Genuine Parts Co

NYSE:GPC

Earnings Call Analysis

GPC Posts Solid Q3 Results, Confirms Full-Year Guidance

In the third quarter (Q3) of 2023, Genuine Parts Company (GPC) faced some headwinds, including a declining U.S. auto business and one less selling day, but still managed to report solid results. Total sales increased by 2.6% to $5.8 billion with a modest 0.5% rise in comparable sales and a notable 130 basis point expansion in gross margin to 36.2%. The strong sales performance in the International Auto and Industrial segments offset the U.S. Auto segment's sales decline. Despite some execution challenges, GPC is taking active steps to improve service and regain market share in the U.S. auto business. Net income rose 11.7% to $351 million, or $2.49 per share, compared to the previous year. GPC's full-year guidance includes 4%-6% sales growth, with 2%-4% expected in the Automotive segment and 4%-6% in the Industrial segment. Gross margin is forecasted to improve by 50-60 basis points, and SG&A leverage is expected at 30-40 basis points. They project free cash flow of $900 million to $1 billion and plan capital expenditures of $375 million to $400 million for the full year.

Sales Performance and Market Dynamics

In the recent quarter, Global Industrial achieved sales of $2.2 billion, marking a 0.6% increase from the previous year, while Global Automotive sales rose to $3.6 billion, up by 3.9%. Interestingly, both segments faced a negative impact from having one less selling day in the quarter, with estimated detractions of 160 basis points for Global Industrialand 100 basis points for Global Automotive. Comparable sales saw a modest rise of 0.3%, a notable contrast against the same period last year, which enjoyed a surge at approximately 20%. E-commerce channels have shown impressive performance, with almost a 30% growth year-to-date, now constituting over 30% of total sales – a significant increase from 2021.

Profitability and Efficiency Optimizations

Despite mixed results in sales, both the Industrial and Automotive sectors saw profit increases — 16.6% for Industrial, leading to a strong profit of approximately $283 million, and 4% for Automotive, totaling $322 million in profits. Global Industrial segment margins experienced significant expansion, contributing to a healthy profit increase. On the other hand, Global Automotive margins remained flat at 8.9% compared to the previous year, despite the profit rise.

US Market Challenges and Strategic Adjustments

The U.S. Automotive sector did not meet expectations, facing execution setbacks and a tightening market influenced by higher interest rates and persistent cost inflation. To address these issues, the company is boosting operational rigor in stores and distribution centers, revamping inventory strategies with analytics tools, and securing product availability by collaborating with alternative suppliers.

International Markets Achieving Growth

International automotive markets have been strong performers, with Canada reporting a 4% sales uptick in local currency, Europe with an 11% sales increase, and the Asia Pacific region achieving a 6% sales boost. These figures encapsulate consistent execution and successful market strategies across various geographies.

Financial Health and Guidance Update

Overall, the company's financial health appears robust, with gross margins improving by 130 basis points to 36.2%. The expansion of segment profit margins by 70 basis points is a highlight, with total segment profit up 9.6% to $605 million. Net income for the quarter increased by 11.7%, reaching $351 million or $2.49 per diluted share. Cash flow remains strong, with $1.1 billion generated from operations and $733 million in free cash flow. Looking ahead, the company maintains its sales growth guidance at 4% to 6% and expects Global Industrial segment margins to expand by at least 150 basis points. Diluted earnings per share are projected to be between $9.20 and $9.30, signaling an expected increase of roughly 10.3% to 11.5% from 2022.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen. Welcome to the Genuine Parts Company Third Quarter 2023 Earnings earnings conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Tim Walsh, Senior Director of Investor Relations. Please go ahead, sir.

[Ishan Majumdar, analyst]

Thank you, and good morning, everyone. Welcome to Genuine Parts Company's Third Quarter 2023 Earnings Call. Joining us on the call today are Paul Donahue, Chairman and Chief Executive Officer; Will Stengel, President and Chief Operating Officer; and Burton Napier, Executive Vice President and Chief Financial Officer.

In addition to this morning's press release, A supplemental slide presentation can be found on the Investors page of the Genuine Parts Company website. Following our prepared remarks, the call will be open for questions. If we're unable to get to your questions, please contact our Investor Relations department. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release.

Today's call may also involve forward-looking statements regarding the company and its businesses as defined in the Private Securities Litigation Reform Act of 1995. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. With that, let me turn the call over to Paul.

[Paul Donahue, executive]

Thank you, Tim, and good morning. Welcome to our third quarter 2023 earnings conference call. I'd like to start this morning with a few remarks on our overall performance before turning it over to Will to cover the highlights of the automotive and industrial businesses. And then Bert will get into the details of our financial performance before we open the call to your questions.

To recap the third quarter, total GPC sales were $5.8 billion, an increase of 2.6% compared to last year. Total company segment margin was 10.4%, a 70 basis point increase from last year, and diluted earnings per share were $2.49 and an increase of 11.7% from adjusted diluted earnings per share in the same quarter last year. I want to take this opportunity to give a call out to our GPC teammates around the globe as we delivered our 13th consecutive quarter of double-digit EPS growth.

Our third quarter results reflect our strong operating discipline and our ability to improve our operating margins and profits despite a more challenging top line environment. Overall, we continue to benefit from solid industry fundamentals in both the automotive and industrial end markets, including rational pricing environments in both segments. In our global automotive business, the underlying fundamentals of the aftermarket remained favorable, increasing miles driven and aging and complex vehicle fleet and high vehicle prices and financing costs.

Within our Global Industrial business, we benefit from a highly diversified portfolio of customers and end markets with overall growth driven by manufacturing and opportunities with onshoring and reshoring trends. Our automotive and industrial businesses are mostly break fix and nondiscretionary in nature. And as a result, we remain focused on offering solutions that support our customers to have the right part in the right place at the right time across both business segments. Sales in our industrial business were up slightly in the third quarter, and the team continues to deliver exceptional profit conversion as evidenced by 180 basis points of segment margin expansion. During the quarter, demand trends were positive, but continued to moderate relative to the first half as expected. Over time, Motion has transformed its business into an industrial solutions provider with a compelling value proposition. Motion serves diverse end markets with many of its product offerings being highly technical in nature.

In addition, with the acquisition of KDG, Motion has added scale and enhanced its industry-leading offering of value-added services, such as fluid power, automation, conveyance and repair. The Motion team is focused on executing on our strategic initiatives to expand gross margin while remaining disciplined on cost, driving further segment margin expansion. Turning now to our global automotive business. We continue to see strong results across our international automotive businesses with the eighth consecutive quarter of double-digit sales growth in Europe and record sales and profits in Australia and New Zealand. Our teams continue to focus on our key organic initiatives in addition to our bolt-on acquisition strategy. During the quarter, we announced the acquisition of Gaudi, one of the largest independent players in Spain, Europe's fifth largest car park, building on our 2022 acquisition of Lasan, Gaudi mainly operates in the Catalonia and Madrid regions and creates further scale and a national platform across Iberia with the addition of 22 stores to our market-leading position. We expect this acquisition to be accretive to our European business post synergies. We welcome the Goudy team to GPC. While we were pleased with the growth internationally, the U.S. automotive business performance was below our expectations with sales down 1.1%. Let me take a moment to share a few thoughts on the performance at U.S. auto. There is no doubt we've seen some challenges in 2023 from the record levels of inflation seen a year ago, which benefited the industry and have faded throughout 2023, as anticipated the challenges across our own execution. Our year-to-date results demonstrated that we have not operated to our full potential in 2023. We -- as many of you know, success in the automotive aftermarket is highly dependent on availability of inventory, particularly for the important IFM customer, which represents approximately 80% of our automotive revenue. Further, the automotive aftermarket has demonstrated consistent performance throughout all economic cycles. As we close out 2023, we are taking actions to better service our customers and ensure our commercial activities are where they need to be. Under the leadership of Randy Bro, we are confident the U.S. Automotive team has taken the measures to improve execution with our customers. Will plans to discuss these actions in greater detail. And before passing the call over to Will, we'd like to highlight our 2023 sustainability report, which we published earlier this month. At GPC, we embrace our responsibility to build a more sustainable and equitable future for our planet. This year's report highlights the progress we've made at the company to measure and reduce our carbon footprint. This year, we are proud to report that in 2022, we further improved the measurement of our carbon emissions and have reduced Scope 1 and Scope 2 emissions by over 10%.We encourage you to visit the sustainability page on our website for more information on our progress. So in closing, our performance in the third quarter, again, demonstrates our unique and differentiated portfolio. Will and I continue to visit with our global teams, including a recent trip to Europe and Australia. The teams are investing in the right areas of the business to drive long-term profitable growth, and they couldn't be more energized. We enjoyed the benefit of strong global brands and the GPC culture is alive and well across all our global operations.

Further, we remain committed to the strategic investments and initiatives that we highlighted at our Investor Day back in March. We believe these investments are critical to our long-term success and are contributing to our financial performance both now and for years to come. We want to thank each of our 58,000 GPC teammates for their hard work and continued dedication to serving our customers around the world.

So with that, I'll turn the call over to Will.

[William Stengel, executive]

Thank you, Paul. Good morning, everyone. I want to start by also thanking the global GPC team for their ongoing commitment to serving our customers. We appreciate the hard work every day to deliver parts and solutions that help keep the world moving. It's great to see the teams work together as 1 GPC team to deliver customer success. .

We do this with coordinated focus on our foundational priorities, including talent and culture, sales effectiveness, technology, supply chain and emerging technology complemented by a disciplined M&A strategy. To that end, I'd like to take a moment to specifically recognize the global teams for the progress on our numerous in-flight initiatives around the world.

We're executing a broad set of initiatives across our global business and making strong and steady progress. The teams are simultaneously working to evolve the business for the better while delivering on our day-to-day service commitments to our customers. As we detailed at our Investor Day, we believe we have compelling opportunities to invest back in the business and are excited about the progress and outlook. As Paul mentioned, we have great examples of progress around the world. Specific examples range from state-of-the-art distribution centers with automation and next-generation technology, enhanced data visibility and analytics capabilities, added talent and expertise modernized technology platforms to enhance growth and productivity and much, much more. We know that teams are working hard to execute the body of work. So thank you very much.

Now turning to the details of the business segment results. Before I get into the specifics, I should mention that the third quarter had 1 less selling day in the U.S. when compared to the third quarter last year. This impacted our total sales and comparable sales growth versus prior year for both our industrial and automotive segments. During the quarter, total sales for Global Industrial were $2.2 billion, an increase of 0.6%. We estimate that the 1 less selling day negatively impacted global industrial sales growth by approximately 160 basis points.

Total sales for Global Automotive were $3.6 billion, an increase of 3.9% with a negative impact to global automotive of approximately 100 basis points due to the 1 less selling day. Now turning to the Global Industrial segment. Our quarterly results were essentially in line with our expectations, and we remain ahead of our year-to-date plans.

Recall that our expectation was for industrial growth to be lower in the second half of the year compared to the first half. Comparable sales growth increased 0.3% and in the third quarter versus the same period last year. The same period last year was our highest quarterly comp during the year at approximately 20%. The monthly average daily sales cadence through the quarter was relatively consistent with each month of the quarter up low single digits.

During the quarter, Motion saw a more mixed result across its various end markets with the strongest growth coming from industries such as food products, iron and steel and mining offset by relative softness in equipment and machinery. As mentioned, Motion continues to make excellent progress with initiatives including sales excellence, pricing, e-commerce, technology, and supply chain strategies that are helping to win profitable market share. As 1 example, the inside sales team initially formed in 2020 now covers approximately 25% of active customer accounts.

The proactive sales calls are helping to drive profitable double-digit growth across the selling channel with a lower cost to serve. Our technology investments supporting revenue growth are also helping deliver a better customer experience, with nearly 30% growth across e-commerce channels year-to-date and e-commerce now at over 30% of total sales, up approximately 6 percentage points since 2021.

Motion's second new fulfillment center in Fort Mill, South Carolina is another example of exciting progress. This supply chain initiative consolidates various older legacy facilities while improving productivity, efficiency, speed and service to customers. Our first fulfillment center in Lakeland, Florida opened at the end of 2021 and has delivered outsized sales growth a 10% reduction in operating expenses and corresponding profit margin expansion. We'll continue to roll out this strategy with additional fulfillment centers openings scheduled for 2024. In Asia Pac, our Motion team delivered another strong performance in the third quarter with double-digit sales and profit growth. The local teams are energized as reaffirmed by recent independent survey data showing high levels of team member engagement, combined with market-leading customer satisfaction rates.

Motion is a trusted value-add adviser to its customers, and the team has detailed plans to win additional share in this fragmented market. Industrial segment profit in the third quarter was approximately $283 million, up a strong 15.6% and at 12.9% of sales, representing a 180 basis point increase from the same period last year. The profit improvement in Industrial was driven by another quarter of excellent operating discipline in both North America and Australasia.

The accelerated integration of the KDG acquisition has contributed to the strong performance and we will exceed our $50 million synergy estimate by the end of this year. Turning to the Global Automotive segment. Similar to the first half of the year, total automotive sales benefited from our global diversification with our international auto businesses outperforming with mid-single-digit to double-digit sales growth in local currency. Comparable sales for the Global Automotive segment increased 0.6% in the third quarter, and by geography, include low to mid-single-digit growth in each of our international businesses and comparable sales of negative 2.9% in the U.S.

The moderation in inflation continues to be a significant factor in our year-over-year performance. As expected, global automotive sales inflation moderated in the third quarter to low single digits from mid-single digits in the second quarter. By comparison, in the third quarter of 2022, global Automotive benefited from high single-digit levels of sales inflation, which includes a benefit in the U.S. of approximately 10%. We expect sales inflation in global automotive to be low single digits in the fourth quarter.

Total automotive segment profit in the third quarter was $322 million, up approximately 4% versus the same period last year. and segment operating margin was 8.9%, flat with last year. In the quarter, each of our international geographies delivered margin expansion while U.S. Automotive segment margin was down due to expense deleverage related to planned investments and the impact of lower sales. Now let's turn to an overview of our automotive business performance by geography.

In the U.S., as Paul outlined, automotive sales declined approximately 1% in the third quarter, with comparable sales down 2.9%, which includes the negative impact of 1 less selling day year-over-year, as I had previously mentioned. Further, the third quarter of last year included the benefit of sales associated with our NAPA Expo. A sales event held approximately every 5 years which negatively impacted our year-over-year comparisons by an estimated 170 basis points. Collectively, these 2 factors represent approximately 340 basis points of headwind in evaluating our year-over-year growth performance in the U.S. In the third quarter, sales to both commercial and retail customers were down slightly with commercial and DIY essentially performing at similar levels.

Our commercial business was mixed in the quarter as fleet and government outperformed and major accounts remained pressured driven by the impact of tighter market conditions on the end consumer. The average daily sales cadence by month was July, slightly up, August down low single digits and we exited the quarter with September up low single digits. It's fair to say that our performance in the U.S. Automotive business was below our expectations. And we believe the underperformance is a combination of execution and further tightening of market conditions. On the execution side, we have not been crisp enough in the field with service to our customers.

In addition, while supply chains have improved significantly post pandemic, we've experienced some lingering issues with inventory availability in a few product categories. Finally, the impact of tightening market conditions, including higher interest rates and persistent levels of higher cost inflation has created a more cautious trading environment for our customers.

Despite the challenges we're taking action. First, in terms of service in the field, we've taken actions to intensify our operational rigor at stores and DCs as well as further enhance our inventory strategies, powered by investments we've made in data analytics tools. Second, we've experienced fill rates below our acceptable levels in a few product categories. This fill rate performance has taken too long to remedy post pandemic.

And as a result, our merchandising teams partnered with alternative suppliers to address the issue to ensure our markets are properly stocked. Finally, while we can't control the overall market conditions, we are working closely with field sales to drive incremental growth opportunities and we continue to be disciplined on costs, including ongoing cost actions, which Burt will discuss further.

As mentioned, we've underperformed our expectations at U.S. Automotive in 2023, but with new leadership in roll for 100 days now, the team has clarity of the priority opportunities has taken action and are quickly moving to get where we need to be. With solid industry fundamentals and the team's competitive drive to win, we're confident our U.S. automotive team is positioned to overcome our recent challenges and execute on our long-term strategy to profitably grow share.

In Canada, sales grew approximately 4% in local currency during the third quarter with comparable sales growth of approximately 3%. During the quarter, our automotive and heavy-duty businesses grew mid-single digits and low single digits, respectively, and we are pleased with the Canadian team execution of their strategic initiatives despite macroeconomic pressures and a cautious consumer. In Europe, our automotive team delivered another strong quarter with total sales growth of approximately 11% in local currency and comparable sales growth of approximately 7%. We continue to drive strong growth and market share gains across our European markets due to the ongoing execution of our initiatives and strategic value-creating acquisitions. During the third quarter, we delivered mid-single-digit to double-digit growth across each of our geographies, driven by continued wins with key accounts, winning higher share of wallet with existing accounts and expanding the NAPA brand in the region. In addition, the team is making excellent progress on our new national distribution center in France that Paul Burton had a chance to visit. Scheduled to open in 2024, this 500,000 square foot facility helps evolve the network strategy and upgrades the level of technology and automation within our supply chain. This effort complements a similar investment in the U.K. and the teams are working well to leverage best practices.

We expect these facilities to further drive productivity and efficiency as well as increased service levels to our customers. In the Asia Pac automotive business, sales in the third quarter increased approximately 6% in local currency, with comparable sales growth of approximately 5%. Sales for both commercial and retail were solid in the third quarter with retail growth slightly above commercial. Having recently visited with this world-class team, it's impressive to see the team consistently executing at such a high level and delivering another quarter of record sales and profitability. Our Asia Pac team is driving market share gains, improving profitability, increasing its employee value proposition, all while executing strategic initiatives to create long-term value.

In closing, the global GPC team delivered solid third quarter results driven by the benefit of our strategic business mix and global geographic diversification. We remain committed to our plans for continued growth through the balance of the year despite a dynamic environment. We're confident our teams are focused on the right long-term strategic initiatives that will deliver customer solutions and create value. Thank you again to the entire GPC team for your hard work, your performance and your dedication to taking care of our customers.

With that, I'll turn the call over to Bert.

[Herbert Nappier, executive]

Thank you, Will, and thanks to everyone for joining us today. Our performance in the third quarter reflects the operating discipline in our business alongside the focus by our teams to serve our customers, which is evident with our double-digit earnings growth for the quarter. Before I walk you through the key highlights of our third quarter performance, I would like to note that we had no nonrecurring items in the third quarter and 9 months of 2023. Our comparisons to the prior year, however, excludes certain nonrecurring items in 2022, primarily related to the integration of KDG Total GPC sales increased 2.6% to $5.8 billion in the third quarter of 2023.

This reflects a 0.5% improvement in comparable sales which includes low single-digit levels of inflation, a 1.7% contribution from acquisitions and a 0.5% favorable impact of foreign currency. Our sales performance reflects ongoing strength in international auto, continued but moderating growth in industrial, offset by a decline in sales at U.S. Automotive.

Further, 1 less selling day in our U.S. businesses negatively impacted sales growth by an estimated 120 basis points. Our ongoing execution of our strategic pricing and sourcing initiatives were the primary driver of our strong gross margin expansion. Gross margin was 36.2% in the third quarter a 130 basis point improvement from the same period last year.

Given our performance year-to-date, we now expect our gross margin rate for the full year to improve 50 to 60 basis points from 2022 and an increase from our prior estimate of 30 to 50 basis points of improvement. Our total operating and nonoperating expenses in the third quarter were $1.6 billion or 28.2% of sales.

This compares to total adjusted expenses of 27.5% of sales in the third quarter last year or an increase of approximately 70 basis points. The SG&A deleverage in the third quarter is primarily attributable to a few key factors: planned investments in wages and benefits for our teams and increased spending in technology to support our strategic initiatives. These investments in wages and benefits for our team members impacted SG&A by approximately 35 basis points, while investments in IT and digital impacted SG&A by approximately 25 basis points in the third quarter.

As you heard earlier from Will, within SG&A, the U.S. automotive team has been working hard to execute on cost improvement actions. The team has been successful in reducing headcount, implementing a hiring freeze and driving discipline around travel and other discretionary costs. These actions are on track and equate to approximately 15 to 20 basis points of benefit, which is embedded in our annual guidance and year-to-date results. For the full year, we continue to expect SG&A deleverage of 30 to 40 basis points based on our investments in our team members and IT.

Our third quarter revenue growth and gross margin expansion drove total segment profit of $605 million, up 9.6%. The Segment profit margin was 10.4%, a 70 basis point increase from last year and our seventh consecutive quarter of margin expansion. This quarter's segment margin expansion is a clear reflection of the value of our portfolio diversification, highlighted by industrial, which now represents nearly 50% of GPC segment profit. While we delivered strong overall margin expansion driven by Industrial, our global automotive segment margin was flat due to U.S. automotive. We've demonstrated consistent improvement throughout 2023, and as Global Auto segment margins improved again sequentially.

Further, we have identified opportunities to improve execution at our U.S. automotive business and position the business to take share. With the combination of operating discipline and ongoing investments in strategic initiatives to drive further operational efficiencies and productivity for the year, we now expect GPC segment margin expansion of 40 to 50 basis points, an increase of our previous outlook of 20 to 40 basis points of improvement. Our third quarter net income was $351 million or $2.49 per diluted share.

This compares to adjusted net income of $317 million or $2.23 per diluted share in 2022, an increase of 11.7%. Turning to our cash flows. For the first 9 months of 2023, we generated $1.1 billion in cash from operations and $733 million in free cash flow. We closed the third quarter with $2.2 billion in available liquidity, and our debt to adjusted EBITDA is 1.6x, which compares to our targeted range of 2 to 2.5x, highlighting our flexibility and the strength of our balance sheet.

We remain committed to our 4 key priorities of capital allocation, which include the investment in our business through capital expenditures and M&A and the return of capital to our shareholders through dividends and share repurchases. During 2023, we have invested $350 million in capital expenditures, including $145 million in the third quarter. We remain disciplined, investing in initiatives we believe will drive modernization and long-term growth for our business.

As acquisitions remain a key element of our growth strategy, we invested $211 million year-to-date for acquisitions, including the investment in Goudy to expand our market-leading position in Iberia. We continue to generate a robust pipeline of bolt-on acquisition targets for our business. Thus far in 2023, we have also returned approximately $565 million to our shareholders in the form of dividends and share repurchases. This includes $393 million in cash dividends paid to our shareholders and $172 million in cash used to repurchase 1.1 million shares. We remain well positioned with solid cash flows and a strong balance sheet to effectively deploy our capital through any economic environment. Turning to our guidance. We continue to navigate a balanced mix of headwinds and tailwinds as we move into the fourth quarter. With that backdrop, we are reiterating our full year sales guidance and updating our diluted earnings per share guidance previously provided in our Q2 earnings release.

We now expect diluted earnings per share to be in the range of $9.20 to $9.30, an increase of approximately 10.3% to 11.5% from 2022. This compares to our previous outlook of $9.15 to $9.30. Our sales guidance is unchanged, and we continue to expect total sales growth for 2023 and to be in the range of 4% to 6%. By business segment, we are guiding for the following: 4% to 6% total sales growth for the Automotive segment, with comparable sales growth in the 2% to 4% range.

Within this outlook, we expect international Automotive to be at the high end or above this range with U.S. automotive below. We also expect Global Automotive segment margin to be flat to slightly down for the year. For the Industrial segment, we expect total sales growth of 4% to 6% with comparable sales growth also in the 4% to 6% range. As expected, the sales growth within this segment has moderated along with the industrial economy and our outlook includes low single-digit growth in the fourth quarter.

For the year, we now expect Global Industrial segment margin to expand by at least 150 basis points year-over-year. We are reaffirming our outlook for cash from operations and free cash flow. We expect cash from operations to be in a range of $1.3 billion to $1.4 billion and free cash flow to be in the range of $900 million to $1 billion. We continue to plan for capital expenditures of $375 million to $400 million for the full year, which includes incremental investments in technology and supply chain, among others.

In closing, our third quarter double-digit earnings growth demonstrates our ability to improve earnings and expand margins in low growth environments, backed by a strong balance sheet and returns to our shareholders through our dividend. Our teams are delivering on what we said we would do for 2023, including our expectations for mid-single-digit sales growth, gross margin expansion, segment margin expansion and double-digit earnings growth for the full year. We look forward to closing the year strong and reporting on our fourth quarter and full year results on our call in February.

Thank you, and we will now turn it back to the operator for your questions.

[Operator]

[Operator Instructions] And our first question will come from Scott Ciccarelli of Truist.

[Scot Ciccarelli, analyst]

I know your Investor Day wasn't all that long ago, but you guys had outlined some margin targets for each of your divisions. And while we've seen great progress on the industrial side, how are you guys thinking about your automotive margin targets given the performance from the last few quarters?

[Herbert Nappier, executive]

Yes, Scott, it's Bert. Thanks for the question. Look, I don't think we've changed how we're thinking long term. We've got 2 years left on that cycle. And again, as we close out this year, as I mentioned in my prepared remarks, we're looking for global automotive segment to be flat to slightly down. With 2 years left, it's not unusual to get to a 3-year plan a little differently maybe than you started in March and when we announced all that.

But we still feel confident that the levers are there. as we look at the long-term margin expansion, particularly for auto, we got pricing and category management benefits. So when we talk about pricing and sourcing benefits and gross margin expansion, we'll continue to see those levers. And we've got further long-term investments, and that's really how we're thinking about this. We've got some short-term challenges, but a long-term investment around things like supply chain, investments in IT, those remain in early innings. And so we're really still bullish on the long term despite some of this near-term choppiness.

[Scot Ciccarelli, analyst]

Okay. That's helpful. And then given some of the near-term choppiness and you guys are obviously implementing various improvement processes to improve the U.S. auto business. But the way this business typically works is once you lose market share, it's kind of hard to get back. So how are you guys thinking about -- can you actually -- are you guys thinking that you can call that market share back? Or are the changes you're implementing really just kind of patching holes in the ship and stopping incremental share losses?

[William Stengel, executive]

Yes. Scott, it's Will. Let me add a few thoughts. And I'll start by just saying the U.S. automotive team, just to be very clear, is working incredibly hard every day to take care of their customers and be easy to deal with. And as you know, better than anyone, what that means for customers is we've got to be in a position to offer them the right quality part in the right place at the right time and have that transaction be seamless. I -- once that product is available in the market, we needed to efficiently and quickly be efficient and quick to search for the park and then pull the part and get it to the customer. And so when you think about what we're working on every day, we have opportunities probably to be better in each part of that. There's no single point of failure that is recently on these customer needs and we're making good progress. And while we might have been disappointed with recent performance and might indicate that we've given back a little bit of share, we still feel good about what we're working on. We just need to do that body of work with more urgency at a faster pace.

[Paul Donahue, executive]

Scott, I would just add on to that. Look, we've been in this business a long, long time. There's nothing structural that has shifted or changed in our business or in our structure. We know the levers to pull. We'll hit on them. And trust me, there is a sense of [Audio Gap] up and down the organization to get it done. And I have no doubt we'll get it done.

[Operator]

The next question comes from Michael Lasser of UBS.

[Unknown Analyst]

On the U.S. auto business, can you free how much market share you have lost in the more frequent quarter? And how did that compare sort of run rate or that is getting better? Or is it getting worst?

[Paul Donahue, executive]

Michael, can you repeat the last part of that question, you're kind of fading in and out on it.

[Unknown Analyst]

Sorry, Paul. Sorry. Are your shares losses getting better? Or are they getting worse?

[William Stengel, executive]

Yes, Michael, I don't think it's getting worse. Listen, I think we're clearly disappointed with the recent performance. And as I said, that plus some of the performance of our credible competitors would indicate we've given back some share over the last couple of quarters. But maybe a few thoughts to elaborate on the whole share thought which is we've always had strong competition in this profit pool, both large and small. And as I said with Scott, it takes a consistent execution every day to serve those customers. and we just haven't performed to our expectations in '23. I would tell you, we have seen with the supply chain challenges moderating over the last 12 months. Some of our smaller competitors have gotten more healthy as it relates to inventory. And so we're seeing them playing from a different place of strength than they were maybe 12 or 24 months ago. The good news is that we play in a huge market. It's very fragmented. And as Paul said, we know what we need to do to return to a position where we're taking share. But we're not feeling like it's getting worse. We've got a good line of sight of what we're working on and taking action as we talked about on the call.

[Herbert Nappier, executive]

And Michael, I would just add to that, that you really have to break down -- I mean, it's a very broad question. When you start thinking about and talking about market share. It's a very fragmented industry. Yes, you have the big 4, but then you've got independent WDs, scattered throughout the country, along with others. So you really got to look category by category. And what I'm pleased to see, and I'm encouraged to see is that when I look at specific product categories, product categories that move the needle for our business, we have made changes, and we have improved our availability and we've improved our supply chain. And I would tell you, if we're at fault for anything, it took us too long to make those changes. I think we'll touched on that. So yes, no doubt, better days are ahead and the team under Randy's leadership are all over it.

[Unknown Analyst]

My follow-up question is we sticking in the internal spaces influence...

[Technical Difficulty]

[Herbert Nappier, executive]

Michael, it's Bert. You're still cutting out pretty bad. We can't hear you [indiscernible] very you give.

[Unknown Analyst]

So hopefully, that's better. My follow-up question is, some of the share dynamics influence Genuine Parts ability or willingness to do acquisitions in the U.S. auto business right now?

[Herbert Nappier, executive]

Michael, it's Bert. And first and foremost, welcome to the universe of coverage for GPC. Thank you for joining us. We appreciate that. I would say no. I mean, look, we look at what -- what's happening here and as Will and Paul have given me some color on, really, just as something we're managing through here in the near term. The great thing about GPC is that we performed pretty well through all cycles. We've had $1.1 billion of cash generated year-to-date, $733 million of free cash flow.

We have a tremendously strong balance sheet, and we're improving our margins and growing earnings double digits despite some softer top line. And so I think the great thing is that the performance of the business holistically allows us to continue to take advantage of the market, including the M&A market and investments in capital expenditures that are great for the business long term. And so while we may have a little choppiness short term, it doesn't impact our ability to move as we need to move, whether it's in U.S. automotive on M&A or the whole portfolio.

[Operator]

The next question comes from Greg Melich of Evercore ISI.

[Gregory Melich, analyst]

I'd love to go a little deeper in the trend through the quarter and the exit rate and particularly how inflation may have impacted that.

[Herbert Nappier, executive]

Greg, it's Bert. I'll talk about inflation first and then we'll come back to kind of our views on guidance and outlook. I think we've talked about this a little bit along the way throughout the course of the year. Inflation has really developed almost exactly as we expected with where we thought we would to begin the year. That's a little bit of a surprise in that we could be kind of that consistently planning and thinking out the way we're thinking about the trends of inflation. We thought they'd moderate through the course of the year and they have. So we started the year with mid-single digits, moving to low single digits in Q2, all up low single digits here again in the third quarter. and we expect to finish out the year in low single digits.

So really has followed how monetary policy has been implemented around the world and tick down as we expected. One thing to call out on inflation, I think it's important to keep in focus, and Will mentioned it in his prepared remarks, inflation or said differently, price was a significant tailwind in 2022 for the automotive aftermarket, and that's dissipated in 2023, as I just kind of outlined. And in particular, in the third quarter a year ago, we were looking at inflation and sales at the high single-digit level for the Global Automotive segment with the U.S. at nearly 10%. And that's a pretty tough comp when you think about low single digits for this particular period that we're coming up against.

So I think right now, moving as we expected, we'll close out the year low single digits across the board. In terms of the outlook and how we're thinking about the rest of the year, bringing that up just to level, I'll start at the highest level and then maybe work down through getting to U.S. automotive. We think we had a great quarter in terms of earnings growth, double-digit earnings here that gave us some confidence to narrow our range and lift the bottom up with a new guidance range of $9.20 to $9.30. As I said in my prepared remarks, we really have a mix of tailwinds and headwinds tailwind, solid industry fundamentals for both segments. We've improved our gross margin outlook, Industrial margin for the full year, is a bit better than we thought. There's some positive trends in industrial production data. I'm not ready to call a new trend, but at least it's leaning positive of late. And we're going to have continued ongoing discipline in cost, and that's going to lead to our expectations for segment margin expansion for GPC. In terms of headwinds, you guys know most of these. We've got a choppy environment out there.

We've got inflation geopolitical considerations, a new thing here in October with student loan repayments starting back, that's probably somewhere near $10 billion a month. So obviously, something that will impact the consumer interest rate environment up sharply over the last month. And so taken together, we see an increasingly cautious consumer. We're also going to be prudent about the time that it's going to take to effectuate some of the operational changes and rigor that Will mentioned. So that taken together, I think, is how we're thinking about the rest of the year. But again, we expect a strong year when it's all said and done. We're going to close out the year based on our guidance with mid-single-digit revenue growth, gross margin expansion, segment margin expansion, and we expect to have double-digit earnings growth in a tough environment for the full year. And maybe Will, if you want to comment a little bit on the cadence of the quarter.

[William Stengel, executive]

Yes, Greg, for U.S. auto cadence of the quarter, it was mixed through the quarter. July was slightly up, as I think we said in our prepared remarks, August was down low single digits, and we exited the quarter with September up low single digits. We did call out the Napa Expo year-over-year compare. That event was in July of last year by the time all the sales have processed, it's probably -- it's not scientific, probably impacting August. So as you think about that adjustment, it's probably mid-quarter, mid to end of the quarter.

[Herbert Nappier, executive]

And Greg, I'll coming back and giving a little bit more color. You kind of talked about how things are looking as we start and maybe pull that up. As I think about this year on U.S. Automotive, the full year, we started out Q1 with a little softer weather impact there. And as we said in Q2, we really knew that our U.S. automotive business had more potential than we showed. And it's a feeling we continue to echo. Q2 made some new moves with new President, cost actions to further drive some of the improvement to offset the weakness on the top line.

And the Q2 result really a catalyst for the executive team to walk away and look at the things that are impacting our performance. We'll share those perspectives. But as we look at the fourth quarter with respect to USA or to the U.S. automotive business, we know that we got a tough comp coming up yet again. So fourth quarter for U.S. automotive was a 9.6% reported comp sales growth was 6.3%. So we have another tough quarter ahead. And all things considered, we expect the fourth quarter for them to be in line with the third quarter.

[Gregory Melich, analyst]

Got it. And when did inflation peak last year, and maybe you even brought it out to more like average unit price, if you think about mix.

[Gregory Miller, executive]

Yes. So our third quarter would have been the highest inflation comp for the year for that business, and we'll mention that. We've got another tough comp on.

[Herbert Nappier, executive]

Inflation in the fourth quarter. That's going to be around 8% for the U.S. Automotive business. So the peak would have been Q3, but we still have a tough Q4 comp.

[Operator]

The next question comes from Christopher Horvers of JPMorgan.

[Christopher Horvers, analyst]

It's Christian [indiscernible] on for Chris. So motion organic trends have been outperforming the ISM and industrial production as the industrial economy has slowed as you digest the outsized share gains following the KDG acquisition, do those indicators become more relevant again? And as you look ahead, are there any end markets where there's reasons to believe it should inflect positively or negatively?

[William Stengel, executive]

Yes, Christian, thanks for the question. Look, those are 2 important data points. We monitor and track them closely. And we've publicly said that it seems whether it was KDG or post pandemic that the correlation was less clear. Having said that, we still look at those indicators. And we've been encouraged, obviously, by the recent trends, in particular, in industrial production. So they're certainly part of what we look at as we inform our views of the outlook of the business and based on those recent inflections, we're cautiously optimistic.

There's no specific tie with those metrics to a specific part of our business. I think it's a good representation of the diversity of our business. And so it's something that we look at in conjunction with customer vendor feedback, a variety of different other pieces of internal and external data, but we're cautiously optimistic based on what we're seeing both in the business and from a third-party data perspective.

[Paul Donahue, executive]

Chris, I would just tag on to what Will said. We are encouraged 1 will meant in the industrial production numbers, which we saw a nice lift in September. But we track 14 different indicators in our motion business, Christian, we saw 5 of those indicators improve in September. So categories like I mean, automotive has continued to be positive food products, DC, logistics, equipment leasing, all are trending up, including mining. So yes, to Will's point, has the industrial downturn has that reached a trough. I think if it hasn't, we're darn close. And what we generally find is as we see the major indices like industrial production begin to bounce back. We generally follow that somewhere 60 to 90 days later, we'll see our business begin to shift.

So again, great team at Motion. They've had a phenomenal year, and we're looking forward to better days here in 2024 on the top line for that group.

[Unknown Analyst]

Got it. That's very helpful. And as you think about gross margin, are there any onetime or unsustainable items in 3Q, just given -- and as you look ahead, vendor allowances have historically driven a fair amount of volatility in 4Q gross margins? So is there anything to call out there?

[Herbert Nappier, executive]

Christian, it's Bert. Nothing to call out. We had a really clean quarter on gross margin. Nothing related to some of the noise you just mentioned there. Super proud of the team. They've executed at a very high level. So our expansion of gross margin here in the third quarter of 130 basis points continues to come on the back of the investments we're making in sourcing and pricing.

[Operator]

The next question comes from Seth Basham of Wedbush Securities.

[Seth Basham, analyst]

My question is regarding the pricing strategy in the U.S. automotive business. Obviously, you've done a great job improving your gross margins there. But what gives you the confidence that you're more less aggressive pricing is not leading to some market share losses?

[Herbert Nappier, executive]

Yes, Seth, it's Bert. Look, it's a good question, a thoughtful question. And we don't believe that our work around gross margin has come at the expense of share gains. You all know that price is not generally the leading factor in driving sales in the aftermarket. It's more about availability and quality testing strategies at the category and SKU level and the long-standing balance of that against unit growth. We believe the investments we're making in data analytics and pricing tools. Many of those we showcased at Investor Day have really given us an ability to be even more strategic, and flex our strategy up and down by both category and geography. It allows us to remain competitive, respond to the environment as it moves and stay in line with the market dynamics. So I think the short answer is no. We don't believe that our work there is impacting share gains or losses. And we continue to stay focused on driving our gross margin performance. We lifted our expectations for the year, now looking at 50 to 60 basis points of improvement for the full year and pleased with that result.

[Seth Basham, analyst]

That's helpful color. And you mentioned responding to market dynamics. You talked about some of your smaller competitors being better in stock. Last quarter, you talked about weighing the cost and benefits of the major account segment. Can you give us an update on that latter point, how you think. .

[Herbert Nappier, executive]

In the way that we're thinking about the business or that piece of the business. It's about 15% to 20% of our commercial business. So it's not a large outsized portion of the total commercial business. And as I think we've said before, it's inside of our major account business, there's 4 or 5 different even sub verticals.

And there's different nuances associated with each 1 of those verticals. So we have seen some consolidation in some of the national players, in particular, some of our existing customers that have come to consolidate that impacted some of the year-over-year trends just as they work through some of their acquisition activity. But generally speaking, the business continues to kind of be at the same level that it was last quarter to slightly down.

[Paul Donahue, executive]

Yes. Just a little additional color on that. We're -- the -- as we break apart that major account business, which Will alluded to, where we see challenges is in some of the big national tire chains. But on the flip side, we're seeing good growth in our fleet and our government. We're seeing recent growth in the OE dealer segment, which we expect to continue as some of those challenges for that segment continues. So there's puts and takes. But again, our team is addressing those issues, and I think we'll see improvements here going forward.

[Operator]

The next question comes from Daniel Imbro of Stephens.

[Daniel Imbro, analyst]

I want to start on the Motive margin. Maybe a follow-up to Scott's question earlier. I think you mentioned pricing and category management as levers to still pull in the coming years. Just curious, as you think about some of the fixes in the auto business as you expand to new suppliers, does that limit the category management benefit or the NAPA private label offering? And then pricing is good to hear. I guess you kind of answered it in the past question. But can you just talk about the pricing backdrop and the ability to use that as a lever to grow margins again? .

[Herbert Nappier, executive]

Sure. Look, I don't think we think anything differently about the longer term to follow up on that earlier point. As I said, maybe we'll get there a little bit differently than we expected when we announced everything in March. This year has played out slightly differently. But we have 2 years ago, and gross margin opportunities aren't going to be impacted by changes in suppliers. Actually, there are opportunities more than anything as we look at continuing to be competitive, going to market with our size and scale, looking at some of these opportunities more globally through a 1 GPC Prism. So I see those as limitations at all to actually tend to be more of an opportunity for us. The pricing environment remains rational. We still think there's opportunity there. As I mentioned a few minutes ago, we've got great work and data analytics there that allows us to be flexible and nimble. And we haven't really seen a change in the way the competition is behaving in that space that would change our view on the longer term or the short term for that matter.

[Paul Donahue, executive]

Yes, Daniel, I would just add the -- your question around the NAPA brand and category management. That's all upside. And just as a reminder, I think as we talked at Investor Day. When we look at category management now, we essentially by product category, we look at our global volume. So that NAPA brand has got strong presence now across Europe, Asia Pac and of course, we get into a better position from a supply and inventory standpoint to really accelerate our growth in a couple of key product categories.

[Daniel Imbro, analyst]

Great. That's helpful. And then just to clarify, Bert, I guess, you had 1 fewer selling day in the quarter. I guess how did that happen? Was it timing of a holiday? And what month did that fall in as we think about the cadence you laid out? And then are there any makeup? Is there 1 more selling day in any quarter coming up, we should be aware of as a model?

[Herbert Nappier, executive]

So I missed the very beginning of your question. Can you give that back to me one more time.

[Daniel Imbro, analyst]

You said 1 fewer selling day. Was it a holiday timing or kind of what drove that? And then what month did it fall into as we think about the cadence you gave us of month-to-month comps?

[Herbert Nappier, executive]

I'd rather not get into parsing out the quarter by month. The quarter year-over-year in the U.S. for both Motion and for U.S. Automotive was impacted by 1 day. We'll just leave it there. And then in the fourth quarter, we're going to be flat on operating days.

[Operator]

Our last question comes from Kate McShane of Goldman Sachs.

[Katharine McShane, analyst]

We had 2 quick ones. First, is there a way to deviate between the pockets of where inventories may be a little light versus some of the execution issues that you highlighted in automotive? And is there a time line of when inventory availability improves? .

[Herbert Nappier, executive]

Yes. There is -- we have great information on where we've got our opportunities as we've talked about the last 12 to 24 months investing in analytics and in particular around inventory analytics has been an area of focus. So I think that made us better to know precisely where we have opportunities. And the opportunities are not just availability but it's movement. And again, there's not a new thought here. It's just better execution that's taking the inventory that we have, getting into the right spot at the right time and making sure that you've got enough of the stuff that's moving fast. So we've got a lot of visibility into that. And it's an ongoing effort. I mean we've been working on this topic probably forever, and we're just stepping up our urgency.

So we'll -- the teams are urgent, they're focused on it, and we're going to make progress each and every day.

[Unknown Executive]

And Kate, I would just tag on to what Will said, the specific categories that were problematic for us during the pandemic and even post pandemic. those new programs are rolling out as we speak. So we would expect to see improvements in those product categories here going forward.

[Katharine McShane, analyst]

Okay. And then our last question is just around the 340 basis point headwind in the quarter. Was that anticipated when you were originally guiding 4% to 6% same-store sales in automotive. And if so, what is bringing that original comp guide of 4% to 6% down to 2% to 4%. Is it more what's being anticipated in Q4? .

[Herbert Nappier, executive]

Yes, Kate, it's Bert. Of course, we knew the Expo headwind and the selling day was there. So that wasn't a surprise to us at all. Remember, we don't guide to quarters. So we weren't thinking about through that throughout Q3 lens, we were thinking about our guidance through the full year. And we -- as we guided, I thought we would sell through that. And again, we've reaffirmed our top line guide for the year this morning. We did lower the guide for automotive. I think that's just being smart about having to factor in the slower and softer performance for U.S. automotive year-to-date and what it's going to mean for the full year. But at the end of the day, as we thought about expectations, sales recovery didn't progress quite as quickly as we thought in Q3. We'll have given you a lot of detail around the execution things we're working on. And again, we've reaffirmed our full year top line this morning.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Donahue for any closing remarks.

[Paul Donahue, executive]

Yes. Thanks, Andre. And just to reiterate, we want to thank all of our teammates around the globe for their efforts in the quarter and year-to-date and just let them know how much we appreciate all they do for the company and for our customers. I'd also like to thank all of you for joining us today, and thanks for your combined and your continued interest in Genuine Parts Company. Have a great day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.