Tom Greco
President and Chief Executive Officer at Advance Auto Parts
Thanks, Elisabeth, and good morning, everyone. Before we begin, I'd like to thank our entire Advance team and Carquest independent partners for their dedication throughout Q2. Thanks to their relentless focus on improving the customer experience and disciplined execution of our strategy, we delivered double-digit adjusted diluted earnings per share growth in the quarter.
I'll begin my remarks today with a review of our Q2 performance, as well as the factors that led to the revisions made to our full year guidance outlined in our press release. I'll then discuss the consistent progress we're making on our primary strategic initiatives before turning it over to Jeff to review our Q2 financial performance, including an update on cash returns to shareholders.
In the second quarter, we remain focused on the execution of our strategy. Consistent with this, we delivered another quarter of growth in net sales and adjusted operating income, underscored by adjusted operating income margin expansion. Q2 2022 was our ninth consecutive quarter of year-over-year adjusted diluted EPS growth, including a 10% increase versus Q2 2021.
Notably, Q2 adjusted diluted earnings per share of $3.74 was a quarterly record for Advance Auto Parts, and grew 72% on a three-year stack when compared with Q2 2019. We continue to invest in our business while returning approximately $700 million in cash to our shareholders in the first half of 2022.
Our comparable store sales declined by 0.6% in Q2, while increasing 12.7% on a three-year stack. As we're now opening new locations to expand our footprint, our net sales grew faster than comp sales and were up 0.6%.
Our deliberate move to increase own brand penetration, which carries a lower absolute price point, reduced both net and comp sales by approximately one full point with a disproportionate impact to Professional.
Moving to margins, we are pleased that we are able to deliver a 166 basis point increase in our adjusted gross margin rate in Q2. A key element of this improvement is the execution of our strategic shift to own brands within our product mix, as just mentioned, which provides a much higher margin rate.
In Q2, owned brands as a percent of overall product mix were up over 200 basis points. As expected, our elevated SG&A costs year-over-year partially offset our adjusted gross margin expansion. Overall, in Q2, our 11.7% adjusted operating income margin was the highest quarterly rate Advance Auto Parts has reported in seven years.
I'll now shift to more details on our sales performance in the quarter and the factors that led to our updated guidance. After a late spring contributed to a stronger sales at the start of the quarter, comp sales softened and turned negative with final results below our expectations, primarily driven by DIY.
In terms of category growth, fluids and chemicals, including motor oil as well as batteries and brakes were the top performers in Q2. Our regional sales performance was led by the Mid-Atlantic and West regions.
While we contemplated several external factors when we provided our initial 2022 guidance in February, increased inflationary pressures, particularly in fuel, were well above our planned estimates in the second quarter. Rising inflation and significant year-over-year cost increases are having a disproportionate impact on the discretionary spending of our core DIY consumer. As a result, our low single-digit net sales decline in the quarter in DIY drove our sales shortfall in the quarter.
There are a couple of factors to consider surrounding how a more challenging economic environment impacts the DIY customer. First, the majority of DIY jobs are considered non-discretionary. In this case, DIYers must address the problem and repair their vehicle as soon as possible. These are what we call break fix or failure-related categories.
Failure or non-discretionary DIY categories like batteries and brakes, performed well in Q2. On the other hand, some categories are more discretionary and therefore, can be deferred. As an example, in Q2, we saw softness in appearance chemicals and accessories, which are some of our better performing categories during the height of the pandemic.
As we enter the back half of 2022, we expect continued softness in DIY discretionary categories. Despite recent moderation in fuel prices, overall inflation, including fuel, remains substantially higher than 2021, which we expect will pressure the DIY customer. This is the primary driver of our updated guidance.
Separately, as we consider our balance of year guidance and sales outlook, the biggest opportunity we have to build shareholder value is to complete the integration of AAP and grow our margins. As we've consistently communicated, we remain laser-focused on these objectives and are executing our plan. This includes a relentless focus on category management, which is our largest initiative to drive profitable growth.
As part of category management, our new strategic pricing tools are fully implemented. We're now leveraging the enhanced capabilities these tools have to offer, which enables us to differentiate pricing by category, region, store and customer. We've also significantly improved visibility into the return on investment surrounding our discounting practices by leveraging Advance analytics to gain insights on the competitive landscape and evaluate our strategic pricing actions. This is helping determine the quantitative and qualitative effectiveness of these actions.
On the professional side, we're now able to measure sales lift on different levels of discounting real time and at a much more granular level. Knowing price is not the most important driver of choice for professional customers, we're becoming more disciplined in eliminating unprofitable discounts. An important byproduct of this strategy enables us to redeploy resources to enhance our service to our most loyal and fastest-growing customers.
Our disciplined pricing strategy is an important value driver, which we expect to contribute to further margin expansion over the long term. In the short term, we expect this may result in temporary sales softness in our professional business in the back half, which we factored into our updated guidance. We firmly believe this is the right approach for AAP to drive sustainable top line growth and margin expansion.
Looking forward, while we're cautious about the consumer and macroeconomic outlook, we remain bullish on the resilience of our industry and the disciplined execution of our strategy. At an industry level, key drivers of demand remain positive, including the outlook for the car park and aging fleet and vehicles entering the sweet spot. A critical variable we're watching closely is miles driven, which in Q2 still remains slightly above 2021 levels.
I'll now briefly discuss the progress we've made on some of the drivers of total shareholder return outlined in our April 2021 strategic update. An important driver of our TSR agenda is to deliver profitable growth while building sustainable capabilities to drive long-term competitive advantage.
Starting with Professional, our long-term growth strategy concentrates on what our customers value most, extensive parts availability, outstanding customer service and reliability of delivery. We offer customers a comprehensive multi-brand assortment of high-quality national brands, owned brands and OE parts, ease of ordering, as well as consistent reliable delivery.
By leveraging enterprise assets, we are strengthening our value proposition, with the tools our customers need to grow their business profitably and ensure they have the right part at the right time. As we grow together with pro customers, we continue to add important program elements to help our customers compete.
New vehicle technologies such as hybrid and electric, along with an industry-wide technician shortage, creates challenges for professional customers. This led us to create enhanced training and technology platforms that help customers provide comprehensive repair services and recruit technicians.
Our focus to strengthen the Pro customer value proposition is demonstrated by growth in our strategic accounts and TechNet customers. The successful rollout of DieHard batteries and professional garages continues to drive sales growth and bring new customers to these large accounts. Carquest branded parts are also gaining momentum as a result of their high quality, evidenced by very low return and defect rates.
Separately, we're continuing to leverage Worldpac's best-in-class model for professional customers across the enterprise. Reliable delivery is vitally important and enables installers to more effectively schedule technicians and provide their customers with accurate service times. Now when an order is created, we've enabled all of our digital platforms to provide delivery times like Worldpac has done for many years.
In DIY omnichannel, our number one priority is to ensure our customers have the parts they need to do the complete job. We continue to work on improving store in-stock rates as global supply chain constraints moderate. This includes adding more depth of parts in the front room and leveraging our dynamic assortment tool to improve parts availability for the complete job.
Our highly regarded owned brands are a differentiator for Advance. Specific to DieHard, we continue to build this brand and delivered another quarter of double-digit sales growth. This ongoing strength is due in part to the successful launch of DieHard Hand & Power Tools, as well as our latest product innovation, the exclusive DieHard EV and hybrid battery.
In terms of building awareness and increasing loyalty, the enhancement of our Speed Perks program through the launch of Gas Rewards has been a highlight for DIY this year. Our field team has dialed the execution of this initiative in 2022. Year-to-date, active Speed Perks members have increased to 13 million. In Q2, we increased Speed Perks as a percent of both transactions and sales by over 300 basis points compared with the prior year quarter.
Rounding out our top line growth initiatives, we're executing our new store opening plan. In the quarter, we opened 43 new locations, including the recent opening of our flagship store in downtown Los Angeles. Our California expansion is already contributing to share gains in the West. Year-to-date, we've opened 78 new locations and remain on track to deliver our annual guidance of 125 to 150 new stores and branches.
I'll now shift to the progress we're making to capitalize on our significant margin expansion opportunity, starting with category management. Our strategic pricing strategy starts with a deep understanding of the customer decision journey for each job, including the role of price. Obviously, the importance of price varies by both channel and job based on a variety of factors. As we execute our strategy, we can remain competitively priced, remove unprofitable discounts and drive further gross margin expansion.
Separately, we're streamlining and simplifying our supply chain to improve service and reduce cost. We continue to rollout a single warehouse management system across the Advance and Carquest DC network and are on track to complete the implementation by the end of 2023. We've also begun activating elements of our labor management suite of tools across our DC network and are beginning to see productivity benefits.
Finally, in terms of SG&A, we're leveraging our labor management tool to do a better job of matching hours to transactions in our stores. This helps improve scheduling to ensure we're there when the customer needs us and offsets rising cost per hour inflation when transactions soften.
In summary, during the second quarter, we're pleased that we were able to expand adjusted operating margins and deliver a record quarter of adjusted diluted EPS. We also returned nearly $700 million in cash to shareholders in the front half of the year. Over the long term, we remain focused on building a stronger customer value proposition for both Pro and DIY customers.
While we expect that both the consumer and retail environments will be challenging in the back half of 2022, we also believe that the continued disciplined execution of our initiatives will enable sustainable long-term growth and margin expansion going forward.
I'll now turn the call over to Jeff to review our Q2 financials and updated outlook for the balance of the year. Jeff?
