Last winter, when China ordered tens of millions of people back into a pandemic lockdown, executives inside the $170 billion automotive aftermarket parts industry took a deep breath.
Jeff Shepherd, CFO of aftermarket giant Advance Auto Parts, says that the possibility of another China shutdown had just not been part of Advance’s procurement calculus. Still, parts “in stock” at Advance stores during 2022 have dropped only a few percentage points from their usual inventory level in the “mid-90th” percentile, according to Shepherd, who credits the anticipation of yet another China-related event with influencing Advance’s astute purchasing.Read More
“The last time China hosted the Olympics, they shut the power down and they shut the factories down. So, during the Games, you can’t get product out and it’s not being manufactured,” explains Shepherd, who notes that Advance’s procurement team anticipated a China shutdown in February due to the Beijing Olympic Games.
“We started doing a lot of buying late last year and very early this year,” comments Shepherd, who reports that not unlike those of its competitors, Advance’s 2021 supply chain troubleshooting efforts were related mostly to bottlenecks at U.S. ports and a confounding shortage of truck drivers.
“We’re not out of the woods now—I will tell you that it’s not perfect,” remarks Shepherd, regarding the existing supply chain challenges inside the U.S. However, if Advance’s “in stock” levels stay in line, the company may have a read on future developments in China.
Says Shepherd: “I can’t take credit for knowing those things, but we were indeed able to get out in front of the China shutdown, and our ‘in stock’ percentages are now nearly back to their pre-pandemic levels.” –Jack Sweeney
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CFOTL: Tell us about Advance Auto Parts and the vision behind the company chapter that you are now helping to open …
Shepherd: I probably need to give you a little bit of history. I think that what a lot of people actually don’t know is that Advance is a 90-year-old company. It was founded in 1932 in Roanoke and was really a general merchandise store with appliances, televisions, toys, and so on. Then, in the ’70s and ’80s, as specialty retailers became increasingly popular, the decision was made to move into auto parts and related accessories. Then the company really started to grow through acquisitions. There were regional retail automotive parts locations such as Western Auto Supply and, in the Southeast, Discount Auto Parts. In 2001, the company went public. Then, in 2014, Advanced acquired Carquest. Maybe you’ve seen locations for Carquest and for another one of ours, WORLDPAC, which really supports the professional side of the business. All of this is what has brought us to be an $8 billion, $9 billion, $10 billion company.Read More
The 2014 acquisitions were quite large. One was like $5 billion, the other was $4 billion. So, you’re putting two very large organizations together. For the previous management, I would say that the integration of these entities was a challenge. Carquest and WORLDPAC primarily support professional customers. I don’t change my own brakes, so I take it into the shop. We provide the parts that go into these shops. This would be the professional side of our business, which provides about 60% of our revenue base. Advance was really supporting the do-it-yourselfer. Let’s say that you do change your own brakes. You would go into the Advance retail store, you’d get your brakes, you’d take them home, and you’d do them in your garage over the weekend.
It was a real challenge to get these two entities to integrate. What happened was that in 2016, an activist investor came in and then brought in our current CEO, Tom Greco. I joined the company in 2017. I was part of that. From 2016 to 2018, Tom changed out 19 of the top 20 leaders in the organization. In ’16, ’17, ’18, we had an organization that was essentially underperforming. There were really four different banners. You had Carquest, you had Advance Auto Parts, you had WORLDPAC, and you had another one called Autopart International. They were completely separate, so you had separate systems, separate supply chains, separate people, and separate processes that were supporting these systems. Now we were tasked with this integration. If you were to pull a 10-K from 2017, you would see that the operating income margin rates of our competitors were significantly bigger than ours.
This was really what attracted me to Advance. We were looking at this—looking at 2016, 2015—and you could see the discrepancy. But as you went back and looked at that journey, you could also see that the discrepancy was an opportunity. That’s where we’re at. We’re essentially a turnaround company, and we have significant margin expansion opportunities that you really don’t see very often in retail, especially in today’s environment. What we’re doing is going through these margin expansion initiatives. We laid this out in more detail last year for investors. This is the journey that we’re now on as we new opportunities to integrate the company and grow the business. The business’s top line was shrinking when we got here, despite the fact that we were opening stores. We’re on this journey now. We’ve taken out a lot of the structural issues, and now we’ve moved into not only that top-line growth but also that continued margin expansion process. We put out some guidance last year that by the end of next year, our margin rates will be between 10.5 and 12.5 percent.
“Build a world-class team and understand how all functions of the business work, and you will have success across the organization.” –Jeff Shepherd, CFO, Advance Auto Parts
Advance Auto Parts | www.shop.advanceautoparts.com | Raleigh, NC