領先汽車配件 (AAP) 2002 Q1 法說會逐字稿

Hello, welcome to the advanced auto

parts first quarter 2002 conference call. Before we

begin, Eric Margolin, the company's senior vice

president and general counsel will make a previous

statements concerning forward looking statements that

will be made on this call.

Good morning, certain

statements that will be made on this conference call

will contain forward looking statements that

incorporate assumptions currently available to the

company. These statements discuss, among other

things, expected growth, store development and

expansion strategy. Business strategies, future

revenues and future performance. These forward

looking statements are subject to risks, uncertainties

and assumptions, including but not limited to

competitive pressures, demand for the company's

products, the market for auto parts, the economy in

general, inflation, consumer debt levels, the weather,

and other risk factors listed from time to time in the

company's filings with the securities and exchange

commission.

Due to changing conditions, should any one or more of

these risk factors materialize or any of the

underlying assumptions prove incorrect, the actual

results may materially differ from anticipated results

described in these forward looking statements. I will

now turn the call over to Larry Castellani, advanced

auto parts chief executive officer

Good morning and welcome

to our first quarter 2002 conference call and thank

you for joining us. With me this morning is Jim Wade,

our president and chief financial officer, David Reid,

our executive vice president and chief operating

officer, and Jeff Gray, our senior vice president and

controller.

during the first quarter of 2002, our team members

produced very strong results. Same store sales rose

7.8 percent and E.P.S. before one time items grew

293 percent to 55 cents, from 14 cents last year.

After one time items, E.P.S. rose 143 percent to 34

cents. As we move forward, we continue to focus on

achieving the three goals we set at the beginning of

the year, and they are one, to continue to improve our

operating margins at our advanced auto parts stores.

Two, to successfully integrate the discount auto parts

store and three, to use our precash flow to prepay

debt. Before I elaborate, I'd like to hand the call

over to Jim Wade, who will review our first quarter

results. Jim

ADE !!! Good morning. We certainly

are very proud of what our team members about

accomplish in this first quarter. For the first

quarter, total sales rose 37.7 percent to 1 billion

4 million, compared to last year, as a result of both

strong same store sales and inclusion of discount auto

parts results for the fourth quarter. We experienced

strong growth in our retail segment where sales grew

40.47 to 963.3 million compared to last year. The

retail segment includes the D.I.Y. and commercial

sales. As anticipated, the sales from our western

auto wholesale dealer auto network declined

9.4 percent to 36.8 million.

Total same store sales growth was 7.8 percent for our

advanced auto parts store for the quarter, on top of

5.7 percent in the same quarter last year. An

increase in customer account generated approximately

three-fourths of the growth in same store sales with

the remainder coming from an increase in average

ticket. We think this shows our new merchandising and

marking initiatives are positively impacting

additional traffic into our stories. Our D.I.Y. same

stores sales growth was in excess of 8 percent for the

quarter and our commercial comps were up approximately

5 percent. We believe our merchandising, marketing

staffing and our initiatives that Larry will talk

about, as well as the overall strong industry dynamics

were key factors in the sales growth. As planned, we

added no net new commercial plans in the quarter,

approximate think 1370 of our stores have the

commercial program and as we've said, our focus is on

increasing sales and profits in these existing stores.

Sales at our discount auto parts stores were also

solid during the quarter, resulting in a same stores

sale gain resulting in growth of 1.5 percent, compared

to 2.7 percent in the same quarter of 2001 and we

believe these improved results certainly reflect the

significant sales opportunity that exists as we

complete our integration plan.

Let me remind your the discount auto parts stalls same

store gains are report reported in the company's comp,

since they've been owned for less than a year, we will

be reporting them separately each quarter, so you'll

have this information as we go through 2002.

During the first quarter, we began integrating the

discount auto parts store. As part of the

integration, we closed 119 stores. The 119 closings

included 94 discount auto parts stores and 25 advanced

auto parts stores. Both the advanced and discount

same store sales increases I talked about earlier were

increased by significantly less than 1 percent from

the closing of these overlap stores and the transfer

of sales volume.

However, it is important to point out that the

advanced stores benefiting from the overlap closing

achieved same stores sales growth in excess of

20 percent for the quarter. David Reid, who heads up

the discount auto parts integration, will be giving

you a more complete update in a few moments on the

integration. During the first quarter, opened 17 new

stores and closed three stores, outside of the

discount market, rutting in an ending store count of

2,379. We still plan to open about 100 to 125 stores

this year in our existing market. We're also very

pleased with the accelerating sales results we're

experiencing in our new stores as a result of our

discipline new store development program that you've

heard us talk about before.

Gross margin was 43.5 percent for the first quarter,

improving 80 basis points over last year's

42.7 percent. Retail gross margin, which excludes our

wholesale dealer network, was 44.6 percent, compared

to 44.5 percent last year. The 44.5 percent last year

did include a gain of 8.3 million, or about 120 basis

points as a result of a settlement reached with a

vendor. The comparable increase of about 120 basis

points in retail gross margin, excluding the

8.3 million last year, resulted primarily from the

purchasing synergies due to the discount auto parts

acquisition, our supply chain initiatives and the

benefits we're seeing from category management. Just

as a reminder, during the fourth quarter of 2001, with

you did change our method of accounting, of

cooperative funds received from vendors. We're now

reflecting these funds in net product costs, which

results in a lower cost of goods for the product sold,

rather than our previous method of using these funds

as a reduction in advertising expense. This change

was applied in our 2001 financial statements, as if

the change occurred at the beginning of our 2001

fiscal year, and was recognized as a cumulative effect

of the change in accounting principle.

Additionally, we reflected this change at each of our

three previously reported quarters, of 2001 in our

financial statement.

SG and A, spends before integration expenses declined 160

basis points for the quarter to 37.6 percent of total

sales from 39.2 percent last year. After the

10.6 million in integration expenses, SG and A percent to

sales declined 50 basis points. We're within our

budget for integration expenses relating to discount

auto parts and remain comfortable with our previous

guidance of about $40 million for the entire year of

2002. During the first quarter, we leveraged our

fixed costs, our store payroll and our advertising

expenses. We're also benefiting from discount auto

parts owning approximately 75 percent of their stores

and we continue with our effort to decrease our

operating expenses.

Operating margins rose 230 basis points to 5.9 percent

for the quarter, due to the solid same store sales

growth, increasing grows margins, and leveraging of

our SG and A expenses. This clearly reflects our team's

ability to generate operating margin improvements as

Larry discussed. For our bankers and bond holders on

the call, EBITDA as adjusted rose 79.3 percent, before

integration expense in the first quarter to

86.7 million. After integration expenses, EBITDA rose

57.5 percent to 76.1 million, compared to the first

quarter last year.

We anticipate that 2002 EBITDA will rise to

approximately 325 to 330 million, before the

40 million integration expenses. Depreciation and

amortization in 2002 are anticipated to be

approximately 100 million.

Interest expense rose to 27.6 million from the quarter

from 19.6 million in the quarter last year as a result

of the discount auto parts acquisition, offset

partially by a loafer average debt level than

anticipated. The tax rate for the quarter was

38.8 percent and we anticipate this approximate time

of tax rate for the remainder of the year. During the

quarter, we recorded an extraordinary loss from the

extinguishment of debt of 774,000, this resulted from

the writeoff of deferred financing fees from the early

retainment of bank debt. We were able to reduce our

debt, which I'll elaborate further in a moment, due to

the stock offering, which generate approximatelialist

9 million in proceeds. We'll continue to use our

excess cash to prepay debt. As we do this, we'll have

additional write office of deferred finance costs an

as extraordinary item.

Net income before integration expense and the

extraordinary item rose approximately 400 percent to

19.3 million for the quarter.

After the one time items, net income rose 212 percent

to 12.1 million.

Our earnings per diluted share before integration

expenses and the extraordinary item rose 292.3 percent

to 55 cents, compared to 14 cents per diluted share

last year. After integration expenses and the

extraordinary items, earnings per diluted share rose

142.9 percent to 34 cents.

I'll review the key components of our balance sheet.

Our cash position increased to 65.3 million, from

18.1 million at the end of last year. The increase in

cash was a result of higher than anticipated profits,

an increase in the accounts payable to inventory ratio

and enhanced he inventory management. Our total cap X

for the quarter, 26.4 million, including 6.8 million

of integration cap X. We remained comfortable with

our previous guidance of 115 million for the year, of

which approximately 40 million relates to the

integration of discount auto parts.

Our accounts payable for inventory ratio at the end of

the first quarter, 50.9 percent compared to 43.7% at

the end of 2001. And 45.3 percent for the comparable

quarter last year.

for the quarter, net inventory or inventory less

payables, declined approximately 54-point Pfeiffer

million from the end of the fourth quarter. On a year

over year basis, net inventory increased 16.5 percent,

compared to a sales increase of 37.7 percent.

the improved accounts payable to inventory ratio was a

as a result of increased inventory turns, attributable

to our supply chain initiatives, and enhanced payment

terms from our suppliers. We anticipate that the

accounts payable to inventory ratio will be

approximately 48% at year end, compared to

43.7 percent at the end of 2001. Our total debt

decreased 72.9 million from year end to 88 -

882.9 million at the end of the quarter. Net debt was

817.6 million, down 154.8 million from year end. We

generated 70 million in free cash flow during the

quarter from our solid operating results as well as

the focus on increasing our return on invested

capital.

As a result, our return on invested capital increased

10 percent on L.T.M. basis this quarter, compared to

last year's comparable period. We are raising our

earlier guidance of 40 to 50 million in free cash flow

for the 2002 fiscal year to 90 to 100 million. As we

previously stated. This free cash flow will be used

to prepay debt. Since the end of the first quarter,

we prepaid an additional 30 million in bank debt.

We're currently evaluating exactly when and how we

will repave additional debt from the cash currently on

hand.

the first quarter was a very solid start to the 2002

year. Strong same store sales growth leveraged our

operating income and our earnings per share. Focus on

return on invested capital resulted in substantial

free cash flow. Going forward for the remainder of

2002, we remain comfortable with mid single digit

growth and same store sales at our advanced stores and

low single digit gains for our discount stores during

the integration. I will add that during the first

four weeks. Second quarter, flat same store sales in

our advanced store compared to a 10 percent same

stores sales increase in the same period last year.

We believe this is attributable to the unseasonably

cool and wet weather we've experienceped a and does

not reflect any fundamental change in very solid

business trend. By contrast, discount auto stores,

same store sales during the same four week period were

in the mid single digit range and ahead of plan and

the weather was more normal in Florida during that

period. We remain comfortable with concensus

estimates with the second quarter earnings per share.

We remain comfortable with the analysts range of

estimates of $2.39 to $2.50 before integrations

expense and the extraordinary items for the remainder

of the year. As we said before, we can achieve a

25 percent increase in earnings per share in 2003.

Now I would like to turn the floor over to David Reid,

our chief operating officer, who will further update

you on the integration of auto parts and how it's

progressing

As our strong same store sales

increases demonstrates, the discount auto parts

integration is progressing on plan. Our team members

are making it happen and they generated above

anticipated results for the quarter.

We converted 54 stores in the first quarter in

Louisiana, Georgia, and South Carolina. During the

second quarter, we anticipate converting another 54

stores.

the results for our converted stores are exceeding our

plan. Our nonflorida market stores should be

converted by the end of the year. These markets

include Louisiana, Mississippi, Alabama, Georgia,

South Carolina, and the panhandle of Florida.

In Florida, we have begun the process of updating the

discount stores by refreshing the exterior and

interiors of our stores, including painting, lighting,

landscaping, and repair of the parking lots.

Merchandise alignment is well underway and will be

substantially completed by the end of the second

quarter. The store system conversion in Florida will

begin at that time.

the conversion of the Florida discount stores to the

advanced format is planned to begin in the fourth

quarter of this year.

We have successfully completed the conversion of the

discount auto parts Mississippi distribution center

for the advanced warehouse management system and it

will begin servicing advanced and converted discount

stores in the second quarter. This will substantially

increase the utilization of that facility. The

conversion of corporate systems continues on schedule

as well. Most of the corporate systems not including

the store systems will be converted by the end of the

second quarter.

the most important achievement coming from the

integration is the high level of team member retention

we are achieving. This is truly our team members and

they are making this integration the success it is.

Now let me turn the call back over to Larry Castellani.

Thanks, David. I would

like to add one thing to what David said. In the last

couple of months that I've been in Florida with our

team members, I've seen firsthand their level of

dedication in making the integration a success and it

truly is remarkable and we definitely thank them for

it.

the after market continues to benefit from strong

industry trends, including more miles driven and

S.U.V.'s coming into our sweet spot. With these

positive industry dynamics, as well as our various

initiatives, that will allow us to focus on our

customers better, we believe we are well positioned

for the future. Our sales and profit improvement

plans include new merchandising and marketing

initiatives, M.P.T. and EPAL and I would like to

elaborate on each of these.

New merchandising and marketing initiatives. Our

biggest initiative is category management or enhanced

line reviews. Which in effect means we're reorient at

a timing our merchandising and marketing planning to

better focus on the customer. Using consumer data,

we're making sure that we're getting the most from

each product or S.K.U. we sell by pricing more

appropriately. Merchandising it more effectively,

promoting it more appropriately, and measuring and

monitoring its sales more definitively. Along with

our merchandising and marketing initiatives, we have

many system initiatives underway, including M.P.T. and

APAL. MPT, management planning and training, is the

company's new labor management system which helps us

more effective Mav for the appropriate traffic levels,

as well as to make sure we complete the tasks that

need to be done in order for our stores to maintain

their gold standard. Grand opening loft daily.

As of the end of February, 2002, M.P.T. was rolled out

to all of the advanced auto parts stores. We will

roll this out to the discount stores in Florida as we

convert these stores to the advanced format.

We believe that we are now receiving initial benefit

of the system, which include increased sale per labor

hour, a decrease in payroll as a percent of sales, and

an increase averaged rate of pay. The average rate of

pay is up slightly due to staffing our stores with

team members that have stronger experience and

knowledge, which has more than paid off due to

enhanced productivity.

Over time, this system will continue to be refined,

helping us to manage our labor to make sure we give

great customer service and great looking stores and

have the product productively merchandised for our

customers.

We believe that this system has help us leverage our

payroll, increase our sales and profits. We know that

this will positively impact our gross profit margin,

as we staff our stores with more skilled parts pros,

who can more readily sell a total solution, versus

just a single part. We believe we will continue to

reap benefits from MPT over a very long period of

time.

Let's move on to another systems update, appal or

advanced parts and accessories lookup, is our

proprietary windows based catalog. APAL is currently

in about 400 stores, or approximately 20 percent of

the advanced auto parts stores, including is it 4

discount auto parts stores outside of the Florida

market, that have been converted to the advanced

format. The roll out of APAL will accelerate in the

second quarter, when we will begin to convert the

discount auto parts Florida stores. By the end of the

year, we expect to have most of the discount stores

convert and and by mid 2003, we plan to have all the

remaining advanced auto parts stores converted.

We are pleased with the results we are seeing so far

from APAL and believe that this proprietary electronic

catalog will be the platform from which we will

increase sales for many years to come by enabling our

team members to sell more add-on parts, thereby

increasing our average ticket and and enhancing

margins.

to summarize, as we move forward, the advanced team is

focused on expanding our operating margins, increasing

our return on invested capital, and successfully

integrating discount auto parts. Everything we do

going forward will be measured on how it enhances

operating margins and return on invested capital.

Thank you for participating on the call this morning.

We look forward to speaking with you in about three

months about our second quarter results and now we'd

be pleased to take questions, operator

Very good. At this time, if you

would like to ask a question, please press the 1 on

your touch tone phone. You may withdraw your question

at any time by pressing the pound key. Again, to

register your site for your question, please press the

1 on your touch tone phone at this time. We'll take

our first question from the site of Ron Schwartz with

J.L. advicery. Please go ahead

Congratulations on a great quarter,

guys. I just wanted to ask if there's any, you know,

initially people expected that a lot of discount

suppliers were shipped over to advance suppliers, but

it seems like you guys are able to negotiate and

achieve additional leverage there. Can you discuss

some gains you're making there. And then

additionally, regarding the free cash flow, is it safe

to assume that all additional free cash flow this year

will go to pay down debt and can you discuss the

effect on the bottom line there

I'll take the last one.

Jim will answer the second. The issue with the

suppliers with discount auto parts, with the increased

volume, we're able to bring to the table, or, in the

event of suppliers that were supplying discount and

not advanced, we were able to very successfully sit

down with a broad range of suppliers and negotiate

better terms that really benefited both the

co-advanced auto parts store as well as discount. Jim

gave me the numbers on that. We're very pleased with

the results. The full benefit of that of course, will

be literally rolled out in 2003 as some of the

contracts that were in place didn't lapse until

throughout 2003. So we look to the run rates in 2002

and continued benefits there after

Should we expect to see some

additional deals like the transfer deal that happened

earlier this quarter?

I believe the answer to

that would be yes. I think that in time, we have to

work it through this year. There's going to be no

immediate pop up in the next quarter, but it will be

enhanced as we work through later this year and the

full run rate through 2003. As we do have a number of

contracts that were certainly in place prior to the

discount acquisition.

Ron, in regard to free cash

flow, the question you asked, we are going to be using

our free cash flow to pay down debt as we go through

the year on top of the additional stores that we're

opening and everything else that we talked about in

the call. This will have some positive effect on

interest expense as we go through 2002 as we pay down

additional debt, but certainly, again, we'll see the

full run rate of that as we go into 2003.

Thank you.

We'll take our next question from

the site of Gary halter with Credit Suites, First

Boston.

Thank you. First of all,

congratulations on a great first quarter, second

quarter as an official public company. Two things,

one is because everybody is so short-term oriented as

opposed to see all the upside, the one thing people

will remember is flat comps after four weeks. Our

model says six to eight per the quarter last year.

You mentioned the model is against a 10, so things

sound like they get easier as you progress and

obviously with the weather, things should be easier.

Is that a fair way of looking at it?

That's very appropriate,

Gary. We've seen this many times before. During the

course of a quarter, we've had - I don't think we

have to tell anybody on the call what the weather was

really like and I think everybody knows the vast

majority of our customers don't have garages, we have

that kind of inclement weather, but we've seen this

many times before and over the course of the weather,

we'll earn it back and be on target. Your remarks

relative to the second two periods in the quarter,

yes, do give us easier compares son

You mentioned the APAL and then I may

have missed it. Did you talk about the impact, what

it does to comps once that started to roll out?

It's positively affecting

our comps, Gary, as well as the margin, because the

additional add-on parts that our people are able to

access and also display on the screen, and hopefully

we'll have the opportunity at some point to

demonstrate this to you firsthand and everybody else

that's on the call. It's something we're awfully

proud of and the most meaningful things we can do is

demonstrate it to you

I saw that happen in Roanoke where you

didn't have the part for the 792 Volvo.

Competitively, it looks, you're doing great, auto zone

is doing well, the others are doing well. It sounds

like the pricing environment also is quite calm at

this time. Is that what you're seeing, any evidence

of either pricing, getting more aggressive or going up

or anything changing in that regard

Gary, I think it's safe

to say there's a lot more rationalization in this

business and all areas, from real estate to pricing.

Clearly we've raised prices in some areas. Where it

was justified and very low term merchandise and when

you look at our activity based costing, you'll see

that there is a need to get a higher margin on very

slow turn merchandise, that has a very high cost, and

supply chain attributed to it, and at the same time

we've been able to get much more competitive and I

would like to tell you, Gary, we've done that in

getting more competitive against all classes of trade

as well, in particular, - it's something that - some

things we've gone up on, some things we've gone down

on, but it gives us the Richer mix and it's very

important with our new marketing plan that we continue

with the value orientation that we have in place and

we're pleased with the result. It's going to take us

some time to finish all the category reviews, the line

enhancement reviews, the new product mix we're add to

go our stores. This is both on the front room and the

parts department. It's not something we're going to

do overnight, but over a protracted period of time.

We look forward to continual uplift in both sales and

margins as a result of the initiative.

Thank you very much.

We'll go next to the site of Alan

Rafkin [phonetic] with Lehman brothers.

I will certainly add my

congratulations as well on an outstanding quarter.

With respect to the integration of the discount

stores, Larry, could you maybe comment on the

performance post conversion with respect to traffic

and average ticket, an then secondly, can you maybe

provide some color on the efficiency of the process of

the conversion process? You know, are you getting,

you know, more effective at it, an then my second

question, is while the gross margin improvement of

about 80 basis points is certainly strong, would I be

direct in assuming that given your inventory turns,

the Q1 gross margin increase does not reflect the full

- magnitude in synergies going forward

On discount, relative to

plan, I think Jim said it and David reit's rated it in

the call, we are running ahead of plan. The discount

stores have been converted, the sales are running

ahead of plan. Our team is pretty damn good at it.

mergers. I think that we've said it many times

before, we not only clock daily and weekly the

customer accounts and sales growth, but we also

retain, put an awful lot of emphasis on the retention

rates of the personnel that really are fundamental to

this, so the plan is working well. The team is very

good at it. They're getting better at it all the

time. The thing that's really making it work is the

terrific contributions on the part of the discount

auto parts team members. I I.

Alan, led me add to the gross

margin question and elaborate a little bit. You're

correct in saying we had an 80 basis point increase

last year net in gross margin, but as I mentioned in

my remarks, last year included a one time $8.3 million

settlement from a vendor, which was about 120 basis

points on our total gross margin last year, so when

you add those together, the increase in the first

quarter was more significant than just the 80 basis

points obviously and then going beyond the first

quarter, we will continue to see some additional

increases in gross margin as we get the full run

rates, both on the advanced and discount side from the

synergy.

Okay. Thank you both very much.

We'll go next to the site of

Anthony rose with J.P. Morgan. Go ahead.

Good morning. Just two quick

questions. First in terms of your better working

capital management, can you point to any one or few

initiatives, such as category management that had the

biggest impact?

Sure. I'll take that. It

comes from a number of areas and the key point I would

make again is we have throughout the company, a focus

on a return on invested capital at a greater level

than we've probably ever had before and that's

translating into improved results in a number of

areas. Certainly some of the key ones I mentioned, in

the inventory area, we're seeing benefits from the

category management program, we're seeing benefits

from the supply chain initiatives, where we closed a

distribution center last year and we're able to

increase our sales and service more stores from the

facilities that we're operating from. In the accounts

payable ratio area, we did, as I mentioned, have a

significant improvement in our ratio there. And

that's, I think, an indication of the support we're

getting from our suppliers and our ability to increase

our sales, but increase our inventory at a lower

level, which is also driving up our - our numbers for

the first quarter in that regard.

Beyond that, in the cap X area, we have a tremendous

focus on cap X, and certainly we're making the

investments in the business we need to make in every

area, but at the same time we're expecting a return on

those investments and if it's not there, we don't

spend the money. So as a result, that's driving

additional efficiencies in that area as well.

So it's a number of things, as I said, I think the key

thing is in every area of the company we're focused on

increasing our return on invested capital, which is

generating free cash flow, which is going to repay

debt.

Just one last question. In terms of

improving accounts performance of the newly acquired

discount stores, was there any notable difference

between Florida and non-Florida stores?

As far as comps are concerned?

Yes

Not really. The only thing I

would mention there is you remember in David's

remarks, the stores we're converting from discount to

advance are all out of state and as we're converting

those stores, 54 in the first quarter, we're seeing

some very solid increases in sales in those stores as

they're converted to advanced. Having said that, 54

out of the entire chain is not enough to move the

entire number greatly, so on an overall basis, we're

seeing good solid comps in both areas

Thanks a lot.

We'll go next to the site of Alex

Pune [Phonetic] with Morgan Stanley.

It's Vijnay [phonetic} A couple of

questions. On the commercial business, can you just

talk about, and I got disconnected for a minute, just

the growth rates you saw on the discount side as well

as on the advanced side and just the strategy going

forward, particularly on the discount side. Second,

can you talk about any specific markets where you

think you might be gaining or losing market share.

Third, can you talk about if there's any way to

quantify some of the positive impact you've had on

advanced comp store sales from some of the closing of

discount stores. Thanks.

Yeah, I think that Alex,

the closing impact Jim covered in his remarks

verbatim. Jim, do you want to hit that one line again

Sure. In the first quarter,

the increase in comps for both advanced and discount

as it regards the overlap pickup was significantly

less than 1 percent, in other words, it was very

immaterial to the entire comp increase we saw in both

the advanced and discount stores

On your second question

there, Alex, regarding the special discount auto

parts, bear in mind discount has an entirely different

model than advanced does with the call center as

opposed to handling everything at store level. Also,

bear in mind that as we've demonstrated before,

discount auto parts does about half the sales in their

commercial programs in the stores that have it or in

the system or as a percentage of sales that advance

auto parts does. It's a significant upside

opportunity for us, and we have yet to, as David

mentioned in his remarks, we've yet to complete the

product rollout or the systems rollout that would be

the enabler for us to convert to the advanced auto

parts model. That's going to take some time but it's

happening immediately in the out of state stores where

we're doing the discount conversions in the five out

of state stores on the run rate that David told you.

There's no question that that is a big upside

opportunity for us and leveraging commercial business

with the acquisition.

Does that answer your question?

Yes. Again, it's Vijnay. I was

wondering on the growth rates for the commercial side?

Sure. In the first quarter,

the commercial comp in the advanced stores increased

about 5 percent and the D.I.Y. business increased a

little over 8 percent, and, again, in the commercial

business, the approach that the focus we have on the

commercial this year is not to continue at programs,

because we have the majority of the markets that we

cover, covered by the programs we have in place, we're

focusing on quality of sales in those stores from the

commercial business, and the profitability of the

commercial business in those stores and we're seeing

good results there in both cases.

Great. Thanks.

We'll go next to the site of Brent

Jordan with AdVest. Go ahead

Good morning. A couple quick

questions. You were talking about 90 to 100 million

in free cash for your year estimate, and as it

sounded, that was up from a year dr - your prior

expectation of 40 to 50. Is that a result of some

windfall you found in the working capital or was the

prior estimate just lacking in visibility given the

early stage of the discount auto parts acquisition?

And also, a question on operating of expenses

leverage, I guess given the autos owe ridely leverage

in the low '30s versus yourself in the mid to high

30's, is there a number you can get to on a two to

three-year basis on a percentage of sales at the

operating SG and A leverage side?

Brent, let me take a shot at

the question. As far as the increase in the operating

- the free cash flow from 40 to 50 million to 90 to

100 million really is coming from two or three areas.

Probably the largest is what I mentioned earlier,

around the inventory management and accounts payable

ratio. We believe we can go through the 2002 year

with everything that we have going on with the

integration and additional stores and running the

existing stores and growing the business with

basically no working capital effect in total. Through

a combination of the accounts payable ratio being

somewhat higher than we had earlier anticipated in the

40 to 50 million as well as managing inventory a

little more aggressively and focusing on cap X at

every level, so it's primarily falling in those

categories. And certainly as we've gone now in to

may, we are starting to get a much better feel for the

entire year in terms of how the integration is going

to flow with the inventory movement as discount and

the other factors that go into that.

from the standpoint of operating expense leverage, the

one thing I would have you keep in mind again is as

you're looking at the SG and A expenses for advanced, is

we did make the change last year moving all of our

unrestricted co-op money from SG and A up to gross margin,

so that has a little bit over a 200 basis point

increase effect on SG and A as a result of that movement,

so I don't know how each of the other companies

necessarily treat that, so there is some difference

there when you look that specific item

Right, I recall that, but is there a

number you're working towards or anything in your

internal model you care to share?

what I can tell you in that

regard, what we have said, publicly a number of times

over the last several months is that we plan to

leverage the SG and A in 2002 and you're starting to see

the results of that and then we've also said beyond

2002 that we see in the neighborhood of another couple

hundred basis points that we think we can take out of

SG and A as we grow the sales and leverage the expense.

Part of that is going to

come, not just from sales and leveraging, but all the

initiatives that we have underway right now, Bryant,

including the supply chain initiative are going to

positively impact that

Thank you.

We look forward to

continually improving that area in the next couple of

years

We'll go to the site of jack Bedlose

[Phonetic] of Midwest securities

First I want to ask awe couple of

questions, Jim. One is what was your inventory level

in the first quarter of 2001? And what is your cap X

expectation now for 2002?

Let me take the second of

those first and we'll pull out a number for you on the

inventory. The cap X for 2002 remains at what we have

talked about in past calls, and that is about

$115 million in total for the year, of which roughly

about 40 million is coming from the integration of

discount.

the inventory numbers for the same time last year, in

total dollars, was about $783 million. And again,

remember that doesn't include discount, because we

didn't purchase discount until the end of November.

So does that mean, excluding the

40 million for conversion, that the underlying

75 million is a going forward rate for the company and

excluding the additional money you'll spend in 2003?

The go-forward cap X number

will probably be a little north of the 75 million that

you mentioned, but not substantially north. We feel

like I think one of the very positive parts of our

story is that that we have the increasing our

operating margin significantly as we go forward for

2002 and beyond and none of the initiatives that we

have laid out require substantial inventory,

investment, or cap X. In fact, as I think the first

quarter demonstrated, we have the opportunity to

increase margin while actually bringing up cash flow

as well, so we'll be probably a little north of the 75

but not much

Okay. Larry, I wanted to ask you

about the commercial delivery, was is up, as you said

5 percent and you also mentioned you're focusing on

profitability. Does that mean that you're being

selective in terms of customers or pricing? I was

wondering when you might expect the 5% to get up to

the level of the retail comps?

We're being very

selective on the locations. As we've said in prior

calls, jack, that we've con consolidated many of them,

we have a model now that shows what it takes for us to

get to our new hurdle rates from a return standpoint,

and we believe that there's upside opportunity with

commercial, but as we said many times before, the

focus of this company is on the D.I.Y. segment, we'll

continue to do so, and we'll continue to he reinforce

our marketing plan with the emphasis on the 85 percent

of our business in D.I.Y., and we will grow commercial

only where it meets our profit model and we do not

expect it to grow at any huge accelerated rate in the

future, but we do see it ratchetting up to the total

growth of D.I.Y.

so in other words you think the

5 percent might get to the same level of what the

future comps are in D.I.Y. down the road?

Yes, with the exception

of discount auto parts, where there's a huge upside

opportunity and we see that taking place over some

time as a result of the going through this year,

rolling out the product, mixing the systems and

everything else.

I see. One last thing and that is

when it comes to category management, the negotiations

with vendors, are you doing - is this an annual thing

that you're working on weekly or are you also sign

multi-year agreements?

This is something that a

permanent way of life in the company, and as you know,

jack, in category management, it's a process that

starts, it never ends. You work on continual

refinement. These are things that we work at in a

very participative manner with the suppliers and the

development of our people and also it takes some time

for us to develop our people as well as our systems.

When it comes to the higher return rate, we're looking

for, the new models that we have, putting in a new

product mix, and working with our suppliers and our

people to do so. I will tell you we're plysed -

pleased with our early results, the development of our

people and we're very much pleased with the support

we're getting from suppliers and we see this as a

significant opportunity to help us close the operating

margin gap that exists between us an our competitors

and to the extent the company is doing it today, it's

far greater than anything we've ever done in the past,

and if you can't tell, we're pretty damn excited about

it

Right. Just one last thing, in terms

of something that occurred to me regarding commercial

delivery, and that is do you foresee, relatively

speaking, a better potential increase in gross margins

and commercial delivery as opposed to retail?

We're experiencing that

now. I think the - it's important to point out and I

thank you for bringing up the point that we have had a

very meaningful increase in our commercial. By being

more selective in what customers we support and how we

go about doing it. There's a big difference in

getting sales from the commercial accounts and selling

lower margin product mix as opposed to hard parts.

That yields us a better return and we've been very

selective in that, and as a matter more of mix change

than pricing. We've been able to improve that and

we'll continue to do so into the future.

We'll go next to the site of Leon

cooperman with Lee I don't know advisors.

the guidance that you provided for

next year, your comfort factor with a 55 percent

earnings increase, what level of comp store sales

increase would you need in 2003 to meet guidance, that

would be question one. Secondly, given the fact that

you provided guidance, what is your assumption

regarding free cash flow for 2003?

Third, do you have any sends in the timing of the next

secondary from Sears or freeman in terms of their

intentions of reducing their position?

Lee, the last question

first. No, that's something that's totally freeman

and probably Sears' call. They've been exceptionally

fine partners to work with and certainly have worked

with us in a most responsible manner and we think that

whatever they do going forward is certainly going to

be their call and we'll just work with them as we have

in the past in supporting their goals and objectives.

Nothing has been dated though. Jim

The other two questions you

asked about the 25 percent earnings number increase

for 2003, is based on mid single digit priced comps

which is again essentially what we've based our

remainder of 2002 numbers on as well. We've run

historically a higher comp than that, but we build our

budgets on what we believe is a very reasonable comp

that forces us to also challenge our sales on the

expense lines and manage the expenses effectively. As

far as free cash flow is concerned, as I mentioned, 90

to $100 million in 2002 and we haven't given out any

specific numbers for 2003 yet because we're still

working through the specifics of inventory and where

we think we'll be in the cap X, but there's a

substantial opportunity for free cash flow next year

and certainly equal to, if not greater, than what we

have in 2002

I'm coming up with about 110 million,

which I assume is in the ballpark?

That's in the ballpark

Thank you. Good luck, guys.

We'll go next to the site of Wayne

cooperman with cobalt capital.

Hi, guys. If we just pro formad your

data and current cost of interest, what sort of your

run rate interest expense at this point? I don't know

if you've gotten - as you prepay your debt, if you're

getting a break on the interest expense, the rate at

all.

You're talking about the

average cost of debt?

Yeah.

Yeah. It's - the current

number is around - when you balance our bank debt and

our bonds that we have outstanding, the currents

number would be around 8, 9 percent in that range.

I assume that as you pay down your

debt, you think you could bring that lower?

You know, we're looking at

really all of our options as we go forward on our debt

structure. I don't think that rate will change

significantly in 2002. It may change a little, but

overall, not in total I don't think a whole lot.

All right. Great. Thanks.

Our last question comes from the

site of Carla Costella [Phonetic] with J.P. Morgan.

a couple of housekeeping questions.

I'm trying to calculate your credit ratios based on

the pro forma EBITDA. I'm wondering if you could give

a question of where pro for that EBITDA westbound on

an L.T.M. basis combining discount and auto

Carla, I will need to get back

to you on that. I don't have the numbers right in

front of me. They're numbers that we clearly have and

would be happen to share with you but I don't have

them in front of me

a couple other questions. On the

integration expenses of that 10 million, how much is

cash versus noncash?

Virtually all of this is cash

and it will be as we go through the entire year. Most

of the 40 million is cash expenditures, specifically

I'd identifiable items with converting the stores, the

merchandise and systems and everything else involved

with the integration

Can you cap X number for this quarter?

For the first quarter was

26.8 million.

Okay.

26.4 million, sorry

Lastly, it seems like your scale is

benefiting you and allowing you to increase your

payable terms with vendors. Do you expect that to

continue through the year or would that be more of a

one-time

We are slightly over

50 percent currently as far as the accounts payable

ratio is concerned, and what I said, as part of the

call, is that we expect to be around 48 percent at the

end of the year, and the reason that we'll be at

48 percent is our year end is - at the end of

December, which is although this business is not

greatly seasonal, what seasonality there is at the low

point occurs that point, so we think that we've

achieved probably some of the improvements a little

bit faster than we had hoped for. We will, I think,

continue to see some improvement as we go through the

remainder of the second and third quarter, but would

end up around 48 percent at the end of the year

compared to 43.7 I believe it was at the end of last

year.

Okay. Great. That's all my question.

Thank you

No further questions at this time.

I'll turn the call back over to management

Okay. We thank you very

much. We appreciate everybody participating in the

call and look forward to talking to you three months

from now. Thank you ladies and gentlemen.