Welcome to the Advanced Auto Parts 4th Quarter 2012 Conference Call. All participants are in a listen only mode until the question and answer session and today's call is being recorded. Before we begin, Joshua Moore, Vice President, Finance and Investor Relations will make a brief statement concerning forward looking statements that will be made on this call.
Good morning and thank you for joining us on today's call. I'd like to remind you that our comments today contain forward looking statements. We intend to be covered by and we claim the protection under the Safe Harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1990 5. Forward looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, will, plan, forecast, outlook or estimate and are subject to risks, uncertainties and assumptions that may cause the results to differ materially, including competitive pressures, demand for the company's products, the economy in general, consumer debt levels, dependence on suppliers, the weather, business interruptions and other factors disclosed in the company's 10 ks for the fiscal year ended December 31, 2011, on file with the Securities and Exchange Commission. The company intends these forward looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available.
The reconciliation of any non GAAP financial measures mentioned on the call with the corresponding GAAP measures are described in our earnings release and our SEC filings, which can be found on our website at advancedautoparts.com. For planning purposes, our Q1 2013 release is scheduled for May 23 before market open and our quarterly conference call is scheduled for the morning of Thursday, May 23, 2013. To be notified of the date of future earnings reports, you can sign up through our Investor Relations section of our website. Finally, a replay of this call will be available on our website for 1 year. Now let me turn the call over to Darren Jackson, our President and Chief Executive Officer.
Darren? Thanks, Joshua. Good morning, everyone. Thank you for joining us and welcome to our Q4 conference call. The Q4 brought to a close a very challenging year, yet we reached several important strategic and operational milestones.
Our achievements during 2012 are a direct result of the hard work and dedication of nearly 54,000 team members. I want to say thank you to our Advance team for their continued diligence and commitment. Our bottom line results in the Q4 were better than expected. That being said, we are never satisfied when comparable store sales and EPS decline. Our 4th quarter results reflected sequential improvement from last quarter in sales, gross margin rate, SG and A expense control and operating profits.
As we had forecasted during the Q3 call, we anticipated that the market challenging and demand would continue to be weak for the Q4. Our focus was to build on the Q3 sales trajectory, while materially improving our operating results in the face of near term decelerating trends of our industry. As a result of our efforts, our market share gains were greatest in the 4th quarter, while achieving a record high operating profitability. I'm encouraged that our comparable store sales sequentially gained 30 basis points in the quarter when adjusted for the holiday shift. Our improvement was driven by both commercial and our DIY business.
Quarter over quarter improvement in market share was driven by commercial with consistent comp store sales growth in each period during our quarter when adjusted for the holiday shift in December for our advanced stores. Our commercial business had positive trends in both transactions and average ticket size. Our DIY comp sequentially improved from Q3 to Q4 driven by an increase in the average ticket size. The increase was driven by mix of products sold and better in store customer engagement and staffing on the weekends. The uptick in overall average ticket was principally driven by the mix of products sold, namely the impact of failure category sales.
Further impacting the average ticket growth has been the increasing cost of components driven by the ever increasing complex via vehicles and the cycling of last year's escalating oil prices. From a geographical perspective, we continue to see weakness and volatility in our cold weather markets, especially in the Great Lakes and the Northeast regions. Our performance in those two markets continue to be impacted by the lingering effects of the unseasonably warm weather. These regions comparable store sales continue to trail our total company average by several 100 basis points. However, we've seen our comparable store sales stabilize in these regions over the last two quarters, which is very encouraging as we enter 2013.
Finally, we continue to post low single digit comparable store sales growth in our Western markets where we only have 10% of our store base. As you recall, during our Q3, we invested more heavily in the sales and service elements of our business in an effort to reignite demand and drive more customers through our doors, over our phones and onto our e commerce website. Our investments in these areas improved our sales and market share results, but reduced our profitability in the Q3. We expected our sales and service driving investments in the Q3 would carry over and benefit the balance of the year. The improved sales momentum combined with our focus on improving our gross margin and cost management results in higher profitability in the Q4.
Overall, the improvement in our operating profitability was modest, increasing to a record 8.5% for the quarter. More importantly, it sets the right focus and tone as we enter 2013 to leverage higher levels of profitability on modest sales gains. For the year, our operating income rate decreased 18 basis points to 10.6 percent of sales and our earnings per share increased 2.2 percent to $5.22 Mike will provide more specific highlights of financial performance a little later in the call. As I reflect on 2012, we achieved some critical, strategic and operational milestones. Strategically, we opportunistically entered the boroughs of New York through the acquisition of 21 former Strauss Auto Parts stores and 6 Steinway Auto Parts locations.
Collectively, we opened 137 stores in 2012, which is the high watermark in the last 5 years. Importantly, it is our best performing class of new stores in nearly a decade. Our success in our 2012 new store performance positions us well as we expect to open nearly 200 stores in 2013. Competitively, it will close nearly a 300 basis point annual sales gap with some of our key competitors that has impacted our total and comparable store sales over the past several years. Strategically, our greatest accomplishment was the acquisition of BWP, which closed on December 31.
Certainly, BWP helps solidify our position in a very large and competitive Northeast market. More importantly, the Stockhol family and BWP team as a whole are extraordinary leaders in the commercial industry. We gained proven leadership and outstanding team and 1st class customer relationships that will provide a significant opportunity to learn and improve our commercial business in the short and long term. We are excited to welcome BWP to the Advance organization preeminent commercial players on our team. Operationally, our focus and related achievements were on execution, fundamentals and completing industry leading commercial capabilities.
The commercial capabilities include the launch of our in house commercial credit program, the opening of our new daily replenishment distribution center in Remington, Indiana, reaching double digit penetration of our new B2B ordering platform and continued hub store expansions. These milestones are significant steps which will allow us to more effectively compete in the larger and faster growing commercial market. Our better execution of the fundamentals including improved delivery times, more effective weekend staffing and record low shrink which enabled record in stock levels will position us well heading into 2013. Turning to 2013, we are cautiously optimistic about our outlook. Our optimism is based on several external and industry factors.
Obviously, it starts with a return to more normal weather patterns, which alone will provide much needed strength for our business. The industry is expecting a gradual increase in the number of vehicles 7 years and older, coupled with a record level of deferred maintenance in 2013. Finally, gas prices though very volatile are forecasted to decline which has historically provided nice tailwinds for the industry. Internally, our opportunity still lies within the fact that we have a very small commercial market share. The investment I mentioned earlier along with our developing capabilities such as our B2B e commerce site and MottoLogic, our new diagnostic tool set along with the rollout of a new electronic parts catalog to our stores later this year will strengthen our ability to compete and allow us to continuously increase our commercial market share while speeding up and improving and improving the reliability and execution of our service at the shop and store level.
Our guarded view is related to a couple key macro developments that temper our optimism. First is the increase in the number of people purchasing or contemplating the purchase of a new vehicle. Undoubtedly this will be good for us in the long term. However, it will cause short term volatility in the industry as customers are more concerned about what they invest in maintaining their aging vehicle. 2nd, our economy continues to be lurching with high unemployment and wavering consumer confidence.
The level of financial stress on our core customer will become more acute with the most recent payroll and other related tax increases that effect at the start of the New Year. The silver lining is that this is an economy of necessity where consumers will continue to seek value from their local aftermarket garages or perform needed repairs and maintenance themselves. My final comment on the industry and customer outlook is whether we are at a structural inflection point or simply a cyclical moment. Clearly, I believe the long term structural drivers of our industry remain very strong. Cyclically, have a renewed interest in new vehicle purchases, home investment and other select big ticket purchases.
The weather cycle will even out over time. Structurally, parts proliferation, parts time. Structurally parts proliferation, parts complexity, aging vehicle reliability and extended import part failure rates all underpin a fundamentally sound outlook for the industry. Roughly 250,000,000 vehicles on the road today that are over 11 years old, like human beings are lasting longer and requiring more care. In 2012, the industry may have caught a cold which simply needs to run its course.
Our recent 2013 regional leadership and sales team meetings conveyed one simple objective for the year, which is a company of 1 focused on fundamentals. The expected outcome is simple, which is to make the day in terms of our customer experience, sales and profitability. Pragmatically that means we will stay the course on a few key initiatives that will drive our growth and improve our profitability including 1, growing our commercial business through improved levels of delivery increased customer retention and share of wallet with our national and regional accounts. 2, relentlessly improving our local market availability through hub expansions, tailoring and intensifying key store availability and leveraging our supply chain infrastructure. 3, expanding our new store pipeline to grow at a run rate closer to 200 stores a year versus 100 while successfully capitalizing on our BWP acquisition.
4, continuing our in store execution excellence through scheduling effectiveness, on hand accuracy, add on sales training and customer engagement. 5, and finally, increasing our efficiency and effectiveness throughout the support areas and through a more integrated store operating model. Clearly, our company priorities have a more intense operations and execution bias than years past. Strategically, our agenda remains the same as years past. Operationally, our focus has moved from building key capabilities to driving results through outstanding execution.
In closing, I'd like to share one example to illustrate the points I've been discussing. Partnership is key to commercial excellence. And since last February, our new commercial credit team has become the partner that more than half of our commercial customers rely on. Financial Services Director, Bill Quarry and his team provide our customers seamless personalized service with flexibility that meets their needs. Advance Commercial Credit is creating an improved customer credit experience, while helping our team better serve their customers.
This team works closely with our customers from the minute they purchase from Advance to the time they are issued credit and receive statements. The feedback has been overwhelming. Our customers love talking to the same knowledgeable people and the program simplicity like getting credit within minutes instead of hours. Thanks Bill to you and your team for all you are doing to bring service is our best part to life and drive excellence at Advance. Now I'd like to turn the call over to Kevin Freeland, our Chief Operating Officer.
Thanks, Darren, and good morning.
And thanks to all of our team members. Even though 2012 was a challenging year, their efforts and milestones reached have made 2012 a pivotal year in our profitable journey. As I begin my prepared remarks, I'd like to go into a little more detail on these accomplishments and provide an update on our progress on the key priorities that support our superior availability strategy and new store growth. As I've mentioned in our previous calls, our focus with respect to superior availability is on providing our customers with the best end market availability and consistency of service, both in order accuracy and delivery speed. The areas of priority continue to be the expansion of our hub network, the continued upgrade of our parts inventory at our non hub stores, the opening of our new DC and the implementation of our daily replenishment capability, the growth in new stores and the continued growth and rollout of our B2C and B2B e commerce platforms, commercial diagnostic tool and our electronics part catalog.
In our Q4, we continued to expand our hub network through new store expansion and the upgrade of existing stores, which have the space and are strategically positioned to operate as a hub. As a result of this work, we added 11 additional hub stores, bringing our hub store count to 339 versus 294 at the end of 2011. We also upgraded the inventory at 211 non hub stores during the quarter. Including our hub store conversions, we've upgraded the inventory to over a quarter of our total store base. This was no small effort by our inventory and store teams and this work positions us to provide the products our customers need when they need them.
Our Q4 also marked our 1st full quarter where our Remington DC was fully operational. The opening of this new DC was critical on two fronts. 1, it gives us much needed additional capacity as the result of our store growth over the past 5 years and will relieve a great deal of pressure on other DCs. 2, Remington will be a model for us in the future in terms of automation, which we expect will greatly improve our productivity and efficiency and allow us to replenish our stores daily. We'll continue our rollout of shipments to stores within Remington service area in phases, ultimately ramping up to over 400 stores this year.
The initial rollout of daily replenishment has been going well with all 195 stores receiving daily shipments at the end of 2012. Our initial results are promising as the potential to provide best in class availability is one of our top goals. Once this new DCs begin servicing its entire market, we expect it will begin to improve our supply chain costs and strengthen our gross profit rate. As a result of our store level upgrades, the opening of Remington and a higher mix of parts inventory, our total inventory increased 13% to $2,300,000,000 This increase is in line with our expectations and will position us well into 2013. We anticipate our total inventory will continue to grow in 2013 as we focus on increasing the overall breadth of our parts assortment, improving our position with larger commercial customers and integrating BWP.
However, our growth in 2013 will likely be at a slower pace than 2012. That being said, we continue to work aggressively to free up capital to fund other parts of our business and improve our return on invested capital through our supply chain financing program. Our work in this area translates into expanding our accounts payable to inventory ratio, which increased roughly 700 basis points from 80.9% at the end of 2011 to 87.9% this year. Our own inventory decreased 28.5 percent or $111,200,000 from $390,000,000 to $278,800,000 Over the past year, we've been working aggressively to improve our e commerce capabilities to better compete within our industry. To that end, we turned our efforts toward increasing the amount of our commercial business that's transacted online.
We expect to continue to increase the B2B penetration rate over time. This will position our company to strengthen our relationship with larger and more national commercial garages as well as improve both the frequency and retention rate of our existing commercial customers who utilize this capability. In April of last year, we had our full debut of Motologic, which we acquired in October of 2011. Motologic provides the best in class repair and diagnostic capabilities. We're still in the early stages of our rollout, but our initial customer response has been great.
Our B2C site continues to make great progress and we achieved new levels of performance. As I mentioned last we now have the number 1 multi channel site in the markets we serve. Our B2C team ended the year with record sales and achieved $1,000,000 in daily sales twice during the Q4. This progress is fantastic and is only a glimpse of the possibilities our mobile and electronic capabilities can provide. Turning to our new store openings, we added 67 new stores including 2 new AutoPart International stores and Auto Part International stores and Auto Part International's acquisition of 6 former Steinway stores.
This has been a record quarter for new store openings and our teams have done an excellent job ensuring that the quality in which we open stores is at the highest standard. For the year, we had 137 stores including 21 AutoPark International stores and closed 5. As of December 29, 2012, our total store count was 3,794 including 218 AutoPark International stores. Our 2012 class of new stores continues to perform very well beating our internal expectations of sales growth and overall sales productivity. As I mentioned last quarter, our 2012 class of stores is proving to be our most successful in terms of sales productivity and the pace of their weekly sales ramp.
As Darren discussed, we acquired BWP at the beginning of fiscal 2013. We're very excited about this affiliation as BWP is 1 of the strongest commercial only distributors within the markets they serve. This is a great opportunity for us to learn and integrate the best of Advanced Auto Parts with the best of BWP and expand what they do to the rest of our commercial programs. On day 1, BWP will have a positive impact on our performance. We expect them to add $170,000,000 to $180,000,000 of sales to our business this year and incremental operating income dollars.
We plan to integrate and convert the 124 BWP stores to our systems and branding over a 2 to 3 year period. We will continue to give you updates on any material developments as we work to convert these stores. As a result of this conversion process, we anticipate the net impact of the acquisition will be slightly dilutive to operating income for the year. Finally, I want to provide you a brief update on our progress to improve our gross profit rate. As you might recall, our goal after our Q2 2012 results was to stabilize our sales trends, reverse our decelerating trends, while improving our overall gross profit rate.
Through our efforts to better safeguard our inventory, maintain our disciplined approach in pricing, partnering more effectively with our suppliers and better managing our promotional activity, our gross profit rate increased 87 basis points to 49.9 percent versus 49.0% during the Q4 of 2011. For the year, our gross profit rate was 49.9%, which was up 19 basis points versus 2011. As we look ahead, we continue to see modest improvements on our gross profit rate for 2013 as we improve our product acquisition costs, generate increased supply chain efficiencies and continue to maintain our disciplined pricing strategy and shrink management. The improvements will be partially offset by the continued supply chain investments.
Now let me turn the call over to our Chief Financial Officer, Mike Norona to review our financial results in more detail. Thanks, Kevin, and good morning, everyone. I'd like to start by thanking all of our talented and dedicated team members for their commitment to serving our customers as we navigated through a challenging fiscal 2012. I would also like to welcome our new BWP team members. I plan to cover the following topics with you this morning.
1, provide some financial highlights from our Q4 of 2012 2, put our Q4 and year to date results into context with our expectations and key financial dimensions we use to measure our performance and 3, share with you our financial outlook for 2013. 2012 was a challenging year for our business and the markets in which we operate. Our 4th quarter performance and full year results were primarily driven by the ongoing softness in our colder weather markets. In addition, our results were impacted by fluctuating gas prices, high unemployment and a tough economic environment with more uncertainty, which decreased consumer demand for auto parts. As Darren mentioned, our focus all year has been to influence the things that are in our direct control and we continue to be focused on achieving our longer term growth and profitability goals by maintaining our strategic focus, executing on the fundamentals and simplifying our operations.
While we are disappointed we did not achieve our growth and profitability expectations, we are encouraged by our improved sales performance trends versus the market and generating positive operating income growth in our Q4. This improvement translated into a 4th quarter sales increase of 0.1% to $1,300,000,000 despite a comp store sales decrease of 1.9%. Adjusting for the impact of the calendar shift in Q4, where we lost a couple of selling days as Christmas fell on a Tuesday this year versus a Sunday last year, our comp store sales decreased roughly 1.5%. Offsetting our comp store sales decline was the net addition of 132 new stores over the past 12 months. Our total sales for fiscal 2012 increased 0.6% to 6 decreased 0.8%.
Our 4th quarter gross profit rate increased 87 basis points to 49.9% versus 49% in Q4 of 2011. The increase was primarily driven by continued improvements in our shrink performance and supply chain efficiencies driven by the increased volume of inventory handled during the quarter, partially offset by investments in our supply chain driven by the opening of Remington and increased new stores. For the year, our gross profit rate increased 19 basis points to 49.9%. Year to date, our commercial mix represented 38.1% of 20 12 sales versus 30 20 12 sales versus 37% in 2011. Our 4th quarter SG and A rate of 41.4 percent increased 79 basis points versus the Q4 of 2011, primarily due to the expense deleverage as a result of our 1.9% comp store sales decline, increased new store openings and costs associated with our acquisition related activity during the quarter, partially offset by lower incentive compensation.
For the year, our SG and A rate increased 36 basis points to 39.3% versus 39% over the same period last year. The increase in our SG and A is principally due to our fixed cost deleverage as a result of our 0.8% comp store sales decline. All in, our 4th quarter operating income dollars increased 1.1 percent to $113,200,000 and our operating income rate increased 9 basis points over the same period last year to 8.5%. This was on top of 182 basis point improvement in Q4 2011 over Q4 2010. Our diluted earnings per share decreased 0 point $2 to 0 point 8 $8 during
the quarter versus $0.90 in the Q4
of last year. For the year, our operating income dollars decreased 1.1 percent to $657,300,000 and our diluted EPS increased 2.2 to $5.22 Our average diluted share count was 74,100,000 shares at the end of Q4. For the year, free cash flow was $412,300,000 down $94,900,000 over the same period last year. The largest driver of the decrease in free cash flow was our planned increase of $89,900,000 in our accounts receivable as a result of the in sourcing of our commercial credit program. Our inventory increased 13%, primarily in hard parts categories, driven by the opening of our Remington DC, our investments in hubs and store level inventory upgrades, more new stores and to position the company for a strong availability in 2013.
Our investments in inventory continue to be enabled by reductions in our owned inventory, which decreased 111,000,000 compared to the end of 2011 and was driven by our continued efforts to increase our accounts payable to inventory ratio, which now stands at 87.9% versus 80.9% in Q4 of 2011. At the end of the Q4, we had $598,100,000 in cash and $604,500,000 of long term debt on our balance sheet. Our adjusted debt to EBITDAR ratio was 2.2 times, which is well below our previously stated ceiling of 2.5 times. We continue to measure our performance, the financial dimensions of growth, profit and value creation. Our approach and philosophy has always been prioritize growth as our primary use of capital in order to increase returns and drive shareholder value.
Our investments over the course of this year have been centered on accelerating our commercial growth and stabilizing our DIY business by improving our availability through our hub store openings, inventory upgrades, supply chain investments and strengthening our market position with increased new store openings. We are very proud that in our Q4, we implemented our 1st wave of daily replenishment, entered the boroughs of New York and finalized our commercial credit in sourcing. We are also excited about our acquisition of BWP, one of the leading commercial players in our industry. This acquisition closed at the beginning of 2013 fiscal year. While we prioritize growth as our number one use of capital, share buybacks have always historically been a part of our capital allocation.
We made the deliberate decision to slow our share buyback program in 2012 to preserve capital as we explore growth opportunities, including the acquisition of BWP. Looking ahead, we plan to continue our historical practice of opportunistically repurchasing shares in a disciplined manner in 2013 and beyond. Currently, we have roughly $492,000,000 left under our share repurchase authorization at the end of Q4. Turning to profit. We remain committed to improving our profitability, which requires both delivering on our sales growth goals, primarily driven by commercial and developing a more cost competitive operating model.
While we are not satisfied with the progress we made to our profit metal in 2012, our plans in 2013 and beyond are focused on improving our profit model, which I will cover shortly in our annual outlook. As we look at value creation, we continue to maintain our disciplined approach to capital, which is reflected in our return on invested capital of 19.4%. ROIC decreased modestly from our Q4 last year, driven primarily by our planned increase in accounts receivable due to our commercial credit insourcing and lower operating income. Our AP Our AP ratio at the end of 4th quarter was a record 87.9 percent and we remain focused on achieving an AP ratio of 100% over time. Turning to our outlook for 2013, our performance will be driven by continued growth in our commercial sales, improved availability, increased new store openings, improved execution, modest improvement in gross profit rate and improvements in our cost structure.
We expect the industry dynamics to remain favorable and anticipate to return to more normal weather patterns. These will be somewhat offset by continued in the economic environment with more uncertainty impacting the consumer, such as increased taxes, relatively high unemployment and continued volatility in gas prices. As a result, we anticipate our comp store sales to grow low single digits driven by stronger commercial comps. We plan to open 170 to 190 new stores and work to integrate the 124 BWP stores we acquired at the beginning of the fiscal year. We anticipate BWP to add approximately $170,000,000 to $180,000,000 of incremental sales in 2013.
As a reminder, BWP will not be reflected in our comparable store sales calculation until fiscal 2014. We anticipate our gross profit rate to modestly improve, driven by merchandising capabilities and global sourcing, offset by competitive headwinds, the integration of BWP, which has a lower margin rate and an increased mix in commercial sales. We anticipate our SG and A to deleverage, driven by increased new store growth, more normalized incentive compensation, the annualization of new stores from 2012 and approximately $0.15 to $0.20 of one time integration costs for BWP. These costs will be somewhat offset by improved labor productivity, more effective marketing spend and improvements in our non customer facing support costs. All in, we anticipate our SG and A per store to increase 3% to 5%.
We anticipate our quarterly operating profit for our Q1 of 2013 to decline mid to upper single digits given the current industry softness, tougher sales comparisons, the annualization of 20 12 new stores along with the heavy concentration of stores opened in the Q4 of 2012 and higher incentive compensation. Turning to capital expenditures, we expect to invest approximately $275,000,000 to $300,000,000 driven by new store development, supply chain investments and store systems. We expect free cash flow to be a minimum of $375,000,000 excluding the acquisition cost of BWP, which was approximately 1x BWP sales. Finally, we estimate our 2013 annual operating EPS outlook will be in the range of $5.45 to $5.60 per share, excluding one time integration costs of BWP of approximately $0.15 to $0.20 On a reported basis, including the BWP one time integration costs, our EPS outlook is expected to be $5.30 to $5.45 This annual outlook reflects a weighted average share count of approximately 74,000,000 outstanding diluted shares. Consistent with our historical practice, our outlook does not reflect any anticipated share repurchase activity.
As we have previously shared, we plan to continue our historical practice of opportunistically repurchasing shares in a disciplined manner, which could possibly impact our 2013 annual EPS outlook. In closing, we are disappointed we did not deliver on the financial expectations in our Q4 and in 2012. We remain committed to improving our performance and achieving our longer term growth and profitability goals by maintaining our strategic focus, investing in the key areas such as commercial and availability and executing on the fundamentals. We also have great confidence in our team's ability to improve our performance based on their talents, character and competitive spirit. Operator, we are now ready for questions.
Thank
Our first question today is from Gary Vaucher with Credit Suisse.
Thank you. Darren, first of all, congratulations to Golden Eagles 16 and 5 start to the season.
Thank you. It's still early though.
Well, you got a Canadian Guard, so you should be okay. Could we one question and one follow-up. Can you talk about Remington and what it's doing for you? Could you I don't know if you could quantify in the 195 stores where you said you've already rolled it out, the type of impact you're from that? And then past Remington, could you talk about the rollout of further distribution centers into this year and following years?
Thank you.
Yes. Gary, I'll frame it
and Kevin will give some of the details. Maybe I'll start with the back half of that question. So as we look at the daily replenishment opportunity long term, right now as we've said before, we're going to start with Remington and understand the lift and we're delighted with the first set of stores we've seen and Kevin will give you a few more details on that. We've committed to a second center in the Northeast, in part because of the expansion in the Northeast and also in part because of our initial optimism that we had seen in some of our tests in terms of daily replenishment as well. I think longer term, what we're trying to balance is that these are not cheap facilities.
We have found a number of ways through the process now to get the cost down. So after we get done with Connecticut, there are a few other places in the country we'd look to go to next. But what I found is that if you get too far ahead of yourself in terms of kind of the disclosing where those are for competitive reasons, that's not good. And making sure that the theory that we see on paper turns out in reality. And right now in Remington, at least the initial stores that we're seeing the lift numbers from the stores that are receiving daily replenishment, we're pleased
with. Kevin, what would you add to that?
Sure, Gary. So as I said in my remarks, there were two reasons why we opened Remington. One was the first DC we've opened in many, many years, first DC that I've opened in the 5 years that I've been here. And just based on store growth and comp store gains over the years, it was needed just to keep up with demand. 2nd is, obviously, it's a different facility with a different role.
And the lifts that we're seeing, we essentially built a pro form a that was based on 2 things. It's less costly for us to run that facility because of automation and then it lifts because of better in stocks in our stores. And essentially, the lifts that we're receiving today are ahead of that pro form a and we're still in the early phases of kind of the shakedown crews of the new DC. As Darren said, we and that would be essentially became our 9th DC. We've secured a 10th DC in Connecticut and work is underway to replicate that work up there.
One of the things that's highly sensitive here is how far can we deliver the product based on the sales lift and the humble assumptions we began with suggested at 150 miles we began with suggested at 150 miles. At this point, essentially, the question that we have is based on the sales lift, can that get pushed to 200 miles? And we'll have a better sense of that over the next few quarters, assuming that in fact that becomes the case. Most all of our stores are within 200 miles of the 10 DCs we would then have. And what we have is a new capability that can be deployed into those DCs.
So I think the future of this is to play out over the next several quarters, but it has a lot more to do with just leveraging what we've already done, more so than a significant change of the facilities that we previously owned.
So just following up on that, the ignoring, let's say, like the DCs that are on the outskirts like in Kansas, but in the other ones, could you reformat them to take a lot of what you have in Remington? Or do you have to build new facilities?
The existing plan today is inordinately weighted to leveraging the 8 legacy DCs that we have.
Okay, great. And just following up, we've written about the polar vortex and the impact of the weather on sales and we're getting a big storm right in your market this weekend, which I'm happy, but other people may not be. When do you think we'll see assuming that it was weather and clearly your results point to that given the difference between the weather impacted markets and not, when do we start seeing the benefits of the snow and the cold that we're getting this winter?
Yes. Gary, our best estimate is, as Mike highlighted in his comments is, as we look at our business, Q1 is our longest quarter with 16 weeks. We would be looking in terms of the wear and tear is going to continue to occur through the Q1. And as we begin the Q2 of the balance of the year, that's where we see the uptick. As we said in our comments, we're cautiously optimistic.
One of the pieces in the caution is that our Northeast business early on in the year last year was still pretty strong. It really felt the effects of the winter as we got into say that later in that March, April and beyond time period. So when I step back, we have such a large footprint in that Northeast and Great Lakes region. Great Lakes was equally a good business and we're looking for both of those regions to see that bounce back as we head into Q2 and the balance of the year. Thank you very much.
Thank you. Our next question is from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. You alluded to some share gains that you experienced in the quarter. Can you talk about those in a little bit more depth? And is there a way that you could tie the share gains to some of the actions that you may have taken earlier in the year?
Yes, Michael, when we refer to that, what we're doing is looking at the NPD data in aggregate. What we can see is our Q4 was by far our best quarter in terms of commercial share gains. We continue to give up some DIY share in the quarter. Just to be clear, just to highlight one thing, over the last several years, we made a deliberate decision to slow down new store growth in favor of focusing on our commercial capabilities. When we did that, we've been running at a rate about half of some of our competitors in terms of new stores.
And principally, the way you grow DIY share these days is through new store growth. And so we expect that share gap particularly as we go into 2013 to close. And what you should take away from that to the new stores that we are adding, we have been over the last 2 years focusing on how do we position those to better serve the commercial customers while delivering a DIY experience that certainly we'd be proud of. And the new to our class that we have now is this is the best class that we've had in nearly a decade. So we're upbeat about we're staying on strategy in terms of commercial growth while being able to reposition the DIY business for share gains in the future again.
And then given the performance of those new stores, the most recent class, do you get even just a modest lift to your comp as those fall into the comp base?
Absolutely. Yes,
absolutely. That's our estimates over the last several years and I've talked about this before is that versus some of our known competitors, it's probably about a 300 basis point gap that we've been experiencing. Certainly, you can see it in the totals, but the way these store models work, you experienced significant comp store benefits in year 2, 3 and 4. Usually, it's about 4 years before you ramp to a maturity level in these stores.
That's super helpful. One last question maybe for Mike. On the growth the 3% to 5% growth in SG and A per store, how does that going to break down? Or is there any way you could just provide a little more detail on the nature of those to quantify the nature of those investments that you're going to be making in the upcoming year? Thank you very much.
Yes, there's a couple that are the big drivers of that. So one of the drivers that's in that 3% to 5% SG and A per store increase is we acquired BWP. That's over half of that increase and that their SG and A isn't growing. We just put their SG and A now on top of our SG and A. So that's half of it.
And then the other big driver, 2 big drivers are our new stores. So we've accelerated our new stores and we've got an outlook of 170 to 180 and more normalized incentive compensation. So those are the 2 drivers. And then the offset to that is improved labor productivity, improved marketing effectiveness and then obviously we're going to continue our cost work around pulling out cost furthest away from the customer.
Thank you. Our next question is from Matthew Fassler with Goldman Sachs.
Thanks a lot and good morning. My first question is about the buyback. And to your point, you had abstain from buying back stock last year. How do you think about value? You talked about being opportunistic.
What criteria do you use? And in that vein, you talked about your buyback through 2012. Have you bought back any stock year to
date? Yes. So Matt, maybe I'll do your last one first. We don't comment on our buyback before we do it. So we will comment on that.
We did say that we did kind of pull back on our buyback program last year as we preserve capital, look at sales growth opportunities, including buying the PWP. And what I will tell you is our philosophy on buyback hasn't changed, so you asked what do we do. We look at value. And the first use that we think about it when we are deploying our capital is we prioritize growth, so investing in the business. And then we look at buyback as also another way to pay back the shareholder and create long term value and we take a long term disciplined approach.
We do use a DCF model that we shared before. And the good news is, that can sometimes frustrate shorter term shareholders that hold us for shorter periods of time. But longer term shareholders have benefited because we bought back 41% of the company at an average price of just under $42 So our philosophy hasn't changed. What did change a little bit last year is we were looking at those sales growth opportunities and what we did say in our remarks is we do plan to resume our historical practice of buying that shares in a disciplined manner as we've done in the past. And also as a reminder, in our annual outlook, we have not included any share repurchases.
Understood. And then second question, if I could. So you've spoken about some high level enhancements that you expect to make over time to your fulfillment capabilities. And you also spoke separately about your desire to increase your traction with some national accounts. And I guess my question is, if you think strategically about where you stand competitively in terms of your ability to provide optimal service to all sorts of commercial accounts, is there a class of business or a class of customer where you feel you've been under penetrated from a market share perspective relative to peers where you think your ability to compete and maybe for first call is going to grow as a result of some of these logistics efforts?
Yes, Matt. So let me put all three of those together because being about Advanced Auto Parts 5 years ago, our commercial business was $1,000,000,000 Today, it's $2,300,000,000 By and large, the growth has all come organically. So it's not about us simply adding programs to DIY stores that was done a decade ago. And as we have taken that journey from a DIY exclusively focused retailer 15 years ago, our first step is that I'll call it the small mom and pop garages were just easier for us to deal with. In many ways, they look like our DIY customers that we were comfortable serving.
And I would say today, over the last 5 years, we have grown significantly whether it's our relationship with Monroe, our relationship with Sears, our relationship with Goodyear, our relationship with Brakes Plus, all of those customers in some ways are helping us understand better what we need to do to be effective with them long term. Our push in availability specifically and import parts, closer availability to customer daily replenishment is all reflective of the reality that serving these larger customers starts with availability, but it also includes, as Mike highlighted, our need to get into the commercial credit business. Our experience on that with our partner just was not
what our larger accounts expected was 1.
And then 2, we talked about accounts expected was 1. And then 2, we talked about our B2B platform. 2 years ago, our penetration on that was close to 0. We surpassed 10% this year on our way to 20%. And the majority of those as you would expect are the larger bank Rogers in terms of reflecting those capabilities.
I feel like we're in great shape today in terms of our sales force and how we're focusing them in terms of our platinum diamond customers and their growth expectations. I feel terrific about what the teams have done in store. We talked about our shrink results this year. Shrink is helpful because we see that in the P and L, but what's really helpful is the in stock levels at the local store level. So organizationally, as I said, we this has been a journey of 5 years to get to a set of capabilities that those larger bay customers are a opportunity for us principally versus the traditional WDs for sure.
I will tell you one of the benefits of BWP when we look at their business is that nearly 2 thirds of the business that they're doing are with customers that we weren't doing business with. And they tend to be larger Bay how to penetrate and how to penetrate and grow even deeper relationships with those larger Bay customers.
Thank you. Our next question is from Colin McGranahan with Bernstein.
Good morning. Thanks for taking the question. First just on BWP, focusing on that for a second. Can you give us a little detail on the integration and what those costs will be in 2013? Just looking at the EPS guidance, it looks like it translates to maybe $18,000,000 to $24,000,000 dollars of actual integration expenses, which seems a little high at 10% to 14% of the sales of BWP.
So maybe you can just give us a little more specificity on what those integration costs are and how that integration is going to go?
Yes. So Collyn, this is Mike. I will maybe I'll start that and Darren you can add any comments. But first
of all, we're not going
to go into a lot of details on our integration costs from a competitive standpoint. But let me give you a little bit of a frame. We said that these are one time costs whenever you buy a company. One of the things that was a little bit unique about the BWP business is they had the company owned stores and then they had the independents. We don't have the independents.
So part of the costs are kind of separating the DCs and moving the DCs to the GPI. The DC is the GPI. So there is going to be some costs associated with that. And then there is just integration costs as you transition, as you make changes, as you move things around and convert things. So those are where the costs are.
I want to be clear those are one time costs, dollars 0.15 to $0.20 Obviously those are estimates right now and our goal will always be to beat those numbers. But that's our best view right now. I think the more important part about that business is and I think Darren said it, we're extremely excited about it.
This gives
us some access to some new capabilities, some very talented people, including the family and all the team members. And so far we're off to a fabulous start in that business. And then we also said that if you net out and take away the integration costs, that business, the sales of $170,000,000 to $180,000,000 is actually accretive to our business. It's in the commercial space. So we're really excited about that.
Yes. I don't have much
to add, Collin, except just imagine you have 3 DCs products co mingled. There's going to be a fair amount of work on the front end just to realign all the products to support the company owned stores, to support the stores that GPI will be taking as a part of this. And then there's repositioning in our own markets. There's going to be real estate related costs that drive a fair amount of that one time cost. And then there's just the natural retention in people type of cost too.
So our goal is to actually get those behind us and always to try to achieve a lower level of integration costs than what it takes. But we thought it was helpful to frame that for the outside world.
Great. That's very helpful. Just a second very quick follow-up on new store expansion. 2013 and even beyond, obviously, you're starting to accelerate the expansion a little bit here. Can you geographically talk about where the emphasis and focus will be contrasting existing markets, new markets?
It sounds like New York City and then New England area might be a bit more of an emphasis and then further west as well?
Sure. Kevin? Yes, Colin, this is Kevin. So essentially there's 2 elements. The easy question or easy answer to your question is what's our plan in 2013?
And we have markets that were materially underpenetrated. And as we had in our prepared remarks, we entered New York City. New York City is just on the commercial side over $1,000,000,000 in volume and it's a market we just entered last year. We through the BWP acquisition making a big bet in the Northeast, but the majority of our stores that we opened in 2012 were in the Northeast and that will remain true as we go into 2013. So it's essentially storing out markets that were under penetrated in.
We're also making a material push into Chicago and that's another underpenetrated market. As you move forward 2014 and beyond, you look at a map of Advance and it's an East Coast based company and we've commented on that and the impact of the weather and the entire West Coast of the United States is essentially what we would be moving to over the next several years.
Great. Thank you very much.
Thanks, Collyn.
Thank you. Our final question today is from Dan Weywer with Raymond James.
Thanks. Darren, you noted a number of initiatives to further grow your commercial market share. But on do it yourself, I believe the only catalyst is accelerating the number of new stores. But beyond that, is there anything in the works to improve the do it yourself productivity? And also I may have missed it, did you provide the do it yourself commercial sales mix in your prepared comments?
Yes. Yes, Josh, we'll close the 38.2%
is our commercial mix for
the year.
Yes. And we would see that grow into over 40% next year with BWP and our other commercial efforts. Joshua, what was it for the quarter? 38.2%. That was for the year as a quarter.
Quarter. Quarter. Okay. I'm sorry.
Okay. And then Dan on DIY, it was blended into the comments, but it's a great question. So within DIY, Kurt Schumacher, who has been in the industry 39 years with us for 12 years took over our store organization, mid year our field organization. I'll tell you, Kurt is just passionate about the simple fundamentals of the DIY business, including when you look how DIY trends work these days, Friday, Saturday, Sunday are the days for the business. He's put a lot of effort into simple things and the fundamentals, which include the weekend staffing is 1.
We've talked before about down to the team member, we can see that average basket each team member is moving in a store these days. We put in a lot of effort in growing the average ticket. We've said for years and others may disagree with
us, the DIY business is a 0
to 1 grower in total. The us, the DIY business is a 0 to 1 grower in total. The focus we've all been challenged by ticket growth in there our transaction growth for years. What we realize is we benchmark some of our average ticket in store were low. And so our efforts this year have a lot to do and as you travel our stores as I know you do is focusing on our add on sales efforts.
We talked about later in the year, we're going to be rolling out our internal languages, find it fast, get it fast, our new EPC. So today, our EPC doesn't necessarily make it easy for someone without deep auto industry knowledge to be able to put together a complete solution for the customer. Others have that ability on the EPC to kind of put together a complete bundle. What we see is the opportunity as we roll out our EPC. What we're doing is transferring some of the knowledge and selling process in the electronic catalog and allowing that associate at the counter, that team member at the counter to be able to put together a complete break bundle to put together a complete oil change offer and to be able to measure it and give feedback on that as well.
And so I'm very optimistic. We had our catalog built by our best parts pros in our stores and our general managers. We're beginning that, as Kevin would say, the shakedown process for that and making sure that when it does hit the store, it works as advertised. But that's where I see the growth coming in DIY is the combination of new stores and growing the average ticket not through hope, but actually through the training process and ultimately supporting that through the new parts catalog as we get through the back half of the year.
And then just one quick question for Mike. 1st quarter operating profit to drop what 5% to 8%.
Is the increase in
the incentive comp is that the key reason as
far as that timeline? Yes. Hey, Dan, before I hit that question and I know you always like to get to precision with your numbers. So let me give you so the Q4 mix of commercial was 37.9 and the annual mix of commercial was 38.1.
Okay, great.
Thank
you. And then the drivers and then in terms of the drivers, there's a few of them. First of all, we're going to be anniversarying, so we got more channel if you remember, I think we took out about 2 21 basis points of cost last year of leverage, so we're anniversarying that. 2 is our new stores. So we're adding new stores.
And last year, our new store mix was more at the back half of the year. This is going to be spread out through evenly throughout the year. And then we have a third one component is the annualization of those stores. So typically we open 67 stores up in the back half of the year. As you know, the heavier costs are at the beginning of that.
So that will be the 3rd component. And then the last component is the incentive compensation. So as we know, it's not increased incentive, it's just normalizing incentive comp just given our lower performance last year just resulted in lower incentive comp.
Are you still thinking same store sales
are slightly negative in 1Q before flipping positive?
Yes. We don't give out quarterly guidance around that. But you can read into Darren's comments. I think Darren gave a good frame of how we think about the quarter. Yes.
Cool.
Okay. Great. Thank you. Okay. Thank you.
Thank you. I would now like to turn the conference over to Joshua Moore for closing comments.
Thank you, Wendy, and thanks for our audience for participating in our Q4 earnings conference call. If you have any additional questions, please call me at 952-715-5076. Reporters, please contact Shelly Whitaker at 540-561-8452. Thanks again and that concludes our call.
Thank you. This does conclude today's conference.