Welcome to the Advance Auto Parts First Quarter 2025 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President of Investor Relations.

Good morning, and thank you for participating in today's call. I'm joined by Shane O'Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides that are available to view via webcast. The slides have also been posted to our Investor Relations website. Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, guidance, and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the first quarter and provide an update on 2025 guidance. Following management's prepared remarks, we will open the line for questions. Now let me turn over the call to our CEO, Shane O'Kelly.

Thank you, Lavesh, and good morning, everyone. I want to take a moment to express my gratitude for the hard work, unwavering commitment, and dedication of the Advance team. I am pleased to report that our team delivered better-than-expected first quarter results. After a challenging start to the year for the industry, we began to see demand rebound in late February led by our Pro business. For the quarter, Pro grew in the low single-digit range, including eight consecutive weeks of positive comparable sales growth in the U.S. This positive momentum in Pro has continued during the first four weeks of Q2, driven by our focus on providing exceptional customer service. In addition to better-than-expected top-line results, we also reported stronger profitability with near breakeven adjusted operating margin, and we're on track to deliver positive operating margins starting with Q2. Based on our performance to date and expected progress on our initiatives for the remainder of the year, we are reaffirming our full-year 2025 guidance. Ryan will provide additional details later, and I want to note that our guidance also considers the impacts of tariffs currently in effect along with our planned mitigation strategies. We believe the combination of an aging and growing vehicle fleet in the U.S., coupled with the relatively nondiscretionary nature of auto part spending puts Advance and the industry in a favorable position to navigate through a volatile environment. We participate in a disciplined industry that has always operated rationally, and we would expect that to continue. In March, we reached a significant strategic milestone with the completion of our store footprint optimization program. Approximately 75% of our store footprint is now concentrated in markets where we hold the #1 or #2 position based on store density. We have also embarked on an ambitious new phase of store expansion aimed at further strengthening our presence in these regions to capture share in the more than $150 billion total addressable market. Over the next three years, we expect to open more than 100 new stores with plans to further accelerate that pace of growth in the future. Our team is focused on implementing initiatives across the strategic pillars of merchandising, supply chain, and stores to drive improvements in operational performance. These efforts are designed to strengthen our operational capabilities while building a robust foundation to deliver sustainable, long-term profitable growth and enhanced value for our shareholders. Next, I will provide an update on each strategic pillar. Let's begin with merchandising. The team has made good progress in expanding parts availability and securing quality products at a competitive cost. Last quarter, we piloted a new assortment framework in a single designated market area, or DMA, to improve parts coverage at the store level. We created a top-down assortment plan for each store, hub, and market hub in this DMA, which led to the rebalancing of hundreds of SKUs to align the inventory to market-specific needs. The new framework is enabling us to increase coverage in prominent hard parts categories, many of which are frequently in demand by our Pro customers. During Q1, we expanded this framework to 10 additional DMAs. And in the first nine weeks following the rollout, we have observed an estimated uplift of nearly 50 basis points in comparable sales growth within these DMAs. Encouragingly, we are observing increased sales in categories where additional SKUs have been introduced, while sales in categories with reduced SKUs have remained relatively stable. Looking ahead, we anticipate gradual improvement in sales as increased parts availability translates into higher transaction volume. Feedback from stores has also been positive, which has motivated us to accelerate this program. With our recent learnings, we are expediting the implementation and are now using technology to automate key processes. As a result, we plan to complete the rollout in the top 50 DMAs by the end of 2025 with 30 of the 50 markets expected to be live by August. This is faster than our prior 12 to 18-month timeline, which stretched into 2026. While this new assortment framework enables us to align SKUs to market requirements, we are also prioritizing the improvement of SKU depth across all stores. We are measuring this through our store availability KPI, which is now in the mid-90 percentage range. Notably, this KPI improved by approximately 200 basis points sequentially and compares to the low 90% range recorded last year. Strong coverage depth is enabling our store teams to sell complete assortment bundles and full application job quantities, which is critical for our customers and helps create repeatable Pro business. Advance is a leading player in the industry with a 93-year legacy and a growing store footprint that currently spans more than 4,000 stores. Having the right part at the right place in our network gives us the opportunity to capture our fair share of the market. Next, let's turn to product costs. As we have indicated previously, the gap in merchandise margin is among the largest drivers of our operating margin gap compared to the industry. Over the last year, our team has partnered with vendors to conduct line reviews with the goal of securing high-quality products at a competitive cost. This work is expected to continue through mid-2025 and based on our progress thus far, we have visibility to greater than 50 basis points of annualized cost reductions that will start to flow in the second half of the year. We will continue to pursue further cost reduction efforts while also investing time to develop strategic business plans with our vendors to drive mutual revenue growth. Our customer-first approach and disciplined execution on core retail fundamentals continues to resonate with our vendor partners, giving us optimism in our ability to deliver additional future value. Next, supply chain. I want to start by acknowledging the tremendous effort of the supply chain team during Q1. This team played an integral role in successfully completing our asset optimization activity despite the complexities involved in the execution. Their work included relocating hundreds of millions of dollars of inventory across the network, rerouting replenishment routes to align with our revised store and DC footprint and supporting the merchandising team to launch the new assortment framework in 10 markets. Importantly, they achieved this while maintaining high safety standards and smooth day-to-day operations. Having participated in multiple supply chain transformations in my career, I can attest that the team's accomplishments were no small feat. We are on track to close 12 distribution centers this year with 6 completed to date. We expect to end the year with 16 DCs, making our way towards the goal of operating 12 large DCs by the end of 2026 with each averaging approximately 500,000 square feet. As we complete the consolidation of these DCs, flow higher volume and optimize our inbound and outbound processes, we expect to drive incremental labor productivity. We measure this with product lines per hour, which improved in the low single-digit percentage range during Q1 compared to last year. We are targeting continuous improvement in this metric through the development of fresh operational standards for our DCs. For example, since we started moving more volume through our large DCs, we are evaluating daily workflows such as measuring the time to pick a part and comparing that against benchmarks to determine where our process needs to evolve. Ultimately, we are building a foundation to efficiently support over 4,000 stores through 12 large-sized DCs operating on a single warehouse system versus the previous model of 38 DCs of varying sizes with disparate systems. To do this successfully, we are investing resources to upgrade our operational standards to improve productivity. In conjunction with consolidating DCs, we plan to drive cost efficiency by optimizing both the routing of replenishment orders from DCs and the movement of products between hubs and stores. To achieve this, we plan to implement a new routing framework in stages throughout this year. We anticipate that the combination of improved DC labor productivity and optimized routing will begin delivering cost savings by late 2025 with a larger benefit accruing later. In May, we entered a pivotal phase in the development of our multi-echelon supply network with the opening of two greenfield market hubs in the Midwest. We now operate 21 market hubs and continue to target 10 market hub openings this year while simultaneously building the pipeline for 2026 and 2027. We remain committed to our goal of establishing 60 market hubs by mid-2027 to strengthen our competitive position. A market hub with 75,000 to 85,000 SKUs expands same-day parts availability for a service area of about 60 to 90 stores. Based on the aggregate performance of the market hubs in operation through Q1 and the stores being serviced by these hubs, we have observed an estimated comp uplift of nearly 100 basis points in those markets. These results reinforce our confidence in the path forward, which we expect to further improve as the new assortment framework developed by the merchandising team is fully implemented across the market hubs. In our stores, the team is focused on improving service levels to drive repeatable business and gain market share. The Pro channel led the recovery in comp sales in the second half of Q1. This improvement in the Pro was driven primarily by transaction growth, which we view as a leading indicator of our efforts to move up the call list with Pros. You may recall, earlier this year, we revamped the compensation and incentive structures for our frontline sales team and equipped them with additional tools and resources to better serve customers. We are seeing the results of these investments in the Pro channel, which makes us optimistic about the opportunity to capture additional wallet share of the Pro. Our store team is focused on exceptional customer service and was able to shave off approximately 10 minutes in delivery time compared to last year. This reduction is being achieved through a combination of training enhancements, better in-stocks, and increased accountability in the field. Our goal is to consistently deliver parts within 30 to 40 minutes. Ensuring this consistency helps our Pros turn their base faster and elevates Advance's reputation as a dependable and timely provider of parts. We are encouraged by the progress thus far and are confident in the team's ability to deliver on our service commitment. To support this, we are also testing a standardized store operating structure to guide our teams on store labor scheduling and to provide an effective mechanism to allocate resources such as delivery trucks and driver hours. This test is now live in about 10% of our stores. Learnings from this test will inform our view on the standardized structure, which we expect to launch company-wide later this year. Shifting to DIY. During the second half of Q1, we saw an improvement in DIY trends, although the weekly volatility continues to remain high. Maintenance-related categories such as fluids, chemicals, and oil are performing relatively better, suggesting that DIY consumers remain cautious in their overall spending. As we look ahead, we expect the DIY environment to remain challenged due to the potential for higher broad-based consumer goods inflation impacting household budgets. Despite the sales choppiness, we are proactively addressing areas of the business that are within our control. This includes enhanced training programs for our store teams to deepen product knowledge as well as a reallocation of key store roles to better assist customers. Our efforts to improve the in-store experience are beginning to deliver positive proof points as we are seeing an improvement in units being sold per transaction. This metric has stabilized after declining for most of last year. From a DIY communications perspective, we are also strengthening our brand message through a new marketing campaign with the theme 'right around the corner and ready to help'. This campaign showcases Advance as a leading destination for automotive parts that offers convenient store locations, strong inventory availability, expert advice, free services, and high-quality brands. I want to underscore our commitment to advancing the turnaround and ensuring accountability. We are making traction on operational improvements for the business, and I'm optimistic about the opportunities ahead. Now let me hand the call over to Ryan to discuss our financials.

Thank you, Shane, and good morning, everyone. I would also like to thank the Advance team for their commitment to serving our customers while continuing to make meaningful strides in our turnaround efforts. For the first quarter, net sales from continuing operations were $2.6 billion, a 7% decrease compared to last year. This decline is mainly attributed to the store optimization activity completed in March. Comparable store sales declined 60 basis points during the 16-week period in Q1, excluding locations closed during the quarter, which generated $51 million in liquidation sales. During Q1, sales started off soft, declining in the low single-digit range in the first eight weeks. Demand started to recover in late February, aided by less weather volatility, normalization of tax refunds, and consistent positive performance in our Pro business. Initiatives to improve inventory in stocks and service levels for customers led to eight consecutive weeks of positive Pro comps in the U.S. through the end of the quarter. Separately, Q1 also benefited from the shift in timing of Easter into our fiscal Q2, which we estimate added approximately 20 basis points to comps. In terms of channel performance, Pro grew in the low single-digit range, which is an acceleration compared to Q4 and outperformed the DIY channel, which declined in the low single-digit range. Our Pro comp also accelerated on a two-year basis and was positive for the third consecutive quarter. Transactions declined in the low single-digit range during Q1, with Pro down only slightly. Average ticket grew in a low single-digit range and was positive in both channels. From a category perspective, we saw strength in batteries, wipers, and fluids and chemicals. Gross profit from continuing operations was $1.11 billion or 42.9% of net sales, resulting in a gross margin contraction of 50 basis points compared to last year. The year-over-year deleverage was largely driven by approximately 90 basis points of margin headwind associated with liquidation sales related to our store optimization activity. During the quarter, gross margin also benefited from favorability on capitalized warehouse costs related to a pull forward of some inventory purchases ahead of tariffs. We estimate this added approximately 80 basis points of margin and is expected to normalize during the year. Adjusted SG&A from continuing operations was $1.12 billion or 43.2% of net sales, resulting in deleverage of 180 basis points compared to last year. A portion of the deleverage was driven by the comparison to a gain on asset sales from last year. Adjusting for this, SG&A would have deleveraged approximately 110 basis points, mainly due to higher labor-related expenses. As a result, adjusted operating loss from continuing operations came in at $8 million or negative 30 basis points of net sales. A healthier top line performance helped us deliver better-than-expected operating margins, with operating losses narrowing significantly compared to last quarter. Adjusted diluted loss per share from continuing operations was $0.22 compared with earnings per share of $0.33 in the prior year. On a GAAP basis, we reported earnings per share of $0.40 due to a net discrete tax benefit of $126 million associated with capital loss deductions following the Worldpac transaction, which was factored into our forecast for the year. We ended the quarter with negative free cash flow of $198 million compared with negative $49 million in the prior year. Free cash flow includes approximately $90 million of cash expenses associated with the store optimization project and approximately $100 million of additional inventory investments, which were planned for later in the year to support the accelerated rollout of our store-based assortment framework that Shane referenced earlier. For fiscal 2025, we have reaffirmed the guidance established in February. We remain focused on executing and tracking the progress of our strategic initiatives to develop a strong foundation for the long term. Before discussing items within the guidance, let me provide our perspective on the current tariff environment and how that is influencing our outlook for the year. We are collaborating with our vendor partners to address the challenges posed by elevated product costs and evaluating each cost driver before accepting any increases from vendors. Our approach to navigating tariffs is expected to be measured as we make tariff-related price adjustments. We'll continually assess inflation and demand elasticity, and we'll monitor competitive response while executing our plan this year. Within the current tariff landscape, we are planning for a range of scenarios and feel strongly about our ability to navigate through the rising cost environment. These scenarios are in alignment with our full-year guidance, reinforcing our expectations for the balance of the year. The complexities of the current economic landscape also warrant an appropriate sensitivity to financial flexibility through the turnaround. We will continue to monitor and assess our debt capital structure with the goal of ensuring maximum financial flexibility for the business. We believe we have the right strategy rooted in core retail fundamentals to achieve our financial objectives, and the benefits of our strategic actions are expected to build steadily over the next three years. Next, let's discuss our expectations for this year. Starting with net sales. We expect net sales in the range of $8.4 billion to $8.6 billion. Comparable sales are expected to grow in the range 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 second half, supported by our focus on improving parts availability and elevated service levels. For Q2, we currently estimate flattish comparable sales growth, including the impact of the Easter shift from Q1. During the quarter, we will also fully cycle through the $100 million of price investments from last year. Net sales also include contribution from new stores planned to be opened this year, and we expect the 53rd week to contribute approximately $100 million to $120 million into net sales. Moving to margins. Adjusted operating income margin is expected in the range of 2% to 3%. We expect sequential progress in operating margins this year, with Q2 expected to track in line with the full-year range, and further improvement expected in the second half. Gross margin is expected to be the primary driver of operating margin this year, driven by a combination of product cost savings and supply chain cost leverage with an improvement in sales. We expect SG&A expenses 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. Additionally, we expect to save approximately $70 million in annual operating costs related to our store and DC optimization activity. These savings will begin in Q2 and contribute to margin favorability for the balance of the year. Moving to the other items and guidance. Adjusted diluted EPS is expected in the range of $1.50 and $2.50. We expect free cash flow in the range of negative $85 million to negative $25 million at the end of the year. Our guidance now includes cash expenses of approximately $150 million associated with store and DC optimization activity, which is below our prior estimate of $200 million, reflecting favorability in lease disposition costs. This benefit was offset by opportunistic inventory purchases ahead of the tariff implementation earlier this year. In summary, we are pleased with our progress thus far and remain resolute in controlling the aspects of our business within our control while navigating a volatile macro environment. I will now hand the call back to Shane. Thank you.

Thank you, Ryan. Before closing today's call, I would like to thank all our team members who are listening on the call today. I am incredibly proud of your efforts this quarter. Our team not only managed to deliver results that exceeded expectations, but also completed the store footprint optimization within an accelerated timeline while driving progress on our strategic priorities. Thank you. With that, let's open the call for questions.

Our first question comes from Simeon Gutman from Morgan Stanley.

Maybe my first question, if you think about the 0.5% to 1.5% comp, you have an implicit mix of DIY versus DIFM performance within that. I don't think you've shared that with us. But can you tell us now that the first quarter is in the bag? Can you tell us what that expectation, how it's changed? Do you have any difference in how you think the year will play out based on how it's performing so far? And then I have one follow-up.

Yes, this is Ryan. I'll respond quickly. So far, things have unfolded as we anticipated. We haven't observed any change in the trends for DIY and our expectations remain the same. However, we have indicated that we believe DIFM will drive our performance, while DIY will continue to face some challenges. It's still early in this tariff environment to fully understand if that will shift in the future, but we have considered different scenarios that are reflected in our range of guidance. Currently, we anticipate that the trends will continue, with DIFM leading and DIY remaining under some pressure.

Simeon, Shane here. Let me build on that. So you've seen the Pro trend, 12 weeks of positive comp DIY. I think the volatility of the situation, and you see that in consumer sentiment, some of the credit card data, default rates suggest there could be some difficulties for the consumer, although we're controlling what we could control, and we are putting effort against making sure we're relevant for the DIY customer. That includes the availability efforts, that includes awareness around our marketing campaign, promotions, fewer, bigger, better, leveraging our loyalty program. We have 16 million Speed Perks members, training for the stores in terms of how to present products and train. So we'll look to do things to make sure we're participating with DIY customers.

If we consider the full year guidance in relation to gross margin and SG&A, the first quarter showed better gross performance. It seems there will be some favorable conditions now that liquidation is ending. Shane mentioned that product costs should improve over the year, and it appears that was taken into account when shaping your outlook. However, could you clarify if there is more upward pressure than you initially anticipated? Regarding SG&A, despite some cost reductions, it seems there isn’t much potential for improvement in the SG&A forecast. I understand you’re not altering guidance, and I’m not suggesting otherwise, but the guidance range appears to still be appropriate even with some potential upside. It seems you have already integrated that into your guidance for the remainder of the year. Could you please provide your thoughts on this?

Yes, Simeon. The key factor driving our operating income remains consistent, as it will primarily be fueled by growth in gross profit, particularly in the latter half of the year. Additionally, we are already seeing an annualized improvement of 50 basis points from cost reductions, which is significant. Last year's headwinds in margins set us back by about 170 basis points in the second half of the year, but we are now encountering tailwinds. There is also a reduction of about 30 basis points in SG&A. We expect SG&A to decrease year-over-year, especially due to store closures and the productivity initiatives the stores team is implementing. Furthermore, improvements in the supply chain will enable us to capitalize on the anticipated sales volume. As Shane mentioned, the productivity within the supply chain is enhancing our ability to leverage the sales increase we expect in the latter half of the year. Ultimately, most of our growth is projected to come from gross margin improvements in the second half of the year, and we are pleased with the efforts of our merchant team, led by Bruce, in managing costs and collaborating with our vendor partners.

Just to add that there's a series of puts and takes that go into how we came to reaffirming the guidance. Ryan described some of them there, know that we've run the scenarios and what the tariffs might look like, what that volatility might look like with consumers and the concatenation of that left us to put guide where it is and keep it there.

Next question comes from Seth Sigman from Barclays.

Sounds like progress in a lot of areas. I'm trying to figure out with the improvement in comps this quarter, how much of that was from closing stores that were previously dragging on the comps? Maybe you could give us a sense of how much those stores were under comping previously, so we could try to understand the dynamics there. And then as we think about the closings this quarter, I assume there is some sales transfer to the remaining stores, particularly on the Pro side of the business. So if you could help quantify some of that would be great.

Absolutely. Regarding the first part about the mix from closing stores, the comparative difference between those closing stores and the remaining ones was minimal. We had discussed this previously. The profitability of those stores was based on a lower sales volume, especially in the West, so it didn’t materially affect the comp mix. I wouldn't attribute it as a significant factor in our comp performance for the quarter. We did observe some transfer sales, primarily in the Pro area, which were planned and anticipated, and we achieved our expectations there. I want to acknowledge the Pro team for their hard work in transferring those Pro accounts to the new stores; they did an excellent job. There's some contribution from the Pro trend, but I won't quantify it. The comp differences we observed were primarily in the first eight weeks, influenced by weather volatility and tax refunds, as we were trying to gauge consumer pressure. However, we saw a rebound in the last eight weeks of the quarter. The normalization during this period, alongside some initiatives around Pro and improvements in service time from our stores, also had a positive impact.

Thank you for the question, Seth. To provide some context on the speed of our process, several teams were involved. We discussed supply chain in our prepared remarks, as well as our stores team led by Jason Hand and our real estate team under Todd Davenport. Their efforts allowed us to complete the process quickly. However, navigating through these changes can create uncertainty within the organization and affect how customers perceive our long-term direction. Now that we've concluded that phase, our focus is shifting back to our strategic pillars aimed at creating value and driving growth. We are committed to moving the company forward on our strategy for the rest of the year.

Okay. Great. That's very helpful. And then I did want to ask about the guidance, specifically as it relates to tariffs. I get that tariffs are manageable in the sector. What have you embedded here? How does it impact your P&L as we move through the year? And how are you thinking about pricing?

Yes. No, great question. I'll start and Ryan can add to it. So for tariffs, it's a volatile situation. And think about tariffs as you got the 301s, the 232s, AEPA, and tariff creates variability by product, country of origin, tariff magnitude; by the way, changes to any of the above, the stackability of a tariff, whether it's discrete or combined with others. And so as we've looked at that, in aggregate across the company, our blended tariff rate with currently in effect is about 30%. And if you think about the applicability to products, about 40% of what we source can have some applicability to tariff. Now some of it might be a subcomponent in the goods. So before you just take the 30% times the 40% to say that's the economic impact, know that there's subcomponentry there. But importantly, before just moving forward with that math, we've done mitigation strategies broadly across a number of dimensions. And maybe, Ryan, touch on the mitigation.

Yes. I'll just touch on how we approach this. So our strategy first is we push back on all cost increases and really work with our vendor suppliers. Then we look at alternative sources of supply. So we'll look for that, and I'll touch on that in a second as well. And then finally, anything we can't mitigate between vendors, sources of supply, we're passing that on to price. And it's been fairly constructive, and we've been able to pass that along. Ultimately, we think the full value chain should bear some of that, whether it's the vendor, the supplier, the retailer, and then ultimately, the consumer are going to bear some of those impacts. But to give you an example of supply, when we think about our China exposure, about 10% from China is direct import or 10% of our overall product is direct import from China. By the end of the year, more than 50% of that we're direct importing from China will be sourced from other countries. And the team is already making significant progress on that. So we're looking at alternative sources. We're quickly making changes. Our pricing cost team and our merchants are working diligently around the clock to look at alternative sources. And as this dynamic tariff environment shifts, we're shifting and we're adjusting to find the best cost for us.

Let me just add that we're in a rational industry with rational players. Aspirationally, we would look to hold rate as an objective. If we can hold rate, then we're going to look to managing operating profit in terms of how we think about elasticity units and margin. And we'll drive forward with that approach. The team, led by Bruce Starnes, they're looking at this; they look at it broadly across the portfolio, and then they look around how we would manage each particular category and product. And that analysis and effort, I think, appropriate given, again, as we started the point, the volatility of the situation.

The next question comes from Chris Horvers from JPMorgan.

I'll address your question about tariffs and the current situation. How much inflation did you experience on a similar SKU basis in the first quarter? Is any of that due to tariff pricing? Will that increase as we move forward? Additionally, historically, regarding LIFO, the previous methodology allowed for writing up inventory, which created certain LIFO benefits early in the inflation process. Can you also explain how that affects the P&L and gross margin?

Yes, absolutely. Thank you, Chris. A couple of points to mention. The impact of inflation in the first quarter was minimal. In terms of guidance and the scenarios we've considered, we are still looking at low to mid-single digits for inflation. The range of outcomes we've provided in our guidance takes into account various tariff scenarios. It's still early in the process, and there is a lot to consider, especially since we are only halfway through the 90-day pause period for some of them. As time goes on, we'll have more clarity. The range of outcomes we've outlined is reflected in our guidance. Regarding LIFO, we experienced a slight impact in the first quarter, contributing to the 80 basis points effect, but it was only around $4 million in LIFO favorability for the quarter. Moving forward, we are evaluating our weeks of supply, both for our inventory and what vendors currently have available in U.S. warehouses. We are managing our purchase orders based on this assessment, which allows us to delay placing new orders and enables us to utilize our current costs to minimize early LIFO impacts. This strategy should be beneficial. We have a good supply in certain categories, which is why we haven't encountered significant early impacts. Additionally, we executed a forward buy prior to the tariffs, which supports our weeks of supply and helps us manage before experiencing any major LIFO effects.

Just say, Chris, anecdotally, as you think about it, the moves companies make in situations like ours is, first, you're pushing back the vendor, and you have inventory on hand. And by the way, I think the volatility in terms of what's in effect and when for how much all played a part in Ryan's depiction of not having an impact in Q1. And he's modeling as is the merchant team, how that flows in terms of the rest of the year.

Got it. That makes a lot of sense. I have a couple of questions about margins. Firstly, regarding gross margins, it appears that we'll be in the mid-40s range as we approach the end of the year. Is there anything you're observing, whether it relates to tariffs or operational aspects of the business, that could hinder that potential? Additionally, concerning SG&A, with the $70 million in cost savings from asset optimization, is it correct to assume that we should adjust the SG&A from Q1 to $70 million, and that would serve as the base we build from considering seasonality and top line?

Yes, Chris, just on the $70 million, it's not SG&A; it's more COGS related. And Q1 is a tough one because yes, like from a liquidation piece, it's more sales liquidation impact that $70 million and due to the DCs, DCs really follow up into our COGS. So I would put that more on the gross profit line. From an SG&A standpoint, though, the rest of the year, you're going to see that down year-over-year as we get through that cost. And you will see closer to that mid-40s margin rate. From a tariff standpoint, one thing that Shane alluded to earlier is that while we ultimately want to maintain rate, as the costs come in, we're going to be focused on operating profit improvement as well. So managing the elasticity and the flow-through on the operating income side. So while when we looked at those range of outcomes in our guidance, we looked at all of those from elasticity, what we can pass on COGS price. And so I think our guidance really contemplates the ranges of outcomes that can happen in the rest of the year from what we know today, and Shane alluded to the complexities of all the different types of tariffs that are in their byproduct category.

The next question comes from Michael Lasser from UBS.

As you look towards your longer-term goal, can Advance Auto Parts achieve the margin expectations in the 2027 guidance if DIY sales per store remain relatively flat over that time? Because that seems to be the area where it's going to be the most difficult to effectuate change and has been the area where Advance has really struggled historically such that there may be deeper investments needed in that area in order to generate improvement.

Let me start on the DIY front because some of your points are relevant and we've discussed what the U.S. consumer might face moving forward. We recognize our position and are making an effort to engage with the DIY customer. I mentioned a few initiatives earlier, but I want to add some others that are important. We've talked about our vendor partnerships, including the impact of tariffs. We've also discussed our strategic goal of cost reduction. A third aspect of our collaboration with vendors is strategic business planning to drive mutual revenue growth. Feedback from vendors indicates that we should not only focus on cost and tariffs but also work together to foster growth, especially in the DIY segment. You'll see this reflected in our promotions and upcoming marketing campaign focused on being ready to assist customers. As the leading player in 75% of our markets, we are now better positioned to connect with DIY customers through our store teams and services. Therefore, while you may view our 2027 projections as lacking in DIY market share, we believe these initiatives will support our position. Now, regarding the specifics of the 2027 forecast, Ryan?

Yes. And Michael, I'd just remind you, I think we're looking at low single-digit comp growth to get to our 7%. So we're not looking for a large top line growth here. And by the way, that low single-digit, our growth is really led by DIFM. So we're not expecting major DIY growth to get to that 7% or even large top line growth. In fact, I think that's probably even below some of the market explanations to get to that 7%. That 7% is really built out of the things we control. And that's our merch excellence work that we're doing, our supply chain productivity, and the store productivity that we're driving. And so we can get to that 7% with low single-digit comp growth in that outlook.

I have a follow-up question that might seem quite short-term. You're indicating a flat comp for the second quarter, suggesting that the Pro side is performing well or meeting your expectations while DIY remains volatile. Do you need to see an improvement in the overall business to achieve that flat comp for the quarter? Additionally, as you look towards the latter half of the year, are there other factors that could help you reach a low single-digit overall comp, aside from just overlapping some of the price investments and other contributing elements?

Yes, Michael, I'll start and let Shane jump in here. Our exit rate coming out of P4 is in line with our guidance for Q2. We're currently trending flat coming out of P4, and we don't see the need for any changes. We need to maintain our current momentum. In the second half, there will be acceleration in our initiatives, including the DMA work and market hubs. Additionally, there are easier comparisons to consider. In Q1 and Q2, we need to keep in mind the adjustments for Easter, which accounts for a 20 basis point impact in Q1 and a 25 basis point headwind in Q2.

Yes, just let me illustrate with kind of a story around the initiatives, the strategic pillars. And it's a turnaround, and we're going down the long road to get this company back on footing. I was in a DC with our DC leader, Steve Szilagyi, and we looked at a vendor that has shipped us individual piece parts, and these are small little containers where it costs more to put the container away than what the value of the product is. So Steve goes to the vendor and says, "Hey, why are you shipping us like this?" And the vendor says, "Well, why are you cutting POs like that?" And so together, we sit down at the table and we say, "Hey, if you could send me fewer bigger POs with the right frequency, I can put together bigger orders for you." By the way, we could start doing case-pack quantities instead of one each, and that's a seven-digit cost takeout. And by the way, we're going sequentially across our vendor base having those discussions. Now you can't do that overnight when you start to change pick quantities and things like that. But that's just one example of what's going on in the supply chain to create lines for hour. By the way, simultaneously, we're closing DCs. Simultaneously, we're opening market hubs. Simultaneously, we're refreshing the assortment in the DMA. So there's a lot of activity going on in the company that it's a little bit of a yard at a time that that's what we have as we think about going into the back half of the year. And by the way, into '26 and into '27.

The next question comes from Zack Fadem from Wells Fargo.

Good morning. Now that the store optimization is largely behind us. Can you walk us through your expectations for non-GAAP adjustments for the rest of the year? It looks like about $100 million on SG&A this quarter. So as you look ahead, is there any color you can give on GAAP versus non-GAAP operating margins and EPS expectations for '25?

We're not guiding necessarily GAAP. But I think in Q1, we had the benefit of the tax piece that happened in Q1 from a GAAP standpoint. But from a cash expense standpoint, we had $150 million this year; $90 million is already done. So hopefully, that's helpful.

Okay. And then stepping back on your conversations with vendors, is there a consensus out there on where like-for-like inflation will shake out for the industry this year, both tariff and nontariff driven? And then separately, we've talked in the past about opportunities to renegotiate maybe take some vendors off supplier financing, and that could result in some margin improvement for you. Any update there?

I'll start with the first part. There are many scenarios regarding our vendors. Referring to our previous perspective, we are implementing our mitigation strategies. In some instances, we don't know what the final outcome will be. This is a rational industry, and we will act accordingly to maintain our rate. If we can't maintain that rate, we will focus on managing our operating profit in line with our strategy. That's the first part.

On the second piece, just on industry-specific, there's lots of scenarios that play out on tariffs and what that impact would be. So we don't have exactly where that's going to land. Our guidance has all the different scenarios we think that will happen, and it contemplates those in that range. But going in low single-digit is probably somewhere where we're thinking. But that range could obviously change quickly overnight. I mean it's still quite volatile. We're only halfway through the 90-day pause on one of them. So there's a lot that can take place over the next nine months.

And on the vendor financing piece?

The vendor financing piece, nothing material from a change. Supply chain finance, we're sitting at $3.5 billion of capacity. We're using it to advance about $3 billion of that. And that's just an uptick in normal seasonal buys. We expect long term to be somewhere between $2.8 billion to $2.6 billion on that. And that's going to obviously fluctuate quarter-to-quarter as you have buys that go into there and then you run down the payables. So we still use it. There's nothing material where we've had vendors come off, and it's a material impact to our COGS, but we always evaluate. Supply chain finance is a good tool, but we evaluate what's the better return for us.

The next question comes from Scot Ciccarelli from Truist.

So it sounds like the benefits from better procurement costs are expected to be relatively modest. I think Ryan referenced 50 basis points. I guess I would have assumed that procurement cost was going to be your biggest gross margin opportunity, and yet you're still expecting gross margins to improve during the course of the year. So can you provide any more color on what specifically and kind of the gross margin line is going to be the driver for the balance of the year? Is it just supply chain savings? Or are there other factors in there?

Yes. Thanks, Scot. Yes. So procurement cost of 50 plus keep in mind that those are contracts that we sign. And when those contracts go into effect has an impact on the amount. We are seeing SG&A down. We do have some fixed expense that we're leveraging as we get more volume in the back half of the year. So we are getting significant improvement in SG&A year-over-year. Some of that is coming from the store closures as well as we look at the drag that those had on our business. And then the bulk of our gross margin is going to be coming from COGS improvement, and that's both the first cost work that our vendors are doing and also the leverage on supply chain.

Is there anything within the gross margin on that procurement side that isn't sustainable or it was onetime-ish? Or is this kind of like an existing run rate here?

The 50 basis points is going to be an existing run rate. I mean these are contracts we're signing with our vendors, and those will continue, and that will grow over time as we continue to execute that strategy. It will increase in the future.

Next question is from Steven Zaccone from Citigroup.

My question was just on the improvement you've seen in the business. You talked about February being choppy and things have improved, specifically on the Pro side. How much of that do you think is the industry seeing some better growth after 2024 probably being a reset year versus maybe your own next execution with some of your Pro initiatives?

Yes. So it's a great question. When I look at the business, I look at what our teams are doing, and I look at the initiatives and they say, "Hey, does that make sense? Are those fundamentals of auto parts in terms of activities?" And I absolutely see it in the Pro team. And so we go to market with Pro with really two major bodies of effort. The first is our outside sales team. We have hundreds of men and women who visit our customers every day. And then we have thousands of team members in our stores called commercial parts Pros. If we look at the activities we're taking, and that ranges from making sure we've got the incentive and compensation plans right, that looks in terms of how we recruit and put people into those roles that looks to training that we've reinitiated at scale to make sure that they're properly equipped. And then in terms of how we do call planning and who they call on and when they see them, then what do they say when they go see a customer and making sure correspondingly that we've been thoughtful about where relative pricing is for different Pros based on what they buy and how much they buy. So there's a lot of analysis going in. There's investment in our people. There's energy. We brought our team together for the first time in a decade earlier this year. So that's certainly having an impact in terms of our ability to get business with Pros. And I hear it as well because I'll go out and visit Pros, and they'll say, "Hey, you guys are now more relevant to me as I think about making the call, not the least of which, by the way, is the DMA availability work." Pros, when they have a car on the lift and they make the call, it's like, do you have the part? We're saying yes more frequently than we were in the past. And then add to the mix, the first question is, do you have it? Yes or no. And second is when can I get it? We've saved 10 minutes off the delivery time. So those two components also make a big difference. So certainly, we're subject to the market forces up and down, but there are internal things that we control, that we're improving that are making us more relevant with Pro customers.

Okay. Then the follow-up I had, just drilling down in the second quarter with comps expected to be flattish. How should we think about the build of transactions versus ticket in that second quarter?

Yes, Stephen, so not necessarily guiding specifically on those, but I would say probably expecting the trends in DIFM to continue. And I think it's still early and volatile. We are monitoring the demand elasticity given this tariff environment and understanding the pushes and pulls there as we move price into the market. So not going to guide to those specifics just given the volatile nature of the current environment with tariffs, but we are confident in what we're putting.

I want to express my gratitude for the question. Additionally, I want to mention something important about our independent owners, who provide us with valuable feedback on our performance across various aspects. They are primarily focused on the Pro universe, and we appreciate having them in our network. We believe we have the right number of independent owners, and they are sharing their insights on how well we are meeting their needs, especially regarding product availability. I recently spoke with one of our independent owners, who noted a significant improvement in their ability to obtain the parts necessary for serving their customers. This feedback serves as another benchmark for us as we assess whether we are successfully engaging with professionals in our industry.

Our final question today comes from Steven Forbes from Guggenheim.

I wanted to expand on the servicing model. I think good. You mentioned in the call, 10% of stores are live with labor scheduling and asset allocation models. It was one of the few things you didn't comment on sort of what you're seeing in terms of improved performance, right, within those stores that have that model. So I was wondering if you can maybe first and foremost just expand on sort of what you're doing right in the store, what you're seeing in the store and if you're seeing sort of a visible lift in core KPIs in the back of leaning into that servicing model.

Yes, that's a great question. There are several factors that contribute to our store operating model. One key aspect is how we analyze the allocation of vehicles and driver hours. In our initial assessments, we noticed some stores had four vehicles but typically only utilized three, while others had two vehicles and needed a third. Generally, general managers tend to retain their vehicles because they are hopeful about future demand. We are becoming more strategic about vehicle placement and ensuring that if a vehicle is available, there are adequate driver hours to support its operation. We are experimenting with various parameters, such as the timing of vehicle transfers and the number of hours assigned to each vehicle, for example, whether a vehicle comes with 35, 40, or 45 hours. We are encouraged by the progress we're making, as we believe this initiative holds significant potential for the company. While it's still early in the process and we're not ready to share specific outcomes just yet, we appreciate your patience as we continue this work. Once we have a clearer insight and a plan, we will update everyone.

I appreciate that, Shane. And then just a quick follow-up here. The comment, right, 75% of the store is now in markets where you're #1 or #2 in store density. We often get asked, right, what does that mean in terms of market share? And not that I expect you to sort of flip that for us, but just what's the high-level sort of view or message you're trying to express with that statement, right? #1,#2 in density? What's sort of the big takeaway that we should leave with today?

Yes. We have the right to compete and succeed in those markets due to our company's history, the length of time we've been operating there, our ability to serve professional customers nearby, our proximity to DIY customers, the opportunities for our team members, and the efficiency of our distribution centers. In retail, and also considering distribution, density is crucial. We have participated in markets where our presence was less significant, making it costlier to serve customers, and facing many more competitors. This creates a much more challenging environment compared to our current situation, where we're in our core markets implementing our strategies with a strong store network. In the U.S., we have 4,100 stores and 750 independent locations, positioning us well to serve our customers.

With that, I'll hand back to the management team for some closing comments.

So I want to thank everybody. First and most importantly, the members of Advance Auto Parts for your continued effort in our turnaround, sticking to our pillars, and delivering the quarter that we just delivered. We look forward to seeing everybody in August on our next call, and thank you for participating today. Take care. Bye-bye.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.