Title

Presentation

Advance Auto Parts, Inc. beats earnings expectations. Reported EPS is $-0.22, expectations were $-0.81.

Operator: Welcome to the Advance Auto Parts First Quarter 2025 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President of Investor Relations.

Lavesh Hemnani: Good morning, and thank you for participating in today’s call. I’m joined by Shane O’Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today’s call, we will be referencing slides which are available to view via webcast. The slides have also been posted to our Investor Relations website. Before we begin, please be advised that management’s remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, guidance and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements.

Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today’s call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the first quarter and provide an update on 2025 guidance. Following management’s prepared remarks, we will open the line for questions. Now let me turn over the call to our CEO, Shane O’Kelly.

Shane O?Kelly: Thank you, Lavesh, and good morning, everyone. I want to take a moment to express my gratitude for the hard work, unwavering commitment and dedication of the Advance team. I am pleased to report that our team delivered better-than-expected first quarter results. After a challenging start to the year for the industry, we began to see demand rebound in late February led by our Pro business. For the quarter, Pro grew in the low single-digit range, including 8 consecutive weeks of positive comparable sales growth in the U.S. This positive momentum in Pro has continued during the first 4 weeks of Q2, driven by our focus on providing exceptional customer service. In addition to better-than-expected top line results, we also reported stronger profitability with near breakeven adjusted operating margin, and we’re on track to deliver positive operating margins starting with Q2.

Based on our performance to date and expected progress on our initiatives for the remainder of the year, we are reaffirming our full year 2025 guidance. Ryan will provide additional details later, and I want to note that our guidance also considers the impacts of tariffs currently in effect along with our planned mitigation strategies. We believe the combination of an aging and growing vehicle fleet in the U.S., coupled with the relatively nondiscretionary nature of auto part spending puts Advance and the industry in a favorable position to navigate through a volatile environment. We participate in a disciplined industry that has always operated rationally, and we would expect that to continue. In March, we reached a significant strategic milestone with the completion of our store footprint optimization program.

Approximately 75% of our store footprint is now concentrated in markets where we hold the #1 or #2 position based on store density. We have also embarked on an ambitious new phase of store expansion aimed at further strengthening our presence in these regions to capture share in the more than $150 billion total addressable market. Over the next 3 years, we expect to open more than 100 new stores with plans to further accelerate that pace of growth in the future. Our team is focused on implementing initiatives across the strategic pillars of merchandising, supply chain and stores to drive improvements in operational performance. These efforts are designed to strengthen our operational capabilities while building a robust foundation to deliver sustainable, long-term profitable growth and enhanced value for our shareholders.

Next, I will provide an update on each strategic pillar. Let’s begin with merchandising. The team has made good progress in expanding parts availability and securing quality products at a competitive cost. Last quarter, we piloted a new assortment framework in a single designated market area, or DMA to improve parts coverage at the store level. We created a top-down assortment plan for each store, hub and market hub in this DMA, which led to the rebalancing of hundreds of SKUs to align the inventory to market specific needs. The new framework is enabling us to increase coverage in prominent hard parts categories, many of which are frequently in demand by our Pro customers. During Q1, we expanded this framework to 10 additional DMAs. And in the first 9 weeks following the rollout, we have observed an estimated uplift of nearly 50 basis points in comparable sales growth within these DMAs. Encouragingly, we are observing increased sales in categories where additional SKUs have been introduced, while sales in categories with reduced SKUs have remained relatively stable.

Looking ahead, we anticipate gradual improvement in sales as increased parts availability translates into higher transaction volume. Feedback from stores has also been positive, which has motivated us to accelerate this program. With our recent learnings, we are expediting the implementation and are now using technology to automate key processes. As a result, we plan to complete the rollout in the top 50 DMAs by the end of 2025 with 30 of the 50 markets expected to be live by August. This is faster than our prior 12- to 18-month time line, which stretched into 2026. While this new assortment framework enables us to align SKUs to market requirements, we are also prioritizing the improvement of SKU depth across all stores. We are measuring this through our store availability KPI, which is now in the mid-90 percentage range.

Notably, this KPI improved by approximately 200 basis points sequentially and compares to the low 90% range recorded last year. Strong coverage depth is enabling our store teams to sell complete assortment bundles and full application job quantities, which is critical for our customers and helps create repeatable Pro business. Advance is a leading player in the industry with a 93-year legacy and a growing store footprint that currently spans more than 4,000 stores, having the right part at the right place in our network gives us the opportunity to capture our fair share of the market. Next, let’s turn to product costs. As we have indicated previously, the gap in merchandise margin is among the largest drivers of our operating margin gap compared to the industry.

Over the last year, our team has partnered with vendors to conduct line reviews with the goal of securing high-quality products at a competitive cost. This work is expected to continue through mid-2025 and based on our progress thus far, we have visibility to greater than 50 basis points of annualized cost reductions that will start to flow in the second half of the year. We will continue to pursue further cost reduction efforts while also investing time to develop strategic business plans with our vendors to drive mutual revenue growth. Our customer-first approach and disciplined execution on core retail fundamentals continues to resonate with our vendor partners, giving us optimism in our ability to deliver additional future value. Next, supply chain.

I want to start by acknowledging the tremendous effort of the supply chain team during Q1. This team played an integral role in successfully completing our asset optimization activity despite the complexities involved in the execution. Their work included relocating hundreds of millions of dollars of inventory across the network, rerouting replenishment routes to align with our revised store and DC footprint and supporting the merchandising team to launch the new assortment framework in 10 markets. Importantly, they achieved this while maintaining high safety standards and smooth day-to-day operations. Having participated in multiple supply chain transformations in my career, I can attest that the team’s accomplishments were no small feat. We are on track to close 12 distribution centers this year with 6 completed to date.

We expect to end the year with 16 DCs, making our way towards the goal of operating 12 large DCs by the end of 2026 with each averaging approximately 500,000 square feet. As we complete the consolidation of these DCs, flow higher volume and optimize our inbound and outbound processes, we expect to drive incremental labor productivity. We measure this with product lines per hour, which improved in the low single-digit percentage range during Q1 compared to last year. We are targeting continuous improvement in this metric through the development of fresh operational standards for our DCs. For example, since we started moving more volume through our large DCs, we are evaluating daily workflows such as measuring the time to pick a part and comparing that against benchmarks to determine where our process needs to evolve.

Ultimately, we are building a foundation to efficiently support over 4,000 stores through 12 large-sized DCs operating on a single warehouse system versus the previous model of 38 DCs of varying sizes with disparate systems. To do this successfully, we are investing resources to upgrade our operational standards to improve productivity. In conjunction with consolidating DCs, we plan to drive cost efficiency by optimizing both the routing of replenishment orders from DCs and the movement of products between hubs and stores. To achieve this, we plan to implement a new routing framework in stages throughout this year. We anticipate that the combination of improved DC labor productivity and optimized routing will begin delivering cost savings by late 2025 with a larger benefit accruing later.

In May, we entered a pivotal phase in the development of our multi-echelon supply network with the opening of 2 greenfield market hubs in the Midwest. We now operate 21 market hubs and continue to target 10 market hub openings this year while simultaneously building the pipeline for 2026 and 2027. We remain committed to our goal of establishing 60 market hubs by mid-2027 to strengthen our competitive position. A market hub with 75,000 to 85,000 SKUs expand same-day parts availability for a service area of about 60 to 90 stores. Based on the aggregate performance of the market hubs in operation through Q1 and the stores being serviced by these hubs, we have observed an estimated comp uplift of nearly 100 basis points in those markets. These results reinforce our confidence in the path forward, which we expect to further improve as the new assortment framework developed by the merchandising team is fully implemented across the market hubs.

In our stores, the team is focused on improving service levels to drive repeatable business and gain market share. The Pro channel led the recovery in comp sales in the second half of Q1. This improvement in the Pro was driven primarily by transaction growth, which we view as a leading indicator of our efforts to move up the call list with Pros. You may recall, early this year, we revamped the compensation and incentive structures for our frontline sales team and equipped them with additional tools and resources to better serve customers. We are seeing the results of these investments in the Pro channel, which makes us optimistic about the opportunity to capture additional wallet share of the Pro. Our store team is focused on exceptional customer service and was able to shave off approximately 10 minutes in delivery time compared to last year.

This reduction is being achieved through a combination of training enhancements, better in-stocks and increased accountability in the field. Our goal is to consistently deliver parts within 30 to 40 minutes. Ensuring this consistency helps our Pros turn their base faster and elevates Advance’s reputation as a dependable and timely provider of parts. We are encouraged by the progress thus far and are confident in the team’s ability to deliver on our service commitment. To support this, we are also testing a standardized store operating structure to guide our teams on store labor scheduling and to provide an effective mechanism to allocate resources such as delivery trucks and driver hours. This test is now live in about 10% of our stores. Learnings from this test will inform our view on the standardized structure, which we expect to launch company-wide later this year.

Shifting to DIY. During the second half of Q1, we saw an improvement in DIY trends, although the weekly volatility continues to remain high. Maintenance-related categories such as fluids, chemicals and oil are performing relatively better, suggesting that DIY consumers remain cautious in their overall spending. As we look ahead, we expect the DIY environment to remain challenged due to the potential for higher broad-based consumer goods inflation impacting household budgets. Despite the sales choppiness, we are proactively addressing areas of the business that are within our control. This includes enhanced training programs for our store teams to deepen product knowledge as well as a reallocation of key store roles to better assist customers.

Our efforts to improve the in-store experience are beginning to deliver positive proof points as we are seeing an improvement in units being sold per transaction. This metric has stabilized after declining for most of last year. From a DIY communications perspective, we are also strengthening our brand message through a new marketing campaign with the theme right around the corner and ready to help. This campaign showcases Advance as a leading destination for automotive parts that offers convenient store locations, strong inventory availability, expert advice, free services and high-quality brands. I want to underscore our commitment to advancing the turnaround and ensuring accountability. We are making traction on operational improvements for the business, and I’m optimistic about the opportunities ahead.

Now let me hand the call over to Ryan to discuss our financials. Ryan?

Ryan Grimsland: Thank you, Shane, and good morning, everyone. I would also like to thank the Advance team for their commitment to serving our customers while continuing to make meaningful strides in our turnaround efforts. For the first quarter, net sales from continuing operations were $2.6 billion, a 7% decrease compared to last year. This decline is mainly attributed to the store optimization activity completed in March. Comparable store sales declined 60 basis points during the 16-week period in Q1 and excludes locations closed during the quarter, which generated $51 million in liquidation sales. During Q1, sales started off soft, declining in the low single-digit range in the first 8 weeks. Demand started to recover in late February, aided by less weather volatility, normalization of tax refunds and consistent positive performance in our Pro business.

Initiatives to improve inventory in stocks and service levels for customers led to 8 consecutive weeks of positive Pro comps in the U.S. through the end of the quarter. Separately, Q1 also benefited by the shift in timing of Easter into our fiscal Q2, which we estimate added approximately 20 basis points to comps. In terms of channel performance, Pro grew in the low single-digit range, which is an acceleration compared to Q4 and outperformed the DIY channel, which declined in the low single-digit range. Our Pro comp also accelerated on a 2-year basis and was positive for the third consecutive quarter. Transactions declined in the low single-digit range during Q1, with Pro down only slightly. Average ticket grew in a low single-digit range and was positive in both channels.

From a category perspective, we saw strength in batteries, wipers and fluids and chemicals. Gross profit from continuing operations was $1.11 billion or 42.9% of net sales, resulting in a gross margin contraction of 50 basis points compared to last year. The year-over-year deleverage was largely driven by approximately 90 basis points of margin headwind associated with liquidation sales related to our store optimization activity. During the quarter, gross margin also benefited from favorability on capitalized warehouse costs related to a pull forward of some inventory purchases ahead of tariffs. We estimate this added approximately 80 basis points of margin and is expected to normalize during the year. Adjusted SG&A from continuing operations was $1.12 billion or 43.2% of net sales, resulting in deleverage of 180 basis points compared to last year.

A portion of the deleverage was driven by the comparison to a gain on asset sale from last year. Adjusting for this, SG&A would have deleveraged approximately 110 basis points, mainly due to higher labor-related expenses. As a result, adjusted operating loss from continuing operations came in at $8 million or negative 30 basis points of net sales. A healthier top line performance helped us deliver better-than-expected operating margins with operating losses narrowing significantly compared to last quarter. Adjusted diluted loss per share from continuing operations was $0.22 compared with earnings per share of $0.33 in the prior year. On a GAAP basis, we reported earnings per share of $0.40 due to a net discrete tax benefit of $126 million associated with capital loss deductions following the Worldpac transaction, which was factored into our forecast for the year.

We ended the quarter with negative free cash flow of $198 million compared with negative $49 million in the prior year. Free cash flow includes approximately $90 million of cash expenses associated with the store optimization project and approximately $100 million of additional inventory investments, which was planned for later in the year, to support the accelerated rollout of our store-based assortment framework that Shane referenced earlier. For fiscal 2025, we have reaffirmed the guidance established in February. We remain focused on executing and tracking the progress of our strategic initiatives to develop a strong foundation for the long term. Before discussing items within the guidance, let me provide our perspective on the current tariff environment and how that is influencing our outlook for the year.

We are collaborating with our vendor partners to address the challenges posed by elevated product costs and evaluating each cost driver before accepting any increases from vendors. Our approach to navigating tariffs is expected to be measured as we make tariff-related price adjustments. We’ll continually assess inflation and demand elasticity, and we’ll monitor competitive response while executing our plan this year. Within the current tariff landscape, we are planning for a range of scenarios and feel strongly about our ability to navigate through the rising cost environment. These scenarios are in alignment with our full year guidance, reinforcing our expectations for the balance of the year. The complexities of the current economic landscape also warrant an appropriate sensitivity to financial flexibility through the turnaround.

We will continue to monitor and assess our debt capital structure with the goal of ensuring maximum financial flexibility for the business. We believe we have the right strategy root in core retail fundamentals to achieve our financial objectives and the benefits of our strategic actions is expected to build steadily over the next 3 years. Next, let’s discuss our expectations for this year. Starting with net sales. We expect net sales in the range of $8.4 billion to $8.6 billion. Comparable sales is expected to grow in the range of 50 to 150 basis points on a 52-week basis. We expect sequential improvement in comparable sales during 2025 with stronger growth in the second half, supported by our focus on improving parts availability and elevated service levels.

For Q2, we currently estimate flattish comparable sales growth, including the impact of the Easter shift from Q1. During the quarter, we will also fully cycle through the $100 million of price investments from last year. Net sales also include contribution from new stores planned to be opened this year, and we expect the 53rd week to contribute approximately $100 million to $120 million into net sales. Moving to margins. Adjusted operating income margin is expected in the range of 2% to 3%. We expect sequential progress in operating margins this year, with Q2 expected to track in line with the full year range and further improvement expected in the second half. Gross margin is expected to be the primary driver of operating margin this year, driven by a combination of product cost savings and supply chain cost leverage with an improvement in sales.

We expect SG&A expenses to be down year-over-year with margin in the range of flat to slightly down. SG&A includes the impact of annual wage inflation and other field investments offset by favorability from labor productivity and indirect cost savings. Additionally, we expect to save approximately $70 million in annual operating costs related to our store and DC optimization activity. These savings will begin in Q2 and contribute to margin favorability for the balance of the year. Moving to the other items and guidance. Adjusted diluted EPS is expected in the range of $1.50 and $2.50. We expect free cash flow in the range of negative $85 million to negative $25 million at the end of the year. Our guidance now includes cash expenses of approximately $150 million associated with store and DC optimization activity, which is below our prior estimate of $200 million, reflecting favorability in lease disposition costs.

This benefit was offset by opportunistic inventory purchases ahead of the tariff implementation earlier this year. In summary, we are pleased with our progress thus far and remain resolute in controlling the aspects of our business within our control while navigating a volatile macro environment. I will now hand the call back to Shane. Thank you.

Shane O?Kelly: Thank you, Ryan. Before closing today’s call, I would like to thank all our team members who are listening on the call today. I am incredibly proud of your efforts this quarter. Our team not only managed to deliver results that exceeded expectations, but also completed the store footprint optimization within an accelerated time line while driving progress on our strategic priorities. Thank you. With that, let’s open the call for questions. Operator?

Operator: [Operator Instructions]. And our first question comes from Simeon Gutman from Morgan Stanley.

Simeon Gutman: Maybe my first question, if you think about the 0.5% to 1.5% comp, you have an implicit mix of DIY versus DIFM performance within that. I don’t think you’ve shared that with us. But can you tell us now that the first quarter is in the bag? Can you tell us what that expectation, how it’s changed? Do you have any difference in how you think the year will play out based on how it’s performing so far? And then I have one follow-up.

Ryan Grimsland: Yes. Simeon, this is Ryan. I’ll jump in here real quick. So far, it’s played out similar to what we expect. We haven’t seen any change in trend on DIY and our expectations. But what we have stated is that we expect DIFM to be the driver of our performance. The DIY will still be somewhat pressured. I think it’s still early in this tariff environment to really understand if that will change going forward, though we did model out different scenarios that are reflected in our range of guidance. But as of right now, we expect the trends to — our guidance expects the trends to continue where DIFM will lead and DIY will still be slightly pressured.

Shane O?Kelly: Simeon, Shane here. Let me build on that. So you’ve seen the Pro trend, 12 weeks positive comp DIY, I think the volatility of the situation, and you see that in consumer sentiment, some of the credit card data, default rates suggest there could be some difficulties for the consumer, although we’re controlling what we could control, and we are putting effort against making sure we’re relevant for the DIY customer. That includes the availability efforts, that includes awareness around our marketing campaign, promotions, fewer, bigger, better, leveraging our loyalty program. We have 16 million Speed Perks members, training for the stores in terms of how to present products and [greet]. So we’ll look to do things to make sure we’re participating with DIY customers.

Simeon Gutman: And the follow-up, if we take the full year guidance and look at the complexion with gross margin and SG&A. The first quarter was better on gross. It looks like you’re going to have some tailwinds because the liquidation goes away. You talked, Shane, about the product cost that should improve throughout the year. It feels like that was built into the way you built your outlook, I think. And — but can you talk about is there more upward pressure than you thought. And then on SG&A, even with some of the cost removal, it doesn’t look like there’s a lot of upside to the SG&A forecast. Can you just — I don’t know — I know you’re not changing guidance, and I’m not trying to put words in your mouth, but it feels like the guidance range still looks relatively appropriate even with some of the upside drivers. It looks like you’ve kind of captured that in the guidance for the rest of the year. If you can comment on that, please.

Ryan Grimsland: Yes, Simeon. Yes, the big driver still remains the same is that our driver of operating income will mainly be driven by gross profit growth and especially in the back half of the year. And as Shane said earlier, seeing 50 basis points already annualized on that cost out, that’s a big one. We’ve got the headwinds of — in margins specifically that there are now tailwinds, but headwinds we faced last year in the back half of the year was about 170 basis points. So if you think about that build on our OI and then there was about 30 in SG&A. . SG&A is going to be down year-over-year, especially with the store closures, pulling those out and then the work that the stores team is doing on productivity, we’ll see that.

We’re also going to see on supply chain with the work the team is doing there, we’re going to be able to leverage on the sales volume. So as Shane talked about the, lines power, the productivity supply chain is driving, that’s going to allow us to leverage on the sales increase that we’ll see in the back half of the year. So — but the big bulk of the growth is going to be on gross margin back half of the year, and we like what our merchant team is doing, led by Bruce on our cost out and working with our vendor partners, we like what we’re seeing there.

Shane O?Kelly: Just to add that there’s a series of puts and takes that goes into how we came to reaffirming the guidance. Ryan described some of them there, know that we’ve run the scenarios and what the tariffs might look like, what that volatility might look like with consumers and the concatenation of that left us to put guide where it is and keep it there.

Operator: Next question comes from Seth Sigman from Barclays.

Seth Sigman: Sounds like progress in a lot of areas. I’m trying to figure out with the improvement in comps this quarter, how much of that was from closing stores that were previously dragging on the comps? Maybe you could give us a sense of how much those stores were under comping previously, so we could try to understand the dynamics there. And then as we think about the closings this quarter, I assume there is some sales transfer to the remaining stores, particularly on the Pro side of the business. So if you could help quantify some of that would be great.

Ryan Grimsland: Absolutely. So back to the first part was the mix of maybe the closing stores. So the comp difference between those closing stores and the remaining stores wasn’t material. I think we had talked about that in the past. It was just a lower base and the profitability of those. So they could comp on a lower base sales volume, especially out West. So it didn’t really have much of an impact materially on the comp mix. So I wouldn’t say that, that was a driver of the comp performance in the quarter. We did see some transfer sales, mainly in the Pro area, and that was planned and expected, and we achieved what we expected. We were really happy with that. I have to give a shout out to the Pro team who worked diligently to transfer those Pro accounts to the new stores, and they did a very good job doing that.

So there’s some in there, not quantifying that, but there’s some in the Pro trend. We really like to see, I think the comp difference in what we expected was really the first 8 weeks, the weather volatility, the tax refunds, trying to understand — is there pressure on the consumer that’s different — we saw that bounce back in the final 8 weeks of that quarter. We saw that normalize and some of the initiatives we had around Pro and improved time to serve coming out of our stores, I think, really had an impact as well.

Shane O?Kelly: Just — and thanks for the question, Seth. Just some contextual flavor to that coming through that process as quickly as we did, there were a number of teams. We talked about supply chain in the prepared remarks, our stores team led by Jason Hand, our real estate team, Todd Davenport. These guys getting that done as quickly as we did. There’s a secondary effect when you’re going through these processes. It creates uncertainty in your organization when you’re doing it. And by the way, as you think about how customers think about what your longer-term trajectory looks like. So for us being done with it, and now moving our narrative back to focusing on our strategic pillars, back to creating value, back to growth, that’s where we’re moving the company now. And so we’ve come through that and now driving forward on strategy for the remainder of the year.

Seth Sigman: Okay. Great. That’s very helpful. And then I did want to ask about the guidance, specifically as it relates to tariffs. I get that tariffs are manageable in the sector. What have you embedded here? How does it impact your P&L as we move through the year? And how are you thinking about pricing?

Shane O?Kelly: Yes. No, great question. I’ll start and Ryan can add to it. So for tariffs, it’s a volatile situation. And think about tariffs as you got the 301s, the 232s, AEPA and tariff creates variability by product, country of origin, tariff magnitude, by the way, changes to any of the above, the stackability of a tariff, whether it’s discrete or combined with others. And so as we’ve looked at that, in aggregate across the company, our blended tariff rate with currently in effect is about 30%. And if you think about the applicability to products, about 40% of what we source can have some applicability to tariff. Now some of it might be a subcomponent in the goods. So before you just take the 30% times the 40% to say that’s the economic impact, know that there’s subcomponentry there. But importantly, before just moving forward with that math, we’ve done mitigation strategies broadly across a number of dimensions. And maybe, Ryan, touch on the mitigation.

Ryan Grimsland: Yes. I’ll just touch on how we approach this. So our strategy first is we push back on all cost increases and really work with our vendor suppliers. Then we look at alternative sources of supply. So we’ll look for that, and I’ll touch on that in a second as well. And then finally, anything we can’t mitigate between vendors, sources of supply, we’re passing that on to price. And it’s been fairly constructive, and we’ve been able to pass that along. Ultimately, we think the full value chain should bear some of that, whether it’s the vendor, the supplier, the retailer and then ultimately, the consumer are going to bear some of those impacts. But to give you an example of supply, when we think about our China exposure, about 10% from China is direct import or 10% of our overall product is direct import from China.

By the end of the year, more than 50% of that we’re direct importing from China will be sourced from other countries. And the team is already making significant progress on that. So we’re looking at alternative sources. We’re quickly making changes. Our pricing cost team and our merchants are working diligently around the clock to look at alternative sources. And as this dynamic tariff environment shifts, we’re shifting and we’re adjusting to find the best cost for us.

Shane O?Kelly: Let me just add that we’re in a rational industry with rational players. Aspirationally, we would look to hold rate as an objective. If we can hold rate, then we’re going to look to managing operating profit in terms of how we think about elasticity units and margin. And we’ll drive forward with that approach. The team, led by Bruce Starnes, they’re looking at this, they look at it broadly across the portfolio, and then they look around how we would manage each particular category and product. And that analysis and effort, I think, appropriate given, again, as we started the point, the volatility of the situation.

Operator: The next question comes from Chris Horvers from JPMorgan.

Christopher Horvers: So I’ll take that [baton] on tariffs and what’s going on there. At this point, how much inflation was — did you have on the same SKU basis in the first quarter? Is any of that tariff pricing? And will that accelerate as you move forward from here? And then historically, if I recall, on the LIFO side, prior sort of methodology was you would actually write up inventory and it would create sort of these LIFO benefits early in the inflation process? So can you also talk about how that influences the P&L on the gross margin side?

Ryan Grimsland: Yes, absolutely. Thanks, Chris. A couple of things. So the inflation impact in Q1 was immaterial. And from a guidance perspective and the scenarios we’ve played out, we’re still in low mid-single digits on inflation in our scenarios. So we’ve — that range of outcomes that we put there from a guidance perspective contemplates different scenarios related to tariffs. There’s still early and there’s still a lot. We’re only halfway through the 90-day pause period in some of them. So there’s still a lot that needs to play out, and we’ll get more informed as we go. But the range of outcomes that we booked at really are contemplated in our range in the guidance. From a LIFO standpoint, we had a little bit of an impact in Q1.

That was part of the 80 basis points that impacted, but it wasn’t — only, I think, about roughly approximately $4 million LIFO favorability in the quarter. We’ll see. One of the things that we’re doing that will impact this is we’re looking at our weeks of supply, both for us and what the vendors might have currently in their warehouses here in the U.S. And we’re managing our POs based on that. So we don’t have to cut new POs right away, and we can work through the current costs that we’ve got to minimize the LIFO impact early on. So that should have a benefit. We’ve got decent weeks of supply in some of these categories, and we’re working through those. So that’s why we haven’t seen much of an impact early on. We also talked about we did a forward buy before the tariffs, and that helps with that weeks of supply that we can work through before we see a big impact on LIFO.

Shane O?Kelly: Just say, Chris, anecdotally, as you think about it, the moves companies make in situations like ours is, first, you’re pushing back the vendor and you have inventory on hand. And by the way, I think the volatility in terms of what’s in effect and when for how much all played a part in Ryan’s depiction of not having an impact in Q1. And he’s modeling as is the merchant team, how that flows in terms of the rest of the year.

Christopher Horvers: Got it. That makes a ton of sense. And a couple of margin questions. So first on the gross, if I look at sort of like the underlying trend, it seems like we’ll be in this like mid-single-digit range as we — sorry, mid-40s range as you get towards the end of the year. There — is there anything that you’re seeing or whether it’s with tariffs or just the operational side of the business that deters that potential? And then on the SG&A front, that $70 million of cost savings from asset optimization, is it right to just take the SG&A from 1Q back out to 70 and that’s sort of the underlying base that we build from based on seasonality and top line?

Ryan Grimsland: Yes, Chris, just on the $70 million, it’s not SG&A, it’s more COGS related. And Q1 is a tough one because yes, like from a liquidation piece, it’s more sales liquidation impact that $70 million and due to the DCs, DCs really follow up into our COGS. So I would put that more on the gross profit line. From an SG&A standpoint, though, the rest of the year, you’re going to see that down year-over-year as we get through that cost. And you will see closer to that mid-40s margin rate. From a tariff standpoint, one thing that Shane alluded to earlier is that while we ultimately want to maintain rate, as the costs come in, we’re going to be focused on operating profit improvement as well. So managing the elasticity and the flow-through on the operating income side.

So while when we looked at those range of outcomes in our guidance, we looked at all of those from elasticity, what we can pass on COGS price. And so I think our guidance really contemplates the ranges of outcomes that can happen in the rest of the year from what we know today, and Shane alluded to the complexities of all the different types of tariffs that are in their byproduct category.

Operator: The next question comes from Michael Lasser from UBS.

Michael Lasser: As you look towards your longer-term goal, can Advance Auto Parts achieve the margin expectations in the 2027 guidance if DIY sales per store remain relatively flat over that time because that seems to be the area where it’s going to be the most difficult to effectuate change and has been the area where Advance has really struggled historically such that there may be deeper investments needed in that area in order to generate improvement.

Shane O?Kelly: Let me start on the DIY front because certainly the — some of your points are relevant and we touched on what the U.S. consumer might face going forward. But also know that we recognize our relative position and are putting appropriate effort around being a participant with the DIY customer. And I touched on a few of them earlier. But let me add a couple of others that are relevant. Vendor partnerships. So we’ve talked about tariffs and that relationship with vendors. We’ve touched on our strategic pillar of cost out. There’s a third component of how we’re working with our vendors, which is strategic business planning to create mutual revenue growth. And that’s good feedback that we got from the vendors, which is, hey, don’t just approach us on the cost side of tariffs and our contracts, work with us and we’ll work with you on creating growth.

And DIY is an area around that. And you see that in terms of what we’ll be doing with promotions, but you also see that in terms of our marketing campaign around the corner and ready to help. Reminder that as the #1 or #2 player in 75% of our markets, we’re now a more thorough participant where that DIY customer will be closer in proximity and by the way, with our store team members and our services. So before you kind of depict our ’27 as not having relevant DIY share in our mix, we’re not seeing it that way and know that these initiatives will help keep us in good stead. But as to the specifics on the ’27 forecast, Ryan?

Ryan Grimsland: Yes. And Michael, I’d just remind you, I think we’re looking at low single-digit comp growth to get to our 7%. So we’re not looking for a large top line growth here. And by the way, that low single-digit, our growth is really led by DIFF. So we’re not expecting major DIY growth to get to that 7% or even large top line growth. In fact, I think that’s probably even below some of the market explanations to get to that 7%. That 7% is really built out the things we control. And that’s our merch excellence work that we’re doing, our supply chain productivity and the store productivity that we’re driving. And so we can get to that 7% with low single-digit comp growth in that outlook.

Michael Lasser: My follow-up question, and I apologize for it making — being very short term in nature, but you’re pointing to a flat comp for the second quarter. It sounds like the Pro side continues to perform well or within your expectations, DIY is volatile. Do you need to see an acceleration in the overall business in order to hit that flat for the quarter. And as you think about the back half of the year, are there other drivers to get what would seem to be a low single-digit overall comp that’s embedded in the outlook outside of just lapping some of the price investments and other factors.

Ryan Grimsland: Yes. Michael, I’ll start and let Shane jump in here. So our exit rate coming out of P4, we’re in line with that into Q2. So we’re — and we’re in line with our guidance for the quarter. So that flattish is kind of where we’re trending today coming out of P4. So that’s where we’re at. We don’t need to see a change necessary. We need to continue the momentum we’ve got today. In the back half from a growth there, one, you see the acceleration in these initiatives. So we’ve got the DMA work that we’re accelerating. You see the market hubs that are going. But also keep in mind, there’s some easier comparisons as well. And in Q1 and the Q2, the change in trends or the similar trends, just remember, we’re backing out Easter for that. So if you just adjust for that, it was 20 basis points in Q1, it’s a 25 basis point headwind in Q2.

Shane O?Kelly: Yes, just let me illustrate with kind of a story around the initiatives, the strategic pillars. And it’s a turnaround, and we’re going down the long road to get this company back on footing. I was in a DC with our DC leader, Steve Szilagyi and we look at a vendor that has shipped us individual piece parts, and these are small little containers where it costs more to put the container away than what the value of the product is. So Steve goes to the vendor that says, “Hey, why are you shipping us like this.” And the vendor says, “Well, why are you cutting POs like that?” And so together, we sit down the table and we say, “Hey, if you could send me fewer bigger POs with the right frequency, I can put together bigger orders for you.” By the way, we could start doing case-pack quantities instead of one [each], and that’s a 7-digit cost takeout.

And by the way, we’re going sequentially across our vendor base having those discussions. Now you can’t do that overnight, when you start to change pick quantities and things like that. But that’s just one example of what’s going on in supply chain to create lines for hour. By the way, simultaneously, we’re closing DCs. Simultaneously, we’re opening market hubs. Simultaneously, we’re refreshing the assortment in the DMA. So there’s a lot of activity going on in the company that it’s a little bit of a yard at a time that that’s what we have as we think about going into the back half of the year. And by the way, into ’26 and into ’27.

Operator: The next question comes from Zack Fadem from Wells Fargo.

Zachary Fadem: Good morning. Now that the store optimization is largely behind us. Can you walk us through your expectations for non-GAAP adjustments for the rest of the year? It looks like about $100 million on SG&A this quarter. So as you look ahead, is there any color you can give on GAAP versus non-GAAP operating margins and EPS expectations for ’25.

Ryan Grimsland: We’re not guiding necessarily GAAP. But I think in Q1, we had the benefit of the tax piece that happened in Q1 from a GAAP standpoint. But from a cash expense standpoint, we had $150 million this year, $90 million is already done. So hopefully, that’s helpful.

Zachary Fadem: Okay. And then stepping back on your conversations with vendors, is there a consensus out there on where like-for-like inflation will shake out for the industry this year, both tariff and nontariff driven? And then separately, we’ve talked in the past about opportunities to renegotiate maybe take some vendors off supplier financing, and that could result in some margin improvement for you. Any update there?

Shane O?Kelly: I’ll just start on the first part. There’s lots of scenarios on how it plays out with the vendors. I would just go back to the previously related perspective. We’ve gone through — we’re going through our mitigation strategies. In some cases, collectively, we don’t know what the ending outcome is. It’s a rational industry. We’ll look to act rationally, hold rate. We can’t hold rate, manage operating profit in terms of what our approach looks like. So that’s the first part.

Ryan Grimsland: On the second piece, just on industry specific, there’s lots of scenarios that play out on tariffs and what that impact would be. So we don’t have exactly where that’s going to land. Our guidance has all the different scenarios we think that will happen, and it contemplates those in that range. But going in low single digit is probably somewhere where we’re thinking. But that range could obviously change quickly overnight. I mean it’s still quite volatile. We’re only halfway through the 90-day pause on one of them. So there’s a lot that can take place over the next 9 months.

Zachary Fadem: And on the vendor financing piece?

Ryan Grimsland: The vendor financing piece, nothing material from a change. Supply chain finance, we’re sitting at $3.5 billion of capacity. We’re using at advance about $3 billion of that. And that’s just an uptick in normal seasonal buys. We expect long term to be somewhere between $2.8 billion to $2.6 billion on that. And that’s going to obviously fluctuates quarter-to-quarter as you have buys that go into there and then you run down the payables. So we still use it. There’s nothing material where we’ve had vendors come off and it’s a material impact to our COGS, but we always evaluate. Supply chain finance is a good tool, but we evaluate what’s the better return for us.

Operator: The next question comes from Scot Ciccarelli from Truist.

Scot Ciccarelli: So it sounds like the benefits from better procurement costs are expected to be relatively modest, I think, Ryan referenced 50 basis points. I guess I would have assumed that procurement cost was going to be your biggest gross margin opportunity, and yet you’re still expecting gross margins to improve during the course of the year. So can you provide any more color on what specifically and kind of the gross margin line is going to be the driver for the balance of the year? Is it just supply chain savings? Or are there other factors in there?

Ryan Grimsland: Yes. Thanks, Scot. Yes. So procurement cost of 50 plus keep in mind that those are contracts that we sign. And when those contracts go into effect has an impact on the amount. We are seeing SG&A down. We do have some fixed expense that we’re leveraging as we get more volume in the back half of the year. So we are getting significant improvement in SG&A year-over-year. Some of that’s coming from the store closures as well as we look at the drag that those had on our business. And then the bulk of our gross margin is going to be coming from COGS improvement, and that’s both the first cost work that our vendors are doing and also the leverage on supply chain.

Scot Ciccarelli: Is there anything within the gross margin on that procurement side that isn’t sustainable or it was onetime-ish? Or is this kind of like an existing run rate here?

Ryan Grimsland: The 50 bps is going to be an existing run rate. I mean these are contracts we’re signing with our vendors, and those will continue, and that will grow over time as we continue to execute that strategy. It will increase in the future.

Operator: Next question is from Steven Zaccone from Citigroup.

Steven Zaccone: My question was just on the improvement you’ve seen in the business. You talked about February being choppy and things have improved, specifically on the Pro side. How much of that do you think is the industry seeing some better growth after 2024 probably being a reset year versus maybe your own next execution with some of your Pro initiatives?

Shane O?Kelly: Yes. So it’s a great question. When I look at the business, I look at what our teams are doing and I look at the initiatives and they say, “Hey, does that make sense? Is that what — are those fundamentals of auto parts in terms of activities?” And I absolutely see it in the Pro team. And so we go to market with Pro with really two major bodies of effort. The first is our outside sales team. We have hundreds of men and women who visit our customers every day. And then we have thousands of team members in our stores called commercial parts Pros. If we look at the activities we’re taking and that ranges from making sure we’ve got the incentive and compensation plans right, that looks in terms of how we recruit and put people into those roles that looks to training that we’ve reinitiated at scale to make sure that they’re properly equipped.

And then in terms of how we do call planning and who they call on and when they see them, then what do they say when they go see a customer and making sure correspondingly that we’ve been thoughtful about where relative pricing is for different Pros based on what they buy and how much they buy. So there’s a lot of analysis going in. There’s investment in our people. There’s energy. We brought our team together for the first time in a decade earlier this year. So that’s certainly having an impact in terms of our ability to get business with Pros. And I hear it as well because I’ll go out and visit Pros and they’ll say, “Hey, you guys are now more relevant to me as I think about making the call, not the least of which, by the way, is the DMA availability work.” Pros, when they have a car on the lift and they make the call, it’s like, do you have the part we’re saying yes more frequently than we were in the past.

And then add to the mix, the first question is, do you have it? Yes or no. And second is when can I get it? We’ve saved 10 minutes off the delivery time. So those 2 components also make a big difference. So certainly, we’re subject to the market forces up and down, but there’s internal things that we control, that we’re improving that are making us more relevant with Pro customers.

Steven Zaccone: Okay. Then the follow-up I had, just drilling down in the second quarter with comps expected to be flattish. How should we think about the build of transactions versus ticket in that second quarter?

Ryan Grimsland: Yes, Stephen, so not necessarily guiding specifically on those, but I would say probably expecting the trends in DIFM to continue. And I think it’s still early and volatile. We are monitoring the demand elasticity given this tariff environment and understanding the pushes and pulls there as we move price into the market. So not going to guide to those specifics just given the volatile nature of the current environment with tariffs, but we are confident in what we’re putting.

Shane O?Kelly: I just want to say — thanks for the question. I want to say one other thing on the Pro universe that helps us knew whether or not we’re doing the right things. And that’s our independent owners. So our independent owners, they will give you raw feedback on how well they think you’re doing on different dimensions. And by the way, they basically index entirely towards the Pro universe. And so we’re grateful to have them as part of our network. We think we’ve got the right number of independents, and they’re giving us feedback on how we’re doing on our availability in terms of getting products to them. And I talked to one of our independent owners said, “Hey, I’ve seen a noticeable improvement in my ability to get the parts that ultimately I need to take care of customers.” So that’s another benchmark that helps us sort of calibrate towards — are we on the right track for working with Pros.

Operator: Our final question today comes from Steven Forbes from Guggenheim.

Steven Forbes: I wanted to expand on the servicing model. I think good. You mentioned in the call, 10% of stores are live with labor scheduling and asset allocation models. It was one of the few things you didn’t comment on sort of what you’re seeing in terms of improved performance, right, within those stores that have that model. So I was wondering if you can maybe first and foremost, just expand on sort of what you’re doing right in the store, what you’re seeing in the store and if you’re seeing sort of a visible lift in core KPIs in the back of leaning into that servicing model.

Shane O?Kelly: Yes. Great question. So there’s a number of things that go into the store operating model. One of the things that you’re latching on to is how we look at the asset allocation of vehicles and driver hours. And if you look across our fleet, what we found when we first started this project is there would be areas in the company where a store would have 4 vehicles, but really only used 3 and there’d be another store that had 2 vehicles and really wanted a third. And usually, GMs will hold on to their vehicles if you leave that in their purview because they’re optimistic about what they can do in the future. So we’re being smarter about where do we put a vehicle and then making sure correspondingly, if you have a vehicle and you got the demand, that you have the hours with the driver to operate the vehicle.

And so we’ve been testing multiple parameters and that includes when a vehicle moves over and then how many hours you get with that vehicle. Does a vehicle come, for example, with 35 hours or 40 hours or 45 hours? And we’re encouraged by the results in that we know there’s — that as we do this work, there’s an unlock for the company. We’re not ready to put anything out just yet for everybody here because it’s early days, but let us keep working on it. And when we’ve got sort of a crystallized insight and path forward, we’ll bring it to you.

Steven Forbes: I appreciate that, Shane. And then just a quick follow-up here. The comment, right, 75% of the store is now in markets where you’re #1 or #2 in store density. We often get asked, right, what does that mean in terms of market share? And not that I expect you to sort of flip that for us, but just what’s the high-level sort of view or message you’re trying to express with that statement, right? #1, #2, in density? What’s sort of the big takeaway that we should leave with today?

Shane O?Kelly: Yes. So we’ve got a right to participate and win in those markets, based on the legacy of our company, commonly the duration that we’ve been in that market, the ability to service Pro customers in terms of proximity, the ability to be around the corner for DIY, the ability for our team members to have great career, the ability for our DCs to logistically serve them effectively. So in retail, and I’m going to — I’ll add distribution because that’s kind of how you think about some of the product flows and customers. Density matters. And so having that versus — we participated in markets where we were far thinner and it was much more expensive to serve and on a relative basis, there were many more competitive outlets. That’s a tougher trajectory to run as a company versus we’re in our core markets now, executing our pillars with the store framework. I mean we’ve got in the U.S., 4,100 stores and 750 independents. So we’re in the market ready to serve.

Operator: With that, I’ll hand back to the management team for some closing comments.

Shane O?Kelly: So I want to thank everybody. First and most importantly, the members of Advance Auto Parts for your continued effort in our turnaround, sticking to our pillars and delivering the quarter that we just delivered. We look forward to seeing everybody in August on our next call, and thank you for participating today. Take care. Bye-bye.

Operator: This concludes today’s call. Thank you very much for your attendance. You may now disconnect your lines.