else.

Darren R. Jackson

I think you would agree on the depreciation that, Arum, you're right, if you look over the last 5 years, it's taken off. But some of that we should start to see some relief, it will be offset by some of the new stores. SO take IT depreciation, that's 3 to 5 years. So when you build a website, you got a lot of costs that we're absorbing right now, where others have fully depreciated that warehouse management systems and the likes. So there's been a fair amount of IT costs, but I wouldn't expect us to see those levels of depreciation going forward. They will trade in some of that depreciation for Remington, we'll trade it in for new stores. But the last 5 years has been a much heavier pace, and I would say whether it's a normalized pace, it should be as you build those type of capabilities.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Thanks. And just the 2 housekeeping things, one on the slides, here on Page 9, it says Customer Traction, with numbers next to it. I wasn't sure what that meant. And then, I was just curious on the DIY-DIFM market breakdown, if the DIFM was at wholesale prices or retail prices?

Michael A. Norona

Yes. So I mean, I will take the first one. So 2 other measures that we look at, in addition to our financial measures, is how we're doing with our team and how we're doing with our customers. And so we measure engagement, we do a survey once a year, and that -- we call that engagement. And then our customer traction, we measure -- that we do surveys, phone surveys, with both our DIY and Commercial customers, and every store gets a score. So that's what the measure there is, it's the measure of how we're doing with our customers.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

So it's not customer transaction because it's electronic, not that it's taken away from that either?

Michael A. Norona

No, no, it's customer transaction. It's a measure of how we're doing with our customers.

Darren R. Jackson

Satisfaction.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Yes, in the -- is the DIFM, is that at retail or wholesale, I forgot if you answered that?

Darren R. Jackson

It's an AI data, so it's at the wholesale. I think we have just time for 1 more question here.

Unknown Analyst

Andy Topps with Hallum Capital. In looking at the revised org chart, it looks like strategy has taken an outlet role in the organization, and I was curious if that was inferring to M&A, it would take a more grander scale. And maybe if you could dovetail that with the broadening of the geographic reach out West? I know you guys have about 500 stores, I was wondering what was the -- of the 1,000-stores potential over the next 5 years, how many of those would be out West Coast and what would be the cost of broadening out your DC system in that region?

Darren R. Jackson

Yes. So I missed the first part. So you said strategy...

Unknown Analyst

Yes, in terms of Jim Wade, it seems like he's been elevated on the org chart. And I was just curious if that -- we can infer that M&A was going to take a more prominent role, and maybe building out either your Commercial or your West Coast capabilities?

Darren R. Jackson

Yes. So a couple of things. I know that Jim Wade's been -- Jim is actually on our Board of Directors. Jim was -- headed up strategy for us was our former President, and just very tied into where the industry is going. So I would say, Jim's role, just from my vantage point, allows me to spend more time with Jim. And Jim ran our real estate for a number of years as well. And so it's not by mistake when we see the largest part of the growth potential in stores, in terms of store count, you should think of Texas, West. And so I think today in Texas, we've got, what, 175 stores. That's a market that could easily have upwards of 500 stores. So as we grow the business, we'll grow in concentric circles. And so you get out to places like California. What our focus has been is we still believe if you back up and look at our overall share of Commercial, even in the Eastern U.S., we've been reluctant to actually spend a lot of time opening new markets, trying to make sure that we take that next step on the ramp in Commercial in our core markets, while we begin that process of moving West. There's probably a couple of distribution centers for sure that need to be built. And we haven't quantified the cost of those distribution centers. But they'll likely look more like Remington than our old distribution centers in terms of costs. But certainly, there's a few more that need to be built as we go out West.

Unknown Analyst

And just to follow up, as -- you envision that thing as balance between de novo and M&A? Or how should we think about that?

Darren R. Jackson

Well, I think it would be more de novo than M&A. But that being said, when BWP comes online, it was just such an attractive leadership team, customers and set of assets. There are more of those small regional players that tend to be more WD-oriented than DIY. There's little to no DIY that's still left out there today. But we certainly, as you look at the BWP acquisition, will not shy away from looking at models that we believe, longer-term, that 70-30 model is probably where the next 10 years you're going to have to be, based on the evolution of what the complexity of the car and just the number of DIY-ers that are out there.

Michael A. Norona

Yes, we've been -- as part of our capital allocation, we always talk about investing in the business first. And then the second thing is are there capabilities or growth opportunities that we can do acquisitions, the MotoLogic acquisition, the DriverSide, the key link acquisitions. So -- and we haven't shied away from acquisitions, but obviously, we don't talk about them prior to doing them.

Joshua Moore

So thank you, everybody. This is going to conclude the webcast portion of our presentation. For your records, this will be archived on our website for 1 year, so you can always reference back to it. So I want to thank everybody on the phone and on the webcast.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Advance Auto Parts' CEO Hosts Investor and Analyst Day Conference (Transcript)
This Transcript
All Transcripts