Shane O'Kelly
President and Chief Executive Officer at Advance Auto Parts
Thank you, Ryan. It's an honor to lead this company and work alongside so many talented team members. I am confident in the team's ability to execute our strategic plan and deliver stronger results. To that end, I would like to begin by highlighting the key drivers of our turnaround.
Number one, we're a leading player in the more than $150 billion auto aftermarket industry that has strong demand drivers. We believe that this plan will position us to grow by serving millions of customers through our extensive store network where we have the right to win. As a reminder, even incremental improvements in our performance can yield substantial results.
Number two, our strategy is centered on getting back to the fundamentals of selling auto parts. The slope of our improvement will be determined by the multitude of smaller decisions made by our team and we are embedding industry best practices in our operations and focusing on executing a clear strategic framework to elevate the performance of the advanced blended box.
Number three, our leadership team brings deep automotive experience with broad retail fundamental expertise. In addition, following the Worldpac sale, we will also have an enhanced liquidity position, providing incremental capital to execute our plan. Number four, we completed a thorough assessment of operational productivity across our asset-base and identified opportunities to improve profitability. We believe our plan, including store footprint optimization will enable us to narrow our margin gap to the industry.
And number five, we are now introducing our goal to deliver approximately 7% adjusted operating income margin by the end of fiscal 2027. We expect to achieve this by stabilizing the business to deliver stronger productivity. This will provide a strong foundation to subsequently deliver value for our shareholders over-time.
Now, let me discuss each of these drivers. On Slide 10, you see that Advance operates in an attractive sector with strong demand drivers and access to a large addressable market. In the US, vehicles in operation continues to grow with over 280 million cars on the road and nearly 85% of those vehicles are at least four years-old. The average age of these vehicles has continued to grow and is currently at 12.8 years as consumers continue to hold-on to their cars longer. This trend is influenced by factors such as new vehicle acquisition costs and the high-cost of insurance.
Despite volatility in energy prices, miles driven continues to grow, creating the need for regular maintenance. These factors are expected to contribute to healthy consumer spending on auto, repair and maintenance, supporting demand for parts and accessories and creating a strong backdrop for growth. In the near-term, we are cognizant of the economic uncertainty that is weighing on consumer sentiment and we are planning our business accordingly.
Next slide. To reposition Advance for growth, we are getting back to the basics, which starts with putting the customer-first. When I began this role a year-ago, we started work on a cultural change to put greater emphasis on listening to the customer. We strongly believe that when we put the customer-first and align the rest of the organization to meet the customers' needs, we win. With this focus in mind, we have taken several decisive actions over the last year.
These include, refocusing our efforts on the blended box, which drove our decisions to sell Worldpac and retain our Canadian business. We also reduced costs and then invested additional resources in our frontline to help reduce turnover and enable frontline team members to better serve our customers. Through these efforts, turnover in four key field roles has been reduced by nearly 700 basis-points over the past year.
We initiated the consolidation of our supply-chain, which has been accompanied by the rollout of market hubs to create economies of scale and enhance service levels for our stores. We are seeing early results that the market hubs and the stores served by the market hubs are comping better relative to markets without hubs. We also invested in pricing to improve our competitive position and are seeing improvement in unit sales trends. We also estimate that we've recovered approximately half of the investment of these pricing moves on an annualized basis.
From a talent perspective, our new leaders have been rebuilding teams and refreshing processes to focus on core retail fundamentals, which is integral to our success during the turnaround.
Next slide. Over the last year, we have refocused the organization's actions on improving efficiency of the blended box, which serves both DIY and Pro customers from the same-store. In our view, our blended box focus will enable us to grow our share in the large fragmented market where the top four players account for just under 30% share. We are dedicating our efforts to provide Pro and DIY customers with a mix of well-recognized, high-quality national and private-label brands, including our popular CarQuest and DieHard lines of product.
We have a loyal base of more than 15 million DIY Speed Perks members and tens of thousands of ProRewards members to support our growth. Based on industry estimates, Pro is expected to be the primary engine of growth due to shifting consumer preferences, which is in-part being driven by increasing parts complexity. We have access to a large vendor community that is fully supportive of our turnaround efforts and our renewed focus on the blended box.
With our merchandising initiatives, development of effective end-to-end supply-chain capabilities and changes to our store operating model, we will enable our stores to serve Pros faster. In our Pro sales team, we have redesigned incentive structures and increased wages to market levels to improve retention and drive higher productivity. In our DIY business, we are making investments in stores, team member training and e-commerce capabilities to improve customer experience and conversion.
On Page 13, you can see that our executive team has nearly 300 years of combined relevant leadership experience. We have recently brought in talented leaders in finance, real-estate and merchandising who possess fundamental expertise in executing retail operations. Not shown on this page, but important to mention, is our store team, where leaders, including our field-based Regional Vice Presidents bring extensive automotive expertise. We have also augmented functional talent in merchandising and supply-chain, and I am confident that this team's blend of automotive and retail fundamental knowledge will successfully execute our strategic plan.
Next slide. Last week, we announced the successful completion of the Worldpac sale, adding $1.5 billion of additional liquidity to our balance sheet. As a result, we currently have approximately $2 billion of cash, which exceeds our aggregate debt position. As Ryan will describe in more detail later, we believe the combination of the Worldpac proceeds and the anticipated improvement in our operating cash flow will provide the requisite liquidity to run our business and fund our investments. In the coming years, we are focused on two main priorities. The first is investing in activities to improve the business, and the second is supporting our balance sheet, including repaying debt at or before maturity.
Next slide. In August, we began a comprehensive review of asset productivity. Our goal was to assess actions already underway and identify additional areas of structural changes that would establish a stronger foundation for our future. Following this review, we have anchored our strategic plan on three pillars to put us on the path to deliver consistent profitable growth as shown on the slide.
Starting with our store operations. As indicated in our release this morning, we made the decision to close certain non-performing, non-strategic stores in the US to better position our asset-base for long-term sustainable growth. As we move along our turnaround journey with a revised asset-base, we are also redesigning our basic store operating model to yield stronger labor productivity.
The second pillar is merchandising excellence. We are taking a fundamentally different approach to negotiating with vendors to lower our direct product costs. This involves working with our suppliers to show how a partnership with Advance can drive mutually profitable growth. Regarding assortment management, we already have work underway to improve our parts availability by market and to increase the speed of customer service.
Earlier this year, we also made critical pricing changes to become more competitive while avoiding unnecessary discounting in keeping with our industry's rational pricing practices. Our review has also revealed opportunities to improve margins by better managing promotions, including reducing unproductive promotions.
And the third is supply-chain. We continue to make progress in consolidating our distribution centers to operate with a streamlined network of large distribution centers, and as a result, have closed or converted 10 small DCs. We have opened 18 market hub stores to date and are targeting to open 60 by mid-2027. This is slightly behind our original expectation of 2026 as we pause the build-out to complete the closure of stores and DCs announced this morning. While we consolidate DCs and build new hubs, we are simultaneously pursuing opportunities to optimize our DC to store transportation routes to reduce costs and increase productivity.
Separately, and in conjunction with other operational changes, we have made the difficult decision to eliminate certain positions across the organization to align our structure to current business requirements and the execution of our strategic plan. We expect this will yield around $50 million in annualized savings in addition to the SG&A reductions announced last year. Let me now dig deeper and provide an overview of our strategic actions across each of these pillars.
Next slide. A key component of our operational productivity review was evaluating the health of our stores. Following the review, we have made the decision to close more than 500 Advance stores and exit our relationship with more than 200 independent locations. This reduction consists of complete market exits in certain Western states, coupled with the optimization of our footprint in other markets, including the Eastern states where we have higher-density.
Further, there are four Western DCs that are included in the closures. Our decision does not impact locations in Canada. We considered multiple criteria during our evaluation process and I'd like to further discuss three; store profitability, DC productivity and operational execution. Let's begin with store profitability. We evaluated the operating and financial performance of stores across our entire footprint, along with the relative competitive intensity to determine the viability of each location.
Second, distribution center productivity. Our four DCs on the West Coast serve a lower concentration of stores and we would need to allocate significant capital and resources to infill those markets. We do not believe this would be the best use of our capital and believe that investing in other core areas of the business will help deliver stronger profitability. As a result, we decided to close the four DCs and associated corporate stores and independent locations in these less dense markets, resulting in a complete exit of certain markets on the West Coast.
And third, establishing a stronger foundation to simplify operational execution. Our objective was to improve store concentration in our strongest markets to conserve resources and be better-positioned to grow in those markets. Following the closures, over 75% of our revised store footprint will be in designated market areas where we will have the number one or number two position based on store density. We expect to execute these closures by mid-2025. The 700 locations outlined for closure are dilutive to annual operating income by approximately $60 million to $80 million, which we expect to recover following the closures.
We expect to collaborate with landlords to exit leased store locations in a reasonable manner to manage the obligations on our balance sheet. Making the decision to close such a meaningful percentage of our store base was not an easy one as it affects a significant number of our team members. However, we believe this action is prudent to support the long-term health of the company.
Next slide. As we execute our plans with an optimized store footprint, we expect to derive stronger value from our turnaround efforts. This page provides a financial overview of our revised store footprint. On an aggregate basis, our decision includes closure of approximately 10% of our corporate stores and approximately a 20% reduction in US independent locations.
The higher share of independents is primarily driven by our decision to exit the West Coast markets where there is a higher concentration of these locations. Based on financials over the last 12 months, the reduction of these 700 locations is expected to reduce our net sales by approximately $700 million. Our revised corporate store footprint base now implies about 4% higher sales per store compared to the store base pre-closures.
Next slide. This page shows an updated map of our store locations. We believe that our revised store base will enable us to generate higher returns from our turnaround efforts and support improved financial performance in the future. In addition, we will focus new-store growth in higher-density markets and plan to achieve an annual opening cadence of 100 stores per year over-time. Our real-estate team is mapping out opportunities in each market, designing a plan to accelerate new-store openings while compressing our opening timeline. Opening new stores is a successful way of growing regional market-share and gives vendors the opportunity to grow with us.
Next slide. As a next step to maximizing productivity in our stores, we are redesigning our operating model with an emphasis on quality and speed-of-service. Let's break this down by DIY and Pro. Starting with DIY. We are adopting a data-driven centralized approach to managing team schedules based on DIY traffic patterns, which enables general managers to dedicate more time to selling activities. We are also reducing the amount of manual paperwork that our GMs do. We are providing them with better reporting to track their performance and we're also replacing outdated RF scanners with zebra devices.
From a talent perspective, we recently launched centralized recruiting for stores in certain markets to give our GMs more operational flexibility, and we plan to roll this out across all markets. Last month, we also made the decision to sunset our UPS access point program, the time devoted to UPS drop-offs and pickups took time away from serving our customers. To elevate the quality of our service, we have launched a mini training series for our team members so that they can build their knowledge faster and be better equipped to guide the customer with their repair and maintenance needs.
Moving on to the Pro. We are reallocating resources by sales volume, competitive intensity and customer demand. This includes a standardization of our driver vehicle schedules, a reduction in third-party deliveries and the management of commercial parts pros in-stores. With regard to driver schedules, we are assessing store-level performance to allocate resources to high-volume stores and manage labor costs in lower traffic stores. This approach will drive stronger labor productivity, while ultimately lowering our time to service Pro customers. Today, our time to serve is slower than what we want it to be and we are focused on lowering this over-time.
Next slide. To win in the aftermarket and enhance our reputation as a destination for high-quality auto parts, we need to consistently make available thousands of parts for our customers. We have successfully added new leadership with critical expertise to transform our merchant organization and reestablish Advance as a long-term growth partner within the vendor community. This starts with changing our philosophy with vendors from what can you do for me to how can we grow together.
We are undertaking joint business planning with our vendors discussing category strategies, placement for SKUs and mutually establishing roles to build trust. Our conversations with vendors have been constructive and we look-forward to building our dialog with the aftermarket vendor community at our summit in January. In addition, we are also focused on improving cross-functional collaboration between our supply-chain and merchandising teams to drive higher volumes and reduce costs.
To effectively serve the aftermarket based on different demand and service expectations, we need to provide parts coverage for thousands of SKUs at any given time. This begins with product-line reviews that help us identify unproductive SKUs, introduce new products, evaluate private versus national brands and assess supplier diversification to improve the speed with which we bring products to the market. We expect to undertake between 200 and 250 line reviews this year and plan to pick-up the pace over the next two years.
Our ability to bring parts to the market faster also depends on the speed at which the parts are set-up in our system. Our goal is to bring this timeline down significantly by breaking down existing processes and leveraging automation. Setting up parts faster will enable us to capture demand signals faster and results in effective SKU management across the network.
On assortment, our goal is to ensure accurate availability of parts in our network. Our assortment is complex and includes more than 90 million unique store SKU combinations. We are addressing internally identified SKU gaps and building competitive intelligence to expand availability for our customers. This will also support higher labor productivity as our frontline team can reduce time chasing parts from surrounding stores that they do in order to complete an order. We have also started measuring store availability through DC and store in-stock depth. Today, this metric sits in the low-90s and we expect it to reach a high-90s level over-time as we introduce technical capabilities to previously manual processes.
Along with bringing parts to market faster, we are reevaluating our promotional and discounting mechanisms to provide relevant offers to our customers and reduce unproductive promotions. For our Pro business, our team is designing new category-based and customer segmented promotional models along with stronger technical testing capabilities to understand the impact of promotions. These models will consider factors such as customer spending volume, our speed-of-service and competitive density. This data-driven approach will enable us to be more targeted in our campaigns based on market characteristics.
In our DIY business, we plan to run fewer, bigger and bolder promotions in-store and online. Based on our estimates, the number of items sold at discount on our website is almost two times higher compared to others, while the ROI on these promotions has been inconsistent. We have also created execution challenges for our teams in managing SKU depth across multiple simultaneous promotions. To optimize this, our team is focusing on the fundamental goal of driving higher comparable margin dollars on a year-over-year basis and amplifying our vendor-funded media campaigns to influence traffic.
Next slide. We are highly focused on optimizing our supply-chain with one simple goal of reducing the time in which customers receive parts and doing so in the most economical manner. To achieve this, we are consolidating our DC infrastructure to create economies of scale. At the beginning of the year, we operated 38 DCs of varying sizes. By 2026, we plan to operate 13 DCs with each averaging about 500,000 square feet. This is a change from our prior expectation of 14 DCs due to the exit of one large DC on the West Coast related to our asset optimization work.
These DCs will operate on a single warehouse management system to establish better SKU tracking and inbound outbound inventory processes. We have successfully completed the conversion of our final DC to the new WMS system. As we consolidate the volume of smaller DCs in the larger ones, we begin moving more volume via truckload shipments compared to LTL shipments, which lowers our overall freight costs. For example, in our home state of North Carolina, our DC consolidation project has resulted in 15% more volume moving by truckload, which has lowered freight costs.
Operating fewer, larger DCs also provides an opportunity to optimize our picking and outbound replenishment activities. We measure DC labor productivity through LPH or lines per hour, which shows the number of product lines picked and shipped on an hourly basis. This KPI is currently in the mid-20s range and our interim goal is to improve it by 15% to 20%.
Along with the consolidation, we are building a multi-echelon DC store hub network. Our new market hubs are designed to improve our speed-of-service by placing 85,000 SKUs closer to the customer, thereby increasing availability by 70% compared to a hub store and by more than 200% compared to our regular store. While still early in our build-out, this is a proven model in the industry and we are encouraged with the initial results.
On a year-to-date basis, comparable sales growth for a market hub and its network of service stores has been outperforming DMAs without market hubs. This network also helps reduce the number of touches per product driving higher labor productivity. For example, instead of a store driver going to multiple stores to fulfill a customer order, the order can be directly sourced from a single hub or market hub.
While the consolidation and build-out continue, we are also putting plans into action to lower fixed transportation costs in our replenishment model. We plan to do this by optimizing routing from DCs to reduce the number of routes, adding more stops along a route and renegotiating carrier contracts. Separately, as part of the optimization, we are building capabilities to improve DC service levels for stores to support more sales in high-volume stores or to win with availability in highly competitive markets.
Next slide. We fully recognize that Advance has a significant operating margin gap to the industry and we are focused on narrowing that gap. We strongly believe that with our current plan, we can improve our ability to generate higher profits more consistently. Based on cost factors alone, we have identified approximately 500 to 700 basis-points of margin opportunity. This is associated with reducing supply-chain and product costs, improving pricing and promotions management and extracting SG&A efficiencies.
Our largest gap to peers is sales productivity at the store-level, which is almost equal in magnitude to the cost factors. As we take actions to improve our direct and indirect expense structure, we expect a greater percentage of our sales dollars to flow to the bottom-line, which will enable us to further narrow the gap.
I would also like to note that on the far right section of the chart, we show structural components within our financial profile that will limit our ability to fully close the gap in the long-term. These include, a higher mix of rented store locations, the relative mix of Pro customers and margin considerations from sales through independent locations. That being said, we are confident in our ability to improve margins to attractive levels in the long-run.
Our productivity review has identified opportunities to generate over 500 basis-points of margin over the next three years to reach our objective of delivering approximately 7% adjusted operating income margin by the end of fiscal 2027. These margin opportunities stem from actions within each of our strategic pillars. Ryan will share more details on our long-term financial objectives and how we plan to track our progress.
As I wrap-up my section, I would like to reiterate that each activity in our strategic plan reflects an operating philosophy based on core retail fundamentals. We will remain focused on executing and tracking the success of these actions to elevate the performance of the advanced blended box.
I will now hand it over to Ryan to describe how these strategic actions drive our financial plan. Ryan?
