Advance Auto Parts Management Discusses Q2 2012 Results - Earnings Call Transcript

Advance Auto Parts (AAP)

Q2 2012 Earnings Call

August 09, 2012 10:00 am ET

Executives

Joshua Moore

Darren R. Jackson - Chief Executive Officer, President and Director

Kevin P. Freeland - Chief Operating Officer

Michael A. Norona - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Assistant Secretary

Analysts

Gary Balter - Crédit Suisse AG, Research Division

Gregory S. Melich - ISI Group Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Jonathan N. Berg - Piper Jaffray Companies, Research Division

Bret David Jordan - BB&T Capital Markets, Research Division

Presentation

Operator

Welcome to the Advance Auto Parts Second Quarter 2012 Conference Call. Today's conference is being recorded. [Operator Instructions] Before we begin, Joshua Moore, Director of Finance and Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

Joshua Moore

Good morning, 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 use words such as believe, anticipate, expect, intend, will, plan, forecast, outlook or estimate, and are subject to risks, uncertainties and assumptions that may cause the results to differ materially, including competitive pressures, demand for the company's products, the economy in general, consumer debt levels, dependence on foreign suppliers, the weather, business interruptions and other factors disclosed in the company's 10-K for the fiscal year ended December 31, 2011, on file with the Securities and Exchange Commission. 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.

The reconciliation of any non-GAAP financial measures mentioned on the call with the corresponding GAAP measures are described in our earnings release and our SEC filings, which can be found on our website at advanceautoparts.com.

For planning purposes, our third quarter earnings release is scheduled for November 8, 2012, before market open. And our quarterly conference call is scheduled for the morning of Thursday, November 8, 2012. 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 one year.

Now let me turn the call over to Darren Jackson, our President and Chief Executive Officer. Darren?

Darren R. Jackson

Thanks, Joshua. Good morning, everyone. Thanks for joining us and welcome to our second quarter conference call. Before I begin, I'd like to thank our 54,000 team members for their hard work and diligence as they navigated us through a challenging quarter.

As you have seen in our earnings release this morning, our second fiscal quarter reflected a near-term slowdown within the industry and in our results. Today, I thought it'd helpful to provide some context and perspective on the drivers of the slowdown.

As we anticipated, the second quarter faced weak consumer demand in both DIY and Commercial with significant slowdown in our cold weather markets principally located within the Northeast and Great Lakes regions of the U.S.

From a consumer perspective, gas prices continue to weigh on demand. The average gas price increased nearly $0.10 a gallon over the first quarter of this year. The good news is the current outlook is for gas to be lower the rest of the year.

Macro environment continues to be stressed with high unemployment and low consumer confidence, which has constrained consumer spending. This was evident across retail and reflective of our business as consumers were only willing to spend the absolute minimum amount on failure-related parts and were willing to defer maintenance purchases. This slowdown in both failure and maintenance spending impacted both DIY and Commercial and led to a deceleration in sales growth versus the first quarter. The principal driver on the deceleration was a sequential quarter-to-quarter decline in the average ticket, while our transaction growth was down modestly. In the non-cold-weather markets, we saw transaction growth from Q1 to Q2 accelerate in the low single digits. The overall company transaction growth in Commercial still remained positive in the low single digits from a comparable store perspective. The average ticket decline reflects a combination of mix of products sold and our pricing position in the second quarter.

The industry is experiencing the impact of lower inflation in some key seasonal categories like air conditioning and the absence of escalating oil prices and the impact on the oil change special programs. In addition, there are pockets where the consumer is trading down in select categories in pursuit of savings. Finally, while price promotions are not having an immediate positive impact on the top line, we believe it will positively contribute to our growth in the future.

From a geographical perspective, we saw different results throughout the regions of the company with the greatest deceleration in our cold weather markets, again especially in the Northeast and the Great Lakes regions. Our performance in those 2 markets is reflective of the milder weather conditions during the first quarter, which impacted hard parts and pulled the business forward in the second quarter.

Our comparable store sales declined mid-single digits in these regions of the country, including our Autopart International stores within those geographies. Conversely, we saw acceleration from the first quarter through the second quarter in our stores located in the western half of the U.S. Our comparable store sales continue to grow positively, and we're up low single digits in our western geographies, where only 10% of our stores are located, as they continue to be less impacted by severe fluctuations in weather.

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