Welcome to the O'Reilly Automotive Incorporated Second Quarter 2018 Earnings Conference Call. My name is John, and I'll be your operator for today's call. Please note that this conference is being recorded. And I will now turn the call over to Tom McFall. Mr.
McFall, you may begin.
Thank you, John. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our Q2 2018 results and our outlook for the Q3 and full year of 2018. After our prepared comments, we'll host a question and answer period. Before we begin this morning, I'd like to remind everyone that our comments today contain forward looking statements statements and 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 1995.
You can identify Litigation Reform Act of 1995. You can identify these statements by forward looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest Annual Report on Form 10 ks for the year ended December 31, 2017 and other recent SEC filings. The company assumes no obligation to update any forward looking statements made during this call. At this time, I'd like to introduce Greg Johnson.
Thanks, Tom. Good morning, everyone,
and welcome to the O'Reilly Auto Parts 2nd quarter conference call. Participating on the call with me this morning are Jeff Shaw, our Chief Operating Officer and Co President and Tom McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman and Greg Hensley, our Executive Vice Chairman are also President. It's my pleasure to begin the call today by congratulating team O'Reilly on a strong second and a solid first half of twenty eighteen. Our team's proven ability to provide superior service at a great value drove our 2nd quarter comparable store sales increase of 4.6%, which exceeded the top end of our guidance range.
As we discussed on our Q1 call, the Q2 got off to a difficult start as many of our markets experienced continued winter like weather. But for the balance of the quarter, we benefited from more normal patterns as spring arrived and demand picked up at the end of April. Our team of over 79,000 dedicated team members stepped up to the challenge by providing outstanding customer service and driving our strong sales results in the quarter. Our team remains committed to driving profitable sales growth with an unrelenting focus on taking care of our customers, and we are pleased to have driven an increase in the 2nd quarter operating profit of 6.8% as compared to the Q2 of 2017, excluding last year's SG and reform, drove an increase from tax reform drove an increase in earnings per share of 38 percent to $4.28 per share, which also exceeded the top end of our guidance range of $4.05 and is a testament to the unwavering commitment of team O'Reilly to controlling expenses and providing the best customer service in the automotive aftermarket. Now I'd like to provide some additional color on our 2nd quarter comparable store sales results.
We experienced weather driven headwinds at the beginning of April as the unseasonably cold and wet winter in many of our markets pressured ticket counts, specifically on the DIY side of our business. With the onset of spring beginning at the end of April, our comp trends improved. And although April was the softest month of the quarter, it did contribute to our quarterly same store sales growth. Our teams did an excellent job capitalizing on the pent up demand and delivered our best performance of the quarter in May. As we move to typical summer selling season in June, the hot weather in many of our markets was a contributor to the steady demand and we have continued on a steady solid trend thus far in July, which is in line with what we would typically expect to see from a normal weather backdrop.
Similar to our Q1, both our professional and DIY sides of the business were positive contributors to our comparable store sales growth with professional performing better as we saw strong ticket count growth on that side of our business again in the 2nd quarter. As I mentioned earlier, our DIY ticket counts were pressured at the beginning of the quarter but stabilized with the arrival of spring weather. On a combined basis, our ticket count comps finished flat for the quarter. Average ticket continues to be a strong contributor to our comparable store sales increase, driven by the increasing complexity of vehicle repairs, a favorable overall business mix and continued effective pricing management. Similar to the past two quarters, we benefited from some modest commodity driven inflation on same SKU pricing during the quarter.
On a category basis, we saw solid performance broadly across hard part categories with strength in categories such as ride control and brakes in line with our expectations of typical maintenance and failure related demand after a normal winter. As you would expect, we also saw good performance in typical spring maintenance categories as we move through the quarter as well as strong performance on hot weather categories, particularly HVAC and refrigerants in the back half of the quarter. However, these heat related categories present a mixed headwind to gross margin, which I will discuss in a moment. We view the impact of weather we've experienced thus far in 2018 as in line with normal weather cycle for our business, and our expectations for the remainder of the year include an assumption of continued typical weather. Ultimately, swings in the weather balance out over the long term and the strength of the automotive aftermarket is determined by the core underlying drivers of demand in our business of miles driven, the number and average age of vehicles and health of the consumer.
As we have indicated outlining our comparable store sales guidance on the last two calls, we have a favorable outlook for these drivers in 2018 as employment and the economic outlook for consumers remain stable and the average vehicle age continues to increase. However, we expect to face some short term pressures to miles driven as consumers adjust to higher gas prices or otherwise respond to economic uncertainty, including any temporary disruptions to the economy from rising prices or the impact of tariffs. In addition, our guidance incorporates the headwind we will face from an additional Sunday in the Q3 of 2018 as compared to 2017. Sunday is our lowest volume day of the week and is impacted and the impact of additional Sunday has historically been approximately 50 basis points headwind to the quarter comparable store sales. As a result of these factors, we're establishing our quarter guidance at 2% to 4%.
Based on our year to date results, our Q3 guidance and the difficult comparisons we face in the Q4, we are maintaining our full year comparable source guidance to 2% to 4%. For the quarter, our gross margin of 52.5 percent was an 8 basis point improvement over the Q2 of 2017 margin, which was within our expectation built into our full year gross margin guidance. As I discussed earlier, in the second quarter, we faced some gross margin headwinds from strong sales of hot weather categories such as HVAC and refrigerants, which were significant contributors to our comparable store sales and gross profit dollar growth, but on average carry a lower gross margin percentage. This mix headwind as well as continued headwinds from full year gross margin guidance unchanged at 52.5% to 53%. However, we expect to continue to some pressure from the mix dynamic moving forward, and we now expect to come in at the bottom half of that range.
We continue to see rational pricing within our industry's ability to pass through inflationary price increases. We also continue to expect our full year operating profit for 2018 to be within our previously guided range of 18.5 percent to 19 percent of sales. For earnings per share, we're establishing our 3rd quarter guidance $4.20 to $4.30 which at the midpoint represent a 32% increase over EPS of 3.2 $2 in the Q3 last year. We are also updating our full year EPS guidance to $15.70 to $15.80 an increase of $0.40 at the midpoint, reflecting our 2nd quarter comparable sales and gross profit performance of the shares we have purchased through the call today. I would remind everyone that our full year guidance includes the impacts of shares repurchased through this call, but does not include any additional share repurchases.
Before I turn the call over to Jeff, I would like to again thank the team O'Reilly for their solid performance in the first half of twenty eighteen and continued dedication to consistently providing exceptional service to our customers every day. We remain very confident in the long term drivers for demand in our industry and we believe we are very well positioned to capitalize on this demand and increase our market share. I'll now turn the call over to Jeff Shaw. Jeff?
Thanks, Greg, and good morning, everyone. I'd like to begin today by congratulating team O'Reilly on a solid second quarter and thank our team for their continued commitment to providing top notch customer service. As Greg previously discussed, we saw a pickup in our business as we moved through the quarter and we're very pleased with the hard work and dedication of our team, which resulted in the 4.6% comp store performance in the 2nd quarter. Now I'd like to spend a few minutes discussing our SG and A results for the quarter. SG and A as a percent of sales was 33%, a deleverage of 54 basis points from 2017.
However, as we discussed last time or last year at this time, our Q2 of 2017 included a non recurring benefit of $9,000,000 or reduction to a legacy legal reserve. Excluding this one time benefit from the prior year results, our SG and A delevered 15 basis points, which was better than we anticipated as our team drove strong sales while maintaining strong expense discipline. On an average per store basis, also excluding the legal reserve benefit in 2017, our SG and A grew 3.2 percent, which was in line with our expectations. As we outlined in our initial 20 18 guidance, we're significant beneficiaries of tax reform and feel it's appropriate to allocate some of these savings back into the business to continue to improve the levels of service we offer our customers. The cost of these investments is the key driver of our higher than normal year over year SG and A per store growth.
These investments are heavily weighted to enhancing store level, payroll and team member benefit plans. And we remain very confident that our commitment to taking care of the customer by ensuring that we're hiring, training and retaining the very best professional parts people in the industry will drive our continued strong performance. We continue to expect to follow our previously disclosed plan regarding these incremental investments and we're reiterating our guidance for full year growth in SG and A per store of 3% to 3.5%. Now I'd like to spend some time talking about our store expansion for the 1st 6 months of 2018 and our plans for the remainder of the year. We successfully opened 128 net new stores in the 1st 6 months and are on target to hit our goal of 200 net new stores in 2018.
We continue to be pleased with the performance of our new stores and continue to successful in identifying great locations across the country with our store growth in the 1st 6 months of 2018 spread across 29 different states. Our store growth continues to be balanced between our expansion markets with the heaviest concentrations in Florida, Ohio, the Mid Atlantic and the Northeast and backfill in existing more mature markets, including Texas and the Western U. S. Our ability to effectively enter new markets while also selectively expanding our presence in existing markets continues to give us a great advantage in selecting new sites. And more importantly, identifying, hiring and training outstanding store teams to provide excellent customer service in our new stores.
Our success in new store expansion wouldn't be possible without the continued outstanding support provided by our distribution teams. A key to a successful entry in a new market or the ability to remain the dominant supplier in existing markets is to equip very solid store teams with industry leading parts availability. Industry standard with 5.9 a week service to our stores along with multiple deliveries throughout the day to our local stores and our hub stores ensuring that we can be the 1st supplier to provide access to those hard to find parts. I'd like to congratulate our DC teams a strong second quarter and thank them for their continued outstanding customer service. We'll have the opportunity to highlight the great work of one of our distribution teams when we host our upcoming Analyst Day in August at our Greensboro, North Carolina facility.
This DC was opened in 2,009 and was recently expanded from 300,000 square feet in 2017 to support our continued growth in the Southeast and Mid Atlantic. As I close my comments, I want to thank all of Team O'Reilly for their continued dedication to our company's success. We've had a solid year so far and we're in a great position to finish the year strong. Our current and future success is dependent upon providing the best earning our customers' business each and every day. Now I'll turn the call over to Tom.
Thanks, Jeff. I'd also like to thank all of Team O'Reilly for their hard work and dedication, which drove good second quarter results and a solid first half of the year. Now we'll take a closer look at our quarterly results and update our guidance for the full year. For the quarter, sales $165,000,000 comprised of $103,000,000 increase in comp store sales, a $59,000,000 increase in non comp store sales, a $4,000,000 increase in non comp non store sales and a $1,000,000 $1,000,000 decrease from closed stores. For 2018, we continue to expect our total revenues to be $9,400,000,000 to $9,600,000,000 Greg had mentioned earlier, our gross margin was up 8 basis points for the quarter as we faced a headwind from mix but benefited from LIFO.
During the quarter, we continued to benefit from reducing acquisition costs in many areas, but these benefits were offset by
a $10,000,000 charge last year.
For the remainder of the year, we now do not expect to have a LIFO charge. However, this will be highly dependent
on
17 had a dramatic impact on our 2nd quarter earnings and will continue to have a significant positive impact on our tax rate on a go forward basis. Our effective tax rate for the 2nd quarter was 21.5 percent of pretax income, including the benefit from tax deductions for share based share based compensation, which reduced our tax rate by 3%. Excluding the tax benefit from share based compensation, our effective tax rate of 24.5 percent was in line with our expectations. Year to date, our tax rate was 22.2 percent of pre tax income and we now expect our full year tax rate to be 22% to 23% of pre tax income. Please keep in mind, changes in the tax benefit from share based compensation will create fluctuations in our tax rate.
Now we'll move on to free cash flow and the components that drove our year to date results and our guidance expectations for full year of 2018. Free cash flow through the 2nd quarter was $632,000,000 which is $181,000,000 increase from the prior year, driven by higher pretax income, lower in the range of $1,100,000,000 to $1,200,000,000 Inventory per store at the end of the quarter was 600 and $1,000 which was up slightly from the beginning of the year and from this time last year. We continue to expect to grow per store inventory in the range of 1% to 2% this year as our ongoing goal is to ensure we grow per store inventory at a lower rate than the comparable store sales growth we generate. Our AP to inventory ratio at the end of the second quarter was 107%, which we anticipate we'll be able to maintain through the end of the year. Finally, capital expenditures for the first half of the year were $224,000,000 which was down slightly from the same period of 2017 and in line with our expectations.
We continue to forecast CapEx to come in between $490,000,000 $520,000,000 for
the year. Moving on to debt.
We finished the 2nd quarter with an adjusted debt to EBITDA ratio of 2 point 2 times as compared to our ratio of 2.12 times at the end of 2017. The increase in our leverage reflects our May bond issuance and borrowings on our unsecured revolving credit facility. We are below our newly stated leverage target of 2.5x and we will approach that number when appropriate. We continue to execute our share repurchase program and year to date we've repurchased 4,200,000 shares at an average price per share of $259.42 for a total investment of $1,100,000,000 We remain very confident that the average repurchase price is supported by expected discounted future cash flows of our business, and we and we continue to view our buyback program as an effective means of returning available cash to our shareholders. Before I open up our call for your questions, I'd like thank the O'Reilly team for their dedication to the company and our customers.
This concludes our prepared comments. And at this time, I'd like to ask John, the operator, to return to
the line, and we'll be happy to answer your questions.
Thank you. We will now begin the question and And our first question is from Christopher Horvers from JPMorgan.
Thanks. Good morning, guys. Can you talk about the weather a little bit more? Understanding that April was weak on the DIY front, the upper Midwest and Northeast did have a very strong hot trend during the quarter. But as you look ahead, it would seem like your heavily weighted markets like Texas and the West Coast have really seen a spike in the heat.
And I think that's expected to continue particularly on the West Coast. So as you think about that, does that provide sort of this extended hot season where you could continue to see that the performance in the hot weather categories and just driving of the overall comp?
Sure, Chris. This is Greg. What I'll tell you is in the colder weather markets earlier in the quarter, we benefited from some of the failure breakage type parts. When you're looking at chassis under car steering type components, strong sales in those categories. And then in the hot weather markets, and a lot of those cold weather markets to your point that we're seasonally hot, we had strong sales in rotating electrical, HVAC, refrigerants, things like that.
We certainly hope that the hot weather continues in our southern markets and markets where we've seen hot weather, we've seen favorable sales results, and we would expect that to continue if we continue the weather trend we have.
Greg, I might add that the West Coast was hot last year, so we're up against some tougher comparables out there.
And so as you think about this, I mean, sort of speculative question, but if you didn't have the 50 basis point headwind from the extra Sunday here in the Q3, would you have considered guiding perhaps 3 to 5 in this quarter versus the 2 to 4%?
Chris, this is Tom. The 50 basis points is just math and calendar based. As Greg talked about in his comments and we put in our press release here, we're also seeing some rising gas prices, which historically has tended to dampen miles growth and also impacts especially our low end consumer and their ability to afford items. So I think it's the combination of those items that led us to continue to give 2 to 4 guidance when we had a strong Q2.
But is it fair to say that the miles driven impact hasn't necessarily shown up in terms of trend?
That would be fair to say. Obviously, we don't have the latest miles driven data, but we haven't seen
that
question is from Dan Weaver from Raymond
James. Thanks. Greg, I wanted to ask you about pricing strategies for our ship to home revenues as part of your online program. We look at these each week. This week you're not offering any promotions.
Couple of weeks ago you're offering different types of promotions, 15% to 20% depending on the ticket size. What are your thoughts about using this discounted strategy for ship to home and if there's any risk that it maybe jeopardizes the integrity of in store pricing? And how do you think you'll go forward with promotions on ship to home sales channel?
Sure, Dan. It's a great question. Glad you picked up on that. One of our competitors changed their strategy. They announced a strategy change last quarter, I believe.
And we just anniversaried the rollout of our new website a couple of weeks ago. And we had some significant increases on our online through our online channel during the 1st year. But having anniversaried that, we're looking at different options and we're testing a few things. To your point, we're testing different types of promotions online and we're testing periods where we're not running promotions online. So we're in the process.
We just started that a few weeks ago. So we're in the process of really measuring the sales impact of the varied promotions as well as the on off promotion cycle. What I would tell you about the price transparency to in store pricing is on a run rate about 60 plus percent of our transactions are buy online pickup in store. Even though we're running historically promotions online to provide the consumer a discounted price online, those consumers are still ending that transaction in our store. And we feel confident that one of the big reasons for that is, 1, the immediacy of need and 2, the need for interacting with our professional parts people on the counter to get help with the
job the first time. Okay.
And this is a follow-up question on the tariffs. We went through the 200 pages of items on this proposed list. And I was surprised how many auto parts were included. Can you talk about the attempt to pass those prices through to the consumer?
Yes. First of all, Dan, I'll kind of give you a little history as to where we are in that process. When the tariffs were first announced, we immediately reached out to our supplier base and started trying to understand which categories would be impact. And broadly, when you look at that 60 plus page document, there's a lot of categories that at face value you would expect to be included in the tariff rate. To date, we've only had a couple of suppliers that have imposed any type of tariff on us and a couple of more that are coming during early Q4.
And none of those tariffs to date have been a full 25%. They've been fractional based on it either being a component of the product that was manufacturing costs. So, so far we haven't seen a big impact. But what I would tell you is historically our industry has done a really nice job of passing that along. And thus far on the year, both from an inflation and a tariff standpoint, we have been able to pass that along.
Okay, great. Thank you. Yes, Chitel.
To add to that, where we see pricing being more elastic are on commodity items and performance and dress up items that aren't necessary to run your vehicle where you can extend that maintenance cycle. And oil obviously has gone up and down a lot over the years. And as the price goes up, we see people extend how long they'll do how often they'll do oil changes. But most of the parts are required to operate the vehicle safely.
Okay, great. Thank you.
Our next question is from Ben Bienvenu from Stephens Inc.
Hi, good morning. Thanks for taking my questions.
Good morning, Ben. I wanted
to ask, you made some commentary around seasonal maintenance repairs, but I wanted to get a sense as to whether or not you're seeing any evidence of car park related maintenance repairs that might give you a sense that the background trends in the secular environment are improving as it relates to the car park?
Yes. We see when we look at our progress through the quarter, there's a lot of things that are contributing to our increased sales this quarter. We talked about some of those things and one of them would be the car park. And each of our inventories it's hard to differentiate if it's a result of wetter weather, for example, or breakage or just the cycle of doing those routine repairs. But I would say that there are categories that we have seen some improvement.
I think brakes would be one of those. I think battery replacement would be In aggregate, last year was a softer than expected professional business as those vehicles from the late SAAR years star
years continued to enter the beginning of really our sweet spot. And the younger the vehicle, the more apt it is to be repaired by a professional. So the strength year to date in the professional business makes us feel good that we've seen the worst of the SAAR years come into our market and as opposed to being a headwind should be flat and then over time return to a tailwind.
Understood. That's helpful. And then I wanted to ask a question about the traffic versus ticket mix of your business. You've delivered strong comps year to date, primarily ticket driven. That's not inconsistent with the past.
But I'm curious about what environment you would need to have to see traffic perk up in your business over a given period of time?
Well, when we look at our traffic versus average ticket this year, the strength of our average ticket is really driven by strong performance in our undercar categories and more extensive repairs, especially on the professional side of the business, which carries a higher average ticket. In aggregate, from a ticket standpoint, to see stronger positive results, we would need to see stronger DIY counts because of the lower average ticket, but higher traffic volume, which has a bigger impact on our overall business as we saw in 2014, 2015
and 2016.
Great. Thanks. Best of luck.
Our next question is from Simeon Gutman from Morgan Stanley.
Good morning, guys. Nice quarter. I wanted to ask first on DIY, which looked pretty strong. I wanted to just ask generally why. Tom, you're not seeing any impact yet from gas prices.
And so is the strength more weather related or do you think your share gains are accelerating there?
Well, we'll take a look and see what other people report. Obviously, we've always liked to do more business. The DIY really was the side of the business at the beginning of April that was under a lot of pressure as weather didn't allow people to get out and do normal repairs. And some of that business was just deferred to May. When you look at people getting out and cleaning up their cars, that business is lost for the season.
But we continue to feel like we execute very strongly on the DIY side of the business and we're going to do everything we can to take all the market share we can.
My follow-up, it could be for Jeff or for you Tom. Jeff mentioned the 3% to 3.5% SG and A per store growth. You're going
to stick to that.
I think that was 70 or so basis points of investment. It's probably early to talk about 2019, but I wanted to ask if we should expect this to basically just fully go away next year. Is that the right expectation? And is there any debate or logic to having you maintain some level of elevated expenses next year?
Okay. A lot of that will have to do with what the labor market looks like. This year, we talked about making that investment because we had additional dollars to work with from the tax change. When we look at next year versus this year, this year we didn't anticipate a lot of tailwinds from inflation within our top line. To the extent that there is broad based inflation in 2019, we'd expect that to drive expenses higher, but we'd also expect to have more tailwind in our top line performance to drive comp gross margin dollars to offset that.
Okay. Thanks a ton.
Our next question is from Seth Sigman from Credit Suisse.
Thanks. Good morning, guys.
Nice quarter. A couple of follow-up questions here. First, just in terms of commercial versus DIY. So your comps overall accelerated in the 2nd quarter versus the 1st quarter. Just wondering, did you see that acceleration in both commercial and DIY?
Because obviously DIY was impacted earlier in the quarter, just not clear if the comp was actually lower in Q2 versus Q1?
Yes, Seth. Both professional and DIY were DIFM, the professional side was a larger contributor to comp from the DIY side.
Got it. And then just outside of the risk statement around potential impact from gas prices, is it fair to say that you feel better about the state of the DIY business once you got through that April weather and just sort of where you are now?
Yes. I mean, we've seen while it wasn't as strong as the professional side of the business, we're fairly pleased with the DIY side of our business thus far.
Okay. And then just a follow-up on the investments. When you look at the employee count in the release, it does seem like it stepped up quite a bit this quarter. Can you just give us a sense of where you're investing? Is that store labor or other areas?
Yes. We're investing obviously in store labor with the opening of all the new stores and the increased focus on customer service. Also some headquarters department adding staff to support omnichannel initiatives and IT primarily.
Our next question is from Kate McShane from Citi.
Hi, good morning. Thanks for taking my question. Just to follow-up on the question about the incremental investments. Just when are you expecting to see more of a return from those investments? Would it be as early as the second half of the year?
Or would it be more meaningful for 2019?
Well, Kate, that's a great question. When we look at this year, our comps have accelerated from last year and we think part of that is due to some of the pressures we saw last year having more normal weather this year, but also that acceleration has to do with providing better customer service. So we feel like we're seeing a return on our investment now. As Jeff mentioned in his prepared comments, in the second quarter, we spent the SG and A dollars we anticipated, drove higher sales, which speaks to controlling those expenses and leveraging better than we had anticipated.
Okay, great. Thank you. And then my follow-up question is just on the macro drivers. Gas prices are higher as you mentioned. Is there anything else in the macro environment outside whether you're keeping an eye on or seems like it's changing and is resulting in you keeping guidance at 2% to 4% or is it primarily just the higher gas prices at this point?
I think you hit on the big one there, Kate. Gas prices and the potential impact to overall miles driven would be the big economic concern that we would be seeing. Tom or Gents, do
you have anything
to add to that?
We're in a different environment. We haven't seen proposed tariffs like this in the past. Obviously, a lot of them are proposed and yesterday there was talk of pulling some of those back. So that creates some uncertainty. We'll continue to monitor that situation closely and take appropriate actions.
Thank you.
Our next question is from Bret Jordan from Jefferies.
Good morning, guys. Good morning, Bret. Good morning.
Hey, as you look at this sort of more expansion in Ohio, Mid Atlantic, how do you think about sort of distribution infrastructure servicing that market that's a bit further from the Devons DC? And I guess I'll ask my follow-up question. As you look into those central state markets, is the M and A environment materially different or better there? Are there potentially more targets?
Yes, Brett. We are constantly monitoring our distribution capacity across all of our market areas. And I'm going to kick this off. I'm passionate, as you guys know about distribution, like talk about distribution. But in fairness to Jeff, I'm going to kick this back to him in a minute.
So we continue to look for opportunities. We still have capacity in Devon's and we've added capacity, obviously, as Jeff mentioned in his prepared
to to add to that? Heiko pretty well covered it.
I mean, there's obviously a geographical void there that we're going to have to do something about here one of these days.
Okay. And I guess the M and A question, I mean, obviously there's folks like Eastern down there in the Mid Atlantic. But are there in those markets more targets that you would think about? Or maybe you could talk about how you think about M and A in general right now?
Every time we go into a new market, we look to see who's selling parts in the market. It might be one store, it might be a chain of stores and see what the opportunity there is to team up with somebody to acquire existing relationships. And we have a very technical business and having parts people is a challenge to continue to generate those internally. So we look for an opportunity to do that. What I would tell you on the M and A front is we are a very disciplined buyer.
So we're always looking, but we are going to make acquisitions that make sense for us from a return standpoint.
Okay, great. Thank you.
Our next question is from Elizabeth Suzuki from Bank of America.
Great. Thanks for taking my question. Can you just expand a little further on the comment about short term pressure on miles driven? It seems like that trend has actually been slowing for quite some time and over the last few years despite lower average gas prices than in 2014. So do you think there's really this is really a short term issue or are there some longer term headwinds at play here that could impact the growth of the auto aftermarket?
Yes. What I would say to that, and I watched an industry analysis on this yesterday, some of you may have seen the webinar as well from NPD. I think the 3 years around the 2014 time that you alluded to were a period of higher than normal miles per driven growth across the U. S. And I think we're while this year we're probably lower than the normal increase in miles driven, I don't see that as a long term trend.
Fuel prices have increased for sure and may continue to increase. But I think the consumer has adjusted to the short term 1, 2, 3 year swings in fuel pricing And they don't see that that fuel price will have a long term impact on their ability to operate their vehicles.
Great. Thank you. And just as you've gone through that list of imported products proposed for tariffs, the 10% tariffs of that longer list, how much of an impact could there potentially be assuming no change in where you source your product or prices you would negotiate with vendors or the prices that you could charge to the consumer?
Yes, we really haven't like I said earlier, there's a lot of uncertainty across our suppliers, primarily in China where bulk of these tariffs are falling. We're working closely with them. We don't know at this point what that exact impact will be. But again, we feel very confident that we'll be able to pass those increases along.
Our next question is from Chris Bottiglieri from Wolfe Research.
Hi. Thanks for taking the question. I want to start off, it was interesting to hear the inflation being passed through on pricing. I was wondering if you could quantify what like for like pricings contributed to comps this year, maybe as a proxy for how you could inflation next coming years? I'll start with that.
Tom, you want to take that one?
In aggregate, it's less than 1%. What I would tell you is that category by category, it's been significantly more than that. Even though we've had deflation aggregate over the last 3 or 4 years, we've had certain categories that have had pretty big moves and we've been successful at passing along those acquisition increases and maintaining our gross margin percentage.
Got you. That's helpful. And then just given where even ignoring tariffs is looking where like steel is priced right now, aluminum, resins, oil, etcetera. And we think that your suppliers, even the Chinese ones are seeing higher input costs. So can you maybe talk about how those discussions are trending and kind of like to what extent you think even ignoring tariffs like you could see some inflation in the back half or into 2019?
Sure. Well, there may be more discussions taking place. They're really trending very similar to the way that they always trend. We don't openly take price increases. We push back to our suppliers every day during negotiations.
And typically those conversations will start at a given rate increase and end up either with no increase or a much lower rate increase through the hard work of our merchandise team.
You.
Our next question is from Seth Basham from Wedbush Securities.
Thanks and good morning. My question is just on the guidance, the comp guidance and your decision to hold it flat for the year. And when you think about weather, which you said was normal this quarter and you expect it to be normal on the balance of the year with your guidance, you're also seeing a benefit from inflation. What's leading to the hesitation to increase your or keep your guidance flat despite the strong year to date performance? Is it simply your concerns about potential macro effects?
Or is there something else?
Sure, Seth. When you look at the quarter and as I said in my prepared comments, July started out solid and we're pleased with results thus far in solid that's or in July rather. That said, we're roughly 30% through the quarter and there's a lot of quarter ahead of us. And based on the rising fuel costs that we've talked about, based on potential threats of tariff, based on all the things we talked about that contribute to this. And obviously, the thing we've talked about most is the extra Sunday in the quarter that has historically had around a 50 basis point impact.
We just felt prudent to guide it to 4.
Our next question is from Scott Ciccarelli from RBC Capital.
Hey, guys. Scott Ciccarelli. A couple of questions on your private label business. Specifically, is your private label mix much different online than it is in the stores? And then secondly, have you historically seen your private label mix change much in an environment of rising gas priceslower miles driven?
Yes, Scott. Our private label offering would be the same in store as it would be online. With the exception of products that are really heavy that have high shipping cost or we're unable to ship because of restrictions, pretty much our full product offering that's available in the store will be available online.
I guess I wasn't asking about what was available. I guess I was asking about kind of sell through or demand.
It's similar. The mix is similar.
Got you. And then have you typically seen or how much maybe the right question Thomas, how much have you historically seen private label mix change in environment of price and gas prices or lower miles driven? I was seeing there's some sort of trade down effect, just trying to get a feel for how much?
Well, every time we see economic uncertainty, there is some pressure on the high end grades. From a purely private label standpoint, what I would tell you is really the significant growth in our private label is centered around the volume which we do and our ability to source high quality house brand products in a private label box, those have been the biggest drivers of the growth in that. But always during economic uncertainty, we see some trade down, which obviously creates a little bit of headwind on our sales, but those products tend to carry a higher gross margin percentage.
Got it. Thanks, guys.
Our next question is from Michael Lasser from UBS.
Good morning. Thanks a lot for taking my question. You talked about a 1% contribution to your comp from inflation. It sounds like that was more than you saw in the Q1. So was the bulk of the acceleration that you saw in your comp from 1Q to 2Q driven by accelerating inflation?
And what have you factored in for the full year guidance near comps about
inflation? Tom, do you want to take that?
Thank you.
I may have misspoke, but the number is less than 1 percent and was pretty consistent through the 1st and second quarters and primarily related to commodity driven items. Our expectation is that we'll continue to see muted inflation within our guidance to the extent that we don't or we see acceleration of inflation across broader bands, we'd expect to have more tailwinds in our top line sales. And Tom, has that happened? How will that impact your gross margin? Whenever we take price increases, our expectation is that we are going to generate more gross profit dollars.
There may be some slight pressure on gross margin percentage, but our anticipation is that we're going to drive better comp gross margin dollars. We still anticipate that we will be within the range, as Greg said, but in the lower end of our previous overall in terms of the comp? We don't give specific numbers. But what we did say in our prepared comments is that we generated positive comparable store sales in April. May was a better month where we saw that pent up demand released.
So that's our comment on
that. Thank you.
Next question is from Matt Pfaszler from Goldman Sachs.
I have 2 of them today. First of all, you're talking about gas prices and obviously we see the year on year increases. We've heard a lot over the past several years as gas has bounced off the bottom about thinking about both percentage changes in gas prices, but also thinking about kind of magic levels, be it $3 $4 what have you. Based on your observations of how consumers have responded to this initial round of energy price increases really over the past year or 2, Which do you think at this point is more important? And are you more focused on this now that we're kind of kissing $3 or certainly did so at the seasonal peak a few weeks ago?
Yes, Matt. We typically don't talk about a given price point at which the consumer changes driving habits because of fuel cost. We talk more about what we think is more important is the rate of price increase. And it's been a fairly steady increase. You have some swings based on holiday travel, things like that.
But looking forward, if fuel prices continue to rise at a faster rate, then a lot of our lower income consumers will be very selective on where they spend their dollars. If that trend either starts to drop or rise at a very slight rate, we feel like the consumer
car park. You spoke, I think generally speaking about the car park likely being responsible for the stabilization and perhaps improvement in the commercial side of the business. I know that you have very good visibility to the demographics of the cars that you are servicing, your make and model, etcetera. Are you seeing within that evidence
that this is starting to
go your way that as you make your way through that pause and the flow of other vehicles that the right kind of cars are coming into your source?
So two comments on that. As we talked about at the beginning of the year, we expected that that headwind from the lengths our years was going to neutralize this year and we think we've seen that. What we also see on the professional side of the business is from the normal winter weather that we had seen a normal undercar repair level of business, which is primarily a professional job be where we would expect it to be after being down the last few years.
And we've reached our allotted time for
team for your continued dedication to customer service in the Q2. I'd like to thank everyone for joining our call today, and we look forward to reporting our 2018 Q3 results in October. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.