Good morning, everyone. Can I have everybody to answer good morning? I'm Joshua Moore. I'm the Vice President of Finance and Investor Relations. And I just want to thank everybody to our Investor and Analyst Day.
Glad to have everybody here. Before we begin, I want to just quickly introduce the panel that we have here for everybody in the room and everybody in the webcast. And everybody in the webcast, thank you for attending as well. Here I have Darren Jackson, who is our Chief Executive Officer. He is going to take some time this morning to go over our strategic overview and update.
Mike Norone, our Chief Financial Officer, will provide a brief financial overview. And then we also have Charles Tyson here who will participate in the Q and A portion of the webcast and of the section of the event. I want to remind everybody before we get into the details of the presentation that there will be some comments that we make here today that will contain forward looking statements. I am not going to read that whole thing on the slide, but you guys can review that. But just know that there will be forward looking statements and we're not liable to anything that we say here.
So we'll have some brief remarks and go through prepared remarks. And after that, we will open things up to Q and A. So at this time, I'd like to turn it over to Darren Jackson.
Thanks, Joshua. So I'm going to walk down is this on? Are we on now? How about now? Yes.
Okay, we're on now. Great. So I'm going to walk down here because when I sit up here and talk to the group, it feels like I'm in church and it's going to be a sermon. That wouldn't be good for you or me. So for those of you that are not familiar and I assume most of you are with Advanced Auto Parts, here's just a little background.
So we're into our 80th year now. Advanced Auto Parts was 6 $200,000,000 last year, approaching 3,800 stores. We will go over 4,000 stores this year as many of you know. Nearly 90% of those stores as we've talked about are still east of the Mississippi. I would say as we look forward, part of what I want to talk about today is just what the growth profile of the company is.
And in addition, what we're focused on in terms of our strategic priorities to get there. I thought I would start with the industry. The industry we still see is strong with many key fundamentals. It starts with the 240,000,000 cars that are out there on the road. But the thing I'd focus you on in the top left is the salvage rate.
One of the things that we're seeing is that salvage rate is scrappage rate is maintaining its 5% level or 13,000,000 cars, which is having those cars stay longer on the road. The other thing that we're seeing is the age of vehicle. That age of vehicle to the right, you can see the profile that 77% of those vehicles are 5 years or older, which is coming into our sweet spot. One of the things that I thought it would be helpful in our industry to understand is how complexity plays into the sales process. So I don't know if you've seen this before, but we just went back and looked at parts for example.
And when you look at the parts, we pulled NPD parts data for the last 4 years. And you can see that the average complexity and the inflation in the parts part of our business has been growing 5% to 6%. And that's one of those underlying trends in the industry that's been with us for years. And we would expect that to continue as time moves on. Is that whether it's the batteries, whether it's the starters, alternators, whether it's the fact that that electrical system and mechanical system continues to evolve at a rate, the complexity will continue to drive the underlying sales process.
And last is that bottom right, which is deferred maintenance. That deferred maintenance number you can see this year that we're going into has reached an all time high. It's $68,000,000,000 So when you put those things together, the combination of the 240,000,000 vehicles, that steady salvage rate that's in the industry, the mix of cars that are out there in terms of the aging process and our sweet spot, the growing complexity and how that's priced into the components of our business combined with that growing deferred maintenance bill, we see a longer term fundamentally solid industry. We've shown this for years. One of the things that back in 2007, we said, well, where is Advanced Auto Parts going?
And overall, we serve 2 customers, the DIY customer and the commercial customer. When we think about markets, we think about the addressable market and in the red, we've said for years, we believe that the auto parts segment that we serve is roughly $20,000,000,000 growing 1% to 2%. Now within that 1% to 2%, clearly some are growing faster, some are growing slower. But our focus has been that commercial market which is roughly $40,000,000,000 in terms of our addressable market. What we've seen as we look out we see that addressable market growing another $10,000,000,000 over time, again driven by many of those strong fundamentals and increasing complexity.
So many of our strategies back in 2007 and forward are to how do we capitalize on that commercial market, how do we grow in that space and position our company because structurally the business is changing. Here's just a way to think about our focus as a company over the last 5 years and then the next 5 years. So the 1st 5 years and it's probably better looked at this way is that we focused on many of the key fundamentals and capabilities to get into the commercial business. And it began with the most fundamental, which was availability and getting the right brands. And that for us was MOOG and Wagner.
But it also included many of the key pricing capabilities that we built into the business and many of the key custom mix capabilities. We built on that and Charles Tyson will talk about it in a minute in terms of how we built sourcing, whether that was our Taipei office or our e commerce capabilities up and through this past year where you can see we've been very busy whether it's been building out Remington which you'll see today, our commercial credit capabilities or acquiring BWP which I'll talk about. And more recently we focused our development efforts in terms of brands, in terms of wherever platinum breaks. As we look forward, probably what changes for us as we look out is that over the last couple of years what hasn't changed is our strategies that focus on service leadership and superior availability. Now those priorities we've narrowed down to just a few is that how do we continue to grow that commercial business and accelerated rate, How do we move our focus in terms of in store execution, which we've talked about a few times?
And then how do we do it in a more efficient operating model when you have a DIY and DIFM business working together? And I'll talk about the priorities underneath that that we're driving in a minute. And as we look out availability is key. So how do we enhance that availability through some of our local market availability efforts which we'll talk more in detail today in terms of Charles' presentation. And then we see an opportunity as we've reconfigured, redesigned and repositioned our new stores to drive those stores with more 70% parts distribution and 30% we'd say more of the DIY distribution in the important and that's delivery speed and reliability.
And so each one of our stores today, we're able to through our electronic delivery board, tell our customers and measure each one of the deliveries that we're getting to our customers as we roll out our find it fast, get it fast parts catalog later this year, we'll be able to give our commercial customers and quote them delivery times. So how do we move to the next level from simply measuring to being able to make a promise and deliver around delivery times each time that we're talking to a commercial customer. One of the other efforts, and when you see our proxy next year, as we focus our team, we're spending a lot more time focusing them on customer, commercial customer retention. So we'll evolve from simply measuring satisfaction with our customers to incenting our team, particularly on our largest customers to improve week in, week out, year in, year out our commercial customer retention rates. The other piece that we have focused on in commercial growth this year and invested in is national and regional accounts.
So if you look at the mix of customers that are out there today, roughly 78% of the garages are 3 plus bay and larger. Our percentage penetration in those garages is in the mid-60s. So what we have focused our team on is investing and growing that national and regional account. Some of our largest accounts were in Las Vegas with a group of us 2 weeks ago. So whether that's Sears or Monroe, we are spending time working with those customers to figure out how we more deeply penetrate them, but more importantly, grow that portfolio of national and regional accounts as we go forward.
We also are recognizing that in this dual model in terms of our in store execution we're spending more time with our labor systems positioning those systems to better serve commercial customers. Our DIY business we've been running for 80 years. We're pretty adept at running that. But getting the schedule right in terms of delivery drivers and delivery execution has been a key. One of those things again will help is our find it fast, get it fast later this year and our enhancements to our new labor model.
Inventory accuracy, you've seen a little bit of this in our shrink results this past year. What we talk about, it shows up in shrink, but we've developed a more intense focus across all of our stores in terms of in store availability. Charles will talk about in terms of that inventory accuracy to how we're investing in terms of more SKU count and the redesign of our back rooms in order to both improve the availability at a local store level and execute it in a way that we can be sure that we're in stock on the most important items. We've spent more time in execution this year working with our DLs, our general managers and our CPPs and what we call the triangle team process. And that's really helping our DLs, many of which who grew up are division managers in a retail environment know what their roles are in terms of serving commercial customers and commercial customer relationships.
So each week we will work with those teams on customer feedback and customer engagement to help them be a bigger part of the selling process than they've been in the future in the past. So in the future, they'll be able to affect more of those commercial relationships. On the efficient operating model, Mike will talk a little bit about that in his remarks, but part of what we're doing too is we look at our hub runs, as we look at our in store labor is trying to balance in terms of the cost structure of the business, how we're taking cost out farther away from the customer and investing those costs into delivery capabilities and commercial capabilities. As we look out, a couple of the key growth areas of our business and we'll spend a lot of time on this today in Charles' presentation is that we've recognized this local market availability being able to say yes to local store has been a key focus for us. The easy things to focus on, we'll spend time on today is Remington, but we've had a concerted effort over the last several years to grow our local hubs and grow that hub penetration market by market.
I think Mike will take you through the actual growth rates of those hubs over the last few years. And then finally, we have been investing more in terms of our custom mix capabilities, improving those and targeting the inventory upgrades, all in an effort to keep driving up that percentage of stores delivering out of store the full order each time. Lastly, last year was the best year of our new store opening process. And as I talked about earlier, we spend a lot of time reconfiguring the stores that we're opening focusing more on commercial business and the commercial backroom. And what we can see that was our best group of stores probably in the last decade in terms of performance in terms of weekly sell through rates.
What we see is that opportunity and I'll take you through it in a minute is to leverage that as we look west and grow our store portfolio into the future. And lastly, late last year, the last day of last year, we completed the acquisition of BWP and I'll talk about that in just a minute here. So one of the things you'd say, well, what do you focus on to know that you're pointed in the right direction? And what I put up here is that quarter in and quarter out we use IMR to survey a few 1,000 garages on the measures that we think are most important to our commercial strategy. And what this shows is that over the last 2 years just some
of the key metrics that we're paying attention to
from a customer point of view and it in parts on Eden Stock and really led the industry and probably the in parts and even stock and really led the industry and probably the most important thing we think our customers whether it's DIY or commercial are interested in do I have the parts in stock. We also looked across at do I have the right breadth of products. So do I carry the wide selection, again we made tremendous progress last year and are near the top of the industry in the breadth of products. Probably about 4 years ago, partly through our AI efforts, but partly through a focus on where is the customer going and how are the cars evolving. We put a big effort in terms of import parts.
And I would say we're only second to Carquest and that's probably Worldpac in terms of the import part business. And so from a customer point of view and I think some of you have done in the room have done your own surveys have recognized that we've made quite a bit of progress in terms of parts availability. We recognize you have to have the parts but you also have to be competitive on price. This is pretty consistent again with many of the surveys that are out there that you can see that we've made quite an impression to not just in having the part, but in terms of the industry also projecting the value image that we want to project, not necessarily cheap, but competitive in terms of pricing. The other places that we've said we must differentiate is delivering the part fast.
So whether it's our electronic delivery board or whether it's how we've positioned our hub network or how we've positioned our delivery fleet. Again, last year, we led the industry in terms of parts delivery, in terms of speed. Finally, we knew that there were a couple of areas of the business that we were just behind on. So 3 years ago, we didn't have a B2B website. So you can see that's reflected in terms of as we exited 2011 and as we began this year, our parts website, overall website has grown immensely to lead the industry, virtually lead the industry in terms of capabilities.
And finally late last year we brought online our commercial credit capability. So as we looked across and you can see we're very proud of just the response to that credit capability in terms of what customers are seeing relative to their other choices. So when I back up and think about over the last 5 years, we have been very focused on how do we build a set of capabilities as we look out because structurally we believe longer term our business has to first achieve a fifty-fifty mix and then go beyond that in terms of must be out of time and then go beyond that in terms of our commercial penetration. How do we start with a set of capabilities and then transition into the next 5 years and I want to talk about some leadership changes we made last week because they were actually leadership changes that we've been contemplating more in terms of a year or quarters as we turn and focus more on the execution of the business versus the capability build. And so, we feel like we're in a very good position in terms of the teams that we've built.
We feel like we're in a very good position in terms of our trajectory of capabilities that we've built to participate in terms of where the business is going. And so we made some why don't
I just
am I good on time? So last week, we made some announcements where George Sherman will be joining our company as President. But I thought before I get into George, I'd just take you through a little bit of our organization before and what our organization is after. So for 5 years, we have been focused on building a set of capabilities, principally driven through Kevin Preelin, our COO. Across that Jim Wade, who heads up works with me on our strategy efforts of the company still will work with me.
Kurt Schumacher and Donna Broom who run the execution or field parts of our business and then Mike Norona who you'll hear from today. But we had basically across that set of responsibilities mixed some of the strategy development, some of the sales activation. And in part, we were trying to cover a lot of ground over the last 5 years in terms of building those capabilities. As I look out over the next 5 years under Mike's leadership as our CFO, under George's leadership as our President, under Tammy Finley as our HR leader and then Jim Wade who reports to me in the strategy efforts, we will streamline the management team in a way that our sales activation efforts will all be under the President of our company from availability to our field operations to commercial sales with a mission that the work tends to be more of driving the culture around commercial execution, sales and store ops as a company end to end in terms of from the availability efforts to the store execution efforts to our people efforts where I'll focus more of my time on in terms of the recruiting, developing, succession planning of the company and strategy efforts with Jim Wade who was really integral on our BWP acquisition earlier this year.
Finally, Mike will lead our finance efforts as he has and our IT efforts. So all of our support functions from finance, legal, competent benefits to IT will all be under Mike's organization. So in many ways, last week's changes were really to drive 3 outcomes. 1 was to align with the next 5 years in terms of the focus around the customer and execution. 2 was to simplify, to simplify our organization structure in a way that day in, day out, there's more clarity in terms of the outcomes to drive.
And then 3, what it allows us to do is to make sure that we're also peering out in a way in terms of the strategy of the business, because what we can see particularly in the commercial market this past year is I do think that we're seeing a little bit of that evolution of the small mom and pops, our acquisition of BWP, it's probably been one of the more robust years and some of these smaller players coming up for sale. And just understanding how the market and the industry is going to evolve as the complexity evolves and quite frankly, it's more of us focus on how we're going to grow the business going forward. So with that, I'm going to have Mike Norone come up and talk a little bit about over the last 5 years what has our journey been in terms of and how has it translated to the financials of the business.
Thanks, Darren. Good morning, everyone. So what I'm going to do is I'm going to translate the strategies that Darren talked about into the measures we use to track our performance and the progress we've made. And we're going to talk about it over the last number of years. I'm going to touch on our outlook.
We shared some news yesterday, so I'm going to give you a little context for that. And then we're going to talk a little bit about the road we see ahead and the opportunity we see to both grow our business and improve our profitability. So, we've seen some solid progress from the strategies that Darren talked about in the last number of years. As we've invested significant amounts in commercial, availability and as Darren referred to, building a lot of capabilities in our company. And you can see from a commercial standpoint, the resources that we put in and you can see the number of commercial programs are up 25%.
You can see we have 3,000 more delivery trucks, over 8,000 delivery trucks. We've doubled our sales force, over 430 salespeople out there on the street helping us drive our commercial business. Our B2B sales penetration is 10%. And as Darren alluded to, 3 years ago, we didn't have a site. And it's a great way in order to when people use our site, we have better retention, better sales, better service.
And then our sales per program, and this is something we're extremely proud of, of the growth of our commercial sales per program, which is which now stands at $638,000 per store. It's up 45% in the last 5 years. And another thing that we're proud of is how many ASC certified team members we have in our organization, over 8,000 of them. And really, that's a great measure of the training we're doing to put knowledgeable people around parts in front of our customers and talking to our customers. And again, these are some of the progresses that we've made to really drive our commercial business.
And as it relates to availability, we have 3 times more hubs than we had 5 years ago. And again, hubs are a critical part of our availability strategy to improve our coverage and in market availability. It's absolutely critical. Our inventory per store is the highest in the industry at $609,000 per store. I think last year in 2012, our inventory was up 13%, the year before it was up 9.6%, the year before that it was up 14.2%.
So we've been investing a lot in in the inventory. You have to have inventory. You have to have parts in this business. We've been funding that, as you can see, through the reduction in our owned inventory and our AP ratio currently stands at 87.9%. So we've been funding that growth in the inventory.
And then, our SKU count per store is up from $16,000 SKUs per store to 18,000 SKUs per store. Again, another key measurement of the improved coverage and the number of parts we have available for our customers. As we look at our financial performance, we've also seen accelerated performance. And I wanted to highlight a couple of things. One is, 2012, we didn't hit our expectations from both a top line and bottom line perspective.
We had some real challenges in our colder weather markets, it's been well documented, which created some challenges in our business from a top line perspective. And that was driven by the colder weather. It was also driven by a tougher consumer environment as we saw the demand for aftermarket auto parts slow a little bit in 2012. As our typical consumer that hasn't seen their disposable income change over the last number of years, driven by some of the unemployment and some of the other economic factors have to make different trade offs. Darren alluded to a number of the deferred maintenance is at record levels.
That's a great indication that people are just holding off and we saw that in some of our maintenance categories. And then in terms of so although there was softness there, as Darren says, the fundamentals of our business are good. We believe in the future of things like commercial, availability is going to drive that. So we're very confident, but we did see softness. The second thing I wanted to cover is just the sequential improvement we've seen in the things that we measure from a financial perspective.
We kind of focus on 3 things: growth, profitability and returns. So when we think about growth, it's that sales per store growth. And you can see there, our sales per store have grown about 9% over the last 5 years, obviously driven by our commercial growth. We've also seen our gross profit rate, and Charles will talk a little bit about this, grow over 300 basis points. We're very proud of that.
And then we've seen our operating income rate grow 200 basis points.
I'm going to give you a
little bit more context of where we think that can go. But the 200 basis points, we're proud of over the last 5 years. And then we've seen our EPS more than double over the last 5 years, obviously driven by the growth in commercial and the improvements that we've made in some of our gross profit rate. Turning to returns, it's something that's very important to our company in order to build a solid financial foundation with which to grow for. We've really improved our balance sheet.
We've improved our working capital and we've improved our capital structure. So we really position the company to have a solid financial footing to grow from. And some of the measures that we look there, obviously, our return on invested capital is up 540 basis points over the last 5 years. We've watched our free cash flow almost double when you net out the in sourcing of our credit receivables that we did last year. And then our leverage ratio is at 2.2x.
And again, that's very important for our capital structure, very important for our investment grade, helps us with things like our AP ratio. So when you look at these metrics, we've seen sequential improvement and it gives us just a solid financial footing to grow from. I wanted to touch a little bit on the outlook. So as you remember, on our Q4 earnings call, we talked about in the Q1 that we expected our operating income to decline mid to high single digits. And some of the drivers around that is we anticipated that we would have some of the impacts, the environmental impacts that we saw in 2012 would carry over into our Q1.
Our top line and bottom line comparisons to Q1 last year were the most challenging. So we knew that would be a headwind. Some of the stores that we opened last year, the new stores, we had a larger openings in the end of 2012. So the annualization of that would be a headwind for us. And then last year, we didn't pay much incentive compensation because of our performance.
So as we build in now more normalized incentive compensation, that would be a headwind in Q1. So that was the outlook that we had provided. You saw that we released some statements yesterday and we wanted to be transparent with you that we did expect Q1 to be choppy, to be challenging, and we said that in our remarks. It's been more challenging than we expected, primarily in the areas of DIY. Some things that we didn't we just didn't have visibility to when we reported that we have seen challenges in is obviously the delayed in tax refunds has had an impact on our consumer.
The higher payroll taxes has had an impact and just the slower start to spring. We haven't seen spring. What is optimistic is when we do see glimmers of spring, we haven't seen much of it, but when we do see days of spring, the business is out there. So that's encouraging for us. We're not going to provide today any further numbers in relation or comments to our Q1 numbers because we're still in our Q1.
I did want to give you a little bit of context though to our annual outlook that we put up here and just remind you, we haven't changed our annual outlook. We're still early enough in the year. We need to see when that spring comes. And so we haven't changed our annual outlook at this particular juncture. And just to give you a little bit of context, we were expecting low single digits driven by commercial.
As Darren alluded to, we've upped our new stores this year in the range of 170 to 190 new stores. And then the addition of the BWP stores, they're not included in our comp, but they'll be included in our sales results and our operating results. We've planned for a modest improvement in gross profit, in our gross profit rate this year. And then we expect our SG and A to grow 3% to 5%. And I wanted to give you a little context for that as a reminder.
If we didn't buy BWP, that number would be 1% to 3%, so the growth in SG and A. And the primary drivers of that are 2, our new stores and a more normalized incentive compensation. And then when you layer in BWP on top of that, there's 2 aspects, you're putting a new organization on top of that. And then we said that we're going to have $0.15 to $0.20 of integration costs. So that's included in the full 3% to 5% and in the SG and A per store.
We expect our capital expenditures to be $275,000,000 to $300,000,000 Again, investments in availability and supply chain, new stores, store systems. And then from a free cash flow perspective, we said that we would be a minimum of 3.75 dollars and that excludes the BWP acquisition. And as a reminder, the BWP acquisition was completed at the start of 2013. And then EPS outlook, we said would be in the range of $5.30 to $5.45 and that does include the one time BWP integration costs. So I want to now turn about what we see ahead.
So Darren talked a little bit about the strategies. And what we want you to hear there is, they're not changing and we have a real commitment in our company towards growing our commercial business, maintaining our DIY business and really improving our availability, which helps both those businesses. We more recently, we haven't met our own internal expectations from a top line perspective and a bottom line perspective. Over the last number of years, we're pleased with the progress we've made. But what we wanted to share with you today is a recommitment to getting to 12% operating margins.
So you would have seen recently, we did a special grant to our officer team, which was focused on one performance measure, is getting to 12% in 3 years. Our company is firmly committed to doing that. In the proxy that Darren referred to that you'll see next year for 2013, so you'll see it in 2014, you will see that our short term incentive, so our bonus program, 80% of that is driven off our operating income growth. So again, another what gets measured gets done. And as an organization, we know we have to improve our profit model and we're committed to improving our profit model at 12%.
And really, there's really three dimensions of getting to 12%. Because sometimes when you hear getting to 12%, people hear cost cuts and hear reductions. The first thing we want to share is growth is critical. We have to grow our business. And there's 3 dimensions.
We've got to ensure that we continue to grow our commercial business. We continue to improve our availability because it drives both our commercial business and our DIY business. And we're going to improve our store footprint and we're going to have more stores. So growth is paramount. The second dimension is profitability.
The profitability and the pathway to 12% is going to be modest gross profit improvement and a much better cost much more efficient cost structure, much better execution. 3 big drivers around that will be improvements in our labor productivity. We've invested in a number of tools. One of them is a tool that allows us to measure our productivity for every team member in our company that works in a store. So we can now measure productivity and do performance management in order to improve our dollars per transaction.
So we expect to see better labor productivity. The second area is building a more flexible cost structure. We have a high fixed cost model. So the more of our costs that we can variabilize, the better our costs will flex as our business flexes. And the 3rd dimension is costs furthest away from the customer.
We have opportunity to take those out, whether it's professional services, whether it's support costs, whether it's occupancy costs. Those are a few examples. And then the 3rd dimension to getting to 12% is returns. We have to make sure that we continue the disciplined approach we have with our financials, with our balance sheet, with our working capital. And some areas that we're focused on there, obviously, is ensuring that we continue to make sure we make investments in things that give us good returns.
Continued towards improving our AP ratio. We've shared that we're committed to reducing our owned inventory and our AP ratio can get to 100%. And then the third thing is, and very important to us as well, is to improve shareholder returns. We're going to do that in a couple of ways. 1 is improving our operating performance.
That's what we're always focused first, investing in the business and growing our earnings. And the second is things like share buyback. And we shared at the beginning of this year. Last year, we didn't buy back any shares as we looked at sales growth opportunities. And we said this year, we're going to get back to historical levels of share repurchases.
We have a disciplined approach and an opportunistic approach. Some of you may have seen in the proxy, our updated share count. And I wouldn't read how much shares we've bought in the first little bit of this year. We always measure our share repurchases over the year and over years. And we're committed to getting back to historical levels of share repurchases.
So I'm going to turn it back to Joshua to kick off the Q and A. But what we wanted you to hear is we're firmly committed to the strategies, things like commercial availability. We're firmly committed to improving our profitability and our top line. And we're firmly committed to continue to drive shareholder returns.
Thank you, Mike. Thank you, Darren. We are going to transition to the Q and A section. What I want you
to do, we're going to
have 2 mics. We're going to kind of split the room in half here. And we have plenty of time for Q and A. So everybody will be able to get into the queue. Everybody who's in the queue will be able to get to you.
And what we want you to do is definitely speak into the mic. This is webcast. We want everybody on the webcast to be able to hear your questions. Please also state your name and the firm that you're with so we can hear that loud and clear as well. Let's go right over here.
It's Colin McGranahan at Bernstein. Clearly, commercial is a big part of the strategy here, both from a growth and returns perspective. Sales per program is pretty healthy relative to the competitors. And it seems like really the growth strategy is to penetrate those 3 bay garages more. I may be jumping the presentation a little bit here, but I was hoping you could talk a little bit more what the strategy is to try to go after some of those larger garages and get on those call lists of the more sophisticated customers?
Yes. Thanks, Collin. So, I'd say three things. As I talked about earlier, if you think about how we've progressed time, if you look back far enough when our business was 80% DIY, your natural next step was a 1 to 2 bay customer because that customer looks a lot like a DIYer. And so what we've done over the last several years by just getting what we referred to as table stakes, the trucks, the salespeople, the parts pros, we've been able to grow our penetration of 3 plus Bay to mid-60s.
This year, we made a decided effort to invest in a national accounts team, a regional accounts team that is a dedicated team to go after those garages. Probably our largest customer today is Sears and Monroe. And we've been investing in our view has been with MOTO Logic, with driver side, with KeyLink, we bought some key e services to also think about those larger garages. Part of their needs going forward would be not just parts needs, diagnostic needs and also needs and also educational needs. So those teams are also challenged with what can we do beyond the traditional parts delivery in terms of those larger garages in order to meet their needs.
And the other thing that we're learning, take in the Northeast, is that we're able to use the assets of BWP, use the assets of AI and use the assets of AAP in a way that if you look at national accounts in particular, what they're seeing in their business is that in our meetings with them last week, their Saturday and Sunday business, some of them Sunday has become the 4th largest day of the week. And so how we begin to use our assets, our combined assets that we can be 1st call, 2nd call and 3rd call in those key markets, the Northeast being the easiest, but we have many other markets where our density and our proximity I think allows us to serve those garages more consistently. Now to be fair, one of the challenges that we're seeing is that we now have to figure out as I talked about scheduling effectiveness, how you staff the stores with the right commercial parts pros and delivery support to make sure you can capitalize on those parts of the day and weekend schedules in order to serve those larger accounts. We're being forced by their customers to offer different types of hours and different types of service.
So to summarize, we've made a decided investment. This is just part of us growing. We still don't have a fleet business per se. We don't have a government business. National and regional accounts is the next logical place for us to invest in to grow our capabilities and credibility with those accounts.
And on that 60% that you're penetrated, do you find The 60% that you're penetrated, do you find you're in a different position on the call list, further down on the call list with those larger garages than you are on the 1 and 2 bay guys? And is part of the strategy to kind of further increase your penetration with the guys you're already in? Yes. So we are farther down on some of those lists, not clearly not Monroe, clearly not Sears, but what we've been able to do really through part of our analytics is to know that some of our biggest opportunity is to climb into that second and first call position with some of these larger accounts. And that's probably the other thing to mention is that we knew we had a gap 3 years ago because many of these larger more sophisticated garages, we were required to have B2B capabilities.
And literally we've gone from 0 to 10. We believe the industry outside of Worldpac is closer to 18%. So we've made up a lot of ground in a short period of time. I would expect that the other piece of the business that we recognized that we were a little deficient in, in terms of service levels was our credit capabilities. And so, part of the investment to take the next step in terms of servicing those 3 plus bay garages was to do it in a way that we could be in much better control of the service experience from a credit point of view as well as a B2B point of view and a parts availability.
But it works it's a connected system because the hubs connect into that, the daily replenishment center connects into that. We find that those largest accounts, quite frankly are more persistent users of the longer tail of our inventory than the fast moving parts of the inventory as well.
Hi, Ken. Mike Baker from Deutsche Bank.
So my question is on the sales All right. So the guidance is that
it gets positive. I guess
the question is what happens?
Sure. All right. For
the word time,
we'll try again. So it's Mike Baker from Deutsche Bank. Question is on same store sales trends, presumably negative in the Q1. Guidance is that it gets positive for the year. Is it really just a matter of easier comparisons?
Is that what is built in there? Or is it a lot of your company specific initiatives kicking in? Do you see the economy getting better maybe as we get further away from the tax refund delays? Just wondering what's baked into that estimate for the full year? Thanks.
Yes. So just as a reminder, we and I just showed you a slide that said that we expect our Q1 operating income performance to be slightly worse than what we anticipated in our annual outlook. And typically, we don't give quarter information, but we thought it was just prudent given last year. Q1 was our strongest quarter, so definitely the compares get easier. So that will be one aspect.
Probably the biggest thing we're waiting for is for spring. Typically, we typically have a pretty decent historically have a pretty decent Q1 because it's our 4 periods and spring usually hits during that and we haven't seen spring yet. So obviously spring it's important that spring gets back. The deferred maintenance that Darren talked about, we had the lingering impacts of last year's just no winter in 2012. So consumers we sell failure and maintenance.
And in Q1, some of our seasonal categories have been down. When we look at our wash and wax, we look at our AC business, we look at our brakes. So we're expecting to see some bounce backs in some of those parts of the business. As Darren also talked about, as we improve our retention of our commercial customers and Darren alluded to the fact that we were just with some of our best customers at a we do an annual event with them every year. And I think we are all expecting there's a lot of pent up demand with this deferred maintenance.
Darren, if you would add anything else?
Yes, I think that's right. So, Mike, maybe a way to answer that is that when we built the guidance for the year, we probably saw 3 key things. Certainly, we were going to anniversary some lower comps. That's helpful to know, but I get underneath that and say, well, what should drive it? I think this year right around April, we'll be anniversarying some of the impacts of Walmart's reentry into the business and that was April of this year.
2, we knew we were up against some pretty big inflation still principally in the oil categories as we were going through Q1 that begins to abate in the final three quarters of the year. And so those are think about those as external events. And then internally, we are anniversarying in terms of we get to much larger store pipeline that just keeps building and anniversarying in the comps that should help us. 2, the hub store expansion and the availability efforts that we've been building over the last, as Mike said, 3 years, but principally in the last four quarters. That effort, a lot of it was continuing through the Q1 and this year should help the back end of this year as well.
And the wildcard for us as we said on the Q4 call, the other thing I pay attention to is how do you think gas is moving. I would have said on the conference call, it seemed like it was moving against us. Today, it seems like it's stabilizing with us. So I like that trend. I don't like the trend of payroll taxes.
I don't like some of the underlying trends I talked about in the call in terms of the pressure on our consumer, but
I think those will be outweighed
by the other factors we talked about.
Good morning. It's Matt Fassler from Goldman Sachs. We spoke about a lot of evolving strategic initiatives today. And you have, as you said, a pretty fundamental change in the structure of your team and to some degree the personnel of your team. We don't know George Sherman very well yet, but if you could talk about how you think the change in structure and the change in people will enable some
of the initiatives that you spoke about today? Yes. Thanks, Matt. So probably the simplest thing to know about George is he grew up in a small town in Upstate New York at 25,000 people and his mom instilled a great set of values in him and his dad instilled a great set of values in him. He was in the Air Force for 7 years as an officer before he left the Air Force to join the Target organization where he was there for 15 years.
He started out as a store manager and grew all the way to the RVP ranks before Bob Ulrich picked him out and put him into Mervin's to run that store organization as they were trying to fix it. As Marvin Ellison gravitated to Home Depot, George spent a number of years at Home Depot working in that organization from store operations to store support to home services. I can't tell you how many great references out of Home Depot that I received. And if you think about what we're trying to do strategically and I've said this to some in this room is that the next 5 years I see different than the last 5 and it really is driving more of the cultural parts of the business, the sales, the execution and lining up the teams that include everything from our availability and supply chain efforts that include Charles Tyson who will talk later today to store execution which is Kurt Schumacher, our commercial business which will be led by Jim Durkin, our field support business led by Bill Carter and that team along with Scott Bohofer who runs our e commerce business is literally now all aligned in one organization driving one outcome, which in a simple word, Matt, is sales activation, customer activation of the business.
A few quarters ago, the HR function which reported to me, quite frankly, Mike took it over for a period of time as we refocused our effort on sales. That was never a permanent structural change for us. I'll go back to focusing on the people and the succession planning. Jim Wade, which many of you know has been in our industry for 20 years. Jim works with me today on the strategy of the business.
He's very instrumental in BWP. So that will, again, allow me to take some of my time, which was dedicated to commercial sales and operations. And there are certain things I do well, but to be honest, I didn't grow up in a field organization. And one of the changes here that we're trying to effect in our senior leadership team is to add that field customer execution part of the business aligned in one organization to drive out the strategies. And so part of it many times in leadership changes, we'll think about the people, but you got to put the people in the context of where the business is and what you're trying to accomplish.
And over the next 5 years, I see more value coming out in that consistency of the customer field and store execution.
It's not that
they're bad today, but field and store execution. It's not that they're bad today, but organizationally that focus within one part of our organization, I think, is more critical than spreading it across the organization. So that I'm hopeful gives you a little bit of context as to where we're going. And I hope I use the organization chart to help also help you understand the simplification of our organization and the structure too because part of it is speed and focus that I'm looking to get out of this as well.
Good morning. It's Bill Sims from Citigroup. I have two questions. 1, Mike talked about pursuing a more flexible cost structure going forward. Does this involve more part time employees or what else does this entail?
And the second question is in regards to the chart on Page 6 of the customer survey where Advanced seems to rank highest than just about every other competitor. Sales productivity, meanwhile, is in the mix. Where's the disconnect between what the survey is telling us and what the productivity is telling us?
Yes. So maybe I'll do the last one first. I'll have Mike talk about the cost structure pieces of it. I think Bill, part of it is that if we were here 5 years ago,
I
think we're $440,000,000 a program going to $640,000,000 if we're here 10 years ago, we're a fraction
of that. I think the commercial business
is different than a typical of that. I think the commercial business is different than a typical retail business that you turn on with retail promotions or price change or what have you. Commercial business as you turn on through relationships and they grow more through a step function than they do a linear and they grow more through a step function than they do a linear function. And so, if you think about that chart, in many ways, it reflects the work of the last 5 years that the customers are certainly noticing and maybe to Colin's question, that may have got us to from 3rd call to 2nd call. So how do you get from 2nd call to 1st call?
In many ways, it's building those relationships and consistently and reliably executing, which goes to Matt's question, what are you focused on over the next 5 years is that how do I align the organization and it's not a good or bad. It really is kind of a evolution in terms of the context of what we're trying to achieve is that that report card for me says that from a customer point of view and I think those are 12,000 shops that said, you've come a long way in the last 5 years and your parts availability to your website to your credit. Now you have to activate, build the relationships.
And even if you do that, you have to consistently and reliably
customer is recognizing in terms of our journey. And so the positioning of the team, the focusing on building the national and regional accounts are to do just that.
And then the first part of your question, First part of your question is around the more flexible model. And we're not going to get into the specifics of some of our initiatives obviously because of some of the competitive nature of them. But I'll give you an example. During quiet times of the year, we'll be operating at minimums. And whenever you hear that term, it usually means you're not leveraging your cost structure.
So with whether it's our incentive programs, that business performance management tool that I talked about is now we can see the productivity by team member, where we schedule people, how we schedule people, how we design our incentive programs to make them scale with volume and performance are ways in which you could make your model more flexible. I think the other thing and it gets back to a question that was answered earlier, I think, around the structure. I think when we started in commercial, it was more we started as a retailer and then we've really grown this commercial business and now it's 38% of our business and we think there's an opportunity for it to grow to 50% of our business. We need to have 54,000 team members thinking about commercial. And as we look at our store teams, as we look at our sales teams, and as we look at all our company support teams, we all have to be committed to growing commercial.
So I think as we look at the roles within the field and how the sales force integrates with the store and with the DLs, I think there's lots of opportunity to leverage our resources across the
There's been a lot of debate about what's transpired in the last several quarters, whether it's weather, whether it's something more. If once the comparisons ease and things across the industry don't prove? Maybe it's because new car sales are on the rise, longer term at the cohort of vehicles that were sold in 2,007, 2008 start to graduate to the sweet spot of the industry and things just are a tougher slog from here. How's A, what's your view on that? And B, how's that going to influence your plans and what can you do to respond to that?
Yes.
It's a question that we study a lot in light of we've had challenging weather for a year. But that's going to go away. I mean it's temporal. I mean it's out of our control. As we study the 240,000,000 vehicles out there, one of the things we do see and you saw in my slide is that we've really seen a shift from the 0 to 5 to the tenant out in terms of what's out there.
But the other small thing you got to pick up on is that the absolute number of vehicles, if you go back tenant out and say how many tenant out vehicles are out there, I think it's up 12% in the last 5 years. So the absolutes hang out there. The scrappage rates aren't changing. And one of the things we see underneath and maybe Charles have perspective on this is that failure rates are moving out too. So the import failure rates are not they don't fail at the same rate as a dodge.
And so part of what's pushing kind of that timeline out in terms of our business too is just kind of the extension of the failure rates and some of the key, whether it's under car engine management or whatever is just pushing out the aging cycle of that vehicle. What I don't see is that and this is probably where the debate would be is when we look at that $68,000,000,000 if we went back 2 more years on the slide, you would have seen an enormous build in deferred maintenance. And then in 8, 9 and 10, we saw that deferred maintenance came down again. So part of our discussions internally is the consumer, we tend to think about are they thinking about new cars, is that slowing down the investment cycle? Probably a little bit, we believe that.
Are they thinking about their home? And so did they defer on the home for a period of time and are they investing in the home? We think that's a little bit in terms of what's going on. So this business, the good news is it doesn't appear to be in a cycle that others experienced in 8, 9, and 10 when we didn't experience it. It's a much more stable industry.
But you can have choices with our consumer who is so cash flow constrained that they might be putting a few more dollars in the home. They might be putting a few more dollars, just a few more because the percentages are inconsequential in the new cars, just it's inconsequential, but it doesn't change in terms of their cash flow statement. So we might be riding a little bit of a cycle, and we've seen this probably more in our Eastern markets than other markets that it's timing. So it doesn't mean bad industry, it just means point in time in terms of how the consumer is choosing to spend. Hi, Dan.
Hi, thanks. Greg Malek with ISI. You gave some a 3 year target of 12% operating margin. I think we've talked about that in the past, but there was never a definitive target. And then now incentives are aligned to that.
Could you give us what the sales targets are for incentives? Because obviously, if you just target margin, there's always the risk that people will chase what they're paid to do as opposed to what's also important to get there. So what sort of top line algorithm are you thinking about in terms of store openings or sales productivity improvement that's consistent with that 12%? And then I had a follow-up, which was I think in your prepared remarks, you mentioned that incentive compensation for commercial customer retention is something that's a real focus. I'm just curious how you even define that?
Is it do you have to be 1st call? How do you even define 1st call?
Yes. So I agree with you, Greg, that if we just said go hit a rate, you could end up if we hit a rate and comps grow at minus 5 the rest of the way, that's bad outcome. So, we didn't give out sales targets that go with that per se, but I think you can look at our view of how the industry should progress over the next several years what we said to the team, we actually dollarized that outcome for the team. So we said there, if we look at the cumulative OI dollars that we have to achieve over the next 3 years, let's put a cumulative OI dollar target out there that we can go get. And within industry kind of views of how sales growth should be, if we balance those 2, I think we get the right behavior towards I certainly don't want an organization that prides itself in going backwards, but ultimately measures itself in terms of getting good profitability rates measured by achieving those OI profit dollars.
So that's question number 1. On commercial customer retention, so you'll see it, it's a year from now as Mike said 80% of the incentive for next year is achieving an OI dollar target. 20% of it is commercial customer retention. Historically, the way we've done that is that you have to both retain what we call our focus customers. So, I know many of you visit our stores.
If you go back to our CPP desk, you'll ask them how's your focus customer list today. So everybody has a focus customer list. They have their top 20. They have their weekly, 4 week, 12 week trends. There's a group of customers that we call focus.
So what we're measuring is that did you both
retain those customers and did you grow them. So it's not a case that you can just retain them. You have to retain and grow in can just retain them. You have to retain and grow in order to be a retained customer in our book. So years ago as part of the capability builds, we chose salesforce.com.
We're now into that generation of down to a local store level, the CPP, the GM, the DL, the salesperson versus just the salesperson owning a group of focused customers and then incenting those teams to both achieve retention of those customers. Now you can just retain them, but they can't be $1,000 going to $100 to count. They have to be $1,000 going to $1,001 to count in terms of our definition of commercial customer retention.
Those focus accounts that would typically a top 20. Yes. What percentage of the business would they typically account for?
Well, we've said, generally speaking in this business, your top 20% to 25% are going to account for 80% of your business. But that becomes a slippery slope too because there's many outside of that 20% that have higher potential. So I'm back to if we're second call and that represents still 80% of the business, what we're challenging the teams to do and that's why retention works on growing your share with those customers versus just maintaining them.
Hey, Greg. I also so Darren, on your first question, Darren is exactly right in terms of we've assumed more historical growth rates for both DIY and commercial. And also with respect to our new stores, they're going to be more consistent with what you're seeing this year versus what you've seen in the last 5 years from us. So a little bit more store openings more consistent with this year, 20 13.
Thank you. It's Denise Chiat, Bank of America Merrill Lynch. I had a couple of questions. You said that you plan to maintain DIY and grow commercial. So can you give us a bit more color on how you plan to expand the modestly expand the gross margin?
What are some of the levers that you can still pull there? And just secondly, you said that your inventory per store is the highest in the industry. So how should we think about that going forward? As you build out more hubs, will inventory per store kind of top out or what do you see as the optimal level?
Thank you. So I think there's 3 questions in there. Charles, you might want to just talk a little bit about, as you look at margin going forward, what are the key drivers in margin? And then there's always the headwind we have with a higher commercial mix penetration, too.
Yes. So we still continue to see benefit and I'm going to talk about it later on and what we're doing around our private brand development and our global sourcing. With some of the changes that we've seen with the consolidation with our supply chain team and then with my replenishment team and my market availability teams, we see a lot of value to be driven out through our vendor integration programs working with our suppliers to drive out more efficiency on how they service us. We're still working through some price optimization from a parts perspective as well. We're still on that journey.
And we've seen as we've improved our margins over 300 basis points over the last 5 years, price optimization has been a valuable part of that tool. So at a slower rate, we obviously had some pretty dramatic improvement in our margin rates. But there are still levers that we see in terms of our ability to be able to optimize our margin, even though we're going to get some headwind, obviously, as we see our commercial mix growing and the contributing margin that comes from that commercial mix versus the DIY mix.
Yes. Well, and more recently, maybe the 2 other parts of the question is, more recently, the availability efforts and shrink efforts has been brought our shrink levels to record levels. And I go back to what shrink generally means or availability, it's like the canary in the coal mine is that when you get that right in terms of shrink, what you're really getting right in terms of the customer is availability on the shelf. And so shrink in those efforts continue to be structural improvements to our business that we see even going through this year as we go forward. Think it's the DIY share and if I'm in the audience, I'm thinking I don't know that I heard anything about DIY in this presentation and we're somewhat purposeful in terms of how we see the future of the business having to get to fifty-fifty, sixty-forty and seventy- thirty over time.
We think that's just structural and driven by the customer. Doesn't mean we're abandoning DIY in terms of DIY profitability. And what you learn about DIY is 83% of customers make their choice on DIY around one key driver, location. And so, the share losses that we experienced probably beginning in 'eleven and 'twelve, the last 3 months in particular have turned around quite a bit and it's because we started to grow stores again. So we purposely made a decision for 5 years to hold back on store growth until we got to a prototype that met our commercial objectives while achieving the DIY profitability that helps the whole model go forward.
So when we see share improvements as Mike talked about and we talked about earlier, we do see a much clearer pathway now to growing our stores into the future. We do see the results in our NPD market share of those stores adding accretively both to share and profitability and to returns. If we don't see that working in the future, we'll adjust again. But we do see that working today and that will be part of the key in terms of the DIY share gains going forward because it's still a large market, very profitable. We're just trying to make sure we have it positioned correctly for the future of our enterprise.
And the last question which one of those?
Availability. So your question around inventory and I'll cover that in the next section. But the answer is yes, we're going to continue to invest in SKU count at the local market. We're going to continue to invest in hub upgrades. When we start to talk about Remington and what capability that gives us in the market in terms of expanding our availability, that means we will continue to invest in inventory per store.
And I'll go through that in more detail in the next section. Okay?
Yeah. And from a DIY perspective as well, I mean, I think we've I don't think the story has changed around the transaction. We've seen the transaction declines in DIY. And that tool that we spoke about earlier that allows us to measure our performance, I mean, the opportunity is to capitalize on the business that's coming into the store and some of the initiatives that we have and we've talked about them is how do we improve our dollars per transaction and the basket and the attach that we have with the existing customers coming to the store because that I think Darren's talked about it at length, the transaction is going down. The way even bigger is how do you get the ticket up.
And that's the way you get the ticket up. Yes.
Let me add one more too. When we think about our DIY business, and Darren mentioned it, when we look at our Find It Fast, Get It Fast initiative and the new EPC that's rolling out, we're going to put technology in front of our team members that's going to enable them to drive a better solution. So it's going to be easy for them to look at what else gets added into the basket. And when you think about turnover across our industry in terms of Ali Associates and their parts knowledge and the work we have to do or getting them parts knowledge. We've got to figure out how to use technology versus just assuming we're always going to be able to hire somebody particularly in the part time space that's going to have that knowledge.
And so the investments we're building and the training that we're working on how do we link the technology with the dollars per transaction, the units per transaction, how they think about solving the customer solution. There's going to be a lot of work with that we're going to drive out over the next 12 months as we roll out that EPC.
Yes. That's probably that's an excellent point, Charles. I'd say, imagine our EPC is better than a decade old. We'll actually flash forward to something that looks more like our website that will give those that don't come with automotive knowledge, the ability when it break jobs in front of them, what's required and what's recommended and we'll be able to then coach those team members to what was the opportunity that we missed. So today, one of our deficits in store, I'd say, is that we've got a reasonable EPC where the EPC moves over the course of the balance of probably the second half of this year and into next year is that how do we use technology to help guide someone who may not come with all that automotive knowledge in that space with that consumer were required and recommended are part of the both the training, but also built into the selling process through the technology.
Dan Weywer, Raymond James. Darren, in the past, you've talked about the potential of generating $1,900,000 or $2,000,000 per store and that the next $200,000 or $300,000 would come from commercial. When you think about the part of the possible with this commercial or this national account effort, how much of that $200,000 or $300,000 could come from national accounts? And then also if you could talk about the profitability of that category, how much lower margins than the bread and butter DIFM customer? And then I would assume a lower cost structure
to support national accounts, but if you
could talk about that as well? Yes. Dan, so we still see that $2,000,000 a store. Part of it will be mix of stores too. So as we look out, our view of hubs in terms of the mix of our business, so if a standard store does $1,500,000 and a hub does closer to $2,500,000 or greater.
Part of the work that we've been doing just over the last several years has been driving our hub strategies is how do we better position those hubs to be a larger part of the mix, more hard parts intense. And so part of what will drive the store averages in totality is that we just see a much larger percentage of the stores being hub level opportunities for us based on customer opportunity, not just based on where the stores lay in the system today. 2, in terms of those large accounts, you're right. They come with a lower gross margin, but they come with a higher average, we'll call DPT dollars per transaction. So the profit per truck roll in terms of dollars is much better than those smaller bay garages.
So part of what you're trading in terms of the business is, 1, they have a fundamentally healthier business in terms of those large national and regional accounts and they have a fundamentally healthier DPT dollars per transaction. So the overall dollar business in terms of the stores I think about the mix of business in terms of the stores that we're putting out there to serve customers and regional and national accounts being a few size. Let me ask the question this way. What's the addressable market for national accounts? Well, there's national and then there's regional accounts.
And so I don't know that we've quantified that for the team out there at this point, but I'll get Joshua bring that back for the group.
Thanks. It's Aaron Robinson at Nomura. Question around the 12% goal and then I've got 2 kind of housekeeping questions, but what role does depreciation play in there? Because you guys kind of over punch your weight in D and A. You seem to depreciate your assets at a much, much faster rate than some of the peers.
So just curious if things like that are going to help. And then on the overhead side, where is overhead now as a cost? Where should that be? And I guess that brings up a point of thinking about the various headquarters and the move, I guess, that George will be to Roanoke. Is there going to be a condensation of the headquarters out there?
What should we think that's going to look like over time? And then I had just 2 and then pick follow ups.
So maybe I'll start and Ernie can build. So we don't I don't anticipate depreciation is going to be a big contributor to us getting 12%. One of the reasons that our depreciation is a little bit higher is people like me and our team study that ad nauseam in the comparatives is, we do a little bit more leaseholds than some of our competitors that have shorter depreciation life. So, and some of the other ones have different distribution strategies, more DCs that you can depreciate over a longer period of time, but depreciation is not going to be a big contributor. In terms of our overhead, we don't break out I won't give you specifics, but one of the big areas that we think are going to help is reducing our support costs and our costs furthest away from the customer.
Embedded in getting to 12% is still investing in more stores and more availability and the supply chain strategy that Charles is going to talk about. So there's investments in there. So that 12% is a net number. In order for that to be a net number, then we've got to be more prudent with our support costs. And those include all our costs at the support center.
And ones that I would call furthest away from the customer, I think it was a 2011, we did a rationalization of our officers and took our officers' account down quite a bit. And we see some opportunities with professional services, occupancy, some of the other things that functional costs and line. And again, we'll measure that over contributions. One of the things I think we've done a good job in the new dollars that we've put into the systems, whether it's in Global Sourcerin or dotcom or commercial investments or availability, have given us good returns. You can see that in our ROIC.
One of the things that we haven't spent a lot of time on is going into the rest of the SG and A and we've been spending more time recently doing that and we see some opportunities to take overhead out. And then and I did want to comment on our offices. So our main office is in Roanoke. So that's where our support center is. So it's very logical that the President would be in Roanoke because most of his direct reports staff will be in Roanoke.
So that's the same for Jim, who's going to be running our commercial business and that's the same for George. We maintain an office in Minnesota and there's no plans to change that. If you remember, one of the rationales for doing that is we run our front room merchants out of there and we were able to attract some people into that market and we're very pleased with their performance. That report is up to Charles and there is no plans to change that. Currently, we run our dotcom out of San Jose.
I don't think anyone has made more investments or more progress in their dotcom and we attribute that to that team and that the team that we built out there and we could move very fast. And we have a global sourcing office in Taipei. I think all companies are always looking at their costs, they're always looking at their structure and they're always looking at their position. So could things change in the future? Absolutely.
I think as a good prudent management team, you're always looking to do that. But at this particular juncture, as we sit here today, we're pleased with those offices. And if we have any changes going forward, they'll be because they help the business versus anything else.
Mike, you would agree on the depreciation that, Jeremy, you're right. If you look over the last 5 years, it's taken off. But some of that, we should start to see some relief. It will be offset by some of the new stores. So take IT depreciation, that's 3 to 5 years.
So when you build a website, you got a lot of costs that we're absorbing right now, where others have fully depreciated that warehouse management systems and the like. So there's been a fair amount of IT costs that I wouldn't expect us to see those levels of depreciation going forward. They'll trade in some of that depreciation for Remington, we'll trade it in for new stores. But the last 5 years has been a much heavier pace than I would say what is a normalized pace that should be as you build those type of capabilities.
Thanks. And just the 2 housekeeping things. 1 on one of the slides here on Page 9, it says customer traction with numbers next to it. I wasn't sure what that meant. And then I was just curious on the DIY, DIFM market breakdown, if the DIFM was at wholesale prices or retail prices?
Thanks. Yes. So, Amit, I'll take the first one. So,
two other measures that we look at, in addition to our financial measures, is how we're doing with our team and how we're doing with our customers. And so, we measure engagement. We do a survey once a year and we call that engagement. And then our customer traction, we measure we do surveys, phone surveys with both our DIY and commercial customers and every store gets a score. So that's what the measure there is, is the measure of how we're doing with our customers.
So it's not customer transaction because it's actually probably not
that No. No. No. It's customer traction as a measure of how we're doing with our customers.
So it's an action. Yes.
And the is that DIFM, is that at retail or wholesale? I forgot if you answered that. Wholesale.
It's AAIA data, so it's at the wholesale. We have just time for one more question here.
Yes. Andy Topps with Holland Capital. In looking at the revised org chart, it looks like strategy has taken an elevated role in the organization. And I was curious if that was inferring that M and A would take a more grander scale and maybe if you could dovetail that with the broadening of the geographic reach out west. I know you guys have about 500 stores.
I was wondering what was the of the 1,000 stores potential over the next 5 years, how many of those would be out West Coast and what would be the cost of broadening out your DC system in that region?
Yes. So I missed the first part. So you said strategy?
Yes. Just in terms of Jim Wade, it seems like he's been elevated on the org chart. And I was just curious if that we could infer that M and A was going to take a more prominent role in maybe building out either your commercial or your West Coast capabilities?
Yes. So a couple of things. I know that Jim Waitsman Jim is actually on our Board of Directors. Jim was headed up strategy for us, was our former President and just very tied into where the industry is going. So I would say Jim's role just from my vantage point allows me to spend more time with Jim and Jim ran our real estate for a number of years as well.
And so it's not by mistake. When we see the largest part of the growth potential in stores in terms of store count, you should think of Texas West. And so I think today in Texas, we've got what 100 and 5 stores. That's a market that could easily have upwards of 500 stores. So as we grow the business, we'll grow in concentric circles.
And so you get out to places like California. What our focus has been is we still believe if you back up and look at our overall share of commercial even in the Eastern U. S, we've been reluctant to actually spend a lot of time opening new markets trying to make sure that we take that next step on the ramp in commercial in our core markets while we begin that process of moving west. There's probably a couple of distribution centers for sure that need to be built and we haven't quantified the cost of those distribution centers, but they'll likely look more like Remington than our old distribution centers in terms of cost. But certainly, there's a few more that need to be built as we go out West.
And just to follow-up, do you envision that being as balance between de novo and M and A
or how should we think about that?
Well, I think it would be more de novo than M and A. But that being said, when BWP comes online, it was just such an attractive leadership team, customers and set of assets. There are more of those small regional players that tend to be more WD oriented than DIY. There's little to no DIY that's still left out there today. But we certainly, as you look at the BWP acquisition, will not shy away from looking at models that we believe longer term that seventythirty model is
probably where the next 10 years are going to
have to be based on the probably where the next 10 years are going to have to be based on the evolution of what the complexity of the car and just the number of DIYers that are out there. Yes, we've been as
part of our capital allocation, we always talk about investing in the business first. And then the second thing is, are there capabilities or growth opportunities that we can do acquisitions, the Modalogic acquisition, the driver side, the KeyLink acquisition. So and we haven't shied away from acquisitions. But obviously, we don't talk about them prior to doing them.
So thank you everybody. This is going to conclude the webcast portion of our presentation. For your records, this will be archived on our website for 1 year. So you can always have reference back to that. So I want to thank everybody on the phone and on the webcast.