Bret Jordan: Hey, good morning, guys. On the supply chain initiative, and obviously, that seems like it’s been on for a while. The WMS should be done by the end of this year. At what point do you see actually having the DCs on a single ERP system? And when you use those smaller DCs as a sort of forward inventory, will there be an investment cycle in building more large distribution center infrastructure?
Shane O’Kelly: Yes. So great question. Thank you, Bret. On the WMS, we’ll be done with that this year. So high jump is our WMS system. So we’ll have that in all of what will be our replenishment DCs. The second part of the journey, in terms of creating market hubs, and you see this model probably elsewhere in the industry. We can use our smaller DCs to perform in this fashion. And we’ve had a journey in supply chain, but not a definitive one in terms of creating a unified single supply chain. What we had in the past, we had cross-banner replenishment. But what we were doing is basically asking 38 DCs to function as full on replenishment notes, basically to provide every product to a store requiring that product. And some products, some DCs don’t have the size and capability to do that, 38 is far too many for my past life in terms of where you’d expect your vendors to ship into.
So the idea is we create a national network of larger DCs. We’re not ready to definitively — to define that exact number. But you can look at other companies, and sometimes you’ll see 8, 10, 12, 14 large DCs to give you that national footprint. And then market hubs, both the conversion of our — of the smaller DCs, we’ll add additional market hubs beyond that because I think that, that flow model works. And so if you take those two together and look at the footprint, there are probably some additional large DC efforts that we need to undertake, and we’ll describe that more in terms of here’s our exact number. Here’s where we happen today. Here’s where we might be a new one. That will all be coming in the coming months. But the key for today is that we are putting a flag in the ground to have a unified supply chain, one flow path, one set of systems, and an easier interaction for our vendors to work with us.
Bret Jordan: Do you have a feeling, I guess, internally for what your basis point impact has been to run to despair it pretty inefficient supply chains, like what’s the incremental cost of running as you have been running? Or what might you pick up by consolidating?
Shane O’Kelly: I’ll just say it’s material, right? So if anybody who’s been in logistics, if you’re running two supply chains and everybody else or your previous endeavors as one supply chain, it’s just — it’s just not the path forward for us. So as we will explain with you, we think there’s material moneys that come out of the system. And then importantly, for our customers, the product flows better. The availability goes up. And so there’s kind of a one, two combo there that we’ll describe more at a later date.
Bret Jordan: Great. Thank you.
Operator: The next question is from Steven Forbes of Guggenheim Partners. Steven, your line is open. Please go ahead.
Steven Forbes: Good morning, Shane and Ryan. Shane, maybe a follow-up on the supply chain. You mentioned potentially using the sale proceeds to accelerate the migration to the single unified network. I was maybe just curious, like if we can think through the two scenarios here in terms of time frame to completion of that initiative, right? If the asset sale occurs, is there like a time frame in mind that you have to reach the goal? And then I guess, if the asset sale doesn’t occur, sort of what is that change in the time frame that would result in maybe a difference in sort of the near-term free cash flow proceeds of the business?
Shane O’Kelly: Yes. So this is my third time combining supply chains in companies, and we want it to be sooner rather than later. But it’s a multiyear endeavor. I think that’s just the practical reality of what happens. So can we shave time off? Absolutely, and we will do that with the proceeds. But this isn’t something that this group should expect to be done in ’24. We’ll extend into ’25, and probably into ’26 as we do this. And in particular, there’s both the existing set of efforts, which is what we’ll do with the first 38. Where we have to add net new market hubs or where — if we look at our larger DC structure, where we need to put in a large-scale new DC, those efforts take time. I think, the thing for everybody here to know is that journey is beginning.
And our first market hub conversion is going on. And so — and early indications are, this is going to be a really good thing for us. We will move as fast as we can because we know that the end state creates value for the customers and improve the profitability of the customer. And so more to come, but know that our supply chain team is dedicated. They’re focused and they’re already focused.
Steven Forbes: Thanks. And maybe just a quick follow-up for Ryan. As we think through sort of noncash and cash impact on the margin outlook, any sort of color around the fourth quarter LIFO either benefit or charge? And then sort of what’s implied within the margin guide for 2024 in terms of LIFO?
Ryan Grimsland: Yes. So in Q4, we saw $5.2 million of income related to LIFO. And we expect it to be moderating in 2024, so a moderate expectations in 2024 in our guidance.
Shane O’Kelly: Thank you.
Operator: The next question comes from Seth Sigman from Barclays. Seth, your line is open. Please go ahead.
Seth Sigman: Hey, good morning, everyone. I wanted to follow up on the comps this quarter, down 1.4%. I’m just curious, as you started to implement changes, are you seeing a wider dispersion in performance across the store base? I’m sure it’s noisy with weather, but anything you can point to and maybe quantify to say that some of the early initiatives are working?
Ryan Grimsland: Yes, absolutely. So as we saw availability improve, we did see improvement in the pro traction. So we’re actually seeing good performance in the pro. We’re excited about that, encouraged by our inventory availability. We still see DIY pressured. And so that kind of offsets some of the pro performance in that. And that’s also kind of what’s in former guide going forward. We expect to see good improvement in the pro as we have improved availability, while reducing DIY pressure going forward.
Seth Sigman: Got it. Okay. And then my follow-up question is just thinking about the gap in profitability versus some of your peers, and what — I guess, you’ll ultimately guide us to at some point. How much of the issue/opportunity is just four-wall profitability that’s sales-driven, it’s volume driven versus how much of that profit gap is maybe inefficiency outside of the stores? And maybe both, but I’m curious how you think about that as we contemplate the road map from here? Thank you.
Ryan Grimsland: Yes, it’s a good question. It is a little bit of both. So some of it is — we talked about supply chain conversion, that obviously will generate some benefit for us and how to flow that gap as well. There’s also a mix factor, as far as the type of the product in our mix being heavier pro than DIY, and that margin mix has a little bit of an impact as well. Yes, there’s also other areas where we need to focus on for merch excellence. Shane talked about improving line reviews, et cetera. So there’s some areas there. We’re not going to go into specifics around de-comping all of that, but obviously, there is some work and opportunity to close that gap. But I think the biggest one is that mix impact will keep us from closing it completely, but we do have opportunity, and that’s why we’re focused on the big one here, which is the supply chain conversion.
Shane O’Kelly: Ryan is exactly right. And one way to illustrate, and why we’re focused on the blended box, if you look at revenue per store, and you think about us as a kind of a 1.7, 1.8. And you can look at other folks who have higher numbers. When you add revenue to a store, $100,000, $200,000, $300,000, that money drops to the bottom line at an incrementally larger level, right? So you’ve got your fixed costs covered. So that’s a key for us. So I think your question is a good one, Seth. We need to do both. And as we do both, we see the path forward to continued success. And now that, as we look at where Advance is, we don’t sit and say, hey, let’s benchmark off the other guys. Our goal as an organization is to be incremental, to be incrementally better every day, take care of our customers, look after our team members.
And I’ve seen this movie before in other industries, in fact, in my last organization, and that’s a recipe for success. And we’ll look for that from us, and then look for us later this year to provide a perspective on what that might look like after a couple of years.
Seth Sigman: Okay. Great. Thank you, both and good luck.
Operator: The next question comes from Chris Bottiglieri from BNP Paribas. Chris, your line is open. Please go ahead.
Chris Bottiglieri: Hey, thanks for taking the question. Sort of [indiscernible] seeing some of these inventory adjustments. Just wanted to — I’m not sure I fully understood Chris Horvers question. Is it likely these inventory write-downs and changes in estimates will be reversed in subsequent period when you sell it? Or is that not possible? Like are these permanent changes?
Ryan Grimsland: Yes. No, we don’t anticipate reversing it. This was making changes to estimates and vendor receivables that as we went through that process. I don’t — I wouldn’t expect that these would reverse at any point in time.
Chris Bottiglieri: Got you. And then next question is just — I was hoping you could talk more about the independent businesses that you’ve divested. It looks like you take up the first 100. Is this like an immediate margin saving because you — you’re actually losing money to these customers? Or it’s just — does this enable you to actually shut down some of these Carquest DCs because you wouldn’t need them anymore if you stop serving this under these particular market?
Shane O’Kelly: So I’ll start, Chris, and Ryan can — yes. Thanks, Chris. I’ll start, and Ryan can jump in. The independents are an important part of the business, right? They could serve geographies we can’t get to. They can serve end markets where their depth of capability exceeds ours. So this isn’t a play around exiting the independent arena. This is one where, at times, we were exuberant in terms of adding independents, and as we looked at the sort of balance of trade, if you will, in terms of the benefit to each party, it wasn’t working for us. In some cases, it wasn’t working for the independent either. And so we looked at the aggregate number, and there are about 100 folks that at the end of the day, that didn’t make sense for us to continue that relationship.
And as we did that, it’s a good move for us. Ryan can talk about the impact. But it’s also been received well in the independent network. The independents who are good at what they do, and by the way, they exhibit a lot of pride in their business. They don’t want folks representing the Carquest name and doing it in a manner inconsistent with what our customers would expect. So it’s been a well-received adjustment, and we’re happy with the independence that we have.
Ryan Grimsland: Yes, Chris, I’ll just add that well, we’ll lose some sales on that, but we’re actually going to gain on the bottom line and operating profitability, roughly $3 million to $4 million. So it’s definitely a net positive for us.
Chris Bottiglieri: Okay, that makes sense. Thank you.
Operator: The next question comes from Seth Basham from Wedbush. Seth, your line is open. Please go ahead.
Seth Basham: Thanks a lot and good morning. My question is around the balance sheet leverage going forward. How do you expect that to play out over the next few quarters, including post sale of Carquest? And any implications for the vendor inventory financing program?
Ryan Grimsland: Yes, it’s a good question. So as we said with the sale, and Shane talked about it, if we do get the proceeds from the sales, one of the first things we’ll do is work to delever our balance sheet with some of those proceeds. That’s one thing we’ll look at it. But going forward, I think the business is generating good cash flow, and as part of that cash flow, we will continue to work to delever the balance sheet. We’re going to first invest in the business, but also get that leverage target into a better place.
Seth Basham: Okay. That’s helpful. And as you look beyond ’24, obviously, early, but with the supply chain transformation, should we expect CapEx to rise from ’24 guide?
Ryan Grimsland: The CapEx guide that we put out contemplates actions we’re taking in supply chain conversion. We’re going to be much more focused on our capital expenditures and making sure we’re investing in the right things that drive our business and then we focus on these decisive of actions. So as we said earlier, the capital is really focused on IT and supply chain right now.
Seth Basham: Thank you.
Shane O’Kelly: Yes, I’ll just jump in there. The supply chain transformation is a big one. I think Ryan’s got our guide exactly where it should be for ’24. We could raise it in ’25. And we’ll feel either through the proceeds from Worldpac or just as the business performed better and we’re able to deploy more, again, back to the previous questions, if we can accelerate or wherever we can accelerate the supply chain consolidation, we’ll do it.
Operator: Next question comes from Michael Baker from D.A. Davidson. Michael, your line is open. Please go ahead.
Michael Baker: Okay. Great. I just want to follow up on the 38 distribution centers that you talked about. Any — I’m looking in the case, in past annual reports and everything, and I can’t find a breakdown. I know in the past, you used to talk about PDQs, which are the smaller DCs, but can you just tell us, of these 38 DCs, how many do you consider bigger? What are — what is the bigger DC? How many are smaller? Just trying to get a sense of what you’re going to go forward with in terms of your big DCs, and what may need to be added to that? Thanks.
Ryan Grimsland: Yes. So with the 38, I know it’s hard to approach 38. 38 is the Advance and Carquest DC network. So I think in total, we’re about 50, which would include the Worldpac as well. So that’s, when we talk about 38, we’re specifically talking about the Advance and Carquest DC network.
Shane O’Kelly: So we’ll give you, in the coming months, a complete breakout of all the facilities. I’m a little reticent to be more specific. Obviously, we’ve got team members in these DCs. And if their DC is going to be converted into a market hub as we go through that plan, we want to make sure we’re staying abreast of keeping them in the loop. So we’ll break out the differences. In general, the smaller DCs that are more — that are appropriate for the market hub Conversion K for Carquest, the larger DCs from the Advance model, there’s a substantial size footprint difference. We largely think we have the large DC network that we need. Again, we may refine that a little bit in terms of what that national footprint might look like.
Michael Baker: So you had said to a previous question earlier that based on the other guy, somewhere between 8 to 10 to 12 to 14 is the right number of large DCs. And you’re saying that you think you have those already from the Advance, the old Advance network, give or take, a couple? I just want to clarify that.
Shane O’Kelly: Yes, Michael, good job threading some questions and answers together. The 8 to 12 to 14, that’s my experience in the past life, right? If we hired some of the firms that do the work on setting up national infrastructures, and you say, hey, I want to have a nationwide distribution network. That’s what they’re going to tell you. And that’s what I’ve seen, and that’s what I’ve lived. And so I think that’s an appropriate range for us. And yes, we largely think we’ve got the facilities today. Thank you.
Ryan Grimsland: We’re leveraging our current assets, right? We’re leveraging our current assets that we have — we think we have the assets to create the network that we need.
Shane O’Kelly: Yes. If we came to you and said, hey, we got to put 10 new 500 to 1 million square foot DCs up in the United States, you guys can do the math on what those buildings cost and how long that takes. We’re trying to do this both more quickly and efficiently using the facilities we have. And a national model might come out and say, gosh, the DC you have might be marginally better if it was located an hour this way or that way That’s a little bit of the trade-offs we’ll make, which is minor in terms of the efficiency drag. But in exchange for the speed and the overall cost effectiveness, that’s the right way to go.
Michael Baker: Yes. That makes sense. One other — just from the beginning of the call, if I could clarify. You talked about, you found another $50 million from — to get to frontline employees from sunsetting things. What is that? And I guess on a year-over-year basis, is that an incremental $50 million investment? Or is that netted somewhere?
