Welcome to the Advance Auto Parts Second Quarter 2018 Conference Call. Before we begin, Elisabeth Eisleben, Vice President, Investor Relations will make a brief statement concerning forward-looking statements that will be made on this call.

Good morning and thank you for joining us to discuss our second quarter 2018 results. I am joined by Tom Greco, our President and Chief Executive Officer; Jeff Shepherd, our Executive Vice President and Chief Financial Officer; Bob Cushing, our Executive Vice President of Professional; and Mike Broderick, our Executive Vice President, Merchandising and Store Operations Support. Following their prepared remarks, we will turn our attention to answering your questions. Before we begin, be advised that our comments today may include statements that may be deemed forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. While actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, which are described in the company's filings with the Securities and Exchange Commission and on our website, we maintain no duty to update forward-looking statements made. Additionally, our comments today include certain non-GAAP financial measures. Please refer to our quarterly press release and the accompanying financial statements issued today for additional details regarding forward-looking statements and the reconciliation of non-GAAP financial measures referenced in today's call. The content of this call will be governed by the information contained in our earnings press release and related financial statements. Now let me turn the call over to Tom Greco.

Thanks, Elisabeth and good morning. Before I begin as you read in yesterday's press release I am thrilled to announce Jeff Shepherd has been appointed Executive Vice President and Chief Financial Officer and I am also very excited that Reuben Slone is joining our leadership team in October as Executive Vice President, Supply Chain. I look forward to working with Jeff and Reuben in their new roles and we will provide further context on these exciting changes momentarily. I would like to begin by recognizing the hard work of the entire AAP team as well as our network of Carquest independents, who delivered strong balanced performance in the quarter. We are raising our game on execution which is enabling us to win business, drive growth, and significantly narrow the performance gap versus the industry. In addition our focus on cost control and working capital enabled bottom line growth year-over-year and has substantial improvement in cash flow. In the second quarter net sales increased by 2.8% to $2.3 billion and comparable sales were up 2.8%. Our adjusted operating income margin of 8.8% increased 19 basis points compared to the prior year quarter and our adjusted earnings per share increased 24.7% to $1.97. Our free cash flow was $382 million through the first six months of 2018, an increase of $237 million year-over-year more than 2.5 times. Our cash position is at the highest level since the 2014 GPI acquisition, and as a result Jeff will discuss our capital allocation plans along with more details on our financials later in the call. An escalated focus on execution by our AAP team members and independent partners has enabled a significant improvement in relative growth on both the one- and two-year stack basis and resulted in increased units per transaction and increased ticket values.…

Thanks and good morning everyone. I want to thank Tom, the Board and the entire Advance team for their support as we continue working together to fully cast the vast opportunities ahead for Advance. I am honored to be part of such an impressive team of leaders and grateful for this opportunity during such an exciting time in the company's transformation. Before I expand on our financial performance I want to congratulate all of our team members for delivering a strong quarter of improved results and thank them for the hard work they do every day to enable our success. In the second quarter our adjusted gross profit was $1 billion, an increase of 2.4% from the prior year quarter. On a rate basis our adjusted gross profit margin of 43.7% was down slightly compared to the prior year quarter primarily due to both planned and unplanned supply chain expenses which in total reduced our gross margin by 35 basis points. As we've indicated previously, expenses related to the two new distribution centers that were opened last year raised our cost base in the quarter versus the prior year. Separately rising transportation and fuel costs exceeded our forecasted inflation for these cost lines in the quarter. Additionally while we have seen positive top line results from cross banner visibility there are still significant opportunities to improve operational efficiencies as we fulfill new demand with a less than optimized fulfillment model. At this stage we're focused on ensuring the part is received in a timely manner and at times this results in inefficient delivery. While we know our cost structure is not optimized we will continue to leverage cross banner visibility to drive growth and expect to deliver improved cost as a percentage of net sales over time as we improve…

Thank you. [Operator Instructions]. And our first question comes from Chris Horvers from J.P. Morgan. Your line is open.

Thanks, good morning guys and congratulations Jeff and for the hiring of Reuben. So a few questions, so can you talk about how DIY and the Pro business performed relative to each other in the second quarter and can you talk about how they trended sequentially versus the first quarter, did Pro accelerate more, did DIY accelerate more because of the seasonal shift?

Hey, good morning Chris. First of all, they actually performed relatively close over the course of the quarter in absolute terms. Within Pro we saw real benefit from cross banner visibility as we spoke about in our prepared remarks, so we saw a nice acceleration for Pro. And then on the DIY side, we actually had a greater sequential improvement from the first quarter some of which was that shift that we talked about on the Q1 call where a very soft April led to a terrific start to the quarter in May, particularly on the DIY side and very encouraged by the trends in DIY. In the stores, we're executing better, we're driving our units per transaction nicely, that is helping our store performance, and then of course the online piece continues to perform very well and accelerate. So, relatively speaking, in line with each other but sequentially a greater improvement in DIY.

Understood and then how are you thinking about your performance relative to the market. You focus -- you mentioned one and two year stacks, should we think about the second quarter and thinking about looking at the stacks or should we look at the first half given some of these shifts, I think it's tough because I mean clearly there is an acceleration in the industry and execution, so just trying to get your thought there on how you're thinking about instead of the performance of the business on a stack basis?

Yeah, I think in fairness, we would probably want to look at the full front half of the year, right Chris. I mean just the timing shift from Q1 into Q2 but even if you look at that you'll see a nice improvement relatively speaking versus our primary competitors over the course of the last three years if you look at 2015, 2016, 2017. And then contrast that to the front half of this year you'll see a significant improvement on a relative basis. But I think in fairness you probably want to look at the front half.

Understood and then just one clarifying question, as you think about the guidance and the raise of the comp guidance for the year, I understand that you talked about an improving demand environment, but was essentially the comp raise only for the first half upside?

I think we have continued to see positive trends through the back half also so there was obviously the front half performance was reflected, but I think you're going to continue to see an improved demand in environment for the industry. We like what we are seeing. Certainly, it's been very warm this summer, so we benefit from that and then from an execution standpoint I really like the progress that our field team is making in terms of driving improved execution and we're going to continue to stay focused on that every week. So we're encouraged by that and that's partly reflected as well.

Thanks, best of luck.

Thank you.

Thank you and our next question comes from Matt Fassler from Goldman Sachs. Your line is open.

Thanks so much and good morning. It would be really helpful to try to get a sense from you as to the impact you think some of your self-help initiatives had. You spoke about improved analytics and parts availability, you spoke about the cross banner initiative, I know that it might be difficult to pinpoint the impact that it had on the business but while the industry got better you had a very nice beat relative to expectations, any sense of how they're contributing would be terrific?

Sure Matt, I think again splitting it out into their respective businesses, on the Professional side there's no question that the work that Bob Cushing has led on cross banner visibility has really helped us. It gives our customers visibility to the breadth and assortment that we have across the enterprise as opposed to a narrower view. And we're up to 40,000 customers that we've got on Advance Pro. They are in a great position to see all the parts that we have and they're ordering accordingly. So there is clearly some incremental benefit we're getting from that and that just keeps getting better each week as the learning curve improves on cross banner. On the DIY side, for sure we're seeing progress on units per transaction, our field leaders Mike Reid and Maria Aires [ph] are driving UPT deep into the organization. Mike Broderick conducts the call each week with the store operations leaders to focus on what's the progress we are making on UPT, how are we performing against very specific initiatives. So we're seeing improvement there and I think we're up 10 of 12 weeks on UPT. There is still a lot of room to grow that one Matt but we feel good about it. And then in terms of online we look at our visitors to our website. I think if you look at the most recent reports that have been out on that through June our traffic was up over 90% in June and we're amongst the leaders in all of retail in online visitor growth and the good thing about that is we have been actually been able to hold our conversion rate as our traffic has been going up. So I think some of the things that we're doing online are helping as well. So those are the big drivers from an internal standpoint that are helping our execution and I think they played a role in not just us rising with all the boats within the industry but by disproportionately doing so.

Just a quick follow up on cross banner, Jeff talked about some margin offsets associated with that, it sounds like the net economic impact this year probably is modest despite better sales, any way to size the margin, perhaps the sales impact for those and the margin headwind you'd expect from that initiative over the rest of the year?

Yeah, what's happening there Matt I mean you think about when we launch cross banner which is really a strengthened engagement platform for our professional customers and we wanted to make sure we knew what the impact of that was going to be before we started to make wholesale changes to our fulfillment structure. And so now we've got a couple of months under our belt, we're starting to get a sense for what are the products that are disproportionately improving, are there assortment changes we need to be making inside of our Advance stores or Worldpac branches, how do we connect those end market nodes, all of those factors are being considered as we look at the balance of year. So we now have a couple of months under our belt and we're very focused on a much more coordinated effort with our end market nodes. So you think about the hub routes that we have that connect our stores to the hubs and the distribution centers, you think about the routed delivery network that we operate through Worldpac. What's happening now when Bob's leading a lot of its work and with Leslie at the moment and ultimately with Reuben but how do we optimize a new more demand really coming into us and make sure that we're doing it in the most efficient way possible. So that work is underway. I just don't expect it to have a huge impact on the back half.

Okay, thank you so much.

Thank you. Our next question comes from Mike Baker from Deutsche Bank. Your line is open.

Thanks, a couple of questions. First on the comps, just using the midpoint of the guidance it looks like you're expecting a similar back half comp versus the front half yet you have about 150 basis point easier comparison and then you guys do look at the two year stack, so why wouldn't we expect an acceleration in the back half versus the front half?

Hey, good morning Mike. I think the thinking there is we're just early into the quarter. We still got a lot of time left in Q3 as a matter of fact and also Q4. So, we just don’t want to get out ahead of ourselves. I think we really like the progress we're making. You're absolutely right that we had a difficult Q3 last year. We just want to make sure we are thoughtful as we look at this and we are really engineering our cost structure to a level that we can deliver on all the key metrics that we are accountable to, so I think that's the point.

Okay, that's helpful, and one more, just on the margins you read out some reasons why your sales increase is ahead of your margin increase, couple of thoughts, one, you didn't mention specifically incentive comp or bonuses in there, is that a factor precluding you from raising the high end of your margin guidance? And then secondly you talked about inflation being a potential negative to margins, why wouldn’t you be able to pass through cost increases I think historically that's what the space is seeing, so why would that be a margin hit?

Well, let me let me try and give you a bit of sense for that Mike. First of all we did mention bonuses as a factor. I mean the bonus was a factor in the quarter, it will be a factor full year. So, I'll try and give you a sense for how we are thinking about the full year. Some of these items we called out in our prepared remarks that impacted Q2 and they will limit the margin expansion in the back half. So within supply chain which is the biggest one we are seeing inflation in transportation costs that are in excess of our plans. I just talked a little bit about cross banner visibility where the source and delivery costs are not yet optimized. We talked about product mix in our prepared remarks where we're selling more of certain products which carry a lower gross margin rate. So if you think about those factors impacting Q2 we do see -- we have carried forward a little bit of that into our balance of the year forecast. There is two other items that I draw your attention to balance of year and both of these are within SG&A. First we will be investing in the back half in marketing to drive traffic and customer loyalty. We're really excited about a new advertising campaign that we're kicking off, it'll be in full flight in September and we expect the ROI in this to be very positive but more to come on that. Very exciting new advertising for us, it's been a long time since we've had effective advertising in this company and we want to build our brand, build customer loyalty, and drive traffic behind that campaign. Secondly we are opening more Worldpac branches in the back half. There are short-term startup costs associated with this that are above the prior year. But we think both of these investments, the marketing and the Worldpac branches will enable us to exit 2018 and start 2019 with momentum. So those are the things that went into the back half guidance and we're excited about the top line momentum that we have and we want to continue that momentum into 2019 and of course we'll stay diligent on the cost side.

That makes sense. One follow-up to all that if I could, a quarter ago you said gross margins would be up within your guidance, is that still the expectation?

Yeah, for the year we do expect the gross margins to be up, yes.

Thank you, appreciate it.

Thank you. Our next question comes from Michael Lasser from UBS. Your line is open.

Good morning, thanks a lot for taking my question and congratulations Jeff and Reuben on their new roles. One of the elusive factors from Advance Auto Parts model over the long run has been getting the sales and the margins to work together at the same time. We saw a little bit of that again this quarter Tom, when do you think it's reasonable to expect that you can get sales gross margin, the SG&A leverage all work together at the same time?

Yeah, good morning Michael. Thanks for the comment. I think that we're balancing those levers very thoughtfully. We are actually in the middle of updating our five year strategic plan, we shared a draft of that with our Board of Directors recently. And I would say more than ever we deeply understand the margin differential between ourselves and that of our peers. And we're very clear on what I would describe as our addressable opportunities on the margin line from structural opportunities. So if you consider our year-end margin of 2017 of 7.3% and you contrast that to our primary competitors we believe somewhere between 60% and 70% of that absolute margin gap is in fact addressable. So what we're doing now, my leadership team and I we are really fine tuning the choices we need to make in order to balance that addressable margin expansion opportunities with the share growth opportunity because we also have a big share growth opportunity sitting here with what we believe is about 7% of the industry market share. So how do you do that over a five year plan, how do you drive shareholder value through a combination of top line growth margin expansion and SCF [ph] improvement. And I think you should see consistent progress on this from here on in to answer your question directly. We believe we can drive our top line, improve share performance, increase margins, and drive free cash flow throughout our five year plan and that's how we're approaching it. It's really a balance between all of those levers and we're going to continue to stay focused on doing it in a way that is sustainable.

Thank you and my follow up question is on how you measure your idiosyncratic improvement or what you have control over within your organization because clearly the industry environment this quarter was much more favorable than it was last quarter particularly in the region that you are more levered to, so can you give us some sense of what you think the weather catch up from the first quarter to the second quarter contributed to your second quarter results?

Yes, it is a difficult question Michael but to think that as I have mentioned earlier there's obviously an industry benefit that happened in the second quarter overall. But we are seeing progress on some of the key metrics that we look at that say we're improving our competitiveness at the same time. And those are all the infernal input metrics that we talk about whether that is units per transaction or online visitors or even DIY market share that we look at. So, I think there are some things that would say that our execution is driving disproportionate improvement.

Great, good luck with the second half of the year. Thanks.

Thank you.

Thank you and our next question comes from Bret Jordan from Jefferies. Your line is open.

Hey, good morning guys.

Good morning Bret.

A question on the leverage ratio, I guess the 2.9 times is still I bet implementing a share repurchase program. It sounds like you have talked to the rating agencies and they will let you spend a couple hundred million without getting down to 2.5 first?

Yeah, we do talk up frequently with the rating vacancies but I'm sure they'll be publishing something. I'm not going to speak for them but we feel really comfortable with where we're at in terms of our cash balance and our ability to continue to generate cash on a sustained basis Bret. So we kind of factored all that in, in-line with our cash priorities which as we've said before maintaining that investment grade rating is very important to us. We want to continue to invest and reinvest in the business. You can see that we have got some back half CAPEX investments were going to be taking place. And having said all that we feel like we've got the right level of cash, we've got the right discipline in place to generate cash, sufficient that we feel like we can start returning cash to shareholders. So we feel very comfortable with the positions that we're taking.

Yeah, and I think you commented that you expected your accounts payable ratio to go up in the balance of the year. So I guess to some extent is there a target AP inventory maybe by the end of the year?

We expect it to continue to go up. It went up a couple of points I think from Q1 to Q2. And I would expect a similar trajectory but to be clear Bret it's going to take some time. If the initiatives that we have put in place, Mike and his team as they go through the negotiations with our vendors and getting the new terms, we have to lap those old terms and those are going to take time. And as we continue to improve on top line execution that of course will help move the needle as well. But we want to do this in a very disciplined manner so I would expect the trajectory to be very similar to first half.

Okay, and the question I always have to ask, can you update us where we are on IT and catalog consolidation?

Sure, we're pretty excited about the work that Sri Donthi who is our Chief Technology Officer. He has been here for about three or four months Bret, is doing to really accelerate the work that needs to be done there. He obviously was part of the five year plan, the one page clip notes version of what he's talking about starts with the integration of the technology across all of our banners. We know we have to simplify our systems and data architecture across all of our banners. He's got significant experience with that. He's working closely with Bob Cushing, with Mike Broderick, all of the key constituents to construct a roadmap to get that done faster than it had been moving previously. And we feel very comfortable that we're going to get that work done. So all of that is road mapped and the timing of it is coming. Obviously many of these things have to be tested but Sri is going to make a big difference there for us.

Okay, any targets for timing for when?

We absolutely have targets against that. We're not communicating that broadly but we're going to continue to work it.

Okay, great. Thank you.

Thank you. Our question comes from Simeon Gutman from Morgan Stanley. Your line is open.

Thanks, good morning. Tom I wanted to ask you a somewhat of a follow up. You were talking about three to five year plan, so does the margin performance this quarter inform you any differently about the potential for the future margin, you mentioned you understand your issues better and I think this quarter was probably the ultimate test given the strain on the supply chain but is the amount that you can get bigger than what you initially thought, does it take longer because you've identified other issues that came to bear this quarter?

We believe we can get to that mid teen margin Simeon over time so I mean there's nothing that has changed our perspective. I think we understand it better and we understand the sequencing of it, how quickly we can get there, all of those things are clearer to us now as the management team has got deeper into it. And again I think it's important to note that the construction of this five year plan that we're in the middle of right now, everybody here was intimately involved in it. I think the first time around I've been here very briefly. We constructed it with a team that many of whom are not here anymore. So I think I think everybody's got their fingerprints on this one. We know the key levers and the timing of it. We're not completed with it, we had a draft we shared with our Board over the last couple of weeks. And we will finalize that this fall but absolutely believe we can get to that mid-teens margin over time.

And will the sequencing, the timing of it be shared with the Street and where I am going it sounds like in the back half you're making some investment which sounds like the prudent marketing around Worldpac, etc, so I guess the timing of the sequencing versus how the Street is expecting it probably matters, curious if we learn about that over time?

Yeah, we expect to finalize the plan by the end of the year and we will provide an update on the timing and the key initiatives once we've got everything done.

Okay, and then my follow up is just on product margin. You talked about inefficiencies in the supply chain and then mix shift just from some of the seasonal products. I forget if you mentioned anything about promotion discounts or the over ride still declining year-over-year?

Yeah, no we feel good about the over ride situation, I mean I think that we have had a lot of learnings there and now we're managing that much differently than we had managed it and we look at it every week both on the DIY side and the Pro side, it's pretty small on the DIY side as you know. But there's no major changes there year-on-year.

Okay, thanks.

Thank you. Our next question comes from Matt McClintock from Barclays. Your line is open.

Hi, yes, good morning everyone. Tom I was wondering if I could take a different approach in terms of thinking about timing and sequencing, etc and just say it wasn't that long ago you used to tell us and you used to caution us to remember that it's still very early stages in the broader restructuring of the company, it seems now today with a new shared purpose put in place you're starting to get efficiencies out of the sales team and you actually have cross banner visibility that we might actually be out of the early stages or the early inning of a broader restructuring of the company, clearly not within a larger plan but in the broader restructuring, could you maybe update us on your thoughts of where the company is today in terms of a stable platform for executing a maybe a more traditional five year plan or more importantly I am just trying to get a sense of are we now into more of the fourth inning or the fifth inning of what you thought this company could be when you joined, thanks?

Yeah, great question Matt. I think how I would react to that, first of all I would say that I've learned in my time here that there's nothing more important to a successful turnaround than the people and the culture. And we spent a great deal of time in the past two years, how do we strengthen the talents in the organization, we have got a lot of great people who worked here for a long time that need to be developed. We had to go outside and find people that brought new capabilities to Advance whether that be in technology, in supply chain, in digital marketing, in many areas. And we got -- we had to build the bench [ph] that we had because we didn't really have much in the way of bench. So I think that the answer I get is I feel dramatically better than I did two years ago in terms of the people and the culture. Now it's early in that respect. I mean you're still -- we are still making a lot of changes to be clear. I will use the field organization as an example. We restructured the field about a year ago. We put two field leaders in place, we put 12 regional Vice President in place. I think they are now starting to get their stride. It was a it was a pretty dramatic change for that part of the organization. We subsequently paired up the supply chain field organization with that store operations organization. So, now those -- think of those as division business teams are starting to perform as much more of a cohesive unit. I still believe there's an opportunity to tear down the silos that have existed here for a long time. I still believe there's a way for us to move faster and more efficiently. I would say we're certainly out of the very, very early innings. I feel much more confident in our ability to do something when we say we're going to do it now. So, I wouldn't say that everything is perfect by any stretch of the imagination. We have still got a lot to do but we're in a much better position than we were two years ago. So hard to put a number on it but I think we're in a bit of a different phase than we were.

Thanks for that color and if I could have one follow up, just with Reuben coming down from the Board and given that he has maybe a little bit of a different backgrounds from a more traditional retailer, are there any changes in prioritization of your longer-term supply chain initiatives or is the message here that it is just more of the same in executing what's already in place?

Yeah, the great thing there Matt is that Reuben has been intimately involved with Leslie in the construction of that supply chain agenda. So he knows exactly what we're doing. He's been very supportive, he has actually been a very active board member. He was a very active board member and very helpful for me over the last couple of years. So he's been deeply involved. He knows the leadership team well. Leslie had built a very strong leadership team in the last few years. That was one thing that we really had as a deliverable for her to really strengthen that supply chain leadership team. Reuben has been involved with that. So, the key initiatives that are within the supply chain are going to continue. I think what Reuben brings is real strong background in the whole omnichannel well in fact he was very involved in the construction of that omnichannel strategy with Walgreen. So we are excited about him coming in. He also brings what I would describe as a general management mindset to the role. So I don't see any major shifts in the direction supply chain. I just think we will be moving faster than we have as he comes in here and starts to work closely with the rest of the leadership team.

Thanks a lot, best of luck.

Thank you.

Thank you. Our next question comes from Greg Melich from Moffett Nathanson. Your line is open.

Hi, thanks, I had a couple of questions. One, if you look at the comp time and it's a nice improvement, was traffic actually positive or it sounds like a lot of it was sort of ticket and mix may have been helping and units in the basket?

I'll split it up again Greg, on the Pro side both were positive, the transactions and average ticket. On DIY we saw a significant improvement in our store traffic. It was not positive but it was a significant improvement in our store traffic and average ticket was up and then partly helped by UPT as I mentioned earlier of course. And then of course our online traffic I mentioned earlier was through the roof.

So overall traffic was positive and with DIY a lot of the improvement it sounds…?

If you put them together.

Okay, great. And was inflation a significant positive in the quarter?

Not a huge factor Greg, under 1%.

Got it and then I am surprised we haven’t had the China imports question with tariffs all floating around, what percentage of your comps are directly imported from China or indirectly?

I will kick this one over to Mike Broderick, Greg. So, Mike.

Greg this is Mike Broderick, good morning. So, from a comp perspective we don't really give out that number but at this point in time everything that we're seeing from tariffs is very manageable. We're working with our suppliers to find best country to provide from. But at this point down we've been able to pass it along into the marketplace. So it's really been not much of an issue at this point in time.

Thanks a lot, and just one last one, thanks for the five year plan that talk about working on that, if you think about getting to that mid teens margin Tom is more of it supply chain, it sounds like with everything you're describing that the bulk of it would be supply chain or am I missing something?

There's a couple of components, supply chain is probably is the biggest number on the page. But there are three other variables in there that are opportunities for us that we can go after and we're going after all of them. And it is just a question of sequencing and timing at this point and balancing that with the share growth opportunity that we have, that's how we are thinking about it?

That's great, good luck guys.

Thank you and our next question comes from Seth Sigman from Credit Suisse. Your line is open.

Great, thank you, good morning. So can you update us on store consolidation, how many you closed in the quarter performance maybe as you have heard the closed doors, just in general did you learn anything new about the opportunity, thank you?

Hey, good morning Seth. Yeah, absolutely, really excited about what's happening there. I mean we -- I think we're at 35 on a year-to-date. These guys will get me the number on the quarter 20 -- it was 20 in the quarter. Overall the discipline that we're seeing in closing these stores it's just -- it's hard to express how much different it is than it was. In fact we just went through some materials yesterday on some historical stuff that we had done and the assumptions that we had in there which were quite honestly very optimistic in terms of what we could retain. And we didn't actually retain, this was literally a 2014 document. Now we've got very clear deliverables surrounding how much professional business can we retain, how much DIY business can we retain. And then there is the team member piece which is so important. We measure for every one of those 35 store closures what percent of each one of those dimensions are being retained. And there's accountability on the surrounding stores, on the district managers, on the Region Vice President, there is discipline around capturing those sales. So it's not just close the store and hope for the best, there's quite a bit of tracking and follow up on it and we're exceeding our numbers there consistently in terms of what we believe we can retain we're actually retaining more than we thought we could retain. In terms of retaining team members we are retaining the key team members we need to retain. And then obviously there's the outstanding lease obligation which I think were much tougher in the discussions surround that with our landlord. So all of those variables going into a store closure we make the decision based on a five year cash flow model and we're exceeding all of those metrics. So, we still have opportunities there. I think all of you guys in the call know that. We've got a lot of stores that are less than one mile apart but we don't blindly close every store that is a mile apart. We have a comprehensive multivariate model that we use to make those decisions and we're going to continue to drive hard at optimizing our footprint. And a minute ago Greg asked about the variables that can help us improve margin, obviously one of them is average sales per store. So as we optimize the footprint we can drive our average sales per store up and that can also help us with that margin gap we have with our competitors.

Okay, great, thank you and just my follow up question is around the gross margin and the outlook for the second half of the year, you obviously highlighted a couple of incremental headwinds. You did have some headwinds a year ago including supply chain and also trade income I believe, so can you just remind us on what you're lapping from last year, some of those buckets I mentioned and also where are you guys in terms of the material cost reductions as you start to lap those gains from a year ago as well?

Yeah, we did have some headwinds on and supply chain a year ago. I think what we are looking at this year is really related to fuel and transportation. I mean I think as we mentioned in our prepared remarks I think everybody has talked about this. We planned around 4%, we're seeing diesel is upwards of 20% right now, our gasoline is about mid-teens. So those are pretty big numbers for us. We also talked about mix set, that's a factor for us because as we have this great warm summer we really like it, some of the categories that surged just carry an absolute lower margin rate. So that's also a factor that we're talking about. So when you put it all together you've got where we think this thing is going to come in and we're going to continue to our best to improve on everything that we're driving at. The material cost piece, we continue to drive hard at that. I think we're up to about 80% of the way through the categories now. As I think we said previously, some of the benefits there don't come right away, they come down the road because you have to be acquire the inventory, you have to put it in your system, then you have to sell the inventory just to get the full benefit of the material cost optimization. But Mike Broderick and his team are doing a really good job working with our suppliers on that journey. And then as we move into the next round of that we are thinking about it more as an enterprise approach because we haven't been doing that in that regard to date. It's been primarily an Advance Carquest initiative and we're broadening that across the enterprise going forward.

Thank you so much.

Thank you. Our next question comes from Scott Ciccarelli from RBC Capital Markets. Your line is open.

Hi guys, I know it's after 9, so 2 quickies. First, can you specifically quantify what the gross margin headwind was from the cross banner efforts? And then similarly, can you tell us specifically what you experienced on the merchandise margin front? Thanks

Yeah, I mean we're not breaking out cross banner Scot. It's not an insignificant number though so that's why we did call it out and we do believe we can get those costs out of our system. We just have to optimize those costs and we've got to get all of our supply chain teams together to make sure that we're delivering cross banner product as efficiently as possible. What was your other question, sorry.

On the merchandise margin front, you broke that out for us last quarter, I think it was 82 or 86 basis points?

Yeah, overall we actually did see improvement in the quarter on the merchandise cost. A couple of dynamics there, generally what we would see in the past and we saw last quarter was the MCO savings that we just talked to you about. We continue to see that in the second quarter. Largely we were able to offset a lot of the supply chain headwinds that we've experienced in previous quarters and we were largely able to do that. Unfortunately it was more than offset by the product mix so the combination of the headwind of product mix and supply chain more than offset the savings that we normally see in MCO and that's sort of the dynamic that you see this quarter and which is why we're calling out mix and supply chain on a go forward basis.

So, what that improvement have been if you were just isolated?

We're not breaking that out but like I said if you were to just take mix in MCO it would have been a tailwind for us.

Got it, okay, thanks guys.

Thank you. Our next question comes from Dan Wewer from Raymond James. Your line is open.

Thanks, something besides gross margin. I wanted to ask about the ongoing transformation expenses. Tom I think we are what in the fifth year now of the GPC acquisition and what we rank up almost another $30 million of transformation expenses including $5 million actually in cost of goods sold. I don't think you're running that a year ago, I guess there is a lot wider cost of goods sold item for transformation expenses? And then second, how many more quarters or years of these type of charges should we expect?

Yeah, this is Jeff. If you sort of step back and look at what we're calling transformation, we have had the GPI consolidation cost going after some time. Those are significantly ramping down. I think we are under $1 million for the second quarter and what we're doing now is really shifting towards the more of a transformational enterprise look. So, making sure that we're optimizing all of the assets and some of the more bigger ticket focuses such as infrastructure, IT, supply chain, those bigger investments to really make sure we can optimize the assets that we have in place. Specific to your question on cost of sales it's really a dynamic of the accounting. We had some impairments associated with the two distribution centers that we are closing here in the second through the fourth quarter. And those costs for accounting purposes have been recognized in cost of sales rather than SG&A which is normally where you see those costs. So it is just a function of the accounting. We want to highlight that as one of the impairment that we normally wouldn't have if we weren't closing distribution centers and closing stores. So that's why you see the 5 million up there. In terms of your question of timing, the transformation is going to take some time and as Tom said we're going through the five year strategic business plan refreshed. This is all part of that and it's going to continue to inform us in terms of what are the investments that we're going to have to make. Clearly it is going to go through the balance of the year, we've given a range of $140 million to $180 million. We're comfortable with that range for this year and we're assessing it as part of our strategic business plan for the future.

And then just real quick question on the San Antonio distribution center, this facility closed because it became redundant after you opened the Houston distribution center or are we in the early process of unwinding from 50 distribution centers to maybe 20 someday?

It's really a function Dan of the end-to-end supply chain work that was done that looked across our entire network of 54 DCs and the decision to open Houston had already been made when we did that. So it was really looking across the 54 and it is really the latter in terms of how you ask the question. We are looking across our whole system, we do not need 54 distribution centers so we are gradually working through those changes and we're doing it in a way that's not disruptive. And I will say that both Gallman Mississippi and San Antonio have been executed flawlessly by our supply chain team. We've been moving the stores from those facilities to other distribution centers and we really like the outcome that we're seeing so far. So it really is part of the broader end-to-end supply chain strategy.

Okay, great, thank you guys.

Thank you, our next question comes from Seth Basham from Wedbush Securities. Your line is open.

Thanks a lot and good morning. I had some questions around integrator replenishment and last mile delivery test in Raleigh, can you give us an update on how that is progressing and when you might be able to expand those additional market spend, that will helpful?

Sure, yes, we are excited a bus when we started out and we are obviously trying to look for a way to really strengthen availability across the enterprise and you think about availability broadly in terms of assortment in market connectivity and execution. So there's a lot of work going on with assortment, I'll highlight a couple of things. First of all we talked about cross banner visibility but Mike and his team are also working through a transition to dynamic assortment which enables us to use artificial intelligence and machine learning tools to really assort differently and we are in the early stages of that Seth in terms of how we're using that with a couple of categories. I think by the time we get to the first quarter of 2019 we'll be in a real strong position to strengthen both the quality and breadth of our assortment across the system. So that's part of the solution. In terms of end market connectivity that's one of the things we are testing inside the pilot. We're making sure that we're using all of the assets that Advance has inside of our market so that we can get the inventory we need to our customers faster than we had in the past. And then execution is really about the measurement of the key factors, how often are we able to say yes to the customer, what's our order to delivery time using our technology platforms to connect all of those things it is enabling us to really look at the different variables and how they can be improved. So excited about the pilot and we're going to continue to learn from it but we're not -- where we see things that work such as cross banner visibility we're rolling them out right away to make sure that we're driving progress. And most of the key metrics that we measure on availability close rate or to the delivery time we're making progress on just through better execution. So you're going to continue to see us focus on that.

Got it and so as start of the prior roll out, was some of those initiatives beyond [indiscernible] would first half 2019 be the target?

Yeah, I mean we are -- a lot of the things that we are doing we are already doing, right. Again with cross banner visibility we have had success but we rolled it out. The new Advance Professional catalogue, we have rolled out. With Sun's data system, so where we see something that works that's low risk kind of reward we just go with it. Where you're touching things that need to be validated that may have customer impact we're being more thoughtful about it. So it really depends on what specific initiative we have. Dynamic assortment is a good example. We want to make sure that when we roll this and implement it in the stores and transition from the current methodology we used that we're getting a lift from it and the earlier turns are good but we want to continue to make sure that the data is clean. We've got enough data behind it. Any kind of AI tools require six to nine months of that kind of validation. So we're making sure that we're doing it thoughtfully.

Fair enough and my follow-up question is around the online performance. Where are we in terms of DIY sales online percentage of total DIY sales in terms of the mix. And the key drivers of the improvement there in traffic and maintaining conversion, can you pinpoint them as it primarily related to assortment, promotion, transportation, delivery times or anything else? Thank you.

Sure, I mean we don’t break out the online component of our DIY sales. I will say that the opportunity there for us is extraordinary both on the ship to home and bio-line [ph] pick up in the store. We see a lot of wide open turf there. I think the work that's been done by Yogi Jashnani and his team has really centered on broadening the assortment so offering more skews to our customers. In increasing the delivery capability I think we're up to about 12 distribution centers now, they're able to ship to home which is a significant increase from where we were and that's going to go continue to go up. So obviously as we get closer to our customers with our distribution centers we are able to get the part there more quickly. So you're reducing the amount of time it takes to get to the customer. I think our engagement platforms have been very, very successful in terms of how we've cleaned up our website it's a much more -- the user experience is much better. I think Yogi would say there's still a lot of work to do, there's still a lot of room for improvement but based on where we were I think the user experience online is significantly better and we can see that in the things that we measure there. We obviously measure visitors but we also measure social media sentiments and like to dislike ratios things like that associated with our website and all of those are going to enter in our direction.

Thank you and our next question comes from Chris Bottiglieri from Wolfe Research. Your line is open.

Hi, good morning. Thanks for taking my questions. First question is on private label mix, I think Tom I think before you arrived the previous team disclosed 47% of COGS, can you give us a sense where that is today and where that mix every time and then is there reason to think that this mix will be different than your international mix?

Sure, first of all when we look at private label mix or any mix now we look across the enterprise. So, I think what you may have heard was a narrower view of that number. We are in the mid-30s in terms of our private label mix so I guess it is a little bit lower than maybe we had previously communicated. And Mike and his team are doing a lot of work on the category management side, Mike Broderick, and maybe I'll have Mike talk a little bit about how we're thinking about each category. But that in of itself was a big opportunity. What we're doing is really combining that MCO work with market share aspirations, with our pricing, with our assortment. So, Mike do you want to talk to little bit of the category management work you are leading.

Of course, good morning Chris, Mike Broderick. So you're right, we've disclosed in the past I would say that from an AAPCQ we're still at that same number of high 40's, close to 50%. It is about $3.6 billion of our business. But when you look at the true opportunity from a private label just to give an illustration, right now we're in the path of actually rationalizing with Bob and Bob's team from Worldpac, we actually have right now three different private labels which were very much in the midst of really trying to rationalize so we get the best use of our inventory dollars. So that's just a good example of what we're going to do in the future. Obviously we're still a big brand house, we believe in our brands, we believe in our partners who have relevant brands for our professional customers as well as our DIY customers. But of course we actually have to have a private label that's recognized in the marketplace too which is a big opportunity that we're going to be driving for the next couple of years. As most of you know this will take a little bit of time.

Got you, okay. And then just as a follow up on the supply chain, two DCs are consolidating now, can you maybe just give us some element of understanding of the operational and technical process you have to undergo to close the DCs and as you kind of think of this bigger opportunity is there kind a limitation into the cadence of how many DCs you can close or maybe just more broadly if you can give some overlap numbers or how are you thinking about the supply chain holistically will be helpful?

Sure, I mean it's obviously a big undertaking for us. You have to do it in a way that is not disruptive. And in the case of Gallman, I use Gallman as an example, we had a couple of hundred stores. And you're gradually moving them from that facility to Nashville and Houston respectively. So you're doing that, you don’t just kind of flip a switch. It is over several weeks. So we have a basically a close -- DC closure team that does that, that leads the work itself, and to make sure that they work closely with the merchandising team, the replenishment team, the store operations team to seamlessly move stores from Gallman in that case to Nashville or Houston and do it in a way that's invisible to the customer. And I can tell you that to date that has been the way it's worked. We've been very thoughtful about how we do it and in the case of Gallman we ran into a situation where we saw some -- our field rates were getting below the prior year so we immediately slowed down the stores that were being moved. So you're going to do it in a way that is invisible to the customers as possible and visible to the stores. So it's a very thoughtful process. In terms of the overall cadence you're right and there's only so many you can take on in a year. We're not going to flip a switch on this, it is a gradual migration. I've done it in a previous life where you've got a certain segment of the organization that is very focused on that change at one time and change management becomes the bottom act. You can't do it all at once sort of thing. So there is a limit on how many you can do. Obviously we are doing a couple in the front half of this year and I think that's probably how you should probably think about the long-term.

That's helpful, thank you.

Thank you and our next question comes from Ben Bienvenu from Stephens. Your line is open.

Hi, thanks, good morning. I wanted to ask about the labor side of your business, you talked about your ability to retain talent as it relates to store consolidation, I am curious to hear about your ability to retain talent more broadly? And then as it relates to your ability to attract talent, maybe how you're going about doing that, is it communicating the narrative of the turnaround in the organization, is it higher pay to attract talent, maybe just give us a sense of where you stand on that front?

Sure, in terms of retention we have talked Ben in the past about our frontline organization which is so important to our success. We're only as good as our interaction with a customer in a store right now. So those big four jobs that we have out there in the field, the general managers of our stores, the commercial parts Pros were so important to us on the counter, our district managers and our customer account managers that call on professional garages, those four jobs our turnover has dropped significantly versus where it was two years ago and we are kind of holding at the prior year rates. We would like it to be lower but we are -- well basically our turnover is kind of flat this year year-on-year. It had been going down, down, down and now it is flat. So we feel pretty good about that and we are going to continue to focus on it. We do have a significant stock ownership program that we have for our frontline associates where we've had literally thousands of our front line leaders in those groups that have earned a stock awards at Advance and that certainly helps us retain that talent. In terms of attracting I got to tell you we spent a lot of time interviewing here. I mean I don't care what function it is, people are accountable to build bench inside their organization and then strengthen the leadership team that they have and develop the people who worked here for a long time. Both of those are very important to me, we spend a significant amount of time as a leadership team every quarter going through the leadership team and the big roles that drive value in our company. And while we have gaps we fill those gaps. So we've actually been -- this is a great place to attract talent. Raleigh, North Carolina has a terrific talent base, we're in the research triangle. I mean depending on what you're talking about I think Sri and Yogi would say the technology talent is robust here at the same time the unemployment rates for technology talents are extremely low across the country so you have to be really be very competitive there. But, I wouldn't say that we're -- our overall approach is focused on compensation. It's a very holistic brand proposition that you have when you come here and there is tremendous upside I think to your point, people can understand that the transformation opportunity here is substantially larger. The growth opportunity is substantially larger here than it is in many companies and that's really what we're anchoring on. We spend a lot of time on our brand proposition if you will to employees and we'll continue to do that.

Thanks for the detail, best of luck.

Thank you and I am showing no further questions in the queue. I'd now like to turn the conference back over to Tom Greco for any closing remarks.

Well, once again I'd like to thank all of our team members and independent partners for their dedication each and every day to drive improvement across AAP. And thanks to everybody on the call this morning. We appreciate your support you can count on us to be absolutely relentless in moving the successful transformation of Advance forward and delivering value to our shareholders. I'm very confident in the talented team we have in place, we will fully capitalize on the robust opportunities ahead and we look forward to discussing our continued progress with you on our third quarter call in November. Thank you.

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.