Advance Auto Parts, Inc. (AAP) Q1 2014 Earnings Report, Transcript and Summary

Welcome to the Advance Auto Parts First Quarter 2014 Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. Before we begin, Zaheed Mawani, Director of Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

[Audio Gap] And thank you for joining us on today's call. I'd like to remind you that our comments today contain forward-looking statements we intend to be covered by, and we claim the protection under, the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events, developments or results and typically are words such as believe, anticipate, expect, intend, will, plan, forecast, outlook or estimate, and are subject to risks, uncertainties and assumptions that may cause our results to differ materially. Our comments today will also include certain non-GAAP measures, including certain financial measures reported on a comparable basis to include impacts of cost that were incurred in fiscal 2014, in connection with the integration of General Parts International and BWP Distributors. Please refer to our earnings press release and accompanying financial statements issued today for important information and additional detail regarding these forward-looking statements and the reconciliation of the non-GAAP measures referenced in today's call. The company intends these forward-looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available. For planning purposes, our second quarter 2014 earnings release is scheduled for August 14, before market open, and our quarterly conference call is scheduled for the morning of Thursday, August 14, 2014. To be notified of the dates of future earnings reports, you can sign up through the Investor Relations section of our website. Finally, a replay of this call will be available on our website for 1 year. Now let me turn the call over to Darren Jackson, our Chief Executive Officer. Darren?

Thank you, Zaheed. Good morning, everyone. Thank you for joining us, and welcome to our first quarter conference call. I'd like to start off by thanking all of our team members for their hard work and commitment to better serve our customers and to grow our business. Joining me on the call today is our President, George Sherman, who will update you in our business operations; and Mike Norona, our Chief Financial Officer, who will discuss our financials. I'll begin my prepared remarks today, updating you on our first quarter performance, including our business priorities, followed by an overview of our integration of General Parts. We are pleased with our start to 2014. We continue to build on our momentum from the fourth quarter finish. Our team members remain focused on our 3 core outcomes and continue to drive improvements into the business. The base business improvements, along with the ongoing benefits from the favorable winter weather, enabled solid first quarter results. Our total sales grew 47% in the quarter compared to the first quarter of 2013, primarily as a result of the acquisition and our positive comparable store sales increase of 2.4% in the quarter. Our first quarter comparable cash earnings per share of $2.25 increased 35.5% versus our first quarter last year, driven principally by the acquisition of General Parts and the base business performance. Specifically, we delivered low single digit comparable store sales gains in DIY and mid-single digit gains in commercial, both showing acceleration from our previous quarter. Entering the first quarter, we saw steady customer demand due to the extreme weather. We experienced some volatility early in the quarter from weather-related store closures, yet we capitalized on opportunities, including double-digit sales increases in batteries and antifreeze, as well as a strong wiper business. Sales in all markets accelerated from the fourth quarter, with our cold weather markets accelerating at a faster pace. In particular, our Northeast and Great Lakes markets benefited the most from the extreme winter conditions. The consumer continues to be targeted with their spending, as they perform needed repairs resulting from part failure or safety to ensure vehicle reliability in tough winter conditions. Our customers likely benefited from timely tax refunds and stable gas prices versus a year ago to pay for these unexpected repairs. Overall, there has been more consistent day-in and day-out customer traffic in 2014. During the quarter, both our gross profit rate and our comparable SG&A rate declined. Gross profit declined 446 basis points to 45.6% and SG&A improved on a comparable basis 383 basis points to 36%. This was due to the acquisition of General Parts and it was in line with our expectations. Notably, our continuing SG&A focus on the base AAP business remains on track. Mike will be discussing the financials in more detail shortly. In 2014, we have 2 very clear overarching priorities: First, ensure delivery of our base business outcomes; and second, the successful execution of the year 1 deliverables of the multi-year General Parts integration plan. Within our base business, consistency is critical through building on our operational and execution achievements. We will continue to invest in those areas that drive our sales growth, customer service excellence and profit outcomes. We remain focused on driving sequential improvement in our sales of our DIY and our Commercial Business. In DIY, we are increasing our sustained investment in training, including the company rollout of a new automotive systems training, driving productivity improvements and leveraging our parts availability to meet our core customer needs. In commercial, we continue to strengthen our existing and build new ones, our relationships and focus our efforts on moving up the call list. We are growing the national accounts and our portfolio of larger bay accounts through consistent service and the strongest in-market availability. We are introducing CARQUEST TechNet, CARQUEST Technical Institute and WORLDPAC to existing Advance customers while attracting new customers with the broadest set of capabilities in the market. An example of a high-impact initiative is our cross-sourcing, which is gaining strong momentum between CARQUEST and Advance with over 5,000 CARQUEST and Advance stores currently ordering from each other. I'll discuss this more shortly. We are also focused on serving approximately 1,400 independents across the U.S. and Canada. Over the last few months, our organization has put forth tremendous effort to plan for and support the growth of this important business, and we are focusing on the needs of these individual business owners. We are always working to strengthen our core customer service proposition and the outcomes. We have been seeing visible improvements from our investments in training, simplification and creating a principle of ownership in our field, where our team members and our store GMs are leading by example and empowering our teams to deliver the service our customers have come to expect. George will speak in more detail about this in a minute. Turning now to our integration. I'd like to update you on our progress so far. At the outset of the integration planning process, we embraced the following 4 principles as part of our operational framework: Number one, prioritize and drive the day-to-day performance of the base business and make decisions in the best interest of our customer; two, bring the best from both organizations; three, focus on capturing the expected synergies, including efforts to achieve economies of scale and enhanced efficiency; and finally, balance the delivery of long-term value, while establishing integration momentum and rapid execution on specific activities. Overall, we are pleased with our initial progress we have made in the first 4 months of this integration. We are still in the early days of a multiyear integration process, but we're off to a start that we expected. The important activities out of the gate were, first, to align our leadership and begin integrating our teams, followed by communicate it early and often to our independent customers. Notably, we are pleased and confident in the operating leaders from General Parts that are taking key leadership roles in the combined company, including David McCartney, Bob Cushing, Al Wheeler, Steve Gushie and others. Subsequently, we began focusing on early quick win opportunities, while commencing some of our longer-tail activities. One of the first quick win opportunities for our customers was to leverage our leading inventory availability by launching cross-sourcing capabilities between Advance and CARQUEST stores. We are beginning to see good early results with cross sourcing, enabling our teams to say yes to our customers more often. Our independent customers are also leveraging this advantage to drive increased same day in-market availability and to access new products. This and other efforts have positioned us for a good start with our important independent partners, and we are pleased to report that our independent growth and retention rate is roughly similar to that experienced by CARQUEST prior to the acquisition. In addition, we have successfully introduced WORLDPAC sourcing into Advance Auto Part stores in selected markets. We believe this is an opportunity to expand the distribution of WORLDPAC products by leveraging into thousands of Advance Auto Parts points of distribution as we look to improve our service levels and assortment to the import customer. The program is off to a good start, and we anticipate continuing to expand the program throughout the year. Our cost synergy work, which is expected to realize between $45 million and $55 million this fiscal year is well underway and it is progressing as expected in the first quarter. We have also begun parallel planning work on our long-tail activities, including our comprehensive supply chain network assessment, our store consolidation and conversion strategy and integration to a common set of processes and IT systems. As we progress through this early planning work, the knowledge we are gaining reinforces our confidence in driving the long-term value from the acquisition and achieving our 3-year synergy target of $160 million. The planning work is revealing adjacent benefits by providing us insights from General Parts on how to more effectively execute future store conversions. We will provide more updates on these longer-term activities as they progress. Overall, we are pleased with our start to the year. I am encouraged by the progress we are making with our operational execution. Our teams are focused on the importance of driving consistent sales outcomes and building upon our comp momentum generated over the past 2 quarters. The simplification work and training has strengthened our field team's ability to execute on the fundamentals and maintain our customer focus. The early integration progress suggests it will allow us to leverage our breadth of capabilities, build market-leading positions with our commercial customers and enable us to capture scale economics from this acquisition. Our growth and profitability is on track. Our first quarter comparable results generated a 35.5% comparable EPS growth, a step in the right direction. Looking ahead to Q2, we are encouraged by the sales momentum resulting from the weather and the sustained execution of our team to meet that demand. We are very pleased with our integration efforts and these related benefits that they are delivering. Together, our operational and integration momentum position us to expect a very solid year. I'd like to close by once again thanking all of our team members for their tremendous hard work and good start to the year. I will now turn the call over to George Sherman. George?

Thanks, Darren. Good morning, everyone. First, I'd like to thank all of our team members for their contributions to customer service in the quarter and doing all the right things to show our customers that we put them first. At the heart of executional excellence is great customer service, and our team members drove our success this quarter to their commitment to the customer. With my prepared remarks this morning, I'll provide a view on our first quarter business performance followed by a business update including our key priorities within the quarter. Looking at sales, we're pleased with our performance in the first quarter, as the team delivered a same-store sales outcome of 2.4%, a sequential acceleration of 230 basis points from our fourth quarter and 100 basis points on a 2-year basis. Our positive sales performance was attributable to solid execution by our field, merchant and supply chain teams, combined with a continued customer demand on the frigid winter conditions that persisted throughout much of the first quarter. Notably, we did experience weather-related sales disruptions at intervals in the quarter, which kept some of our stores and distribution centers from opening or operating under normal hours. Overall, we're pleased with our sales performance in the first quarter. We'll continue focusing our efforts on a greater outcome. As a result of the acquisition, our newly combined commercial mix now stands at 56%, with our Commercial Business continuing to grow disproportionately. We generated good comp acceleration in our Commercial Business, with the cold weather markets in the Northeast and Great Lakes leading the way, benefiting from both transaction and ticket growth in the quarter. As Darren mentioned, we're focused on growing our strategic accounts, and we're making progress on that front as we saw double-digit sales growth in the quarter with key accounts. Our B2B business also continues to perform very well, with approximately 40% growth in the first quarter. Other areas we're starting to leverage in order to drive continued commercial growth include our TechNet program, a business that creates a partnership with independent repair shops to drive their sales and retain their customers. It's already over 5,000 locations strong and primed for acceleration. Another area we're very excited about is the CARQUEST Technical Institute, which is a sales, technical and management training program for Advance Auto Parts professional and CARQUEST Auto Parts customers. Looking at our DIY business, we're pleased with our positive comp performance. Similar to commercial, our cold weather markets led the way with comps leveraging the increase in ticket growth due to higher-priced battery sales. This was a good outcome for our DIY business, but we aspire for more. Make no mistake about it, DIY is critical to our mission to be the best. While commercial is the company's growth engine, DIY remains a sizable and highly profitable part of our business. We're intensifying our efforts to improve DIY and what it takes to win. We're launching new advertising campaigns, piloting a customer rewards program on a test-and-learn basis in select markets and accelerating our B2C business that continues to perform very well, with over 80% of e-commerce customers leveraging our site to buy online and pick up in store. As I've mentioned previously, we're on a mission to reignite our focus on sales, great customer service and profitability. The structural changes we've been making to our field organization have been taking root, and I can say with confidence the focus is working. Our efforts around simplifying our business model and taking steps forward to a field-centric operating model are beginning to drive the outcomes that we're expecting. I now want to touch on the area of customer service. Our customer service scores are on the rise. We're working from the customer back, and we're relentlessly focused on fine-tuning our current capabilities. And where we have gaps, we're closing them. We continue our quest of having the best team in the business through sustained investment in our training programs. The training is resulting in team members having improved counter knowledge, enhanced by a deeper technical understanding. Our robust automotive systems training program is giving them the confidence to serve our customers better than ever. We're not stopping there. We're speaking to our customers. But more importantly, we're listening to them. We're asking how we get better, and they're telling us. We're then taking that feedback into actionable improvements. Overall, I'm pleased with how our customer service and customer-focused initiatives are starting to come together, and we're getting stronger. I've previously talked about disciplined execution and accountability as keys to success. Our field leaders are building more muscle definition here and are more than ever focused on being accountable to the outcomes rather than the activities. They're focused on the key financial drivers of their respective businesses and are exhibiting owner-operator mentality on key outcomes, such as strong expense control. Improving sales execution is not an overnight process but a series of building blocks, and we continue to lead up [ph] and see many positive signs as we look ahead to the balance of the year. Turning to our integration, I'll build on Darren's comments and share a few additional insights from an operational perspective. As mentioned, our integration efforts are underway, and we're progressing as expected. The second source quick win is a visible proof point, displaying the tremendous cooperation and sense of team across the enterprise and it builds more confidence with our field teams and our commercial value proposition. Second source is a culture of looking to partner internally versus looking outside the company and driving the benefits of a stronger in-market availability and speed of delivery for our customers. This availability improvement is enabling our teams to say yes to our customers on the critical question as to whether or not we have a part in stock. The impact of the WORLDPAC introduction in the AAP stores is another significant quick win. This capability should further strengthen Advance's position as the import authority in the automotive industry. Continuing on the topic of integration, but changing gears slightly, I'd like to update you on our BWP integration process. During our first quarter, we successfully consolidated or converted another 35 BWP store locations. Those stores continue to perform well and generate results that exceed our expectations. With regards to our remaining BWP store conversions, we've deliberately decided to extend the time line for completion. We've determined there are aspects of the BWP conversions that are best done alongside the CARQUEST integration program, enabling us to leverage the strategy, integration strengths and efficiencies of a larger reference [ph]. We now expect the BWP conversions to be complete by the end of the fiscal year. Moving on, I'd like to update you now on our supply chain initiatives. Looking first at our distribution centers, we continue to see good performance of our Remington facility and are now servicing 442 Advance locations. We continue to progress our daily delivery capability, and now 282 Advance stores receiving 6x delivery between both our Remington and Lakeland distribution centers, with the majority of CARQUEST stores also receiving 5x daily delivery out of the 34 CARQUEST DCs. As previously stated, our comprehensive distribution network optimization study is in flight and is expected to conclude around midyear. We'll keep you updated on that. Second, we continue to drive improvements of in-market availability through our hub store strategy. During the quarter, we added 31 hub stores through a combination of new stores, upgrades of existing stores and the addition of 15 hub stores as a result of the acquisition. At the end of the quarter, our hub store count was 405, an overall increase of 57 from the first quarter last year. Third, as we look at inventory, our inventory growth was up over 60% year-over-year in the first quarter, primarily due to the General Parts acquisition and our increase in hub stores. We continue to be focused on our goal of having superior availability, the deepest assortment and continuing to invest in our strategy of getting parts closest to the customer. Looking at our new store growth, during the quarter, we opened 20 new Advance and CARQUEST stores and closed 9 stores, bringing the company total store count to 5,276. We also added 2 WORLDPAC branches in the quarter, bringing our total branch count to 105. We're progressing as expected and continue to pace our new store openings to be in line with our guidance of between 120 and 140 new stores this fiscal year. As I close out my remarks today, I'd like to share one aspect that is gathering momentum at our company from a cultural perspective. We are clearly seeing a reinvigoration and pride across the organization. From our support center taking pride in how they support our stores to our field leaders in stores working together to develop market plans, drive business outcomes and taking pride in the sales performance. Being the best is a journey. And our next steps are to channel our investments and our energy in a pattern of habitual winning. That pride and spirit was evident in our first quarter performance, and we're excited to continue taking strides forward and progressing against our mission in Q2. Now I'd like to turn the call over to Mike Norona, our Chief Financial Officer.

Thanks, George, and good morning, everyone. I'd like to start by thanking all of our talented and dedicated team members for their commitment to serving our customers in the quarter and helping our company deliver solid financial performance in our first quarter. I plan to cover the following topics with you this morning: One, provide some financial highlights from our first quarter of 2014; two, put our first quarter results into context with our expectations and key financial priorities that we use to measure our performance; and three, provide some insights on the remainder of 2014. Before I begin my remarks about the quarter, I would like to remind everyone, Advance will present its financials and supporting commentary, unless otherwise specified, on a consolidated enterprise basis, inclusive of General Parts' results. We see our combination with General Parts as an integrated expansion of our commercial assets and capabilities to grow with our existing customers and attract new ones. In addition, we will also include results on a comparable basis, which excludes the impacts of onetime integration expenses related to the acquisition of both General Parts and BWP, along with any amounts related to the amortization of intangibles resulting from the acquisition of General Parts. The company believes this non-GAAP information is significant to understanding trends and is important in analyzing the company's operating results and earnings. Coming into 2014, we completed the transaction of General Parts and began the work of integrating the 2 companies. Another significant work stream that kicked off was purchase accounting assessment. We have completed our preliminary evaluation of the opening balance sheet and the evaluation of accounting policies and conformity with regard to the acquisition of General Parts. Included in the accounting conformity was a reclassification of approximately 70 basis points of supply chain costs from SG&A to gross profit in the first quarter. This adjustment had no impact to operating income. We are pleased to report a first quarter comparable EPS -- cash EPS of $2.25, a 35.5% increase from our first quarter in 2013. The first quarter results reflect a continuation of the sales momentum from our strong finish in the fourth quarter. Our sales momentum was driven by sustained progress on our operational execution improvements, as well as the continued consumer demand. In addition to sales momentum, other notable drivers include $0.07 in synergy realization in the quarter and $0.05 in onetime favorable tax audit settlements. On a GAAP basis, our first quarter EPS of $2.01, which included $0.11 of intangible asset amortization associated with the acquisition of General Parts and also included $0.10 of onetime expenses to achieve synergies related to the integration of General Parts and $0.03 in onetime costs associated with the integration of BWP. Turning to sales, our first quarter net sales increased 47.3% to $2.97 billion compared to our first quarter of 2013. This sales growth was principally driven by the acquisition of General Parts, our comparable same-store sales increase of 2.4% and the addition of new stores. As a reminder, sales from General Parts are not included on our comparable sales calculation. As I mentioned earlier, our positive same-store sales was driven by strong execution from our field and supply chain teams to meet consumer demand. Moving to gross profit. In the first quarter of 2014, our comparable gross profit dollars increased 34% to $1.35 billion from $1.01 billion in our first quarter of 2013. Our comparable gross profit rate of 45.6% was down 446 basis points compared to the first quarter of 2013. This year-over-year rate decline was the result of the acquisition of General Parts resulting in a higher mix of commercial sales that has a lower gross profit rate, the approximate 70 basis points of supply chain reclass, I shared earlier, offset by 24 basis points of synergy savings in the quarter. Turning to SG&A. In the first quarter, our comparable SG&A rate of 36% was down 383 basis points compared to our first quarter of 2013. This year-over-year rate decline was the result of the acquired General Parts business having a lower SG&A cost structure, the approximate 70 basis points of supply chain reclass and cost leverage from our 2.4% comp store sales increase, offset by increased occupancy costs due to the severe winter weather and higher incentive compensation due to our better sales performance. All-in, on a comparable basis, our 2014 first quarter operating income dollars increased 38.2% to $284.4 million and our operating income rate decreased 63 basis points over the same period last year to 9.6%, primarily as a result of the acquisition of General Parts. Our operating cash flow for the quarter was $81.1 million versus $135.3 million last year, driven by an increase in owned inventory, partially offset by higher net income in the quarter. The increase in owned inventory was driven by our continued efforts to improve our availability. Our total consolidated inventory increased 61.4% versus 2013, driven by the acquisition of General Parts, and we expect our inventory growth to flatten as we progress throughout the year. Our free cash flow for the quarter was $20.1 million and in line with our expectations. Our accounts payable to owned inventory ratio for the quarter was 76.1% versus 86.7% last year. This decline was expected due to the acquisition of General Parts. And as previously shared, we see continued opportunities to improve our AP ratio as a combined company. At the end of the first quarter, we had roughly $2.07 billion of debt on our balance sheet and our adjusted debt-to-EBITDAR was 3.1x, driven by the acquisition of General Parts and was in line with our expectations. As previously stated, we are committed to quickly paying down debt with our free cash flow to get back below the 2.5x leverage ratio and maintaining our investment-grade ratings. We continue to measure the performance of our business and prioritize our investments to achieve growth, profit and value creation. Our growth engine continues to be our Commercial Business, and our acquisition of General Parts has positioned us to accelerate our commercial customer growth. Growth will also come from our new store development, including WORLDPAC, as we see significant opportunities to increase our geographic footprint. Finally, we expect to continue to improve our operational performance and execution through investments and availability, supply chain, store systems and team member development. Turning to profit. As a newly combined company, we are pleased with our 9.6% operating income rate that we achieved in our first quarter and see continued opportunities to improve our profitability. We remain on track to achieve our year 1 cost synergies of $45 million to $55 million on our way to achieving the total expected cost synergies of $160 million over the next 3 years. We're also focused on improving our profitability by growing our sales to better leverage our new size and scale and improving our cost efficiency. With respect to value creation, the acquisition of General Parts provides us a compelling opportunity to drive shareholder returns through incremental earnings and strong cash flows. We see this -- we saw this in the first quarter with a 35.5% increase in our comparable EPS. As a combined business with General Parts, we expect to drive strong operating cash flow, which will enable us to rapidly pay down our debt to get back to our previously stated leverage ceiling of 2.5x within the next 2 years. Once our debt is paid down, we will continue to leverage our capital structure to maximize shareholder value. Turning to the balance of the year, we are pleased with our start to 2014 and the momentum we have. We shared this morning in our press release that we have raised our full year annual consolidated comparable EPS outlook to be in the range of $7.30 to $7.50. Historically, we have not raised our outlook this early in the year. However, we are now 120 days into our combination with General Parts and have learned more about their business through our integration efforts. This, coupled with our business momentum, has allowed us to increase our outlook. As George shared, we now expect our BWP conversions to be complete by the end of 2014 versus our prior expectation of completing the conversions by midyear. We still estimate the BWP integration cost to be between $12 million to $15 million for the full year. As previously shared, we had a favorable onetime tax settlement within the quarter. Consequently, our first quarter tax rate is not representative of the rate for the balance of the year due to this onetime event. As such, we expect to maintain an effective tax rate of 38% for the balance of the fiscal year. Finally, we estimate the 70 basis points reclass between SG&A and gross profit that I shared earlier will have approximately the same impact to the remaining quarters. Turning to phasing. We're on pace to deliver our first year cost synergies. However, we expect the majority of these synergies will occur in the back half of the year. In closing, we are pleased with our performance in the quarter and are off to a good start to the year. Our focus is still squarely set on our 2 key priorities of delivering on our base business outcomes and successfully integrating General Parts. The integration is progressing as expected, with the team generating some early quick wins while delivering the synergy benefits we expected. We continue to see team momentum and incremental progress in our efforts to simplify our business and are pleased with the progress we continue to see with our operational execution. I want to once again thank our over 74,000 talented team members for what they do each and every day to serve our customers, inspire our team members and grow our great company. Operator, we are now ready for questions.

[Operator Instructions] The first question today is from Gary Balter with Crédit Suisse. Gary Balter - Crédit Suisse AG, Research Division: Darren, when you were talking, you were talking about sourcing and the first initiatives of WORLDPAC sourcing going into the markets, could you or George expand on that a little bit? And as part of that, how does AI fit into the picture?

Yes. WORLDPAC, a couple of things. One, their speed-dial system, which is their online ordering system, for a long time, they've had those installed in the capability in the CARQUEST stores. What we've done is taken a version of speed-dial and put it in 2 markets right now that allows our parts pros to be able to order the WORLDPAC products. So instead of going to maybe another competitor or dealer to get that product to deliver to our customers, what we're doing is offering a deeper selection of WORLDPAC product in our stores. We thought we'd test it in 2 markets. I got to tell you, it is an outsize piece of the second source business we do today, which means there's a group of customers out there that WORLDPAC has an industry-leading reputation, but there's still other customers that desire it that may not get as much access because they don't do enough volume, but they want it. And what we're seeing in our stores, we're able to supply that. In terms of Autoparts International, right now, it's business as usual in that we have so much going on in the integration process. That team is heads down in terms of executing their business plan. And the small things they are doing with the integration include working with the WORLDPAC team to see other parts of the Autoparts International product offer that could be distributed to WORLDPAC. And I think we won't take that decision lightly. We want to make sure it works for the WORLDPAC customers, but Autoparts International has product lines like their exhaust lines, absolutely revered in the industry. And so if we can increase distribution of their products where we're not essentially stepping on each other, whether that's Canada, whether that's out west or other select markets, we think that's yet another opportunity, and the teams are sizing that amongst many of the revenue opportunities that we're still working through. Would you add anything, George?

Just a couple things, Darren. First of all, I mentioned in my comments that second sourcing is a practice of looking internally. That's obviously a counterintuitive statement. Normally, second sourcing is looking elsewhere to find the parts because we didn't have it. I say that because we are now seeing a significant portion of second sourcing happening within the family, the combination of Advance Auto Parts, CARQUEST, WORLDPAC and Autopart International. So they both play key roles in that. I further say that the test of WORLDPAC in Advance stores is giving us a very nice halo effect. We think that WORLDPAC is a dynamite service model and it's now bringing that into the Advance store. Gary Balter - Crédit Suisse AG, Research Division: And do you find -- like because you're bringing it into Advance, how do you deal with the potential conflict from the CARQUEST store that had that already?

Yes. So Gary, we are going to have a few places, again, where there's conflict overall. But what we're talking about is a level of volume that I think the overall relationship between the stores is -- the way we've tried to build up between all of them is that our first goal is to always serve the end customer. And the volumes that we're talking about at this level, I don't think are really creating any angst at this point. You're going to have some flare-ups for sure. But at this point, the customers that are -- have the increased availability are really giving us positive feedback for it. Gary Balter - Crédit Suisse AG, Research Division: That's great. And then one follow-up, and then I'll get off. We keep on talking about $160 million of cost synergies. But I'm assuming that doesn't include like any of the benefits you're seeing, like it's purely cost that we're talking. So we're not talking about any benefits from cross sourcing or this WORLDPAC sourcing I just asked about. Is that fair to think about it that way?

Gary, I think a better way to think about it is, we haven't included any sale -- type of sales benefits in there. But remember, the synergies fall into 3 buckets: purchasing synergies, supply chain synergies and then scale and leverage synergies. So that's what we've said, and that's $160 million. And we've given the guidance this year of $45 million to $55 million. So things that benefit our margins around costs are included in those synergies.

The next question is from Greg Melich with ISI Group.

I wanted to follow up, if you could give any color in terms of how underlying gross margins were in the business, given the -- obviously, the comparables sort of screwed up given the acquisition. And I have a follow-up.

Greg, it was tough to hear you. I think your first question was how was the underlying gross margins, is that -- was that the question?

Correct. Yes.

Okay. Yes. So yes, when you put these 2 businesses together, you can see that there was a decline on our gross margin rate of 446 basis points, and that was primarily driven by the purchase of GPI, which has a higher mix of commercial and a lower gross profit rate. When you -- if you look into the businesses, we met the expectations with respect to our gross profit rate in both businesses. So we were pleased on that front. Obviously, a driver was the synergies we started off of the gate, even though the majority of the synergies will come in the back half of the year. We did see some synergies in the quarter from our purchasing. I think in my remarks I talked about that was about 24 basis points. But I think we're pleased with the progress we've made. Some of the drivers are our global sourcing, some of the supply chain efficiencies in GPI last year. They made some changes to their supply chain. Those showed up in margin. And then the offset of that obviously is the higher mix in commercial. So both businesses met the expectations with respect to gross profit rate.

And the expectations were for basically flat with some improvement from synergies, just...

No. What we said is that the gross profit rate would be modestly up, and that did not include the synergies.

Got it. And then the second was on inflation. Is there any out there now? And if so, are you passing it through? And how does that bake into your outlook?

Yes, Greg. I'd say we see very modest inflation. There's some indication on oil going out into Q3 and Q4. If and when that passes through, we haven't seen any resistance from a general market competitive standpoint of being able to increase ASPs. You go out and you do your own checks, you can see how that's moved up in the oil business on a year-on-year basis. We think from a commodity standpoint, it's moderate. And what we're seeing in Asia is very moderate pressure on pricing capacity is -- there's plenty of capacity. So it's going to be moderate, consistent with probably the last 12 months.

Okay, that's great. And I had one last one for George. I know when you got there last summer, you made some changes to how store managers are compensated, incentivized, et cetera. Could you give us an update on sort of the traction those initiatives are having? And how you think it's helped or hasn't helped as much as you'd hoped, if it hasn't?

Yes, sure. I'll hit a couple of them. I think we said early on that there really was no on-off switch for sales. It's a building block process and it's a series of steps that I think are leading us in the right direction. So we're very, very happy with the commercial evolution of our business and how our general managers, how our district leaders, how our regional vice presidents have really rallied around and begun to think commercial first and really drive that business. The outcomes focus, we've done an awful lot of work to clarify the message to our teams. We've removed extraneous metrics and kept them focused on the key ones, which really drive around growing our sales, providing great customer service and the profitability of our businesses. And that has worked. I think that has really kept our team laser-focused on the outcomes as opposed to the process metrics, which are important, but come secondarily. We really try to and, I think, have begun to build a culture of accountability and have a deep sense of performance management built in. So we have expectations every day. We have quarterly rhythms with our teams where they come in and we had all our regional vice presidents from across the corporation in last week. And they go through their business for the entire quarter and they meet with the leadership team and are accountable for that. And I'm very proud of the way that they've risen to the occasion and have taken ownership for and accountability for their overall business. And our conversations, and I think the significance of the comp is we're much more focused on conversations around sales and barriers to sales as opposed to expense management. Expense management has been extraordinary. The team has done a terrific job with that, and that really is just happening automatically within the business, and we're leveraging. But the conversation around growing the business and the hunger around growing the business and the competitiveness around growing the business really has our team culturing in a new place. And that may be one of the most important things that we have to say this quarter is that we have a good, healthy, competitive environment in our stores, in our field structure and a team that is really focused on growing their top line, growing their comps. So all-in, that plus the whole idea of the field-centric environment, where our support center has really risen to the occasion and has taken a great deal of pride in getting individual or groups of stores better poised to go capture sales has been a big, big win for us. So I'm pleased with the progress, and I think it's become culturally very noticeable in Advance Auto Parts.

And when do you expect to roll that out into the CARQUEST group? Or you don't want to throw too much into it right now?

I think right now, we've been very focused on assimilation of the CARQUEST team and just building great relationships with the CARQUEST team. We've said before that culturally we're cut from the same cloth. The companies followed very similar paths as they grew up. So our relationship with CARQUEST field leadership and CARQUEST overall leadership has been tremendous. And we've integrated some of those folks. Al Wheeler is our Senior Vice President of Commercial for our enterprise now. Al comes from the CARQUEST business. Dave McCartney, he's the President of CARQUEST but is deeply integrated in all of our business rhythms going forward. And that's kind of happening across the board where the teams are cross-pollinating more and more. So when we had that meeting last week, when I mentioned we brought our field leadership into Roanoke for a series of quarterly business reviews, that meant CARQUEST too. So those general managers and those divisional vice presidents were here and part of that process, and I think got a lot of it and enjoyed their time.

The next question is from Seth Basham with Wedbush Securities.

So my first question revolves around WORLDPAC as well. It looks like you have some nice early wins there in your test markets. Would you care to quantify what type of revenue synergies you're experiencing in those test markets?

They're good.

Okay. Taking to the other side, WORLDPAC core growth, you mentioned plenty of opportunity to grow geographically with that business. Can you give us a sense of where you are now, penetration-wise, and where you think you could be in a couple of years?

Yes, Seth. This is Darren. So a couple of things. So WORLDPAC is on track this year to open at least 6 more branches. Literally, as George was saying, the week before, George, Mike and I and a few others were out visiting with Bob Cushing. Their team is heads down running their base business, and their base business grew very nicely this quarter, both top line and bottom line. What we've asked Bob to do is give us a view by the end of the second quarter, I'll call it an artist rendering, is how big WORLDPAC can get over the next several years. We think with the 106-plus branches that he has, he is still early in his growth. And I think it's key that we not ask Bob to do something new. His formula is working. So he's identifying markets where he can take his model and continue to accelerate what he's doing best. And so what we had believed initially in the acquisition thesis, I would say, we're even more encouraged based on what we see today in terms of growth profile. I think some of the pleasant surprises have been there continues to be some product overlap between WORLDPAC, take basic things like Dorman. And so those things fit into the synergy profile, which is nice. And we also see a nice synergy in terms of how they're working with our e-commerce team out in California. They're 20 miles away from each other, and our e-commerce team helps support our B2B platform. So it's so far, so good. It's early days. Growth, we like it. What we can see in synergies, we're encouraged by. And what we can see in terms of, I would say, capability around technology should be synergistic between WORLDPAC and the greater enterprise, too.

That's really helpful. And just making sure I'm clear, you talked about you like what you see with GPI. I assume, obviously, that refers to WORLDPAC. But what about the core CARQUEST business? How did that perform in the quarter? And what do you -- what's different than what you were experiencing or thinking prior to the acquisition?

Seth, it's Mike. Maybe I'll start and I'll pass it to George. We're very pleased with the business. We've got a lot going on in our company with the integration. And as Darren said, we're focused on the base business and integration, and that team did a super job and they met the expectations around their plan. So we were very pleased.

Yes. Not much to add, Mike. I think -- again, we gave a series of targets to the CARQUEST team. And much like the overall enterprise, they met them. So we're pleased with the overall business trend and we're pleased with the integration progress. We're pleased culturally that the teams are overlapping well.

The next question is from Scot Ciccarelli with RBC Capital Markets.

I think a little bit of a follow-up here. Can you just help us understand a little bit GPI's total contribution to sales and EBIT in the quarter? And since we don't really have year-over-year quarterly actuals, kind of what that year-over-year change was? I think we're just trying to get a little bit more clarity on that.

Yes. So Scot, it's Mike. We're not going to break out the businesses. And as I said in the remarks, is we view this combination now as an integrated expansion of our commercial assets and capabilities going after and growing our existing customers and attracting new customers. So that's how we think about the business. That's how the organization is rallying around growing this business, both from a growth and profit standpoint. I'll help you out a little bit. If you remember at the beginning of the year, to help you think about the year -- and I think it's good to think about the year and look at the top line and look at the bottom line. There's going to be a little bit of noise in the year when you put these businesses together because the gross margins are a little bit different and the SG&A is a little bit different. But if you look at the top line and are we growing and you look at the profit that we're growing, I think that's a good way to look at the business. When -- at the beginning of the year, we gave you a little bit of a cadence. If the businesses hadn't been combined last year, we said the business would have finished off somewhere between $9.4 billion and $9.5 billion. The gross profit rate would have been somewhere between 45.5% and 46% and the SG&A rate would have been somewhere between 36.5% and 37%. So that's what we said. And then what we -- and that was without synergies. And what we expected is we were going to add some synergies roughly $45 million to $55 million in synergies that would go into that -- that would be additional to that number. And then we expected that both businesses would grow. I think the only change that happens now with respect to those numbers is we did have a reclass of supply chain from accounting conformity, primarily on the GPI side. That moves SG&A from SG&A to gross profit about 70 basis points. I anticipate that's going to be there for the entire year. So if you adjust that out, I think we're right on plan for growing off those base numbers of 2013. And that's how I would think about it.

All right. Sounds like we're not going to get more than that. Another question is, we may wind up hearing more about this in the June Analyst Meeting. But should we expect store consolidation plans? And could that wind up changing the cost synergy assumption you guys have laid out for everybody?

Yes. We could -- Scot, this is Darren. We are working through, I think, in my prepared comments, by the end of Q2, to have a clear view on number of consolidations, number of conversions. You can imagine, we have an artist rendering today of that, and we're working with field teams to make sure that the artist rendering and the blueprint make sense. What we see is you're going to get a couple of things is that in our initial $160 million, we had some estimates for what the benefit would be from some of those consolidations. What we're doing now is -- BWP's helped us refine those. It's also helped us refine what the DIY lift will be in the converted stores. And then the other piece that we're still working through is that when you consolidate a store, there is a benefit to the existing store because the customers served out of that Advance store end up with a higher service level. So the core customers in the store should benefit as well, and we have the team working through that, too. We haven't finalized the analyst materials for the Analyst Day. But naturally, we expect that talking about the store conversion strategy would be something that would be on your mind.

That's helpful. And just a clarification on that, Darren. You mentioned that the DIY lift, but I thought the $160 million didn't include any revenue synergies? So is that -- help me reconcile those 2.

Yes. So there's 2 things going on. We will lose some -- when you consolidate the store, you're going to lose some Commercial Business because you're not going to retain 100% of the revenue. When we convert a store, we'll pick up some DIY. So we've made some preliminary estimates, not final estimates, as to what that impact would be in the $160 million, but we viewed that -- the primary benefit you're going to get from that is you get to leave some costs behind, right, Scot? And so that's why we've said it's in the fixed cost savings and we kind of netted out some of the revenue. I would say at this point, we're encouraged by what we've learned from BWP. And as we refine those estimates, you know what, we'll provide some context to that.

The next question is from Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: I wanted to follow up on the integration with BWP, even prior to the GPI acquisition. The pace of that integration was running slower than the original plan. Can you give us more information as to what was responsible for that, and then what are the implications when you think about the consolidation conversion of that 1,200 company-owned CARQUEST stores?

Yes, Dan. I think when you look back at the BWP conversion, that's pre-acquisition, our role was relatively static. So we took those initial BWP stores. We converted them over to our product line. We converted them over to our systems. We consolidated. And things have changed for us now. So that was a learning process for us, and it was progressing. And we were poised to go ahead and take that one all the way through to completion. As you think about it now, they're CARQUEST stores. They were BWP owned but they're CARQUEST stores. We now have a larger conversion and consolidation process that's going to get into motion here, and we have to be considerate of the brand hierarchy that we're going to roll forward with. We have to consider the systems architecture we're going to roll forward with. And we have to consider the supply chain strategy that we're going to roll forward with. So all 3 of those things really make a pausing on this, I think a good idea and folding into the broader conversion strategy going forward. We don't want to make stores and teams go through change management twice. So we're going to be very careful that going forward, we've got our go-forward planning, then we're just going to roll it into the broader consolidation. But I would say that in general, there are aspects of consolidation and conversion now that are easier. We run different POS platforms, we own both now. We had different brands, we have access to both now. We had one DC network, we have a shared DC network that we're going to begin to optimize going forward. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: But with the consolidation in the BWP stores, so the stores that you've consolidated, what is the greatest distance between an Advance and a BWP store where a consolidation would makes sense? Are we talking about a 20-minute drive, 10-minute drive time between the 2?

I think in general terms, you think in terms of a 3-mile ring. These locations were really fairly close together. If there's a chance to have incremental new store count, we're going to take that. But it just makes a lot of financial sense to consolidate these businesses. We're in that 1-, 2-, 3-mile range. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: And George, also I wanted to ask you a question on the process of achieving the buying synergies. I mean, this must be a really daunting process for your buyers, over 100,000 active SKUs within the Advance network. I'm not sure how many that CARQUEST was managing, but it could be a similar number, right? So for your buyers to touch every category through this product line review, are we talking about a 6-month endeavor, a 1-year endeavor?

Dan, this is Charles. Fortunately, we have team members on both brands that have actually done acquisitions before. And so when we get into the technical side of lining up our assortments, we're well down that path and we feel very confident the teams are actually slightly ahead of the deadlines that I'd set them to get that work done. In terms of making sure that we stay on track from a synergy perspective to drive the outcomes, yes, they've got to get in and do the negotiations with our vendors, and that work is progressing to the targets that we set the team. So yes, the sheer size of the number of SKUs can sound daunting, but we've got a very focused process and a cadence inside both buildings to make sure that we stay on track, and I'm very happy with the work that the team has accomplished in the first 90 days. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: And just the last question I have, will the -- this product line review process and the savings that you're achieving, are there any negative consequences on the vendor-financed inventory programs, such that we might not see the payables inventory rate that we might have been expecting before the acquisition?

No, Dan, it's Mike. Actually, I think we're really pleased by the early work we're seeing. As you saw, our AP ratio kind of gets recalibrated now to 76.1%. And Charles and the team are, I would say, are right on track. And I think what we said is that we expect that AP ratio to continue now to grow in a new base, as we work with our vendors and partner with them. And the whole idea of growing our AP ratio is around growth, getting more inventory into our stores and having the availability in order to serve the customers. So -- but we're on track in terms of what we anticipate as we go forward.

Our final question today comes from Mike Baker with Deutsche Bank.

So one question on the guidance, up $0.10, but you're not raising the synergies. So I'm wondering where it's coming from. Is it coming from sales? Although the sales up 2.4% seem to be in line with your guidance. So just wondering where that is coming from.

Yes, it's Mike. Typically, we wouldn't adjust our annual outlook this early in the year, and I think we said it in our remarks. I think where it's coming from is we've learned a little bit more about the businesses. The teams are working great together. Both base businesses are off to a great start. So that's a factor. And then the other factor is we had a little bit of a beat in our first quarter, and it gave us some momentum. That's another one. I think we still think the same on the synergies. I think we're on track for the $160 million over the first 3 years and I think we still feel good about achieving our $45 million to $55 million on the synergies for the year.

So it's maybe cost savings or better margins in the underlying business or something along those lines?

Yes, and I think George talked about it. I mean, we've got out of the gates pretty strong here in terms of the business momentum from a top line, and our teams are doing a great job on both sides of our business converting it to the bottom line.

Okay. Two more quick ones. You didn't talk about the comp outlook. You were previously thinking flat to up low single digits. Is that still the case even as comparisons get more difficult? And then one last one is would you say your total sales number was in line with where you thought they'd be, given a 2.4% comp?

So I'll talk about the first one and I'll let George talk about. We really didn't go into all our assumptions. Again, it's too early in the year. We finished one quarter. The reason we give an annual outlook because there's always pluses and minuses that come out with the year. Obviously, as we see more of the year, we get more comfortable with that. But it's just too early. And I think what we felt is the $0.10 we thought was a responsible and prudent thing to do, just given the start we had to the year. But we really didn't change any of the other assumptions.

Well, and it's fair to say, Mike, as you said in your prepared remarks, absolutely pleased with the 2.4% comp and we're pleased with the sales momentum as we start the second quarter. So I don't -- it's a different way of asking was the 2.4% in our plan a total sales number, and I think Mike answered that question that, Mike, we are pleased with sales momentum. That's what we'd say. And we've got ways to go to finish out the year and a lot going on in terms of the integration efforts. We're just pleased. In simple terms, there's been no bump in the night at this point. And the teams are doing a great job on the base business, which I'm encouraged by, and they're achieving their integration time line. And I think for us to kind of change a myriad of things at this point so early in the year would be -- it wouldn't be genuine to you guys and it wouldn't be consistent with how we're running the business today. But...

Right. No, understood. What -- well, I'll tell you what I was really getting at in that question was at least relative to consensus estimates, the comp was better, the total sales number was a little bit lighter. It's tough for us to model, putting these 2 businesses together. So that's what I attribute that to. But I was wondering if there was something else that maybe didn't perform as well as you expected.

No. I think from our standpoint, I can't -- I don't run all the other models. I just run our plan model, and we exceeded expectations on both our comp and on the total sales.

Thank you. And that's all the time we have for questions. I will turn the call back to management for any final comments.

Thank you, Wendy, and thanks to our audience for participating on our first quarter earnings conference call. If you have any additional questions, please call me at (952) 715-5097. Reporters, please call Shelly Whitaker at (540) 561-8452. That concludes our call.

Thank you. That concludes our call today. You may now disconnect. Thank you for joining us.