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Advance Auto Parts Inc (NYSE:AAP)
Q3 2019 Earnings Call
Nov 12, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Advance Auto Parts Third Quarter 2019 Conference Call. Before we begin Elisabeth Eisleben, Senior Vice President, Communications and Investor Relations will make a brief statement concerning forward-looking statements that will be discussed on this call.

Elisabeth Eisleben -- Senior Vice President, Communications and Investor Relations

Good morning and thank you for joining us to discuss our third quarter 2019 results. I'm joined by Tom Greco, our President and Chief Executive Officer and Jeff Shepherd, our 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 our comments today may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those projected in such statements due to a number of risks and uncertainties which are described in the Risk Factors sections in the Company's filings with the Securities and Exchange Commission. We maintain no duty to update forward-looking statements made.

Additionally, our comments today include certain non-GAAP financial measures. We believe providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results. Please refer to our quarterly press release and accompanying financial statements issued today for additional details regarding the forward-looking statements and reconciliations of these non-GAAP financial measures to the most comparable GAAP measures referenced in today's call. The content of this call will be governed by the information contained in our earnings release and related financial statements.

Now, let me turn the call over to Tom Greco.

Tom Greco -- President and Chief Executive Officer

Thanks, Elisabeth. Good morning and thank you for joining us today to discuss our third quarter 2019 results. I'm proud to report another quarter of good progress toward our long-term strategic objectives . This would not be possible without the relentless dedication of our more than 70,000 team members and network of Carquest Independent.

I want to take a moment to thank them for their unwavering commitment and passion for the customer. In the third quarter net sales increased 1.6% to $2.3 billion. In comparable store sales increased 1.2%. This is now our sixth consecutive quarter of revenue growth. Our 2-year stack on third quarter comp sales accelerated to 5.8% and was the strongest we've delivered in 8 years.

We also expanded margins as our adjusted operating income margin of 8.9% increased 36 basis points compared to the prior year quarter. Our adjusted diluted earnings per share increased 11.1% to $2.10. Jeff will speak more about our financial results shortly.

First, I'll highlight some details around our third quarter performance. Consistent with recent trends, our professional business was strong in the quarter. We grew in each of our professional businesses with Worldpac and our Independent business leading the way .

In addition to opening 9 Worldpac branches and adding 29 net new Independents over 2019, our dynamic assortment roll out is enabling top line improvements. As a reminder, dynamic assortment leverages machine learning to better understand customer demand and improve the quality of our assortment. We merit lookups by location with several other variables and we expect this will drive increased turns in profitability of our industry leading assortment of national brands OE products and own brand private label. Dynamic assortment together with Advance Pro and cross banner visibility enabled us to improve stock and close rates in the quarter in those categories that have been deployed.

We expect to complete the deployment of our top 25 backroom categories by year end. Separately, we've implemented multiple enhancements to our online My Advance platform including integrated promotions and connected customer service. This includes continuing improvements to Advance Pro our catalog for pro customers within my Advance which now has customized versions for strategic accounts. In fact, we saw double-digit increases in My Advance user sessions in the third quarter. We are still early in implementation, the initiatives we've launched over the past several quarters are resulting in continued improvement in our ability to say yes to professional customers

Moving to DIY Omnichannel. We continue to deliver impressive sales growth in e-commerce with strong double-digit growth once again in Q3. We continue to see substantial increases in website traffic along with steady progress in conversion rates. We know speed and convenience are critical to the Omnichannel customer and remain committed to delivering a frictionless experience. In Q3, we improved the customer experience for buy online, pickup in store. This included enhancements in the mobile experience such as improved order status via text messaging. We also rolled out a standardized area for order pickup in stores , close to the front door for easy access and convenience.

As part of our DIY Omnichannel strategy, we also made progress with our walmart.com partnership. In Q3, we continue to build our assortment and are on track to enable additional customer fulfillment options since the launch of our partnership, traffic, units and sales have accelerated each month. Notably, the majority of customers who have ordered through the walmart.com site are new to Advance. Our DIY retail business remains a work in progress. In Q3, we saw pressure in transactions, which were negative in the quarter although improved versus Q2. In Q3, we rolled out our new Speed Perks 2.0 loyalty program following successful pilots in two lead markets during the first half of 2019. Speed Perks 2.0 is an important platform to help us improve DIY performance both short and long term. Our goal here is to improve customer loyalty and share of wallet by leveraging first party data to personalize our offerings. Prior to launch, Speed Perks transactions were approximately 25% of total DIY transactions. This is low versus loyalty programs across broader retail. In the third quarter, we began to address this by providing new and improved benefits for our DIY customers. In addition, Speed Perks 2.0 includes technology enhancements for our team members to see Speed Perks member status at the point of sale.

Our team did an outstanding job launching the program delivering an 80% increase in new member sign ups, 45% growth in the number of Speed Perks transactions and improved UPT performance versus year-to-date trends . These are all important elements to the long-term success of our loyalty program. In total, our Q3 launch resulted in sequential improvements in DIY transactions and unit sales in Q3. As part of our investment in this new program, we also saw a significant increase in reward redemptions during the quarter.

While this was expected, given our test market experience, the investment in our new loyalty program resulted in incremental coupon redemptions in Q3 and exceeded the lead markets. The incremental investment year-over-year was approximately $14 million in the quarter impacting both net sales and gross margin. We expect this to abate over the next few quarters and believe this is a good investment to delight existing customers and attract new customers. I am confident that as we sign up more Speed Perks members and increase Speed Perks transactions as a percentage of sales, we will leverage this first-party data to drive sales and share of wallet. While this was expected given our test market experience, the redemptions during our national roll out exceeded those of the lead markets and resulted in a coupon redemption headwind in the quarter impacting both net sales and gross margin. We expect this to abate over the next few quarters and believe this is a good investment to delight existing customers and attract new customers.

I am confident that as we sign up more Speed Perks members and increase speed purchase transactions as a percentage of sales, we will leverage this first-party data to drive sales and share of wallet. To summarize our top line results by channel, professional and e-commerce continued to perform well and while DIY Retail improved sequentially, we're not satisfied at all with our results here and remain focused on addressing traffic, loyalty, and overall performance as rapidly as possible

All channels accelerated on a 2-year stack basis and at a category level, we saw the strongest growth in brakes and batteries with high single-digit growth while delivering sequential improvement in cooling, optics, and engine management

From a geographic perspective, we saw the strongest growth in our Midwest, West Coast and Appalachian regions. In addition to making important improvements in the customer experience, we continued our footprint optimization efforts in Q3 to drive profitability and cash flow. As we closed or consolidated an additional 23 stores, bringing the total number 82 stores year-to-date. We've made meaningful progress over the past 18 months to fix and or close underperforming stores and we continue to be very disciplined in optimizing our store footprint in a market by market approach.

All of our top line initiatives are focused on driving sales and profit per store, which is the first of 4 pillars in our margin expansion plans. In the quarter, we completed the rollout of [Phonetic] MyDet enabling us to get to a single labor management system. This unified and improved system will help our staff, our stores more efficiently to meet customer demand.

In Q3, we also made great strides in our second margin expansion territory supply chain. For the first time in 8 quarters we leveraged supply chain expenses as a percentage of net sales in Q3. We accomplished this while absorbing incremental costs attributable to the work stoppage in Kutztown. While we clearly did not plan for or want the work stoppage, ensuring our long-term supply chain cost structure is competitive throughout our entire network was a critical objective in our negotiations in Kutztown. We're pleased we came to an amicable resolution, which enables us.

Separately, the consolidation and integration of our multiple supply chains is well under way. In terms of Advance and Carquest , we are now in execution mode of cross banner replenishment as we transition stores to the most paid logical distribution center in a disciplined market by market approach. Substantial savings are expected here as we reduce stem miles and further optimize our Advance and Carquest DC network with the completion date of mid 2021

In addition, the integration that Worldpac and Autopart International is also now under way. Here, we expect additional savings and growth related benefits to be fully captured by the end of 2020. Finally, Reuben Slone and his team are laser focused on improving operations across our supply chain. Execution is improving as we standardize processes, reduce turnover and improve fill rates. As we build a performance culture throughout supply chain, we expect efficiency gains to drive cost savings.

Moving on to our third pillar of margin expansion, we remain disciplined in our material cost optimization and category management efforts. Despite material cost headwinds, this year from inflationary costs, we continue to work diligently with our supplier partners to mitigate increases and our pricing to cover inflation in a rational environment

We remain focused on increasing skew count including expanding our offerings for late model vehicle coverage. Additionally , we're making great progress on improving Carquest private label offerings and increasing private label as a share of our mix. I'm confident these efforts will enable top-line growth on our well-respected Carquest private label brand as well as meaningful margin improvement over the next several years.

The fourth pillar of our margin expansion strategy includes SG&A productivity. Jeff will expand on other cost savings we saw within SG&A in the quarter shortly. However, I want to highlight our performance on team member safety and the benefit this is delivering across our business. Our team has been incredibly disciplined in creating a safety first culture, including building awareness through education and training programs to ensure our team members are empowered to do their job without incident and return home safely each and every day

The detailed focus of this team is benefiting all areas of advance including significant improvements in our accident and incident rates. Our emphasis on safety has reduced our total year-to-date recordable injury rate by 11% and our lost time rate improved by 14% this quarter. Importantly, our vehicle collision rate has improved by 19% year to date, surpassing our target for the year. More broadly, I'm very proud of the progress we've made in building a performance culture at Advance this year, and confident we're creating an environment where team members can excel. We're improving our competitiveness every day with a stronger more experienced leadership team and through innovative offerings such as our fuel the frontline program which rewards top performing frontline team members with Advance stock . We've also made important wage investments in our supply chain, which has dramatically reduced turnover to ensure we are as effective and efficient as possible within supply chain

The investments we're making in our team members inclusive of ongoing training and development is evidenced by the continued improvement in our overall annualized average turnover, which declined by 14% in Q3 compared to year-end 2018. I am pleased with the progress we've made to date and look forward to sharing more details about our ESG focus as well as our people first culture when we publish our second annual corporate sustainability and social report in 2020.

With that, I'll turn it over to Jeff for details on our financial performance.

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Thanks, Tom, and good morning everyone. In the third quarter, our adjusted gross profit was $1 billion, an increase of nearly 1% from the prior year quarter. On a rate basis our adjusted gross profit margin of 43.9% declined by 39 basis points from the prior year quarter, primarily driven by the increase in the investment in our loyalty program and the incremental costs related to the work stoppage in Kutztown. Despite the work stoppage, we were very pleased with our ability to leverage supply chain in the quarter. As Tom also mentioned, our investment in Speed Perks 2.0 negatively impacted gross margins in Q3. We remain confident this new program will significantly increase customer loyalty. We expect this investment will normalize over the next few quarters. Our adjusted SG&A performance was very strong at $810 million in the third quarter as compared to $814 million a year ago. On a rate basis, our adjusted SG&A as a percent of net sales was 35%, an improvement of 74 basis points compared to the prior year quarter.

This was a direct result of our focus on cost controls and driven by improvements in occupancy, labor-related costs and a reduction in insurance claims from continued progress in team member safety. These excellent results more than offset important long-term investments in information technology. As we've consistently communicated, we expect information technology costs will remain elevated through the balance of the year and into 2020 as we work to build new digital capabilities and fully integrate multiple technology platforms across the enterprise.

Adjusted operating income in Q3 was $205.1 million, a 5.9% increase in Q3 2018. Our adjusted OI margin rate increased 36 basis points to 8.9% in the quarter. Adjusted diluted EPS for Q3 was $2.10, an increase of 11.1%. During the third quarter, we continued to be extremely disciplined in managing our cash. This is clearly illustrated as we improved our AP ratio to 77.5% which is an increase of nearly 530 basis points compared to the prior year quarter.

Our AP ratio has now improved 840 basis points since the first quarter of 2017. We remain laser focused on working capital management and are confident in our ability to continue generating meaningful cash growth to drive shareholder value. Our free cash flow for the third quarter was $539 million compared to $576 million in the third quarter of 2018. The year-over-year decrease of free cash flow was primarily result of increased capital investments to drive sustainable sales growth and continued margin expansion going forward.

Year-to-date , we increased our capital spending by 61% to $169 million. We continue to make investments in our stores, warehouse system consolidations and other information technology initiatives such as our finance ERP system as part of our business transformation. Our leverage ratio was 2.0 , which is in line with our capital allocation priorities of maintaining an investment grade rating, reinvesting in the business and returning excess cash back to shareholders. During the third quarter, we returned nearly $340 million to our shareholders through the repurchase of 2.4 million shares of Advance stock .

In addition, I'm pleased to announce an additional $700 million share repurchase authorization. This new authorization is further evidence of the confidence we have in delivering on our sales and margin objectives as well as our ability to generate significant free cash flow and drive shareholder value. Consistent with our commitment to provide transparency with our transformation plans and expectations for this year, I want to take a moment to provide an update to our outlook for the balance of the year.

We remain confident in our ability to deliver results within the full-year guidance we provided earlier this year and updated last quarter. We also recognize that the top end of our comparable store sales may now be challenging to achieve as a result of the continued investment in our loyalty program with higher than anticipated coupon redemptions impacting net sales and gross margin in the fourth quarter.

Therefore, we believe it's prudent to narrow the top end of our sales guidance while maintaining the bottom of our current comp sales range. Our updated guidance includes net sales in the range of $9.65 billion to $9.75 billion. Comparable store sales range of 1% to 1.5%. Our adjusted OI margin guidance is unchanged with an adjusted OI margin expansion of 20 to 40 basis points for the year.

Similarly, we are confident that with the continued strength of our working capital efforts that we can deliver our free cash flow guidance of a minimum of $700 million which we increased in the second quarter . I'm proud of what we've accomplished with the first three quarters and our entire team is focused on additional progress in the fourth quarter.

With that, let's open it up to addressing your questions, operator?

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from Michael Lasser with UBS. Your line is open.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. Tom, in your prepared remarks you referred to some of the pillars of your long-term plan. But how do you respond to those to stay now you've had two consecutive quarters of gross margin degradation and you've made a lot of progress over the last few years in harvesting cost savings to how realistic is it that you will get to a low to mid-teens operating margin over the long run as you've outlined previously?

Tom Greco -- President and Chief Executive Officer

Well, first of all, I think, the gross margin, just to give you some background on that Michael it is important to explain this. we had a couple of atypical elements in the gross margin in the quarter. The biggest factor within gross margin was our investments in our loyalty program. The coupon redemptions in the quarter were up 14 million versus year ago, which is what we outlined in our prepared remarks. We knew this was going to be higher in the quarter as we planned investment behind Speed Perks 2.0 but the sign up and the transactions as a percentage of our total transaction significantly exceeded that of our lead markets, so the coupon redemptions were more than we expected

Over the long term, this is a very good thing. We're absolutely committed to winning in DIY Omnichannel. We had meaningfully invested in our loyalty program prior to Q3. The customer and Team Member response to Speed Perks 2.0 has been fantastic and it positions us well for the long term . We're going to leverage the first-party data we get from Speed Perks to personalize our offerings and we expect the incremental investment on Speed Perks to subside over the next few quarters with incremental growth.

So, that was a very big factor in gross margin in the quarter. And secondly, we incurred one-time incremental cost within the supply chain related to the work stoppage in Kutztown, so we don't think what happened in the quarter is something that is going to have any impact on our ability to achieve our long-term margin goals both within gross margin and in SG&A. We had a couple of atypical elements in the quarter on gross margin.

Michael Lasser -- UBS -- Analyst

Indeed, the launch of Speed Perks 2.0 drive incremental sales in the quarter, and this is important because the comp spread versus those others in the industry is back to widening and shouldn't we take that as a signal that some of your efforts to close the performance gap are now flipping and would you attribute all of that to Speed Perks 2.?

Tom Greco -- President and Chief Executive Officer

Well, we certainly benefited from Speed Perks in the quarter, but it's difficult to say how much. With the number of Increased sign-ups we had obviously the purchase frequency in our category is much lower than typical category. So we'll see that over time. We also had a higher percentage of our transactions, much higher than we've seen historically and even in the lead markets, so that's going to benefit us over time, because we use the data to personalize the overall 14 million if you do the math that's about a 60-basis point headwind POX sales right from our total number.

So that's the value of the coupons clearly somewhere between 0 and 60 we benefited from Speed Perks but in the quarter the cost of the coupons outweighed the benefit of Speed Perks.

Michael Lasser -- UBS -- Analyst

OK, just to clarify that. So , can you help us understand how it was a net positive if you're seeing $14 million hit to sales, but it drove incremental comp or incremental sales.

Tom Greco -- President and Chief Executive Officer

Yeah, it's difficult to quantify the incremental sales at this point. What we've modeled is that over time the incremental revenue associated with Speed Perks is going to be significant, you're essentially increasing your member base, we started at 11 million, we added a significant number of new members in the quarter, we had a net increase in our membership base in the quarter. We're going to increase the percentage of transactions, so we're talking about a substantial improvement in our DIY sales over time. In the short term, you can't really measure Michael is how many of existing customers that were already coming in the store, are now transacting as Speed Perks customers, it's very difficult for us to break that out, but we know the value of the program in terms of the impact it has on the P&L and over time, this is a meaningful benefit for us. We're very excited about it.

Michael Lasser -- UBS -- Analyst

Okay, Good luck with the fourth quarter. Thank you very much.

Operator

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley, your line is open.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks, good morning. My first question is for Q4. You've provided a fairly wide range of comp I think 0 to 1.5 or 1.6 depending on the math. Can you give us a sense, I mean there is only 6 weeks left, where -- where we're headed so far, and then it looks like if we hold the SG&A rate from the third quarter, which may or may not be the right assumption that gross margin could be up a decent amount in the fourth quarter 20-30 basis points.

Can you comment on those two points?

Tom Greco -- President and Chief Executive Officer

Sure. Simeon, good morning. I'll let Jeff handle the second question. On the sales guide, yes, I mean we're essentially guiding in line with what we expect. Obviously, the last six weeks of the year can be very volatile, but we like what we see so far and we're well positioned to deliver within the sales guidance. As we said, we will have continued coupon redemptions in the fourth quarter. The reason is, we've got a number of coupons from the original program that are still unredeemed. So once the end of the year comes into play, those are no longer available and will only be dealing with the coupons from Speed Perks 2.0, so that's essentially the reason and let Jeff answer your second question.

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Yeah. And just to build on the gross margin, we are continuing to see the coupon headwinds that Tom talked about. The original Speed Perks program those coupons have a 6-month life, so those are going to roll off basically in the fourth quarter a little bit of bleed into the first quarter, but not much. But we're still modeling those headwinds, as well as the headwinds associated with commodity and tariffs, right now we don't see any changes in the tariffs into the fourth quarter, so we still think we're going to have those headwinds . Having said that, everything we're seeing right now in SG&A is still positive. We've got excellent controls in place to control our costs, consistent with what we did during the third quarter and we fully anticipate we'll be able to do that into the fourth quarter.

Simeon Gutman -- Morgan Stanley -- Analyst

So just to clarify that point. It sounds like there is still going to be headwinds to gross margin, but it's SG&A that if that will provide the leverage to the margin in the fourth quarter.

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Yeah, yeah, that's right, Simeon, and just to make it really clear, and Speed Perks hurts same-store sales because coupons go against net sales right and in the quarter -- in the third quarter that was a 60-basis point impact on same-store sales, so we might have gotten a few more transactions but it hurts net sales on a net basis in the short term. Over time when people return more frequently, we benefit from Speed Perks but in the short term, it's a net sales headwind

Simeon Gutman -- Morgan Stanley -- Analyst

Got it. Okay and then my followup question. The supply chain transformation. You mentioned it briefly in the prepared remarks, Tom, can you talk about where you are in it, what you've accomplished so far, what are the tasks that are going to get done next. And then can you assess any execution risk in some of the next steps, please.

Tom Greco -- President and Chief Executive Officer

There are really exciting progress on supply chain, Simeon, I think Reuben is really getting some momentum there. We've obviously began to execute the cross banner replenishment initiative, which is a significant productivity driver for us and allows us to reduce stem miles to the stores and to optimize our DC network So that's well under way and we've had the pilots in the respective red and blue networks and we're now beginning to move stores to the relevant DC that we've got a number of those plan for the balance of this year, there'll be hundreds of them executed next year and into the front half of 2021 and we'll finish it at that point. Just in terms of raw execution, we are seeing very good progress there across all the key metrics. We are also beginning our work on a standardization of our warehouse management system that Reuben is leading that will allow us to improve our labor management in the distribution centers.

Finally, we've begun to integrate the Worldpac and AI organizations and supply chains, including the AI stores, so that will help us over time. So very confident in our ability to deliver the supply chain productivity that we've discussed and we're beginning to see the benefits of that, as I said in the prepared remarks, we actually leverage supply chain in the quarter in spite of a pretty significant cost associated with the Kutztown work stoppage

Simeon Gutman -- Morgan Stanley -- Analyst

And just to clarify one more followup on that Tom, is we keep talking about the benefits of these initiatives won't be done till I think the middle of 2021. But does that mean the benefits from some of these initiatives, don't show up until 2021 or they start to show up now and rolling into next year.

Tom Greco -- President and Chief Executive Officer

Yeah, we'll start to see some -- on the supply chain we will start to see benefits next year as we execute the DC store changes that I mentioned in terms of the full benefits of the cross-banner the full benefit of the warehouse management system implementation and they starts to come later, but we will see benefit from supply chain next year.

Simeon Gutman -- Morgan Stanley -- Analyst

Great, thank you. Thank you.

Operator

Our next question comes from Seth Sigman with Credit Suisse. Your line is open.

Seth Sigman -- Credit Suisse -- Analyst

Hey guys, good morning. Just first on the Pro business, I think you categorized it as strong in the quarter, can you just discuss how it performed relative to the second quarter, did it actually accelerate. And then I think you highlighted Worldpac and Independents as the strongest channels within, what's working there and maybe different than what you're seeing core AAP and Carquest. Thanks.

Tom Greco -- President and Chief Executive Officer

First of all, Seth, our Pro business did accelerate versus the second quarter, we had a terrific two year stack the best we've ever seen on our Pro business by the way on AAP business as well, not just the other businesses. I think that what's working well broadly inside of Pro is Bob together all of the key elements of our Pro offering. Everything from the catalog, which we obviously call Advance Pro, we're getting increased usage on the catalog, people are seeing the merits of our assortment. We're executing its dynamic assortment across the enterprise, which is enabling us to improve our stock rate and close rate on key items in the backroom, cross banner is benefiting us continued benefits from cross banner. So we're able to source from the various entities at higher levels than we used to in the past. So we're very happy with where our Pro business is when we look at the reported results to date , we feel good. We feel like we're performing at or above the market and our Independent business there we were able to present some of the things that Bob is pulling together for the broader corporate entity here and present them to potentially new independents who want to fly the Carquest flag, and the net benefit there we're starting to see as well. So strong conversions in the quarter on the independent side but also good comp sales for our independents -- existing independents, which is very important

Worldpac is just a terrific business, they've got a great model, their online platform is best in class, Bob has built that over many years with a terrific team out there at Worldpac and we've opened more branches this year than we've ever opened before, they're driving top line growth. They are expanding margins, they're focused on being very complementary to the broader enterprise. So there's a lot of things that are working well with Worldpac that we're taking and bringing to the broader enterprise. So I'd say generally speaking, those are the things that are helping us on the Pro side.

Seth Sigman -- Credit Suisse -- Analyst

Okay, that's helpful. So given some of the positive changes happening in the store, presumably that should be helping DIY also what do you view as the fundamental challenge facing the DIY business, obviously online is growing for you, but just I guess store level DIY some of the challenges that you may be facing there?

Tom Greco -- President and Chief Executive Officer

Yeah, I think, first of all we did improve our transactions and unit performance in the quarter on DIY, the net sales number as we said, obviously the coupons are entirely attributable to the DIY business weighed down the net sales number in DIY in the short term, as we said, but I think, Jason McDonell is our new CMO, we couldn't be more excited about having Jason here, he is focused on traffic job one, improving our traffic inside the DIY business. He has done a lot of work in the short time that he has been here, I feel very good about the plans that are coming together for 2020. We've done a lot of work on the customer journey to develop integrated programming. I think that was an opportunity Seth to your point to make sure that the marketing that we're spending is very well integrated with the merchandising plans and the in-store execution Speed Perks 2.0 will be a driver of top line growth next year. As we start to bring more people into Speed Perks and we start to get a higher share of transactions, we are able to personalize our offering and we know there is a big share of wallet opportunity there. Third, the media plans big opportunity there. Again, Jason is working that very hard right now, we're going to shift non-working dollars that we were spending in marketing to working and that will drive awareness, which we made progress on last year, but we kind of stall that 32% and now we need to take that up, because we are significantly behind the industry leader on that one.

And finally the partnership that is developing with Walmart will start to be a factor as we get into 2020. So there's a lot of things that are happening right now in DIY that we feel really good about as we head into next year and it will give us what we need on the other side of the box, if you will, as Bob continues to drive the Pro business

Seth Sigman -- Credit Suisse -- Analyst

Got it. All right. Thanks, Tom.

Operator

Thank you. Our next question comes from Christopher Horvers with JPMorgan. Your line is open.

Chris Horvers -- J.P. Morgan -- Analyst

Thanks, good morning. So first, a couple of followups on the comp guide, what specifically is the implied comp guide 4Q, is if you held a two year stack it would imply a bigger number than the range that was asked in a prior question. And then could you quantify how much Kutztown actually impacted gross margin?

Tom Greco -- President and Chief Executive Officer

Yeah, we're not going to, we're going to not going to talk Kutztown Chris. I'll just -- I'll just say that obviously, it's important that we have a very, very competitive cost structure in our supply chain. So we had to do what we had to do in Kutztown and we accomplished it and we feel really good about where we ended up there, but we're not -- we're not going to break that out

Chris Horvers -- J.P. Morgan -- Analyst

Did that sustain? the Kutztown sustain?

Tom Greco -- President and Chief Executive Officer

No. it's obviously we had a several week work stoppage. Right. So you've got, you've got all the costs associated with that -- that are built up in there and we knew we were going to have those costs in the quarter and ended up being where they ended up being. So in terms of the stacks, we're obviously going to continue to drive as high of a two-year stack as we can. The big factor is the -- is the coupons, which we've talked about several times. If you also look at the 3-year stack, you'll see it more in line with the --, with the third quarter. So that's essentially where we ended up, but I think the thing to call out is the net sales.

The coupon impact on net sales in the fourth quarter based on the lower sales number and the redemption, this is probably going to be kind of a similar number, which is a percentage higher.

Chris Horvers -- J.P. Morgan -- Analyst

got it. So just to, so -- so you really looking at a three-year and that's what was the sort of guiding light for the 4th quarter comp guide?

Tom Greco -- President and Chief Executive Officer

That's right, that's right, we've seen -- we've seen continued improvement on that 3-year stack, so we're kind of focusing on that to factor out the back half of '17 which we all know was a difficult time for us

Chris Horvers -- J.P. Morgan -- Analyst

Got it and then another one, on the DIY did that also accelerate despite the coupon headwind, which is about 120 basis point headwind to the comp in the third quarter on the DIY front,

Tom Greco -- President and Chief Executive Officer

Yeah, it absolutely accelerated on POS sales. Yes. And that's why the transactions improve, the units improved. In fact, our unit share Chris. When we look at our relative performance on unit share through syndicated data also improved by about that's similar, the relative growth improved by about 150 bps. So on a same-store basis in the most recent period, we actually held share on units which I feel great about. And we haven't done that in a long time. So, selling more units, getting more people signed up to Speed Perks, higher percentage of transactions over time this is going to be a good thing.

Chris Horvers -- J.P. Morgan -- Analyst

Got it. Lastly, and then can you talk about, Jeff can you talk about how much LIFO was a headwind in the quarter, it was about 70 basis points in the second quarter. Do you -- was that -- where did end up in 3Q and how are you thinking about LIFO into fourth quarter and then into next year, really as that play out over the year, assuming the price environment stays as it is,

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Yeah, so for third quarter LIFO was an impact of $34 million and we publish our -- our 10-Q later on today, those were 100% offset by what we call some of the inventory related costs, warehouse cost capitalization. We saw improvement there along with store -- store and DC cost changes. So the net impact of that was zero. Obviously, the $34 million with a headwind in the third quarter on a stand-alone basis . The fourth quarter. I would expect to see similar level just given the fact that we're still in this higher rising cost environment. So I would anticipate that into the fourth quarter. And I do think in the fourth quarter could be more of a headwind. Especially, on a year-over-year basis. If you remember last year we purchased a bunch of inventory as a result of dynamic assortment and some early buying related to the spring selling season. They gave us a little bit of a tailwind and we're not going to see that again this year or this quarter for sure. So on a year-over-year basis it's certainly going to be a headwind. Going into 2020, if we get cost stabilization. I would expect to see a similar level of impact is all we can get it to stabilize, we can drive down that inventory. Obviously we will pick up that headwind, but we're still working through our plans for 2020, we will have a lot more detail when we talk to you next quarter.

Chris Horvers -- J.P. Morgan -- Analyst

And so when you see similar level. Is that similar dollar, so the rate impact moderates, are you seeing the rate impact should be the same over the year.

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Similar dollars in terms of what we're seeing in the third and fourth quarter.

Chris Horvers -- J.P. Morgan -- Analyst

Got it. Understood. Thanks very much .

Operator

Thank you. Our next question comes from Matt McClintock with Raymond James, your line is open.

Matt McClintock -- Raymond James -- Analyst

Hi. Yes, good morning everyone. Tom, you mentioned that you expect Walmart to be -- theWalmart partnership to be material next year or I don't know if you used those words, but I assume that's what you meant. Could you maybe talk a little bit about how you have improved the customer experience now that you've launched there the improvements that you have been trying to make there and then how far away are we before Buy Online and Pickup in Store options are available through that partnership.

Thanks. Sure. Yeah, just to clarify, I don't think I used the word material, we definitely feel that it can be helpful next year, it's definitely going to be material over time. I think the big things that we've done so far is on the engagement front, we've obviously stood up the website , their significant branding, on the website for us that the Walmart team has been terrific in helping us enables and we begun to work the fitment work with them to make sure that the experience, the customer has when they're buying a specific product is world class, and I know the Walmart team is very committed to that outcome.

We don't want to start adding parts and jobs when that would be the experience for the customers a world-class. So that's what we're working on with them right now, we've made a lot of progress, we're adding SKUs, all the time as they build fitment capability in the various categories . We're very excited about getting in store pickup stood up, we haven't got a firm date on that at this point but we're shooting for the first quarter of 2020 that's the goal.

And then kind of as a followup, can you maybe discuss the engagement levels that you've seen with your current on improvements of the Buy Online Pickup in-Store experience?

Tom Greco -- President and Chief Executive Officer

Yeah, definitely seen great progress there. I mean we're getting excellent growth on in-store pickup. We are now paying the customer right away as soon as they send us their order we're letting them know the order is ready. The team is executing extremely well and making sure that the product is ready for them when they come in the door. So we're beginning to see that and we've had obviously a cold snap here in parts of the country, we can see it, we can see the benefit of the in-store pickup starting to have an impact on our overall sales because of that and increasing as a percentage of our sales. So we're very excited about the opportunity there. I know, Jason is also thinking through how to engage consumers and build awareness on that capability, because it's, you can get it very quickly and we want to make sure people know that not only can you pick them up quickly at Advance but we will install your battery for you, or install your wiper blades. So we can do other things when you're there so excited about the new capability. We're building there.

Matt McClintock -- Raymond James -- Analyst

Thanks a lot for that . Best of luck.

Operator

Thank you. Our next question comes from Gregory Melich with Evercore ISI. Your line is open.

Gregory Melich -- Evercore ISI -- Analyst

Hi. Great. I have a couple of questions . First on the top line, Tom, you had mentioned on the cross banner initiatives in categories that have been converted to have advance Pro and the cross banner items, you've seen a nice improvement. How many of the top 25 categories have been converted already.

Tom Greco -- President and Chief Executive Officer

Well good morning, Greg. First of all we've done is we've rolled out the top 25 into stores. So it's really a case of how many stores have received that right. So when we, when we do it, we put all 25 categories, and we basically do a changeover in the store that we've done the top 25. So we're pretty much through all of the chain. I think we have got to all of the so-called Red stores by the end of the year. The blue stores come in the first quarter next year, but the top 25 will be rolled out completely by the first quarter

And I think I think what we said in prepared remarks is that if you take the store and product combinations. It's about 11% of the backroom sales. So that gives you a sense for it and we're just going to continue to use this and we're seeing a couple of points, about 2 points of growth associated with it because the items that we're adding obviously are contributing a lot more than the items that we're deleting,

Gregory Melich -- Evercore ISI -- Analyst

So just to be simple on that. Does that mean if it's 11% you're getting 2 points of growth --20% lift in the stores when you do this in that category?

Tom Greco -- President and Chief Executive Officer

We are seeing big growths in the categories we're doing -- you're using, yes that's correct.

Gregory Melich -- Evercore ISI -- Analyst

Two points.

Tom Greco -- President and Chief Executive Officer

Two points in the in the category.

Gregory Melich -- Evercore ISI -- Analyst

[Speech Overlap] Okay, I understand. And then second, inflation, I know a lot of ebbs and flows years, we hear different things from different people anything from 150 bps to 300 bps. What is your perspective. Now on the amount of the pass-through of the tariffs and other cost input inflation that you've seen.

Tom Greco -- President and Chief Executive Officer

Yeah, we look at cost per unit, Greg. That's the best way to measure it because when you see average ticket price and Pro, there's a whole bunch of other factors come into play, but it's 2.5% to 3% on a per unit basis is what we're seeing

Gregory Melich -- Evercore ISI -- Analyst

Got it. And then last, Jeff, maybe more on the free cash flow side, when you guys are using the $700 million plus, how much of that is from the working capital improvements and how much of it would be from everything else, my rough math gets to 750, then take off capex of 270 and you get around $500 million to $550 million of free cash flow before working capital gains. Is that right?

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Yeah, that's right. Most of it's going to come from our working capital initiatives. If you look at what we've done most specifically in the area of payables. We've increased that substantially, our AP ratio is at an all time high at 77.5% and we think that's going to continue to improve. So the working capital as we increase our inventory turns that will help us as well. But we really think we're going to get the vast majority of that improvement through the working capital that we're going to, that we're not only doing, but it's going to continue to manifest itself through the fourth quarter and into 2020. So, yes, that's exactly the way to think about it.

Gregory Melich -- Evercore ISI -- Analyst

And then lastly on that point of the buyback, a lot in this quarter, it looks like you were sort of opportunistic. How should we think about that. Now that you're down to the two times leverage I guess if you include leases, maybe 2.5. But how do you think of that going forward. Does this all the free cash flow come back is buyback or would you ever take a look at the dividend again?

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Yeah, I mean dividend something that we've talked about quite a bit. We do have the $700 million additional. So that gives us a lot of flexibility. We're still in the transformation. We still have our same investment priorities, we want to continue to invest back in the business this year with a heavy investment year next year is going to continue to be a heavy investment year. Having said that, that we want to continue to be opportunistic and the $700 million gives us that flexibility to be opportunistic as we were here in the third quarter.

Gregory Melich -- Evercore ISI -- Analyst

Great. Good luck, guys.

Tom Greco -- President and Chief Executive Officer

Thanks.

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Thanks

Operator

Thank you. Our next question comes from Daniel Imbro with Stephens, Inc. Your line is open.

Daniel Imbro -- Stephens Inc. -- Analyst

Yeah. Hey, good morning guys. Thanks for taking my questions. I wanted to start on the supply chain. You had mentioned the work stoppage that lasted about two weeks. But as you guys progress on your supply chain rationalization from here. Tom, you mentioned those cost shouldn't continue, but in your updated long-term plan do you think that those kind of negotiations could lead to other higher wage pressures in your supply chain or how you are thinking about the impact into your other distribution centers from that works stoppage you had

Tom Greco -- President and Chief Executive Officer

Yeah, good question, Daniel. I mean obviously that's the point. We only have 5 union facilities out of our 50 odd DCs and that's why it was important in this case, to make sure that the cost structure there was competitive, so that there is no essentially sphere of influence for our non-union sites. So we were able to accomplish that. And we feel very confident in our -- first of all, we made an investment this year, as you know, in DC wages proactively nothing to do with what happened in Kutztown, to make sure that we reduced turnover and Rubens has done a great job there, we dropped our turnover basically in half in the DCs and that's why we're getting much better execution in the DCs we are not turning as many people

So it for sure the glide path on supply chain is very clear. The productivity agenda has been laid out, and we're executing against it and obviously contemplate the relevant wage increases that we need to do over time in order to be competitive, so no change there really.

Daniel Imbro -- Stephens Inc. -- Analyst

Got it. A quick followup to that, I guess you mentioned turnover coming down significantly but you think the issue that led to the work stoppage and the eventual kind of negotiations were facility specific or these pushbacks are getting from employees in other facilities as you push more products and rationalizing the supply chain

Tom Greco -- President and Chief Executive Officer

No, very much facilities specific unfortunately in that case and we're committed to rebuilding the team in Kutztown, it's a great group of people. I know our leadership team has spent a lot of time with them . This was a long-standing situation that's been going on literally for years and we all look to our people -- it's a really -- do a better job of engaging with them directly and that's the plan from here. But it's very much facility specific.

Daniel Imbro -- Stephens Inc. -- Analyst

Got it. And then last one from me just on working capital. I think this is the fourth quarter of actual inventory dollar growth on the balance sheet as a result of dynamic assortment. As we have lap over that and the fourth quarter of last year, should we begin to see inventory levels resume their kind of trickle down as you guys work that out or should inventory continue to grow as you invest in product availability. Thanks .

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

No, I think we're going to start to see that to stabilize and then work itself down, I think in fact in the fourth quarter, I think we're going to see inventory come down from where they're at today and probably be in line with what we saw at the end of last year. And then as we have the dynamic assortment stabilize, we will continue to triple that down going into 2020.

Daniel Imbro -- Stephens Inc. -- Analyst

All right thanks. Best of luck.

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Chris Bottiglieri with Wolfe Research. Your line is open.

Chris Bottiglieri -- Wolfe Research -- Analyst

Hey, guys, thanks for taking the question. So I wanted to take it -- congrats on improving market share data on the DIY side . I was wondering if you held your market share in Q3 equal to Q2, what would that impact of comps had been -- like how much of the market share and DIY help your comps this quarter.

Tom Greco -- President and Chief Executive Officer

Yeah, I think the, change would be the relevant number. I think there Chris would be about 30 bps something like that, the improvements. So I think it's -- NPD doesn't capture everything, so to be clear. I'm just giving you the NPD number but it's 29 categories. It's not everything in the front room, but it's a good proxy. But that's the number .

Chris Bottiglieri -- Wolfe Research -- Analyst

Got you. Okay, that's helpful. And then obviously there's a lot of the innovation, you're making a lot of changes, but would you -- what would you attribute that improvement in market share for was it Speed Perks was it's kind of like Walmart was just everything else we're doing online thoughts there.

Tom Greco -- President and Chief Executive Officer

Well we for sure believe that Speed Perks contributed to improve transactions in the quarter. I mean, we saw a 150 change. Now some of that was industry related in terms of the improvement in transactions, but for sure Speed Perks had some contribution. I think the in-store pickup was well executed, our team is very focused on these initiatives, I mean to Speed Perks itself we called out the changes. I mean we challenged the field to do a good job executing Speed Perks. In the lead markets, we had a 30% increase in sign-ups and in the national roll out. It was 80%. Okay transactions as a percent of sales lead market 28% national rollout 40%. So I do feel the field team is executing better than they ever have. We see that in our Net Promoter Scores that's obviously helping us. And when we launched something like in store pick, it's, it's much more -- it happens faster . Our ability to get it done happens faster. So I mean, as we continue to build the initiatives Chris on DIY I'm much more confident that we will execute them well.

Chris Bottiglieri -- Wolfe Research -- Analyst

Yeah. Got that. And then, big picture, I mean, I think you're very much ahead of your peer group online doing a lot of great work there, but I would say this industry has historically been kind of online-resistant, which frankly were in the hard way the last couple of years, but big picture what do you see the online presence in this category, growing over the next several years. Are you making a calculated bet that online penetration picks up or is just, this is where you think you could be most differentiated any thoughts that would be helpful.

Tom Greco -- President and Chief Executive Officer

Well, absolutely we expect it to pick up. And also think about online Chris as Pro as well. Right. It's not just DIY so your pro experience. We've got obviously Worldpac which is primarily all online right, then you have the AAP business, which is much lower. I think on average for something like 38% of our of our Pro orders come in through online platform. So we expect that number to go up. And obviously that has over time benefits for us because we're not on the phone handling the customer over the phone. So that number goes up each year we see that number going up each year. On the DIY side, we've certainly quantify what we believe the online penetration is going to be. We think it grow substantially, both shipped to home and buy online pickup in store over time and that's why we want to make sure the Buy Online Pickup In-store experience is world class, because that's where we think we can really differentiate ourselves

Chris Bottiglieri -- Wolfe Research -- Analyst

Makes a lot of sense. Thank you.

Operator

Thank you. Our next question comes from Kate McShane with Goldman Sachs. Your line is open.

Kate McShane -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for taking our question. I wondered if you could talk a little bit about what you're seeing with labor costs versus the improvements you were able to make in the labor related cost during the quarter and is this a dynamic we can see for the next several quarters.

Tom Greco -- President and Chief Executive Officer

Yeah. We've done a really good job Kate, managing wage inflation. We talked about supply chain earlier on the call that we did make an investment there and that was intended to reduce the turnover inside of supply chain. Meanwhile, on the store side, which is of course the majority of our people, we have a unique program that no one else in the industry has which is Fuel the Frontline, we're now up to 18,000 grants of company stock. We are absolutely convinced that this is lowering our turnover meaningfully in the key jobs that we have, that's the general managers in our stores, the customer account managers, the commercial parts pros, DMS rather. So those four comprise 15000 people they are critically important for our company, we want the very best parts people in the industry and those, those four jobs are central for the success. So we make sure that we're highly competitive there.

And we've seen our turnover drop across the board there. So to me that's the best asset test, if you will, on how you're compensating your people and the type of roles you're providing and on well we're still seeing inflation obviously in wages. And we've got states that are increasing minimum. We contemplate all of that as we package our value proposition -- employee value proposition together and we use the Fuel the Frontline to really augment that so we can keep our best people.

Kate McShane -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Scot Ciccarelli with RBC Capital Markets. Your line is open.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning, guys.

Tom Greco -- President and Chief Executive Officer

Good morning Scot.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

So, we've talked a lot about kind of Speed Perks this morning and how is a $40 million dollar drag in both sales and gross profit in the quarter but can you help us better understand why the sales and gross margin drag would actually decline as the membership and usage of program growth because I thought that was the implication

Tom Greco -- President and Chief Executive Officer

Yeah, the biggest factor is, we still have outstanding coupons unredeemed from the original Speed Perks Scot and they'll basically be gone by the end of the year. So that's a big factor because we're redeeming not only the coupons from Speed Perks 2.0 but from the original program. So as the year ends, those coupons are no longer eligible, they basically expire. So as we get into 2020, we will see that subside but we contemplated it for the fourth quarter and as we get into 2020, we start to see incremental revenue. We see more frequency people come back more often, we signed more people up and by the way, we have people -- less people leaving. We are seeing improvement across the board on each one of those, you think about how do I attract new members. How do I graduate members from one tier to the next tier. And how do I retain existing members and the way we measure that Scot is did somebody transact in the past year.

So we saw an 80%, an increase in new. We saw a significant improvement in our retention of the people with that were in Speed Perks and then obviously, we're trying to graduate people up the tier. So that's the intent. And what you'll see is revenue going up with everything we've modeled, everything we've seen in the lead market. The revenue will be going up and the cost will be coming down

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Got it. So in other words, you have two parallel programs where you're kind of getting hit, but only one kind of revenue source. And then over time that first piece kind of goes away and then you're going to just have a higher contribution margin on incremental sales as you build that base.

Tom Greco -- President and Chief Executive Officer

Yeah, the pure Speed Perks program, the math on the pure Speed Perks 2.0 is very attractive. It's just in this interim period. We knew coming into the back half of the year that we going to have to deal with these existing unredeemed coupons from the original program which now you've got a whole bunch of awareness to them and there was a lot of them out there.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Got it. Okay, all right. Understood. Thank you.

Operator

Thank you. Our next question comes from Liz Suzuki with Bank of America. Your line is open.

Elizabeth Suzuki -- Bank of America -- Analyst

Great, thank you. Can you talk about the monthly trajectory comps. Are there any particular months in your quarter that there were significantly better or worse because they know it can be a bit volatile or more so for advanced versus some of your peers. Just given your geographic exposure.

Tom Greco -- President and Chief Executive Officer

Yeah, there wasn't a huge swing Liz as there have been in the past quarters I think the -- it started out very strong in kind of our northern geographies. And then I did tail off in our Northern geographies and of course, now in the last week, we've seen that bounce back. So if you think about our periods 8, 9, 10, 8 and 9 were better than 10. It's not unusual for us to see that, especially in the northern geographies and we call our top performing areas West Coast, Midwest we were a little challenged in the back-end on in the Northeast and Great Lakes, which is again up in those northern locations.

Elizabeth Suzuki -- Bank of America -- Analyst

Great. And just sort of a longer-term, can you explain some of the bigger gaps in your margins versus peers on gross margin in particular just mix side versus DIY versus Pro, just can you talk about some of the low hanging fruit on the margin side that over time you think you can get closer to some of your peers.

Tom Greco -- President and Chief Executive Officer

Yeah, what we've called our four key territories Liz that we're executing against, so sales and profit per store where we're making good progress, we started this journey at [Phonetic] 1.5 million, we want to get to a 1.8 million and then there is a number of initiatives to drive profit per store including everything that you would expect inside the four walls of our stores themselves. The supply chain is a very big factor. We talked about that earlier on the call, we're executing against the initiatives there. The category management piece is one that we're excited about where we're standing up essentially a strategic pricing capability next year and we've made a pretty big investment in the new pricing engine, which is going to allow us for regional pricing and an adaptive pricing approach to Omni Channel that's going to deliver a seamless customer experience. We're also driving private label, our customers are really responding well to Carquest, I wish we could roll it out faster to be honest, we've got a number of categories that were initiating now that we're going to continue to drive that. But private label as a percent of sales is a big opportunity for us.

So inside of category management, you've got the ongoing material cost optimization, you've got strategic pricing and you've got a private label as a percent of sales. And then in terms of SG&A, I feel great about where we are. There is a number of initiatives under way there. You saw the performance in the quarter, you're going to continue to see that going forward. And then there is the ERP system that Jeff is executing against for finance where we're -- essentially a lot of the SG&A initiatives are about the -- the integration of the company, which is now well under way. Okay.

We are integrating the company in many places, we've already done workday in terms of HR systems , we're in the process of ERP, talked about warehouse management systems and Sri Donthi who is our Chief Technology Officer is doing a lot of things in the IT world to bring the systems together

Elizabeth Suzuki -- Bank of America -- Analyst

On the private label point specifically, I mean, what percentage of your sales is that now and how big do you think that can ultimately get.

Tom Greco -- President and Chief Executive Officer

Yeah, we're in. It depends how you look at this, we have different, different, different categories where we see big opportunities there but we think we're well under penetrated versus peers. I know that there has been a lot of commentary on that. But when we do the benchmarking we feel that there is an opportunity for us to significantly grow private label as a percentage of sales. And I think this year, we're up about a point Liz, but there's still a lot of room to grow in terms of percentage of sales.

Elizabeth Suzuki -- Bank of America -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Mike Baker with Nomura. Your line is open.

Michael Baker -- Nomura -- Analyst

Thank you. two questions, one, if I'm right about my math, it looks like the 4th quarter, the midpoint of the guidance, if just you sales and the implied operating profit, it looks like you're looking for an operating profit increase is better than you've done year-to-date. I get about 60 basis points at the midpoint. And I guess related to that an improvement in the operating profit dollar growth, is that right? And if so why should the 4th quarter, margins on a year-over-year basis look better than they have year-to-date?

Tom Greco -- President and Chief Executive Officer

Yeah, no, I think you're directionally correct. Again we know we're going to have headwinds in the gross margin. We're going to be working very hard to overcome those -- I really like to see a positive gross margin counter from a rate basis year-over-year, but a lot of the efforts that we're seeing within SG&A, we talked about standing up and being able to leverage labor in the 4th quarter. 4th quarter it's a volatile quarter, but what we've seen so far, going into the quarter, we think we can get a significant amount of leverage in terms of the SG&A, that's really going to drive that growth on a year-over-year basis.

Michael Baker -- Nomura -- Analyst

Okay. So it's in the SG&A side?

Tom Greco -- President and Chief Executive Officer

It also about supply chain. Look we improved leverage slightly and that included these one-time costs, but we're not going to see again in the 4th quarter. So our expectation is that supply chain is going to continue to leverage in even more significantly in the 4th quarter.

Michael Baker -- Nomura -- Analyst

Okay, understood. And then one more if I could, just on the Speed Perks, where are you -- is this just a catch-up in terms of the offering to customers relative to your competitors or are you now getting more aggressive in prices, this has always been as space that has been thought of as being very rational in pricing, but you're talking a lot about a new loyalty program and presumably better for the customer. So we are in pricing the space. Are you getting more aggressive versus peers or you just catching up to them?

Tom Greco -- President and Chief Executive Officer

Yeah, I think it is a rational environment. Let me start by saying that, but we do feel we have the best offer in the industry. There is a number of drivers to that, Mike, that we feel pretty good about and the receptivity has been fantastic. I mean our team members are incredibly enthusiastic about it. They are talking to the customers about it. They can see the -- we've allowed them to see the status of the customer on the point of sale systems. So they're talking it up in the stores. We think we can get the percentage of transactions up significantly. If you benchmark versus broader retail, we are very low, and it's important that we have that first-party data we want to know what kind of car somebody drives. We want to know everything about that person in terms of what they're buying in our stores and today, we have a lot of customers who come in but we don't know that. So this is our opportunity to get them into the program, and make our offering much more sticky. So that's the intent behind it. That's what we saw in the lead markets, and that's what you're going to see us do.

Michael Baker -- Nomura -- Analyst

Okay. So effectively, you're getting more people to sign up by giving them a better offering?

Tom Greco -- President and Chief Executive Officer

Yeah. Our offer is, we believe the best in the industry right now. We do.,

Michael Baker -- Nomura -- Analyst

And so, is there the risk that others follow you in terms of that offering?

Tom Greco -- President and Chief Executive Officer

Yeah, I can't comment on what others are going to do. I just feel that our program is one that can really help us get the first party data we need to drive share of wallet with existing customers. We know that they don't buy all of their auto parts needs in our stores. That's a fact. We've got a very clear picture on the various levels. We've got 3 levels within the platform. We have our lead members. We have our BIP . We have our club members and we have a pretty good idea of what our share of wallet is in each of those peers and the goal obviously is to drive more and more people up -- graduate people up the ladder. So that their share wallet increases.

Michael Baker -- Nomura -- Analyst

Okay, thank you. Understood.

Operator

Thank you. Our next question comes from Seth Basham with Wedbush. Your line is open.

Seth Basham -- Wedbush -- Analyst

Thanks a lot and good morning. I just had a couple of follow up questions diving into gross margins a little bit more deeply. First of all, in terms of the supply chain leverage in the quarter. A, would you care to quantify and B, could you give us some color as to where it's coming from, is it from freight rates or your stem miles et-cetera?

Tom Greco -- President and Chief Executive Officer

Yeah, it was relatively minimal now granted, we did have the cost of the work stoppage that we called out that was in the number and we still leverage. So I feel pretty good about it. So if I take that cost out, we actually did pretty well. It's really across the board. I mean we're executing better in the DCs. I think we're managing our turnover much better in the DCs as we said and that allows us to get our unit fees per hour, all of those picking, packing, receiving all of those things that need to be done flawlessly. We're making progress on.

Clearly, we are starting to see benefits by optimizing our fleet. We're going to see much more of that over time. We start to get to cross banner that's where you're going to see the big numbers come out. We have fewer distribution centers now. I mean, we're now up to -- we've announced a total of 4, and we still got the [Phonetic] Erma facility to close in balance of this year early part of next year, but that will be four or less buildings. Right. So you've got all of the reduced cost associated with that.

I think we're working much better across the banners. So Reuben is looking across all of the banners of AAP to figure out how to be more productive in terms of how we move things around. We move a lot of auto parts around in this company. So moving around less is going to save us money. So finally, safety is a improving inside of our buildings that doesn't show up necessarily in supply chain, but it's important, it shows up in SG&A. So I think the productivity agenda for supply chain is when we feel really good about. And I think we're starting to see the benefits from.

Seth Basham -- Wedbush -- Analyst

Got it. That's helpful color and just other piece of gross margin, I was interested in is the impact from mix, mix shift the online channel first any category mix shifts that you experienced this quarter?

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Yeah, we did see headwinds associated with mix, and we look at it, sort of 2 different ways. One is the channel or banner mix and as expected, we continue to see the shift from DIY to Pro. Your question on the product mix, we did see it in two categories, one was in batteries and the other was in wipers and the first one was just a mix within the category. The second one was just broader of volume out of the category, which is a very, very high margin categories. So that's what we saw in terms of category mix.

Seth Basham -- Wedbush -- Analyst

Got it. Either of those mix shifts impact to your gross margins, more or less than the last quarter,?

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

They are about the same.

Seth Basham -- Wedbush -- Analyst

Thank you.

Tom Greco -- President and Chief Executive Officer

Just to add one thing on that, Seth, I mean obviously we -- the question came up earlier, but we fully contemplate all the mix changes that are going on inside the industry as we guide and look at our go-forward plans, whether that's our long-term plan or 2020. So all of the shift to online, the shift to pro, the shift to large customers and Pro, those are all contemplated and we end up netting out from that. So those are known headwinds that we believe are going to happen one way or the other.

Seth Basham -- Wedbush -- Analyst

Thank you.

Operator

Thank you, this concludes the question-and-answer session. I would now like to turn the call back over to Tom Greco for closing remarks.

Tom Greco -- President and Chief Executive Officer

Well, thanks everyone for joining us today. As you heard this morning, we're going to continue to work diligently to execute our strategic objectives and we're confident we're putting the necessary steps in place to deliver growth in the balance of 2019 and beyond. We recognize we still have work to do, particularly in DIY but we believe we're on the right path to 60. I'm proud of the team we have in advance and I'm grateful for our team members unrelenting focus on saying yes to the customer while creating significant long-term shareholder value growth.

Before we conclude, and in order of Veterans Day yesterday, I want to take a moment to thank our veterans from all branches of the military for their service. It goes without saying that we are all deeply embedded for their sacrifices including our more than 6,000 Advance team members who previously served. We are honored to partner with several organizations to recruit, support and engage with service members, including building homes for heroes the USO and hiring our heroes. We're committed to fully further the partnership with these great organizations working together to support our veterans.

Thanks for joining us this morning and we look forward to sharing our 4th quarter results and 2020 outlook with you in February.

Operator

[Operator Closing Remarks]

Duration: 76 minutes

Call participants:

Elisabeth Eisleben -- Senior Vice President, Communications and Investor Relations

Tom Greco -- President and Chief Executive Officer

Jeff Shepherd -- Executive Vice President and Chief Financial Officer

Michael Lasser -- UBS -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Seth Sigman -- Credit Suisse -- Analyst

Chris Horvers -- J.P. Morgan -- Analyst

Matt McClintock -- Raymond James -- Analyst

Gregory Melich -- Evercore ISI -- Analyst

Daniel Imbro -- Stephens Inc. -- Analyst

Chris Bottiglieri -- Wolfe Research -- Analyst

Kate McShane -- Goldman Sachs -- Analyst

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Elizabeth Suzuki -- Bank of America -- Analyst

Michael Baker -- Nomura -- Analyst

Seth Basham -- Wedbush -- Analyst

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