Earnings Call
Advance Auto Parts Inc (AAP)
Earnings Call Transcript - AAP Q1 2023
Elisabeth Eisleben, Senior Vice President of Communications and Investor Relations
Good morning, and thank you for joining us to discuss our Q1 2023 results. I'm joined by Tom Greco, President and Chief Executive Officer; and Jeff Shepherd, 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 remarks today will 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, future performance, and leadership transition. 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 Form 10-K and subsequent filings made with the commission. Now let me turn the call over to Tom Greco.
Tom Greco, President and CEO
Thanks, Elisabeth, and good morning everyone. I'd like to start by thanking our entire team for their relentless focus on serving our customers. The dedication of our frontline team members has been a hallmark of the company for many years, and we're grateful for their ongoing commitment. I'll review a couple of themes today and provide an update on our performance in the first quarter and outlook for the balance of the year. First, we're putting the customer and our team members first in every decision we make. While our financial results in the first quarter were well below our expectations and there is still work to be done, our customer-focused investments in parts availability and price competitiveness resulted in improvements across key relevant performance indicators. We're executing our plan to drive continued improvement in our transactions with Pro customers highlighted by increased parts availability, sustaining competitive price targets, and improved execution across the board. Secondly, as we look to the outlook for the balance of the year, we expect the competitive environment in the Pro channel to remain very challenging. As you saw in our release, we are reducing our annual guidance based on the shortfall we experienced in Q1 and our updated balance of year outlook. Additionally, we believe it's prudent to enhance financial flexibility, and we've made the difficult decision to reduce our quarterly cash dividend. We remain committed to executing against our key initiatives to drive top-line growth and improve operational performance. In terms of our top line, Q1 net sales increased 1.3%, while comparable store sales decreased 0.4%. New stores contributed to net sales growth in the quarter, inclusive of the 21 stores and branches we opened in Q1. We saw net sales growth in both DIY omnichannel and DIFM, with DIY omnichannel slightly outperforming DIFM driven by a double-digit sales increase in our e-commerce business. In terms of cadence, we believe that lower tax refunds pressured our business in March. From a category perspective, motor oil and brakes led the way as a milder winter impacted cold weather category sales in some of our geographies, particularly in some of our northern geographies. Overall, both net and comparable sales growth were below our expectations for the quarter, driven primarily by our professional business. As I mentioned, we saw improvements in the KPIs we track to measure parts availability. In collaboration with our vendor partners, our supply chain fill rates improved in the quarter. In terms of availability, our on-hand rates improved by approximately 50 basis points in the quarter. In terms of competitive pricing, we’ve talked in the past that based on our research, the most important criteria for an installer to make choices above their part supplier starts with availability, followed by consistency of delivery and relationship. Pricing has historically been the third or fourth criteria for an installer. However, if the gap between our price and competitors becomes too wide, price becomes a bigger factor. Last year, we saw a relative price position within Pro climb to unacceptable levels as a result of changing competitive dynamics surrounding price-related investments. We've done considerable work testing different price points across categories and geographies to determine the best approach to drive increased transactions and growth in our Pro business. This work helped us refine price targets for each category relative to competition, be it a traditional competitor or a wholesale distributor. As a result of improved availability, along with the investments we made within Pro to achieve competitive price targets by category, we saw improved performance in both transactions and units relative to the fourth quarter. This was more than offset by less year-over-year growth in average selling price relative to the fourth quarter. In order to sustain our targeted competitive price position in Q1, we had less price realization in implant, which put substantially higher pressure on our product margin rate. Our gross margin rate declined 162 basis points, with the single biggest shortfall versus expectations being less than planned price realization within product margin. Separately, we also experienced a mixed headwind within product margin, which Jeff will explain in more detail shortly. These two primary headwinds within gross margin more than offset the benefits we saw from both channel and own brand mix. In terms of SG&A, we incurred a headwind associated with the prior year adjustments which Jeff will discuss further. The combination of gross margin and SG&A deleverage resulted in an operating margin decline of 339 basis points in the quarter. As we look to the back half of 2023, we're urgently focused on operational improvement. On the top line, we're continuing to drive our DIY omnichannel business behind the strength of DieHard, our Speed Perks loyalty platform, and strong growth in our e-commerce business. In terms of Pro, we're focused on improving top line sales and driving gross profit dollars. This is highlighted by a back-to-basics approach and a heightened focus on execution across the board. The first big driver here involves further optimization of our inventory and parts availability to improve on-hand rates. In some cases, we plan to sell through owned inventory at discounted rates to transition to new higher-margin alternatives. The second driver involves our plans to sustain competitive price targets to ensure we close the sale. On the margin front, we've talked about strategic sourcing within category management in the past. We're now taking a much more holistic approach, starting with the latest customer and category insights and updating the role of each category within our business. We then apply a very disciplined approach to determine sourcing, distribution, shelf space, pricing, and promotion. Our category management process involves the engagement of our strategic suppliers with an overarching goal of accelerating our mutual sales growth and margin expansion. We're addressing opportunities here on a category-by-category basis, with continued work planned balance of year and into 2024. In addition, we also executed a corporate restructuring in the first quarter, which will provide savings balance of year within SG&A. In terms of our balance of year outlook, we continue to be mindful of macroeconomic uncertainty and potential pressure on consumers. For our industry, the primary drivers of demand remain positive, including an increase in car park, aging fleet, and a modest increase in miles driven compared with one year ago. Our overarching goal for the balance of the year remains to improve operational execution to regain top line sales momentum, particularly in the professional sales channel. Regaining our share of wallet with existing customers has been challenging. However, we're elevating our focus on parts availability, sustaining competitive price targets and improving field execution. Jeff will cover more details surrounding our revised guidance later in the call. But given what we've experienced year-to-date, we expect that sustaining our competitive price targets by category will require higher than planned price investments in Pro, and we factored this into our full-year guide. Before turning the call over to Jeff, I want to talk briefly about the newly expanded role of our Independent Board Chair, Gene Lee, and provide a quick update on the CEO search process. As you saw in our release this morning, Gene is now serving as Interim Executive Chair and will be providing additional operational oversight and support to our management team during this time. I look forward to working with Gene and continuing to leverage his experience as we work to deliver operational improvement in the business, while helping to ensure a seamless CEO transition. With respect to the CEO search, following a very thorough vetting and selection process, we've retained a leading independent search firm to assist with this work. Our succession committee is comprised of board members with significant experience in retail, automotive, industrial, and multi-unit operations. The committee is evaluating internal and external candidates and remains committed to identifying a candidate who is exceptionally fit for the role. With that, I'll now turn the call over to Jeff to review our first quarter financials in more detail and provide our outlook for the full year.
Jeff Shepherd, Executive Vice President and CFO
Thanks, Tom, and good morning. I want to reiterate our gratitude for our team members and the ongoing commitment to putting our customers first while navigating a difficult quarter. In Q1, net sales of $3.4 billion increased 1.3% compared with Q1 2022, driven by new store openings. Comparable store sales decreased 0.4%. Gross profit margin was 43% compared with 44.6% in Q1 2022. In terms of gross margin, we experienced headwinds associated with targeted price investments, which were above expectations due to the current competitive landscape. It's important to point out that as we remain committed to maintaining the competitive price targets we've established and have now attained in key categories, we were unable to price to cover product costs in the quarter. Product costs were up mid-single digits compared with the prior year, which exceeded our year-over-year price realization. In addition, unfavorable product mix and increased supply chain costs also contributed to gross margin deleverage. In terms of product mix, we routinely see variations, which can be influenced by several factors, including macroeconomic conditions and weather. As you know, we had a milder winter in the quarter, which impacted battery and wiper sales in Q1. This, coupled with an increase in motor oil, which carries a lower margin rate had an unfavorable impact on product margin. While we had channel and owned brand mix tailwinds, product mix headwinds more than offset these benefits. The combination of inflationary costs in our new DCs in California and Toronto, as well as lower-than-expected sales resulted in supply chain deleverage. This more than offset productivity gains from our supply chain initiatives. SG&A in the quarter was $1.4 billion compared with $1.3 billion the previous year. As a percent of net sales, Q1 2023 was higher than planned due to the softer top line and was 40.4% compared with 38.6% in the prior year. We incurred approximately $17 million in SG&A costs in the first quarter. As a result of management's review, it was determined these amounts were paid in 2021 and 2022, but not correctly expensed in those years. We've concluded these costs were not material to prior years and therefore, we recognize the adjustment in Q1. In addition, our SG&A deleverage was also due to inflationary headwinds associated with labor and benefit-related expenses. We incurred costs associated with new store openings, which were partially offset by a reduction in start-up costs we incurred in 2022 related to our California expansion. Our Q1 operating income was $90 million compared with $203.3 million in the previous year. On a rate basis, Q1 was 2.6% compared with 6% in the previous year. Diluted earnings per share was $0.72 compared with $2.26 in the previous year. Q1 capital expenditures were $85 million compared with $114 million in the previous year. The year-over-year reduction was primarily attributable to the completion of certain IT-related investments from the prior year and lower new store and branch openings in Q1 2023. Free cash flow was an outflow of $468 million in the quarter, with the largest contributor being the timing of payables. As you saw in our release this morning, and as Tom mentioned, the Board made the difficult decision to reduce our cash dividend to $0.25 this quarter. Given our recent performance and balance of the year outlook, we believe it's prudent to retain financial flexibility. Given the factors discussed, we are updating our full year guidance to include net sales of $11.2 billion to $11.3 billion, comparable store sales of negative 1% to flat, GAAP operating income margin of 5% to 5.3%, income tax rate of 24% to 25%, diluted earnings per share of $6 to $6.50, capital expenditures of $250 million to $300 million, a range of $200 million to $300 million in free cash flow, and 40 to 60 new store and branch openings. With that, let's open it up for questions.
Operator, Operator
Thank you. And our first question is from Elizabeth Suzuki from Bank of America. Elizabeth, please go ahead. Your line is open.
Elizabeth Suzuki, Analyst
Great. Thank you. Just on the competitive environment, you noted that you expect competition in Pro to remain challenging. I mean, do you think that competition is mostly coming from the large chains? Or are the smaller independents getting more competitive too as the supply chain leases up and they're able to get more product as well?
Tom Greco, President and CEO
Hi, good morning, Liz. I think it's a combination of the two. I mean, we measure the relative price indices against the industry. And obviously, we also measure it against our direct close-in competitors, but we predicate our pricing strategy off of the industry more broadly. So really, those two are both looked at, but the primary driver for us is the industry because, as you know, the Pro business is highly fragmented and there's a lot of business out there. It's a $100 billion category, so we look at the whole thing.
Elizabeth Suzuki, Analyst
Great. And then Tom, you had also mentioned in your prepared remarks that you talked about plans to sell through some of your owned brand inventory to replace it with better products. I mean, is the implication there that the owned brands didn't meet the demands of your customers in terms of quality or features? And are you pausing expansion in owned brands?
Tom Greco, President and CEO
Yes. Let me correct that. We have owned inventory, which is essentially inventory that we've already paid for; it's not necessarily owned brand. We're essentially transitioning from one brand to another in a couple of big categories, and that's what we're talking about here. For the most part, we are actually transitioning into higher-margin owned brands, so I know that's a little confusing. But this is largely about expediting the process to move out of inventory that is essentially moving out of our system and into higher-margin owned brands.
Operator, Operator
The next question comes from Chris Horvers from JPMorgan. Chris, your line is open, please go ahead.
Chris Horvers, Analyst
Thanks. Good morning. So just at a high level, narrating this, you cut your operating margin by 280 basis points. So is that essentially 250 on the gross margin line and the balance on SG&A given the lower outlook? And then within that gross margin, is that all price investment that's driving that difference?
Tom Greco, President and CEO
Yes, Chris. Let me give you some context on what happened in the quarter and how we're thinking about the balance of the year, and then I'll let Jeff sort of tie it off. In terms of the sales, I mean, DIY was generally in line with our expectations. We were down low single digits in transactions, up mid-single digits in average ticket. We posted a positive comp generally in line. As you know, in Pro, the goal was to invest in inventory and make sure that our competitive price index was in line with where we had targeted. We want to drive our units. We want to drive transactions. We're trying to increase our share of wallet with our existing customers get back to where we were. We're actually making good progress on improving units and transactions. In the quarter, we improved. We were down low single digits in transactions in the quarter, but that was a nice improvement from where we were at the end of last year, so we're getting more jobs with our installers. The challenge is two-fold. We're not getting enough lift yet, so it is taking longer to recover share of wallet with our existing customers. That's been the biggest issue that we faced so far this year. We're going to stay at it. It is taking longer than we'd like, though. And then in terms of our average ticket in Pro, it was up low single digits, which is significantly below how we plan that business. And as we look forward, that's going to be a big P&L headwind for the year. So I'll let Jeff tie it out from there.
Jeff Shepherd, Executive Vice President and CFO
Yes. In terms of the split between margin and SG&A, Chris, the best way to think about it, if you look at the balance of the year, kind of midpoint of the guide for last year, we're expecting deleverage in both gross margin, as well as SG&A relatively split. I mean, there could be some variability there, but that's why we're sort of thinking about the balance of the year. And just to put a bow on that, we do think the second quarter will be the most deleverage, and then we'll see improvement in the back half.
Chris Horvers, Analyst
That's a good transition to the follow-up. Considering price and availability, have the necessary price adjustments been made and are we now looking at the annualized effects? Is there any Last In, First Out dynamic at play? Regarding availability, you increased inventory significantly. Is availability at the desired level, or are we also addressing the issue of having inventory that may not be in the right locations?
Tom Greco, President and CEO
Sure. I'll start with availability because Jeff can discuss price shortly after I speak. We're committed to improving availability, and we are making significant progress. Our on-hand rates are increasing, supplier flow rates are up, and our fill rates from the distribution centers to the stores are improving, so we are seeing good progress in availability. There is still room for further improvement, but clearly, we are moving in the right direction. Regarding price, as I mentioned earlier, we have a targeted price index by category compared to the industry. To directly answer your question, we are currently where we need to be. However, this has resulted in less price realization than we had anticipated, but we are now aligned with the targeted index.
Jeff Shepherd, Executive Vice President and CFO
Right. And we're planning on that being a competitive dynamic through the balance of the year, so that is factored into the revised guidance. In terms of impact from LIFO, we're not anticipating anything significant there. We talked about inflation being up mid-single digits. We're expecting some moderation over the balance of the year. However, LIFO, we think, will be a slight benefit.
Chris Horvers, Analyst
Slight benefit for the year, but it was a headwind in 1Q?
Jeff Shepherd, Executive Vice President and CFO
That was a benefit in 1Q, very small, $7 million.
Chris Horvers, Analyst
Got it. Okay. Thanks very much.
Tom Greco, President and CEO
Thank you.
Operator, Operator
The next question comes from Simeon Gutman from Morgan Stanley. Simeon, your line is open. Please go ahead.
Simeon Gutman, Analyst
Good morning, everyone. In the prepared remarks, it outlined a highly competitive, price-driven environment. I'm curious if you could discuss whether the commercial sector has engaged in anything resembling a price war, as it seems a bit different from how other competitors have characterized it. Are you noticing price matching? Is it primarily from the large chains or the independent operators? Could you elaborate on that competitiveness?
Tom Greco, President and CEO
Good morning, Simeon. I believe my previous comments align with this. We are setting our price targets based on our weekly observations in the industry across all categories and responding accordingly. We have a strong team focused on strategic pricing who analyze our unit performance in each category at various levels. We have a clear understanding of the pricing needed to improve units and secure more jobs. They set the targets for each category, and we observe shifts, primarily at the industry level. While we do consider individual competitors, our pricing strategy is primarily driven by broader industry trends, so it's a blend of both factors.
Simeon Gutman, Analyst
And can you give any sense for how much of the gross margin impact is due to the acceleration of moving some lines out of your network versus the price investments?
Jeff Shepherd, Executive Vice President and CFO
It's primarily the price investment. I mean, that has been the single biggest factor. We aren't able to cover inflation with price, and that was by far the biggest driver.
Simeon Gutman, Analyst
Got it. Okay. Thank you.
Operator, Operator
The next question comes from Bret Jordan from Jefferies. Bret, your line is open. Please go ahead.
Bret Jordan, Analyst
Hi, good morning, guys.
Tom Greco, President and CEO
Good morning.
Jeff Shepherd, Executive Vice President and CFO
Good morning, Bret.
Bret Jordan, Analyst
Could you talk about the repercussions of the debt to EBITDAR now being at 3x? Is this going to require sort of a more funded working capital level? And I guess, what does it do to your, I guess, inventory balances and cost of goods?
Jeff Shepherd, Executive Vice President and CFO
Yes. I mean, we're looking to make the necessary investments within working capital to ensure we have the right availability. We've made substantial improvement in that. In the first quarter, you'll see our free cash flow. When you look at the details, our inventory is up $100 million. We think we have some further investments to go, but we think that will be largely completed by the end of this quarter, so we're confident that we can get those investments in and start producing the cash from making those investments. We watch our ratios very closely. It's elevated, and we believe that to be temporary as the availability improves our transactions and we improved the cash flow.
Bret Jordan, Analyst
Okay. Your accounts payable, I think we're in the 70s as a percentage of inventory. Is that number probably heading lower here as we go into a sort of into this 3-plus debt to EBITDAR ratio?
Jeff Shepherd, Executive Vice President and CFO
No. We think we'll see some slight improvement over the course of the year. We had some sizable planned payments in the first quarter associated with our payables, so that will start to flatten out over the balance of the year. And so, we'll see some slight improvement.
Bret Jordan, Analyst
Okay. And then a question on commercial. I mean, obviously, could you maybe give us some color as to what percent of your commercial business is national accounts? And then obviously, one of your big national accounts did an RFP in the first quarter that I think maybe took some business away from you. How do we reconcile that with this phase of price investment you think that given the fact that you're calling out lower pricing that RFPs like that would be going towards you as opposed to a way?
Tom Greco, President and CEO
Sure. We examine the various channels within Pro. While we don't disclose the exact size of our major accounts, our strategic accounts are crucial to us. To address your question about the RFP, we anticipate seeing improvement in the latter half of 2023 across our national account base for several reasons. Most of the progress we've achieved so far has been from local business, which I find encouraging. We will keep pushing our local operations, securing more jobs, and increasing our market share. Our field team is dedicated to delivering results and has a solid strategy in place. We aim to improve availability and maintain our CPI, which should lead to increased transactions and units, and enhance our share of wallet. Therefore, as we move into the latter half regarding Pro, we foresee advancements on the strategic side and ongoing progress in local business.
Bret Jordan, Analyst
Okay. Part of that first question on the payables and free cash, considering that we will likely need to fund a bit more working capital, is your confidence in that guidance related to lower capital expenditures or store opening expenses? You should consider the factors affecting cash flow.
Jeff Shepherd, Executive Vice President and CFO
Yes, we took a comprehensive look at all of that, and you'll see we did reduce the number of planned new store openings this year. We've reduced our estimate for capital expenditures. So all of that has been contemplated, and we're going to continue to assess that throughout the year.
Bret Jordan, Analyst
Okay, great. Thank you.
Operator, Operator
The next question comes from Greg Melich from Evercore ISI. Greg, your line is open. Please go ahead.
Greg Melich, Analyst
Thanks. I wanted to just quantify a little bit more on inflation, what it was in the first quarter in both DIY and Pro? It sounds like it was low single digit, maybe mid-single, and then what's your expectation for the rest of the year, the cadence of that?
Tom Greco, President and CEO
You're talking about costs, Greg? Or are you talking about -
Greg Melich, Analyst
top line.
Tom Greco, President and CEO
Yes. So yes, we saw mid-single digits on DIY in terms of average ticket and we saw low single digits on Pro, which the Pro number was well below how we planned it, so that's kind of where it came in.
Greg Melich, Analyst
And then the guidance, the cadence for the rest of the year, should we expect that to go all to low single digits or near flat?
Jeff Shepherd, Executive Vice President and CFO
Guidance would be near flat.
Tom Greco, President and CEO
Yes. I mean, we're anticipating that the competitive environment in Pro is similar for the balance of the year, and that's why we're making the single biggest driver of our guidance revision is that.
Greg Melich, Analyst
Got it. Okay. And then for the follow-up, are we bringing inventory back and working on improving fill rates, which is a primary way to regain market share? Is inventory currently up 5% year-on-year? Is that at the desired level, or is further investment in inventory still needed?
Jeff Shepherd, Executive Vice President and CFO
We're almost there. We believe we need to make a bit more investment that should be completed in the second quarter, and at that point, we think the working capital or inventory investments will be mostly finished.
Greg Melich, Analyst
Got it. And for my final follow-up, could you provide more details on the SG&A? I understand it was up by $17 million, but you mentioned wage inflation as one of the contributing factors. Can you elaborate on that and how it's currently trending?
Jeff Shepherd, Executive Vice President and CFO
Yes, wage inflation was the biggest factor, again, mid-single digits, so couple that with the top line and that's pretty difficult to get leverage there. We also did see deleverage in our newly opened stores, where we're moving through these phases of last year's preopening costs. Now we're moving into open stores, and where we get natural deleverage there as we build the revenue, we're still seeing deleverage. That was offset by preopening costs that we had last year, so it's sort of shifting that, but those were the big drivers.
Greg Melich, Analyst
Got it. Thanks, and good luck.
Tom Greco, President and CEO
Thanks, Greg.
Operator, Operator
The next question comes from Scot Ciccarelli from Truist. Scot, your line is open. Please go ahead.
Scot Ciccarelli, Analyst
Good morning, guys. A follow-up question on the balance sheet. So I know you mentioned there were some timing issues, but vendors in this industry are well known for being very sensitive to the performance of their customers. And so, I guess the question is, are some of your vendors starting to change terms or maybe are your payment terms on private goods different than or shorter than branded goods? Because if we just had timing differences, I guess, I would think the AP ratio would improve a little bit more than what you suggested.
Jeff Shepherd, Executive Vice President and CFO
Well, there haven't been any significant changes in terms. Really, the timings associated with the investments we started to make in the back half of the year, and those invoices are coming due in the first quarter, and we largely anticipated that. So it wasn't a significant surprise to us. And as I said, it will even out over the balance of the year, and we'll see improvement in the AP ratio as the year goes on.
Scot Ciccarelli, Analyst
So if inventory is going to continue to go up then you would expect AP to increase more than whatever increase is still happening on the inventory side?
Jeff Shepherd, Executive Vice President and CFO
Yes, ideally, we will start to sell through that inventory, which will also help our accounts payable ratio. That's the way to think about it.
Scot Ciccarelli, Analyst
Understood. Thank you.
Jeff Shepherd, Executive Vice President and CFO
Thanks.
Operator, Operator
The next question comes from Steven Forbes from Guggenheim Partners. Steven, your line is open. Please go ahead.
Steven Forbes, Analyst
Good morning. Maybe just to start with a quick follow-up on a prior comment. As I think you mentioned you expect the most deleverage on EBIT margin in the second quarter, so can you just expand on what's driving that? Is it comp compares? Or is there something in the margin profile that we should be aware of that you're cycling as well?
Jeff Shepherd, Executive Vice President and CFO
Yes. I mean, part of it is inflation in terms of we expect that to moderate more in the back half than in the first half, so we're dealing with that. And then it's really just finishing up the availability once we get that availability where we wanted more improvement in sales in the back half than as compared to the second quarter.
Steven Forbes, Analyst
And then just a quick follow-up. If we think back to the Analyst Day, the transformation margin expansion timeline exhibit, and so forth, can you just talk about whether we're sort of progressing against that timeline or if any of these changes in the capital expenditure profile of the business or investment agenda has impacted that timeline for the supply chain transformation in any such way?
Tom Greco, President and CEO
Sure. Well, first of all, a lot has changed since the day we made that presentation, and the biggest thing is the competitive environment in Pro. And so, our objective is to regain momentum in our Professional business, that's our largest business. It's vitally important for the company. We are getting back on our front foot on the top line in Pro. We're going to improve our availability. We've got to be where we need to be on the pricing and raising the bar on execution. So relative to what we discussed there, we are continuing to execute all of the margin expansion initiatives that we laid out. This is a new dynamic that we're dealing with, and we're going to address it directly.
Steven Forbes, Analyst
Thank you. Best of luck.
Tom Greco, President and CEO
Thank you.
Operator, Operator
The next question comes from Michael Lasser from UBS. Good morning. Thanks so much for taking my question.
Michael Lasser, Analyst
So you're well into the transformation that you started many years ago. And yet, it does seem like everything is taking a step back between margins, free cash flow generation, you needed to cut the guidance, cut CapEx. Why is this all happening now? Is it something that's internally catalyzed or more externally catalyzed?
Tom Greco, President and CEO
Yes. I think it's similar to the last question, Mike. I think it is external. I mean, obviously, the dynamic has changed on the Pro side. You would say that, that's probably been ongoing here for the last 1.5 years anyway, and that's a fair comment. We are addressing that competitive dynamic. I think, I've got a very strong resilient team here at Advance. We've built a great team, both in the corporate office and in the field. We faced adversity before, and we've overcome. And I have no doubt that we'll overcome the challenges we face today. But we've got to address what's in front of us right now, and that's about driving operational improvement and regaining share of wallet with our Pro customers. Now we are going to continue to execute against the things that we believe will continue to improve our business that were part of the transformation timelines that we've discussed.
Michael Lasser, Analyst
And Tom, are you seeing the challenges in your Pro business across both the legacy Advance and Carquest businesses, as well as Worldpac? Maybe a way to address that question, can you give us a sense for how Worldpac performed in the quarter?
Tom Greco, President and CEO
Yes, Worldpac is doing fine. I mean, the multiyear stacks on Worldpac look terrific, so we continue to perform very well at Worldpac. Our challenges on Pro are isolated largely to the Advance Pro business.
Michael Lasser, Analyst
Thank you very much, and good luck.
Tom Greco, President and CEO
Thank you.
Operator, Operator
The next question comes from Bobby Griffin from Raymond James. Bobby, your line is open. Please go ahead.
Mitch Ingles, Analyst
Hi, everyone. This is Mitch Ingles on for Bobby. My first question is, if the competitive landscape in the Pro segment continues to be challenging and passing through price increases is not an option, what strategies or actions do you have or need to implement in order to rebuild and improve the gross margin in your Pro business?
Tom Greco, President and CEO
Yes, good morning. We discussed our category management process earlier, which I believe presents our biggest opportunity. It encompasses a detailed approach to sourcing shelf space and various aspects of category management. We will work closely with our supplier partners to increase sales and profits, ensuring that both parties gain from this collaboration. Supply chain continues to be an area for improvement as well. Our new Chief Supply Chain Officer is gaining strong momentum with his team, and there are still more opportunities to explore in that area.
Mitch Ingles, Analyst
Got it. Thanks, Tom. And on that subject, can you elaborate on what the supply chain headwinds were in the quarter that led to the deleverage? And what steps are taken to mitigate these going forward? And you previously mentioned on the last call about some of the consolidation opportunities in the supply chain, so any updates there? Thank you.
Jeff Shepherd, Executive Vice President and CFO
Yes. I mean, the primary deleverage point was the wage inflation that we saw for our labor in the distribution centers. We also had some deleverage of our newer DCs as we get them up to capacity, so we'll naturally get improvement there as we get the distribution centers serving a full slate of stores. It's a bit of an iterative process where you bring a number of stores online. It starts at a lower number until it works up to its full capacity. And once it does that, we'll get much better leverage there, but those are the two big ones. And I'll turn it over to Tom on the consolidation part of the question.
Tom Greco, President and CEO
Yes. So what we talked about is that our long-term vision for Pro is really to leverage the entirety of our enterprise assets and provide a superior customer experience. As you know, the pro margins are lower than the DIY margins, which results in natural channel mix headwind, so we're testing variations of how we might better leverage the entirety of our enterprise assets. We talked about Toronto in our last call. We're seeing good progress up there, and we see that as an opportunity. There's still work to be done to optimize it, but we believe there's potential to go further there. And the end-state goal is pretty simple, superior customer experience, accelerate the Pro growth while expanding margins and potentially reduce inventory, so more to come there.
Operator, Operator
The next question comes from Seth Sigman from Barclays. Seth, your line is open. Please go ahead.
Seth Sigman, Analyst
Hi, good morning, everybody. So my question is mainly on investments. It does seem like there is more of a message today of investing to drive higher sales productivity, which I think is still the biggest gap versus your peers, and I think that's both a retail issue and a professional issue. So the question is really beyond just price, are there other areas that you may still need to lean into incrementally from an investment perspective thinking about store investments, labor, et cetera? And could those investments potentially extend into next year?
Tom Greco, President and CEO
Yes, good question, Seth. You're absolutely right. The main difference between us and our peers is that they have much higher throughput in their boxes. We believe this relates to availability, which involves investing in inventory and ensuring we get more parts closer to the customer. Additionally, we've already made significant investments in our team through our frontline stock ownership program. We will continue to seek ways to enhance our e-commerce business, which has been quite successful. Regarding DIY, we're pleased with our performance and how we compare to others. However, we need to improve our Pro business and increase our share of wallet there. From that point, we will aim to boost our sales per store and, of course, profit per store.
Seth Sigman, Analyst
Okay, thank you. And then just to follow up on the price investments specifically. Can you help us frame how off your pricing has been relative to peers and perhaps the scope of the changes that you're making, looking at the percent of the assortment, maybe the depth of the changes? And then stepping back, if you think about how some of your competitors have sharpened prices over the last two years, that's also been combined with other improvements, right, in stock availability, service, some of which you've already talked about. But I guess, ultimately, what gives you the confidence today? I understand the gap in performance, but what gives you the confidence today to make those big changes? Thank you.
Tom Greco, President and CEO
Yes, we've seen really good progress in many of our stores and many of our categories with the actions we're taking. We got to just continue to do what we've been talking about on the call, which is a kind of a back-to-basics approach of improving our availability, making sure our competitive price indices are there, and raising the bar on execution. So where we have that in place at, we're seeing really, really strong performance, and we just need to replicate that further across the chain.
Seth Sigman, Analyst
Can you just help us with the scope of the changes, maybe looking at how much of the assortment you're actually changing?
Tom Greco, President and CEO
Well, we're not changing the assortment. We're improving availability, right? I mean, we're increasing what we call our assortment rates and our on-hand rates. So what is designed to go into a store, 22,000 SKUs in an Auto Parts store, what do we want in the back room, so we're improving the quality and composition of the assortment in the back room. And when we do that, we see significant improvement in our sales. I mean, the most important thing in our business, as you hear from all of us, is availability, so that's the number 1 driver. And of course, you mentioned the investments from others, that happened over the last two years, so we've had to essentially replicate that investment this year in terms of making sure that we're in line with where we need to be on competitive price by category.
Operator, Operator
The next question comes from Zach Fadem from Wells Fargo. Zach, your line is open. Please go ahead.
Zach Fadem, Analyst
Hi, good morning. Tom, following up on the last question, comparing you to your peers, curious if you could talk to the structural or infrastructure differences that you believe may be having an impact that drives the lower throughput and thus the need for higher investment? And then specifically looking at your commercial business, curious to what extent the execution improvement can narrow the gap versus just having a structural difference?
Tom Greco, President and CEO
Yes. I mean, I think infrastructure-wise, we have the assets we need to compete. I mean, we've got, obviously, a large Pro business. It is different than our peers, given that we have the Worldpac business, which is fully integrated. We've got the Advance business. We put all of the large buildings that we can have Auto Parts in, we have over 500 of those. So we're doing a much better job leveraging the entirety of the enterprise assets and there's still room for improvement in that area. In terms of execution, we're going to continue to make sure that we're building the relationships that we have with our Pro customers. We're making the number of sales calls we need to make with our account managers that are out there. Bob Cushing has terrific relationships with the large strategic accounts that are going to continue to grow at outsized rates over the next several years, so we have a lot of things that we can leverage on the Pro side of the house to drive growth going forward.
Zach Fadem, Analyst
Got it. And then, Jeff, a two-part question for you. First one, following up on the Q2 commentary, is there any guidepost that you can give us on magnitude with respect to Q2 comps where you're tracking today and maybe gross margin versus SG&A? And then second, you mentioned doing a corporate restructuring in Q1. Can you help us understand the cost impact in Q1 and then expected savings and productivity for the rest of the year?
Jeff Shepherd, Executive Vice President and CFO
I'll begin with the second question first. The costs for the quarter were relatively low, in the low single-digit millions, so it wasn't a significant investment. We haven't detailed the savings for the remainder of the year, but it is substantial, and we've taken that into account for our updated guidance. It is something we can easily monitor, and so far, we are meeting our expectations, which is encouraging. Regarding the second quarter, we anticipate a decline in both gross margin and SG&A, with the decline in gross margin likely being more pronounced than in SG&A, but we do expect a notable decrease in the second quarter.
Zach Fadem, Analyst
Got you. Appreciate the color guys.
Operator, Operator
The next question comes from David Bellinger from Roth Capital Partners. David, your line is open. Please go ahead.
David Bellinger, Analyst
Hi, good morning. Thanks for the question. Going back to the DIFM price gaps, so with the changes you've now made, are those gaps largely closed versus your direct competitors? Are you going even further and taking price below other market participants in order to recapture some of the share that's been lost over the past year or so?
Tom Greco, President and CEO
Well, first of all, we are where we need to be. It varies from market to market, and we consider factors like high share markets and low share markets. These elements will influence our targeting strategy in different markets. Generally speaking, we are at the right point, and this is reflected in our full year guidance. However, the level we need to be at is significantly lower than what we had originally anticipated in terms of price realization, which is our current situation.
David Bellinger, Analyst
Okay. And then a follow-up in regard to Professional sales in general. There's been some concern around certain end customers shifting suppliers. Can you help us understand the breakdown of, I believe, it was a flattish Pro sales comp this quarter. Maybe you can talk about average spend per customer in light of the inflation benefit versus any customer losses that occurred within the Q1 period?
Tom Greco, President and CEO
We are seeing growth in average spend per customer, which is good. It's not where we'd like it to be. We want it to be higher because we want to recover. The biggest challenge we faced last year was share of wallet with existing customers. I mean we're now growing customers. The share of wallet is the opportunity that we're driving at, and we are growing average sales per customer, but it's not where we like it to be.
David Bellinger, Analyst
Got it. Thank you, Tom.
Tom Greco, President and CEO
Thank you.
Operator, Operator
The next question is from Seth Basham from Wedbush. Seth, your line is open. Please go ahead.
Seth Basham, Analyst
Thanks a lot. And good morning. My question is also around the pricing environment. As you forecast improved performance on sales for the balance of the year, are you anticipating any competitive reaction pricing-wise?
Tom Greco, President and CEO
Yes. We've obviously considered different scenarios, Seth. We do expect it to be very competitive, so Jeff mentioned essentially flat on price realization, which is well below our plan. If that changes to the positive or the negative, we will respond.
Seth Basham, Analyst
Got it. Understood. And my follow-up question is around private label brand performance. Can you give us some more color on the overall performance for private label brands? You mentioned that you're still moving in the direction of private label brand or are you having pockets where you're having to roll back some of that new products because of underperformance?
Tom Greco, President and CEO
On the contrary, I've been in a lot of stores over the last several weeks. I've met with a lot of customers. People like the quality of our Carquest branded product that we've moved to. So we're very pleased with the products, and we're continuing to improve the assortment rates in the stores and availability of those products. But clearly, we've got a winner in terms of the product quality itself. The return rates are much lower. The manufacturers we have chosen are OE suppliers so very pleased with that.
Jeff Shepherd, Executive Vice President and CFO
And just to add to that, we're seeing a benefit in the P&L from own brand in terms of both dollars and rate, so it's executing well. We want to continue to push that product through because it's a benefit to the P&L as well.
Seth Basham, Analyst
Thank you.
Operator, Operator
The next question comes from Michael Baker from D.A. Davidson. Michael, please go ahead. Your line is open.
Michael Baker, Analyst
Thank you. It seems that you reached your pricing goals in the first quarter. Did you notice any positive shifts in your sales trends as a result, or considering we are several weeks into the second quarter, are customers responding to your pricing adjustments in comparison to competitors? If not, how long does it usually take for such reactions to occur, especially in an industry not primarily influenced by price?
Tom Greco, President and CEO
Yes. Good morning, Mike. Our customers are definitely responding. Earlier, I mentioned that we saw a decline in transactions of mid-single digits in the fourth quarter and low single digits in the first quarter, and we anticipate that trend will continue to improve. However, it's important to note that the average ticket is decreasing as we focus on increasing our units and transactions.
Michael Baker, Analyst
Even with that decline, it seems you won't be investing further in pricing unless others react. How do you plan to regain market share if you believe pricing is now at the right level?
Tom Greco, President and CEO
We believe we will regain market share as we notice improvements over time in units and transactions. As our assortment and availability get better, we are seeing positive changes, and we expect this trend to continue throughout the year.
Michael Baker, Analyst
Okay. Okay. Fair enough. Thank you.
Operator, Operator
The next question comes from Brian Nagel from Oppenheimer. Brian, your line is open. Please go ahead.
Unidentified Analyst, Analyst
This is on for Brian Nagel. Thank you for taking my question. So you mentioned that the structural underpinnings of the sector remained positive in your view. You highlighted the aging fleet, an improving miles driven. Just wanted to ask, have there been any changes to your view of near-term demand trends in the industry at all?
Tom Greco, President and CEO
Not really. I know there have been things written over the last several weeks about that. We still see industry growth at 3% to 5% this year. Based on the underlying primary drivers of demand continuing to improve, there's still pressure on new car sales. People are keeping their vehicles longer, which has typically been very good for our industry, so we anticipate 3% to 5% growth this year.
Unidentified Analyst, Analyst
Thank you. That's helpful. Goodbye.
Tom Greco, President and CEO
Thank you.
Operator, Operator
We have no further questions, so I'll hand the call back to Tom Greco for any concluding remarks.
Tom Greco, President and CEO
Well, thanks again for joining us this morning. As I shared at the outset of the call, Q1 was challenging and our financial results were well below expectations. We know there's work to do, and we remain focused on increasing parts availability, sustaining our competitive price targets, and improving our field execution. We're committed to executing our long-term strategy to overcome our recent challenges and ensure that Advance is positioned for future success. We look forward to sharing more in August.
Operator, Operator
This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.