Welcome to the Advanced Auto Parts 4th Quarter 2017 Conference Call. Before we begin, Elizabeth Eisleben will make a brief statement concerning forward looking statements that will be made on this call.
Good morning and thank you for joining us on today's call to discuss our Q4 and full year 2017 results. I'm joined this morning by Tom Greco, our President and Chief Executive Officer Tom Ocray, our Executive Vice President and Chief Financial Officer Bob Cushing, our Executive Vice President of Professional Mike Broderick, our Executive Vice President, Merchandising, Inventory, Replenishment and Store Operations and Provakar Badyyanathan, our Vice President, Treasury and Investor Relations. 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 are not historical facts and may be deemed forward looking statements as defined by the SEC's 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 accompanying financial statements issued today for important information and additional detail regarding both the forward looking statements and the reconciliation of non GAAP financial measures referenced in today's call. The content of this earnings 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, Elizabeth, and good morning, everyone. I'll begin my remarks by thanking the entire AAP team and network of Carquest Independent for their unrelenting focus throughout the 1st full year of our 5 year plan. In 2017, we implemented important building blocks to capture the substantial opportunity ahead. In doing so, we made progress against our long term strategic objectives amidst a challenging environment for the industry. In addition, we narrowed the competitive growth gap on a full year basis and delivered significant cash flow improvement.
Specifically, total revenue was down 2.2% and comp sales were down 2.6% in Q4. While we're far from happy with this sales outcome, it was ahead of our guidance, which considered the difficult comparison of our positive 3.1% comp in Q4 2016. Our top line performance was a result of improving execution throughout the quarter and a better than expected December, resulting in a 2 year stack of positive 0.5% in the quarter. Our adjusted operating income margin was 5.6 percent and our adjusted earnings per share was $0.77 Rounding out the financials, our continued focus on working capital resulted in free cash flow growth of 56% on a full year basis to $411,000,000 Our cash position is the best it's been since the 2014 acquisition. Throughout 2017, we put the foundation in place to enable our transformation.
Delighting our customers and empowering our frontline team members remains at the center of everything we do, which will ultimately drive market share gains and significant margin expansion. In terms of sales in the Q4, we continue to see top line strength in certain businesses and regions. The Worldpac business achieved top line growth above the industry average, and our Canadian business continued to perform very well. In both corporate and independent U. S.
Stores, our 1 2 year stack performance improved compared to Q3. From a category perspective, we saw above average growth in battery sales as well as increased demand for wipers and lighting. These improvements were partially offset by softness in undercar and cooling categories. We expect these trends to carry forward into the Q1 of the year as the Q1 started off with colder weather in key geographies driving winter related demand. Turning to the bottom line in Q4, we realized savings from productivity, including material cost optimization, which benefited gross profit.
In addition, we saw positive impacts from 0 based budgeting within SG and A as we delivered cost savings and lower third party fees compared to the previous year. Finally, we remain laser focused on cash flow and reduced inventory for the 3rd consecutive quarter by $51,000,000 in Q4, with a total reduction of $157,000,000 in 2017. Tom Ocray will elaborate further on our financial performance shortly. While we're pleased we closed Q4 by exceeding our guidance across the board, we fully recognize a great deal of work remains to fully capture the tremendous opportunity ahead. Now I'd like to review the transformation actions we took in 2017 and what you can expect from these initiatives in 2018.
Throughout 2017, we made important investments to strengthen our core value proposition. We made investments in the customer and in technology. We also made investments in our people, investments in our frontline team members as well as team members in our customer support center. We're confident that the investments we made last year set us up for long term growth. A major accomplishment we announced late in Q4 was a strategic partnership with Interstate Batteries, the undisputed market leader in batteries for professional installers.
In terms of DIY, AAP will be the only retailer in the nation carrying a complete lineup of Interstate batteries in store and online. This unique partnership creates a powerful combination of Interstate's R and D and brand recognition with our substantial fulfillment capabilities combined with our store and frontline assets. The Interstate relationship reinforces the importance of brands and suppliers to our transformation. We want to provide the very best market leading brands at great prices. In addition, our supplier base is critical to our success.
We continue to work closely with our highly valued suppliers to find additional partnerships that drive benefits for both parties. Moving to an update on key initiatives within our long term plan. I'll start with professional. In Q4, we continued our availability transformation rollout and ended the year with roughly 1,000 stores completed. We're also implementing other proven initiatives to enhance our professional value proposition in all stores.
This includes cross banner visibility, a critical step in increasing availability, which is expected to be complete in Q1. As a reminder, we believe AAP has the strongest lineup of professional brands in the market and cross banner visibility enables both professional customers and all Advance, Carquest and Worldpac team members to see a broader range of inventory across the enterprise and place their order from 1 platform. The ability to see the entire inventory and portfolio of brands available in market regardless of banner enables us to serve customers faster and more efficiently. Most importantly, it enables us to say yes more often. Related to cross banner, we implemented Advance Pro, our e commerce engine for professional customers and approximately 12,000 professional customers in 2017, including 4,000 converted in the 4th quarter.
Advance Pro allows our professional customers to fully access our common catalog and we plan to double the number of customers utilizing this platform in 2018. In terms of DIY, we're improving the in store experience for our customers. Our team members are now leveraging a standardized approach to customer engagement and selling. We're providing increased training to frontline team members, enabling better execution. In addition, we continue to improve the quality of our online experience through the launch of our new website in mid-twenty 17.
We added to our online SKU assortment, made search much easier and in providing a faster and more frictionless online experience. As a result of our omnichannel focus, our DIY performance strengthened in Q4 and we exited 2017 with momentum in DIY. Next, we've been working on strengthening and streamlining our supply chain from end to end. Our first priority is to improve baseline execution. We remain focused on a limited number of KPIs in our supply chain.
While we've made progress on fill rate, close rate and store in stock rate, significant upside remains. In 2018, we expect to see further improvements in each of these metrics, along with order to delivery time and consistency, safety and cost. We'll also begin moving forward in 2018 with our longer term supply chain transformation roadmap. We're taking the necessary steps to validate key elements of our plans this year with meaningful benefits to come in the future. In terms of optimization, our supply chain can be streamlined to better meet the future needs of our customers.
Our supply chain strategy is about differentiation, improving the customer experience and structural cost reduction. The 3 key elements of our strategy include: 1st, a market by market approach to drive share secondly, the repurposing of our in market store and asset base and third, the optimization of our distribution centers. In the future, we anticipate markets across North America will have significant differences in how customers shop for Auto Parts, requiring a market by market approach to drive share. Some of the variables we consider include the outlook for professional versus DIY, online versus in store sales and buy online ship to home versus buy online pickup in store. To optimize our in market store base, we've also evaluated the entirety of our assets market by market.
This includes Advanced Stores, Advanced Hubs, Advanced Super Hubs, Carquest Corporate and Independent Stores, AutoPart International Stores and Worldpac Branches. Our goal is to strengthen our customer value proposition, while simplifying our current asset base. In some DMAs, we see opportunities to reduce our store base where we have underperforming stores. While stores remain very important to our long term success, when you have more than 5,000, not all stores have the potential to perform at the level we expect. In those situations, we're adopting a very surgical approach to reducing our store base.
Bottom line, we will close stores when it's clear the decision will drive long term cash flow. We're approaching store closures very differently than we have in the past. This includes a much more robust process to transfer sales to other AAP outlets and most importantly, an approach that ensures we retain our top performing team members. In some markets across North America, our store presence is limited. In these markets, we intend to accelerate Worldpac branch openings to drive professional growth, while investing in marketing, online and digital to drive DIY.
Regardless of the inherent differences in each market, our objective is consistent, strengthen our customer value proposition and gain market share. In terms of distribution centers, we currently have 54 across North America. In many cases, we ship parts from multiple DCs to the same city, demonstrating there's a significant productivity opportunity. Our plans to optimize the AAP DC network include some initiatives that are relatively easy to implement. Others are more difficult, requiring technology unlocks currently in progress.
We begin this journey in 2018, capturing some early wins while testing a more comprehensive solution with the potential to significantly improve in market availability and substantially reduce costs. When we say streamline our supply chain from end to end, we'll bring each of these three initiatives together. 1st, a market expansion strategy that puts the customer first and considers the future shape of demand and our existing asset base market by market. 2nd, an in market network that optimizes stores to drive ROIC and free cash flow. And 3rd, a DC network that is integrated and better leveraged at end state.
Allow me to briefly touch on new stores. Given our underperformance in company owned Advance and Carquest stores over the past few years, we see an opportunity to improve execution through increased focus. As a result, we don't want to distract our field leaders with new stores until we grow the comp sales of existing stores. This is not to say we won't open new Advance and Carquest stores in the future. It simply says we're laser focused on execution in existing stores and strengthening the Advance and Carquest brands.
Once we're growing comp sales in existing Advance and Carquest owned stores, we will open new stores again. Most importantly, we remain focused on growth, gaining market share and driving improved performance. We're making growth related investments in 2018. In terms of CapEx, we're investing in technology and additional Worldpac branches. In terms of OpEx, we're continuing to invest in online, digital and our frontline team members to drive growth.
And as I mentioned, we're bringing Interstate Batteries to our stores, where we will be the only nationwide retailer with the extensive Interstate lineup available. In summary, we're pleased with how we finished 2017. In 2018, we expect to further narrow the competitive growth gap and deliver margin expansion. We remain focused on cash and our inventory optimization efforts. We're highly confident 2018 will be a year of improved performance.
With that, I'll turn it over to Tom Ocray for a review of our financials and 2018 outlook.
Thanks, Tom, and good morning, everyone. I will begin with the operational performance of the business and specific impacts on our margin results. In the Q4, gross profit was $874,000,000 On a rate basis, our gross profit margin of 42.9 percent was 69 basis points lower than the prior year quarter of 43.6%. The primary driver of our gross margin contraction was increased supply chain costs, which reduced our margins by 89 basis points. While the biggest driver of our increased supply chain cost was a result of new DCs, which were approved prior to the commencement of our end to end supply chain work, we also have an execution opportunity here, as Tom mentioned.
In addition, the non cash impact of our inventory optimization efforts negatively impacted our gross margin by 20 basis points. These increased costs were partially offset by continued material cost improvement and a reduction in defectives, which combined improved 42 basis points compared to the Q4 of 2016. Adjusted SG and A was $760,000,000 in Q4, a decrease of $22,000,000 as compared to the prior year Q4. This was $38,000,000 lower versus our adjusted SG and A in the Q2 of 2017, exceeding our objective of lowering adjusted SG and A by $25,000,000 versus the Q2 of 2017. As a percentage of net sales, our 4th quarter adjusted SG and A improved 24 basis points from 37.5 percent to 37.3%.
Continued progress in expense management during the quarter, including labor, third party fee reductions and other improvements in utility, maintenance and repair costs were partially offset by higher medical costs and insurance. Turning to adjusted operating income. We delivered adjusted operating income of $114,000,000 in the 4th quarter and adjusted operating margins of 5.6 percent, 45 basis points lower than the prior year, which were impacted by the gross profit and adjusted SG and A levers we described above. The impact of the tax reform signed into law in December will have a significant impact on our income and effective tax rates. As a result of changes in the law that reduces the federal corporate tax rate from 35% to 21%, we were required to revalue our deferred tax liabilities in Q4 at the new lower rate of 21%.
This drove a onetime non cash tax benefit of $144,000,000 and was the primary driver of our 4th quarter effective tax rate, which is a benefit of approximately 149 percent or $1.94 increase to our diluted EPS. Due to the one time nature of the non cash tax benefit, we excluded this impact in our adjusted net income and EPS calculations. In 2017, our effective tax rate with tax reform was 8.6%. In 2018, we expect our income tax rate to be between 24% 26%. Turning to cash flow and to echo what Tom discussed earlier, we are very pleased with the strength of our free cash flow in 2017.
Our full year 2017 free cash flow was $411,000,000 a 56% increase as compared to prior year. We have put a tremendous amount of focus into managing our cash that simply did not exist in the past. This includes new working capital management and CapEx policies implemented over the past 12 months. We will be relentless on selecting profitable investments, protecting the long term health and viability of the company and maximizing the returns to the business. Now I'd like to wrap up our discussion with an overview of our expectations for 2018.
With respect to Q1, we expect to deliver OI margin expansion both as compared to Q4 and on a year over year basis. Based on the current trends we are seeing across our business, we estimate flat to 25 basis points of adjusted OI margin improvement for the Q1 compared to the same quarter in the prior year. For the 2018 full year, we expect to deliver net sales of $9,100,000,000 to $9,400,000,000 with comparable store sales in the range of negative 2% to 0%. We expect adjusted operating margins to increase between 0 to 50 basis points for the year. We estimate our 2018 capital spending will be $200,000,000 to $250,000,000 Leveraging our efficient deployment of capital allows us to maintain our historical level of capital spending, while increasing our investment in technology, e commerce and our people.
In line with our continuing transformation agenda, we estimate integration and transformation expenses of $140,000,000 to $180,000,000 in 2018. The increase versus the prior year is primarily related to optimizing our supply chain footprint. Following the December 2017 tax reform, we estimate an effective tax rate between 24% 26% in 2018. Further, we estimate this change will result in $70,000,000 of incremental cash flow and increased EPS by $0.90 This incremental cash flow from the tax reform provides additional operating flexibility. However, it did not change our investment strategy or annual operating plan that was finalized in November ahead of the passage of tax reform.
Our 2018 plan includes increases in technology and e commerce in addition to continued investment in our people. We remain focused on delivering free cash flow and expect to deliver at least $400,000,000 of free cash flow in 2018. The primary drivers of the $400,000,000 when compared to our fiscal year 2017 free cash flow result are incremental cash flow related to the lower tax rate and continued improvement in working capital, offset by higher capital spending, expenses related to our supply chain footprint optimization and the 2017 non recurring benefits related to the sale of our aircraft and vehicles. In summary, we are pleased with the traction and positive momentum we achieved this past year, but want to be very clear, we still have a lot of work ahead of us. Our entire team continues to work hard every day to drive further improvements, and we are confident that we will deliver against our 2018 objectives.
We remain optimistic about the opportunities ahead and look forward to discussing our continued progress throughout the year. With that, let's open it up to addressing your questions. Operator?
Thank you, sir. And our first question will come from the line of Seth Sigman with Credit Suisse. Your line is now open.
Thanks a lot. Good morning. Nice to see the progress guys. Just quickly on the DIY improvement that you cited, Tom. So I think you attribute some of that improvement to enhancements you made to the online offering.
Can you elaborate on that a little bit more? Was that direct to consumer or is that buy online, pick up in store? And I guess just overall, what does it tell you about the importance of online in the category?
Well, first of all, we definitely made some progress on our website, Seth, in the back half of the year. We are focused on just improving the experience overall and making it more frictionless. So reducing page load times, reducing the number of clicks to get out. We tried to align our entire organization around the online offering, so that we're actually compensating our general managers for buy online, pickup in store and buy online, ship to home. So everybody is really aligned around making the omnichannel experience better.
So we're continuing to elevate the focus of people often over half of the time start to search for auto parts on a mobile device. So we've just got to be out in front of that and you're going to continue to see us make investments in technology and the omnichannel experience to drive that. And that helped our DIY business. It was one of our best quarters on DIY for a while. We did benefit I think a little bit from the storm related activity that was throughout the Southeast and in Texas.
That drives DIY. It actually hurts professional, but it drives DIY. But that was kind of the story of the Q4.
Okay. That's really helpful. And then just a quick follow-up on the cash flow, obviously, significant improvement this past year. Just based on the guidance, I mean, you guys will have close to $1,000,000,000 in cash at the end of 2018. How are you thinking about deploying that at this point?
Is there an opportunity to possibly resume buying back stock here? Thanks.
Yes. Thanks, Seth. We're staying true to what we've said in the past. We want to get back our leverage ratio to 2.5. We're at 2.9 now.
We want to get back to 2.5. 2nd priority is invest in the business, a lot of opportunity there. And then the third one is return to shareholders with buybacks. Right now, we don't have anything on the radar screen for this year in terms of buybacks.
Okay. Thanks. Good luck.
Thank you. Thanks.
Thank you. And our next question will come from the line of Michael Lasser with UBS. Your line is now open.
Good morning. Thanks a lot for taking my question. My first question is on how you thought about creating your top line guidance for the upcoming year. Others are kind of indicating they think the industry is going to grow 2% to 4%. We take the midpoint of your flat to down to comp guidance would suggest that there's not going to be much narrowing of the performance gap versus others.
So did you just take a lot of conservatism in your outlook for your comp for the upcoming year?
Well, good morning, Mike. I'll certainly understand your question. Let me give you some perspective on this one. In terms of sales, we absolutely believe 2018 is going to be a stronger year for the industry and for Advance for a couple of reasons. First of all, from an industry standpoint, the dynamics are all positive.
GDP, vehicle miles driven, sweet spot, car park, finally a cold winter, which we benefit from with a lot of stores in the Northeast and North Central. And when you look at ourselves, the big changes that we had to make as part of this transformation are behind us. When you think about the field restructure we executed last year and the professional sales organization, these were big changes to big things and they were very distracting. So there's no question that we'll be more focused this year on our execution of our plan. The big initiatives that we have are starting to have an impact as well, whether that's cross banner visibility, availability transformation, our omnichannel work.
And then we did finish the year with our best 2 year stack in a long time and narrowed the gap significantly both on a full year and Q4 basis. All of that said, it's very early in the year and we need to be prudent. We have a large cost base that over time we're addressing in a way that's thoughtful and doesn't impact the customer. And for 2018, we've built our cost base to match that sales guide. So be assured everybody at AAP is focused on exceeding the sales and profit numbers we've guided to.
And in the event that we do that, it'll be a tremendous year for us. And we think this is the right approach for 2018.
My follow-up question, Tom, is can you give us a sense My follow-up question, Tom, is can you give us a sense for how the margin integration expenses are going to flow from here over the next few years? Are you at the point where 2018 will be the peak integration expense year and after this you'll be able to make substantial progress to your long term operating margin expectations?
Yes, Michael, I'll take that one. I think you were going to below the line costs are going to come down over time. They were roughly $24,000,000 in 2017,000,000 will come down more in 2018. Our amortization related to GPI is going to stay roughly steady at about 40%. But what you will see over the next couple of years going forward is an increase in our transformation expenses as we really start to double down on our supply chain footprint optimization.
Okay. Thank you so much and good luck with the rest of the year.
Thank you.
Thank you. Our next question will come from the line of Simon Gutman with Morgan Stanley. Your line is now open.
Good morning, guys. First question is related to Q4. This is not it's maybe hard to do, Tom, but how much was the better trend the result of weather versus how much can you isolate to execution and operational improvements?
Yes. I mean, we obviously look at it every single week, Simeon. We look at our input metrics that really define what ends up happening on the output side. And given the changes we made in the Q3, which I'd say the peak of that disruption was around period 7, period 8. As we looked at period 9, 10, 11, 12, each one we started to improve, whether that was in stock, fill rate, greeting the customer, the things that we're measuring on a routine basis.
So I would attribute more of the improvement to execution. The weather was I think you've heard from others October, November was favorable. We had a good October November. December we expected was going to be tough. It got better as we closed the year and obviously that continued into the 1st period of this year.
But overall, December was not a good year over year lap. It was an excellent 2 year performance, but it was not a good 1 year performance.
Okay. And my follow-up has 2 parts. The first part is on the guidance for 2018, in particular the EBIT margin range. Is that solely tethered to the comp range? Or is there a potential upside coming from margin items, meaning there's some cost reduction and or margin enhancement that could occur irrespective of how comps play out?
And then just as a small part of that, can you just comment on why the CapEx is about $60,000,000 south of where you were, I think, prior to I think for this year, why is it $60,000,000 light versus guidance? Okay.
Well, maybe I'll take the margin. I'll flip the CapEx question over to Tom. We're really excited about the fact that we're going to expand margins this year. We're starting to see the productivity agenda kick in. The areas that we've discussed in the past are starting to really impact our P and L, the material cost optimization, helping us on the gross margin line.
The supply chain productivity agenda is helping us. And then 0 based budgeting is really becoming pervasive throughout the company. And that's enabled us last year to make investments in the area of the businesses that we think we need for the long term. And we referenced that in the prepared remarks, technology and marketing, customer service and in people. So yes, we've engineered our cost structure to match that sales guide to the extent we can beat that sales guide.
There's going to be some upside overall. But we want to make sure that we're being thoughtful about how we run the business and we've engineered the cost structure accordingly. So the productivity agenda we have for 2018 is robust. It's about it's slightly bigger than we had last year, but it's in the same areas of material cost supply chain and zero based budgeting. Tom, you want to talk CapEx?
Yes. With respect to CapEx, we've just become much more cash focused within the company. I think I've mentioned on previous calls, we've got a cash council that meets twice a month. We've got actually got an organization now in terms of a capital department that we didn't have in the past. We're not happy with the 13 ROIC.
We want to have industry leading ROIC. And so we've just really raised the bar on our capital projects. We're just being much more rigorous in terms of what gets through and what gets spent. We've got target for each category of capital spend. So the decrease from 2016 is really just a higher bar for approval.
Thank you.
Thank you. And our next question will come from the line of Seth Basham with Wedbush Securities. Your line is now open.
Thanks a lot and good morning.
Good morning.
My first question is on the margin guidance for 2018. For the Q1, you're guiding to 0 to 25 basis points improvement, but for the full year, 0 to 30 basis points. It seems like you had the easiest comparison in the Q1. Why would you see a more limited improvement in the Q1 relative to the balance of the year?
Yes, good question. It goes back to what Tom talked about for the overall guidance. We're just really trying to be prudent with the guidance in the Q1 as well as for the overall year. We like the gross margin that we see in the Q1. It's still early in terms of sales.
Depending on how the sales growth goes, then that will dictate what the overall bottom line margin will be and how much we lever in terms of SG and A.
Got it. Helpful. And my second question is related to the supply chain transformation that you guys are undertaking. Can you provide a little bit more color on the initial steps you're taking in 2018, the easy wins versus the bigger wins and what you're doing to pilot some of those more comprehensive changes?
Sure, Seth. So first of all, when we talk supply chain, think of it as end to end. So really all the way from the distribution centers to the stores. So I'll speak to those separately. In terms of the distribution centers, first of all, we feel great about the amount of planning and rigor that's gone into our long term transformation plan on supply chain.
We're very committed to optimizing our network, while strengthening the customer proposition. That's very, very important to us. In terms of distribution centers, we mentioned in prepared remarks, we've got 54 DCs. There's an opportunity for optimization there. These DC plans are very sensitive, as you can appreciate, for both competitive and internal reasons.
So we're not prepared to share specifics on what we're doing there at this time. At the appropriate time, we'll share more details on the DCs themselves. As it pertains to the stores, the stores are inextricably linked to the supply chain work we're doing on the DCs, obviously. So what we've done is we've taken a market outlook literally DMA by DMA in the tri state area. What do we expect in terms of auto parts sales over the next several years?
How much is going to be pro versus DIY? How much is DIY online versus DIY shipped to home, etcetera. So every market in the country we've done that work. And then we overlay the entirety of our asset base in each DMA. So in the case of the tri state area, we'd have obviously advanced stores.
We have Carquest stores, we have Carquest independence, we have AutoPart International stores, Worldpac, all of those assets we look at in the market. And then we're taking a very surgical approach to optimization. So in the case of an asset we have in that market, a store, for example, if we don't feel that store can achieve the desired greater return, we're going to close that store. And we're extremely confident in terms of the effort we put into this that when we close a store, it will be very good for the company's cash flow over time. But the one thing I would add is we're going to close the stores very differently than we have in the past.
Obviously, we've gone through this before. It's a much more thoughtful approach. We have to figure out how to retain the professional business when we close those stores. And most importantly, how do we retain our top people. So the overall work that we've done here is significant and we start to take our first steps on it in 2018 and we're very excited about the long term prospects to drive margin expansion and market share associated with it.
Thank you and good luck.
Thank you. And our next question will come from the line of Greg Melich with MoffettNathanson. Your line is now open.
Hi, thanks. I had a couple of questions. One on the integration costs and then understanding the working capital a little better. On the integration, if we take out the amortization, it seems to have been running around 70 something million in the last few years. And Tom, I think I got it from your earlier comments that that's the step up to basically 100 to 140.
So could you help us understand why that part of it's going up so much once we take out the amortization, what it's going on? And if that new run rate of 2018 looks more like a peakish number or is it building to something larger once we get supply chain done over the next couple of years? And I have a follow-up on
working capital.
It's all related to the question that Tom just answered. We're going to be very surgical in terms of how we look at our supply chain optimization, making sure that the stores and the DCs pay their way. So that's the main reason for the increase.
And so whether it's $100,000,000 or $140,000,000 is a function of like sort of the timing and if it ended up being $100,000,000 then we would expect the difference in the next year? Or how do we do we think of that as a new normal? Or is this a year that we're going to be spending more on it than typical?
I think we'll see it at the current levels for the next few years as we undergo the supply chain transformation.
Perfect. And then on inventory, a nice reduction last year, is that a number of improvement year over year that we should think about going forward? In other words, can we get under $4,000,000,000 of inventory? Should we expect another $150,000,000 out? And also the AP ratio as that plays out, how should we think about that?
Yes, that's a great question. We took out year over year $157,000,000 in inventory, whereas the prior year we grew $151,000,000 So for a net decrease of over 300,000,000 dollars We would expect in 2018 a similar level of decrease year over year. If I look at the AP ratio, we're at 69.5 round to 70. We've got certain barriers there to getting to our high 90s target. One of it is just structural.
That's related to our supply chain. We've got 5 different supply chains as we've talked about. It just requires us to have duplicative inventory into the system. And that's something that's going to stay until we get at this transformation we've been talking about. The other issue, we've got lower purchases as we start out with this inventory drawdown.
That's going to catch up in the back half of the year and provide some tailwinds to our AP ratio. And then the third thing, we've been very maniacal on cash flow. So what we've been doing is we've been netting receivables to accounts payable with our vendors. So that will also normalize over time. So we still stay committed to the high 90s AP ratio.
We also think that we're going to have a similar level of reduction in inventory this year as compared to last year.
That's great. And if I could one follow-up for Tom. It sounds like the Interstate deal is a pretty interesting and unique one. And are you how are you thinking about that beyond in other categories and sort of partnering and using somewhat a vendor's brand more exclusively and more broadly? Are there other areas that you think could really help enhance, so I'm just actually thinking Worldpac, now with Bob looking at the entire commercial side, are there other areas or categories that look interesting to you to do something like that?
There definitely are. And we're not going to get into specifics here, Greg. But the whole point about brands and the importance of brands to our customers, all the work we've done lead us to believe that brands are extremely important, not just to our DIY customers, even more so on the professional side. So how do we partner with our suppliers? Our suppliers are critically important to this transformation.
How do we partner with them to really lift up their brands, work together to find relationships where you can literally make 1 +1equal3. And that's what we think we've done with Interstate. Obviously, they bring great R and D and brand to the category. They're the number one battery amongst the professional installers. And we have a large footprint and 74,000 passionate team members and 1500 independents that love to sell auto parts.
And you put that together, it's a pretty powerful combination. So we do think there's more of those out there and we're working actively with our supplier community right now to find more.
That's great. Good luck.
Thank you.
Thank you. And our next question will come from the line of Scot Ciccarelli with RBC Capital Markets. Your line is now open.
Hey, guys. Scot Ciccarelli. So over the last 2 years or so, early on you guys had a pretty big spike in SG and A dollars, but SG and A spending and SG and A on a per store basis seems to have improved pretty significantly over the last two quarters. Now, I know, Tom, you talked about you're building your expense plan to the sales outlook you just provided. But when you think about your outlook for 'eighteen, how are you guys thinking about SG and A growth on a per store basis?
And related to that, should we expect much of a net change at all in terms of total stores given your store commentary from earlier? Thanks.
Well, maybe I'll take the first one on total stores. Again, we want to be clear on the AAPCQ side. If you look at what we've done previously 2015, 2016, 2017, we opened up what I would describe as conventional stores, Scott, anywhere from 70 to 100, 7,500 square foot boxes that had DIY and professional in them. And at this stage, we want to make sure that our field team is laser focused on executing in existing stores and making sure we're driving the comp sales in existing stores and our team is very focused on that. We're excited about the prospect of moving the comp sales of our existing stores up.
In terms of adding new stores, the primary effort there in 2018 is going to be Worldpac. So we've got some markets where we're opening up Worldpac branches and this is all part of the end to end supply chain strategy to really go to market a little bit differently than we have in the past and take advantage of the growth we see coming in professional with a model that works very well. Tom, do you want to?
Yes. In terms of the absolute level of SG and A going forward, we feel comfortable with the levels we're at now. And obviously, there'll be some repositioning going on. We'll continue to invest in labor. We're still building the leadership team below Tom's direct leadership team.
That will have payoffs in the future as we've described in the past. We're front loading, for example, in the finance organization till we get our new ERP system in and then we'll be able to take out costs in the back end. We're also going to invest in e commerce and marketing and we'll have some headwinds related to depreciation as our investments are more e commerce related. Having said that, we feel really good about the progress that we're doing in terms of ZBB, really turning over every stone. So we think we're going to offset those increases as we go forward.
Bottom line, as it relates to SG and A levering, it's going to come back to the top line and the comp growth.
But just to be clear, Tom, so you're when you said comfortable with the level we're at, you're talking total SG and A dollars kind of flattish in 2018 versus 2017?
Correct.
All
right. Very helpful. Thanks, guys. Thanks.
Thank you. And our next question will come from the line of Dan Weaver with Raymond James. Your line is now open.
Thanks. I wanted to ask about the adjusted debt to EBITDAR. It looks like it's been unchanged at 2.9 turns for about 3 quarters. What kind of conversations are you having with the rating agencies in terms of a time line that they would like to see for that to return to the 2.5 threshold? And then also curious with the cash flow benefits from tax reform that happens below the EBITDA rate.
So in your conversation with the rating agencies, are they thinking about looking at that metric differently to include that unexpected cash flow benefit from the lower tax rate?
Well, S and P already includes cash flow in terms of how they look at their ratings. To your specific question though, we have regular conversations with the rating agencies. I won't comment on their behalf, but we're very happy with the cash flow that we've generated, free cash flow up 56%. We think that that's attractive to both equity and debt investors. But yes, we've had great conversations with both S&P and Moody's.
So there's not an expectation and there's not a time line as to when that needs to return to the 2.5 threshold?
No time line that they've given us, no.
I guess, again, a separate question. You talked about the 2 new distribution centers and the pressure that's putting on your gross margin rate. Were those the facilities that opened in Nashville and in Houston? And I'm a bit confused, those opened before you joined the or those were in the process of opening before you guys joined. And so they really don't fit with the long term supply chain outlook.
Is that correct?
What we said, Dan, was that they opened before we completed the end to end supply chain work. And that's they did they were approved in mid-twenty 16. I mean, it takes a while to approve these. Obviously, you're talking about long term. This is a 500,000 square foot building.
So they were approved relatively shortly after I joined, certainly before Tom joined. But I was here. We approved them. We just hadn't done the end to end supply chain work.
And so this is going to be an overhang on the gross margin rate for probably another 2 or 3 quarters?
Yes. It will be for a couple of quarters, which really makes our results in Q4 from gross margin, I think, all the more interesting. I mean, we had a big headwind from the supply chain. We also had a headwind from the inventory optimization. We really had great performance on our material cost optimization and defectives, good working relationship with our vendor partners.
Another headwind was trade. That will get turning the other way when we start seeing the growth in comps going. So we're happy with where we're positioned in gross profit, but you're right, for the next couple of quarters, we will see headwinds related to the DCs in the supply chain area.
Okay. Thank you.
Thank you. And our next question will come from the line of Chris Bottiglieri with Wolfe Research. Your line is now open.
Thank you. This is a couple of questions. I guess just to start, piecing together a bit of what you said on the call today, I was wondering if you could update us on the $750,000,000 cost takeouts, kind of how far you are on that gross number by the end of 2018? As we think about comp deleverage, the ability to offset that wage inflation that everyone's seeing, your new DCs that Dan just referenced, the increased investments you're making on finance and e comm, supply chain headwinds near term and then the margin improvement embedded in your guidance, Kind of sounds like a real lot. So I'd imagine that's something north of $100,000,000 Just want to get your perspective on kind of where you are in those gross takeouts?
Yes. Well, first of all, we're on track for the $750,000,000 That was gross productivity that we communicated and when we'll hit that number in the timeframe we committed, we're making real progress on taking out cost in each of the areas that we talked about. Everything that you just referenced is included in the guide. Obviously, we knew about the DCs. We've been investing in our frontline really since the tail end of 2016.
You think about some of the challenges we faced back then, our turnover in the key positions was really off the charts. General managers, commercial parts pros, customer account managers, DMs. And we introduced essentially a stock ownership program that we call fuel the frontline. And that was a pretty big investment for us in 2017 that carries forward into 2018. We literally gave out stock awards, performance based stock awards to 1,000 of our frontline team members.
And that really helps us with this wage inflation issue that you referenced. I can tell you that our turnover in 2017 in each of those jobs was down significantly. And we remain focused on getting the very best parts people in the business to come and work at Advance. And this has been a key lever for us to go do that. So we're very mindful of making sure that we're investing in our people and that's fully included in the guide.
Got you. Okay. Then one related, So it sounds like the 20 basis points of pressure from, we'll call, supply chain cost, it sounds like unfortunately inherited those costs before you took over. You were originally looking for 100 basis points of pressure that fell to about 20 basis points in the back half. As you kind of cut inventory costs, how do you think about I know it's non cash, but how do you think about the level of those margin headwinds in 2018?
Yes. For you're talking to the inventory optimization, Chris?
Yes, exactly. The previously capitalized supply chain costs as you kind of cut through inventory, you incur those?
Yes. Expect that to be approximately flat going forward for 2018. So the headwind should size in 2018.
Got you.
Okay. Thank you, Bill. I'll add Chris that this is a big opportunity for us. I think we learned a lot last year and we're happy that we got to be able to get it down by $157,000,000 There's more opportunity there. We're going to do it smart though and we do it in a way that doesn't impact the customer.
So it's a very important driver of cash flow for us. So we're very focused on. And as Tom said, this cash council that I attend every other week is really driving the focus on all elements of working capital and cash flow metrics. So we feel very good about our ability to continue to drive cash flow.
Yes. We fully recognize that our inventory velocity is not where it needs to be. But back to your question, on a year over year basis, we should be basically flat.
Okay. That's great. Thank you for the help. Appreciate it.
Thank you. And our next question will come from the line of Bret Jordan with Jefferies. Your line is now open.
Hey, good morning guys. Hey, Bret. Good morning.
On the integrating the DC network subject, I guess is the software in place? I mean you were rewriting the APAC software. Do you have the systems finished now where you can start consolidating the supply chain?
They're not finished. We continue to work them, Brett. We've we're taking this one step at a time, but it's very much underway. The technology work to get that enabled is underway.
Do you have a feeling for timing on that?
We're not communicating that at this point, but we do have a feeling for it. We're continuing to work through it. Okay. And then I guess
the second question would be, if you looked at your collection of distribution centers, the 54 that you have and you think about where you need to be in a couple of years as far as consolidating that, do you think you have the assets today where you can just sort of cull the herd or do you have to build out incremental distribution infrastructure to fill out the gaps?
That's part of the validation work that we have this year. Certainly, we've got more assets than we need, okay? But I get your point, are there additional things that we need to do? I think there are parts of the country where our footprint is relatively light. And by the way, they happen to be very growing parts of the country that we are thinking through.
But overall, we have more than we need, whether or not we have to add some back in certain areas is something we're validating.
Okay, great. Thank you.
Thank you.
Thank you. Our next question will come from the line of Alan Rifkin with BTIG. Your line is now open.
Thank you very much for taking my question. So 2018 is going to represent the 5th year post the acquisition and admittedly Tom you've only been there a little less than 2 years. But as we look at the integration and transformation expenses forecasted for 2018, they're materially higher than what we saw in 2017. I guess my first question is,
do you
have a rough idea when these integration expenses will cease? And the $140,000,000 to $180,000,000 in expenses, approximately how many stores and or DCs might that include?
Yes. So again, let me unpack the integration expenses, Alan. The GPI amortization of intangible assets, that's going to be $40,000,000 ongoing into the future. The GTI integration piece that is going to come down significantly and start to subside in 2018, 2019. It will be virtually gone.
Where we will start to increase is our transformation expenses. That's where we will get at the supply chain and the store footprint, which we've been talking about on the call. We're not going to talk about a timeline here. We're doubling down on those activities in terms of testing in 2018, but would expect that to go on for the next couple of years.
Okay. And a follow-up, if I may, with respect to the inventory rationalization. By the end of 2017, it was certainly less than what you had guided to at the beginning of 2017. Is that because there's less inventory in your opinion to write down? Or do you just think, Tom Greco, that the inventory reduction program will take longer?
And is an incremental $800,000,000 to $900,000,000 in inventory reduction, is that a pretty good number to go by?
Well, first of all, I think what happened last year, we did a number of things on reducing inventory. And candidly, some of them worked extremely well and some of them, we didn't feel worked as well. So we refined our plans very quickly after we started to see it was compromising the customer proposition because we're not going to do that. We're putting the customer first and everything we do the single biggest opportunity we have is to drive market share in our category, in our industry. And that's kind of the superordinate goal.
So when we see something that's compromising that superordinate goal, we're going to pull back, Alan, and fundamentally, that's what we did. So the overall plan to drive inventory down is a thoughtful one. It has multiple components to it, some of which obviously you can appreciate would be related to our footprint optimization. So there are some unlocks there. Some of it is about stratifying SKUs differently than we have in the past.
But overall, I think your numbers in the ballpark, it's going to be a multiyear journey for us to get there.
Okay. Thank you very much. Best of luck in 2018.
Thank you.
Thank you. And our next question will come from the line of Chris Horvers with JPMorgan. Your line is now open.
Thanks guys and good morning. I wanted to follow-up on the operating margin outlook. You operate in a very high cost business. So I was curious if you sort of if you didn't have the productivity opportunities, what level of operating margin deleverage is a natural headwind in the business on a flat to down 2 comp?
Yes. It's a tough hypothetical question to answer if you didn't have the productivity agenda. I mean, obviously, every business needs to have a productivity agenda to offset inflation, to offset any sort of headwinds that you have in normal business, whether it's fuel or wages. So I want to stay away from the hypothetical and just tell you how I'm thinking about 2018. Really expect us to do well in gross margin and have gross margin be favorable to the prior year.
We're doing some fantastic things on material cost and defects. We'll have our inventory optimization headwinds subsiding. We'll continue to see supply chain headwinds as we've talked about. And as it relates to SG and A, whether we lever there and how much we lever there is really going to come back to the top line growth.
Understood. And then as you think about, I know you only guided comps for the year, but how is there any commentary you could give in terms of the potential cadence over the year? Do you think 2 year stack continue to improve in 1Q? You had the disruption in the second to the third quarter from the field structure changes. So any comments on cadence would be great.
Yes. Obviously, we're focused on continuous improvement. So I mean, I think I look at the back half of last year where we had the peak of the disruption, right, Chris, that looks like a big opportunity for us. We're just going to be focused on fill rate and in stock and making sure the weekend service is right for our customers. Last year at this time, we were heading into a period where we were thinking about reducing our regions from 34 to 12 and making major changes.
And I just have to say that's just a very disruptive event. No matter how many times I've done it, there's always disruption associated with that. So obviously, the year has started out well. I mean, the 1st part of the year in Northern geographies was very cold. We love potholes in the road.
I grew up around them. I'm hoping that there's a ton of potholes. I hope they don't repair them. And we're going to have a very strong spring selling season associated with that. So we feel good about the way the front half set up, but I would say the back half looks like we can really start to make some gains.
Thanks very much.
Thank you. And our next question will come from the line of Matt Fassler with Goldman Sachs. Your line is now open.
Thanks so much. My first question kind of a cleanup for Tom, great Tom. If you could just specify if you didn't already what portion of the transformation charges that you expect to book in 2018 will be cash and how that would compare to the cash component of those charges in 2017? Yes. I mean, we're not going to go into the details specifically to say how much is going to be cash, but a healthy portion of that will be cash, which is why we're we put the guide together that we did for our free cash flow.
Obviously, if you look at our free cash flow, we're starting out with $411,000,000 in 2017. We've got tailwinds related to tax reform, working capital improvements and higher OI, but we also have the tailwinds associated with CapEx, the transformation related to your question and and one time equipment sales, which happened in 2017 that won't happen in 2018. Understood. And then secondly, if we could take a step back on the top line, you're guiding to a level of revenue growth, same store growth below the level that your peers are guiding to and you're guiding essentially to market share loss. Now understanding that last year was a year where you put the business through a lot, through the transformation effort.
And it sounds like some of that will continue, but probably to a less extreme degree. Is there a reason based on the distractions or disruption in the business or the desire to walk away from some less profitable business, anything in particular you put your finger on to say, this is the reason why you should not expect us to hold pace with the market in 2018? Or would you ascribe it to conservatism? Because your comments on sales a moment ago and answering the prior questions seem pretty constructive on both the first half and the second half of the year.
Yes, Matt, it's really about being prudent and thoughtful with our cost base. I mean, we really do feel very good about the sales outlook. And we measure market share based on what people report, not based on what they guide to. So if we look at our performance in 2017, we did narrow the gap. The guidance is something that every company looks at in different ways.
And at the end of the day, the scoreboard we'll look at is when we report our sales at the end of the Q1, second, etcetera.
Yes. It's very difficult to take the cost structure out once you put it in. It's much easier to add cost when these sales are growing. So it sounds like we should take the cost structure associated with that comp guidance extremely seriously and kind of watch the top line as
it evolves?
That's a good way to look at it.
Thank you.
Thank you. And our next question will come from the line of Mike Baker with Deutsche Bank. Your line is now open.
Hi, thanks. Within the both the Q1 margin and the full year margin guidance, can you talk about what you expect for gross margin trends within that?
Yes. We don't want to get down to the gross margin and SG and A guidance. But what I'll tell you is I would expect for both Q1 as well as the fiscal year that we will have we will be favorable year over year.
Okay. And then so we can then on the Q1 specifically, you said that the 0 to 25, now we know some thoughts on gross margin, but that 0 to 25 basis point spread is predicated on sales. It sounds like you're not giving specific Q1 guidance, but I mean any idea of what kind of comp is associated with a flat margin in the Q1 versus up 25 basis points in the Q1?
Yes. I mean, we're not going to guide on sales for the quarter, Mike. But again, we're very excited about the outlook for the year on sales and we're going to continue to focus on beating the sales guidance we've given by the widest margin possible. That's the focus of everybody in the company.
So if I could ask one more follow-up. Is there anything relative to the 16 weeks in the Q1 that things get easier or more difficult as we go through the quarter? I know just about a year ago where we were had the big tax refund dip, which a year ago this time was down $59,000,000,000 and now it's about flat. How does that play into the sort of cadence of trends throughout the Q1?
Yes. Obviously, we certainly saw that last year, Mike, and I think everyone spoke about it. But in our case, with a 16 week quarter, I think it evened out, at least for us. We didn't attribute any sales softness to the tax refund situation. Last year was really more of a timing thing as far as we were concerned.
I mean, we couldn't find it. I mean, we obviously saw the $59,000,000,000 We look at that thing every week when it comes out. As I think you wrote in one of your notes, it's up year on year right now marginally. The 2 year stack looks horrendous right now for the very reason you talk about. But eventually that money comes back into the economy and to our customers' pockets.
And when it does, they're going to come and want their car to be repaired and they're going to want to fix it. So, I don't think that plays out at least for us in the Q1.
Okay. Thanks for the color. Appreciate it.
Thank you.
Thank you. And our next question will come from the line of Steve Forbes with Guggenheim Securities. Your line is now open.
Good morning, Steve. So you mentioned
the $70,000,000 of cash flow tied to tax reform. Right now there was no change to your investment plan that you provided in the Q4 here. So given the action of other retailers broadly, especially as it relates to wages and benefits and your focus, especially your message today on driving improved top line momentum. Can you expand on why you're confident that your investment plans for next year are sufficient, especially as it relates to people?
Well, we really measure turnover, right? I mean, that's the key one for me, Steve. You got to make sure that you're keeping the best people, the parts people who are really critical to that customer relationship. And we look at that every 4 weeks. We measure our turnover.
We look at it year on year by job type. And I would describe turnover as a leading indicator, right. If it's going up, which honestly when I got here was going through the roof on the big core four jobs that our customer facing, that's not a good sign, right? So we had to invest back in our people to make sure that we were getting the best parts of people we could. And it's been going down for several periods in a row.
So we'll stay focused on that. We obviously have ongoing dialogues with our frontline team members. They're very important to us and we're going to continue to make sure that they love coming into work every day and they're excited about it. And as I said, I think it was a little over 4,000 were awarded stock ownership in the company. It's a model that we like a lot because it creates ownership.
Our people celebrate those wins. So it's very important to keep great people in the company and that's what we're focused on and we do it in a way that's holistic. We don't look at like one offs. I mean, as you probably know, different states have changed their minimum wage and other retailers are taking their starting salaries up. Those types of things are going on around us, but we don't look at it in a vacuum.
We look at it holistically.
And then as a follow-up, maybe just your high level thoughts here, right? So you mentioned you're not going to talk about a timeline for the supply chain optimization, but I believe, right, it was clearly part of the 750 4 year target, right, from the productivity agenda. So how do we piece this together, right? Are you seeing greater opportunity in material cost optimization and ZBB? Or will you still be able to capture enough supply chain savings, right, maybe not dependent on a particular timeline to get us to the same place?
I mean, how do we think about this high level as you try to help us conceptualize the gross to net and the margin opportunity that exists?
We feel very confident that the elements of the supply chain strategy that are firm, that are embedded in the $750,000,000 we will execute in the timeframe that we've called out. There are some other things that are less certain at this stage that may not happen. We're not sure. But overall, it's the $750,000,000 is the $750,000,000 We feel good about the $750,000,000
Yes. What I would add to that is there's 2 buckets of supply chain optimization. 1 is just the daily supply chain, less touches, better receive, better pick, pack, stove, better truck utilization. And that is the foundation of what's in the 750 as it relates to supply chain. There's a separate bucket, which is the end to end supply chain, which is treated as a separate project, if you like, and really connected but viewed separately from the $750,000,000
And then on that end to end, right, you touched on, right, the incremental transformation expenses and so forth. And as you kind of develop this plan and test it this year, I mean, is there a range of expenses that we can start thinking about, whether it's both capital investments and expenses that what it would take to get you where you need to go? I mean, you said it's going to be around, right, maybe $100,000,000 over the next couple of years. How big is it?
Yes. We're not going to talk about specific expenses at this time, but what I will talk about is opportunity. When you look at our gross margin compared to our competitors, a big difference in terms of our gross margin rate is supply chain. We have a lot of work to do there. So the upside in terms of gross margin that will flow through to overall bottom line is quite large.
Thank you. Thank you.
Thank you. And our next question will come from the line of Elizabeth Suzuki with Bank of America. Your line is now open.
Hey, good morning, guys. I just had a quick housekeeping item and you may have answered this already and I missed it, but could you talk about what percentage of your sales are currently taking place online or what that number was in 2017 versus 2016 and just what the growth rate looks like for online sales versus total company?
We don't split that out. We were very excited about the growth that we've had in online and we're going to continue to invest in it. Our website improvements were significant in the back half of this year, sorry, of 2017. And we did see a pretty big surge at the end of the year and we're continuing to see that into this year. And we're going to continue to make sure that we serve our customers how and where they want to be served.
And if they want to buy online and have it shipped to home, they want to buy online, pick up in store, we're really working towards the omni channel experience really throughout the enterprise. So we put that into our overall DIY number. Obviously, we look at from DIY. We also have a pretty big online business on the professional side, where Bob Cushing has led with Worldpac a really strong website that is very, very user friendly, customer friendly, all those kinds of things.
Okay. But it's fair to say that the growth in online is generally outpacing total company sales growth?
Yes. Yes, both in terms of DIY and in terms of professional.
All right. Thank you very much.
Thank you. And our next question will come from the line of Ben Bienvenu with Stephens Inc. Your line is now open.
Yes, thanks. Good morning. Thanks for taking my questions. I want to ask about tax reform. It sounds like you're not planning on reinvesting into incremental wages, though you are making a number of investments more
broadly, mutually exclusive from tax reform. So I
wonder, it sounds like mutually exclusive from tax reform. So I wonder, it sounds like turnover is a key metric you're tracking as it relates to how you think about investing in wages and field level associates. How willing are you be how willing might you be to change sort of your posture on tax reform reinvestment in light of a tightening labor market more broadly and even within your own industry?
Hey, Ben. First of all, I wanted to clarify, we are investing in frontline compensation, okay? You use the term wages. I mean, we look at the total, right? And when we make a pretty big investment in fuel to frontline, which we did last year, we are investing in our people.
It is intended to incent them and compensate them at a level that they get excited about. So we have been investing in our frontline compensation and we're going to continue to stay focused on that. So the tax reform that came whenever it was late in the year, we had set our plan. We were very aware of the competitive dynamics around wage inflation, not just within auto parts, but in broader retail. And as we built our plan for 2018, that was all factored in.
So to the extent that we've got to address specific markets, we'll go ahead and do that. But it's the environment, I would call it the labor environment itself is something that we look at very closely as we build our financial plan for 2018. And we want to make sure that we're driving, making our Advance a great place to work and attracting the best parts of people we can. So you're going to continue to see us with that as an overarching goal and how we achieve that through different methods of compensation is something that we spend a lot of time on.
Okay, great. And then for Tom O'Cray, a clarifier on the guidance. I think you said gross margin percentage should be flat to up in 1Q and then up in the full year. When you combine that with sort of flattish SG and A dollars year over year, that seems to make it hard to get towards the top end of the EBIT margin guidance. So can you help us think about sort of the puts and takes within the range of EBIT margin guidance relative to those comments?
Yes. I'm not going to go into specific split between gross margin and SG and A. I'm just telling you that we feel good and expect expansion in gross margin year over year. SG and A expansion or SG and A leverage is going to be very dependent on the top line.
Okay, great. Thanks and best of luck.
Thank you. Thank you.
Thank you. And our next question will come from the line of Matt McClintock with Barclays. Your line is now open.
Hi, yes. Good morning, everyone. Tom, you kind of hit upon this earlier, but just in terms of the store optimization going forward, historically, the company has shared kind of an expectation for a recapture rate. Could you share that this time around? And also, what did you learn last time that lessons learned that maybe prevented you from achieving that recapture?
And what are you doing this time around to ensure in a better sense that you will be able to recapture a lot of that business?
Yes. Good question, Matt. I think a couple of things. First of all, I can tell you unequivocally the level of rigor and discipline that we put into evaluating our store fleet is a factor greater than it was. We're looking at a very large list of variables, how far away from one store to the other is it, what's the competitive dynamic, what's the growth rate, what's the margin, professional DIY mix, all of those factors go into it.
And then in terms of what is the do different, the big levers, right, are how do I retain the professional business, which is difficult
and it will be clear in
our business and I think for all of the, and it will be clear in our business and I think for all of the major players, it's difficult to retain the professional business when you close a store and try and move it to another store. But we have a plan to do that much better than we have in the past. And I'm not going to communicate the specific number, but we know the number that we have typically achieved in the past in terms of retention of that professional business. And obviously, our goal is to, at minimum achieve that and anything above that is actually upside. DIY is harder, obviously.
You've got shoppers that are coming into that store. It's more about proximity there. So but we do have some solutions there that pertain to more online speed perks, loyalty card, those types of things to retain DIY sales. And then the third factor is obviously the lease itself. And what's the obligation that's on the lease when we look at these things.
So those three variables are the big things that are being considered. And we make sure that when we close that store, when you look at a couple of years, that cash flow picture is extremely rosy. So that's kind of how we're approaching it. I think you're going to see a very different level of discipline and rigor from our field team. We've been very thoughtful about how we're doing it as well, by the way.
So when we make a change, it's not going to be concentrated in an area we're going to have we have 12 regions. So each of the regions will have a fairly short list of projects to work on and we're going to rack and stack and make sure we execute it flawlessly.
Thanks a lot for the color, Tom.
Thank you.
Thank you. And our next question will come from the line of Brian Nagel with Oppenheimer. Your line is now open.
Good morning. This is David Bellinger on for Brian. So a couple of questions from us. And first shifting back to e commerce. So you mentioned wipers as a positive in Q4.
That should be a category that lends well to online sales. So can we take that as further evidence that online competitors are simply not pushing aggressively into the space, at least at this point? Or is there anything new in terms of online competition from your perspective?
Well, hey, Brian, first of all, yes, I mean, the wiper sales have been through the roof. As you guys are living up there in New York, it's been a good year for wipers with snow and ice and rain. Mike Broderick obviously leads our category team. We've got a terrific category strategy on wipers. I think it's probably one of the first ones where we are starting to see the fruits of our labor in terms of putting a very disciplined category plan in place that works.
We refined our planograms, I think, in the Q4 of 20 17 and we're seeing a big uptick. So it's honestly not surprising, I would say, to us that the wiper business has responded the way it has. We actually obviously look at market share very closely. We look at NPD. We gained market share in the Q4 on wipers and we gained market share in period 1.
We also keep in mind, we install wipers for our customers and that's a big deal. That parking lot service that we provide is a real advantage versus an online player where you've got to do it yourself. So those are the couple of the big factors.
Got it. And then my follow-up on Worldpac. So you mentioned sales have been above average for a few quarters now. So is there anything behind that outperformance? Or is it simply a better inventory position?
Or is there some other factor helping those stores relative to the advanced store base?
Yes. So for Worldpac, if you go back probably 20 years, we've been outperforming the industry and it's all based upon the technology. And so basically the online presence obviously that we have with our customer on the B2B side, the assortment strategy that we basically have incorporated through the years there and certainly what we call the ease of doing business. So importantly, with all that technology that we've developed over the years, we're bringing that same technology to Advance. So when you think about true demand, which drives assortment strategy, when you look at the new B2B platform that we put out, which is fully integrated with SMS's Advance Pro, what we've just done recently with cross banner visibility, where in market customers have access to basically the full offering portfolio of brands.
All of that is key elements to it. And as I mentioned importantly for all of us is that we look at what is the technology which is a differentiator for us and that technology is being brought to demand as we released it and we're going to continue to do throughout 2018.
Perfect. Thank you.
Thank you. And our next question will come from Carolina Jolley with Gabelli. Your line is now open.
Thanks for taking my question. I'll just ask a really quick one here. Can you talk about any discrepancies around your comps that you saw across the regions? Any spread between regions?
Sure. I mean for the year Carolina, we the West and the Southwest was our best performing geographies. And I think honestly, they benefited last year disproportionately from the weather.
So I mean last year
was a year where I wish from the weather. So I mean, last year was a year where I wish I would have had more stores in the West. We had a great year in the West. Our VP up there is terrific. She did a great job.
The Southwest was also strong for us. And then they were both strong in the Q4. As it pertains to shortfalls, we weren't we had a very tough quarter in the North Central, North Midwest. Northeast was better, okay? But North Central, North Midwest, Midwest was very tough last year and in December.
We love it when you've got continuous days of 0 to 15 degree weather. And last year in December, we had that in the North Midwest and North Central is a big, big December, huge actually. That didn't happen in December, but honestly, we did benefit from that early part of this year, but it didn't show up in the Q4. So West and Southwest best, North Central, North Midwest lowest and Northeast improved versus where we've been.
All right.
Thanks a lot.
Thank you. Ladies and gentlemen, this concludes our question and answer session for today. So it's my pleasure to hand the conference back over to Mr. Tom Greco, President and Chief Executive Officer for some closing comments and remarks. Sir?
Well, thanks again for joining us today everyone. As you heard, we're really pleased with how we finished 2017 and we're confident that we're putting the necessary pieces in place to drive long term growth. We're firmly committed to the continued execution of our strategic plan and we appreciate your ongoing support. We acknowledge that there's a great deal of work ahead of us, but we have got a talented, very committed team in place and we're poised to capture the opportunities ahead of us. And we look forward to speaking to you again in May when we discuss our Q1 results.
Thank you.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.