Earnings Call Transcript - GPC Q1 2021

Sidney Jones, Senior Vice President of Investor Relations

Good morning, and thank you for joining us today for the Genuine Parts Company First Quarter 2021 Earnings Conference Call. With me today are Paul Donahue, our Chairman and Chief Executive Officer; Will Stengel, our President; and Carol Yancey, our Executive Vice President and Chief Financial Officer. As a reminder, today's conference call and webcast include a slide presentation that can be found on the Genuine Parts Company Investor Relations website. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release issued this morning, which is also posted in the Investors section of our website. Today's call may also involve forward-looking statements regarding the company and its businesses. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. Now I'll turn it over to Paul for his remarks.

Paul Donahue, Chairman and Chief Executive Officer

Thanks, Sid, and good morning. Welcome to our first quarter 2021 earnings conference call. We appreciate you joining us today and hope you're staying safe and well. We are pleased with the strong start to 2021 and ongoing recovery in our automotive and industrial businesses. The GPC team remains focused on solid execution and delivering strong financial results through improving sales trends, increasing operational efficiencies, and enhancing customer value. Through the quarter, we operated thoughtfully, with the physical and mental well-being of our employees being the top priority as our 50,000-plus GPC teammates are the core of our success. Turning now to our first quarter financial results. Total sales for the quarter were $4.5 billion, up 9% from last year, and significantly improved from the 1% sales decrease in the fourth quarter of 2020. Gross margins was also a positive, representing our 14th consecutive quarter of year-over-year gross margin expansion. Our teams in the field continue to do a great job of managing our expenses through ongoing cost actions and the carryover of expense reductions implemented last year. These results drove a 41% increase in operating profit and an 8.1% operating margin, which is up 180 basis points from the first quarter of last year. Our strong operating performance drove net income of $218 million and diluted earnings per share of $1.50, up 88%. We also continued to fortify our balance sheet, ensuring ample liquidity and solid cash flow. We are proud of our teams, and we are encouraged by our results, and we intend to build on this momentum throughout 2021. Turning now to our business segments. Automotive represented 66% of total sales in the first quarter, and industrial was 34%. By region, 73% of revenues were attributable to North America, with 16% in Europe and 11% in Asia Pac. Total sales for global automotive were $3 billion, a 14% increase from 2020 and much improved from a 1% increase in Q4 of 2020. Comp sales were up 8%, improved from a 2% decrease in the fourth quarter, and segment profit margin was up 250 basis points, driven by strong operating results in each of our automotive operations. Sales were driven by positive sales comps across all our operations, with 15% comps in Europe and Asia Pac, 7% comps in the U.S. and 3% comps in Canada. The ongoing global economic recovery, including financial stimulus in the U.S., improving inventory availability, favorable weather conditions, and our focus on key growth initiatives were all sales drivers in the quarter. We would add that while we continue to expect a reasonable level of inflation as we move through 2021, price inflation was not a factor in our first quarter sales. In Europe, sales were much improved from Q4 as our team capitalized on the strengthening sales environment despite lockdowns throughout the region. In addition, initiatives to grow key accounts enhance inventory availability, and the ongoing launch of the NAPA brand continue to prove effective in driving profitable growth and market share gains. For the quarter, our teams in France and the U.K. outperformed in the region with strong double-digit sales comps. We would also call out a much-improved performance by our team in the Benelux region. The strong sales recovery, combined with excellent expense controls, produced a 500 basis point improvement in operating margin, so a terrific start to the year for our European operations. In Asia Pac, our automotive sales remained in line with the mid-teens growth we experienced through the second half of 2020. For the quarter, both retail and commercial sales held strong as the region operated through multiple lockdowns associated with the pandemic. Retail sales, which represent over 40% of our total sales volume through our Repco stores, continue to outperform, posting a 33% increase in March and plus-24% in the quarter. Our commercial sales continue to accelerate as well, posting double-digit sales growth in the quarter. We continue to benefit from the strength in online sales, which reached record highs at 3x pre-COVID levels. Finally, building on the NAPA brand name has been well received, and we remain focused on growing our NAPA presence in the region. Summing it up, this group continues to perform at a very high level on both the top and bottom lines, resulting in a 150 basis point improvement and profit margin for the quarter. In North America, comp sales in the U.S. were up 7%, helping this business post a 180 basis point increase in profit margins. In Canada, we operated through a variety of regional lockdowns, which impacted our larger markets of Ontario and Québec. Comp sales were up 3% and operating margin was up 130 basis points. Sales in the U.S., which posted its strongest quarterly comp since the first quarter of 2015, were driven by solid growth in both the retail and commercial segments. This was our first quarter of positive commercial comps since pre-pandemic, and our team produced record sales volumes in the month of March. In addition, both ticket and traffic counts were positive on both our retail and commercial transactions, marking our first increase in traffic counts in several quarters. By region, the Atlantic, Midwest, and West groups posted the strongest growth, although we would also call out our Northeast group, which produced solid growth in the quarter. This is notable since this region of the U.S. has been most affected by the COVID-19 lockdowns over the past 13 months. Likewise, we would add that product sales in categories such as batteries, tools and equipment, and brakes were strong this quarter. We are especially encouraged to see the rebound in our brakes business, which generally is a positive indicator for our commercial business. On the retail side, which continues to outperform with strong double-digit growth, we continue to drive sales via investments in retail specialists and store refreshes as well as targeted promotions. We would also call out our ongoing omnichannel investments and the increase in B2C online sales, which reached record levels in the quarter and were up 150% from the prior year. For commercial sales, our other wholesale category of independent garage customers continued to generate strong growth. We have been encouraged by the number of new accounts we are serving. Clearly, our investments in increasing the number of professional salespeople on the street have been effective in attracting new customers to NAPA. We were also pleased to see improved sales with our NAPA Auto Care and major account customers, which posted positive sales growth for the first time in several quarters. Sales to the fleet and government group were down year-over-year but sequentially improved from the fourth quarter. And we look for further improvement in sales to this segment. As we look ahead, we are excited about the growth opportunities we see for our global automotive segment. We expect further improvement in aftermarket fundamentals such as increased miles driven, a growing vehicle fleet, and an increase in vehicles aged 6 to 12 years, all favorable for the industry. We can assure you we remain focused on our initiative to deliver customer value and ultimately sell more parts for more cars. These plans include further enhancing our inventory availability, strengthening our supply chain, and investing in our omnichannel capabilities. In addition, we expect to expand our global store footprint with additional bolt-on acquisitions, changeovers, and new greenfield stores to further enhance our competitive positioning. So now let's discuss the global Industrial Parts Group. Total sales for this group were $1.5 billion, flat with last year. Comp sales were down 2%, improved from a 4% decrease in Q4 and reflecting the third consecutive quarter of improving sales trends. March was a breakout month with the North American Motion team posting a 7% increase in average daily sales and achieving record sales volumes. This was a tremendous accomplishment and another turning point for GPC and our emergence from the pandemic. The ongoing recovery over the last 9 months is in line with the continued improvement in the industrial economy, which you can see in several key indicators for our business. For perspective, PMI was 64.7% in March, an increase of 4.2 points from December 31. In addition, industrial production increased by 2.5% in the first quarter, the third consecutive quarter of expansion following the significant downturn in the second quarter of 2020. Importantly, we can see these positive indicators translating to more activity with our customers, which are operating at higher run rates as well as releasing capital project orders. The strengthening sales environment, along with our initiatives to drive growth and control costs, produced an 80 basis point margin improvement with segment profit margin at 8.3% versus 7.5% last year. Diving deeper into our Q1 sales, we would start by saying that inflation remains a non-factor in our numbers thus far. That said, we are seeing more pricing activity and expect another year of 1% to 2% price inflation from our suppliers. For the quarter, we experienced improving sales trends among virtually all product categories and industries. We were especially encouraged by the recovery in the equipment and machinery, aggregate and cement, and wood and lumber sectors, all key industry groups for us. In addition, we continue to benefit from the build-out of our omnichannel capabilities, with digital sales up 2x from the first quarter in 2020. A key driver of our digital growth relates to our inside sales center, which is generating incremental sales to new Motion customers. While still a relatively small percentage of total sales, we are excited by the potential for future sales growth. We also remain focused on growing our services and solution businesses to expand our expertise and sales opportunities in areas such as equipment repair, conveyance, and automation. We have made several bolt-on acquisitions to build scale in these areas, and our services and solutions capabilities remain a key consideration in our overall M&A strategy for the industrial business. To further ensure profitable sales growth, we continue to enhance our pricing and category management strategies. In addition, we plan to continue to optimize our supply chain network and further improve our productivity while delivering exceptional customer service. Closing out our industrial comments. We remain bullish about our Motion business, and we are excited to see this team moving back into a growth mode. So now I'll conclude my remarks by providing a brief update on our ESG initiatives. As outlined in our corporate sustainability report, GPC embraces our responsibility to innovate in ways that provide for our environment, our associates, and the communities in which we operate. In Q1, we expanded our training and development programs to ensure personal growth and enhance our comprehensive well-being program focused on the emotional, financial, and physical health of our GPC teammates. Additionally, we continue to make progress in the advancement of our corporate commitment to diversity and inclusion. We are actively recruiting talent that is representative of the communities we serve, training our teammates to mitigate unconscious bias, and model inclusive behaviors while strengthening partnerships that support our D&I initiatives. Finally, we remain focused on our mission to be good corporate citizens where we both work and live. Since 1928, we have been giving back to communities and causes that make a difference, and that legacy continues in 2021. So now, I'll turn it over to Will for his remarks.

William Stengel, President

Thank you, Paul. Good morning, everyone. First, I want to congratulate the global GPC team on the performance this quarter. I'd also like to thank our customers for their loyalty and our suppliers for their partnership. As Paul mentioned, our team delivered solid performance in the first quarter and had strong momentum. The environment has improved compared to 2020, but we remain cautious as global uncertainty continues to be a part of doing business each day. Areas of attention for us include COVID-19, inflation, global logistics, and product and labor availability. We also have more challenging year-over-year comparisons that will require sustained momentum during the second half of the year. Despite the uncertainty, the GPC team is energized and focused to deliver performance. I'll now share some additional perspective on our strategic initiatives in progress. The foundation of our priorities is based on the customer experience and understanding their needs and working to exceed their expectations. We are analyzing and listening to customer feedback on our corresponding strengths and opportunities. In the simplest terms, our customers need us to be easy to do business with, reliable, and helpful. This independent data reinforces our priorities and serves as a guiding principle in terms of required action and strategic investments. To deliver a best-in-class customer experience, we have opportunities to simplify and integrate our existing operations. The global teams are executing multiyear plans to realign teams, streamline processes, improve operational productivity, and reduce costs. These initiatives will not only create operating efficiency but also enable faster team executions, deliver a better customer experience, and accelerate profitable growth. I'd like to highlight a few initiatives that illustrate our efforts to simplify and integrate. For example, we're working to optimize facilities' footprint and coverage, simplify and integrate disparate legacy IT systems, streamline back-office support functions, offshore noncustomer-facing functional activities, and centralize GPC indirect sourcing processes as a few examples. As we simplify and integrate, we're simultaneously investing in our core business and positioning for the future. Our strong cash flow, solid capital structure, and disciplined capital allocation provide the flexibility needed to continue to make these investments. Key pillars of our core investments include talent, sales force effectiveness, digital, supply chain, and emerging vehicle technologies. A few highlights of our progress across the key pillars during the quarter include: Talent. We continue to take deliberate action across the globe to recognize high-potential talent, infuse new capabilities into the organization, and recruit diverse talent that is representative of the communities we serve. Examples include category management, digital, emerging vehicle technology, and field leadership roles to name a few. Talent will always be a priority area of investment as we strive to be an employer of choice for teammates that share our GPC values and want to play a leadership role in our exciting future. Sales force effectiveness. Data and analytics to understand our unique customer segments, the different needs of each segment, and associated strategies to serve the segment is a foundational element of sales force effectiveness. The sales efforts reflect our omnichannel initiatives and include an increasing mix of both traditional selling and digital strategies. As an example, the U.S. automotive team revamped its sales intensity with new reporting and tools to track customer visits, digital tools to communicate with field sales teammates, and enhanced virtual product and skills training. In addition, in 2021, the U.S. automotive team adjusted compensation programs to better align incentives with profitable growth. Digital. As I mentioned, digital is a foundational priority as we deliver a best-in-class customer experience and accelerate profitable growth. Our businesses delivered excellent performance via digital channels in the quarter. We continue to see strong increases versus the prior year across our global digital channels. Digital still represents a relatively small portion of our total sales, and we're excited about the compelling digital vision our teams are executing. Related, we continue to invest in foundational digital elements, including catalog, search, and other critical customer experience elements such as ease of ordering, pricing, and analytics. Supply chain. Our supply chain initiatives are focused to ensure we have the right product available in the right market at the right time. We're continuously executing inventory, facility, productivity, logistics, and technology strategies to achieve this goal. One solid example is the success the U.S. industrial team enjoyed with recent facility automation investments that delivered a 500% labor productivity improvement. Other select examples would be enhanced workforce management and delivery tracking tools in the U.S. automotive business. Lastly, emerging vehicle technologies. We aspire to lead as it relates to the opportunities that emerging vehicle technologies present for our automotive industries. We believe we have a unique position to leverage, including our scaled global footprint, diverse portfolio, leading global brands, established customer-supplier relationships, and One GPC team approach. Through our planning process, we developed a multidimensional strategy to address electric vehicle trends. A few select highlights include: the alignment of talent 100% dedicated to developing and executing EV strategies, product and category management strategies with existing and new SKUs, global supplier councils with existing strategic partners, advisory groups leveraging our 25,000 global repair center relationships, and partnerships with strategic EV market participants. While we acknowledge the focus on critical initiatives that deliver near and medium-term performance, we're taking action to build out and act on an exciting future vision. Lastly, strategic bolt-on acquisitions are a key part of our GPC growth strategy. We utilize acquisitions to acquire new customers, further penetrate existing priority markets and our new geographies, acquire product and service capabilities, and acquire talent. We also believe our acquisition capabilities position us well as we selectively consider and test new business models. Our acquisition pipeline remains active and actionable given the fragmentation of our markets. We believe our scale, market-leading brands, global footprint, and unique culture position us to be an acquirer of choice. We will remain selective and disciplined as we execute this important part of our strategy. Similar to the approach utilized for our 2019 cost savings plan, the global teams developed tools in a monthly cadence to create visibility and status on initiatives. This approach not only helps drive performance but also helps to share best practices around the globe as One GPC team. In summary, I hope today's remarks reinforce our sense of focus and global teamwork. We will remain agile as the global environment continues to evolve, and we will remain focused on what we can control as we execute through the balance of the year and beyond.

Carol Yancey, Executive Vice President and Chief Financial Officer

Thank you, Will. We will begin with a review of our key financial information, and then we will provide an update on our full year outlook for 2021. Total GPC sales were $4.5 billion in the first quarter, up 9% from last year and improved from the 0.7% decrease in the fourth quarter. Gross margin was 34.5%, a 60 basis point improvement compared to 33.9% in the first quarter last year. Our steady progress and improving gross margin continue to reflect the positive impact of a number of initiatives, including our pricing and global sourcing strategies, and we also benefited from a sales mix shift to higher gross margin operations. We would add that the level of supplier incentives in the quarter were in line with last year and neutral to gross margin. As we move through the year, we will continue to execute on our initiatives to drive additional gross margin gains via positive product mix shifts, strategic pricing tools and analytics, global sourcing advantages, and also strategic category management initiatives. Our selling, administrative, and other expenses were $1.2 billion in the first quarter, up 4.6% from last year or up 5.3% from last year's adjusted SG&A. This reflects an improvement to 26.8% of sales this year, which is down nearly 100 basis points from 27.7% last year. So tremendous progress, primarily due to the favorable impact of our cost savings generated in 2020, as well as ongoing cost control measures and improved leverage on our stronger sales growth. Our progress in these areas was slightly offset by rising costs in freight expenses, which we're closely managing; and planned increases in our technology spend, which supports our strategic initiatives, as Will covered earlier. Our total operating and nonoperating expenses were $1.3 billion in the first quarter, up 2.2% from last year or up 2.1% compared to last year's adjusted expenses. First quarter expenses include the benefit of approximately $20 million related to gains on the sale of real estate and favorable retirement plan valuation adjustments that are reported to the other nonoperating income line. All in, our total expenses for the quarter improved to 28.1% of sales, down 190 basis points from 30.0% in 2020. Total segment profit in the first quarter was $361 million, up a strong 41% on the 9% sales increase, and our segment profit margin was 8.1% compared to 6.3% last year, a 180 basis point increase. In comparison to 2019, our segment profit margin has improved by 100 basis points. So solid improvement and our strongest first quarter profit margin since 2015, a reflection of the positive momentum we're building in our businesses. Our net interest expense of $18 million was down from $20 million in 2020 due to the decrease in total debt and more favorable interest rates relative to last year. The corporate expense line was $31 million in the quarter, down from $55 million in 2020, due primarily to the favorable real estate gains and retirement plan adjustment discussed earlier. Our tax rate for the first quarter was 23.8%, in line with the reported rate last year and improved from the prior year adjusted rate of 26.5%. This improvement primarily relates to the favorable tax impact of stock options exercised, as well as the previously mentioned real estate gains and retirement plan adjustments. Our first quarter net income from continuing operations was $218 million with diluted earnings per share of $1.50. This compares to $0.84 per diluted share in the prior year or an adjusted diluted earnings per share of $0.80 for an 88% increase. So now let's turn to our first quarter results by segment. Our automotive revenue for the first quarter was $3 billion, up 14% from the prior year. Segment profit of $236 million was up a strong 65% with profit margin at 8.0% compared to a 5.5% margin in the first quarter last year. The 250 basis point increase in margin was driven by the continued recovery in the automotive business and the execution of our growth and operating initiatives. We were pleased to have each of our automotive businesses expand their margins for the third consecutive quarter. In addition, we're encouraged that our first-quarter margin also compares favorably to the first quarter of 2019, up 120 basis points. So a broad recovery across our operations, and we look for continued progress in the quarters ahead. Our industrial sales were $1.5 billion in the quarter, flat with last year, and improved sequentially for the third consecutive quarter, which is consistent with the strengthening industrial economy. Our segment profit of $125 million was up 10% from a year ago, and profit margin was up 80 basis points to 8.3% compared to 7.5% last year. The improved margin for industrial reflects the third consecutive quarter of margin expansion in both our North American and Australasian industrial businesses, and is also up by 90 basis points from the first quarter of 2019. So another quarter of strong operating results for industrial, which we expect to continue with stronger sales growth projected through the remainder of the year. So now let's turn our comments to the balance sheet. We continue to operate with a strong balance sheet and ample liquidity and the financial strength to support our growth strategy. At March 31, total accounts receivable is down 27% from last year, which is primarily a function of the $800 million in receivables sold in 2020. Our inventory was up 6% from the prior year, and accounts payable increased 14%. Our AP to inventory ratio improved to 124% from 116% in the last year. We are pleased with our progress in improving our overall working capital position, and we continue to believe we have opportunities for further improvement. Our total debt is $2.6 billion at March 31, down $1 billion or 28% from last March and down $60 million from December 31, 2020. We significantly improved our debt position throughout the course of 2020 with the issuance of new public debt and a new revolving credit agreement that provides for expanded credit capacity and more favorable rates. With these positive changes to our debt structure, our total debt to adjusted EBITDA has improved to 1.8x from 2.5x last year. Additionally, we closed the first quarter with $2.6 billion in available liquidity, which is up from $1.1 billion at March 31 last year and in line with December 31. We also continue to generate strong cash flow, generating $300 million in cash from operations in the first quarter, which is up from $28 million in the first quarter last year. With a strong start to the year, including the increase in net income and the improvement in working capital, we continue to expect cash from operations to be in the $1 billion to $1.2 billion range and free cash flow of $700 million to $900 million. Our key priorities for cash include reinvestment in our businesses through capital expenditures, M&A, the dividend and share repurchases. We invested $48 million in capital expenditures in the first quarter, an increase from $39 million in 2020. Looking forward, we have plans for additional investments in our businesses to drive growth and improve efficiencies and productivity. We continue to expect total capital expenditures of approximately $300 million for the year. As you heard from Will earlier, strategic acquisitions remain an important component of our long-term growth strategy. We continue to cultivate a strong pipeline of targeted names, and we expect to make additional strategic bolt-on acquisitions to complement both our global automotive and industrial segments in the months and quarters ahead. In the first quarter, we paid a cash dividend of $114 million to our shareholders. The company has paid a cash dividend to shareholders every year since going public in 1928, and our 2021 dividend of $3.26 per share represents our 65th consecutive annual increase in the dividend. We have actively participated in a share repurchase program since 1994. While there were no repurchases in the first quarter, the company is currently authorized to repurchase up to 14.5 million additional shares, and we will resume share repurchases in the months and quarters ahead. Turning to our outlook for 2021. We are updating our full-year guidance previously provided in our earnings release on February 17, 2021. In arriving at our updated guidance, we considered several factors, including our past performance, current growth plans and strategic initiatives, recent business trends, the potential for foreign currency fluctuations, inflation, and the global economic outlook. In addition, we consider the continued uncertainties due to market disruptions such as with COVID-19 and its potential impact on our results. With these factors in mind, we expect total sales for 2021 to be in the range of plus-5% to plus-7%, an increase from our previous guidance of plus-4% to plus-6%. As usual, these growth rates exclude the benefit of any unannounced future acquisitions. By business, we are guiding to plus-5% to plus-7% total sales growth for the automotive segment, an increase from plus-4% to plus-6%; and a total sales increase of plus-4% to plus-6% for the industrial segment, an increase from plus-3% to plus-5%. On the earnings side, we are raising our guidance for diluted earnings per share to a range of $5.85 to $6.05, which is up 11% to 15% from 2020. This represents an increase from our previous guidance of $5.55 to $5.75. We enter the second quarter focused on our initiatives to meet or exceed these targeted results, and we look forward to reporting on our financial performance as we go through the year.

Paul Donahue, Chairman and Chief Executive Officer

Thank you, Carol. Looking ahead, the GPC team is excited about the ongoing recovery in the global economy and the growth prospects we see for both auto and industrial. Our strong balance sheet provides us the financial flexibility to pursue strategic growth opportunities, and we remain focused on executing our plans to capture profitable growth, generate strong cash flow, and drive shareholder value. As a result, we are optimistic that we can deliver strong financial results in the quarters ahead. So in closing, we want to thank each of our GPC teammates for their continued support, dedication, and commitment to being the best. Thank you for your interest in Genuine Parts Company. And with that, we'll turn it back to the operator for your questions.

Operator, Operator

And our first question is from Christopher Horvers with JPMorgan.

Christopher Horvers, Analyst

Can you discuss the impact of having one less day on the reported comparable sales? Are you considering that as a disadvantage? How does this affect each segment? Additionally, you mentioned a record selling performance in Motion in March, with a 7% increase on a per day basis. Was there anything specific that contributed to that performance? Also, how does the March comparable sales look when compared over a two-year period?

Carol Yancey, Executive Vice President and Chief Financial Officer

Yes, Chris. You are correct. We had one less day in the quarter, and we did not account for that in our comp sales figures. It would equate to about 1.5 points for each of our segments equally. The positive aspect is that we won’t face that issue for the rest of the year. While we will end the full year with one less day, we have not reflected or adjusted for it in any of our comp numbers.

Paul Donahue, Chairman and Chief Executive Officer

Thank you for your question about Motion, Chris. We always enjoy discussing our industrial business. March was a standout month for us, and we had been anticipating it. All the indicators, from PMI to industrial production, have been showing positive trends. We knew it was only a matter of time. Motion faced some challenges in February due to the storm, which impacted our business in the south, but they rebounded strongly in March. Historically, when Motion is on a positive trend like now, we expect that momentum to continue throughout the year.

Christopher Horvers, Analyst

Got it. And then, Carol, on the gross margin, 34.5% in the first quarter and up on a two-year basis, some of that is divestiture and so forth. But can you talk about the puts and takes going forward? Do you think gross margin could still see some modest expansion over time given the initiatives that you laid out? Or does DIY versus commercial mix and inflation keep that more in check?

Carol Yancey, Executive Vice President and Chief Financial Officer

Yes, Chris, I want to clarify that we have fully accounted for the impacts of divestitures and discontinued operations. This is indeed a core gross margin impact. We are expecting ongoing improvement in gross margin for the full year 2021, based on what we discussed during our February call. This improvement is driven by our initiatives. As you heard from Will and me, we've made significant progress with our strategic pricing tools and analytics, as well as in category management and global sourcing. We've also experienced product mix shifts. Our industrial team has consistently delivered quarter-over-quarter increases, and our global sourcing teams and tenders are performing well. Additionally, we observed a neutral impact from rebates for the quarter. Thus, we believe gross margin will continue to improve and increase for the full year.

Christopher Horvers, Analyst

Okay. Just one last quick question. Looking at the balance sheet, it seems like you've never had this much cash available before. Typically, you aim for acquisitions in the range of $50 million to $100 million. Are you considering something larger, or how are you approaching the possibility of being more aggressive with share repurchases?

Carol Yancey, Executive Vice President and Chief Financial Officer

Yes. Chris, great question. And I think you're spot on, none of us recall having that much cash on the balance sheet. But as was prudent in 2020, we did look at conserving our cash and sort of prudently got ourselves in a great position. We do expect to return to more normal capital allocation. It is a little bit of a timing thing right now. So you will see our M&A pipelines, as Will talked about. You will see the bolt-on type acquisitions that will come in. You're going to see our CapEx getting up to the $300 million. And share buyback, again, we were somewhat precluded from buying our shares with some of our debt agreements and where we had found ourselves. We expect to be in there buying, honestly, right away. We will do our normal share repurchase. And if we have the opportunity to do more, we'll certainly do that. So more normal capital allocation, and you'll see us putting that cash to use as we move ahead.

Greg Melich, Analyst

I had two questions. I wanted to start with the cost reductions. I heard a 500 basis point improvement in labor productivity. And just wanted to sort of understand that and sort of what part could be sustainable if we think about what the sustainable operating margin of the business could be?

William Stengel, President

Yes. It's a great question. Thanks for asking it. That was a great case study in using technology inside the four walls of a distribution center. As we think about getting more productive with the number of people we have doing the work relative to technology. So think vertical lift modules, et cetera. And that's completely sustainable. That technology and that investment is in the building, and it will continue to improve as we move forward.

Carol Yancey, Executive Vice President and Chief Financial Officer

And Greg, I would just add a comment on the operating margin improvement. I mean, again, our operating margin outlook in the long-term is sort of the 8.5% to 9% operating margin. We're implying about a 30 basis point improvement this year in our 2021 results, and that is coming from a combination of gross margin and SG&A. And honestly, that's probably a 50 to 70 basis point improvement over 2019 as well.

Greg Melich, Analyst

Right. That's a structural part, effectively, it sounds like. That's great. And to pivot a bit on inflation, I think you mentioned it really wasn't material in the first quarter, but obviously, there's a lot of rise in input costs out there. So I'd just like to know what inflation are you seeing in the COGS or in your guidance are you assuming? And what would you expect that also, what inflation numbers in the top line?

Carol Yancey, Executive Vice President and Chief Financial Officer

Yes. You're right, we had pretty modest inflation for Q1 and really no impact on our sales or gross margin. As we look ahead, we do think that's going to come and probably more second half-weighted. We're looking at a 1% to 3% on the automotive side and a 1% to 2% on the industrial side. But quite honestly, with our initiatives, we believe we'll be able to continue to deliver on our improvement in gross margin and be able to pass that through. But we have not modeled that, if you will, into our guidance on sales. Quite honestly, if it hasn't hit us yet, we'll look forward to that being a tailwind as we move ahead.

William Stengel, President

Greg, it's Will. I might just add on the cost side. I mean, I alluded to it in the prepared remarks. But like everybody else, we're watching and seeing SG&A inflation in different parts of the world and in different parts of the business, ranging from wage inflation in selective geographies. You've got global logistics inflation. You've got commodity inflation. So we're watching that and doing good work around being cost productive to offset some of that inflation, but that's definitely something that we're working on actively every day.

Kate McShane, Analyst

I wondered if I could just ask about some of the contributors to comp. I know there was improvement in the fleet business. However, it was a drag. If you were able to quantify that. And you didn't call out regional performance in the South East. And I just thought that would have been a place maybe where you would see more strength, given that it seems more open than the rest of the country at this point. So just wanted to get your comments on that.

Paul Donahue, Chairman and Chief Executive Officer

Yes, Kate, thank you for your question. In terms of the breakdown, fleet did show improvement in Q1, which we mentioned in our last call. We expect fleet to turn positive in Q2 and remain positive for the rest of the year. When looking at the different segments, our retail business performed exceptionally well. We were particularly encouraged to see positive growth in both our major accounts and NAPA AutoCare center businesses, with mid-single-digit growth in those areas. Overall, we saw improvements across the board and are especially pleased to see our heavy-duty fleet business with government municipalities turning positive in Q2. Regarding regional performance, I highlighted our northern regions, and I would also mention our Atlantic division, which led the way for us in Q1. The Atlantic division includes the Carolinas and Virginia, representing a part of the South. Our Southeast performed adequately, but it wasn't as strong as what we saw in our northern and western regions.

Kate McShane, Analyst

Okay. And I was wondering from a, just a follow-up question, you had mentioned that you were successful at signing up more commercial accounts, thanks to your new sales effort. Is there a way to quantify that or compare it to what you've seen in the last couple of quarters?

Paul Donahue, Chairman and Chief Executive Officer

If you look at what we call other wholesale, that's the smaller garages with one or two bays. That business grew by 7% in the quarter, and we haven't seen that kind of growth in a while. We made significant changes to our sales force after 2020, effectively doubling our touchpoints. We're actively engaging with those customers, and it's showing in our business results. We are optimistic about the future and are very pleased to see the DIFM category recover, as we anticipated it would in 2021.

Scot Ciccarelli, Analyst

I guess as a follow-up on Kate's question, would you, or maybe more importantly, your customers, attribute improved commercial business that you guys are seeing or saw in the quarter to better consumer mobility? Or given your regional commentary, because it seemed like it was more affected by weather patterns and like the harsh winter, et cetera, that we had?

Paul Donahue, Chairman and Chief Executive Officer

Yes. I believe it’s a mix of several factors, Scot. As you know, we often discuss weather during these calls, and this year we experienced a more typical winter, which definitely affects our business. The increase in miles driven is still not back to where it was two years ago, but it has improved compared to last year. Additionally, the initiatives our NAPA team is implementing, which Will mentioned, along with the changes in our sales force and marketing strategy, are contributing to this. It’s really a combination of our sales strategy and the better availability of inventory at the street level. I wouldn’t single out one factor; it’s a blend of positive elements coming together. I'm particularly encouraged that we achieved this success while many regions are still experiencing COVID-related lockdowns. For instance, Canada is currently under full lockdown, yet our business showed positive trends this quarter. Our service levels and supply chains have not returned to normal yet, so while we are proud of this quarter’s performance, I believe there’s potential for even more growth once we overcome some of these challenges.

Seth Basham, Analyst

Can you hear me?

Paul Donahue, Chairman and Chief Executive Officer

We got you now.

Seth Basham, Analyst

Paul, my question is around market share. I don't know if you can quantify how you think that your core NAPA business ex fleet is doing in the U.S. this quarter relative to recent quarters?

Paul Donahue, Chairman and Chief Executive Officer

Well, look, it remains to be seen, right? So we're the first one out this quarter. We're pleased with our performance and certainly pleased as it stacks up against 2020. We've been waiting for our commercial business to bounce back and really pleased to see that happen in the quarter. So I do believe that was a solid performance. The retail business, I already touched on with Bret, that was solid. What we're pleased to see is that the fleet business and what we referenced as our IBS business really beginning to bounce back. So I think we're doing quite well, and I'm really proud of the NAPA team for the quarter they put up.

Carol Yancey, Executive Vice President and Chief Financial Officer

Yes. I guess one comment I would say is the trends, and Paul alluded to it, January started off really strong, February was a little softer. March was our strongest month in the quarter, and it was pretty even between the commercial and the DIY. So I think you laid it out as it happened.

Brian Sponheimer, Analyst

I'll be really quick. I just want to say hello, but also the investment for next-generation vehicles, be it electric or otherwise, would this also include potentially investing in ways to help with charging stations and support for the fleet as well?

William Stengel, President

It does. Yes. I think we're doing a lot of work around all of our choices on this topic. And I think it's important to note, though, just to reemphasize that we are intensely focused on the part that we serve today, the ICE engine, is going to be the main focus for us as we move forward. We just think it's prudent to be doing work and understanding the facts and developing strategies as the business evolves. So we're open and looking at everything and refining the strategy as we move forward.

Paul Donahue, Chairman and Chief Executive Officer

And Brian, it's great to hear from you again. With our presence in Europe and the European Union's strong commitment to electric vehicles, we are primarily focused on our current business with internal combustion engines. However, we are also looking ahead. Our European team will be at the forefront of this transition because we believe we will see a significant shift in Europe before it happens here in the U.S.

Daniel Imbro, Analyst

Carol, I wanted to follow up on the guidance. I believe you raised the full year by about 100 basis points. Please correct me if I'm wrong, but I think the previous guidance didn't account for any foreign exchange tailwinds, which were actually beneficial in the first quarter. Could you clarify how much of the guidance increase is due to foreign exchange? Additionally, have you made any adjustments to your underlying organic growth guidance for each segment based on the first quarter results?

Carol Yancey, Executive Vice President and Chief Financial Officer

Thank you for the question. Regarding our guidance, the increase in sales and earnings for the full year reflects our strong recovery in the first quarter. We considered the favorable foreign exchange impacts and some unusual items during the quarter. However, we did not factor in the events of Q1 into our full year projections. We have adopted a more cautious approach regarding currency and did not include it in our model. As for the same-store sales guidance, we have raised it by 100 basis points across all segments, resulting in an increase of 4% to 6% for automotive and 3% to 5% for industrial in same-store sales.

Paul Donahue, Chairman and Chief Executive Officer

Yes, we did. Thank you, everyone. I appreciate your time and interest in our company today. Please reach out to us if you have any additional questions. And we look forward to updating you on our progress in the upcoming quarters.

Operator, Operator

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.