Welcome to the Advanced Auto Parts Second Quarter 2012 Conference Call. Today's conference is being recorded. Before we begin, Joshua Moore, Director of Finance and Investor Relations will make a brief statement concerning forward looking statements that will be made on this call.
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 under the Safe Harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, will, plan, forecast, outlook or estimate and are subject to risks, uncertainties and assumptions that may cause the results to differ materially, including competitive pressures, demand for the company's products, the economy in general, consumer debt levels, dependence on foreign suppliers, the weather, business interruptions and other factors disclosed in the company's 10 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 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 Q3 earnings release is scheduled for November 8, 20 12 before market open and our quarterly conference call is scheduled for the morning of Thursday, November 8, 2012. To be notified of the dates of future earnings reports, you can sign up through the Investor Relations section of our website. Finally, a replay of this call will be available on our website for 1 year. Now let me turn the call over to Darren Jackson, our President and Chief Executive Officer.
Darren? Thanks, Joshua. Good morning, everyone. Thanks for joining us and welcome to our Q2 conference call. Before I begin, I'd like to thank our 54,000 team members for their hard work and diligence as they navigated us through a challenging quarter.
As you've seen in our earnings release this morning, our 2nd fiscal quarter reflected a near term slowdown within the industry and in our results. Today, I thought it'd be helpful to provide some context and perspective on the drivers of the slowdown. As we anticipated, our 2nd quarter faced weak consumer demand in both DIY and commercial with significant slowdown in our cold weather markets, principally located within the Northeast and Great Lakes regions of the U. S. From a consumer perspective, gas prices continued to weigh on demand.
The average gas price increased nearly $0.10 a gallon over the Q1 of this year. The good news is the current outlook is for gas to be lower the rest of the year. The macro environment continues to be stressed with high unemployment and low consumer confidence, which has constrained consumer spending. This was evident across retail and reflective of our business as consumers were only willing to spend the absolute minimum amount on failure related parts and were willing to defer maintenance purchases. This slowdown in both failure and maintenance spending impacted both DIY and commercial and led to a deceleration in sales growth versus the Q1.
The principal driver in the deceleration was a sequential quarter to quarter decline in the average ticket, while our transaction growth was down modestly. In the non cold weather we saw transaction growth from Q1 to Q2 accelerate in the low single digits. The overall company transaction growth in commercial still remained positive in the low single digits from a comparable store perspective. The average ticket decline reflects a combination of mix of products sold and our pricing position in the Q2. The industry is experiencing the impact of lower inflation in some key seasonal categories like air conditioning and the absence of escalating oil prices and the impact on the oil change special programs.
In addition, there are pockets where the consumer is trading down in select categories in pursuit of savings. Finally, while price promotions are not having an immediate positive impact on the top line, we believe it will positively contribute to our growth in the future. From a geographical perspective, we saw different results throughout the regions of the company with the greatest deceleration in our cold weather markets, again especially in the Northeast and the Great Lakes regions. Our performance in those two markets is reflective of the milder weather conditions during the Q1, which impacted hard parts and pulled the business forward from the Q2. Our comparable store sales declined mid single digits in these regions of the country, including our Auto Parts International stores within those geographies.
Conversely, we saw acceleration from the Q1 to the 2nd quarter at our stores located in the western half of the U. S. Our comparable store sales continue to grow positively and were up low single digits in our western geographies, where only 10% of our stores are located, as they continue to be less impacted by severe fluctuations in weather. As a result of the declining ticket and lower DIY transaction counts, our comp store sales decreased 2.7%, which was at the low end of our outlook for the quarter. Additionally, our operating income decreased 19,700,000 to $169,200,000 in the quarter.
This was in line with our outlook for the quarter. Despite achieving our previously shared range of outcomes, we are not satisfied with our performance during the quarter. Yet, we remain encouraged by the fundamentals of our industry and have specific action plans to improve our performance for the balance of the year. As such, we continue to focus on growing commercial and competing for the right to serve our customers. The last few years have been focused on gaining a level of fundamental or basic competitiveness by implementing the table stakes of the commercial business, which simply meant investing in the industry's best parts pros, sales team, delivery trucks and parts availability.
We continue to focus our efforts in those areas, but realize the next level will require us to move from being fundamentally better to providing our customers with even greater levels of reliable service, increased delivery speed and superior availability. As a result, we continue to move forward with the in sourcing of our commercial credit function, the opening of our new DC with daily replenishment capabilities, rolling out our B2B e commerce platforms, electronic parts catalog and diagnostic tools for our commercial customers. These key initiatives will fuel our growth over the next several years and allow us to aggressively grow in commercial. Our field and sales teams are more focused than ever at running the business with excellence. Kevin will provide you with an update on our progress and the opening of our DC and other operations update.
As we start our Q3 and look to the back half of the year, we continue to anticipate sluggish consumer demand and choppiness in our business performance. I want to stress we view this as a moment of unevenness versus a longer term downward trend in the industry or our performance. In the upcoming quarter and possibly for the balance of the year, we anticipate we will continue to see lower transaction counts driven by DIY, partially offset by slight improvements in our average ticket. However, in the second half of the year, we will continue to roll out our new commercial program and make investments and focus our efforts in the areas: improving our availability through the addition of new and converted hub stores and inventory upgrades. These availability investments will translate into roughly $60,000,000 of increased parts inventory.
We are increasing our traffic driving advertising to stem the decline in transactions and increase the number of customers that visit our stores. We continue to grow our commercial sales force and anticipate growing our team by roughly 5%. And finally, we will continue to maximize our in store labor to meet our customers' needs and provide superior customer service. We expect but cannot guarantee that the hot summer and more normalized winter weather will provide a lift as we enter the back half of the year. However, we remain cautious with our outlook as our current trend suggests that our comp store sales will be constrained.
This view of our generating positive comps for the balance of the year. In generating positive comps for the balance of the year. In closing, I want to share a story of how team members Alex Moore and Chris Webb recently showed what living our values looks like. Alex from our store in Christianburg, Virginia stayed well after closing 1 night to help a family who was stranded while driving from Connecticut to Florida. Their alternator and radiator had failed and their car battery was dead.
Chris, an instructional designer on our training team at the support center who was passing by at 10:30 at night on his way home saw the car in the parking lot and stopped to offer his help. Alex and Chris stayed well after midnight helping our customers get back on the road again in their time of need. I would like to recognize and thank Alex and Chris for their compassion and their focus on service for the decisions they made to help create an advanced customer for life. Now I'd like to turn the call over to Kevin Freeland, our Chief Operating Officer. Kevin?
Thanks, Darren, and good morning. I'd also like to thank the team for their hard work during the Q2. I'll provide updates on the work that occurred during the quarter as well as update you on our initiatives to support our superior availability strategy and new store growth. As Darren mentioned, our soft performance during the quarter does not overshadow the long term fundamentals of both our business and industry. Our focus on increasing breadth and depth of our end market product assortment and availability remains and will continue to aggressively move forward with the availability initiatives we laid out at the beginning of the year.
Those initiatives include the expansion of our hub network, the continuous upgrade of our parts inventory at our non hub stores, the opening of our new DC and the continued growth and rollout of our B2C and B2B e commerce platforms, commercial diagnostic tool and our electronic product catalog. Hub's inventory upgrades continue to be a vital component to our availability strategy as it allows us to provide superior end market parts availability. Due to the aging fleet of vehicles, both maintenance and failure parts have increased in order of importance for our DIY commercial customers. We continue to expect the demand for these products to increase as the average age of vehicles increase despite the current slowdown in demand due to unseasonably warm weather. As a result, continue to increase the number of hubs through new store expansion and upgrade of existing stores, which have the space and are strategically positioned to operate as a hub.
At the end of our Q2, our total hub count was 320 versus 288 in the Q2 of last year. Additionally, we upgraded the inventory in 231 non hub stores during the quarter. As I mentioned, increasing our parts availability is critical to our success and growth. However, we've been working to ensure to free up capital to fund other parts of our business. As such, we continue to expand our accounts payable to inventory ratio, which increased roughly 784 basis points from 75.1% at the end of Q2 last year to 82.9%.
As a direct result, we've reduced our owned inventory by 31.3% or 163,400,000 dollars from $521,600,000 to $358,200,000 As previously stated, our new Remington, Indiana distribution center was slated to start receiving product in the Q2 and I'm delighted that we successfully achieved that milestone. Work is now underway to schedule the 1st outbound shipments in mid September. We will ship product to our stores in phases, ramping up to 400 stores next year. We're also excited about our ability to provide improved availability by providing daily replenishment to over 200 stores next year. Essentially adding this new capability will allow us to provide greater coverage to the cards in the market and the customers we serve.
We continue to focus on growing our business through our expanded penetration of our B2B capabilities to our commercial customers as well as through successful new store openings. During the Q2, we opened 10 stores, including 3 AutoPart International stores. Year to date, we've opened 35 stores, including 6 AutoPart International stores. As of July 14, 2012, our total store count was 3,692 including 203 AutoPart International Stores. We remain on pace to open approximately 120 to 100 and and 40 stores this year.
Our gross profit rate increased 16 basis points to 49.9 versus 49.7 during the Q2 of 2011. The increase was primarily driven by improvements in shrink and supply chain expenses due to labor productivity and lower fuel costs, partially offset by increased promotional activity and a higher mix of commercial sales. Year to date, our gross profit rate was 50.0, a 14 point basis decline over the same period in fiscal 2011. Again, I'd like to thank the team for their hard work during this challenging environment. We remain confident in the priorities we've laid out and our teams are working diligently to ensure our focus does not get diluted and that we execute our initiatives and the fundamentals of our business flawlessly.
Now let me turn the call over to our Chief Financial Officer, Mike Marona 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 Q2. I plan to cover the following topics with you this morning. 1, provide some financial highlights from our Q2 of 2012 2, put our Q2 and year to date results into context with our expectations and key financial dimensions we use to measure our performance and 3, provide some insights on the remainder of 2012. During our Q1 earnings call, we shared that we were tempering our 2nd quarter expectations given our slow start to the quarter.
We ended up coming in at the lower end of the outlook range we shared for the quarter. We believe our softness is a function of the tough economic environment that is taking a toll on our customers as evidenced in our maintenance categories and the lingering impacts of this year's milder winter. This latter point is evidenced by the significant softness we experienced in our cold weather market such as the Northeast and Great Lakes areas. This softness drove weakness in both our DIY and commercial businesses and our AutoPart International stores. While we are disappointed with our 2nd quarter performance, we also know our relative underperformance can be partially explained by the fact we have more stores in colder weather markets.
For our Q2, our total sales decreased 1.3 percent to nearly $1,500,000,000 driven by a comp store sales decrease of 2.7%, partially offset by the net addition of 65 new stores over the past 12 months. Year to date, our total sales increased 1.2% to $3,400,000,000 and our comp store sales are flat. As Kevin mentioned, our 2nd quarter gross profit rate increased 16 basis points to 49.9% versus 49.7% in the Q2 of 2011. The increase was primarily driven by improvements in shrink and supply chain expenses due to the labor productivity and lower fuel costs, partially offset by promotional activity and a higher mix of commercial sales. Our commercial mix represented 38 percent of our 2012 sales versus 37.2 percent in 2011.
Year to date, our gross profit rate decreased 14 basis points to 50% versus 50.2% over the same period last year. Our SG and A rate of 38.3 percent increased 135 basis points versus the Q2 of 2011, primarily due to expense deleverage as a result of our 2.7% comp store sales decline and the planned shift of expenses from 1st to 2nd quarter, partially offset by lower year over year incentive compensation expenses. Year to date, our SG and A rate decreased 50 6 basis points to 30 8.5% versus 39.1% over the same period last year. All in, our 2nd quarter operating income dollars decreased 10.4% and our operating income rate decreased 119 basis points to 11.6%, primarily driven by the planned SG and A shift from 1st to 2nd quarter and the SG and A deleverage from the lower comp sales. While our diluted earnings per share decreased 8.2 percent to $1.34 versus $1.46 last year, roughly $0.08 was due to the SG and A shift.
The planned shift in expenses, which was previously communicated during our Q1 conference call, was driven by our Annual General Managers Meeting and some strategic investments. Through the first half of twenty twelve, our operating income dollars increased 5% to $393,800,000 and our diluted EPS increased 12.5 percent to $3.14 Year to date free cash flow was $265,400,000 down 7.6% over the same period last year. The decrease was driven by increased accounts payable as a result of the in sourcing of our commercial credit program and lower deferred income taxes due to the lapse of certain corporate tax legislation, offset partially by continued reductions in our owned inventory. As Kevin mentioned, our owned inventory decreased 31.3 percent from Q2 2011, driven by our continued efforts to increase our accounts payable to inventory ratio, which now stands at 82.9% versus 75.1% in the Q2 of 2011. We are maintaining our previously communicated annual free cash flow outlook to still be a minimum $400,000,000 which includes our previously communicated increase in accounts receivable of $80,000,000 to $100,000,000 for the full year from in sourcing our commercial credit program.
We are excited about this new capability as it will allow us to provide a higher level of customer service to our existing commercial customers, help fuel our commercial growth as we increase our credit penetration with customers and allow us to build deeper relationships with our customers at lower costs. At the end of the second quarter, we had $448,600,000 of cash $600,000,000 of long term debt on our balance sheet. Our adjusted debt to EBITDAR ratio was 2.1 times, which is well below our previously stated ceiling of 2.5 times. Our average diluted share count was 74,000,000 shares at the end of the second quarter. While we're not meeting our expectations as we go through this soft period, we remain confident with the solid industry fundamentals, the commercial market opportunity and our team's ability to improve our performance.
We continue to measure our performance through the financial dimensions of growth, profit and value creation. As we have consistently communicated, we prioritize growth as our primary use of capital to increase shareholder value, which includes growing our business through our strategic investments, our operational performance and looking for future growth opportunities or strategic capabilities that capitalize on the market growth opportunity. While we see growth as our primary focus to increase shareholder value, we will continue to use share buybacks opportunistically. At the end of our Q2, we have roughly $500,000,000 left on our share repurchases authorization. While we're in the moments in time where investors will attempt to read into our share repurchase activity, we want to remind investors that we take a long term disciplined approach to share repurchases and we measure our success over years and not over quarters.
We continue to maintain the same disciplined approach with respect to share repurchases, which is focused on creating long term value, not short term earnings. While this can have a tendency to frustrate short term shareholders, this philosophy has allowed us to purchase over 41% of the company at an average price of roughly $43 since 2004. Turning to profit, we continue to improve our profitability, which is reflected in our operating income per store and our trailing 4 quarter operating income rate of 11%, which is up 100 basis points from 10% during the Q2 last year. We have been able to invest in both commercial and availability while preserving our in store service levels by maintaining the same levels of labor hours in our stores. We've been able to fund these investments by managing our cost structure through our continued focus to build a more efficient, competitive and profitable operating model.
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 19.9%, which increased 140 basis points over the Q2 of last year. Our ROIC has increased over 600 basis points over the past 4 years. We're also pleased with our 82.9 percent AP ratio, which continues to lower our owned inventory and we believe we can get our AP ratio to 100% over time. Turning to the balance of the year. While we are not satisfied with our Q2 performance, we believe that the long term industry dynamics are solid and our commitment is unwavering to continue our strategic investments at the same pace as we originally planned, which are focused on commercial, availability, supply chain and e commerce.
These are foundational to our future growth and thus we will not slow or change the timing of them. That said, our business trends continue to be soft with a challenging consumer environment. This coupled with industry growth decelerating and more challenging second half of twenty twelve comp sales compares, particularly in the Q4, which historically has been our most volatile quarter, require us to take a more prudent approach to our annual outlook. As a result, we now expect our annual comp store sales to be flat to slightly down for 2012. We continue to expect our gross profit rate will improve modestly for the full year as previously shared in our outlook.
We will make the appropriate adjustments in our variable expenses with the changed comp outlook and we'll maintain our disciplined focus on managing our discretionary administrative support costs. As a result, we now expect our SG and A per store will be down 1% to 2% for 2012. With these changes, we now anticipate our fiscal 2012 EPS to be in the range of $5.25 to $5.35 per share. In closing, I would like to thank our talented team members again for their resolve and focus to serve our customers during our challenging Q2. We have confidence in our team as they have shown many times that when faced with adversity, they always respond with character, resiliency and competitive spirit.
We expect to rise to the challenge to improve our performance. Operator, we are now ready for questions.
Thank you. We are now ready to begin the question and answer session. And our first question comes from Gary Balter with Credit Suisse. You may ask your question.
Thank you. My question relates to obviously the results. When you analyze what's going on, obviously your numbers everybody slowed down the sector and Darren you talked about that. But if you look at the disadvantage that you have because of the fact that your delivery you mentioned you're going to have the hub working or you're going to have the delivery center working soon. But what's the disadvantage caused by that?
Have you adjusted labor hours at the store that's maybe hurt you? Do you why do you feel you lost momentum in commercial because that looks like it was negative? How do you address those? And what are you doing to deal with those on a near term and long term basis? Thank you.
Yes, Gary. Absolutely the right question. So maybe a little bit of context. When we look at our overall commercial business in the Q2, as we said, when we look through it and ask the question, are we still driving the business as measured by transactions? Our transactions across the company were up low single digits.
Matter of fact, many, if not all of our non weather affected markets, they were up better than mid single digits. And so when I look at the health of being out there, are we delivering the parts, are the teams making the sales calls, are we improving in terms of our relationships with customers, I think
transactions are a better proxy. What we see then is that we saw
a lot of pressure on industry, we have some great customers up in the Northeast. 1 of them is a public company. We saw those same challenges in the weather affected parts of the business, principally in our maintenance categories and that includes categories like brakes. When we get down to the next fundamental question, you said we're expanding our hub network. We're doing daily replenishment.
Maybe a way to think maybe a way to answer that question is that we have 3 15 hub stores today. Those are big commercial programs for us, many of those well over $2,000,000 in terms of their productivity. And what we're finding is that as we go across the country, we use those hubs to supplement some of the local stores in terms of their availability. And if we could flip a magic wand and convert all of our DCs to daily replenishment, we would. But in lieu of that, what we've been doing over the course of several years is just slowly marching up our hard part SKU count at the local store level and at the hubs.
So we still see an opportunity in the existing network and we still have some of the largest stores in the industry, I mean, not by thousands of square feet, but certainly 100 to continue to add hard parts at the local level. We know when we have the hard part at the local store, our close rates are darn near 100%. And so when we said we're going to invest $60,000,000 in the back half of hubs and local stores, what we're essentially doing is saying we're going to add thousands of hard part SKUs to those local stores across the network. Hubs aren't ideal, but by themselves they're a great return. Our first replenishment facility comes online later this fall.
We've inked our 2nd replenishment facility. And over the course of several years now, what we've done is through a balance of custom mix technology by store and actually getting rid of what we'd say some of the slow moving product. We feel like we're in a certainly an improving position each year. But I'll be honest, is it ideal? Not ideal in terms ideal is closer to a daily replenishment model, but up just modestly on a per store basis.
So it's not a case that we pulled back. We made a little bit of a bet in the second quarter, a little bit on pricing and a little bit in terms of traffic driving. And my takeaway is that when we start to snap back in some of those cold weather markets, they should start behaving more like some of our non weather affected markets, which really gives us I don't know the word is hope, but confidence that the business will come back overall. I think what you heard on our call is that we see the back half and our teams are absolutely focused in our internal targets and plans to drive positive comp store sales. That is absolutely the expectation here.
And we're also realistic that we see trends in terms of that hot weather that we just experienced is generally positions us well. And the benefits of that come when it get cold, principally in places like batteries, 1st and foremost. So we're trying to both send a message that we're being balanced in terms of what we see immediately in the consumers. But more importantly, in the short term, give us a little cold weather in those cold weather markets. I'm certain we'll see some of those businesses absolutely snap back.
And it doesn't change the fundamental thesis of our industry of 240,000,000 cars on the road. They're out there and the consumer from our point of view are making choices today where they're just stretching it out a little bit longer principally in the maintenance categories in order to manage their checkbook a little bit better.
Thank you. And just for my follow-up and I won't ask Mike kind of scared us off from asking the buyback question, so I'll stick to something else. I'll leave it to somebody else on that one. Do you think all 3 of you have kind of said the weather's had an impact. A few years ago business wasn't that strong because and then all of a sudden all this deferred maintenance started getting spent on and comps picked up a lot for everybody.
Do you think we're just past that stage where the deferred maintenance kind of caught up and this is more normal or do you difference right now? Yes. You're right, Gary. Back in 2,008, I remember having one of these conference calls and it was ourselves in the industry. We're all kind of
shaking our head and it was essentially flat comps for the industry even down in a couple of places. And then 180 days later, we were all high fiving because the comps were closer to 10%. I think you look at some of the AAI data and other data, it says the deferred maintenance bill out there, any one point in time, it's not less than $60,000,000,000 So it's still a big number that sits out there in those vehicles for us. So I think it's certainly out there. I think the way the consumer is managing their dollars right now is that we've talked about this time and time again that gas price from our vantage point, I think it's every $0.01 move is $1,000,000,000 of discretionary income.
As that comes down and we can see it in some of our markets where there's a little more gas price relief, those tend to be markets that are doing a little bit better. And as you said, and I'll reinforce that, we have markets where quite frankly, they look the difference and these aren't small markets from the Northeast, the parts of the South are literally 15 points difference in terms of how they're performing. And so I don't think the economies are that different between the two markets for sure, but I certainly kind of pin back to in those markets and it's competitively they're comparable too. So I do think we have a little bit of a stretch out period going on in some markets and in other markets that were less
Group. You may ask your
Two questions. First on the sales trend. I mean, Darrin, clearly the focus is getting those comps back to positive and you listed how the things are doing. But also the guidance infers that it's negative in the back half. Could you just give us some insight as to how it's been since the end of the quarter?
I assume it's still negative, but maybe better than you actually were in the Q2. And you mentioned in your release, the second part of that, that the last period of the quarter was better. Could you just describe what that period was?
Yes. Yes. So as we a couple of things, Greg, to your direct question. Since the beginning of the quarter, it's been a little choppy. And so what I can see and we've talked about this in the remarks, I mean, this is true, our final period, which is cuts off about mid July, our comps absolutely turned positive in the final period.
And that was low single digit, low low single digit, but they turned positive, which was a turnaround from what we experienced early in the quarter. And if you said what was driving it, it certainly we all saw the heat come back into the market that helped drive some of the seasonal categories. And we got that lift. I mean, the thing that tends to benefit from that as you know is, you take air conditioning. That was a principal driver, didn't help as much this year because we saw that was one of the categories from an inflation point of view that was literally down 50% this year.
So in some cases, we could have been up 38% in units, but still down 12% in comps because the inflation effect went against us this year and we saw a little bit of that in the ticket. But all that being said, I think the read you should take away from that when we bounce back to, I'd say, more seasonal trends. And in many of our markets, it went beyond seasonal trend. It was just plain warmer than it ever has been. The business reacted appropriately.
When we look to the back half of the year and what we can see is that our confidence, we're no good at predicting the weather, I'll just tell you that. But what we are good at predicting is that if we have more normalized weather patterns, heat that we just experienced will certainly manifest itself in some of our stronger categories of business, whether that sits in the starters, alternators and battery categories that I think the difference between a strong positive in the second half and a more challenging business trend like we're experiencing in the first half is literally if we find our way back to the more normalized patterns.
Great. And then the second question in terms of capital allocation, you guys are running with more cash than ever before. And I think I heard your comments mentioning a second daily
replenishment facility. I'm wondering
are you considering another new DC like facility. I'm wondering, are you considering another new DC like Remington? Or is there some other spending there? We've seen some acquisitions like Quaker City that came up. How are you thinking about allocating that cash?
Or is that the new level you need to run at given the commercial credit program?
Yes. So three things. Greg, you're right. We're at an all time high level of cash. I did say that as we look out, we've penciled a new agreement for a second daily replenishment center.
I'd like to actually not get into details of where it is for competitive reasons, But everything that we see certainly says that to take to further build on the momentum we've built in the last 4 years, we're taking the next steps competitively in the commercial segment. And we believe that's where the future is. Mike did talk about commercial credit for years and it was just lower on the priority list. We had that outsourced to a third party bank. It was principally a retail bank.
What we know is that we're going to spend $100,000,000 which is comparable to our competitors to bring it into the business. We feel that by bringing that in, we're going to actually be able to provide a better level of customer service. More importantly, only about half of our business is done on commercial credit today, which is a fraction of where the industry is or even AI. So we think it's not only a great customer service tool, but it also is a sales generation tool for many of our customers that quite frankly could benefit from that credit particularly in difficult times. So that's 2.
As we look to next year, our store count and we have purposely and I think this is I've said this before is challenging some of our comps relative to others in the competitive set. We have slowed store growth to about 100 stores a year. We'll be 125 this year. Next year that number will be closer to 200. And the bright spot of our performance this year has really been this class of new stores.
So we've been spending time re architecting the store model to be a more commercially driven store model, a much lower cost model for us in terms of the cost to build it and where we place it. And as we go into next year, we see a great opportunity to begin to up the store count in terms of many of the markets that we see in part because of the commercial potential. And 4 years later, we feel like we have a commercially oriented new store program that is worth investing more dollars into for sure.
Thank you. Our next question comes from Michael Lasser with UBS. You may ask your question.
Good morning. Thanks a lot for taking my question.
On the distribution center, is there any way you could quantify the potential benefit that you might see on the sales side as that facility comes online?
Yes. This is Michael, this is Kevin. Essentially the center will totally service over 400 stores and approximately half of those will be within a range close enough to the facility to receive daily replenishment. We do we actually
have
quite a bit of work on what the lift will be and it's a good change as it improves the availability of those stores. Quite frankly in a fleet of 3,700 stores changing 200 to a better availability will have somewhat of a modest impact on the overall company. It's as that program rolls out that it would be a more pronounced impact on the company as a whole.
That's helpful. And my second question is, what is the guardrail if you saw opportunities either on the acquisition front or the ability to accelerate the pace of new distribution center openings to really improve the positioning of the business over the long term?
Yes, it's Mike. We have at this particular point, I'm kind of no appetite to take our adjusted debt to EBITDAR ratio above 2.5 times. And we believe actually we can grow our business and do the things that Darren talked about and Kevin talked about and operate our business and grow our business and make the investments in our strategic initiatives and keep within that. So but at this particular time, we have
no plans to do that. Yes. And Mike you would say that Mike you asked a question about our daily replenishment centers. Maybe to put that a little bit more into context in order to make those things happen, you have to replace warehouse management systems and that's complete. We've got to open the first one and honestly work the bugs out.
These are complex centers. We're excited about what we see right now in terms of how that center is operating in terms of the phase that we're in. And I would say this is that we have absolutely capital and cash that if that proves to be what we believe it will prove to be, we are not constrained both in terms of dollars and leverage ratio to go a lot faster on that. What we are doing and we think it's responsible is that we certainly want to work the bugs out on it because if you get if you speed in this area in the supply chain, it pays the price, 3,600 stores pay the price. And so you shouldn't read And so you shouldn't read anything into our comments that we will be timid in terms of our ability to invest in the business, provided and I'm confident the teams will figure this out, we get the results.
Thank you. Our next question comes from buyback issue. I understand your response on looking for reinvestment opportunities. I understand that you use a conservative DCF model to determine when to buy back shares. But we're also 27% from its peak.
Free cash flow yields up to about 10% now. But I guess the bottom line is what are we waiting for?
Yes. So Dan, the good news is you listen to our pre remarks and you understand our philosophy hasn't changed that our first priority with capital and Darren said it is to invest and grow in the business. And quite frankly, that's where we prioritize. And quite frankly, we're not growing at our level of expectation at this particular point in time. So the balance of the year, we're focused on reversing the trends.
We're going to continue to invest in the business and generate positive comps. And buybacks don't create sense. So the I think the most important thing is, we believe that investing in the business and growing our business is what creates long term value and buybacks also show our confidence in doing that. And we've done them over the last few years since 2004, we bought back about 41% of the company at an average price of $43 So we think that has created good value. However, it doesn't create sales.
And I think the most important thing is that we get the question a lot and we're focused on creating long term value not short term earnings. And we also take it very seriously about what we're going to do with the cash. I think to Greg's question and to some of the questions earlier, what you're going to do with the cash. We typically don't talk about debt. We don't talk about buybacks before we do them.
We don't talk about the other things before we do them. But just know that this management team takes very seriously what we do with the cash. And whatever we do, do with that cash, we'll make sure that we get a good return and we drive long term value.
Okay. And then just a question about Carquest, Darren, a speculation that its ownership may change hands. Can you remind us the difference in Carquest position in the commercial market relative to Advance and AI? And also if there are certain potential buyers that would create more of an issue, more of a headwind for Advance than other potential buyers?
Yes. Dan, I'm going to just start first. First of all, we don't comment on specific opportunities that may exist out in the marketplace. And Darren, if you want to give a few insights to his question around comparisons. Yes.
Dan, both of your questions are understandable and I understand why you're asking them. And I would say this is that the following week, the market right now as you know there was another public company that was out there for sale that was sold and then put back. And so there are things shifting in the marketplace right now. Part of that is that who knows. I couldn't speculate at this point whether Carquest gets sold or not or it doesn't get sold.
I can't speculate who buys them or who doesn't buy them. The most recent evidence we do have is one of the companies in our industry got sold and it was unsold. And so I think we'll have to watch how that plays out versus at this point us speculating as to what the outcome will be. There's no doubt that as you know and you've watched this industry longer than most, I mean it is a B2B, WD model and you know what that may be attractive to some and it may not be attractive to some. So instead of trying to lead you down a path of speculation, I think we'll all sit back and see how that unfolds over time.
Thank you. Our next question comes from Matt Fassler with Goldman Sachs. You may ask your question.
Thanks a lot and good morning. I have one follow-up on capital allocation and then another on traffic. First of all, on capital, you spoke about reinvesting in the business. If you think about the level of CapEx for this year, but also the perspective level of CapEx going forward given expansion and any other reinvestment that you're contemplating, should we think about a hike in aggregate capital expenditures from your prior run rate or prior thought process?
Yes. So, Matt, I think what we said in our outlook is that we're going to be spending this year $275,000,000 to $300,000,000 and we still believe we're going to be in that range. The big areas that we're investing in capital this year, obviously, 1st and foremost in terms of growth is our NSOs. So that's one big pocket and the maintenance that goes into maintaining those. The second pocket is supply chain.
Kevin has been really clear around. And we're very excited about the Remington facility and the daily replenishment test that we're going to be doing. I think it's going to be a fantastic opportunity. And the first one is always more expensive. So that's a big part of our capital.
And then the 3rd area obviously is IT and IT in our systems. Kevin has talked about some of the our electronic parts catalog and that's going to be a fantastic tool for our teams and our stores to enable them to serve our customers faster. So those are the 3 big pockets. Darren did talk about as we look out, we haven't given an outlook for the out years. But just to be clear, we're going to continue to invest in commercial.
We're going to continue to invest in availability. We're going to continue to invest in supply chain. And we're going to continue to invest in those parts that will grow our business. So but I can't comment at this particular point in time as to whether we're going to increase that. But we're comfortable with the capital at this particular jump here.
Matt, I was going to say, if you look back 2 years ago, it was roughly a $200,000,000 run rate. We've taken it up last year. It was $300,000,000 again this year, principally supply train driven. I mean, next year, you can infer from our comments taking our store count from 125 to closer to 200 that will drive it up. And the other thing that we've been spending capital on quite frankly is our acquisition of Moto Logic and driver side.
And the other piece of capital though it runs through working capital is commercial credit. And so again, we're trying to stay on strategy. And unfortunately, strategy and financial results in 90 day windows or 180 day windows is we're trying to take that next step in terms of capabilities, daily replenishment, commercial credit, diagnostic tools. In the fall of this year, we'll begin the process of our new electronic parts catalog being rolled out to our stores in order to enable the commercial sales as well as the retail hard part sale to be able to be affected in a more customer friendly, but more team member friendly way. And those all sit in the capital buckets.
Usually the back half of this year, we get even more precise as to what the dollars are. So I agree with Mike. We're not going to give you a forecast now. But we're in that in between period where many of the larger investments that are positioned to grow, I would say, our position in commercial with larger base and larger customers. We're in that transition to the capabilities.
I think we just started in July, internal credit on our own books. We'll start in October of this year, shipping daily replenishment. We wish it would go faster and the teams are working their tails off to make it go faster. As that comes through, it informs just how fast we can go and then it will get translated into dollars and projects with the team going forward.
And just as a follow-up, I assure that I asked you this question in the spirit of your intro with long term focus in mind. The last big buyback push from the company was late 2010, early 2011. You bought back a lot of stock in the low to mid-60s and you've been smarter than most about thinking about intrinsic value and picking the right spots. Is there any reason to think that your view of the intrinsic value of the business has changed over the last 12 to 18 months as we think about at what levels this might be too good of an investment for you to pass on?
No, no Matt, not at all.
Thank you. Our next question comes from Peter Keith with Piper Jaffray. You may ask your question.
Great. Thanks for taking my question. This is actually John on for Peter. You guys have done a great job stabilizing shrink now this quarter and it just turned into a benefit. Based on what you lost in shrink in the last three quarters of last year, do you think you're going to be able to recapture that in the second half of this year?
Yes, it's Mike. Yes, I want to really complement our teams on what we've done with our shrink trends and the answer to that is yes. Our trajectory that we were on last year was going in the wrong direction. We've reversed that and we're going to get back. And by the end of this year, we'll be almost to those levels that we were at prior to our decline.
Okay, great. And then as my follow-up, as we think about your Remington distribution center and the margin impacts for both the remainder of fiscal 2012 and then going into fiscal 2013, should we be assuming a drag to margin now for the continue to assume a drag to margin in the second half and margin expansion in 2013?
Yes. This is Kevin. We've had leverage essentially coming the supply chain this year and it's through predominantly efficiencies that we've been driving through the centers and some smart decisions that we made on forward purchases of fuel. As we turn the distribution center on, obviously, the investments that we've made begin to depreciate. We'll begin to operate the facility.
But the actual operating costs
to the facility are lower than any of
our other centers. So it's actually a significant change in the way that we're operating the level of automation that we put into the center. So essentially we get a headwind and a tailwind at the same time. I think when it's all said and done, we see a relatively muted impact of that from a margin perspective and predominantly what we'll see is an impact on sales.
Thank you. And our final question comes from Bret Jordan with BB and T Capital Markets. You may ask your question.
Good morning. Just a quick question. In the prepared remarks, you talked about your pricing position in the Q2. And I guess my question is really sort of what the promotional environment is looking like right now and whether that the comment was a positive or negative pricing position relative to peers?
Yes. This is Kevin. We essentially keep our ear to the ground on DIY and commercial prices every day of the week. And we try to manage in a very tight range of plus or minus 1% of the prevailing prices in the market and we're benchmarking all of our key competitors. I would as we got into the 2nd quarter in that plus or minus 1% range to be honest we've managed to the low end of that range purposely.
As we were hitting tough sales, we want to make sure that it was not being driven by being improperly priced in the market. And it would be our intention to stay in that position until such point as the sales turnaround. So I think what you're seeing in our numbers is in fact what you would likely see in the quarters ahead.
Okay. And one follow-up on the commercial pricing as a couple of these large players become a bigger piece of your commercial business. Is there price deflation as they wield that clout? Are you seeing some compression in commercial pricing through those contracts? Yes.
Brett, to build
on Kevin's point, but specifically to answer that one.
As you build more point, but specifically to answer that one, as you build more national accounts, of course, those come with they come with both lower margin rates, but the truth is they come with greater consistency and growth in the margin dollars for sure. So as we grow that there will be and there has been for 4 straight years just more pressure in our business inherently because commercial gross margins are lower. And I think to your just to put an exclamation point or a period on your other question. When we look at our performance in Q1 to Q2 in terms of the deceleration in our business, what we really saw is that if you broke it down into 2 things, nearly 3 quarters of the deceleration in our comps came from ticket. And in that ticket, you can see both the combination of and you would expect this from us that we saw lower transactions.
We certainly went out and I would say used more promotional vehicles in terms of radio and in terms of direct mail in order to drive traffic in our stores. That's what you do in these times. And what we also saw is a consumer trading down in certain categories of the business, I think that reflects some of the economics. And so as we look out, we continue our to kind of just manage and assess that balance between driving the promotional activities, traffic into our stores, traffic to the commercial accounts, and that balance with ticket in the back half of the year. And that's how you go back and just fight to get the business back.
As you look at and this is not really a third question, I guess, responding to that. As you look at your online pricing, which is pretty aggressive, is that compounding the ticket compression because people are buying online, but picking up in store and they're getting what is running sort of like a 20 percent discount from the online ticket?
Yes. This is Kevin. We do have a more promotional stance online. It's more similar to what we do through our direct mail program. So those 2 are relatively aligned.
And the honest answer is the while that business has grown very large percentages over the past several years, it is a very small part of our business today and not large enough to materially move the company's gross margin.
Thank you.
Thank you. I'll turn the call back over to Josh
Thank you, Shirley. And thanks to our team for participating in our Q2 earnings conference call. If you have any additional questions, please call me, Joshua Moore, at 952-715-5076. Reporters, please contact Shelly Whitaker at 540-5618 contact Shelly Whitaker at 540-561-8452. Thanks again to our audience and that concludes our call.
Thank you. This does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.