Michael Montani : Got you. And then just on the market share front, just wanted to hit on, number one, if you can give some updates to the progress that you’ve been seeing for the Pep Boys converted stores. And then number two was you had mentioned increasing inventory availability, so I was wondering if there was anything you could share in terms of industry benchmark fill rates versus yourselves to help us kind of gauge what kind of improvement we could anticipate from the additional coverage?
Tom Greco : Sure. A couple of things in your question there. So on the Pep Boys conversion, Jeff called out, this is going to be the largest number of new store opens Advance has had in many, many years. So we’ve got that grooved much more so. We’ve got a new Head of our Field Operations, Junior Word, he is a terrific leader. He started out in stores 20 years ago. He’s done all the key jobs inside of Advance. He’s distinguished himself. He’s done this before. So we’re very excited to have Junior take on the role of leading the field organization, including those stores that we’re converting in the West. So each period, our market share grows. In those West stores, we still got lots of room for growth out there. So more to come there. . Second question was, Mike, again, remind me?
Michael Montani : Sorry, just on the fill rates, I guess, on shelf availability.
Tom Greco : Yes. So what we’ve seen there, we really expected the on-hand rate, which is the ultimate measure, right, in the stores themselves. Do you have it when the customer calls to get better in those categories that we converted. And it just hasn’t. So I mean, we obviously have targets for each category. We also have targets by velocity bands. So A SKUs, B SKUs, C SKUs, et cetera. So what I can tell you is we’ve worked very collaboratively with our suppliers on this topic. And they’ve been extremely helpful. We stood up a number of new suppliers, literally all over the globe to enable this expansion. And as we said earlier, we’re very pleased with the margin expansion and the quality of the products. We’re still not happy with where we are in terms of our on-hand rates.
So all I can tell you is we’re below where we need to be, and that is the focus is to get to better on-hand rates in these key categories. And as I said earlier, there are some other things we’re doing with inventory as well. But the biggest one are to get our on-hand rate up in these converted categories owned brand.
Operator: Your next question is from the line of Seth Basham with Wedbush Securities.
Seth Basham : Tom, maybe you could just provide a little bit more perspective on what changed in terms of the competitive environment to drive these inventory and price investment decisions here. Was there a significant change in the third quarter? And then relatedly, do you expect the competitive reaction to these moves?
Tom Greco : Well, first of all, we were executing our strategy, as you know, Seth, and — which is a different strategy than our peers. I think, obviously, the inventory investments that have been made inside the industry and the widely documented pricing investments were out there. And as it started to have a greater impact on us, I think that’s when we had to respond. And we’re responding with primarily targeted inventory investments. That’s the biggest one. That’s where we really are focused here because we believe that’s the most important thing, getting the right part in the right place at the right time. So we will take those actions, and we think that’s going to have a big impact on improving our growth in 2023. The pricing piece, because of our tools, we’re able to respond surgically.
It’s not as important to our customers as the availability is. So we’re going to be very thoughtful and disciplined about that pricing piece. But we are going to take some actions to respond to that. In terms of competitive response, we’ll see what happens there. But we’re optimistic that the inventory investment that we’re making will accelerate our performance in these key categories, which has really been a drag on us over the course of the year. .
Seth Basham : Got it. And as a follow-up, can you talk about the investments in these key categories being ones that you had been focused on migrating more to private label. Does that mean that you need to be more aggressive in bringing national brand inventory back in these categories?
Tom Greco : Generally speaking, we are very pleased with where our assortment is in the categories. Where we’re focused is getting the on-hand rates where they need to be. So it’s not that we are — we have a brand issue necessarily. It’s really more about getting the right part in the right place at the right time.
Operator: Your next question is from the line of Bret Jordan with Jefferies.
Bret Jordan : Do you have any data to support the commercial customers’ enthusiasm for the private label products? I mean, maybe sort of a turnover in A SKUs, assuming that’s a category you probably have in stock, the velocity of that product versus your prior strategy. Would you add a bit more national branded product in that mix?
Tom Greco : We do. I mean, we have the — essentially, when we have it, Bret, we — the close rates are very strong. The return rates are much lower. So we do have a positive reaction from our customers on this. So it really is more about on-hand rate. .
Bret Jordan : Okay. And then a question, I guess, as far as what inning in the inventory really appearing to manage your inventories down until recently. So I guess when we think about going into ’23, where do you see the inventory build being or how out of stock are you, I guess, is the question?
Jeff Shepherd: Yes. As we look at it right now, and our analysis would suggest that we need to make investments that — we’ve made some in Q3, and we need to make some more in Q4. Obviously, that’s dynamic and we’ll continue to assess that, but that’s the way we’re looking at it right now is it’s really a back half investment to get that availability as close to the customer as possible.
Tom Greco : I’ll add one thing to that, Bret. I mean, as we looked at this earlier in the year, we obviously knew we were consolidating suppliers, we were reducing some redundancy in our SKU base. So there was a belief that, that inventory could come down in the back half. And through the analysis we’ve done, we just — we’ve got to refine that and adjust that assumption. .
Bret Jordan : But Q4 will likely be the inventory growth period in which one we’re not going to be growing too much, not going to be a use of cash in ’23 as much.
Jeff Shepherd: Well, yes. We’re investing in the inventory here in the back half. Obviously, depending on the terms, you’ll get some carryover into Q4, and we will take that into consideration as we’re generating our free cash flow assumptions for next year.
Operator: Your next question is from the line of Mitch Ingles with Raymond James.
