Ryan Grimsland
Chief Financial Officer, Executive Vice President at Advance Auto Parts
Thank you, Shane, and good morning, everyone. I would like to thank the Advanced team for their hard work-over the past year and especially over the last few months as we began executing our three-year plan. I also want to thank our frontline team for their dedication to serving our customers every single day.
As indicated last quarter, we made certain changes in the presentation of our financial statements. First, our results show a breakdown of continuing operations for the Advanced business, excluding discontinued operations related to the sale of Worldpac. Second, to provide a better understanding of our performance, we report select financial measures on an adjusted non-GAAP basis to exclude the impact of certain items.
Our guidance and financial plan for the next three years is based on these adjusted financial measures. Lastly, we are providing detail on atypical items that impacted performance. These items include transitory costs and expenses associated with our strategic actions. In our view, looking at our reported results through this lens will provide a helpful understanding of our underlying performance. Now let's turn to our results.
As Shane mentioned, we moved with urgency to execute store closures. As a result, our 4th-quarter and full-year financials include costs associated with these closures, although comparable sales exclude closing store locations. 4th-quarter net sales from continuing operations were $2 billion, a 1% decrease compared with Q4 last year.
Comparable stores declined 1% and exclude closing store locations that generated $74 million in liquidation sales. Our comp performance was stronger in the second-half Q4 and especially in December as extreme winter weather conditions drove demand for failure-related items such as batteries. In terms of channel performance, our Pro comp was slightly negative and outperformed DIY, which declined in low-single-digit range.
On a two-year basis, our Pro comp continued to track positive. During Q4, transactions declined in the low single-digit range in both channels, although Pro performed relatively better. Average ticket grew in the low single-digit range and was positive in both channels. From a category perspective, we also saw strength in filters and fluids and chemicals, while discretionary categories remained pressured. Adjusted gross profit from continuing operations was $779 million or 39% of net sales, resulting in gross margin contraction of 170 basis-points compared to last year.
The lower gross margin was driven by two transitory factors, both of which are not included in our non-GAAP adjustments. First, approximately 180 basis-points of headwind related to end-of-year inventory adjustments associated with an annual review of vendor balances and inventory associated with DCs closed during the year. And second, approximately 100 basis-points headwind associated with liquidation sales.
Without the impact of these factors, our gross margin would have been in-line with the revised expectations shared in November, reflecting seasonally lower gross margin in Q4 and expense deleverage due to lower sales volume year-over-year. Adjusted SG&A from continuing operations was $878 million or 44% of net sales, resulting in deleverage of 175 basis-points compared to last year and primarily driven by higher labor-related expenses.
As a result, adjusted operating loss from continuing operations came in at $99 million or negative 5% of net sales. Adjusted diluted loss per share from continuing operations was $1.18 compared with a loss of $0.45 per share in the prior year. We ended the year with negative free-cash flow of $40 million compared with negative $84 million in the prior year.
Free-cash flow includes approximately $90 million of cash expenses associated with store closures. Adjusting for these expenses, free-cash flow would have been positive. There were atypical gross margin factors that negatively impacted Q4 results, which were not included in our reported adjusted non-GAAP results.
We estimate that these items amounted to approximately 280 basis-points of operating margin headwind and approximately $0.68 of EPS headwind during the 4th-quarter. Next, let's recap our full-year 2024 financial performance. For the full-year, net sales from continuing operations were $9.1 billion, a 1% decrease compared to last year.
Full-year comparable-store sales declined 70 basis-points, driven by the deceleration in the second-half of the year and attributed to the overall softness in consumer spending environment, including deferral and spending for maintenance items as seen across the industry in 2024.
In terms of channel performance, our full-year Pro comp was positive, while DIY declined in the low-single digit range. Transactions declined in the low-single digit range, mainly driven by DIY while Pro transactions were relatively flat year-over-year. Average ticket grew in the low single-digit range in both channels.
From a category perspective, we saw strength in batteries, filters and engine management, while sales in discretionary categories were weaker. Adjusted gross profit from continuing operations was $3.8 billion or 42.2% of net sales and an expansion of approximately 30 basis-points compared to last year. Our full-year gross margin performance Benefited from lapping approximately 160 basis-points of inventory-related headwinds from last year. However, this benefit was partially offset by the $100 million in price investments to realign our pricing to-market levels and the expense deleverage associated with lower sales volume. Also, as indicated previously, transitory cost factors related to additional inventory adjustments, closing store liquidation sales, loss of revenue due to hurricane and system outages during the year impacted gross margin. We estimate these transitory factors collectively drove approximately 90 basis-points of headwind for the full-year and are not included in our adjusted non-GAAP results. Adjusted SG&A from continuing operations was $3.8 billion or 41.8% of net sales, driving a deleverage of approximately 50 basis-points compared to 2023, primarily driven by higher labor-related expenses. Our full-year SG&A expenses were consistent with expectations provided at the start of the year for aggregate spending to be flat to slightly up. Adjusted operating income from continuing operations was $35 million and 40 basis-points as a percent of net sales compared to 60 basis-points last year. Adjusted diluted loss per share from continuing operations was $0.29 compared with a loss of $0.28 last year. To conclude my discussion of full-year results. I am also pleased to report that we have successfully remediated all outstanding material weaknesses as of the end of 2024. I would like to thank our finance and accounting teams for achieving this in-line with our original timeline and for their efforts in enhancing our control environment. I am excited to welcome Michael as Chief Accounting Officer. Certain atypical items influence results during the year and we believe the disclosure of these items provides a clearer picture of the underlying performance of our business. We estimate atypical items amounted to approximately 60 basis-points of operating margin headwind and approximately $0.64 of EPS headwind during the year. As it relates to our cash and liquidity position, we remain committed to maintaining sufficient liquidity over our three-year planning horizon. At the end-of-the 4th-quarter, we had approximately $1.9 billion of cash on our balance sheet. The increase in cash compared to last quarter is mainly related to proceeds from the Worldpac sale-in November. Net proceeds from the transaction are now estimated at approximately $1.45 billion. Following payment of transaction fees and preliminary tax assessment of the transaction. The tax liability is now estimated to be approximately $200 million lower than our prior expectation. Separately, as indicated last quarter, we are incurring certain cash expenses associated with closures of stores and DCs. In aggregate, we now expect to spend approximately $300 million, which is in-line with the low-end of our prior expectation. This revised outlook is being driven by favorability and lease negotiations that Shane referenced earlier and lower-than-expected closure costs. During 2024, we incurred approximately $90 million of these expenses and expect the majority of the balance to be incurred in the first-quarter of 2025. The combination of lower-than-expected tax liability for the Worldpac transaction and store closure expenses has further enhanced our cash position and strengthened our balance sheet. Our current cash position does not include availability under our revolving credit facility, which is fully undrawn. Moving to an update on full-year guidance. As a reminder, 2025 is a 53-week fiscal period and our guidance includes the contribution from an extra week-in the 4th-quarter. Starting with net sales. We expect net sales in the range of $8.4 billion to $8.6 billion, which is a reduction of 5% to 8% year-over-year due to store closures. We expect comparable sales growth of 50 to 150 basis-points on a 52-week basis. We expect sequential improvement in comparable sales during 2025 with stronger growth in the back-half of the year, supported by our strategic focus on improving parts availability and customer service levels. During the first-half, we will be cycling through the $100 million of price investments from 2024, which will pressure comparable sales growth. Net sales also includes contribution from 30 new stores planned to be opened this year and 42 new stores opened last year that will enter our comp base. In addition, we expect the 53rd week to contribute approximately $100 million to $120 million in sales. Moving to margins. Adjusted operating income margin is expected in the range of 2% to 3%. There are four main factors influencing operating margin for the year. First, following the sale of Worldpack, we will be cycling through approximately 30 basis-points of intercompany margin from 2024. Second, we continue to expect to save approximately $60 million to $80 million in operating costs related to closing store and DC locations. The full run-rate of the savings will begin during Q2 and as a result, we expect approximately half of these savings to contribute to margin favorability this year. Third, gross margin expansion is expected to be the primary driver of improvement year-over-year, supported by-product cost-savings along with improvements in supply-chain labor productivity and transportation cost-savings. And fourth, we expect SG&A expense to be down year-over-year with margin in the range of flat to slightly down. SG&A includes the impact of annual wage inflation and other field investments, offset by favorability from labor productivity and indirect cost-savings. The range of operating margin guidance assumes various scenarios for realizing benefits from our strategic activities across merchandising, supply-chain and store operations. The timing of realizing these benefits combined with progress on-sales growth could drive variability in performance during the year. While we don't typically provide quarterly guidance, we are providing additional color on our expectations for Q1. We expect net sales of approximately $2.5 billion with comparable sales decline of approximately 2%. We are seeing more week-to-week volatility in our sales performance thus far in Q1. And as a result, our performance is tracking below expectations. We expect our trends to improve over the next few weeks as seasonal comparisons ease. Regarding profitability, we expect Q1 operating margin of approximately negative 2%, primarily driven by closure costs. Gross margin is expected to improve compared to Q4, although still declined year-over-year due to the margin headwind associated with liquidation sales at closing locations and lapping last year's price investments. For SG&A, we expect expenses to be slightly down year-over-year, including the impact of closure costs. However, the lower sales will result in higher expense deleverage compared to Q4. Adjusting for these transitory closure costs, Q1 operating margin is estimated at slightly negative, which is an improvement compared to Q4 and gives us confidence on the path for margin improvement. Moving to full-year EPS and free-cash flow. We expect adjusted diluted EPS in the range of $1.50 to $2.50. This includes approximately $0.40 or $35 million in interest income from short-term cash investments and approximately $0.05 contribution from the 53rd week. We expect free-cash flow-in the range of negative $25 million to $85 million at the end-of-the year, primarily driven by the estimated $200 million of remaining cash expenses associated with store and DC closures. Excluding these costs, we expect to generate positive free-cash flow for the year. We expect to spend approximately $300 million of capital expenditures this year-on our strategic initiatives and IT store and supply-chain infrastructure. Based on our 2025 planning assumptions, we are tightening our leverage ratio expectation to a range of 3.5 to-4 times. The improvement in our leverage ratio is expected to be primarily driven by improved operating performance during 2025. To conclude, I want to acknowledge that while we have reaffirmed our initial 2025 guidance set-in November, we are also closely monitoring multiple developments in the external landscape and our guidance does not assume any impact from potential changes in the consumer spending environment, tariffs or other macro factors. As I indicated previously, we remain focused on executing and tracking the progress of our strategic initiatives. However, variability in the timing of realizing the benefits of internal initiatives could create volatility during the year. From a top-line perspective, sales have started-off weaker-than-expected entering the year, which is factored into our Q1 expectations. I do want to note that if the lower sales environment were to persist for longer Than we anticipate, the low-end of our guidance range would be a reasonable expectation for the year. We believe we have the right strategy centered on core retail fundamentals to deliver our financial objectives. Shane and I are confident in the plan and the team's ability to execute with a greater emphasis on accountability and progress on KPIs. The implementation of activities under our strategic plan will continue through 2025 and 2026 as we expect to see the margin benefits build throughout the next three years to support our 2027 financial objectives. As we execute our turnaround and improve the performance of the business, a reduction in leverage ratio remains a top priority. Our objective is to reduce debt leverage from more than four times currently to approximately 2.5 times by the end of 2027. We expect to reach this target by repaying debt obligations at or before maturity, reducing lease obligations and improving profitability. Before moving to Q&A, I want to provide a brief update on our supply-chain finance program. Our total capacity under the program currently stands at $3.5 billion, which accounts for a reduction in capacity following the recent credit rating downgrade. At the end of Q4, approximately $2.8 billion of payables related to our continuing operations we're utilizing this program. We will continue to engage with our banking partners to ensure we have maximum operational flexibility in the short and long-term. I want to reiterate, we are confident in our path forward. Our strong balance sheet and improved liquidity position provides a solid foundation to execute our strategic actions to improve business performance and deliver stronger shareholder returns over-time. Thank you. And I will now hand the call-back to Shane.
