Earnings Call Transcript - AAP Q3 2024

Operator, Operator

Hello, everyone, and welcome to the Q3 2024 Advance Auto Parts Earnings Conference Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. I'd now like to hand the call over to our host, Lavesh Hemnani, Vice President of Investor Relations to begin. Lavesh, please go ahead.

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. 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 our strategic and operational review, initiatives, plans, projections and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information about forward-looking statements 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. During today's call, we will be referencing slides which are available to view via webcast. A copy of the slides have also been posted to our Investor Relations website. In addition, we have also filed historical financials for the Advance RemainCo that can be accessed on our website. We will begin today's discussion with an overview of our third quarter 2024 results. After that, Shane will provide an update on our strategic path forward. Then, Ryan will discuss our financial objectives for the next three years. Following management's prepared remarks, we will open the line for questions. Now, let me turn the call over to Shane O'Kelley. Shane?

Shane O'Kelly, President and CEO

Thank you, Lavesh, and good morning, everyone. This morning, Advance took a big step forward on its journey to operational excellence and value creation. Our entire management team is confident, focused, and excited. Today, we will discuss Q3 results, our near-term outlook, and our strategic path forward through 2027. As you'll note from our earnings release this morning, we have provided you with a lot of information. With the successful completion of the Worldpac transaction, we have outlined the financial position of Advance Auto Parts RemainCo so that you have a clearer and fuller picture of where we are, where we are heading, and how we will measure our progress along the way. I feel that what has been done so far is working. It is very satisfying for me to see that with the team effort involved, we now have line of sight to achieve our 2027 outlook, which I'm delighted to share with you today. We are laying out a plan to deliver an anticipated adjusted operating margin of approximately 7% by year-end 2027. My confidence in achieving these goals stems from approximately 500 basis points of expected improvement that will be driven primarily by factors within our management team's control, including merchandising excellence, internal supply chain transformation, and store efficiency. Before we get into those details, I would like to express my gratitude to the more than 65,000 hardworking team members at Advance whose efforts during the recent hurricanes have been exceptional. We are thankful to our many associates who partnered with local communities to bring relief to those impacted, with efforts ranging from helping reopen our stores to leading donation drives. This quarter, results came in below our expectations as the sales softness that began in early Q3 persisted throughout the quarter. Macro headwinds and economic uncertainty continue to weigh on consumer spending, while our results were also impacted by other events such as hurricanes and the CrowdStrike outage. We are pleased to have made progress on our strategic actions, including the completion of the sale of Worldpac and a comprehensive productivity review of our assets. This review has identified opportunities to improve our adjusted operating income margin over the next three years through a broad range of actions, including a realignment of our stores and distribution center portfolio. Over the past year, I have spent a considerable amount of time at our stores and in our distribution centers, meeting with our team members, vendors, and customers. Throughout these conversations, one common thread that emerged is Advance's rich legacy and the important role we play in the industry and in the lives of our customers. With that foundation, today, we are excited to share our strategic and financial plan for the next three years. But first, let me pass it on to Ryan to discuss our Q3 results. Ryan?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Thank you, Shane, and good morning, everyone. Following the successful sale of Worldpac, we have made certain changes in the presentation of our financial statements. First, our results show a breakdown of discontinued operations related to Worldpac and continuing operations reflecting results for the Advance business. Second, to provide a better understanding of our underlying operational performance, we report certain 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, our results were also impacted by certain atypical items that are not included in the non-GAAP adjustments, which I will discuss shortly. In our view, looking at our reported results through this lens will provide a more helpful understanding of our performance. Now, let's turn to reported results for Advance continuing operations. Net sales from continuing operations were $2.1 billion, a 3% decrease compared with Q3 last year. Comparable store sales declined 2.3%, driven by continued softness in the overall consumer spending environment. In addition, two other events impacted us this quarter. First, our store and server systems were impacted by the global CrowdStrike system outage due to which stores were temporarily unable to serve customers and close transactions. Second, later in the quarter, Hurricane Helene impacted sales at over 300 stores. We estimate both these events combined accounted for approximately 50 basis points headwind to Q3 comparable sales. Without these events, our two-year comparable sales growth would have been about in line with the second quarter and our expectations. In terms of channel performance, both professional and DIY sales declined in the low single-digit range, with professional performing relatively better. Importantly, on a two-year basis, our professional comparable sales were positive and accelerated compared with last quarter. During Q3, transactions declined in the low single-digit range, led by a mid-single-digit decline in DIY transactions. Average ticket growth was positive in both channels. From a category perspective, we saw strength in batteries, filters, and engine management, while sales in discretionary categories were weaker. Gross profit from continuing operations was $908 million, or 42.3% of net sales, an improvement of approximately 540 basis points over the prior year. As a reminder, in Q3 last year, we had one-time inventory adjustments. This contributed approximately 525 basis points of the year-over-year improvement. The balance was driven by stabilization of product costs offset by pricing investments initiated earlier this year. Adjusted SG&A from continuing operations was $891 million or about flat year-over-year. As a percentage of net sales, adjusted SG&A was 41.5%, compared with 40.2%, with 130 basis points deleverage attributed to lower sales. We incurred higher labor-related expenses due to frontline investments, which were offset by our cost-out efforts. Adjusted operating income from continuing operations was $16.7 million, or 80 basis points as a percent of net sales compared to negative 3.3% last year. Adjusted diluted loss per share from continuing operations was $0.04 compared with a loss of $1.19 per share in the prior year. We estimate that the loss in sales due to the CrowdStrike outage and hurricane impacts accounted for approximately $0.13 of EPS headwind during the quarter. To conclude my discussion on Q3 results, I would like to provide some additional details of certain atypical items that influenced Q3 results. As a reminder, these items are not part of our adjusted non-GAAP results. We estimate atypical items amounted to 125 basis points of operating margin headwind and approximately $0.34 of EPS headwind during the third quarter. While Q3 performance was below our expectations, we believe that we have the right action plan to deliver improved results in the quarters ahead, and I look forward to sharing details of our financial plan later. Now, let me hand it back to Shane to provide some insights in our strategic path forward.

Shane O'Kelly, President and CEO

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 Advance 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.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

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 U.S., the number of 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. Consumers continue to hold on to their cars longer, 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.

Shane O'Kelly, President and CEO

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 performing better relative to markets without hubs. We also invested in pricing to improve our competitive position and are seeing improvement in unit sales trends.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

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. Over the last year, we have refocused the organization's actions on improving the efficiency of the blended box, which serves both DIY and professional 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 providing professional and DIY customers with a mix of well-recognized, high-quality national and private label brands, including our popular Carquest and DieHard lines of products. 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.

Shane O'Kelly, President and CEO

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 professionals faster. In our professional 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.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

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. Importantly, our store team, including our field-based Regional Vice Presidents, brings 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.

Shane O'Kelly, President and CEO

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 in 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.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

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. Starting with our store operations, we made the decision to close certain non-performing, non-strategic stores in the U.S. to better position our asset base for long-term sustainable growth.

Shane O'Kelly, President and CEO

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. 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. 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.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

This page provides a financial overview of our revised store footprint. 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.

Shane O'Kelly, President and CEO

As we execute our plans with an optimized store footprint, we expect to derive stronger value from our turnaround efforts. We have taken actions to improve our efficiency in store operations, merchandising excellence, and supply chain consolidation to support higher profitability.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

We fully recognize that Advance has a significant operating margin gap to the industry and we are focused on narrowing that gap. 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. I look forward to sharing more details on our long-term financial objectives and how we plan to track our progress.

Shane O'Kelly, President and CEO

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 Advance blended box. I will now hand it over to Ryan to describe how these strategic actions drive our financial plan.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Thank you, Shane. I'm excited to share our financial roadmap through fiscal 2027 and plans to deliver value for our shareholders. Our financial plan reflects progress on achieving greater operational productivity through our strategic actions. We are focused on four key areas to enhance shareholder returns over the next three years and beyond. First, we are optimizing our asset portfolio through store closures and SG&A reductions to provide a healthy foundation for long-term growth. Second, we have identified over 500 basis points of margin opportunity over the next three years from operational efficiencies in merchandising, supply chain, and store initiatives. Importantly, we do not view this as the final destination, but the beginning of our continued operating margin expansion in the future. Third, we believe that we have ample liquidity for investment in high-return projects across critical areas to support our growth. And fourth, we anticipate our strategic actions will enable us to improve cash generated from operations, driving an improvement in free cash flow even as we step up capital expenditures over the next few years. While we have already begun executing part of our plan this year, the largest portion of the implementation is not expected to begin in full earnest until 2025. As a result, we expect these benefits to start showing meaningful progress in 2026 and beyond. During the implementation, we will be measuring the success of each pillar with clearly defined operational KPIs and holding our organization accountable to those goals. As we execute our turnaround and improve the performance of the business, improving our leverage profile remains a key priority. Our objective is to reduce the leverage ratio from approximately 4 times at the end of Q3 to approximately 2.5 times no later than the end of 2027. We expect to reach this target by repaying our debt obligations at or before maturity along with the reduction in our lease obligations.

Shane O'Kelly, President and CEO

In closing, I want to thank everybody for joining our call today. We hope today's presentation provided a clearer view of our path forward and our opportunities for growth. Each leader in our organization is committed to delivering against our three-year plan. I would like to thank our team members once again for their continued dedication to serving our customers while we take the required actions to fuel the improvement and long-term growth of the company. With that, let's open up the call for questions. Operator?

Operator, Operator

Our first question comes from Michael Lasser of UBS. Michael, your line is open. Please go ahead.

Michael Lasser, Analyst

Good morning. Thank you so much for taking my question. It's on the long-term outlook. How much reinvestment have you assumed that you will need to make from the cost savings into the business over the next couple of years? And as part of that, have you assumed that you will be able to maintain your vendor financing program as it currently stands moving forward? Thank you very much.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Thank you, Michael. Regarding the supply chain finance, we are aiming for a target of approximately $2.8 billion. This figure might vary slightly as we continue working with our vendor partners, but we are focused on maintaining the capacity to support this amount going forward. In terms of reinvestment, we believe we are at a reasonable SG&A level. We do anticipate some inflation ahead, but we've included additional capital expenditures in our guidance, which will average around $300 million per year. This figure may vary depending on the timing of some initiatives, but that's the approach we are taking for our capital investments. On the cost savings side, we are effectively bringing those savings to the bottom line, although inflation will partially offset that, which is accounted for in our guidance.

Michael Lasser, Analyst

Got you. Thank you very much. My follow-up question is, philosophically is the plan to say, hey, you know that Advance Auto can compete effectively in the marketplace as a leaner, more nimble, more regional type of organization, and there's evidence to support that from the fact that there are strong regional players in the market already because closing stores, getting out of markets would suggest that the store growth, the ability to be a national retailer is going to be limited over time? So if you could just give us a sense of what the long-term vision on how Advance is expecting to compete with this plan, that would be great.

Shane O'Kelly, President and CEO

Hey, Michael. It's Shane. Good morning. Thank you for the questions. We are confident in our ability to compete, and we have strong evidence to support this. We don't need to focus on regional players; we can evaluate our company internally. In areas where we have a strong presence, we perform well, as demonstrated in various markets. After our store closures, we anticipate being number one or number two in density in 75% of our markets. Analyzing our store performance reveals many locations where not only do we compete, but we also excel and succeed. Our focus is on returning to that winning mindset, achieving the economic targets we’ve outlined, and during this process, we aim to return to growth that includes opening new stores. I don’t view this in the context of national versus regional; instead, we concentrate on where we can succeed and expand, and we will pursue those opportunities.

Michael Lasser, Analyst

Thank you very much and good luck.

Operator, Operator

Thank you. Our next question comes from Chris Horvers of JPMorgan. Chris, your line is open. Please proceed.

Chris Horvers, Analyst

Thanks. Good morning, everyone, and thank you for the presentation. My first question is regarding the decrease in sales in the fourth quarter and the expectation to deleverage, but it appears you are suggesting a 5% decline in operating margin. Are there any one-time costs factored into the fourth quarter non-GAAP figures that are not expected to recur? Additionally, on Slide 7, it seems you're indicating that the 0.8% adjusted operating margin for the third quarter includes about 125 basis points from items that may not happen again next year.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Thank you, Chris. Your calculations are accurate. The fourth quarter is expected to decline, aligning with your expectations. This is mainly due to revisiting certain aspects from last year. We are anticipating some disruptions due to the current turnaround, which will affect sales. Historically, our gross profit rate in Q4 is the lowest of the year. There are various factors influencing this rate, but we are excluding any adjustments related to our strategic initiatives. We are incorporating a slight risk adjustment for Q4 as we focus on the turnaround and store closures. Overall, the traditionally lower gross profit rate in Q4 is a significant factor in this situation.

Chris Horvers, Analyst

Am I correct in noting that on Slide 7, the third quarter had 125 basis points included in the adjusted figures, but you indicated that these won't necessarily be recurring next year? As you consider the bridge to 2025, you're projecting 200 basis points of operating margin expansion, midpoint to midpoint. How much of that expansion would you attribute to discrete lapses, such as one-time costs or impacts like weather, that would contribute to that year-over-year expansion?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yeah. The 125 basis points is just kind of those things that pop up during the year like the hurricane, the CrowdStrike impact on our system. There are other items in there. So they're kind of atypical items that aren't necessarily part of the normal run of the business. So that's the 125 that we're calling out. Not typically something that's in the adjustment.

Chris Horvers, Analyst

Yeah. How much of the 200 next year is execution free, meaning there were unique costs and disruptions this year that are reflected in the adjusted results, but you anticipate recovering those costs next year?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yeah. The 200 going in next year is just you've got the store closures that are coming in, that's the easy one. We're executing those. Those are popping in. Margin improvements that we're seeing as we partner with our vendors. The 200 is clear line of sight on our business actions and objectives. That's really what's driving the increase next year.

Operator, Operator

Thank you. Our next question comes from Scot Ciccarelli of Truist. Scot, your line is open. Please go ahead.

Scot Ciccarelli, Analyst

Thank you. Good morning, everyone. It seems like COGS is projected to be the main factor contributing to your expected EBIT improvement in both 2025 and over the next three years. Can you elaborate on this? Specifically, how much of that improvement is anticipated to come from supply chain efficiencies and how much from enhanced promotional management? We'd like to understand what will truly drive the improvement in COGS. Thank you.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yeah, Scot, thanks for the question. I'll give you some general themes. We’re not going to give you specific ones, but we are excited about where we're going with the COGS improvement. It's broken down between both improved costs, first cost as we partner with our vendors. There's pricing and promotional improvement in there as well. We know we have work to do to improve the effectiveness of our promotional cadence, the scale, the size of those, the effectiveness of them, and then our pricing and where we're pricing, especially to our pros, and making sure that we've got the right pricing structure for our pros. Supply chain is a portion of that. The supply chain, as we continue to consolidate our DCs and our market hubs, is a longer tail than, say, probably the merchandising piece of this. So if you're looking at the COGS improvement, probably a larger portion of that COGS improvement is coming from the merchandising excellence portion.

Scot Ciccarelli, Analyst

And how would you guys kind of rate or rank your confidence in the ability to drive that gross margin improvement because obviously, like, this year hasn't necessarily played out maybe the way you originally anticipated. So, just trying to understand, again, a little bit better on confidence levels of the gross margin improvement going forward? Thanks.

Shane O'Kelly, President and CEO

Hey, Scot, it's Shane. Great question. Thanks for asking. I'm very confident and the reason starts with leadership. So, what we're now starting to see is the impact of the changes we've made with key leaders. So, Bruce Starnes has joined us from Target. He's started to build an outstanding team. And I saw this as we were out in Apex meeting with vendors, both in terms of discussions with existing vendors and working collaboratively to develop plans that support what we're trying to do, also from vendors we haven't worked with who have now said, how do we think about working with Advance. So, he's digging in on a number of retail fundamentals, the PLR process being one, availability being another. And so, as he goes through those, what I would consider tried and true merchandising activities that his previous company would be known for, those will yield results for us.

Scot Ciccarelli, Analyst

Thank you very much.

Operator, Operator

Thank you. Our next question comes from Simeon Gutman of Morgan Stanley. Simeon, your line is open. Please go ahead.

Unidentified Analyst, Analyst

Hi, this is Zach on for Simeon. Thanks for taking our questions. Shane, realize the company is completely different than two, five, and even 10 years ago. As you know, there have always been margin goals much higher in the future and margins have only contracted over time. So, why is this time different? And touching upon the earlier question, sort of what gives you confidence on the target you set out?

Shane O'Kelly, President and CEO

Yeah. Hey, thanks, Zach. Appreciate the question. I can't speak to the past in terms of different decisions and promises made. For this management team, we want to improve our say-do ratio. We're confident in what we're doing and I think about that in terms of the tail of the tape. So, been here a year. And so let's just review briefly what's transpired. Came onboard, depicted that we would do decisive actions. Started a strategic review, said, hey, we'll investigate the sale of Worldpac. We sold Worldpac. We picked-up $1.5 billion for that. We've shored up our balance sheet. We looked at Canada. We like Canada. We're keeping Canada. We invested in the supply chain. We looked at it and said, hey, we've got disparate supply chains, let's move to a consolidated supply chain. We've made that action. We looked at our frontline, said, what are the roles, what's the compensation, what's the training? We made those changes. We looked at our leaders and said, where do we need key leaders in key areas. We've made a number of those changes. And now, as we go forward, we looked at the store base, not easy. We went across every store in the network. We depicted three criteria. We actually had a broader list. We evaluated every one of our locations. We made an incredibly difficult decision to close 500 company stores, and 200 independents. We're willing to do the things that we need to do to be successful. We put on each of these is what does it take to be an auto parts retailer focusing on a blended box? What are the activities? What are the fundamentals that that type of company needs to do? And that's what we do. And if it doesn't fit in that construct, we don't do it. And so that's what gives me confidence.

Unidentified Analyst, Analyst

That's helpful. Thank you. And then, just as a follow-up, so with the business comping down low single-digits, is this industry weakness or share loss and maybe it's a little bit of both? And can you help us think about the path back to positive territory moving forward?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yeah. So, the weakness that we've seen recently is a little bit on the DIY side and we do see the consumer being pressured. What we are excited about is on a two-year basis, our professional comp trend actually accelerated in Q3. It's just more on the comparable side of it. So, there is a little bit of pressure on the consumer right now. This industry is pretty resilient in these times. I mean, at some point, you still have to start and stop your car. And so, the push off of discretionary purchases, less of an impact here, it's more short-term in nature. So, we've got a good strong industry backdrop, but there is a little bit of pressure more recently on the consumer and that's showing up in the DIY comps.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Our next question comes from Seth Basham of Wedbush. Seth, your line is open. Please go ahead.

Seth Basham, Analyst

Thanks a lot and good morning. Thank you for the presentation. First, just some clarifying questions regarding the guidance for 2025. First, on adjusted EPS basis, what are you aiming for there to help us get a sense of the below the operating margin line moving pieces?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yes. Good question. We are going to come back in Q4. We'll probably give more details on EPS and we'll refine the guidance for '25. So, we gave the operating income 2% to 3%. I would expect low single-digit share dilution. So, if you're doing the math, just think of that for next year, low single-digit share dilution, you should be able to get to a decent EPS range based on that.

Seth Basham, Analyst

Okay. And relatedly, regarding free cash flow in 2025, inclusive of some of these restructuring efforts, what are you aiming for in that area?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yes, it includes 30 to 40.

Seth Basham, Analyst

Okay. And then, just lastly, bigger-picture question. There's a lot of change that you guys have in your plan, managing that change and executing on it is critical factor as you mentioned, Shane, you have accountability targets, you have teams set up. Where, if you go wrong, do you think are the biggest risk to execution?

Shane O'Kelly, President and CEO

Yeah. So, anytime you're executing broad-based plans, you need to make sure you're appropriately comprehensive. You need to make sure you're communicating thoroughly, and you need to make sure that you've resourced it correctly. And so, we know that running the existing business and executing this simultaneously does present degrees of risk and we need to execute against that. But we're confident in terms of our ability to do it and it's consistent with how we've been running the company since I've been here and we'll go through it and continue to focus on the fundamentals. The remaining company in terms of where we're located and how we'll operate, you'll see an ability for us to execute those three pillars in terms of store operations, merchandising excellence, and the continuation of the supply chain consolidation.

Operator, Operator

Thank you. Our next question comes from Steven Zaccone of Citigroup. Steven, your line is open. Please go ahead.

Steven Zaccone, Analyst

Great. Good morning. Thanks for all the detail today. And I appreciate you taking my question. I wanted to shift back to the top line discussions. Could you just help us understand, the fourth quarter comp sounds like it's going to be down. You gave some quarter-to-date comment that it's running in line with Q3. Is that excluding the hurricane impact and the CrowdStrike? And then, if we look forward, right, you've given this preliminary outlook for '25 and then what you think 2027 will be. How do you think about the market growth rate for next year? And then, maybe as you think about your ability to take market share, where is the bigger opportunity? Is it on the pro side or is it on this DIY getting better?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yeah. So, I'll take the first part of that. The first part, so we did back out the hurricane impact to say the trends from Q3 to Q4 in line. So, you would adjust for the hurricane and CrowdStrike impact on that to get to kind of where our trends are going into the quarter.

Shane O'Kelly, President and CEO

Let me discuss the market for next year regarding our return to positive comparisons. I believe we will see progress in both areas. On the DIY front, as Ryan mentioned, consumers have been experiencing some lingering effects since COVID. Concerns surrounding the elections, particularly in families with incomes between 50K and 75K, have led this demographic to postpone spending whenever they can. We anticipate a recovery in that market, and we plan to engage in that spending. Additionally, we are very enthusiastic about our initiatives in the professional sector. We've revamped the compensation plans for our outside sales team and made significant strides in penetrating smaller shops, specifically two-bay, three-bay, and four-bay shops. We have also assessed the compensation structures for our CPPs and the accounts they service. These initiatives are currently in progress. We are working on improving parts availability and ensuring a quicker market launch for parts. Furthermore, we are refining how we allocate drivers to our stores, utilizing a more data-driven approach to determine vehicle distribution, ensuring alignment with growth areas. These are some of the areas where we anticipate growth in the professional segment.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

We didn't provide a free cash flow forecast. We just said we expect to fund the CapEx with operating cash flows next year. So, operating cash flow should be able to fund the investments we're making going forward. And do you mind repeating the second question there? We got to follow up on that one.

Steven Zaccone, Analyst

Given the current state of the balance sheet, which still shows debt, it appears that you are not using the proceeds to reduce this debt. If the revenue decreases more than anticipated, and if cost management does not meet expectations, could you explain some additional strategies to safeguard cash flow?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

Yeah. We have levers within the organization that we'll pull on. Absolutely, we think we've got the liquidity to manage through the downside if there is additional downside to this. We feel like the numbers we're putting out there. If we think about store closures being 70 to 90 basis points going into next year. The work we've already done and started on merchandising excellence programs, we feel pretty confident in our ability to achieve the 2% to 3% next year on a very modest top line.

Operator, Operator

Thank you. Our final question of today comes from Zach Fadem of Wells Fargo. Zach, your line is open. Please go ahead.

Zach Fadem, Analyst

Hey, good morning and thanks for all the details today. So, as you think about the path from sub 1% operating margins today to 2.5% next year and 7% down the road, how would you characterize the '25 and '27 margin expectations if comps were flat rather than up low single-digits? So, said differently, how much of the 2025 and 2027 margin expectation are predicated on higher comps?

Ryan Grimsland, Executive Vice President and Chief Financial Officer

We're not anticipating significant top line growth; our focus is on the areas we can control, such as improving service times, store availability, supply chain costs, and infrastructure. These factors are key to our growth and margin expansion rather than top line performance. Sales per store is a substantial part of the gap compared to our peers, and enhancing that presents upside potential. If we see flat comps, there will be some pressure from inflation, estimated at around 2% to 3%, but we expect low single-digit growth over the next three years.

Shane O'Kelly, President and CEO

Zach, Shane, thanks for the question. You see the comp expectations we put out, which are pretty modest. The idea that we can grow at-market rates or above market rates, that's the second bite of the apple for where we can improve the bottom-line of the company. What we're depicting for you today are the things that are cost oriented, that management has line of sight to executing against, that plans are in place, and in many cases, activities underway that we've got the metrics involved with, that we have confidence in achieving. When we get those and hit those in stride, that's where I think we have the follow-on discussions on what further OI margin areas can we close the gap with perhaps related more towards the sales side.

Ryan Grimsland, Executive Vice President and Chief Financial Officer

We haven't made the full decision yet not to pay down debt. We are managing our liquidity as we go through this restructuring and ensuring that we have the right strength in our balance sheet as we go through it. We are looking at the markets today and making sure when does it make the most financial sense for us to de-lever and pay down some of that debt. So, we are leaving it open right now to pay down debt at maturity or before maturity.

Shane O'Kelly, President and CEO

Ladies and gentlemen, thank you for joining us today. Today, we've depicted our future in terms of where we're going over the next three years. We owe gratitude to all the team members on the frontline who work hard every day. We appreciate you taking the time to spend with us to go through each of those actions. We will update you on our journey as it unfolds. We appreciate your questions. Let's go, Advance. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.