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Advance Auto Parts

Letter To Shareholders

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Advance Auto Parts
Letter to Shareholders

Dear Fellow Shareholders,

2016 was a year of significant change and progress at AAP. To capitalize on the tremendous potential of our company, we made substantial changes to our leadership team, our strategy, and our approach to execution. This included transitions on our Board along with our management team as we appointed a new Chairman of the Board, a new President and Chief Executive Officer and a new Chief Financial Officer. These organizational changes were necessary to develop and implement the change we need to dramatically improve performance in the coming years. We are confident that a revitalized Board of Directors and Leadership Team will bring the skills and experiences we need to drive value for the benefit of all shareholders.

A Long Term Strategy to Win

In developing our strategy, we needed a plan to win over the long term. We looked forward, assessed the future landscape and conducted the most comprehensive piece of industry, consumer, and customer research we have ever done. Our research further confirmed our belief that we have a tremendous opportunity for growth in the future. The auto parts industry continues to grow above GDP growth rates and is forecasted to do so for the foreseeable future. Capturing our fair share of this growth is Job #1 as we put the customer at the center of everything we do.

Our research and strategy further informed us that winning requires us to focus on what matters most to our Professional customers and Do-It-Yourself (DIY) consumers. More specifically, understanding the drivers of choice for these critical customer segments laid the foundation of a long term strategic business plan. Our strategic business plan was several months in the making and we could not be more excited about how it has come together — driving and crystallizing our prospects for the future. Our plan focuses on what is needed to win both today and in the future; it is comprehensive; it is integrated, and it is compelling. We now have a very clear five year plan to capitalize on our enormous opportunity.

Our strategy has four major growth drivers that will drive shareholder value. We have subsequently aligned our organization on these growth drivers:

1. Building an advantaged Supply Chain is the foundation of our efforts. Our primary objective is to get the right part in the right place at the right time. This requires us to raise our game on service to our customers and deliver high quality, high value parts, accurately, reliably and consistently exactly when our customers need them. We are making changes in how we distribute, assort and deliver parts to our customers, and we’ll do it faster, more accurately, and more consistently than we do today.

2. In Professional, we are enabling dramatic improvements in the customer experience at every touchpoint as we ramp up sales and service capabilities to earn and maintain first call status with new and existing customers. We are well positioned with the industry’s strongest asset base including:

  • The deepest brand portfolio in the industry
  • Import expertise with WORLDPAC and Autopart International
  • Professional training platforms with Carquest Technical Institute and WORLDPAC Technical institute, and
  • The leading Professional online platform

We will leverage all our assets more efficiently to provide the best availability and experience for our Professional customers. We will drive scale benefits through best practices, market differentiators and technology platforms across all of our Professional businesses to make it simple to do business with AAP and add value to our customers’ businesses with every interaction.

3. In DIY, we are hard at work strengthening our business and are extremely excited about the opportunity ahead of us to improve the customer experience and build stronger loyalty with DIYer’s. We will look to drive market share by:

  • Growing our DIY customer base led by priority customer segments where we are confident we have the assets and capabilities to succeed.
  • Driving frequency as we strengthen and fully leverage our Speed Perks loyalty program and build momentum around new ways to cultivate a much stronger relationship with DIY customers.
  • Improving the customer experience at each touchpoint both in store and by reinventing our online experience.

4. Our growth agenda will be fueled by a robust and ongoing Productivity engine that will enable us to expand margins and drive growth for years to come. We are energized about the Productivity pipeline we have constructed for the future as we plan to remove at least $500 million of unnecessary costs over the next five years. As we implement our Productivity agenda starting in 2017, we will do so with a focus on sustainable savings, not short term cost reduction, and most importantly, we will remove costs thoughtfully without impacting our customers.

At the center of all of this — is our Talent and Culture — which will support and facilitate our ability to execute each initiative. We are making sure we have the right talent to succeed, the right capabilities to win at the highest level and, critically, we are creating a culture which is obsessively focused on the customer up and down the organization.

Focused on Our Mission
Passion For Customers... Passion For Yes!

Our enduring mission is to be passionate about serving our customers better than anyone else and to be passionate about saying Yes to our customers. Our people love and want to say Yes to our customers every single time. We will work harder every day and with each interaction to exceed customer expectations. Delivering great service starts with our Team Members. We are empowering our team of 74,000 strong to rally around our passion for the customer. In doing so, we are reinventing our customer service models and removing barriers to enable flawless execution such that we meet the needs of our customers like never before in the history of the company.

2016 Highlights

  • Total sales for fiscal 2016 were $9.57 billion compared to fiscal 2015 of $9.74 billion due to lower comparable store sales, store consolidations and closures.
  • On a GAAP basis, diluted net earnings per share were $6.20 in fiscal 2016 versus $6.40 in fiscal 2015. Adjusted diluted earnings per share were $7.15 in fiscal 2016 versus $7.82 in fiscal 2015.
  • To support our growth and better serve our customers, we opened 73 new Advance and Carquest company operated stores, 5 WORLDPAC branches and 1 new WORLDPAC Distribution Center.

Undoubtedly, our 2016 performance is inconsistent with our long term expectations for the company. Our performance in 2016 and for several years prior to that underline clear opportunities for improvement and represent a catalyst for significant change. Concurrent with the development of our strategic plan, we seized the opportunity to create new solutions and capabilities that will drive a meaningful impact on our business over the long term. In the back half of 2016, we saw progress in our pursuit of longer term goals in several key areas:

1. To dramatically improve Availability, we developed multiple strategies and completed several pilot programs across the country to develop new ways to improve availability through better product assortment, reduced delivery times, and lower overall inventory. Our results from the pilots were extremely encouraging. As a result of these successful pilots, we are rolling these strategies out across the country in 2017 and 2018. We have confidence that the improved availability we saw in the lead markets will drive incremental sales where it is implemented.

2. We launched our Fuel the Frontline program in 2016 which rewards top performing store and field Team Members with shares of company stock for meeting or exceeding their goals. We are making a big investment in our frontline Team Members who are critical to serving our customers better than anyone else. We firmly believe that rewarding our store Team Members for accelerating sales and profit growth, creates a culture of ownership which will become an inherent part of our employee value proposition. Part of the journey to evolve our culture is a focus on ownership at all levels of the organization. We want all our Team Members to be empowered and to think and act like owners of our company.

3. The evolution of our cultural beliefs includes an enhanced focus on Inclusion and Diversity — making sure every Team Member feels welcomed, valued, respected and heard. As a first step on that path, we developed Team Member Networks (TMNs). TMNs are groups that allow Team Members with similar backgrounds and experiences to come together with a common goal. These networks are an important outlet for leveraging our team’s diverse skills, experiences and perspectives. Our first TMN is the Women in Motion Network which focuses on the engagement, development and growth of our many female Team Members. We absolutely believe that inclusion and diversity will evolve in our industry and being ahead of the curve here will create competitive advantages for AAP.

Giving back to the communities we serve

We have a long history of giving back to the communities we serve. Thanks to the generosity of our valued Team Members, customers and vendor partners, we continued this tradition in 2016 by supporting Building Homes for Heroes, Juvenile Diabetes Research Foundation (JDRF) and many other worthy organizations. With the generous support of our vendors, we raised money for Building Homes for Heroes, an organization that provides homes to severely wounded veterans of Iraq and Afghanistan. We also supported JDRF in their fight to eradicate Type 1 diabetes. We are also dedicated to supporting our Team Members in times of crisis. In partnership with the American Red Cross, AAP provides immediate support to areas impacted by natural disaster. In 2016, we also provided funding to our Team Members in need through our assistance program. At AAP, we believe service extends beyond our doors and into the communities where we live and work.

Executing to Win

We exited 2016 with strategic clarity and momentum that we are carrying into 2017 as our comparable store sales performance accelerated in the back half of 2016. Undeniably, we are stronger today than a year ago with:

  • A company and all its 74,000 Team Members aligned around a cohesive strategy
  • A focused operating agenda centered on the critical metrics that matter most
  • A robust and achievable productivity pipeline as we eliminate waste and fuel our growth
  • An inspired team with deep rooted industry experience combined with new fresh perspectives and world class talent joining the AAP family
  • And most importantly, a common purpose and clarity of mission… Passion for Customers... Passion for Yes!

This is a new AAP with a clear plan to drive value. We’re evolving the culture of the company to one that is obsessively focused on the customer and one with an exceedingly high level of accountability, ownership, and drive for results. While we have work ahead of us, we are aligned on the path forward and excited by the opportunity. We have tremendous confidence in our strategy, in our ability to execute, and in our Team Members.

Thank you for your continuing support, your trust, and your confidence.

Sincerely,

Thomas R. Greco
President and Chief Executive Officer


Jeffrey C. Smith
Chairman of the Board

Vision
Advancing a world in motion
Customer Testimonials

WE PUT OUR CUSTOMERS AT THE CENTER OF EVERYTHING WE DO

 
  • "Received great assistance from the Easley Store last night with my battery. I purchased it two years ago and about a year into owning it, I was having issues with having to jump my battery. I was given some great advice and purchased a charger for my car, but the battery never responded to it. I went back to the store last night and they swapped it out for me under the warranty with no problems. It was customer service at its best!"
    Cherita G Easley, SC
  • "Many THANKS to GUY in Chardon for replacing my battery in the frigid, windy cold weather today"
    Michele L. Stone Chardon, OH
  • "Just want to give a shout out to Store 7376 Rice St, St. Paul!! Hands down best group around. They go above and beyond every time!"
    Shawn D Circle Pines, MN, Store 7376
  • "More kindness and respect from employees creates customer loyalty, thanks @AdvanceAuto on Colerain, you have a loyal customer now."
    Joe Haus Cincinnati, OH
  • "I want to thank Roy at the Scottsville Rd, Bowling Green, KY store for the help today. His tip solved my problem with a wonky thermostat."
    @BrianEmbry13 B.G. KY
  • "Aww shucks…thanks #Carquest for always being there as a Pro Technical Resource & Customer #Auto #PartsMaster"
    Brian Bell‏ Wilmington, NC
  • "Good service is NOT dead!! It's alive and well at Advance Auto Parts!! Exactly 13 minutes in and out with new wiper blades installed, on sale! We bought 2 gallons of washer fluid too. Thanks State College Advance Auto Parts"
    @SmarterSMM
  • "New Ulm, Minnesota's #advanceautoparts store rocks! Great, polite and friendly service!"
    Kerry Ann Minnesota