Earnings call: Advance Auto Parts outlines strategic plan amid Q3 decline

Advance Auto Parts (NYSE:AAP) reported a 3% decrease in net sales to $2.1 billion in the third quarter of 2024, compared to the same period last year, during their recent earnings call. The company faced challenges including consumer spending softness, a CrowdStrike (NASDAQ:CRWD) system outage, and the impact of Hurricane Helene. Despite these hurdles, the company improved its gross profit to $908 million, representing 42.3% of net sales, benefiting from inventory adjustments. CEO Shane O’Kelly presented a strategic plan to achieve a 7% adjusted operating margin by 2027, focusing on merchandising, supply chain efficiency, and store operations. The company is also set to close over 500 underperforming stores to enhance profitability, while investing in operational improvements and customer service.

Key Takeaways

• Advance Auto Parts reported a 3% decrease in net sales for Q3 2024, with comparable store sales down by 2.3%.
• Gross profit increased to $908 million, or 42.3% of net sales, aided by prior inventory adjustments.
• A strategic plan was outlined to reach a 7% adjusted operating margin by 2027, focusing on operational improvements.
• The company will close over 500 underperforming stores and four distribution centers, aiming to enhance profitability.
• New initiatives include a customer-first approach, a data-driven labor management system, and improved vendor partnerships.

Company Outlook

• Advance Auto Parts projects 2024 net sales to be approximately $9 billion, with a decline in comparable store sales of about 1%.
• The company anticipates net sales between $8.4 billion and $8.6 billion for 2025, with 30 new stores opening that year.
• Adjusted operating margin is expected to improve to 2-3% by the end of 2025, with savings from store closures contributing to margin enhancement.

Bearish Highlights

• The company plans to reduce its store footprint, resulting in a projected net sales reduction of $800 million.
• Ongoing store closures and turnaround efforts are expected to lead to a decline in operating margins by up to 5% in Q4.
• Advance Auto Parts anticipates a range from a loss of $0.60 to flat for adjusted diluted EPS in 2024.

Bullish Highlights

• The sale of Worldpac generated $1.5 billion in liquidity, strengthening the company's financial position.
• Advance Auto Parts is targeting $2.8 billion in vendor financing and plans to reinvest $300 million annually in capital expenditures.
• The company maintains a strong cash position, with approximately $500 million available and a $1.2 billion cash influx from Worldpac.

Misses

• The CrowdStrike system outage and Hurricane Helene negatively impacted sales and operations.
• The company's DIY segment is facing consumer pressure, although the professional segment is showing a positive trend.

Q&A Highlights

• Management is focused on enhancing time to serve, store availability, supply chain costs, and infrastructure for growth and margin expansion.
• The company is evaluating the deployment of approximately $1 billion from the Worldpac sale, with options open for debt repayment.
• Closing remarks included gratitude to team members and a commitment to updating stakeholders on progress.

Advance Auto Parts is navigating a challenging retail environment while implementing strategic initiatives to position itself for long-term growth. The company's focus on operational efficiency, customer experience, and financial discipline is aimed at improving performance and delivering shareholder value despite current economic uncertainties.

InvestingPro Insights

Advance Auto Parts' recent earnings report and strategic plans align with several key insights from InvestingPro. The company's challenges are reflected in its financial metrics, but there are also signs of potential recovery.

According to InvestingPro data, Advance Auto Parts has a market capitalization of $2.49 billion, which reflects the market's current valuation of the company following its recent performance and strategic announcements. The company's revenue for the last twelve months as of Q2 2024 stands at $11.27 billion, with a modest growth of 0.49%. This aligns with the company's reported Q3 2024 sales of $2.1 billion and the projected 2024 net sales of approximately $9 billion.

An InvestingPro Tip indicates that Advance Auto Parts has maintained dividend payments for 19 consecutive years, demonstrating a commitment to shareholder returns despite current challenges. The current dividend yield is 2.44%, which may be attractive to income-focused investors.

Another relevant InvestingPro Tip suggests that analysts predict the company will be profitable this year. This is particularly noteworthy given the company's recent struggles and the negative earnings per share reported in the last twelve months. It aligns with management's strategic plan to improve profitability through store closures and operational efficiencies.

The stock's performance has been challenging, with InvestingPro data showing a 31.88% decline in the three-month price total return and a 45.29% drop over six months. This reflects the market's reaction to the company's difficulties and the uncertainty surrounding its turnaround efforts.

For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and metrics that could provide deeper insights into Advance Auto Parts' financial health and future prospects. There are 5 more InvestingPro Tips available for AAP, which could be valuable for those looking to make informed investment decisions in the auto parts retail sector.

Full transcript - Advance Auto Parts Inc (AAP) Q3 2024:

Operator: Hello, everyone, and welcome to the Q3 2024 Advance Auto Parts Earnings Conference Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. [Operator Instructions] I'd now like to hand the call over to our host, Lavesh Hemnani, Vice President of Investor Relations to begin. Lavesh, please go ahead.

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. 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 our strategic and operational review, initiatives, plans, projections and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information about forward-looking statements 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. During today's call, we will be referencing slides which are available to view via webcast. A copy of the slides have also been posted to our Investor Relations website. In addition, we have also filed historical financials for the Advance RemainCo that can be accessed on our website. We will begin today's discussion with an overview of our third quarter 2024 results. After that, Shane will provide an update on our strategic path forward. Then, Ryan will discuss our financial objectives for the next three years. Following management's prepared remarks, we will open the line for questions. Now, let me turn the call over to Shane O'Kelley. Shane?

Shane O'Kelly: Thank you, Lavesh, and good morning, everyone. This morning, Advance took a big step forward on its journey to operational excellence and value-creation. Our entire management team is confident, focused and excited. Today, we will discuss Q3 results, our near-term outlook and our strategic path forward through 2027. As you'll note from our earnings release this morning, we have provided you with a lot of information. With the successful completion of the Worldpac transaction, we have outlined the financial position of Advance Auto Parts RemainCo so that you have a clearer and fuller picture of where we are, where we are heading and how we will measure our progress along the way. I feel that what's been done so-far is working. It is very satisfying for me to see that with the team effort involved, we now have line of sight to achieve our 2027 outlook, which I'm delighted to share with you today. We are laying out a plan to deliver anticipated adjusted operating margin of approximately 7% by year-end 2027. My confidence in achieving these goals stems from approximately 500 basis-points of expected improvement that will be driven primarily by factors within our management team's control, including merchandising excellence, internal supply chain transformation and store efficiency. Before we get into those details, I would like to express my gratitude to the more than 65,000 hard-working team members at Advance whose efforts during the recent hurricanes has been exceptional. We are thankful to our many associates who partnered with local communities to bring relief to those impacted with efforts ranging from helping reopening our stores to leading donation drives. This quarter, results came in below our expectations as the sales softness that began in early Q3 persisted throughout the quarter. Macro (BCBA:BMAm) headwinds and economic uncertainty continue to weigh on the consumer spending, while our results were also impacted by other events such as hurricanes and the CrowdStrike outage. We are pleased to have made progress on our strategic actions, including the completion of the sale of Worldpac and a comprehensive productivity review of our assets. This review has identified opportunities to improve our adjusted operating income margin over the next three years through a broad range of actions, including a realignment of our stores and DC portfolio. Over the past year, I have spent a considerable amount of time at our stores and in our distribution centers, meeting with our team members, vendors and customers. Throughout these conversations, one common thread that emerged is Advance's rich legacy and the important role we play in the industry and in the lives of our customers. With that foundation, today, we are excited to share our strategic and financial plan for the next three years. But first, let me pass it on to Ryan to discuss our Q3 results. Ryan?

Ryan Grimsland: Thank you, Shane, and good morning, everyone. Following the successful sale of Worldpac, we have made certain changes in the presentation of our financial statements. First, our results show a breakdown of discontinued operations related to Worldpac and continuing operations reflecting results for the Advance business. Second, to provide a better understanding of our underlying operational performance, we report certain financial measures on an adjusted non-GAAP basis to exclude the impact of certain items. Our guidance and financial plan for the next three years is based on these adjusted financial measures. Lastly, our results were also impacted by certain atypical items that are not included in the non-GAAP adjustments, which I will discuss shortly. In our view, looking at our reported results through this lens will provide more helpful understanding of our performance. Now, let's turn to reported results for Advance continuing operations. Net sales from continuing operations were $2.1 billion, a 3% decrease compared with Q3 last year. Comparable store sales declined 2.3%, driven by continued softness in the overall consumer spending environment. In addition, two other events impacted us this quarter. First, our store and server systems were impacted by the global CrowdStrike system outage due to which stores were temporarily unable to serve customers and close transactions. Second, later in the quarter, Hurricane Helene impacted sales at over 300 stores. We estimate both these events combined accounted for approximately 50 basis point headwind to Q3 comp. Without these events, our two-year comparable sales growth would have been about in line with the second quarter and our expectations. In terms of channel performance, both pro and DIY declined in the low single-digit range, with pro performing relatively better. Importantly, on a two-year basis, our pro comp was positive and accelerated compared with last quarter. During Q3, transactions declined in the low single-digit range, led by a mid-single-digit decline in DIY transactions. Average ticket growth was positive in both channels. From a category perspective, we saw strength in batteries, filters and engine management, while sales in discretionary categories were weaker. Gross profit from continuing operations was $908 million or 42.3% of net sales, an improvement of approximately 540 basis points over the prior year. As a reminder, in Q3 last year, we had one-time inventory adjustments. This contributed approximately 525 basis points of the year-over-year improvement. The balance was driven by stabilization of product costs offset by pricing investments from earlier in the year. Adjusted SG&A from continuing operations was $891 million or about flat year-over-year. As a percentage of net sales, adjusted SG&A was 41.5%, compared with 40.2%, with 130 basis point deleverage attributed to lower sales. We incurred higher labor-related expenses due to frontline investments, which were offset by our cost-out efforts. Adjusted operating income from continuing operations was $16.7 million and 80 basis points as a percent of net sales compared to negative 3.3% last year. Adjusted diluted loss per share from continuing operations was $0.04 compared with a loss of $1.19 per share in the prior year. We estimate that the loss in sales due to the CrowdStrike outage and hurricane impacts accounted for approximately $0.13 of EPS headwind during the quarter. To conclude my discussion on Q3 results, I would like to provide some additional details of certain atypical items that influence Q3 results. As a reminder, these items are not part of our adjusted non-GAAP results. We believe that explanation of these items is helpful to understand our performance. As you can see on this slide, we estimate atypical items amounted to 125 basis points of operating margin headwind and approximately $0.34 of EPS headwind during the third quarter. While Q3 performance was below our expectations, we believe that we have the right action plan to deliver improved results in the quarters ahead and I look forward to sharing details of our financial plan later. Now, let me hand it back to Shane to provide some insights in our strategic path forward.

Shane O'Kelly: Thank you, Ryan. It's an honor to lead this company and work alongside so many talented team members. I am confident in the team's ability to execute our strategic plan and deliver stronger results. To that end, I would like to begin by highlighting the key drivers of our turnaround. Number one, we're a leading player in the more than $150 billion auto aftermarket industry that has strong demand drivers. We believe that this plan will position us to grow by serving millions of customers through our extensive store network where we have the right to win. As a reminder, even incremental improvements in our performance can yield substantial results. Number two, our strategy is centered on getting back to the fundamentals of selling auto parts. The slope of our improvement will be determined by the multitude of smaller decisions made by our team and we are embedding industry-best practices in our operations and focusing on executing a clear strategic framework to elevate the performance of the advanced blended box. Number three, our leadership team brings deep automotive experience with broad retail fundamental expertise. In addition, following the Worldpac sale, we will also have an enhanced liquidity position, providing incremental capital to execute our plan. Number four, we completed a thorough assessment of operational productivity across our asset base and identified opportunities to improve profitability. We believe our plan, including store footprint optimization, will enable us to narrow our margin gap to the industry. And number five, we are now introducing our goal to deliver approximately 7% adjusted operating income margin by the end of fiscal 2027. We expect to achieve this by stabilizing the business to deliver stronger productivity. This will provide a strong foundation to subsequently deliver value for our shareholders over time. Now, let me discuss each of these drivers. On Slide 10, you see that Advance operates in an attractive sector with strong demand drivers and access to a large addressable market. In the US, vehicles in operation continues to grow with over 280 million cars on the road and nearly 85% of those vehicles are at least four years old. The average age of these vehicles has continued to grow and is currently at 12.8 years as consumers continue to hold-on to their cars longer. This trend is influenced by factors such as new vehicle acquisition costs and the high cost of insurance. Despite volatility in energy prices, miles driven continues to grow, creating the need for regular maintenance. These factors are expected to contribute to healthy consumer spending on auto, repair and maintenance, supporting demand for parts and accessories and creating a strong backdrop for growth. In the near-term, we are cognizant of the economic uncertainty that is weighing on consumer sentiment and we are planning our business accordingly. Next (LON:NXT) slide. To reposition Advance for growth, we are getting back to the basics, which starts with putting the customer-first. When I began this role a year ago, we started work on a cultural change to put greater emphasis on listening to the customer. We strongly believe that when we put the customer first and align the rest of the organization to meet the customers' needs, we win. With this focus in mind, we have taken several decisive actions over the last year. These include, refocusing our efforts on the blended box, which drove our decisions to sell Worldpac and retain our Canadian business. We also reduced costs and then invested additional resources in our frontline to help reduce turnover and enable frontline team members to better serve our customers. Through these efforts, turnover in four key field roles has been reduced by nearly 700 basis points over the past year. We initiated the consolidation of our supply chain, which has been accompanied by the rollout of market hubs to create economies of scale and enhance service levels for our stores. We are seeing early results that the market hubs and the stores served by the market hubs are comping better relative to markets without hubs. We also invested in pricing to improve our competitive position and are seeing improvement in unit sales trends. We also estimate that we've recovered approximately half of the investment of these pricing moves on an annualized basis. From a talent perspective, our new leaders have been rebuilding teams and refreshing processes to focus on core retail fundamentals, which is integral to our success during the turnaround. Next slide. Over the last year, we have refocused the organization's actions on improving efficiency of the blended box, which serves both DIY and pro customers from the same-store. In our view, our blended box focus will enable us to grow our share in the large fragmented market where the top four players account for just under 30% share. We are dedicating our efforts to provide pro and DIY customers with a mix of well-recognized, high-quality national and private label brands, including our popular Carquest and DieHard lines of product. We have a loyal base of more than 15 million DIY Speed Perks members and tens of thousands of ProRewards members to support our growth. Based on industry estimates, pro is expected to be the primary engine of growth due to shifting consumer preferences, which is in-part being driven by increasing parts complexity. We have access to a large vendor community that is fully supportive of our turnaround efforts and our renewed focus on the blended box. With our merchandising initiatives, development of effective end-to-end supply chain capabilities and changes to our store operating model, we will enable our stores to serve pros faster. In our pro sales team, we have redesigned incentive structures and increased wages to market levels to improve retention and drive higher productivity. In our DIY business, we are making investments in stores, team member training and e-commerce capabilities to improve customer experience and conversion. On Page 13, you can see that our executive team has nearly 300 years of combined relevant leadership experience. We have recently brought in talented leaders in finance, real-estate and merchandising who possess fundamental expertise in executing retail operations. Not shown on this page, but important to mention, is our store team, where leaders, including our field-based Regional Vice Presidents bring extensive automotive expertise. We have also augmented functional talent in merchandising and supply chain, and I am confident that this team's blend of automotive and retail fundamental knowledge will successfully execute our strategic plan. Next slide. Last week, we announced the successful completion of the Worldpac sale, adding $1.5 billion of additional liquidity to our balance sheet. As a result, we currently have approximately $2 billion of cash, which exceeds our aggregate debt position. As Ryan will describe in more detail later, we believe the combination of the Worldpac proceeds and the anticipated improvement in our operating cash flow will provide the requisite liquidity to run our business and fund our investments. In the coming years, we are focused on two main priorities. The first is investing in activities to improve the business, and the second is supporting our balance sheet, including repaying debt at or before maturity. Next slide. In August, we began a comprehensive review of asset productivity. Our goal was to assess actions already underway and identify additional areas of structural changes that would establish a stronger foundation for our future. Following this review, we have anchored our strategic plan on three pillars to put us on the path to deliver consistent profitable growth as shown on the slide. Starting with our store operations. As indicated in our release this morning, we made the decision to close certain non-performing, non-strategic stores in the US to better position our asset-base for long-term sustainable growth. As we move along our turnaround journey with a revised asset-base, we are also redesigning our basic store operating model to yield stronger labor productivity. The second pillar is merchandising excellence. We are taking a fundamentally different approach to negotiating with vendors to lower our direct product costs. This involves working with our suppliers to show how a partnership with Advance can drive mutually profitable growth. Regarding assortment management, we already have work underway to improve our parts availability by market and to increase the speed of customer service. Earlier this year, we also made critical pricing changes to become more competitive while avoiding unnecessary discounting in keeping with our industry's rational pricing practices. Our review has also revealed opportunities to improve margins by better managing promotions, including reducing unproductive promotions. And the third is supply chain. We continue to make progress in consolidating our distribution centers to operate with a streamlined network of large distribution centers, and as a result, have closed or converted 10 small DCs. We have opened 18 market hub stores to date and are targeting to open 60 by mid-2027. This is slightly behind our original expectation of 2026 as we pause the build-out to complete the closure of stores and DCs announced this morning. While we consolidate DCs and build new hubs, we are simultaneously pursuing opportunities to optimize our DC to store transportation routes to reduce costs and increase productivity. Separately, and in conjunction with other operational changes, we have made the difficult decision to eliminate certain positions across the organization to align our structure to current business requirements and the execution of our strategic plan. We expect this will yield around $50 million in annualized savings in addition to the SG&A reductions announced last year. Let me now dig deeper and provide an overview of our strategic actions across each of these pillars. Next slide. A key component of our operational productivity review was evaluating the health of our stores. Following the review, we have made the decision to close more than 500 Advance stores and exit our relationship with more than 200 independent locations. This reduction consists of complete market exits in certain Western states, coupled with the optimization of our footprint in other markets, including the Eastern states where we have higher density. Further, there are four Western DCs that are included in the closures. Our decision does not impact locations in Canada. We considered multiple criteria during our evaluation process and I'd like to further discuss three, store profitability, DC productivity and operational execution. Let's begin with store profitability. We evaluated the operating and financial performance of stores across our entire footprint, along with the relative competitive intensity to determine the viability of each location. Second, distribution center productivity. Our four DCs on the West Coast serve a lower concentration of stores and we would need to allocate significant capital and resources to infill those markets. We do not believe this would be the best use of our capital and believe that investing in other core areas of the business will help deliver stronger profitability. As a result, we decided to close the four DCs and associated corporate stores and independent locations in these less dense markets, resulting in a complete exit of certain markets on the West Coast. And third, establishing a stronger foundation to simplify operational execution. Our objective was to improve store concentration in our strongest markets to conserve resources and be better-positioned to grow in those markets. Following the closures, over 75% of our revised store footprint will be in designated market areas where we will have the number one or number two position based on store density. We expect to execute these closures by mid-2025. The 700 locations outlined for closure are dilutive to annual operating income by approximately $60 million to $80 million, which we expect to recover following the closures. We expect to collaborate with landlords to exit leased store locations in a reasonable manner to manage the obligations on our balance sheet. Making the decision to close such a meaningful percentage of our store base was not an easy one as it affects a significant number of our team members. However, we believe this action is prudent to support the long-term health of the company. Next slide. As we execute our plans with an optimized store footprint, we expect to derive stronger value from our turnaround efforts. This page provides a financial overview of our revised store footprint. On an aggregate basis, our decision includes closure of approximately 10% of our corporate stores and approximately a 20% reduction in US independent locations. The higher share of independents is primarily driven by our decision to exit the West Coast markets where there is a higher concentration of these locations. Based on financials over the last 12 months, the reduction of these 700 locations is expected to reduce our net sales by approximately $700 million. Our revised corporate store footprint base now implies about 4% higher sales per store compared to the store base pre-closures. Next slide. This page shows an updated map of our store locations. We believe that our revised store base will enable us to generate higher returns from our turnaround efforts and support improved financial performance in the future. In addition, we will focus new-store growth in higher-density markets and plan to achieve an annual opening cadence of 100 stores per year over-time. Our real-estate team is mapping out opportunities in each market, designing a plan to accelerate new-store openings while compressing our opening timeline. Opening new stores is a successful way of growing regional market share and gives vendors the opportunity to grow with us. Next slide. As a next step to maximizing productivity in our stores, we are redesigning our operating model with an emphasis on quality and speed-of-service. Let's break this down by DIY and pro. Starting with DIY. We are adopting a data-driven centralized approach to managing team schedules based on DIY traffic patterns, which enables general managers to dedicate more time to selling activities. We are also reducing the amount of manual paperwork that our GMs do. We are providing them with better reporting to track their performance and we're also replacing outdated RF scanners with Zebra devices. From a talent perspective, we recently launched centralized recruiting for stores in certain markets to give our GMs more operational flexibility, and we plan to roll this out across all markets. Last month, we also made the decision to sunset our UPS access point program, the time devoted to UPS drop-offs and pickups took time away from serving our customers. To elevate the quality of our service, we have launched a mini training series for our team members so that they can build their knowledge faster and be better equipped to guide the customer with their repair and maintenance needs. Moving on to the pro. We are reallocating resources by sales volume, competitive intensity and customer demand. This includes a standardization of our driver vehicle schedules, a reduction in third-party deliveries and the management of commercial parts pros in-stores. With regard to driver schedules, we are assessing store level performance to allocate resources to high volume stores and manage labor costs in lower traffic stores. This approach will drive stronger labor productivity, while ultimately lowering our time to service pro customers. Today, our time to serve is slower than what we want it to be and we are focused on lowering this over time. Next slide. To win in the aftermarket and enhance our reputation as a destination for high-quality auto parts, we need to consistently make available thousands of parts for our customers. We have successfully added new leadership with critical expertise to transform our merchant organization and reestablish Advance as a long-term growth partner within the vendor community. This starts with changing our philosophy with vendors from what can you do for me to how can we grow together. We are undertaking joint business planning with our vendors discussing category strategies, placement for SKUs and mutually establishing roles to build trust. Our conversations with vendors have been constructive and we look forward to building our dialog with the aftermarket vendor community at our summit in January. In addition, we are also focused on improving cross-functional collaboration between our supply chain and merchandising teams to drive higher volumes and reduce costs. To effectively serve the aftermarket based on different demand and service expectations, we need to provide parts coverage for thousands of SKUs at any given time. This begins with product line reviews that help us identify unproductive SKUs, introduce new products, evaluate private versus national brands and assess supplier diversification to improve the speed with which we bring products to the market. We expect to undertake between 200 and 250 line reviews this year and plan to pick-up the pace over the next two years. Our ability to bring parts to the market faster also depends on the speed at which the parts are set-up in our system. Our goal is to bring this timeline down significantly by breaking down existing processes and leveraging automation. Setting up parts faster will enable us to capture demand signals faster and results in effective SKU management across the network. On assortment, our goal is to ensure accurate availability of parts in our network. Our assortment is complex and includes more than 90 million unique store SKU combinations. We are addressing internally identified SKU gaps and building competitive intelligence to expand availability for our customers. This will also support higher labor productivity as our frontline team can reduce time chasing parts from surrounding stores that they do in order to complete an order. We have also started measuring store availability through DC and store in-stock depth. Today, this metric sits in the low-90s and we expect it to reach a high-90s level over time as we introduce technical capabilities to previously manual processes. Along with bringing parts to market faster, we are reevaluating our promotional and discounting mechanisms to provide relevant offers to our customers and reduce unproductive promotions. For our pro business, our team is designing new category-based and customer segmented promotional models along with stronger technical testing capabilities to understand the impact of promotions. These models will consider factors such as customer spending volume, our speed-of-service and competitive density. This data-driven approach will enable us to be more targeted in our campaigns based on market characteristics. In our DIY business, we plan to run fewer, bigger and bolder promotions in-store and online. Based on our estimates, the number of items sold at discount on our website is almost two times higher compared to others, while the ROI on these promotions has been inconsistent. We have also created execution challenges for our teams in managing SKU depth across multiple simultaneous promotions. To optimize this, our team is focusing on the fundamental goal of driving higher comparable margin dollars on a year-over-year basis and amplifying our vendor-funded media campaigns to influence traffic. Next slide. We are highly focused on optimizing our supply chain with one simple goal of reducing the time in which customers receive parts and doing so in the most economical manner. To achieve this, we are consolidating our DC infrastructure to create economies of scale. At the beginning of the year, we operated 38 DCs of varying sizes. By 2026, we plan to operate 13 DCs with each averaging about 500,000 square feet. This is a change from our prior expectation of 14 DCs due to the exit of one large DC on the West Coast related to our asset optimization work. These DCs will operate on a single warehouse management system to establish better SKU tracking and inbound outbound inventory processes. We have successfully completed the conversion of our final DC to the new WMS system. As we consolidate the volume of smaller DCs in the larger ones, we begin moving more volume via truckload shipments compared to LTL shipments, which lowers our overall freight costs. For example, in our home state of North Carolina, our DC consolidation project has resulted in 15% more volume moving by truckload, which has lowered freight costs. Operating fewer, larger DCs also provides an opportunity to optimize our picking and outbound replenishment activities. We measure DC labor productivity through LPH or lines per hour, which shows the number of product lines picked and shipped on an hourly basis. This KPI is currently in the mid-20s range and our interim goal is to improve it by 15% to 20%. Along with the consolidation, we are building a multi-echelon DC store hub network. Our new market hubs are designed to improve our speed-of-service by placing 85,000 SKUs closer to the customer, thereby increasing availability by 70% compared to a hub store and by more than 200% compared to our regular store. While still early in our build-out, this is a proven model in the industry and we are encouraged with the initial results. On a year-to-date basis, comparable sales growth for a market hub and its network of service stores has been outperforming DMAs without market hubs. This network also helps reduce the number of touches per product driving higher labor productivity. For example, instead of a store driver going to multiple stores to fulfill a customer order, the order can be directly sourced from a single hub or market hub. While the consolidation and build-out continue, we are also putting plans into action to lower fixed transportation costs in our replenishment model. We plan to do this by optimizing routing from DCs to reduce the number of routes, adding more stops along a route and renegotiating carrier contracts. Separately, as part of the optimization, we are building capabilities to improve DC service levels for stores to support more sales in high-volume stores or to win with availability in highly competitive markets. Next slide. We fully recognize that Advance has a significant operating margin gap to the industry and we are focused on narrowing that gap. We strongly believe that with our current plan, we can improve our ability to generate higher profits more consistently. Based on cost factors alone, we have identified approximately 500 to 700 basis points of margin opportunity. This is associated with reducing supply chain and product costs, improving pricing and promotions management and extracting SG&A efficiencies. Our largest gap to peers is sales productivity at the store level, which is almost equal in magnitude to the cost factors. As we take actions to improve our direct and indirect expense structure, we expect a greater percentage of our sales dollars to flow to the bottom-line, which will enable us to further narrow the gap. I would also like to note that on the far right section of the chart, we show structural components within our financial profile that will limit our ability to fully close the gap in the long-term. These include, a higher mix of rented store locations, the relative mix of pro customers and margin considerations from sales through independent locations. That being said, we are confident in our ability to improve margins to attractive levels in the long run. Our productivity review has identified opportunities to generate over 500 basis points of margin over the next three years to reach our objective of delivering approximately 7% adjusted operating income margin by the end of fiscal 2027. These margin opportunities stem from actions within each of our strategic pillars. Ryan will share more details on our long-term financial objectives and how we plan to track our progress. As I wrap-up my section, I would like to reiterate that each activity in our strategic plan reflects an operating philosophy based on core retail fundamentals. We will remain focused on executing and tracking the success of these actions to elevate the performance of the Advance blended box. I will now hand it over to Ryan to describe how these strategic actions drive our financial plan. Ryan?

Ryan Grimsland: Thank you, Shane. I'm am excited to share our financial roadmap through fiscal 2027 and plans to deliver value for our shareholders. Our financial plan reflects progress on achieving greater operational productivity through our strategic actions. As we discussed our financial plan today, both Shane and I recognize that we need to build a track-record of success. Over the past several months, we have dedicated our time to diving into the business, understanding the opportunities that lie ahead and building a plan backed by solid fundamental actions with measurable KPIs to track progress. We are focused on four key areas to enhance shareholder returns over the next three years and beyond. First, we are optimizing our asset portfolio through store closures and SG&A reductions to provide a healthy foundation for long-term growth. Second, as Shane mentioned, we have identified over 500 basis points of margin opportunity over the next three years from operational efficiencies in merchandising, supply chain and store initiatives. Importantly, we do not view this as the final destination, but the beginning of our continued operating margin expansion in the future. Third, we believe that we have ample liquidity for investment in high-return projects across critical areas to support our growth. This includes building our multi-echelon network and accelerating new-store openings. And fourth, we anticipate our strategic actions will enable us to improve cash generated from operations, driving an improvement in free cash flow even as we step-up capital expenditures over the next few years. While we have already begun executing part of our plan this year, the largest portion of the implementation is not expected to begin in full earnest until 2025. As a result, we expect these benefits to start showing meaningful progress in 2026 and beyond. During the implementation, we will be measuring the success of each pillar with clearly defined operational KPIs and holding our organization accountable to those goals. To monitor progress on these initiatives, we have set up internal work streams to manage the implementation and allocation of resources to achieve these goals. We are keenly aware that the initiatives on this slide are frequently used concepts in retail. The difference between companies that are successful and those that are not is the quality of execution. As a management team, that is where we spend most of our time with a focus on getting the basics right. Before discussing our three-year plan, let me provide some color on our financials, adjusting for the full impact of store closures and the sale of Worldpac. Starting with the midpoint of our 2024 guidance and excluding stores planned for closure, our pro-forma revenue is expected to be between $8.2 billion and $8.4 billion. As previously noted, the store closures reduced our net sales by approximately $700 million. However, we are rebasing our plan around $600 million to $800 million of net sales reduction. The high-end of this range assumes modest levels of sales transfer to locations and markets where we will continue to have a presence. The low-end of this range bakes in potential headwinds associated with realignment of our sales team efforts due to the reduction in store footprint. In addition, we show the midpoint of our 2024 operating income margin guidance as well as the anticipated 70 basis points to 90 basis points of savings associated with store closures, about 30 basis points of atypical items offset by the normalization of about 30 basis points of Worldpac inter-company margin. Over the next few slides, I will provide an overview of our three-year financial plan with preliminary expectations for 2025. Starting with net sales, for 2025, we expect net sales of approximately $8.4 billion to $8.6 billion. We expect to begin closing stores later this year with full completion of this activity by mid-2025. As a result, our 2025 net sales target includes a partial impact of lost sales. We also plan to open 30 new stores next year and grow comparable sales between 50 basis points to 150 basis points, which is an improvement on our current run-rate with modest contribution from strategic actions currently in-flight. This rate of growth also includes the carryover of pricing actions, which we expect to be fully annualized in the first-half of 2025. Over the following two years, we expect our rate of comparable sales growth to improve as we realize the benefits of our store operating model changes, improved parts availability and an overall improvement in customer service, including a reduction in our time to serve. While we expect to deliver continuous improvement in our sales trajectory, the timing of the benefits from our initiatives are difficult to predict. As a result, our plan is based on comparable sales growth below industry levels. We also plan to gradually accelerate our pace of new store openings each year to ultimately achieve our long-term target of opening 100 new stores post 2027. Now, looking at adjusted operating margin. By the end of 2025, we are planning for adjusted operating margin between 2% to 3%, implying an expansion of 150 basis points to 250 basis points compared to the midpoint of our RemainCo 2024 guidance. As indicated earlier, we expect to save approximately $60 million to $80 million in operating costs related to the store closures or about 70 basis points to 90 basis points in margin. During 2025, we expect to recover about half of these savings through the timing of closures. The full run-rate of operating cost savings is expected in the second half of 2026. The rest of our margin improvement in 2025 is being driven by cost-savings from merchandising activities, including line reviews and product cost negotiations. We expect modest SG&A leverage in 2025 from labor productivity and indirect cost-out initiatives offset by normal wage inflation. Over the following two years, we expect operating margin to increase by another 400 basis points to 500 basis points, which includes the full operational cost-savings associated with the store closures. Our plan assumes fiscal 2027 gross margin in the mid-40s range and SG&A below 40%. The gross margin improvement is expected to be driven by three primary factors. First, strategic vendor negotiations. As Shane mentioned, we are conducting joint business planning discussions with our strategic suppliers to grow our business with them and improve the economic outcome for us and our suppliers. Second, DC productivity and transportation optimization. We expect to leverage supply chain costs and drive stronger DC productivity through higher inbound and outbound volumes by operating fewer large DCs. We also plan to optimize our store replenishment routes based on transaction volume and market needs. And third, promotions. With the use of targeted promotions, we aim to remove unproductive offers and drive better gross margin returns through a disciplined promotional cadence that will yield higher returns. At the same time, we plan to manage pro customer discounting through new pricing models to increase our wallet share from existing customers. Regarding SG&A, the margin improvement is expected to be driven by increased labor productivity from changes in our store operating model and higher fixed-cost leverage supported by better parts availability. We remain committed to maintaining sufficient liquidity over our planning horizon. Our balance sheet is strong with approximately $500 million of cash available at the end of Q3. The sale of Worldpac added approximately $1.2 billion of incremental cash to support our strategic plans. While we expect to incur certain cash-related costs associated with the execution of store closures, we are simultaneously evaluating options to unlock value from the closed locations to minimize the cash flow impact. Even after reflecting these costs, we expect we would have over $1 billion in cash on our balance sheet. This position I've just described does not take into account our revolving credit facility, which is currently undrawn. Our financial plans assume we will be able to generate strong operating cash flow to fund higher CapEx, which in turn would help deliver higher free cash flow. In 2025, we anticipate spending at least $300 million in capital expenditure related to our strategic initiatives funded through operating cash flow. As we execute our turnaround and improve the performance of the business, improving our leverage profile remains a key priority. Our objective is to reduce RemainCo leverage ratio from approximately 4 times at the end of Q3 to approximately 2.5 times no later than the end of 2027. We expect to reach this target by repaying our debt obligations at or before maturity along with the reduction in our lease obligations. On a preliminary basis, we expect to exit approximately 40% of these leases tied to closed stores over the next 12 to 18 months, partially offset by leases for new stores through 2027. I would like to note, we anticipate reaching our target leverage ratio regardless of outcomes from our efforts to reduce lease obligations. Regarding supply chain financing, we currently have sufficient and growing capacity on the facility and our current three-year planning horizon assumes we maintain approximately $2.8 billion of RemainCo payables under financing agreements with our banks. Separately, as it pertains to inventory, our payables coverage ratio has improved by approximately 300 basis points following the sale of Worldpac. Our three-year financial plan assumes we maintain our current payables ratio. We expect to deliver further improvements in this ratio over time as we execute our merchandising strategies and enhance vendor relationships. This implies approximately 3.5% of net sales over our planning horizon. We are allocating incremental CapEx to support our ongoing business needs, accelerate new-store growth and invest in strategic initiatives to stabilize and grow the business. We will continue to spend toward the build-out of our multi-echelon supply chain and other merchandising projects to improve inventory availability. Additionally, a portion of capital will be allocated towards store and technology debt. These expenditures will be targeted primarily on the key maintenance items such as age roofing, HVAC or technology systems. In summary, we believe we have the right strategy centered on core retail fundamentals to deliver our financial objective for 2027. Shane and I are confident in this plan and the team's ability to execute this turnaround. We are focusing on execution and holding the entire organization accountable to delivering progress on our KPIs. As we solidify our foundation and work to achieve these targets in 2027, we believe we have further upside potential to narrow our gap to the industry and to exceed 7% adjusted operating margin beyond 2027. Moving to an update on our full year 2024 guidance before moving to Q&A. Our guidance is presented on an adjusted non-GAAP basis for the Advance RemainCo. Net sales, we now expect net sales for the full year to come in approximately $9 billion, including comparable store sales of approximately negative 1%. Quarter-to-date, our trends are tracking about in line with Q3, and our guidance assumes we continue at the same trend to the end of the quarter. The impact of store closures is not expected to be meaningful to fourth quarter comp trends due to timing of closures. We expect adjusted operating income margin for the full year to be between positive 25 basis points and 75 basis points. Adjusted diluted EPS for the full year is now expected to be in the range of a loss of $0.60 to flat. We expect free cash flow of approximately flat at the end of the year, which includes cash outflow associated with the execution of store closures. Our guidance for capital expenditures is now expected between $175 million to $225 million as we continue to undertake projects to enhance our IT, stores and supply chain infrastructure. Understanding this is the first time we are providing RemainCo guidance, let me share my thoughts on fourth quarter. Based on our guidance, fourth quarter adjusted operating margin is expected to be negative. We expect gross margin to be up year-over-year, although due to the lower sales, we will experience some deleverage in fixed supply chain expenses. Q4 is traditionally the lowest gross margin rate of the year, and I would expect that to continue. On SG&A, we expect dollars to be sequentially lower, although higher compared to last year due to lapping of certain favorable annual true-ups, which is expected to drive deleverage on lower sales. I would also like to note that our Q4 expectation assumes a temporary reprioritization to execute store closures that could potentially impact our day-to-day operations. We believe these strategic actions are the right path forward to establish a stronger foundation for future growth. In summary, I would like to thank our entire team for their commitment to the turnaround and helping shape our strategy for the long-term. We have a rich legacy and a trusted brand name along with an extensive network of stores to capitalize on strong industry drivers for our growth. Our strategic plan strategic plan is focused on getting the basics right every day. We have a strong leadership team and talented frontline workforce to serve our customers. We have a solid balance sheet to support our investment needs. We now have a clear pathway to narrow our margin gap to the industry and create value for our shareholders. I look-forward to sharing more about our progress in the future. With that, I will now hand the call back to Shane.

Shane O'Kelly: Thank you, Ryan. In closing, I want to thank everybody for joining our call today. We hope today's presentation provided a clearer view of our path forward and our opportunities for growth. Each leader in our organization is committed to delivering against our three-year plan. I would like to thank our team members once again for their continued dedication to serving our customers while we take the required actions to fuel the improvement and long-term growth of the company. With that, let's open up the call for questions. Operator?

Operator: [Operator Instructions] Our first question comes from Michael Lasser of UBS. Michael, your line is open. Please go ahead.

Michael Lasser: Good morning. Thank you so much for taking my question. It's on the long-term outlook. How much reinvestment have you assumed that you will need to make from the cost savings into the business over the next couple of years? And as part of that, have you assumed that you will be able to maintain your vendor financing program as it currently stands moving forward? Thank you very much.

Ryan Grimsland: Hey, thanks, Michael. Yeah, the -- on the supply chain finance piece, yeah, we are factoring in, we're maintaining the ability of the $2.8 billion is roughly where we're targeting. That might fluctuate up or down a little bit as we continue to work with our vendor partners. But we're targeting the $2.8 billion, targeting that we will have the capacity to support the $2.8 billion going forward. From a reinvestment standpoint, we feel like we're at a good SG&A level. We'll have obviously some inflation going forward. But I think in our guide, we factored in incremental CapEx that will be part of that investment. So, moving up to $300 million on average per year, that might fluctuate a little bit depending on the timing of some of those initiatives, but that's the reinvestment we're making more on the CapEx side. On the cost savings side, we're bringing a lot of those cost savings to the bottom-line and that's somewhat offset by inflation going forward, but factored into our guide.

Michael Lasser: Got you. Thank you very much. My follow-up question is, philosophically is the plan to say, hey, you know that Advance Auto can compete effectively in the marketplace as a leaner, more nimble, more regional type of organization and there's evidence to support that from the fact that there are strong regional players in the market already because closing stores, getting out of markets would suggest that the store growth, the ability to be a national retailer is going to be limited over time. So if you could just give us a sense of what the long-term vision on how Advance is expecting to compete with this plan, that would be great.

Shane O’Kelly: Hey, Michael. It's Shane. Good morning. Thank you for the questions. We have no doubt that we can compete and that evidence strongly exists today. We don't need to look at regional players. We just look internally at our company. And where we have density, we perform and we see that in numerous markets. And if you look at how we'll be post store closing, we'll be number one or number two in terms of density in 75% of our markets. So, when you do a bell curve of our store performance, we see plenty of locations where we not only compete, we thrive, we win. And so, the idea is to focus on that, get back to winning, deliver the economic numbers that we've depicted today. And during that journey, we returned to growth, which includes opening new stores. So, I don't think about it in terms of national or not national. We just -- we think about it in terms of where we can win, where we can grow and then start doing that.

Michael Lasser: Thank you very much and good luck.

Shane O’Kelly: Thanks, Michael.

Operator: Thank you. Our next question comes from Chris Horvers of JPMorgan. Chris, your line is open. Please proceed.

Chris Horvers: Thanks. Good morning, everybody, and thanks for the presentation. So, my first question is, understanding that you do have less sales in the fourth quarter and you're going to deleverage, but it seems like you're implying a down 5% operating margin. So, I guess, the question is, are there one-time costs that are included in 4Q non-GAAP that aren't per se recurring or continuing? So, related to that, on Slide 7, it seems like you're saying that the 0.8% adjusted operating margin, and 3Q included, like, 125 basis points of what -- things that won't necessarily repeat next year?

Ryan Grimsland: Yeah. Thanks, Chris. You're doing the math right. Q4 is going a little bit down, close to what you're saying there. It's more of recycling a couple of things that happened last year. There's a -- we're factoring in some disruption given the turnaround right now. You'll see some disruption in sales. And our gross profit rate in Q4 is traditionally the lowest gross profit rate in the year. There's a couple of things impacting that gross profit rate, but nothing that's -- we're adjusting out the strategic initiatives. So, that's out of that guide. But we're factoring in just a little bit of risk adjustment in Q4 relative to us being prioritizing this turnaround and the store closures. But really, the gross profit traditionally in Q4 is a lower rate, and that's driving it as well.

Chris Horvers: And then -- so am I right on Slide 7 that 3Q had 125 basis points of stuff that you're putting in the adjusted, but you're saying won't necessarily recur next year. And as you think about the bridge, the '25, you're modeling 200 basis points of operating margin expansion, sort of midpoint to midpoint, how much of that expansion would you say is discrete lapse, like, one time costs, one time impacts, whether it's the weather or that gets you to that level of expansion year-over-year?

Ryan Grimsland: Yeah. The 125 basis points is just kind of those things that pop up during the year like the hurricane, the CrowdStrike impact on our system. There are other items in there. So they're kind of atypical items that aren't necessarily part of the normal run of the business. So that's the 125 that we're calling out. Not typically something that's in the adjustment.

Chris Horvers: Yeah. And then how much -- is there -- how much of that 200 next year is sort of execution free, i.e., there were unique cost and unique disruptions this year that maybe you put into results -- adjusted results, but you have clear line of sight of getting those costs back next year?

Ryan Grimsland: Yeah. The 200 going in next year is just you've got the store closures that are coming in, that's the easy one. We're executing those. Those are popping in. margin improvements that we're seeing as we partner with our vendors. The 200 is clear line of sight on our business actions and objectives. That's really what's driving the increase next year.

Chris Horvers: Understood. Thanks very much.

Operator: Thank you. Our next question comes from Scot Ciccarelli of Truist. Scot, your line is open. Please go ahead.

Scot Ciccarelli: Thank you. Good morning, guys. So it looks like COGS is supposed to be the biggest driver of your expected EBIT improvement both in ‘25 as well as for your three-year plan. Can you guys break it down a little bit more for us? Meaning, how much of that improvement is supposed to come from supply chain, how much from better promotional management, just so we can understand the -- what's really going to drive that improvement in COGS? Thanks.

Ryan Grimsland: Yeah, Scot, thanks for the question. I'll give you some general themes. We’re not going to give you specific ones, but we are excited about where we're going with the COGS improvement. It's broken down between both improved costs, first cost as we partner with our vendors. There's pricing and promotional improvement in there as well. We know we have work to do to improve the effectiveness of our promotional cadence, the scale, the size of those, the effectiveness of them and then our pricing and where we're pricing and it's mainly to our pros and making sure that we've got the right pricing structure for our pros. Supply chain is a portion of that. the supply chain, as we continue to consolidate our DCs and our market hubs, that is a longer tail than say, probably the merchandising piece of this. So if you're looking at the COGS improvement, probably a larger portion of that COGS improvement is coming from the merchandising excellence portion.

Scot Ciccarelli: And how would you guys kind of rate or rank your confidence in the ability to drive that gross margin improvement because obviously, like, this year hasn't necessarily played out maybe the way you originally anticipated. So, just trying to understand, again, a little bit better on confidence levels of the gross margin improvement going forward? Thanks.

Shane O’Kelly: Hey, Scot, it's Shane. Great question. Thanks for asking. I'm very confident and the reason starts with leadership. So, what we're now starting to see is the impact of the changes we've made with key leaders. So, Bruce Starnes has joined us from Target (NYSE:TGT). He's started to build an outstanding team. And I saw this as we were out in Apex meeting with vendors, both in terms of discussions with existing vendors and working collaboratively to develop plans that support what we're trying to do, also from vendors we haven't worked with who've now said, hey, how do we -- how do we think about working with Advance. So, he's digging in on a number of retail fundamentals, the PLR process being one, availability being another. And so, as he goes through those, what I would consider tried and true merchandising activities that his previous company would be known for, those will yield results for us.

Scot Ciccarelli: Thank you very much.

Operator: Thank you. Our next question comes from Simeon Gutman of Morgan Stanley (NYSE:MS). Simeon, your line is open. Please go ahead.

Unidentified Analyst: Hi, this is Zach on for Simeon. Thanks for taking our questions. Shane, realize the company is completely different than two, five and even 10 years ago. As you know, there have always been margin goals much higher in the future and margins have only contracted over time. So, why is this time different? And touching upon the earlier question, sort of what gives you confidence on the target you set out?

Shane O’Kelly: Yeah. Hey, thanks, Zach. Appreciate the question. I can't speak to the past in terms of different decisions and promises made. For this management team, we want to improve our say-do ratio. We're confident in what we're doing and I think about that in terms of the tail of the tape. So, been here a year. And so let's just review briefly what's transpired. Came onboard, depicted that we would do decisive actions. Started a strategic review, said, hey, we'll investigate the sale of Worldpac. We sold Worldpac. We picked-up $1.5 billion for that. We've shored up our balance sheet. We looked at Canada. We like Canada. We're keeping Canada. We invested in the supply chain. We looked at it and said, hey, we've got disparate supply chains, let's move to a consolidated supply chain. We've made that action. We looked at our frontline, said, what are the roles, what's the compensation, what's the training? We made those changes. We looked at our leaders and said, where do we need key leaders in key areas. We've made a number of those changes. And now, as we go forward, we looked at the store base, not easy. We went across every store in the network across -- we depicted three criteria. We actually had a broader list. We evaluated every one of our locations. We made an incredibly difficult decision to close 500 company stores, 200 independents. We're willing to do the things that we need to do to be successful. And by the way, the lens that we put on each of these is what does it take if you're going to be an auto parts retailer focusing on a blended box? What are the activities? What are the fundamentals that that type of company needs to do? And that's what we do. And if it doesn't fit-in that construct, we don't do it. And so that's what gives me confidence. I'll also depict that we have been appropriately reflective and slow before we put out the 7%. So, Ryan and I have spent a lot of time thinking about when is the right time to come to the market and say, here's something that we believe in, that we have conviction in that we will hit. And so, we've put out the 7% in 2027. People have been asking, people asked last quarter, the quarter before, hey, how come you guys won't give us more definitive numbers? We want today to be about really showing you, showing the Street, showing everyone this is who we are, this is what we're going to do and this is the result of where we're going.

Unidentified Analyst: That's helpful. Thank you. And then, just as a follow-up, so with the business comping down low single-digits, is this industry weakness or share loss and maybe it's a little bit of both? And can you help us think about the path back to positive territory moving forward?

Ryan Grimsland: Yeah. So, the weakness that we've seen recently is a little bit on the DIY side and we do see the consumer being pressured. What we are excited about is on a two-year basis, our pro comp trend actually accelerated in Q3. It's just more on the comparable side of it. So, there is a little bit of pressure on the consumer right now. This industry is pretty resilient in these times. I mean, at some point, you still have to start and stop your car. And so, the push off of discretionary purchases, less of an impact here, it's more short-term in nature. So, we've got a good strong industry backdrop, but there is a little bit of pressure more recently on the consumer and that's showing up in the DIY comps.

Unidentified Analyst: Thank you.

Operator: Our next question comes from Seth Basham of Wedbush. Seth, your line is open. Please go ahead.

Seth Basham: Thanks a lot and good morning. Thank you for the presentation. First, just some clarifying questions regarding the guidance for 2025. First, on adjusted EPS basis, what are you aiming for there to help us get a sense of the below the operating margin line moving pieces?

Ryan Grimsland: Yes. Good question. We are going to come back in Q4. We'll probably give more details on EPS and we'll refine the guidance for '25. So, we gave the operating income 2% to 3%. I would expect low single-digit share dilution. So, if you're doing the math, just think of that for next year, low single-digit share dilution, you should be able to get to a decent EPS range based on that.

Seth Basham: Okay. And relatedly, regarding free cash flow in 2025, inclusive of some of these restructuring efforts, what are you aiming for in that area?

Ryan Grimsland: Yeah, it includes -- 30 to 40 is included in that.

Seth Basham: Okay. And then, just lastly, bigger-picture question. There's a lot of change that you guys have in your plan, managing that change and executing on it is critical factor as you mentioned, Shane, you have accountability targets, you have teams set up. Where, if you go wrong, do you think are the biggest risk to execution?

Shane O’Kelly: Yeah. So, anytime you're executing broad-based plans, you need to make sure you're appropriately comprehensive. You need to make sure you're communicating thoroughly, need to make sure that you've resourced it correctly. And so, we know that running the existing business and executing this simultaneously does present degrees of risk and we need to execute against that. We brought in support. Alvarez & Marsal is working with the company and has been helpful in terms of how we think about this and how we'll go against the closure cadence. We've got additional support as it relates to negotiating with landlords on different leases. We're bringing in support as it relates to how we think about moving inventory in terms of whether we sell it in place, whether we decide to relocate it. And so, that's a key dimension of it. But we're confident in terms of our ability to do it and it's consistent with how we've been running the company since I've been here and we'll go through it and continue to focus on the fundamentals. The remaining company in terms of where we're located and how we'll operate, you'll see an ability for us to execute those three pillars, so in terms of the store operations, in terms of merchandising excellence, in terms of the continuation of the supply chain consolidation.

Seth Basham: Thank you.

Operator: Thank you. Our next question comes from Steven Zaccone of Citigroup (NYSE:C). Steven, your line is open. Please go ahead.

Steven Zaccone: Great. Good morning. Thanks for all the detail today. And I appreciate you taking my question. I wanted to shift back to the top line discussions. Could you just help us understand, the fourth quarter comp sounds like it's going to be down. You gave some quarter-to-date comment that it's running in line with the third quarter. Is that excluding like the hurricane impact and the CrowdStrike? And then, if we look forward, right, you've given this preliminary outlook for '25 and then what you think 2027 will be. How do you think about the market growth rate for next year? And then, maybe as you think about your ability to take market share, where is the bigger opportunity? Is it on the pro side or is it on this DIY getting better?

Ryan Grimsland: Yeah. So, I'll take the first part of that. The first part, so we did back-out the hurricane impact to [say] (ph) the trends from Q3 to Q4 in line. So, you would adjust for the hurricane and CrowdStrike impact on that to get to kind of where our trends are going into the quarter.

Shane O’Kelly: Yeah, I'll start -- let me talk about the market for next year in terms of how we return to positive comps. I think we'll have progress in both arenas. On the DIY side, Ryan touched on it, the consumers definitely had a bit of a hangover coming out of COVID. I think election jitters, so -- and in the low cohort familial spend categories of 50K, 75K family groups. That group has been deferring wherever possible. So, we'll look for that market to return. And so, we'll participate in that spend. But we're also very excited about what we're doing in the pro arena. So, between our outside sales team members where we've rejuvenated compensation plans. We've also created focus in terms of which accounts they call on. And there's a significant effort around what we call up and down the street pro, these are small shops, two-bay, three-bay, four-bay shops that we're catering, are offering to better penetrate. So, that activity is underway. Also, with our CPPs, where we looked at what their compensation plans look like. These are our commercial parts pros inside of our stores and which accounts that they're calling on. So, there's a lot of effort on the pro side and that's augmented by two other things, parts availability and being able to get parts in-market faster. And then, secondly, where and how we allocate drivers in our stores. So we've got a better sort of data oriented way of which stores get how many vehicles to make sure that we're lining up with where the growth is. So, those are a number of the dimensions where we look for growth in pro.

Steven Zaccone: Okay. And then, to go back to the free cash flow discussion, just to understand that correctly, did you provide preliminary outlook for free cash flow in '25? And maybe, if the top line plan or the margin execution comes a little bit weaker than expected next year, what could be another strategy here to protect profitability and protect the cash flow?

Ryan Grimsland: Yeah. So, we didn't provide a free cash flow forecast. We just said we expect to fund the CapEx with operating cash flows next year. So, operating cash flow should be able to fund the investments we're making going forward. And do you mind repeating the second question there? We got to follow up on that one.

Steven Zaccone: Just given -- yeah, given the balance sheet here where you still have the debt, right? And clearly, you're not using the proceeds to pay down debt. If the top-line comes in weaker than expected, right, if some of this cost execution does not plan out as expected, can you just help us think through some additional levers to protect cash flow?

Ryan Grimsland: Yeah. We have levers within the organization that we'll pull on. Absolutely, we think we've got the liquidity to manage through the downside if there is additional downside to this. We feel like the numbers we're putting out there. If we think about the store closures being 70, 90 basis points going into next year. The work we've already done and started on merchandising excellence programs, we feel pretty confident in our ability to achieve the 2% to 3% next year on a very modest top line, the 50 basis points to 150 basis points when market is going to be low single-digits. So, yes, there's risk. There's levers we can't pull along the way. But from a liquidity standpoint, we feel like our balance sheet is really strong. I wouldn't say that we're not paying down debt. We will plan to pay down debt either at maturity or before maturity as we work and execute this turnaround plan. Our goal is to get to $2.5 billion. So, some of that cash eventually will be used to pay down debt along the way.

Shane O’Kelly: Just to add, in terms of managing the business, fewer relevant metrics related to the performance of the business are now being tracked, the review cycle with the leaders around those metrics to create accountability, to create ownership. So, the rhythm of how we're running the company is different and directly related to the things that contribute to the performance numbers we're putting out. So, look for that scrutiny to assist, not just -- I don't think about it in terms of protecting the downside, but in terms of creating the conditions to deliver against what we're saying.

Steven Zaccone: Okay. Thanks for the detail.

Operator: Thank you. Our next question comes from Seth Sigman of Barclays (LON:BARC). Seth, your line is open. Please go ahead.

Seth Sigman: Hey, good morning, everyone. I wanted to focus on store closings. Can you just elaborate on what you identified that's different in those stores, in those markets relative to the rest of the go-forward store base? And maybe, also, just the decision to exit certain states? Any more color there? Thank you.

Shane O’Kelly: Yeah. Thank you, Seth. I'll start with that question and Ryan can chime in. We had a series of criteria that we put against all of the stores in the network. And by the way, we're geographically agnostic in terms of what stayed open and what closed. And so, there wasn't an eye towards particular entire state exits, that's just what occurred as a result of the analysis. Some of those metrics, store profitability. So, if the store is fundamentally unprofitable, that's a key metric for us. We look at, say, what is the horizon to which we think we can make it profitable or how long has it been unprofitable? Has there been a managerial component? And so, that's -- that was one dimension. Another one is the DC productivity, and this did influence how we thought about the Western markets. So, when you have a DC infrastructure in place to support stores, typically, there's a number of stores that creates the scale for DC operations. And we don't have the density of stores to support that, it ends up impacting the profitability. And what we found with the Western markets is that for us to get to the scale for the DC operations to run where we need them to run, we'd have to infill over a period of years and put a significant amount of CapEx to then get to a baseline level of profitability. And we didn't see that occurring or we didn't think that the use of all of our capital to bring that about and the time horizon to make that happen, was a good use of how we're thinking about the future. So that's how the Western markets came about. Other metrics, we've talked about operations. By the way, lots of other ones, physically, where is the store located? Is it in the real-estate market? How much do we pay in rent? What's the horizon? So, this was a very thorough review, not taken lightly. Obviously, when you're closing a store, both in terms of the permanence of that activity, in terms of the company's ability to garner future revenues, but also the human side. And I don't want to lose sight of that. Any time that you're making these moves and team members now don't get to continue the journey with the company, nobody feels good about that.

Seth Sigman: Got it. Okay. That's all helpful. If you sort of zoom back, you've laid out a plan today that I think is clearer for the next few years, but still embeds a lot of improvement ahead from all of these initiatives. We're getting the question, you're getting the question in a number of ways, what gives you confidence that this is fixable, that it's not structural? Are there specific data points you can share on the early wins? Maybe how different store cohorts are performing? You started to roll-out some of the hub stores, are there examples there you can give? Or you've had pricing actions? I know there have been a number of early initiatives. Any specific data points you can share to help instill that confidence? Thanks so much.

Shane O’Kelly: Yeah. So, you talked about the hub stores. That's certainly one. And as we look at other key metrics where we do things around our store activities and we say, hey, if we move vehicles to stores that have the opportunity for pro growth, how do they do? They get more pro business. If you look at merchandising, we say, hey, if we do a better job around parts availability and we pilot that, how did the sales do? We do better in terms of sales. And if you look at how we're structuring some of our relationships with our vendors, can we -- can we create constructs that deliver better economics. And so, we're seeing those things. But I think the more important picture, if you come up to 50,000 feet is what we're projecting to do are items under management's control. So, these are predominantly cost-related actions, doesn't mean they're necessarily all easy, but these are management controlled items that if we can put good plans in place and focus on executing those, the numbers follow. We have a streamlined supply chain, the numbers follow. If we have availability consistent with what you'd see typically, the numbers follow. So, this isn't predicated on outsized above-market sales growth, for example. And so, the idea that this is under our control doesn't require us to take share. That's what gives me confidence. In particular, as I see the plans that are coming from the different leaders, as I see the leaders in the respective seats, that's where I feel very good about it. Ryan?

Ryan Grimsland: Yeah. I'd say the things that we are executing, just in the last few weeks, we've seen store availability pop significantly as we started focusing on the right metrics in there, the warehouse management system now in all of our DCs and the lines per hour improving across all of that. It's -- these metrics are coming in as we continue to focus on these specific metrics. Pricing actions in a -- we've solved for half of that pricing actions already in an environment where the DIY consumer is pressured. And so, we're seeing it here. It's starting to come through. It's going to start to realize over the course of the next year, and we will be sharing these key metrics that we've talked about and the progress of those every single quarter. So, you can get an update on a quarterly basis of these key operational KPIs, and we'll share those every quarter so you can get a feel for how it's going. We understand. Listen, it's -- sounds like we've built a track record of the financial things hitting up, but we are -- these decisive actions we're taking, you're seeing that start to happen. We went from 38 DCs down to 28 DCs. We are taking action. Some of these KPIs are starting to come through.

Seth Sigman: Great. Thanks so much.

Operator: Thank you. Our final question of today comes from Zach Fadem of Wells Fargo (NYSE:WFC). Zach, your line is open. Please go ahead.

Zach Fadem: Hey, good morning, and thanks for all the details today. So, as you think about the path from sub 1% operating margins today to 2.5% next year and 7% down the road, how would you characterize the '25 and '27 margin expectations if comps were flat rather than up low single-digits? So, said differently, how much of the 2025 and 2027 margin expectation are predicated on higher comps?

Ryan Grimsland: Yeah, it's little because we're not expecting to beat the market where -- our assumptions going forward are mainly on what we control and these actions we're taking, not on top line, significant top line growth. So, we are focused on improving time to serve, store availability, our supply chain costs and infrastructure, all these things are things we control. So, the top line is not the driver of this growth and margin expansion. You saw in our walk that sales per store is a big chunk of the gap that we have to our peers and that's not the big part of the driver of this solve. So, if we improve that and that goes, that's just upside potential for us. Now, if you had flat comps, there's a little bit of pressure from inflation, right? 2% to 3% cost inflation that will be there. But for the most part, we're assuming low single-digit over the next three years.

Shane O’Kelly: Zach, Shane, thanks for the question. You see the comp expectations we put out, which are pretty modest. The idea that we can grow at-market rates or above market rates, that's the second bite of the apple for where we can improve the bottom-line of the company. What we're depicting for you today are the things that are cost oriented, that management has line of sight to executing against, that plans are in place, and in many cases, activities underway that we've got the metrics involved with, that we have confidence in achieving. When we get those and hit those in stride, that's where I think we have the follow-on discussions on what further OI margin areas can we close the gap with perhaps related more towards the sales side.

Zach Fadem: Got it. And then, on the $1.2 billion in cash from Worldpac, you've talked about reinvesting a chunk of that. But for the remaining $1 billion or so, can you walk us through just the decision making process around how to deploy the $1 billion? Maybe share some thoughts around the decision not to pay down debt right away? And then, how you think this decision or the decision you make could impact your credit rating one way or the other?

Ryan Grimsland: Yeah. So, on the -- we haven't made the full decision yet not to pay down debt. We are managing our liquidity as we go through this restructuring and ensuring that we have the right strength in our balance sheet as we go through it. We are looking at the markets today and making sure when does it make the most financial sense for us to de-lever and pay down some of that debt. So, we are leaving it open right now to pay down debt at maturity or before maturity. But especially, in the early stages of this turnaround and this restructuring, we're leaving that flexibility out there for us. But that doesn't mean that we won't pay down debt before maturity.

Zach Fadem: Got it. Thanks for the time.

Shane O’Kelly: Thanks, Zach.

Operator: Thank you. Therefore, this does conclude today's Q&A session. I'd now like to turn the call back over to Shane O'Kelly for any further or closing remarks.

Shane O'Kelly: Ladies and gentlemen, thank you for joining us today. Today, we've depicted our future in terms of where we're going over the next three years. We owe gratitude to all the team members on the frontline who work hard every day. We appreciate you taking the time to spend with us to go through each of those actions. We will update you on our journey as it unfolds. We appreciate your questions. Let's go, Advance. Thank you.

Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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