Five Traits for Advance Auto Parts' New CEO

Advance Auto Parts hosted its quarterly earnings conference call Thursday.  I don’t think you should concern yourself with 90% of the conference call.  I think the only thing that matters right now is the selection of a GREAT new CEO. 

First of all, I want to say that I had a considerable amount of respect for Mike Coppola.  But sometimes a company and even an industry just need new leadership. 

When Advance reported fourth quarter 2006 results, I said:

Yet, I think Mike Coppolla's (Advance Auto Parts CEO) statement on the company's conference call yesterday morning (opening quote) was a good sign that the industry is beginning to notice something is wrong.  Admitting there is a problem is the first step.  It is early days, and things (like sales and earnings) may very well get worse in 2007 before they get better. 

 

But it is one of the first signs I have seen that the industry is ready for change.  And if things play out as I think they might, it may begin to move automotive aftermarket retailers in a really exciting new direction.  One that rewards automotive repair customers and shareholders of auto parts distributors. 

 

What gives me a little more optimism about the space? Mr. Coppolla didn't just say Advance is taking a step back and reassessing opportunities (as I began with in the opening quote).  He went on to say that they are using both internal and external resources to help the company understand the growth potential of the business and the major customer segments.  He said that the knowledge they gain from this research (hopefully completed by 2Q07) will help them better serve their customers, help define the company's growth strategy, and ultimately help determine where/how the company should deploy its resources going forward.

 

Advance was beginning to show signs that it was ready for a change.  Mr. Copolla’s departure, as sad as it is, I think clearly shows the company might be ready for a new direction.  Only what direction will it take?

During the conference call, management was asked about what type of skill sets the company is looking for in the new CEO and if they are looking inside or outside the industry.  Jack Brouliard, interim Chairman and CEO said:

We are beginning the search process actually this week.  We are working on refining the job description and particularly the skill sets.  This will be a nationwide search, and we are looking for a top high powered person.  We can’t say in advance where that person comes from.  And we expect that the process will take a certain amount of time.  But we are very optimistic that this is a great opportunity, a great company, with a great future.  And that will attract some very fine candidates.

The way I see it, Advance has three general approaches it can take: 1) promote someone internally, 2) hire a great retailer, or 3) hire someone from outside the retail industry. 

My general opinion is that they should not consider option #2 (hire a great retailer).  I think Advance already has some tremendous leaders within the organization that are great retailers.  Importantly, the management at Advance already best understands the needs of the do-it-yourself automotive aftermarket customers.  Bringing in a new management  (leader) from a retailer outside the automotive aftermarket would likely result in all sorts of new retail strategies (product proliferation like what happened with Pep Boys Scooter/Go Cart strategy) that risk confusing the customer and ultimately failing to deliver real, sustainable, and meaningful change (for the better). 

So if you are looking for a great retail leader, I don’t know why Advance needs to look any further than its own Executive Vice President of Business Development, Jim Wade.  Mr. Wade has been a source of stability throughout the transition from a private to public company.  He has survived multiple leadership transitions at the company.  And I have yet to find an investor or employee that has a negative thing to say about the guy. 

As a result, if Advance’s board wants to “play it safe,” I think the best approach would be to promote Jim Wade to CEO.  It would likely have a similar impact as when AutoZone promoted Bill Rhodes to CEO when Steve Odland left Zone for Office Depot.  Ironically (and in my opinion thankfully) Mr. Rhodes kept Mr. Odland’s return on capital philosophy.  So in reality, not much changed at AutoZone.  But the management change seemed to do wonders for investor and employee sentiment.  And I think promoting Jim Wade to CEO would have a similar effect.     

But I should point out “playing it safe” only lasts for a while.  As I often write: there is just as much risk to not changing as there is to change.  “Tradition is the illusion of permanence” I have quoted Woody Allen as saying before.  The domestic automakers were constantly playing it safe, slow to change.  And you see the problems they are having.  Ford Motor Company finally had to find someone outside of the industry to try to move the company in a new direction (Alan Mulally from Boeing). 

And the automotive aftermarket is ripe for pretty radical change (as I have written pretty extensively about in the past).  So if Advance’s board of directors is serious about change.  If they really want to shake things up and possibly lead the entire industry in a new direction, I think it begins by tapping someone with an outside mindset.  And when I say outside mindset, I mean OUTSIDE.  Not someone with retail experience at all.  In fact, I think the most ideal candidate possibly comes from some leader in the internet or technology space.      

In either case, I have come up with 5 specific traits that investors should expect from a new CEO at Advance Auto Parts.  Think of this as a check list.  A list of questions to focus on when you first get to meet and question the new CEO. 

But I want to be clear.  This is not a formula.  I am not trying to identify a specific CEO or even the approach he/she should take when they take charge.  Instead, these traits are what the CEO should be focused on accomplishing.  The results, if you will.  How the new CEO instills a sense of purpose, changes around personnel, empowers his/her people, begins to bring a greater technology focus, and simplifies complex problems is his/her prerogative.  But they are traits/talents I think the new CEO needs to bring to Advance. 

Trait #1: A purpose

“It is the Mission of Advance Auto Parts to provide personal vehicle owners and enthusiasts with the vehicle related products and knowledge that fulfill their wants and needs at the right price. Our friendly, knowledgeable and professional staff will help inspire, educate and problem-solve for our customers.”

Source: Advance Auto Parts Website

I am constantly writing that before any turnaround can begin, a purpose must be set.  When Steve Odland arrived at AutoZone he brought a return on investment philosophy to the company.  So the company would not throw good money after bad.    

Jeff Rachor (new CEO) of Pep Boys is beginning to bring a focus/mission of making vehicles reliable.  Ford Motor Company’s focus seems to have changed over the decades (likely due to their cost position) from providing quality vehicles to the masses to providing exciting, relevant vehicles customers really want.  But given this vision (of creating exciting, relevant products), the company still needed a way to get there.  Ford’s new CEO Alan Mulally seems to be the first CEO in the space focused on bringing such a purpose by focusing on creating “one Ford.” 

Yet for Advance Auto Parts, the company already has a very clear mission (as cited above).  And I think they also have a pretty clear vision on how they want to fill this need in society (with friendly, knowledgeable and professional staff that will help inspire, educate and problem solve for the customers). 

Now maybe the new CEO will start to say: “ok, how do we really get friendly, knowledgeable and professional staff that will help inspire, educate and problem solve for the customers when we are hiring people at $7 - $9 an hour?” 

I know you hear all the time from Advance and most of the do-it-yourself [DIY] automotive aftermarket management teams about how important their associates are.  And how thankful they are to have them.  What you don’t hear are all the complaints that secretly go on in the inner circles of mid-level managers that have to deal with “flippers” (employees that were flipping burgers 6 months ago). 

Now I don’t want you to think this is all of Advance (or any other DIY retailers) employees.  I am actually surprised when I go in to visit these retailers and I meet someone who is in the process of getting a mechanical engineering degree (like when I went to a couple stores two weeks ago). 

But come on, when you are paying $7 - $9 an hour, you are going to end up with some flippers.  This creates kind of a conundrum (problem).  How do you fulfill your mission of filling the needs of your customers at the right price (so remaining cost competitive) while at the same time hiring knowledgeable associates (not flippers?) 

Maybe it means a more variable compensation structure like O’Reilly Auto Parts.  Maybe it means offering partnerships/scholarships with automotive vocational schools (like United Technologies).  Or maybe the new CEO thinks beyond even the employee/associate issue, and starts to say are there other ways/mediums to accomplish our mission of educating, inspiring, and problem solving for our customer (i.e. maybe online or through a call center versus at the store and with the stores employees?)

Don’t get caught up in the examples.  My point is simply that Advance already has a great mission and even a general vision on how to achieve it.  So the new CEO should not come in and try to reinvent that. The new CEO should latch onto it, and try to say, “ok, we are not filling our mission here because ____.”  The ability to latch onto Advance’s mission and use as a call to raise expectations throughout the organization is probably the most important trait we (in the investment community) should expect from the new CEO.

Trait #2: Personnel Changes

Last week when I attended the National Alliance of Buy Here Pay Here Dealers, Ingram Walters, a leading dealer in the independent used vehicle market said: “one of the fastest ways to jump start your business is to go back and fire someone!  It may sound cruel or unfair.  But what is unfair is letting all of your other hardworking employees know you tolerate mediocrity or subpar performance.” 

I think the recent events at Advance Auto Parts solidifies something is wrong.  The definition of insanity (I have seen written somewhere) is “doing the same thing and expecting a different result.”  So if you are in the process of hiring a new CEO, you should expect over the course of the next 6 – 12 months (after the new CEO gets settled) to see personnel changes.  Keeping the same leadership team in tact would be essentially “doing the same thing.” 

This may mean some people get promoted up to new roles.  It may mean some people from the outside are hired.  But the new CEO will need to establish his/her team in the first 6 – 12 months. 

Lisa DiCarlo wrote a really interesting article in Forbes Magazine April 27, 2005 titled “turnaround masters.”  In the article she discusses 5 CEOs who have proven themselves at turning around companies.  I understand that some of these are controversial CEOs, but what I want you to notice is a common element in each of these CEOs turnaround.  So here are just a few sentences taken from the article about each of these CEO’s:

Jack Rowe, CEO Aetna.  “He cut 15,000 jobs, solidified the balance sheet, brought in new management and exited money-losing businesses.”

Fred Hassan, CEO Schering-Plough. “By November Hassan had replaced most senior executives.”

 

James (Jamie) Dimon.   CEO, JP Morgan Chase.  “But he is already putting his stamp on the company and some of its lackluster units, particularly investment banking, where he has made critical personnel changes, kicked off a broad risk-management assessment and canceled a massive information technology outsourcing deal with IBM.”

Ed Breen, CEO, Tyco. “One month after his arrival, Breen fired Tyco's board (which many believe enabled the fraud) and most of the senior management.”

Hector Ruiz, CEO Advanced Micro Devices.  The only CEO where there was no mention of personnel changes to spark the turnaround was at Advanced Micro Devices.  But when she discussed Mr. Ruiz’s past history, she said: “Before AMD, Ruiz spent more than 20 years at Motorola, where his last job was president of the $7 billion semiconductor group. He spearheaded a controversial overhaul of the business in the mid-'90s.” 

My point is simply that if you expect a turnaround at Advance Auto Parts, you should expect personnel changes.  I should emphasize, this does not necessarily mean the personnel changes come from the outside.  It could be a series of internal promotions and repositioning of talent.  But the new CEO needs to put his/her team in place.  Doing the same thing and expecting a different result?  Well, hopefully you get the point.      

Trait #3: A people maximizer

Every great CEO I have met or even read about over the years has been really good at getting the most out of his/her people. 

Leaders like Roger Penske, Ken Gilman, Jeff Rachor, and even Lenny Damron (a division leader at LKQ) seem incredibly skilled at bringing out the best in their people. 

Below are 10 CEOs that were ranked #1 by Institutional Investor’s Magazine as the #1 CEO in their space (sector). I tried to select a variety of industries that focus on consumers or new approaches to the market place (so anything from restaurants to software).  As I said, I don’t think there is a formula to being a successful CEO.  In fact, the approaches seem rather different. 

And the Institutional Investor (II) rankings are not perfect.  Some of these CEOs are considered pretty controversial, and if you stepped outside of II’s universe of people they surveyed, you might get a very different perspective about the CEOs I discuss below.  Heck, the top hardline retail CEO Robert Nardelli “abruptly resigned on January 3, 2007 by mutual agreement with the company” (Wikipedia). 

Nonetheless, the CEOs mentioned below are considered by many industry, investment and opinion makers (therefore) as kind of the “best of breed” in their sector.  So below I list each CEO and a couple/few sentences I found about each of these top ranked CEOs.

What I think you will notice is that each of the CEOs are described as highly skilled (in one way or another) at setting a direction for the company and/or maximizing employee skill sets.  

In a few cases, I took direct quotes from the CEOs themselves about their management philosophy.  In the direct CEO quotes, what often impressed me most was a focus on empowering the people that work for them.  Most of the time they give all the credit to the employees.  And while I admire the humility, it is the CEO that creates or destroys this “employee empowerment” culture. 

Leisure- Micky Arison, Carnival Corp.

Arison has been known for his hands-on, open-door management style. Many of his employees even call him "Micky." On the other hand, Arison, too, believes in delegating authority. "Working with various aspects of the company taught me that if you've got the right people in the right spots, let them do their thing," Arison said in an NYSE Magazine interview. He went on to note, "My management style is not to get in their way" (April 2003).

Source: Answers.com

Restaurants- David Novak, Yum! Brands

The ‘master motivator’: Chairman and Chief Executive David Novak takes a people- centered approach to running the Yum empire.

Source: Nation’s Restaurant News: 8/15/05

Retailing/Broadlines & Department Stores- Robert Ulrich, Target Corp.

Empowerment down to the lowest level possible is Target's direction, he said. Even though there are limits to empowerment, the proper training and knowledge can enable associates to make the appropriate decisions at increasingly lower levels, Ulrich added.

Source: Discount Store News, September 20, 1993

Retailing/Food & Drug Chains- John Mackey, Whole Foods Market

“Whole Foods is very committed to the team structure and self-managing work teams; they're like the basic cells of the company. The teams are empowered. They do their own hiring. They do their own scheduling. To become a team member at Whole Foods, you have to get voted on by your team after a trial period. If you don't get a two-thirds vote, you don't get on the team.

 

Then there's our concept of gain sharing: As productivity increases, then all the people at our stores make more money. It doesn't flow down the bottom line, it flows into higher paychecks. Last year in gain-sharing we gave away close to $30 million. And stock options: We have a stock-options program that is not only for the executives of the company, but it's wide-based; 94 percent of our stock options are given away to the non-executives in the company each year. . .

 

One of the myths that unions will often talk about is that you could make a lot more money if top brass weren't so greedy and taking in profits. But if you got rid of all the profits at Whole Foods, it would hurt the workers. The team members are already getting 24 percent of the total pie. For every dollar that comes into sales at Whole Foods Market, 24.1 percent is going out to our team members in wages and benefits.”

Source: Grist “The Whole Foods Shebang” answers to questions asked by reporter Amanda Griscom Little December 17, 2004

Retailing/Hardlines- Robert Nardelli, Home Depot

Today, the man once best known for coming up short in the most public succession story in business--the race to replace Jack Welch--wears the mantle of leader with confidence. “He really is the best manager, execution-wise, I've ever encountered,” says Welch. “His real ability is to motivate lots of people around a mission, excite them about it, and make it happen.”

Source: FastCompany, December 2005, page 76

Retailing/Specialty- Stores Scott Edmonds, Chico’s FAS

How did Chico’s turnaround begin?

Scott Edmonds:“It's not a story of some Harvard MBA's getting together with a business model--nothing like that. In 1995, after major layoffs, we were down to the bare bones, and we began rebuilding. We brought in talented management - Mori MacKenzie (from United Retail Group) to supervise sales; Pat Murphy (from Lane Bryant) as GMM, in 1997. In 1998, we hit our stride, and realized we were on to something. In 1999, we hired Jim Frain, (from Laura Ashley and Gucci) as our chief marketing executive.” 

Source: Women’s Wear Daily.  May 21, 2007

Internet- Terry Semel, Yahoo!

But beyond the powerful brand and a company full of whizzes, there was no clear business strategy. The first thing Mr. Semel did was to streamline 44 business units into 4. That helped to set corporate priorities. "Terry's relentless focus on focus is probably the most important thing we as a team or as a company are doing," Mr. Yang (a founder of Yahoo) said.

Source: New York Times, January 29, 2006 (Richard Siklos).

Software- Steven Ballmer, Microsoft Corp.

The number one benefit of information technology is that it empowers people to do what they want to do. It lets people be creative. It lets people be productive. It lets people learn things they didn't think they could learn before, and so in a sense it is all about potential.

 

The lifeblood of our business is that R&D spend. There's nothing that flows through a pipe or down a wire or anything else. We have to continuously create new innovation that lets people do something they didn't think they could do the day before.

Source: Woopidoo Steve Ballmer Quotes

What I hope this drives home is that the board of directors should not be looking for a specific formula in how the CEO manages/leads his/her people.  Everyone of these top rated CEOs has (had) a different approach and style.  Instead, I hope it drives home the idea that the CEO simply needs to have some specific (and hopefully proven) approach in leading, inspiring and ultimately empowering the people within the organization.

Trait #4: A technology focus

You want to know who is rapidly emerging as one of the top retail establishments in America?  Apple!  I am not kidding.

“Saks, whose flagship is down the street, generates sales of $362 per square foot a year. Best Buy (Charts) stores turn $930 - tops for electronics retailers - while Tiffany & Co. (Charts) takes in $2,666. Audrey Hepburn liked Tiffany's for breakfast. But at $4,032, Apple is eating everyone's lunch.”

 

That astonishing number, from a Sanford C. Bernstein report, is merely the average of Apple's 174 stores, which attract 13,800 visitors a week. (The Fifth Avenue store averages 50,000-plus). In 2004, Apple reached $1 billion in annual sales faster than any retailer in history; last year, sales reached $1 billion a quarter. And now comes the next, if not must-have, then must-see, product.”

Source: CNN Money “Apple: America’s Best Retailer.”  March 8, 2007    

Remember that funny idea of convergence I am always talking about?  Apple figured out that they needed a way for consumers to learn about their products.  And that was not going to come from positioning their products at mega retailers.  So Apple built its own box. 

And they did two things to start: #1) they asked around about who was the best retailer in the country.  And so they asked Mickey Drexler who was running the Gap to join their board of directors.  And #2) they rented a warehouse and did a prototype store.  And you know what?  The first prototype sucked (I’m paraphrasing a bit).  So Apple had to completely redo the store.  They lost 6 or 9 months (according to the CNN article), but it helped them to create a store customers really wanted and could benefit from.  

Well, Advance Auto Parts is a great retailer.  But you have heard me discuss before about how the DIY retailers need to evolve, particularly with their approach online.  Or else Amazon.com, US Auto Parts, or some other online retailer will figure out best how to meet the needs of Advance’s do-it-yourself and repair shop customers or their do-it-for me (DIFM) customer base. 

Yet if you look at Advance Auto Parts board of directors, 7 out of the nine members have almost all of their expertise/experience in retail and grocery chains.  Only two board members, Carlos Saladrigas (Chairman of a Bank), and Gilbert Ray (an attorney) have experience/expertise outside of the world of retail/grocery chains.  And there are no board members that come with internet or even a tech company background.  This is the first step for the board of directors (in my opinion).  Add a member to the board with internet/technology experience. 

And then maybe consider hiring someone from an internet or technology company.  Like I said, if you are going to “play it safe” and hire a great retailer, you already have that expertise within the walls of the company’s headquarters in Roanoke Virginia.  But if you are going to take a risk, and try to get someone with a different perspective and approach to the business, maybe you start to look at e-tail, internet or tech management people. 

Trait #5: Complicated problems, simple solutions

Vehicles are becoming more complex.  I understand there are several hundred thousand different types of stock keeping units (SKUs) available.  No Automotive Aftermarket retailer can have all of the parts a customer needs.  Heck, most of the DIY stores average 20,000 SKUs (plus or minus a few thousand). 

The solution has been to try to get better at predicting how to have the right part, at the right place at the right time.  I think this complicates things.  As the vehicle market continues to get spliced into ever thinner segments, I think trying to predict and stock the right parts, at the right place, at the right time becomes more and more difficult.  Especially as luxury vehicles become a greater % of the vehicle population.  I won’t even go into how the aftermarket gas cap I bought set off the computer in my Audi a couple weeks ago. 

My point is simply that the problems or ability to meet the needs of customers is becoming and will continue to get more and more difficult.  The solution is not to make your business mode complicated and more difficult.  The solution is to take these complicated problems and simplify them. 

Personally, I think the goal should be to try to get down to 1,000 SKUs per store.  Huh?  But Jerry, I thought you have said that the reason why the Wal-Mart’s of the world have been kept away from this business is because they lacked the merchandising skill set to hold 20 some odd thousand SKUs that often sell less than twice a year?  Yes, I have said that. 

But I think the real need at repair shops and for DIY customers is insight (understanding) about the parts and repairs they are trying to perform.  This fits in perfectly with the mission of Advance and should become the real value proposition going forward (once again something a Wal-Mart can not easily replicate).  And so if you have customers calling or going online to an aftermarket retailer for advice, before they come into the store.  Well maybe the focus becomes on saying, ok, how can we react best to getting the parts to where people are calling in or saying they need the part?  Instead of trying to predict where to have the part and fill a store with an ever proliferating number of SKUs. 

This idea of reacting versus predicting is what CarMax is trying to do more with their used vehicle management strategy, and is the very same approach/philosophy I think an Advance Auto Parts needs to adopt.  But here again, it is merely an example.  What ways can the CEO come in and find complicated problems, and try to simplify them?  The CEO who can do this, well assuming they latch onto the company’s mission, should probably get the job.