Earnings Call
Advance Auto Parts Inc (AAP)
Earnings Call Transcript - AAP Q4 2021
Elisabeth Eisleben, Senior Vice President Communications and Investor Relations
Good morning, and thank you for joining us to discuss our Q4 and full year 2021 results as well as our 2022 outlook that we've highlighted in our earnings release yesterday. I'm joined today by Tom Greco, our President and Chief Executive Officer; and Jeff Shepherd, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will turn our attention to answering your questions. Before we begin, please be advised that our remarks today may contain forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements, including, but not limited to, statements regarding our initiatives, plans, projections, and future performance. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information about factors that could cause actual results to differ, can be found under the captions forward-looking statements and risk factors in our most recent annual report on Form 10-K and subsequent filings made with the commission. Now, let me turn the call over to Tom Greco.
Tom Greco, President and Chief Executive Officer
Thanks, Elisabeth, and good morning. We delivered a strong fourth and final quarter in what resulted in a record-breaking 2021 for Advance Auto Parts. We closed the year with record top line sales, Advance’s highest annual adjusted operating income margin expansion since our first year as a public company in 2002 and record adjusted diluted earnings per share. In addition, we returned over $1 billion in cash to our shareholders through a combination of share repurchases and our quarterly cash dividend, which is also a record. Last April, we provided a strategic update focused on our long-term plans to deliver top quartile total shareholder return or TSR, and we delivered on this objective in 2021. In discussing our Q4 and full year performance, as well as our outlook for 2022, Jeff and I will reference the same four drivers of this TSR performance we outlined in that meeting. First, build an ownership culture; second, grow faster than the market; third, capitalize on our unique margin expansion opportunity; and fourth, return a substantial amount of cash to shareholders. I'd like to begin by thanking the entire Advance team and Carquest Independent for helping us build an ownership culture and delivering the strong results we're about to review. As we look back on the past two years of managing through a global pandemic, nothing has been more important to us than the health, safety and well-being of our team members and customers. The investments we've made enabled us to keep infection rates at AAP below the national averages. In addition, we believe that consistency of our words and actions managing through COVID-19 enabled us to build trust during a defining moment for companies. Improving organizational health has never been more important amidst a labor market where people have more choices than ever, in terms of where, when and how they work. We fundamentally believe that when we take care of our team members, they in turn will take care of our customers, resulting in strong shareholder returns. Our team members are critical to our customer value proposition. They build enduring relationships with customers. They work together as a team across markets to serve customers. And throughout the pandemic, they fulfilled surging demand for customers. They also navigated this challenging environment to welcome new customers, grow our business with existing customers, and train new AAP team members. Meanwhile, because our team members are so vitally important to our long-term sustainable growth at Advance, we continue to invest in them and in our business despite the pandemic. This includes investments in our differentiated Fuel the Frontline stock ownership program, IT infrastructure, supply chain, stores, independent partners, and leading digital capabilities to help our team better serve customers in the future. In summary, we're incredibly proud and thankful for the progress our team members and independent partners made throughout the past two years to strengthen and build an ownership culture here at Advance. Shifting to our Q4 results, and as a reminder, we were lapping a 53rd week in the previous year. In our press release, you'll find detailed summaries of our 2021 results compared with 2020 on a like-for-like 12-week and 52-week basis. In our remarks today, we'll be measuring our performance apples-to-apples. In other words, Q4 2021 will be compared to the relevant 12 weeks in 2020, and the 52 weeks of 2021 will be compared with the relevant 52 weeks in 2020. In Q4, we were able to once again comp the comp, delivering comparable store sales growth of 8.2%, or 12.9% on a two-year stack. Our adjusted operating margin rate expanded 96 basis points in the quarter, and adjusted earnings per share grew by 35.4% to $2.07. For the full year, we delivered double-digit comp sales growth of 10.7% and 13.1% on a two-year stack. Adjusted operating income margin rate of 9.6% was up 159 basis points, resulting in adjusted EPS of $12.02, which increased nearly 48%. Shifting to the second TSR driver we outlined last April, grow faster than the market. We said many times that the key to this business is to ensure we have the right part in the right place at the right time to deliver on the benefits of availability, care, and speed. To build competitive advantage, we ask ourselves, how do we leverage our diversified asset base? What can Advance offer that sets us apart? In terms of availability, it's about leveraging our industry-leading assortment of national and OE brands while building powerful, trusted owned brands like DieHard and Carquest. When we talk about care, it's about how we provide a superior and more personalized online, in-store, and in-garage experience for customers. In terms of speed, it's about integrating digital and physical assets to serve our customers quickly through our Advance same-day suite of services. Delivering speed now includes opening new stores on the strength of an improved customer value proposition. We made progress in each of these areas in Q4. Our category sales growth was led by brakes, motor oil, and filters. Regionally, our performance was once again led by the Southwest and West regions, which led our growth most of the year. In terms of channels, professional led the way once again in Q4 with double-digit comp sales growth, with DIY omnichannel delivering mid-single-digit comp growth. Throughout 2021, our professional customers continued to navigate significant COVID-19 labor and global supply chain challenges. As a result, our team stepped up to help them in a time of great need. This includes providing world-class training from our Carquest Technical Training Institute by delivering virtual courses in 2021 in an innovative format that provides technicians a live interactive learning experience. In terms of sales growth, our strategic accounts led the way in Q4. In addition, we crossed 14,000 locations to close the year. Improvements made in our MyAdvance digital platform led to the highest online B2B penetration rate ever. We expanded owned brands with great customer acceptance, including a significant increase in distribution of DieHard batteries and Pro garages throughout North America. Our Carquest independents also had a very strong year. In 2021, we welcomed a record 75 new independent locations and remain excited about the continued growth of this business. Our track record of growing sales and profitability for independents continues to attract new partners to the Carquest program. Turning to DIY omnichannel, our success was led by the strength of DieHard. Following the launch of DieHard in mid-2020, DieHard crossed $1 billion in annual sales in 2021. Through effective marketing and PR, we ensured that consumers knew that DieHard was back. Not only did they know DieHard was back, but consumers recently rated DieHard as America's most trusted battery brand. Behind the success of DieHard, we've demonstrated our ability to build brands. By strengthening the DieHard, Advance, and Carquest brands, we not only build customer loyalty, but we also build pricing power. In addition, we're beginning to increase DieHard product offerings, with DieHard Power Tools launched in Q4, and DieHard Hand Tools in the front half of 2022. We're also focused on leading in product innovation. As an example, we were first to market with an enhanced flooded battery in 2021, which carries an attractive 4-year warranty. And yesterday, we announced the exciting news that DieHard has received formal certification from UL as the first automotive battery to achieve one of their distinguished validations. UL is a globally recognized non-profit organization dedicated to the advancement of a safer and environmentally sustainable future. DieHard AGM batteries are now the first and only global automotive battery to receive UL validation within the circularity or closed loop space. This notable validation is the result of years of work between Advance and our strategic manufacturing partner Clarios. Our disciplined execution of battery core returns, along with a proprietary manufacturing process allows for continual reuse of environmentally sensitive raw materials. Simply put, this means that new DieHard batteries come from recycling old DieHard batteries, which contributes to a circular economy and environmental sustainability. DieHard is America's most trusted auto battery. And not only is it reliable, durable, and powerful, but it also stands for innovation. While we're pleased with our early success behind DieHard, we're just getting started on building and strengthening this powerful brand. We also made progress driving DIY loyalty through Speed Perks. We added new Speed Perks members throughout the year, finishing at 12.6 million, while increasing loyalty and share of wallet with existing customers. To further strengthen loyalty, we recently announced a new benefit for Speed Perks members, gas rewards. Fuel savings have been a request of Speed Perks customers, and we're delivering. Partnering with Shell to help customers save at the pump while driving further brand loyalty and share of wallet. Finally, our execution in stores continues to improve. And we remain focused on strengthening the customer experience and increasing our net promoter score. Behind a strengthened customer value proposition, we opened 31 stores and 8 Worldpac branches in 2021 as we began to ramp market expansion. This includes our first 7 stores converted in California after some disappointing delays due to COVID-19. As you saw on our release yesterday, we expect to open an additional 125 to 150 new stores and branches in 2022. In terms of our third TSR driver, we believe our opportunity to further expand margins is unique within our space. Our Q4 operating income margin expansion was led by gross margin improvement driven by category management. This incorporates strategic pricing, owned brand expansion, and strategic sourcing culminating in a disciplined execution plan. Our strategic pricing capabilities have improved considerably following the implementation of a new technology platform in 2020. Our new tools enable us to eliminate unproductive discounts and react quickly to cost increases related to inflation. We incorporated advanced analytics, competitive intelligence, price elasticity, and customer segmentation into our category plans. Increased own brand penetration also played a meaningful role in the quarter, driving margin expansion. We transitioned tens of thousands of SKUs within undercar and engine management with our in-stock improving throughout the quarter. Separately, we continue to transform our enterprise-wide supply chain infrastructure. First, we made further progress on integrating the assortment, supply chain, and technology platforms within Worldpac and Autopart International during Q4. By year-end, we consolidated 55% of AI locations onto the Worldpac tech stack. Getting to a single supply chain and tech stack for our pure play professional business improves customer service, drives incremental sales, and increases margins. We expect this transition to be completed by mid-year. In terms of the integration of our Advance and Carquest supply chains, we completed the rollout of across banner replenishment. Our entire advanced and Carquest network of stores are now serviced by a freight logical distribution center, which reduced our annual mileage driven from DC to store by approximately 14% in 2021. Our next big step is to get to a single warehouse management system or WMS. As of December 21, we've transitioned 44% of our distribution center network, as measured by unit volume to the new WMS. As we complete WMS to new DC, we followed up with the implementation of our labor management system, which drives further savings through enhanced performance pay. The full run-rate benefits of WMS and LMS remain on track to be realized by the end of 2023. Finally, we continue to look for ways within our supply chain to optimize and modernize our network. We're excited about the transition to our new San Bernardino and Toronto DCs that we announced last quarter. Once fully operational, San Bernardino will be the central location for supplier shipments, and help facilitate rapid store and e-commerce delivery in the Western United States. As we ramp the opening of this new DC, we recently announced to our team members that we'll be consolidating operations from our much older, Riverside DC to this new facility. Similarly, our Toronto DC enables the consolidation of two distribution centers, one Carquest and one Worldpac to a single and much larger facility. This will significantly improve our availability in the very large Ontario market. Shifting to SG&A. We're pleased to report that we exceeded our previously stated goal of $1.8 million in sales per store in 2021. As we move into 2022, we plan to build on this achievement behind continued improvement in sales per store, along with the disciplined execution of profit per store productivity initiatives. This includes automating tasks in stores to enable more customer-facing time and leveraging technology that integrates internal driver availability with the gig economy. In addition to improving sales and profit per store, we completed our finance ERP integration. The health of our balance sheet has improved, and we expect to realize the full run-rate of savings in 2022. We'll continue to build on this integrated platform to deliver further improvements in the customer experience and reduce costs. Finally, we're building an enviable track record on team member safety. For the full year 2021, we saw a 10% reduction in our total recordable injury rate versus 2020. And our lost time injury rate reduced by 20%. Our frequency rate on both metrics is now close to one half of what it was five years ago. In summary, Advance is a very different company than we were several years ago. We've strengthened our core customer value proposition integrated many parts of the company, enhanced our diversified asset base, and significantly improved execution. During 2021, we also conducted our first materiality assessment to sharpen our focus and prioritize our ESG agenda. We'll share additional information about the results of this assessment in our upcoming corporate sustainability report. While we're proud of our 2021 performance, we see plenty of runway in 2022 to further drive total shareholder return. As you saw in our press release yesterday, we introduced our 2022 guidance. This contemplates the continuation of our top-line growth and margin expansion initiatives, as well as the following external tailwinds: an aging vehicle population, with several million vehicles entering the sweet spot, as availability of new cars continues to lag historical trends; an ongoing and gradual recovery in miles driven, which has still not reached 2019 levels; and the outperformance of our professional business compared to DIY for reasons we've discussed in the past. Our guide also takes into consideration certain factors that have changed since we initially shared our 3-year strategic plan. This includes the acceleration of broad-based inflation across the economy, and the lapping of significant stimulus dollars, both of which could negatively impact our core customer, within our industry, as inflationary pressures across commodity, wages, and transportation. Overall, we're very encouraged by the resiliency of our industry in 2021, and the momentum we're building behind the disciplined execution of our strategic plan. Jeff will now go deeper on our financials, provide an update on our fourth TSR driver, the substantial return of cash to shareholders, and discuss our 2022 guidance.
Jeff Shepherd, Executive Vice President and Chief Financial Officer
Thanks, Tom, and good morning. I'd also like to thank our team members for their dedication this past year to care for our customers and each other, and deliver record results. Before I review our financial results, I also wanted to remind you 2020 included an additional week. To provide a better year-over-year comparison, the impact of this additional week has been excluded from our discussion of the previous year. Please refer to our earnings release for the full impact of the additional week in 2020. In Q4, our net sales of $2.4 billion increased 8.6% compared to Q4 of 2020. Adjusted gross profit margin expanded 145 basis points to 46.8%, driven primarily by improvements in category management, led by strategic pricing, inventory-related, and owned brand expansion. This was partially offset by ongoing inflationary costs, lapping shrink benefits in Q4 2020, and unfavorable channel mix. Same SKU inflation in Q4 2021 increased 5%. Additionally, despite today's inflationary environment and global supply chain pressures, we're pleased that we delivered a slight supply chain leverage in Q4 and for the full year. Our Q4 adjusted SG&A was $946 million, or 39.5% of net sales. This compares to 39% of net sales in Q4 2020. Late Q3, this was primarily driven by inflationary headwinds within labor, as well as increased incentive compensation behind the record-setting results our team delivered. As expected, incremental costs associated with the opening of our California stores ahead of planned revenue continue to be a headwind to SG&A in the quarter. These headwinds were partially offset by a year-over-year decrease in COVID-19-related expenses. Our Q4 adjusted operating income was $177 million, an increase of 24.8% compared with Q4 2020. Our Q4 adjusted OI margin improved 96 basis points to 7.4%. Our adjusted diluted earnings per share of $2.07 increased 35.4% compared with Q4 2020. For the full year, our net sales were record $11 billion, and increased 10.6% compared to 2020. Our adjusted gross profit increased 14.9% and adjusted gross profit margin expanded 175 basis points. Adjusted SG&A expenses for the full year 2021 increased 11% compared to 2020. On a rate basis, adjusted SG&A deleveraged 16 basis points to 36.4% of net sales. While we reduced our COVID-19-related expenses by $28 million in 2021, we continue to prioritize the health and safety of our team members and customers. Our full year 2021 adjusted operating income increased 32.5% to $1.1 billion. On a rate basis, our adjusted OI margin expanded 159 basis points to 9.6%. In addition, we delivered record adjusted diluted earnings per share of $12.02. Our 2021 capital expenditures were $290 million. Our free cash flow for the year increased $121 million, or 17.2% year-over-year to $823 million driven by improved operating performance. As Tom mentioned, we completed our finance ERP implementation in 2021. We began to see some benefits in 2021, which partially contributed to the approximately 400 basis point improvement in our AP ratio year-over-year. We expect to begin seeing the full run-rate of savings this year. To close out our discussion on our TSR drivers, we returned a record $1 billion in 2021 to our shareholders through a combination of share repurchases and our quarterly cash dividend. In line with our capital allocation priorities, and confidence in the continued robust cash generation of our business, our board recently approved a 50% increase to our quarterly cash dividend to $1.50 per share. This supports our stated objective of a 35% to 45% dividend payout ratio. In addition, our board also approved an additional $1 billion authorization to our existing share repurchase program, which at the end of 2021 with $545 million. We're confident in our ability to generate meaningful cash flow and committed to a balanced return of excess cash to shareholders. In consideration of the factors Tom discussed surrounding our 2022 outlook, our guidance includes net sales of $11.2 billion to $11.5 billion, comparable store sales of 1% to 3%, adjusted operating income margin of 10% to 10.2%, an income tax rate of 24% to 26%, adjusted diluted earnings per share of $13.20 to $13.75 based on our outstanding share count as of yesterday, capital expenditures of $300 million to $350 million, a minimum of $775 million in free cash flow, share repurchases of $500 million to $700 million, and 125 to 150 new store and branch openings. We’re encouraged that through the first four weeks of 2022, our comp sales are running above the top end of our full year guidance. Finally, our guidance for new store openings includes the California stores that were delayed last year, primarily due to permitting challenges resulting from the pandemic. This guidance includes new locations across all banners in both the U.S. and Canada but excludes independent locations. Once again, I'd like to thank our team members for their continued dedication as we build on the momentum of our 2021 results.
Operator, Operator
Your first question comes from Chris Horvers from JPMorgan. You may go ahead.
Chris Horvers, Analyst
Thanks. Good morning, everyone. Regarding your guidance, the 1% to 3% comparable sales range is at the lower end of your 2% to 4% multi-year algorithm, and you're accounting for 50 basis points at that lower end. I expected it would be closer to 100 basis points. Is there something changing in the competitive environment regarding pricing? Is this a more cautious approach, or is it related to your ability to manage inflation? I would like to hear your thoughts on this.
Tom Greco, President and Chief Executive Officer
Good morning, Chris. I'll start by providing some insights on the sales guidance, and then Jeff can add some comments on margins. We are aiming for growth that exceeds the market average in 2022. Our sales forecast indicates a decline in industry growth compared to 2021, so we anticipate less growth this year than last. As mentioned earlier, there are some positive factors for the industry, such as an aging vehicle population with millions of vehicles that are in demand. The supply of new cars remains challenging, and their availability is not on par with historical norms. We also expect a gradual recovery in miles driven, which have not yet returned to 2019 levels. However, we are aware of potential challenges facing the industry. After a record-breaking year, predicting growth rates for 2022 this early is tricky. We've observed a notable increase in inflation across the economy, recently hitting a 40-year high. Therefore, we expect reduced growth in 2022 compared to 2021. Now, I'll hand it over to Jeff to discuss how this will impact our margins.
Jeff Shepherd, Executive Vice President and Chief Financial Officer
Yeah. So just taking that, top line sales guide, in terms of our margin expansion, Chris, first of all, our margin expansion initiatives remain on track. But as we talked about in our prepared remarks, the inflation that we're seeing right now is substantially higher than when we develop that strategic plan. So in this early stage of the year, we’re mindful of the impact that this will have, not only on the industry demand, as Tom said, but also our cost base. So the cost within the P&L and the impact that inflation could have on all of those various line items in 2022.
Chris Horvers, Analyst
So then, as a follow up. As you think about that, 10.5% to 12.5% operating margin in 2023, is your commentary inflation more saying, hey, guys, more likely to be at the low end of that range, or is your commentary more like it's just too early in the year, let's not get ahead of ourselves, given the uncertainty that lies ahead?
Tom Greco, President and Chief Executive Officer
Yeah, it's really the latter. We remain confident in delivering the long-term targets we provided last April. We talked about what the ‘22 guide background was. Long-term, industry fundamentals are attractive. We're innovating and positioning AAP for long-term success. And we still have a significant TSR opportunity for us. So it's really the latter.
Chris Horvers, Analyst
Thanks very much. Best of luck.
Tom Greco, President and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Michael Lasser from UBS. Your line is open.
Michael Lasser, Analyst
Good morning. Thanks a lot for taking my question. With two of your large competitors making price investments to gain market share in the commercial sector and your comps trailing behind this peer set, how much do you need to invest in price above and beyond what you originally expected in order to sustain your market share?
Tom Greco, President and Chief Executive Officer
Hey, good morning, Michael. Well, we've been talking about our category management initiatives for a couple of years now. And strategic pricing, along with increasing own brand penetration and strategic sourcing are key elements of this plan. So let me provide some color on how we’re thinking about our pricing strategy in a professional channel. Three things. First of all, we've been conducting a survey of most of our professional customers for many years. And just to give you a data point from last year’s survey, the top three variables were availability, ease of doing business, and speed of delivery; they were all ranked ahead of price. At the same time, we know competitive pricing is important and our strategy is rooted in how the Pro customer makes decisions. We incorporate an extensive assessment of competitive pricing for each of the Pro channels we compete in by category. And the reason we expanded our lower price point, higher margin owned brand portfolio was to provide more value price options for our customers. Secondly, during our Investor Day, we highlighted our approach to meeting the unique needs of different Pro customers by leveraging our diversified go-to-market asset base. This includes Advance stores, Carquest Independents, and Worldpac, which as you know, is an entirely professional or pure-play WD. It's important to note that Worldpac has competed with WDs for many years and already has very competitive pricing, which informs our enterprise Pro pricing strategy. Worldpac has a different Pro model than conventional retail parts stores. And we're keenly aware of the competitive landscape within Pro, which is usually very different by category and in some cases, even by part type. Finally, we've been investing in improving the customer experience through a single parts look up, technical training, and digital assets to improve speed and visibility of delivery. We also provide customized service models where relevant. So in summary, Michael, our comprehensive approach is tailored to the unique needs of what's most important to each customer and our strategy is working. We grew double digits within Pro last year, and we continue to believe our differentiated strategy will deliver profitable growth and margin expansion.
Michael Lasser, Analyst
Okay. And my follow-up question is on the inflation discussion. Jeff mentioned that part of the reason why you guided like you did for this year was because of cost inflation. Your SG&A dollars grew 9% in 2021; Advance had already been experiencing significant operating expense inflation and now you're suggesting you're mindful of that continuing into 2022? Shouldn't this be more than covered by price increases as the industry historically has typically priced to a full margin? Why would you not be able to recover the cost increases now, whereas the industry's been able to do that in the past?
Jeff Shepherd, Executive Vice President and Chief Financial Officer
Yes, I agree with you, Michael. The industry has remained quite rational during inflationary periods. We have managed to address cost inflation while maintaining our gross margin rate. As mentioned in our earlier comments, we are currently facing significant inflation across our entire profit and loss statement. This inflation is not limited to product costs or commodities alone. Notably, our two largest cost components are product costs and wage inflation. As we assess the situation today, we anticipate that both will remain in the mid-single-digit range for 2022, building on what we've already experienced in 2021. Product costs, measured on the same SKU basis, indicate that this is quite substantial. At present, we do not have a model indicating that our pricing will fully compensate for the inflation across our entire profit and loss statement. However, we are confident that our pricing strategies, along with our other category management initiatives, will more than counterbalance our gross margin. Additionally, our efforts in SG&A will help mitigate the inflation costs within that area.
Michael Lasser, Analyst
Just to clarify, what does your model suggest that Advance will be a contribution from same SKU inflation in 2022?
Jeff Shepherd, Executive Vice President and Chief Financial Officer
Mid-single digits?
Michael Lasser, Analyst
Okay. All right. Thank you very much.
Operator, Operator
Your next question comes from a line of Liz Suzuki from Bank of America. Your line is open.
Liz Suzuki, Analyst
Great, thank you. Just a question on the DieHard brand. You're expanding into new categories? And what do you think is the ultimate total addressable market for DieHard? How many categories can you expand into and what percentage of your sales do you think that could represent?
Tom Greco, President and Chief Executive Officer
We're excited to have surpassed a billion dollars. It's rare to build a billion-dollar brand in just one year. The brand had previously struggled, but now we're attracting new customers and engaging younger audiences. Awareness is increasing across all demographics for DieHard, and we're gaining market share in batteries. The past two years have been excellent, and we still see significant growth potential. DieHard's core identity is automotive batteries, but there are additional categories where we can expand the brand, such as Power Tools and Hand Tools. We believe DieHard can differentiate us strongly in the market. Our professional customers appreciate the stocking program we've established for DieHard batteries, and we will continue to enhance that. There is plenty of opportunity for DieHard, and we will share more about future expansions.
Liz Suzuki, Analyst
Great. And just that one quick follow up. What percentage of your sales do you estimate are for brake fix or general maintenance purposes versus more discretionary categories? And, the reason I asked is as you look at 2020 and 2021 and just the strength in DIY, a lot of which was people spending more time at home, people having stimulus dollars. How much do you think that DIY strength was bolstered by discretionary categories like accessories?
Tom Greco, President and Chief Executive Officer
Well, first of all, there's no question when people have time on their hands. They were doing more with their cars and when they're at home they basically couldn't, couldn't sit at home and watch their computer screen and Netflix all day. So, we did see a surge there. But I can tell you, the resiliency of what we saw at the height of the pandemic within DIY right up until the fourth quarter has been very encouraging for us. And we're continuing to be pleased with our DIY omnichannel business and we're going to continue to drive and grow that business. Obviously to your earlier question, DieHard plays a key role there. If we can draw people into our stores with a differentiated brand such as DieHard we can grow the DIY business. So the first part of your question, we look at the customer journey as it pertains to DIY. And they really do vary. I mean, my car won't start is the journey for batteries. My brakes are squeaking is the journey for brakes, all of them have various degrees of urgency. So we're very focused on the specific drivers of choice within each one of those journeys. And that's how we build out our business.
Liz Suzuki, Analyst
Great, thank you.
Operator, Operator
Your next question comes from a line of Seth Basham from Wedbush. Your line is open.
Seth Basham, Analyst
Thanks a lot. And good morning. My question is also on the inflation environment and the impact on potential demand destruction. Are you seeing any of that occur now? And I don’t know, if you built into your plan for 2022?
Tom Greco, President and Chief Executive Officer
Well, in terms of demand specifically, Seth?
Seth Basham, Analyst
Yes, exactly.
Tom Greco, President and Chief Executive Officer
We haven't observed it yet, and to clarify, we are not experiencing a trade down or deferred maintenance. We still have ten and a half months left in the year, and inflation is quite significant across all categories, including fuel prices. That's something we are keeping in mind. As the year progresses, we will be better positioned to assess the full impact of these factors. It's essential for us to consider all potential outcomes for the industry this year.
Seth Basham, Analyst
Understood. And what have you built into your comp sales plan for ’22 from that effect?
Tom Greco, President and Chief Executive Officer
Well, our guide is to at the midpoint.
Seth Basham, Analyst
Understood, but does that include some demand destruction assumptions for the balance of the year?
Tom Greco, President and Chief Executive Officer
Yes, we are taking into account that the industry saw high-single-digit growth in 2021 based on the latest data from the Auto Care Association. For the overall industry this year, we are assuming low-single-digit growth, around 1 to 2 percent. We recognize that this might be a conservative estimate considering the various positive factors at play. However, we are facing an unprecedented level of inflation, and we still have ten and a half months remaining in the year. That’s the rationale behind our approach.
Seth Basham, Analyst
Understood. Thank you so much.
Operator, Operator
Your next question comes from a line of Greg Melich from Evercore ISI. Your line is open.
Greg Melich, Analyst
Hi, thanks. Just want to make sure I got the guidance right. The mid-single digit inflation implies that that basically units would be down this year. And did you expect the Pro and DIY split to be similar to last year to narrow or widen?
Tom Greco, President and Chief Executive Officer
Yeah, good question, Greg. So obviously, given the guide we are assuming DIY transactions, which is well over half of our transactions. Obviously, the dollars per transaction is lower on DIY. We expect the DIY transactions to be down. That is embedded in our guide. We do expect growth in Pro transactions. So overall positive growth on transactions and average ticket in Pro transactions down in DIY. We're assuming some level of growth in DIY, however, and Pro outpacing DIY for the year as really has been the case for the last couple of quarters.
Greg Melich, Analyst
Great. And then secondly, could you update us on where you are in the brand strategy? You gave a billion for DieHard. When you add in Advance and Carquest, are we 40%-50% of the mix now?
Tom Greco, President and Chief Executive Officer
Yeah. We've said in the past, Greg, we started out this journey in the high-30s, in terms of our percentage of owned brand penetration. And we've moved that up nicely. We're well into the 40s now in the most recent quarter into the higher-40s. And we still believe we have room to grow there. So we're very pleased with the strength of our owned brand. As we've said many times, it carries in general a lower price per unit, certainly in the higher hard part segment than the national branded competitors. But the quality is very good. Our return rates are much lower than they've been in the past. And our in-stocks improved on all of the categories in the fourth quarter. So pleased with the owned brand penetration and relative to others, we still got opportunities there.
Greg Melich, Analyst
And then last, regarding the guidance for the adjusted margin expansion, which is just over 10%, should that be distributed equally between gross margin and SG&A leverage? How should we approach the understanding of that margin expansion?
Jeff Shepherd, Executive Vice President and Chief Financial Officer
Yeah, we think we're going to grow our margins in ’22 coming both from gross margin improvement as well as SG&A improvement. The gross margin improvement is going to benefit from the things we've been talking about our category management as well as our supply chain initiatives. And SG&A is going to benefit from the strategic initiatives we outlined last April, which is to reduce SG&A costs and improve our sales and profit per store.
Greg Melich, Analyst
That's great. Good luck, guys.
Tom Greco, President and Chief Executive Officer
Thanks, Greg.
Operator, Operator
Your next question comes from a line of Scot Ciccarelli from Truist. Your line is open.
Scot Ciccarelli, Analyst
Good morning, guys. Given the lower price points on your own brands, can you guys quantify for us the impact of the headwind to both comp and gross profit dollars from that mix shift?
Tom Greco, President and Chief Executive Officer
Yeah, we don't break that out, Scot. But I mean, obviously it varies by product and category made absolutely as a lower price point. It is a comp sales headwind, if you sell an equivalent amount of units, obviously our goal is to accelerate the unit because as we said, we're providing a more value-priced option for our customers. And that gives us a lower absolute price point for our professional customers. And as we ramp it up the unit growth should offset that. But I can also tell you that in many cases, the gross profit dollars are higher. So we're very pleased with the owned brand performance. It was a significant driver of our margin expansion in 2021. And it will be for the next couple of years.
Scot Ciccarelli, Analyst
Okay.
Tom Greco, President and Chief Executive Officer
Just to remind everyone, it’s very significantly better. The margin rate is significantly better on those categories.
Scot Ciccarelli, Analyst
I have been under the impression that the branded products typically generate more gross profit dollars, which is why I asked the question.
Tom Greco, President and Chief Executive Officer
Yeah, not necessarily.
Scot Ciccarelli, Analyst
Got it. Okay, and then switching gears for a second. The last time you guys enhanced your Speed Perks benefits. We had some pretty notable gross margin headwinds with the new gas rewards, like is there anything we should be wary of as people start to utilize that and what appears to be a very high gas price environment?
Tom Greco, President and Chief Executive Officer
Yeah, we're going to get back on our front foot on Speed Perks, Scot. I mean, we did through the pandemic; just the level of demand that was coming into our stores was substantial. And we wanted to make sure we took care of the customers and obviously having conversations with our customers about a loyalty program. It takes time and we subjugated that. There's no financial consequence at all for gas rewards. We've engineered it in such a way that it will be a real positive candidly, for us. We think it drives share of wallet, in a time of rising gas prices as just out in California, it's almost 6 bucks a gallon. You've got a situation where consumers are getting going to be really mindful of what they're paying at the pump. And we're enthusiastic about how our team is engaged with this gas rewards program. We're going to be working really hard in the stores, signing up new members and graduating members. So this will be a nice little boost for us on DIY in 2022.
Scot Ciccarelli, Analyst
Got it. Thanks a lot.
Tom Greco, President and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from a line of Simeon Gutman from Morgan Stanley. Your line is open.
Simeon Gutman, Analyst
Hey, good morning, everyone. You mentioned that you achieve supply chain leverage this quarter. Can you talk about the puts in the takes? I think I'm sure some of your initiatives are helping it and versus labor and transport which would have been a headwind. So can you maybe tell us I guess what the headwind was, so we can quantify how good you're doing underlying lift?
Tom Greco, President and Chief Executive Officer
If we remove the impact of inflation, the supply chain benefits would appear significantly larger. Our initiatives and supply chain are progressing well. We mentioned this in the third quarter, but we have completed the cross-banner replenishment. Our Warehouse Management System and Labor Management System will be finished by the end of 2023, and they are delivering the expected advantages. However, when we account for inflation, the leverage we achieved was minimal. The inflation in labor costs, especially for warehouse positions, is particularly challenging due to fierce competition for that talent. We are also seeing similar pressures in transportation and fuel costs.
Simeon Gutman, Analyst
Thanks. Tom, you mentioned that the industry is expected to grow this year. Can you provide a range or an estimate on that? Also, do you anticipate gaining market share this year?
Tom Greco, President and Chief Executive Officer
Absolutely. We do expect to take market share. We have a model a low number, Simeon, as we explained earlier for overall industry growth we make sure we're not taken by surprise as the year unfolds, given the unprecedented levels of inflation. But what we showed back in April was as an estimate for ‘22 to ‘23 was 2% to 4%. If you recall, and we believe it's going to be at the lower end of that for all the reasons we explained. If that is somewhat ends up being something different and the industry proves to be as resilient as it's been in the past 2009-2011 most notably, where it was performing extremely well in a recessionary time, that'll be good news.
Simeon Gutman, Analyst
Thank you. Good luck.
Tom Greco, President and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from a line of Michael Baker from D.A. Davidson.
Michael Baker, Analyst
Hi, thank you. I have a couple of follow-up questions. First, I'd like to know about the hiring and labor situation. Is it as challenging as it was? Has it worsened, or is it improving now that some employment benefits have ended? Is there any indication of when we might see relief from that pressure?
Tom Greco, President and Chief Executive Officer
We’re pleased to see a shift in our turnover rates. We closely monitor turnover in both our distribution centers and stores. Turnover in the stores hasn’t increased significantly, largely due to our unique stock ownership program, in which we’ve invested over $60 million in our frontline team members over the past few years. This investment has helped us retain our general managers and our commercial parts professionals. In the distribution centers, turnover peaked around the third quarter of last year during the summer and has begun to decrease since then, although it hasn’t returned to pre-pandemic levels. The applicant pool is starting to expand again as people have fewer job options. We have invested in compensation in our supply chain, though much of that is now behind us. We plan to continue reducing turnover in both stores and distribution centers this year.
Michael Baker, Analyst
Thanks for the update. I also want to revisit the pricing topic and specifically address Mike Lasser's earlier question. From your comments, it seems that some competitors, like O'Reilly last week, made some notable announcements. You're indicating that there won't be any changes to your strategy and that you're satisfied with your current pricing, as you see it as a competitive response to private labels and AutoZone's price reductions. Is that an accurate interpretation?
Tom Greco, President and Chief Executive Officer
We are highly focused on our professional customers and the competitive landscape they navigate. We evaluate our pricing against competitors every week, and we are aware of the overall market situation. This includes wholesale distributors and specialty players that significantly impact large urban markets. Worldpac has been in competition with them for over 20 years, so we recognize that some companies offer lower prices on specific products. Our enterprise pricing strategy is structured around that understanding. Therefore, there will be no changes to our pricing strategy in the future.
Michael Baker, Analyst
One more quick one, if I could, sorry, can you talk about the private label penetration within the Pro business versus the DIY business? I know in the past, maybe Pros didn't like private label as much, but it sounds like DieHard is being well accepted by the pro customer. Can you sort of flesh that out a little bit?
Tom Greco, President and Chief Executive Officer
Sure. DieHard and Carquest are both strong brands in the professional sales channel. Carquest Brakes is a leader in this area and is known for its high quality, with our customers specifically requesting them. As we expand into engine management, undercar, and other categories, Carquest is being positively received, partly because it operates without a brand name displayed at retail locations. This contributes to its strong presence. Additionally, having a high-quality owned brand product that offers good value and is delivered quickly ensures customer support. It's important to note that national brands also play a crucial role in our portfolio, and we are working closely with our national brand suppliers to enhance their visibility as well.
Michael Baker, Analyst
Makes perfect sense. Thank you for color.
Operator, Operator
Your next question comes from the line of Kathleen Brenneck from Goldman Sachs. Your line is open.
Kate McShane, Analyst
Hi. It's actually Kate McShane from Goldman Sachs. I just wondered if we could just go back to your comment on the quarter-to-date running above the 3% or the high end of your full year guidance. Can you talk a little bit about what's the primary driver of your outperformance? And what kind of comp we're facing quarter-to-date versus last year?
Tom Greco, President and Chief Executive Officer
Good morning, Kate. It's interesting how the major seasons often overlap across quarters. The spring selling season spans Q1 and Q2, while the middle of winter overlaps Q4 and Q1. We have a significant presence in the Northeast, which you are aware of. December was relatively mild in that region, but it turned cold early in the year, shifting some business from the fourth quarter to the first quarter for us. On the other hand, the West experienced a colder December, leading to strong growth in that area, particularly in the West and Southwest, unlike the Northeast. Overall, we're quite satisfied with what we've experienced so far and the harsh winter across the country should benefit us. In the second quarter, we've had considerable snowfall, which we appreciate as it drives demand for our heavy machinery in markets like New York and Detroit. This should create a positive impact for us in the second quarter. We've seen favorable weather in the first quarter, and as we look at comparisons, we will begin focusing on a three-year stack, as the two-year stack will lose relevance by the second quarter. The three-year stack is looking strong year-to-date.
Kate McShane, Analyst
Thank you.
Tom Greco, President and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Zach Fadem from Wells Fargo. Your line is open.
Zach Fadem, Analyst
Good morning, Tom. Do you think the elasticity in the industry for the do-it-for-me customer has changed? Considering the importance of service and availability, why do you think competitors are successfully lowering prices? How significant do you view pricing as a factor when competing with peers and WDs?
Tom Greco, President and Chief Executive Officer
Well, I mean, as we said earlier Zach, there are other variables that are more important to our pro customers. And I speak to them all the time, whether that's the CEOs of the company or in the garages themselves. And when you have the part and you're able to get it to the customer quickly, that's by far the most important variable. Now there are certain categories where the time to repair is longer. There are pure play operators in markets who specialize in something like AC as an example or radiators. When you have those types of jobs, price becomes more of a factor. And we're very aware of that. Those are not new dynamics. Those dynamics have existed for a long time, and we obviously compete in that environment. So it's really a question of, in our case, we're focused on what's important to the customer and improving our fundamental value proposition. And we're going to drive top-line growth, but it's also vitally important for us to ensure that, that growth is profitable and that results in big earnings growth. And we put up 48% earnings per share growth last year. We want that to translate into cash generation that we can return that money back to our shareholders. So our focus is to make sure that we are driving profitable growth, and that's what you're going to see us do. The competitive environment is clearly something we pay attention to, but we're very thoughtful about how we approach it.
Zach Fadem, Analyst
Got it. And for Jeff, what are you assuming for LIFO this year? And as we bridge the gap your big-picture 2022 outlook to your 2023 margin guide of 10.5% to 12.5%. Do you still expect equal parts expansion in both '22 and '23 in each year? Or should we contemplate a step-up in '23 as we move past some of the '22 headwinds like inflation?
Jeff Shepherd, Executive Vice President and Chief Financial Officer
Starting with the LIFO question, we believe it will be significant this year. Our early estimates suggest we finished last year with $122 million and expect approximately $100 million this year. It's important to note that the LIFO costs we experienced last year are starting to show in our profit and loss statement this year, and we have already factored that into our model for 2022. As we transition into 2023, some of that will carry over. However, we remain very confident in our margin expansion initiatives and believe we can continue to grow our gross margin and SG&A in 2023, aiming for a range of 10.5% to 12.5%.
Zach Fadem, Analyst
Got it. Thanks for the time today.
Tom Greco, President and Chief Executive Officer
Thanks.
Operator, Operator
Your next question comes from a line of Daniel Imbro from Stephens. Your line is open.
Daniel Imbro, Analyst
Yeah. Hey, good morning, guys. I wanted to follow up on private label fill rates. Tom, I think you mentioned in your prepared remarks that the undercar categories improved through the quarter, but where are those fill rates maybe relative to your desired levels? And if there are any, where are the bottlenecks today in the supply chain as you move more of those categories kind of in-house and away from other brands?
Tom Greco, President and Chief Executive Officer
Sure. Our overall fill rate still faces some challenges, Daniel, to be transparent. This is due to factors like suppliers struggling to maintain staffing and ongoing issues in the global supply chain, which hasn’t fully recovered. However, the transition to owned brands has significantly improved since last summer. We're still a couple of hundred basis points short of our target, but it's a considerable progress from last year. We managed an impressive changeover of nearly 40,000 SKUs, and we're excited to have largely completed this process. We see a lot of potential for growth moving forward as a result.
Daniel Imbro, Analyst
Got it. That's helpful. And then I want to follow up on Zach's questions just on LIFO benefits, so we can be clear, Jeff. If you saw $122 million of benefit in '21, I think you said you're guiding to $100 million of LIFO benefit in '22. If prices plateau into '23, does that create a gross margin headwind? And it seems like just numbers-wise, that would be sizable. So can you maybe walk through the puts and takes? Or are you guys thinking pricing doesn't plateau? Just trying to understand how, if we have that big of a cumulative LIFO benefit, how or when that unwind through the P&L and away from gross margins.
Jeff Shepherd, Executive Vice President and Chief Financial Officer
Yeah. So first of all, it's unwinding now. We're already starting to see it, and we're going to see it throughout '22. And that's embedded in the model or the guidance that we're providing yesterday. So we turn about 1.35 times a year. That translates into about 10 months; rough math tells you that's when it starts to come back to you on the P&L. So again, we plan that for '22. We're going to be planning that as we move into '23. If everything else were to remain completely static, you're right, in absolute terms, it would be a headwind, and that's something we're contemplating. And that's why we're really excited. We have the margin expansion initiatives that we have because we're confident we can overcome that.
Daniel Imbro, Analyst
Got it. Thanks very much for the color. And best of luck.
Tom Greco, President and Chief Executive Officer
Yeah. And Daniel, I just want to clarify one thing. On undercar we're pretty close to our in-stock goal. On engine management, that's the one that I was referencing. And I think you asked undercar, so just to clarify. We're pretty much where we want to be on undercar.
Daniel Imbro, Analyst
Thanks, Tom.
Operator, Operator
And your final question comes from the line of Brian Nagel from Oppenheimer. Your line is open.
Brian Nagel, Analyst
Hi, good morning. Thanks for slipping me in here. So I know there's already been a couple of questions, a few questions maybe on the whole pricing dynamics, so I apologize. But the question I want to ask is, Tom, from your vantage point, recognizing you're very close to your commercial customers and you're watching your competition, are you seeing some of the lesser-known competitors maybe in the WD space actually move price at this point? Or maybe not take price amid broader-based inflation? Is there some change in the dynamic there within that cohort?
Tom Greco, President and Chief Executive Officer
You know what, we really haven't. And I think that from our vantage point, they operate very rationally, right? I mean, these are in many cases, private companies. They don't have retail stores. They're in a warehouse that doesn't pay the same rent. They don't have some of the cost base within SG&A that you have with a traditional retail parts store. I mean, it's just that simple. So their prices tend to be lower. Their gross margins tend to be lower, and their SG&A tends to be lower. So they operate on a very rational basis. They priced typically below what the retail parts companies do, and that's why Worldpac and our diversified asset base helps us because we already have that arrow in our quiver. Worldpac has expanded parts significantly over the past several years, and we are very thoughtful about how we price in accordance with that. We're growing the Worldpac business substantially. It's integrating with Autopart International, and we're growing margins at Worldpac. So it's a very good story for us in that regard, and we obviously want to maintain our competitiveness, but we've got some things in our tool bag that help us there.
Brian Nagel, Analyst
Got it. That's very helpful. And then my follow-up question, just with respect to demand. Clearly, you ended the year very strong, and given your commentary, it seems like the strength persisted here into the New Year. As the economy potentially once again begins to pull away from the COVID crisis. Are you seeing greater variability market-to-market depending on where each market is relative to the pandemic?
Tom Greco, President and Chief Executive Officer
That's a good question. We're definitely looking at miles driven as a key indicator. We need everyone to return to their offices, similar to what Microsoft did recently. I'm joking, of course. The reality is that the number of people going back to offices, especially in large urban areas, is still below pre-pandemic levels. In certain regions, like the Southwest and Southeast, miles driven have almost returned to 2019 levels, while the Northeast remains nearly 10% below where it was two years ago. Although it's improving, it's still not quite there. We expect to see ongoing improvement in miles driven, though the current data indicates it's still down compared to 2019.
Brian Nagel, Analyst
Yeah. Very helpful. Thank you.
Operator, Operator
There are no further questions at this time. Mr. Tom Greco, I turn the call back over to you for some closing remarks.
Tom Greco, President and Chief Executive Officer
Well, thanks for joining us this morning. And as you've heard throughout the call, we remain confident in the strategic plan we're executing and in our ability to deliver top quartile total shareholder return through the four TSR drivers we discussed today. We plan to build on our 2021 results and leverage strong industry fundamentals and continue to strengthen our customer value proposition, deliver against our margin expansion initiatives and return substantial cash back to our shareholders. We remain committed to the execution of our strategic initiatives while driving innovation to position Advance for long-term profitable growth. And we look forward to sharing more of our progress throughout the year.
Operator, Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.