While this turnaround is absolutely the right thing needed to differentiate the company, it will put strain on expenses in the short term.
For fiscal 2008, the company now anticipates leveraging SG&A at an increase of approximately 2% comparable sales versus the 1% increase previously disclosed.
This increase is primarily driven by investments in merchandising capabilities and systems, e-commerce investments, and accelerating some test in commercial combined with the impact of rising fuel costs.
Same-store sales increased 2.9%.
This is the first quarter in nine quarters that comps were positive in all four areas of the country, including Florida. The commercial business continues to be the driver. Commercial continues to accelerate with comp sales growth of 13.5% in the second quarter.
- DIY comp sales trends improved as well, to negative 0.8% in the quarter. That''s up from the past two quarters when DIY comps were down 3%.
- Operating income grew 9%, which allowed the company to leverage its share repurchase into a 23% EPS increase.
The company conducted a DIY summit that identified key themes and ideas to grow and transform the DIY business.
This approach was similar to the company’s parts summit conducted last year which led to parts focus as a company. The company is actively seeking feedback from the front line team and using it to make improvements to DIY business.
The current economic crisis is a constant reminder that the company’s turnaround and transformation efforts must go beyond the traditional approach. More importantly, the changes that need to be made are not optional.
Weakening business and job conditions, along with record high gas prices, are a heavy burden for many of the customers. The company’s outlook remains balanced for the remainder of the year.
The company is making tangible progress in several areas that are impacting current results.
Specifically, Advance Auto Parts is gaining meaningful traction through its parts inventory investments, the launch of its attachment selling initiative, and the efforts to improve weekend scheduling.
Currently, the company is 75 days into its 100-day assessment of the DIY business, which is focused on driving the full potential in DIY and transforming the retail business.
In this pursuit, the company conducted a DIY summit and DIY growth workshop during this second quarter. These sessions produced several key themes and hundreds of ideas.
The company is taking action to enhance the speed and capability of its team in order to accelerate the transformation of the DIY retail space.
Advance Auto Parts has decided to locate its sales floor merchandising team, which accounts for over 50% of DIY business today, in the regional office in Minneapolis. This location will allow the company to more readily add talent from nearby retail and consumer companies, as well as network and benchmark with other retailers with similar systems and practices. Approximately 70 positions will be located in Minneapolis as part of the sales floor integrated operating team.
The company’s longer term target is to be a $10 billion company that produces $2.5 million per store comprised of a 50/50 mix of retail and commercial sales.
The company is making progress in formalizing its commercial sales force and providing the information they need to focus on its highest potential customers.
Advance Auto Parts is developing systems to identify those customers where the company has the best opportunity to deepen its existing relationship and grow its share of their purchases by acquiring new customers so Advance Auto Parts can further accelerate its total growth.
The company continues to pilot several different initiatives that are common within the industry and to look at other distribution businesses outside the industry.
During the quarter, in addition to strong commercial sales increases, the company continues to see all of its key profitability metrics grow at the same time.
That included higher parts productivity, increased truck and driver utilization, and the higher balance of parts sales.
The Autopart International produced a 7.2% comp to the quarter. They also opened 10 stores, which included the acquisition of a five-store local parts distributor. This acquisition provided AI the opportunity to strengthen its presence in the Philadelphia market.
In the second quarter, the company opened 36 stores, to bring the total for the year to 70.
Advance Auto Parts also closed two stores and relocated four stores. At the end of the second quarter, the total store count was 3,325. During the first quarter call, the company indicated it''d be reviewing store performance and real estate portfolio. As a result of the recent review, Advance Auto Parts anticipates closing approximately 20 to 30 underperforming stores for all of 2008, with the majority occurring during the third and fourth quarters.
Over the last six months, the company has been testing smaller prototype buildings and different store layouts to improve new store productivity and reduce occupancy costs while increasing parts availability. Advance Auto Parts started rolling out its 6,000 square foot prototype as it opened new stores, in place of the current 7,000 square foot store. The company will continue to measure results and build a prototype that best serves the needs of both DIY and commercial customers, as well as improving results for shareholders.
Key questions and answers from the second quarter fiscal 2008 earnings call conducted by Advance Auto Parts, Inc. (AAP) on August 7, 2008.
Seth Basham (Credit Suisse):
Could you just tell us what the LIFO credit or charge was this quarter?
