Welcome to the Advance Auto Parts 4th Quarter and Full Year 2019 Conference Call. Before we begin, Elizabeth Eisleben, Senior Vice President, Communications and Investor Relations, will make a brief statement concerning forward looking statements that will be discussed on this call.
Good morning and thank you for joining us to discuss our Q4 and full year 2019 results. I'm joined by Tom Greco, our President and Chief Executive Officer and Jeff Shepherd, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will turn our attention to answering your questions. Before we begin, please be advised that our comments today include forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, which are described in the Risk Factors section in the company's filings with the Securities and Exchange Commission, and we maintain no duty to update forward looking statements made.
Additionally, our comments today include certain non GAAP financial measures. We believe providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results. Please refer to our quarterly press release and accompanying financial statements issued today for additional detail regarding the forward looking statements and reconciliations of these non GAAP financial measures to the most comparable GAAP measures referenced in today's call. The content of this call will be governed by the information contained in our earnings release and related financial statements. Now, let me turn the call over to Tom Greco.
Thanks, Elizabeth, and good morning, and thank all of you for joining us to discuss our Q4 and full year 2019 results. I want to begin by recognizing and thanking every single AAP team member in our network of Carquest Independents for their dedication throughout the year. With an unrelenting focus on delivering against our strategic priority, we made progress on many initiatives throughout 2019, and we plan to continue strengthening the company as we begin 2020. In Q4, we delivered our 7th consecutive quarter of top line growth with an increase in net sales to $2,100,000,000 and comparable store sales up slightly compared to the prior year. We also expanded our adjusted operating income margin rate by 106 basis points in the quarter.
This focused effort to deliver margin expansion with lower than anticipated sales growth translated to adjusted diluted earnings per share of $1.64 an increase of 40.2% in Q4. In the quarter, we also completed our acquisition of the iconic Die Hard brand, which we're excited to add to our industry leading assortment of national brands, OE parts and owned brands. For the full year 2019, our net sales increased 1.3% to $9,700,000,000 with comparable store sales growth of 1.1%. We delivered adjusted operating margin expansion of 36 basis points year over year, adjusted diluted earnings per share growth of 14.9 percent and generated $597,000,000 in free cash flow. Following our 2nd consecutive year of sales growth, margin expansion and strong cash generation as well as our confidence in ongoing improvements in 2020 beyond, our Board approved the first increase to our quarterly cash dividend since the 2014 acquisition.
In fact, this was the first increase since AAP introduced its quarterly dividend in 2,006. Before I turn the call over to Jeff for more details on our financial performance, I want to highlight the operational performance improvements we implemented in 2019 as well as several exciting new initiatives planned for this year, which we expect to enable ongoing top line growth and adjusted OI margin expansion in 2020 and beyond. In Q4, our Professional business led our growth rate, highlighted by Worldpac, Canada and our Carquest independent businesses. As we continue to bring all our Professional assets under one roof, we remain focused on providing best in class parts availability, improving order to delivery speed and consistency, and strengthening our overall value proposition to our customers. This includes ongoing enhancements to our one stop shop professional online platform, MyAdvance, as well as improvements to our best in class online B2B catalog, Advanced Pro.
MyAdvance improves the customer experience with fully integrated access to promotions, product information, our Pro Rewards program, credit reconciliation and key performance indicators. This enables us to leverage customer data to drive engagement, while improving visibility to enrolled promotions and customer involvement. Additionally, we expanded the categories included in the rollout of dynamic assortment, with 50 categories now rolled out across nearly 4,000 stores, representing over 50% of our backroom sales. Dynamic assortment is continuing to improve stock and close rates in key categories. Once fully implemented, we expect dynamic assortment to drive top line improvements through a better understanding of customer demand and utilizing multiple data points to improve availability and help ensure that we have the right part in the right place at the right time.
In terms of our DIY omnichannel business, we had a challenging Q4, particularly in the North. That said, the heavy lifting we did in the back half of twenty nineteen has resulted in a much stronger DIY plan for 2020, which we believe will build momentum throughout the year. There are 4 primary areas of focus here. 1, launch Die Hard 2, build awareness 3, drive loyalty and 4, execute with excellence. So first, we're very excited about launching the iconic DieHard brand throughout the Advanced Network in 2020.
DieHard is the number one battery brand among all customers and presents us with several ways we believe we can differentiate our offering and drive increased customer traffic to our retail stores. Our goal at DieHard is to build on its strong reputation, creating a differentiated value proposition. While we're confident the addition of Die Hard to our industry leading assortment will drive incremental growth for DIY omnichannel, we also see the potential to leverage Die Hard with our professional customers and independent Carquest partners. In the future, we also believe there is a significant opportunity for brand extension into other categories and geographic expansion of Die Hard. Without question, both the Advance team and our Carquest independent are very excited about DieHard.
2nd, we're focused on significantly improving awareness of Advance. Our unaided awareness improved in 2019, but still lags our primary competitors by a wide margin. Our 2020 plans are highlighted by a new marketing campaign, including a significant increase in media, which we've sourced from pre existing lower performing marketing spend. We're confident this new advertising will differentiate the Advanced brand over time. Additionally, we are very excited to leverage our recently announced partnership with Penske Racing and our new driver, Ryan Blaney.
We'll also continue to drive awareness by improving our digital experience as we know that most transactions start online. Our DIY online business continued to grow traffic and transactions, resulting in double digit e commerce growth in both Q4 and the full year. Our team is also making progress on the expansion of product offerings on walmart.com, including the addition of product reviews that facilitate a frictionless experience for our customers. 3rd, we continue to make progress on our loyalty program, SpeedPerks, and we're excited about the launch of our new mobile app for DIYers in Q1. Our app will make SpeedPerks and our mobile experience even more accessible to our loyal customers.
When we relaunched Speed Perks 2.0 mid year, under 25% of our DIY transactions were Speed Perks transactions at that point. We finished the year at close to 36%. This enables us to leverage first party data to personalize our offering. In Q4, we added close to 1,000,000 new SpeedFirst members, finishing Q4 at close to 12,000,000 active members. In addition, we saw increasing graduation rates from 1 spending tier to the next.
We will continue to build loyalty behind Speed Perks by leveraging personalization and communicating directly with our customers. 4th, our field team continues to improve on key execution metrics, including units per transaction, weekend coverage and net promoter score. In 2020, we plan to improve both the quality and execution of our automotive training for our team members, while improving the customer experience for buy online, pick up in store. The fact that our turnover in frontline customer facing roles declined in both 2018 2019 has helped us improve execution overall. In terms of category performance, our Q4 growth was led by brakes, batteries and filters.
Due to a weak December, we underperformed on winter related products such as starters and alternators as well as radiators. Geographically, our regional performance was highly varied with our Midwest, West and Central regions delivering mid single digit growth in Q4 and the largest sales increases on both a 1 and 2 year stack compared to prior years. These geographies significantly outperformed our weakest geographies in the quarter with our Great Lakes, Northeast and Mid Atlantic regions trailing the top performing regions by over 600 basis points on average. To summarize our growth initiatives, we've elevated our focus on differentiating and improving the customer experience for both our Pro and DIY omnichannel business. We remain relentlessly focused on delighting the customer across all of our businesses.
Our Pro business continues to build momentum across all banners, and we continue to integrate key platforms to simplify and improve the customer experience across AdvancedPro and MyAdvance. In terms of DIY omnichannel, while it remains a work in progress, we have the strongest marketing calendar of activity on DIY omnichannel in years with our plans to launch Die Hard, build awareness, increase loyalty and improve execution. Moving on to our key pillars of margin expansion for 2020 and beyond, our first priority is to improve sales and profit per store. This includes optimizing our existing footprint, expanding where we're under penetrated and closing unproductive or underperforming assets where appropriate. Starting with our largest business on the professional side, our team continues to expand our professional footprint to drive share growth.
In 2019, we opened 17 new Worldpac branches and continue to add new Carquest independent locations. In addition to the growth of our existing locations and sourcing new opportunities, our team has also started the consolidation of our Worldpac and AutoPart International banners to deliver improved productivity and product assortment across our professional business. This effort will continue throughout 2020. In addition, behind consistent gradual improvements in execution across our Advanced and Carquest stores, our average sales per store has increased from $1,500,000 at the end of 2017 to roughly $1,600,000 per store at the end of 2019. We're confident we'll continue this growth and are on track to achieve our goal of $1,800,000 per store over time.
Separately, we continue to address more structural opportunities within our retail stores, which includes a strengthened store refresh program and the ongoing optimization of our store footprint. We expect the actions we're taking to improve sales and profit per store will benefit both DIY and Pro. Our second margin expansion priority is within our supply chain, and I'm pleased to say we're now in full execution mode on this critical area of our transformation. Our supply chain team has done a thorough review of our entire footprint and we're now executing plans that we believe will significantly enhance our enterprise wide supply chain. With 50 distribution centers today, we have a clear opportunity to further rationalize our footprint over the coming years.
Importantly, we'll work to optimize the network while improving our service to customers. It's imperative that our DCs have the right part in the right place at the right time so we win more often. One of our major supply chain productivity initiatives is cross banner replenishment, which we began to deploy in late 2019. Following the successful lead markets, we're now beginning to scale this capability throughout RDC and expect to be completed by mid-twenty 21. Once fully implemented, we expect we will improve product availability, drive turns and deliver significant cost productivity.
In addition, we are continuing to invest in the consolidation of several warehouse management systems or WMS for short the one system across our Advance and Carquest network, which as you can imagine is a significant undertaking. When we began our supply chain transformation, we were dealing with multiple WMS systems, along with extensive manual processes and high turnover in RDCs. Not only is our turnover down significantly in RDCs, our safety performance and engagement scores are now trending in a positive direction. While it took time to build the right team and stabilize operations before we introduced a new WMS system, I'm confident we now have the right team in place to help us further our transformation progress. Importantly, our team recently completed the first conversion to our new WMS platform in one of our largest DCs, and that DC is off to a terrific start.
We expect this initiative coupled with the implementation of a new labor management system will allow us to run common across our DCs, so we can provide better product availability at more optimal inventory turns and cost. We're currently on track with our supply chain agenda, and I'm excited for what this will deliver in 2020 beyond. Our 3rd pillar of margin expansion focuses on category management. Here, we've implemented a standardized approach across key categories to facilitate material cost optimization, own brand expansion and unit and profit growth through strategic pricing. This has been a highly collaborative effort with our supplier partners.
In terms of material cost optimization, while unplanned tariffs reduced the benefit of our performance in 2019, we made good progress on MCL both in Q4 and for the full year. For own brand expansion, we began to roll out additional Carquest branded products in the back half of twenty nineteen. We're working to ensure the highest up quality in our Carquest brand rollouts as this brand resonates so strongly with our professional garages. In parallel, we've been exploring own brand opportunities for DIY with our suppliers, with Die Hard being the best example of this to date. Finally, we expect to deploy our new pricing platform by mid year.
This will enable single price execution across all channels to provide consistent and more efficient management of our pricing. A big benefit of this new capability will be the ability to centrally price right down to store level if needed. Finally, SG and A productivity rounds up the 4th pillar of our margin expansion. SG and A was a highlight of our 2019 performance as our team continued to make excellent progress in managing our costs. In the Q4, we were able to leverage our labor related costs, including store labor as a percent of sales in spite of wage inflation and lower than expected sales.
This was largely driven by the improvements from our new store level labor management system, which we rolled out in Q3. Additionally, our diligent efforts to build a culture of safety is becoming ingrained in how our team members work, leading to a reduction in our liabilities and claims expenses across the organization, which benefited the quarter the year. In fact, we lowered our total recordable injury rate by 8% in 2019 and our LTIR or lost time injury rate, which represents the worst safety incidents was reduced by an impressive 17% compared to 2018. Finally, we continue to make progress on rent in the quarter and in the year. For the full year, we leveraged our occupancy and base rent by roughly 20 basis points.
To wrap up our SG and A performance, we made good progress across multiple lines, enabling us to leverage SG and A to drive margin expansion, while at the same time, we made significant investments in technology, e commerce and supply chain in 2019. In summary, 2019 was a year of continued progress for AAP as we registered another year of top line growth and margin expansion, while making important long term investments. In terms of our outlook for 2020, we previously discussed that this year would be similar to 2019 in terms of investment requirements. With that said, some additional items for you to keep in mind. First, as you probably know, we've just experienced the warmest January in history, which is expected to impact demand in the front half of the year.
From an AAP standpoint, we also expect the elevated coupon investment we're making in our loyalty platform to continue in the front half of twenty twenty. On the positive side of the equation, industry dynamics remain very attractive. This includes continued increases in the car park, miles driven, as well as an increase in vehicles greater than 7 years old. All of these are projected to have a favorable impact on demand throughout 2020. Further, we also expect our pro and DIY initiatives to build top line momentum through the year.
Finally, I'm confident in our team's ability to continue our margin expansion trajectory and deliver further progress against our strategic objectives in 2020. All of these factors are contemplated in the full year guidance we introduced in our press release this morning. In summary, we remain very excited about the tremendous opportunity ahead to fully unlock the potential of AAP, and we're committed to driving consistent improvement across the enterprise over the next several years. With that, I'll turn it over to Jeff for details on our financial performance. Thank you, Tom, and good morning, everyone.
In the 4th quarter, Adjusted gross profit margin of 44% declined 19 basis points from the prior year quarter, primarily driven by LIFO headwinds as well as the expected headwinds from continued investment in our enhanced loyalty program SpeedPerks 2.0. These headwinds were partially offset by pricing actions taken in the quarter. Our adjusted SG and A was approximately $779,000,000 in Q4 twenty nineteen compared to approximately $802,000,000 in Q4 twenty eighteen. As a percentage of net sales, our adjusted SG and A expenses improved by 125 basis points to 36.9%. I'm pleased with our team members' dedication to control costs throughout 2019, which enabled us to leverage expenses every quarter.
In Q4, we leveraged labor related costs and once again reduced our insurance and claims expense at key training programs and focus on safety drove improvements across the organization. Adjusted operating income in Q4 was $150,000,000 which improved nearly 18% compared to the prior year quarter. Our adjusted OI margin rate increased 106 basis points to 7.1% in the quarter. Adjusted diluted EPS for Q4 was $1.64 an increase of 40.2%. For the full year, net sales were $9,700,000,000 an increase of 1.3% compared to 2018 and comp sales improved 1.1%.
Adjusted gross profit for the year increased 1.1%
to $4,300,000,000
and adjusted gross profit margin decreased 12 basis points to 44%. Adjusted SG and A for the year was flat compared to 2018 at $3,500,000,000 On a rate basis, our full year adjusted SG and A was 35.8%, which was an improvement of 48 basis points compared to the previous year. Adjusted operating income for the year was $795,000,000 an increase of 6% compared to the end of 2018. Our adjusted operating margin was 8.2% for 2019, which increased 36 basis points compared to the full year of 2018. Adjusted diluted EPS increased 14.9% to $8.19 compared to $7.13 at the end of 2018.
Moving to free cash flow, we delivered $597,000,000 in 2019, which was lower than our expectations. Factors negatively impacting working capital include higher than expected increases in both our receivables and inventory. We also realized an unfavorable payment term mix within vendor payables. This was driven by an increase in Worldpac inventory associated with the opening of Worldpac branches, which carry shorter payment terms as well as an unfavorable mix impact within Advance and Carquest vendor payables. These factors resulted in higher cash outflows at year end than we previously modeled.
Consistent with increasing capital spend throughout 2019, our CapEx in Q4 was $101,000,000 bringing the full year spend to $270,000,000 an increase of 39.4% year over year. As we have previously discussed, our investments have primarily focused on information technology and supply chain projects. And in 2019, more than 60% of our capital spend was concentrated on these two critical areas. Our IT initiatives continue to address long standing lack of investment in critical systems and back office integration, which we expect to continue in 2020 beyond. Nearly 1 third of our IT spend in 2019 focused on customer facing systems, and I'm pleased with the near completion of our next gen store system upgrade across our footprint.
In addition, throughout 2019, our team worked diligently on our finance ERP project, which integrates our back office finance systems. We went live with our first release in this new system at the start of our fiscal 2020, and I'm confident the continued rollout of this initiative will create significant efficiencies across our organization. In addition, our supply chain team worked relentlessly throughout the year to stabilize existing operations. We invested in DC improvements in 2019 with additional plans for 2020, including network upgrades and continued rollout of our single warehouse management system across our legacy Advanced and Carquest network to enable improved accuracy and efficiencies within the distribution centers. In line with our financial priorities to maintain an investment grade rating, invest in the business and opportunistically return capital to shareholders, under our current share repurchase program, we repurchased nearly $11,000,000 of Advance stock during the Q4 and a total of approximately $487,000,000 for the year.
Importantly, we remain confident in our ability to generate meaningful cash from the business. As you saw yesterday, we are pleased to announce our Board has approved a meaningful improvement to our quarterly dividend, which was increased from $0.06 to 0 point 2 $5 We're committed to a balanced approach in returning capital to our shareholders, while making important investments to drive our transformation. As we begin 2020, we remain focused on our strategic objectives and discipline in our execution to deliver against our financial priorities. With that said, this morning, we introduced our 53 week full year 2020 guidance for several key metrics, including net sales of $9,880,000,000 to $10,100,000,000 comparable store sales growth of flat to 2%, adjusted operating income margin expansion of 20 to 50 basis points, capital expenditures of 2.75 $325,000,000 focusing on continued IT and supply chain investments. The 2020 tax rate is expected to be 24% to 26%.
And as we continue our disciplined approach to cash management, we expect to deliver a minimum free cash flow of $600,000,000 As a reminder, 2020 includes a 53rd week. Our financial outlook provided today includes an estimated $125,000,000 to $150,000,000 in net sales and approximately 10 to 20 basis points of margin expansion from the 53rd week contribution. In summary, I want to reiterate our gratitude that Tom began with today to all our team members and independent partners for their efforts throughout 2019, which enabled our continued progress toward our transformation objectives. We remain committed to further improvements in 2020 and remain disciplined in our approach to capitalize on the significant opportunity still ahead for AAP. With that, let's open the call to address your questions.
Operator?
Matt McClintock with Raymond James, your line is open.
Yes. Good morning, everyone.
I was wondering about the initial guidance for 2020, just the comp expectation of 0% to 2%. Can you kind of give us an idea of how you factored in the warm weather from December into that expectation?
Sure. Good morning, Matt. So let me provide some color on that. First of all, we're very dedicated to the long term strategic objectives we've laid out before and that includes some investments this year that we're making as we communicated in the past both 2019 2020 being somewhat similar in that regard. And those investments are designed to enable top line growth and additional margin expansion down the road.
So as we looked at the sales guide, we did a lot of work on the December, January timeframe and we factored in the impact of what at least at this point is an extremely mild winter, compared it to other years. You guys have written about some of this 2017, 2012. It was one of the warmest in history for North America this year, December, January and given our northern footprint, we valued the impact that's going to have on top line sales really in the front half of the year. Considering this and the fact that it's very early in the year, we're being prudent on the sales guidance. That said, there's a lot we're very excited about for 2020 and longer term on the sales front.
As you've heard from others, the industry drivers of demand are very positive. The car park is continuing to grow. We're going to cross $280,000,000 this year. Miles driven continues to increase and the vehicles in the sweet spot. And in addition to that, the vehicles above 7 years and greater is growing.
So those are all positive impacts and that will benefit the whole year. Separately, obviously, we've got a number of top line initiatives across pro and DIY that will build throughout the year, including, pardon me, our launch of Die Hard. So in terms of margin expansion and cash flow, our plans are very robust and we're continuing to execute against them. So, that was kind of the thinking that went into sales. The building blocks of our plan are continuing to work nicely together.
We've got a great team that's poised to deliver against the guidance. We've delivered sales growth and margin expansion 2 years in a row and we intend to do that again in 2020.
And then just as a follow-up on Die Hard specifically, could you talk through how we should conceptualize the launch, How you plan about going about launching it? How we should think about the benefit from that launch? Thanks.
Sure. Well, as we talked when we issued the original press release, there's a tremendous amount of strategic and financial rationale for us behind DieHard. It gives us the opportunity to really differentiate within particularly inside of DIY. As you know, DIY traffic is our number one customer and business issue. And all the work that we've done says that DieHard can really help us with that.
It enables us to differentiate with DIY customers, brands matter to DIY customers and we'll be able to differentiate there. We also plan to build out a unique position on Pro with DieHard separately. So we're excited about that also. As you think about the launch, we're not communicating any specific timing or anything like that right now, but we're obviously working very diligently to build out the launch plan for Die Hard and needless to say it will benefit us more in the back half of the year than the front half. I appreciate the color.
Best of luck. Thank you.
Seth Sigman with Credit Suisse. Your line is open.
Hey, guys. Good morning. Thanks for taking the question. Just I'm going to ask a couple upfront. Just the Q4 cadence, obviously, December was very challenging.
I'd love to just see your observations what you guys were seeing prior to that, because it seems like seasonally it should have been in a better place. So just any color on how the quarter was performing prior to the December slowdown? And then just second, as you think about the guidance, the margin guidance for 2020, up 10 to 30 basis points excluding the extra week. Can you just break this break that down a little bit more between gross margin and SG and A? And just that SG and A piece related to the Q4, the sustainability of some of the benefits that you saw this past quarter?
Any color on that, that would be helpful. Thank you.
Yes. Good morning, Seth. I'll take the first one. I'll flip the second question over to Jeff. In terms of December, October, November, December, I mean, it wasn't that different at the national level.
We did see a slowdown in December, but it was a market difference geographically, as we called out in our script. First of all, in the West, in the Midwest, in Central, there it was very cold in October. We had a very strong October, November in those geographies. We didn't get that benefit necessarily in the Northeast, Mid Atlantic and Great Lakes. And as we got into December, when it was much warmer in those geographies, that really pulled down our business in December overall.
So I think the headline there is the difference. The distribution was quite wide geographically for us in the quarter, as we said, over 600 basis points between the top 3 and bottom 3. Jeff, do you want to cover off the other? Yes, sure. I'll start with the 4th quarter, Seth, and then work into the guidance for 2020.
4th quarter, you saw SG and A improved to 125 basis points. 3 broad categories, labor related, we did leverage store labor in the 4th quarter. We saw some improvements in our marketing program as Jason McDonald comes in and looks at some of the underperforming spend, we pulled back on some of that. And then for the Q4 in a row, we've seen improvement in insurance and claims. And this is really some favorability around some of our actuarial assessments.
So throughout the year, what we've seen is improvements in both the volume of claims and the severity of claims. And those are 2 key contributors to an actuarial valuation to estimate out into the future what you think your costs are going to be. Those are going to come down, albeit slow. So that sort of gets into 2020. We think we're going to continue to see improvements in the areas of labor, of supply sorry, of safety.
Safety, what I just discussed. Labor, we're going to continue to leverage MyDay. We believe we can continue to see improvements there. We have integrations going on in the back office. We've talked about the ERP.
We're going to see second half savings there. And we're also integrating AI and Worldpac. So as we continue to get synergies around that, we'll see savings in SG and A. Now stepping back 2020, as we think about where we're going to see the expansion, we do think we're going to see savings, but we also have a significant amount of investment. Similar to what we guided last year, we're going to continue to have OpEx investment this year in marketing, in people, in supply chain and in IT.
At this point, we think we're going to see more of the improvement in our margin And that's largely driven by 2 factors. 1st is the supply chain. And we've been working on this for a couple of years now and we said it was going to take time, we're going to start to see those improvements in supply chain in 2020. And then the second is category management, which is a combination of MCO, material cost optimization, private label and pricing. And the combination of those items, we really think we're going to see the benefit as we sit here today, more in gross margin and less in SG and A as we take on some of those more in gross margin and less in SG and A as we take on some of those OpEx investments within SG and A.
Okay, great. Thank you for all
the color. Appreciate it. Welcome.
Michael Lasser with UBS. Your line is open.
Good morning. This is Atul Maheshwari on for Michael Lasser. Thanks a lot for taking our questions. First question is on the weather commentary. So why have you factored in the weather impacting only the front half of the year?
Back in 2017, when we kind of had a similar mild winter, I believe it led to subdued sales year. So why would this be any different?
Yes, we didn't actually find that. We did the work category by category, geography by geography. We compared the differences. We did see it in the second quarter, but we did not see an impact in the back half of those years, at least for our sales.
Got it. And that's very helpful. And as my follow-up question, can you talk about the current trends in the Q1? Basically, where are you tracking compared to your flat to 0 flat to 2% comp guidance for the full year? Basically, I'm better trying to understand the degree of acceleration needed in the back half to achieve this guidance?
Yes. We're not going to comment on in quarter performance, but obviously we did say that January was very warm. So, our implied in our guide is acceleration in the back half of the year.
Thank you.
Simeon Gutman with Morgan Stanley. Your line is open.
Hey, guys. This is Michael Kessler on for Simeon. Thanks for taking our questions. First, just wanted to ask about the comp relative to the operating margin growth expectation for 2020. It seems like comp is a fair guide given the backdrop and still guiding to solid margin expansion.
I was wondering how confident are you that you can achieve that given potentially a lower comp with the weather headwinds and how much of the margin expansion, especially on gross margin is really not even dependent on sales growth and you think you can get it regardless of the top line?
Sure. Well, first of all, we're excited about the fact that in the Q4, we delivered margin expansion amid a quarter where we our sales were lower than we expected. So we've always known we've got a tremendous opportunity to expand margins. We've been working on our agenda for a couple of years now. And the 4 big territories that we have for margin expansion, the majority of that upside is not sales dependent.
So if you think about supply chain, we're going to essentially roll out cross banner replenishment, which is nothing more than repointing a store at a distribution center that's closer to the store than the previous one. So that's in full rollout right now. We're standing up a warehouse management system platform that will enable us to standardize our labor management throughout the supply chain. That is not sales dependent. We're integrating Worldpac and AI, as Jeff just mentioned, big opportunity there for us to not only save money, but also to improve our assortment offering and availability to our customers.
But most of the supply chain agenda has nothing to do with any sales dependency. Separately, we're rolling out inside of category management our own brand platform. Jeff has stood up a pricing function. We've got a new pricing platform that we're software tool that we're standing up in the middle of 2020. That will enable us to price at that right down to store level and price regionally, which we can't do today.
So again, not whether that's the whether that's the integration of our back office platforms, improved safety performance, indirect procurement, improving our performance on medical, all of those things are going to happen independent of sales. So I think the key point is, obviously, we want our sales to grow as rapidly as possible and we remain focused on building on our plans there. But our opportunity to expand margins is not as sales dependent as it might be in other companies.
Great. Thanks. Appreciate that color. And just as a follow-up, so we've been hearing that some suppliers are advising some of the major DIY auto distributors that the parts supply out of China could be constrained by what we're seeing with coronavirus. I know you guys are a little less exposed to DIY than some of your competitors, but could you comment at all what you're seeing or hearing thus far and whether there's any contingency you're building in to your guidance for any disruptions?
Yes. Well, first of all, from a business standpoint, to be clear, our guide does not contemplate any impact from the coronavirus. As you said, it's pretty much a level playing field, all of the major players in our industry source from China. But even compared to other industries, auto parts is relatively low. I think we've communicated in the past, at least at Advance, we're in the teens roughly in terms of products sourced from China.
We have several months of inventory depending on the product. We've got obviously our own infrastructure here in the U. S. We've also got a distribution center that has additional inventory in Shanghai. So, we're going to continue to monitor it closely, but at the moment, we don't see any impact in supply disruption from us for us in 2020.
But it's obviously a very dynamic situation and we've got to continue to monitor it very closely.
Great. Thank you.
Seth Basham with Wedbush Securities, your line is open.
Good morning. My question is around your supply chain progress. Clearly, you're making a lot of progress integrating your supply chain. If you could give us some perspective on types of financial benefits and other things that you're realizing from the DCs that you converted thus far? That would be really helpful.
Sure, Seth. I mean, first of all, I'm really excited about what Rubens Fawn and his team are doing inside of supply chain. Again, it's taken us longer than we might have liked, but we're not only improving the effectiveness, the efficiency of the supply chain, the effectiveness is going up as well. And it's as you know, it's one of our biggest opportunities to not only expand margins, but to improve availability. So I think he has really 3 big chapters that they're focused on.
The first is driving execution, where there's been a number of leadership upgrades and a focus on reducing turnover in those DCs, which, we made a lot of progress on in 2019. I believe we'll continue to make progress on in 2020. The second is we call Invest to Make It Better. I covered those a minute ago, but again, that's really changing the physics, if you will, of our supply chain. DC optimization, cross banner replenishment, driving execution through the WMS system.
And I actually was at our first distribution center that we've stood up the new WMS system, very exciting. I mean, as we indicated in our prepared remarks, we've had multiple warehouse management systems, a lot of manual processes and to go to a single warehouse management system across the entire Advanced Carquest network has huge upside for us. It will help us improve our availability and obviously standardize the actions that are going on in those DCs. We talked about Worldpac and AI separately, which is also part of this invest to make it better chapter. And then third, we talk about innovation and in there we've got things like our DC automation projects that we're working on.
So the value of the supply chain productivity agenda is significant. I think we've indicated, it's right there at the top of our opportunities to expand margins. And I'm very confident in our ability to improve within supply chain and not only expand margins as I said, but to improve availability and drive top line growth as a result.
That's really helpful. And just as a follow-up, as you think about the financial benefits from the supply chain initiatives, you expect them to ramp through the year 2020? And similarly, would that mean that gross margin improvement over the year should also ramp?
Yes, I mean, we're now at a point where we expect to leverage supply chain through the year. And I think it's pretty evenly distributed throughout the year in the case of supply chain and in other areas. I mean, Jeff mentioned the coupon investment that we've made inside of Speed Perks. That's mostly a front half investment on the gross margin side of the house. So that'll improve in the back half, but supply chain is relatively uniform through the year.
Thank you very much.
Scott Ciccarelli with RBC. Your line is open.
Hi, good morning. This is actually Gustavo Gonzalez on for Scott. Thanks for taking our questions. So just quick one on, just wanted to know if you can sort of quantify the gross margin impact during the quarter from the coupon redemption?
Yes. What we've said is that it was similar to what we experienced in the 3rd quarter. We're not going to break it out specifically, but think about a comparable number on a rate basis. And so it had comparable impact on our net sales gross margin than we saw in the Q3.
Got it. And then that's helpful. And then anything on just sort of on a go forward basis, you just kind of mentioned it's going to impact the first half year. Is it going to be similar kind of decelerating or to what degree? That would be helpful.
Yes. What we said was that we did obviously the coupons associated with the original Speedworks platform are no longer available. So they're expired. So we're seeing less redemption than we did in the back half of the year. It's still greater than we saw at the beginning of 2019, but it's less on a rate basis.
But we think this is an important investment for us to be making. It gives us we were able to add new members. As we said, we added about 1,000,000 members to Speed Perks. We also are seeing less if you think about attraction, retention and graduation. So, we're attracting new members in about 1,000,000 in the quarter.
We're losing less people. So, our net number is continuing to grow. And then we're graduating people up the tiers and that allows us to personalize and leverage first party data. So very excited about SpeedPerks and its ability to improve our loyalty with our most loyal customers.
Got it. Thanks guys.
Daniel Ambra with Stephens Incorporated. Your line is
open. Hey, good morning guys. Thanks for
taking our questions. Jeff, one for you, starting on MCO, it was a big success, it sounds like in the 4th quarter helped kind of limit the gross margin degradation. I think about a year ago, you guys said you're about 80% through capturing the material cost optimization savings. How far along are we today in terms of capturing those savings? And should that tailwind diminish through 2020?
Or do you have you guys unlocked more
opportunity there? Yes, sure. The material cost optimization is really an iterative process. So we have been through all of our categories. So we're in the process now of going back through certain categories that maybe a year ago we've already been through, but we're looking at all of the various aspects, whether it be cost, whether it be packaging, whether it be supply chain financing, we still think we have a significant opportunity there.
And so, we're going to continue to do that on an ongoing basis. And we're also looking at it at an enterprise level, because when we first started kind of the 1st round AAP CQ was our focus. We're now going back as an enterprise focus to bring in AI and Worldpac. So again, really going to iterate on that. We believe we're going to continue to see benefits to that in 2020 beyond.
Helpful. And then maybe just a follow-up to an earlier question. Tom, I think you mentioned and talked to the cadence of gross margin expansion in 2020. But as we take a step back and think further, when should we see the full run rate savings from the multiple warehouse systems and the new systems there? Is that a first half of twenty twenty one timeframe or kind of when should that be full run rate in the cost?
Yes, I think inside of I mean the different initiatives, right, have different timelines, Daniel. So, in terms of DC Optimization, that's going to spread out over a couple of years, okay. That's 2 to 3 years. In terms of cross banner replenishment, we expect to complete that by the middle of 2021, okay. So that's essentially 18 months out.
We're in the process of appointing stores at a more freight logical location right now. And we're just kind of going through that market by market and we'll realize the full benefit by that timeframe. In terms of the warehouse management system, that's going to take a little bit longer than that. We've obviously got to make sure that we've got everything ready. We're going through that market by market as well.
We stood up one building that's more like 2022, 2023 timeframe. We haven't landed on the final date there. It depends on how quickly we're able to make the transition with these DCs and the training and everything that needs to go there. Worldpac AutoPart International integration early 2021. So you've got a combination of things there.
But as I said, we should leverage we will leverage supply chain this year and next year we expect to leverage supply chain and then get the full benefit. I think you'll see into 2022, you're going to see the full benefit of most of the big initiatives.
Got it. That's helpful. Thanks guys.
Michael Montani with Evercore ISI. Your line is open. Hi.
This is actually Antonio filling in for Mike. I just want to shift gears a little bit to talk about multi channel. So also can you give a breakdown before that, can you give a breakdown of how the DIY consumer is performing? Because I know earlier you mentioned commercial is strong, but also from the walmart.com partnership, are you seeing a meaningful impact to the DIY segment? Thanks.
Yes. First of all, in terms of DIY in isolation, I would take DIY in total. We did improve in the back half of 2019 versus where we were in the front half. We do attribute at least part of that to the launch of SpeedPerks. There's so much upside there yet for us that we're going to really tap into this year based on all the big initiatives that we've put in place that we're still very focused on the improvements there, but we did improve in the back half of the year.
Walmart is not a meaningful number yet and we're continuing to work with the Walmart team. They've been a great partner on this. What we're very focused on is making sure the customer experience is best in class. And as we go through each initiative with them, we've got to ensure that the online experience is working for our DIYer and obviously the fulfillment experience is working well. So we're adding those categories, those SKUs where we feel comfortable with that and they feel comfortable with that.
And when we're ready to launch, we have we've got to make sure that the customer experience is key point.
All right. And just a quick follow-up to that. Is it fair to say that some of that benefit you're seeing there will be realized in 2020 or is this more of a long term initiative that you'll see in 2021, for example?
We'll definitely see some benefit in 2020, but to your point, this is very much a multi year long term partnership with Walmart. And with all the initiatives that we have going on and they have going on, we're making sure the customer experience is best in class. We've got that's kind of at the center of everything we do when we meet together with that team. We're very focused on making sure that the customer experience is where it needs to be. Got it.
Thanks guys.
Brad Jordan with Jefferies. Your line is open.
Hey, good morning, guys. Good morning, Brad.
Could you talk about what you saw from inflation in the 4th quarter and what you're expecting inflation impact on 'twenty to be?
Yes, sure. In terms pricing in place, we saw right around on a like for like SKU about 2.8% and we're modeling for 2020 about 2% from a pricing inflation standpoint.
And that 2% will be skewed to the first half before you lap the tariffs or is that sort of evenly weighted?
Yes. So
that's saying tariff is sort of the same.
Okay. And then a question on DC optimization. As you start rolling some of the cross banner, what do you see the right number of DCs being? If you've got 50 in 3 years, what's that count? And how many of the DCs you see in the future do you currently own or what kind of DC build out might you require?
Yes. First of all, we're not going to provide a specific number there, Brad. Obviously, we've announced these DC closures very thoughtfully. We've got our own people in those buildings. We want to make sure that we do it the right way, etcetera.
So we're not going to break any of that out, but obviously there is a big opportunity for us to further rationalize inside of our network and we do that by looking at the sales and the out years and geographically how can we ensure that we don't have a service challenge. We did close Armonk in New York and repointed stores at relevant DCs and that's gone very smoothly. So we've now I think we're up to 4 in total that we've closed to date and we've got it down. So it's just a matter of phasing that out over time. So, you'll hear more about that when we have something to say and we've had a chance to speak to our people first.
In terms of owned yes, I don't know if Jeff's on yes, we'll have to get back to you on that on owned versus lease. I mean, we'll get back to you on that. We have The question is more
what's in the portfolio? Are there if you see a 30 DC network in 3 years, are there DCs that you're going to need to build out? Or do you have most of what you need to rationalize your distribution?
We do feel we have most of what we need. Keep in mind, we also have Worldpac out there in places like California. So as Bob starts to integrate the assortment across all the banners, we look at all of the assets of the company. So it's not just red and blue, if you will.
Thank you.
There are
no further questions at this time. I would now like to turn the call back over to the presenters for closing remarks.
Well, thanks to everyone for joining us this morning. 2019 was an important year in our journey. And as you heard this morning, we're making progress toward our long term objectives, including consistent gradual improvements to enable meaningful top line growth, margin expansion and strong cash generation. I'm confident in our team's ability to deliver further progress in 2020 beyond. Thanks for joining.
This concludes today's conference call. We thank you for your participation. You may now disconnect.