領先汽車配件 (AAP) 2002 Q2 法說會逐字稿

Welcome to the Advance Auto Parts

second quarter conference call. Just as a

reminder, participants are in a listen only mode.

Before we begin, Eric Margolin, the

company senior vice-president and general counsel,

will make a brief statement concerning forward

looking statements that will be made on this call.

You may go ahead, sir.

Thank you. Good morning.

Certain statements that will be made during this

conference call will contain forward looking

statements that incorporate assumptions based on

information 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.

It gives me great pleasure to now turn the call

over to Larry Castellani, our chief

executive officer. Larry?

Thanks, Eric.

Good morning, and welcome to our second quarter

2002 conference call. With me in morning is Jim

Waite [phonetic], our chief financial officer,

David Reid, our executive vice president, chief

operating officer, and Jeff Gray, our senior

vice-president and controller.

Once again, our team members produced strong

results during the second quarter. Earnings per

share before integration expenses an extraordinary

item grew 57 percent to 77 cents on 49 cents

last year, and we achieved same store sales of 5

percent on top of 6.8 last year. Along with the

solid same store sales and earnings per share

growth, other achievements included continuing to

successfully integrate Discount Auto Parts, the

acquisition of 55 Track Auto Parts stores which

closed on July 26, 2002. We achieved a 220 basis

points increase on operating margins integration

expenses, and we also prepaid approximately

112 million in debt during the quarter and

189 million since the beginning of the year.

During the quarter we successfully achieved our

three key goals, which are to expand our operating

margins, use our free cash flow to reduce our

debt, and to successfully integrate Discount Auto

Parts. We will continue to focus on these goals

as we go forward. But before I elaborate on these

goals, as well as other initiatives I'd like to

hand the call over to Jim Waite who will review

our second quarter and year to date results.

Jim?

Thank you, Larry.

Good morning. We are excited about the strong

performance that was produced by our team members

in the second quarter. During the second quarter

total sales rose 30.5 percent to 792.7 million

compared to last year's 607.5 million. We

experienced strong growth in our retail segment

where sales grew 32.1 percent to 774.9 million

compared to last year's 586.8 million. As you

recall, the retail segment includes both our DIY

and our commercial or DIFM sales. Sales from our

Western Auto wholesale dealer network continue

their expected contraction with a year over year

decline of 13.9 percent to 17.8 million. Same

store sales grew in the second quarter on top of

6.8 percent in the same quarter last year and

increase in customer count generated approximately

two-thirds in same store sales with the remainder

coming from increase in average ticket.

We are excited that more customers are choosing

Advance for their automotive needs and increasing

market share in operating where we're operating

store. As you may recall, same store sales in the

first four weeks of the quarter were flat due to

cool wet weather as well as tough comparisons. As

we expected the remainder of the quarter saw

strong comps approximately 7 percent generating an

overall increase it of 5 percent for the quarter.

Year to date same store sales growth of 6.5

percent compared to 6.2 percent for the first half

of last year. We remain comfortable with mid

single digits same store sales growth for the

remainder of 2002 and the start of the third

quarter confirms that expectation is achievable.

For the quarter DIY same store sales rose over 5

percent and commercial comps are approximately 4

percent.

For the same quarter last year DIY comps were

approximately 6 percent and commercial comps are

approximately 10 percent. Year to date DIY comps

were approximately 7 percent compared to about

four and a half percent last year and commercial

comps were about four and a half percent year to

date compared to almost 15 percent last year.

Last year's stronger commercial comps were

primarily the result of adding additional programs

as well as increasing the number of delivery

trucks in several stores during that period. In

2002 we've added 41 net new commercial programs as

planned, primarily in the Discount Auto

Parts stores. Currently we have a total of 1411

programs with 1240 Advance stores, including the

converted discount stores and 171 at the Discount

Auto Parts stores. Our focus in commercial

continues to remain primarily on increasing sales

and profits in existing programs. the sales at

our Discount Auto Parts stores are also solid

during the quarter producing same store sales gain

of 3.7 percent. This compares to 1.8 percent in

the same quarter of 2001. These sales gains in

the second quarter were achieved during the height

of the merchandise conversion process which will

be completed in September. Just as a reminder,

the Discount Auto Parts same store sales gains are

not included in our reported comps, since they've

been owned for less than a year. These stores

will be added to the comparable store sales base

after 13 completed accounting periods or during

the 13th period of this current fiscal year.

We'll continue to report these results separately

until that time so you'll be able to track their

progress as we go through the year. the stores in

overlapping markets will be closed stores due to

discount acquisition continues to experience same

store sales gains of over 20 percent. However, on

a total comping basis [inaudible] store sales by

less than 1 percent. During the second quarter we

opened 11 new stores and closed 23 stores

including nine related to the Discount Auto Parts

acquisition resulting in an ending store count of

2,367. Year to date we've opened 28 new stores

and closed 145 stores including 128 related to the

discount acquisition. There will only be a few

more closures related to the discount acquisitions

as we go forward. We plan to open approximately

110 stores this year in existing markets which

includes the recently announced Track Auto Parts

[inaudible] acquisition. We also have a strong

new store development pipeline as we move into

2003. We still an at this time anticipate opening

100 to 125 stores in 2003. the Track Auto Parts

acquisition is an exciting opportunity for us to

quickly penetrate the metro Washington, D.C.

market. On July 22nd, we with given bankruptcy

court approval to assume the leases on 255 stores,

48 of these stores are in the Washington DMA, 5

are in Baltimore, and two are in Richmond. The

acquisition closed on July 26th. The total

purchase consideration was the assumption of a

lease, $4 million for fixtures, and up to

12 million for inventory. As we have stated in

many of our other presentations, we believe we've

demonstrated our strong acquisition and

integration experience and this experience was the

key to our receiving bankruptcy court approval.

The Track stores will be systematically turned

over to us in groups of approximately 5 per week.

Once we've taken possession of each group

of stores we'll close them for about two weeks to

totally convert each store to Advance auto parts

including merchandise, systems, remodel and

signage. by the end of this year, all of

these stores will have been converted. the

Washington metro market is a very challenging

market to gain a foot^hold given the limited

amount in high price of real estate locations

available. Because of this issue Washington is

right now an under served market. Our public

competitors have only about 33 stores in the metro

market today. Not only is the market underserved,

but these 55 Track stores have had a history of

strong sales. In fact, they achieved in aggregate

higher average sales per store in the year 2000

than Advance's company averaged. These results

achieved before they declared bankruptcy in July

of last year. Now wrapping up stores our

new stores continue to open at a higher sales

level than in the past. Our new hurdle rates and

discipline store development program are driving

improvements in invested capital. Our gross

margin rose 170 basis points to 44 percent for the

second quarter compared to last year's 42.3

percent. Retail gross margin which excludes our

wholesale dealer network was 44.6 percent compared

to 43.2 percent last year. Gross margin improved

primarily due to purchasing synergies and

efficiencies realized as part of the discount

acquisition and positive shift in product mix.

Year could date our gross margins have risen 120

basis points to 43.7 percent from 42.5 percent

last year. We anticipate gross margins for the

remainder of 2002 to be in line with or slightly

higher than the second quarter.

SG and A before integration expenses declined 60 basis

points to 35.8 percent. We achieved leverage

primarily in our corporate overhead and occupancy

expenses for the quarter. Year to date SG and A

before integration expenses declined 110 basis

points to 36.8 percent from 37.9 percent

last year. Total integration expense for the

discount stores for 2002 was originally budgeted

for 40 million. During the second quarter we

converted 54 stores and the out of state markets

and continue to merchandise conversion in the

Florida market resulting in 7.6 million of

integration expenses. In the first quarter we

incurred 10.6 million total of 18.2 million year

to date. We remain comfortable no more than $40

million in integration expense will be incurred in

2002, and we anticipate that the total may be

slightly below the original estimate due to the

comps combined efforts of the Advance and Discount

team to effectively manage all cost as we go

through this integration process. Operating

margins for the second quarter before integration

expense rose 220 basis points to 8.2 percent due

to solid same store sales growth, increasing gross

margins and leveraging of our SG and A expenses. On

a year to date basis operating margins before

integration expense also rose 220 basis points to

6.9 percent from 4.7 percent last year. We

continue to work towards marrying the operating

margin gap to best in class comparison.

Operating income for the second quarter before

integration expense rose 78.3 percent to

64.9 million. Including integration expense,

operating income rose 57.4 percent to

57.2 million. On a year to date basis operating

income before integration expense rose 98.8

percent to 123.8 million. Including integration

expense operating income rose 69.6 percent to

105.6 million year to date. EBITDA is as adjusted

rose 63.1 percent before integration expense in

the second quarter to 86.8 million and increased

70.8 percent to 173.4 million year to date.

Interest expense rose to 19.1 million from the

second quarter from 13.4 million in the same

quarter last year as a result of the Discount Auto

Parts acquisition offset partially by a lower

average debt level than anticipated as well as

lower interest rates. The tax rate for the

quarter was 38.8 percent and we anticipate this

approximate tax rate for the remainder of

the year.

Since we completed our debt agreement at bond

offering in the fall of last year our financial

strength and overall creditworthiness continues to

grow. In June Standard and Poors raised our

corporate credit rating and Moody's raised our

outlook to positive. Because of our improved

financial position and strong free cash flow, we

repurchased approximately 37 million of our bond

and we refinanced our 305 million tranche B loan

with our more favorable 25 million tranche C loan.

Because of these transactions, we've lowered our

future interest expense and also recorded an after

tax extraordinary loss from the extinguishment of

debt of 7.6 million in the quarter. Approximately

57 percent of the 7.6 million is related to the

writeoff of unamortized deferred loan fees and

related financing fees on credit facilities.

About 43 percent is unamortized discounts and loan

fees as well as premiums paid to repurchase the

bonds. Net income before integration expense on

the extraordinary item rose approximately

100 percent in the quarter to 28.2 million. After

integration expense net income rose 66.8 percent

to 23.6 million. Including the debt

extinguishment charges net income rose

12.9 percent to 15.9 million. year to date net

income increased 164 percent to 4747 [47.6 million

before the extraordinary item and rose 102 percent

to 36.4 million including integration expenses.

After integration expenses and the extraordinary

item net income rose 55.8 percent to 28 million.

Earnings per diluted share before integration

expense and the extraordinary item rose 57 percent

to 77 cents compared to 49 cents per diluted share

last year. Including integration expenses

earnings per share rose 30.6 percent to 64 cents

per share. After integration expense and the

extraordinary loss earnings per share were 44

cents declining 10.2 percent. year to date

earnings per share before integration expense and

the extraordinary item rose 111 percent to a

dollar 33. Including integration expense earnings

per share rose 61.9 percent to a dollar and two

cents. After integration expenses and the

extraordinary item earnings per share rose 25.4

percent to 79 cents. Overall the subject of

earnings per share I'd like to quickly address the

issue of accounting for stock options. In 2001

and 2002 the stock option grants approved by our

board of directors and stockholders have ranged

from 1.2 percent to 1.5 percent of shares

outstanding. If we expense all of our stock

option grants, earnings per share in fiscal 2002

would be reduce bid only approximately five cents

a share using the Black Scholl's [phonetic]

options pricing model. If we expense only our

2002 stock options grant earnings per share would

be reduced by 2 cents per share. We have followed

the disclosure requirements of the statement of

financial accounting standards number 123 in

accounting for stock options as we previously

disclosed in our 2001 financial statements. We

are fully prepared to change our methodology for

accounting for stock options once final rules are

issued. As always, we want to assure that our

stockholders have all the best information

available to them.

Let me now review the key components of our

balance sheet. Our cash position increased

$21 million from year-end to 39.5 million. From

the end of the first quarter the cash balance

declined 25.7 million as we brought down our cash

balances to prepaid debt. Our total capex for the

quarter was 20.2 million including 10.4 million of

integration capex. Capex year to date was

46.6 million including 17.2 million of integration

capex. We remain current with our previous

guidance for capex of no more than 1 $15 million

for the year of which approximately 40 million

relates to the integration of Discount Auto Parts.

Net inventory which is inventory less payables was

up 26.3 percent to 489.5 million compared to a

sale gain of 30.5 percent. Our accounts payable

to inventory ratio 154.4 percent. This compares

with favorably to 58.8 percent for the comparable

quarter last year. We continue to not anticipate

the accounts payable inventory ratio will be

approximately 48 percent at year-end compared to

43.7 percent at the end of 2001. the year-end

ratio is consistently lower than the second

quarter due to the seasonably weaker fourth

quarter. Inventory at quarter end was

1,074 million up 36.2 percent compared to this

quarter last year. Our inventory grew fast they

are than sales for the quarter and slightly more

than we would like through the merchandise

conversion process. However, we are confor thable

that our inventory growth rate will be less

than year over year sales growth [inaudible] once

the inventory has been complete. Net debt

decreased 238.1 million from year-end to

734.3 million at the end of the second quarter.

We generated 75.1 million in free cash flow during

the quarter and 144.7 million year to date. As in

every year the first half of our fiscal year is

the most seasonably strong for cash generation.

Towards the fourth quarter it will be a slight

cash net user. That being said we're raising our

free cash flow estimate to 100 to 110 million for

the year from 90 to 100 million previously. Our

return on invested capital rose 12 percent on a

trailing 12-month basis, increasing

from 10.6 percent in fiscal 2001. We continue to

focus on enhancing operating results, reducing our

debt levels and effectively managing our working

capital. Due to the strength of our results this

quarter as well as lower interest expense, we are

raising our earnings per share guidance for 2002

to a range of $2.53 to $2.60 before integration

expense and the extraordinary item, compared to

$1.31 in 2001. We haven't previously given

guidance for the third and fourth quarter of 2002

and we'd like to take that opportunity to do so as

well. For the third quarter we believe we can

achieve earnings per share of 82 cents to 86

cents, this would result in a comparable increase

of 55 percent to 62 percent compared to the actual

second quarter increase of 57 percent. For the

fourth quarter we expect to achieve earnings per

share of 38 to 42 cents per share. This increase

in guidance for the remainder of the year is

coming primarily from the full recognition of

interest savings from the refinancing and bond buy

back. As we have said before, we believe we can

achieve a 25 percent increase in earnings per

share in 2003. We'll provide additional details

on our 2003 expectations on our third quarter

conference call.

Now let me turn the call over to Dave Reid who

will update you on the Discount Auto Parts

integration as well as our commercial program.

Thanks, Jim.

As you've heard, the integration of the Discount

Auto Parts stores is progressing well. and as we

mentioned before, we have a two-pronged

integration process. One for those stores out of

the state of Florida, including Georgia, Alabama,

Mississippi, Louisiana, South Carolina and the

Pensacola market of Florida. And one for the

Florida stores are what we call the

in-state stores. By the end of the second quarter

we had converted 108 of 165 stores in the out of

state markets and it's important to note that the

entire out of state integration plan will be

completed by mid November of this year. In the in

state markets, we have completed approximately

75 percent of the merchandise conversion which we

are rolling out by category. This will be

completed by the end of the third quarter. Before

the end of August, we will begin the integration

of our store systems in the in state markets. the

POS conversion of POS systems conversion is

expected to be completed by year-end. Now let me

take just a few minutes to talk about our

commercial program.

During the quarter, as you've heard, we achieved a

same store sales increase of 4 percent and as the

quarter progressed our sales did accelerate. We

have added 41 net new programs year to date,

mostly as a result of the integration process of

discount. We have also realized programs in

various markets to ensure we are serving our

targeted customers well. We continue to focus on

expanding our customer base by building strong

relationships with our customers. Over the

past year we have refined our focus to emphasize

on the quality of our sales rather than just the

quantity, to maximize the profitability of each

commercial program. with that emphasis in mind,

we believe the future sales and profitability of

our commercial business will accelerate. Over the

next several months when we have the opportunity

to focus on growing the Discount Auto Parts

commercial business which represents only about 7

percent of their sales as compared to [inaudible]

only 15 percent at the Advance Auto Parts stores.

with our expanded hard parts selection and our

store systems, we believe the Discount Auto

Parts stores have tremendous opportunity to expand

customer penetration once our programs have been

fully rolled out in these stores.

Now let me turn the call back over to Larry.

Thanks, David.

The remainder of the call I'd like to talk to you

about the strength of the after market, some of

our new marketing and merchandising initiatives,

and other updates. the after market continues to

show a plus growth. In fact, in 2001 the market

grew 3.6 percent to 103 billion from 98 billion in

2000. [inaudible] to highest levels at 9.3 years.

In 2000, there were over 123 million vehicles over

six years old. to sum up, there are more older

vehicles being driven more miles per year needing

more parts than ever before. In looking at the

after market, it's important to note that this

industry does well in good times and bad.

Consumer sentiment has no impact on whether or not

a person buys a starter or battery or replace one

that just broke. Americans have to keep their

vehicles work. They have to go to work, they have

to take their children to school. Most our

customers work on their vehicles out of economic

necessity. Because their average hourly wage is

less than $20 per hour and their take home average

hourly wage is usually less than $15, it's

extremely difficult for them to pay someone 40 to

$60 per hour to work on their car. Nevertheless,

needless to say, we value our customers and their

ability to roll up their sleeves and tackle a

repair job. That's the reason we offer them a

good value as well and advise them on how to

complete the repair project effectively. We

believe that the DIY after market will continue to

be strong given the ingenuity [inaudible] and

increasing number of vehicles coming into the high

repair cycle. As for the DIFM market, we believe

that we have great potential to expand our

penetration into that sector by continuing to

focus on serving our professional installer

customers better. to strengthen the after market

as well as our team's hard work, dedication and

focus, gives us increased confidence that we can

increase our operating margin and close the gap

compared to best in class. On a year date basis,

we picked up 220 basis points and given our strong

performance in the first two quarters, we

anticipate achieving operating margins for

the year of 7.0 to 7.1 percent. Beyond this year,

we have articulated that we see at least another

400 basis points of opportunity. That opportunity

exists in approximately 200 basis points of

further SG and A leverage, and approximately 200 basis

points of gross margin expansion. We believe the

gross margin expansion will come

from approximately 40 basis points of purchasing

efficiencies and savings, 60 basis points of

enhanced supply chain initiatives, and

approximately 100 basis points from a marketing

and merchandising initiatives which we are

continuing with our present roll out. This

includes our efforts in category management and

enhanced store buying reviews.

During the past few months, some of our

shareholders have asked us about insider sales.

Please note that none of the officers of our

company have sold any shares. Similarly, our

larger shareholders, Raymond Spalding and Sears,

have not sold any shares since the secondary

offering. Raymond Spalding and Sears have a long

track record of exiting their investments in an

organized way. It's our expectations that if the

[inaudible] decide to money ties some or all of

their investment in Advance, they will do so in an

organized way.

This year we filed our 10(q). We did this 13 days

in Advance of the due date so we could also file

our officers' certification on August 14th.

Although we were not required to file until August

27, we chose to file early in order to assure our

shareholders we stand behind our filings. We like

to assure our shareholders that we have in place

strong financial controls. We monitor and review

our results on a daily, weekly, and quarterly

basis. Our financial team is strong, led by Jim

Waite and Jeff Gray. All of us are proud of long

history of honesty and integrity with which our

team has bill the company and served our customers

and shareholders. During the second quarter we

launched our team member stock purchase program.

Each full-time employee has been with us at least

one month before the start of a calendar quarter

is eligible to participate in the plan. We've

experienced solid participation in the program and

we're pleased that our team members want to be

share holders in the company that they're helping

to build. All in all, the second quarter was a

strong quarter for Advance Auto Parts with strong

increases in revenue and operating income. We

will continue to focus on managing our operating

expenses, thereby leading to a continued growth in

margins as we go forward. Last and but not least

we are on track in integrating Discount Auto Parts

as you heard from David and by the end of the year

all we will have to do is rebrand the stores in

Florida. Mean while we will reap the benefits of

the advanced merchandise mix and leading edge

store system. We look forward to more progress in

the third quarter.

Thank you for your participation on this call this

morning. And now, Operator, we'd like to ask you

to please poll for questions. 00:42:27

At this time if you would like to ask

a question, please press star then the number 1 on

your telephone keypad. If you would like to

withdraw your question, press the pound key.

Your first question comes from Hollanderies kin

with Lehman Brothers.

Congratulations, gentlemen, on an

outstanding quarter. a couple of questions.

Larry or Jim, can you maybe provide the inventory

levels, maybe on a per store basis where they

stand today versus last year as both

[inaudible] stores and the core Advance stores?

Alan, I can address that. I

don't have the specific numbers in front of me,

but I can tell you, I think where we stand in

regard to that. At the Advance Auto Parts stores,

the inventory at the end of the second quarter

first over is basically in line with where it was

last year. There hasn't been any significant

change at all. In the discount stores, it's a

little higher than last year although not very

much as we're adding some SKU's as we

remerchandise the stores. Where we do have more

inventory this year than last year is in the

distribution center. When you look at our numbers

at the end of the second quarter compared to

last year, as I've said in my comments, we're -

we had inventory a little bit higher than our

sales increased, little bit higher than we'd like,

but it's in the distribution centers as we made

sure we went through the integration process that

we maintained a solid order bill and with it being

in the distribution center, that's the easiest

place going forward to liquidate that as we go

through the rest of the year. So we remain very

comfortable that as we do that, we'll show

inventory growth below the sales growth by the end

of the year.

Okay. Just a couple more questions if

I may. You're now saying the integration expenses

will be no more than $40 million whereas only a

quarter ago you were saying it would approach the

40. Should we conclude from that that the

efficiency by which you're converting the stores

is actually increasing at the converted stores?

I think that's a valid

statement, Alan. I think what happens as we've

gone through integrations in the past, what always

happens is as we start the integrations and work

through the individual steps that had to be done,

the efficiency with which our team performs always

increases because of the prior experience as well

as the routine we get into as we convert stores.

So I think we're seeing that again, I think as we

go through the rest of the year we'll continue to

see that.

Okay. and just one more if I may.

with respect to the [inaudible] program, how

many stores have now on that program versus

last year at this same time?

We're almost at 700 stores as

our current number in total.

Okay. Thank you very much.

Congratulations.

Alan, thank you.

Your next question comes from Gary

Baulter [phonetic] with CFSB.

Two questions, if we can. One is you

made a comment about you're comfortable with third

quarter comps, and given what we've seen which is

no rain and a lot of heat, could we infer

from that that you're comfortable the high end at

least at the current time, third quarter comps?

Gary, I think that we'd like

to just stay with what we said before, mid single

digit comps as we anticipated.

You don't want to add any color on it?

No, I think we have to be

right up front and blunt about what we're going

through. We would like to be optimistic, but

wishful thinking is just not a good business plan

and with everything that's going on in the

economy, we think it's important to stay with the

guidance that we gave prior to.

Two more things on that. One is what

do you see - let's assume the consumer slows down

as we're seeing - obviously we're not seeing from

your business, and during the streak that we're

seeing from other retailers. Historically what

has been the impact on your business from a

consumer slow down?

Historically, and you look

back over a long trended period of time, you can

see where there has been some softening, but

nothing dramatic and I think it really goes back

to the core aspect of the business. And I said

earlier in my remarks, Gary, our customers just

don't consider a dead battery or a dead starter a

discretionary purchase. [inaudible] retail we're

not fashion, we're not jewelry, we're business

where our people work on their cars out of

necessity and it's next to their home or their

apartment in most cases it's I the single biggest

investment they have and it's something that they

just continue to make these catastrophic failure

purchases from our stores. We might see a little

bit of softening in the front room and some

discretionary purchases, but the primary part of

our business in hard parts does very, very well

and as a result you'll see our company, if you

look back at our comps and the long, over the last

five years or even prior to, take a look back in

the '70s and '80s when we still enjoyed very

strong high single digit comps during recessionary

periods.

And then the last thing, could you

give us the average volume at the DAP stores that

are now remaining? Because I would assume you

closed them at lower volume stores.

Yeah, Gary, I'll address that

again without a specific number. I can tell you,

yes, we have the stores that we close at discount

were the lowest volume stores primarily outside

the state of Florida where we closed the store and

move moved a lot of that business to the Advance

surviving stores in the same area. As far as the

remainder of the stores concerned, there are sales

per store would fill still be less than Advance's

average sales per store. That's where, as I said

before, we see a major opportunity to grow those

going forward?

We should be thinking like a 1-1, 1-2

bid number?

Toward the higher end of that

number.

Okay. Thank you very much.

Thanks, Gary.

Your next question comes from Peter

Caruso with Merrill Lynch.

Good morning. You mentioned on the

call that the increase in customer transactions

accounted for about two-thirds of the comp. You

can you clarify with that the adjusted statement

for the Advance stores and if so can you give us

some feel on the increase in customer transactions

that you've seen so far at the Discount Auto Parts

chain.

Yes. I'll be happy to do

that. The results that we're seeing from the

discount stores are not significantly different.

In both cases the larger part is coming

from customer count increases as well as customer

average increases. We talked about before in the

discount stores as we go forward, we see a

significant opportunity to increase the customer

average there. They have especially in Florida

some good customer counts, but their customer

average which which think is driven primarily by

not having as much parts mix as we're now adding

is lower than Advance and we would anticipate

going forward seeing that customer average grow

faster than the Advance customer average.

Okay. Secondly, has the pricing

environment in commodities and front end

merchandise remained relatively stable? And if

you looked at your comp, are you getting comp from

the front end as well as from the sale of parts?

It's with the good balance

across the board, Peter. And the only thing I

could add to that is just a continuation of

more - the same kind of pricing rationalization

we've seen earlier in the year appears to be

continuing through the back half of the year.

Okay. and then lastly, the gross

margin that you booked in the quarter is not

sensitive to having taken any volume purchase

rebates that would require you to hit some sort of

same store sale level in the second half of

the year?

No, it is not. And I will say

in the second quarter of this year the trade

discount related income that went into gross

margin was no hire eras percentage of sales than

last year's second quarter.

Great. Thank you. Good luck for the

next quarter.

Thank you.

Your next question comes from Rob

Schwartz with J.L. Advisors.

Hi, congratulations on a great finish

of the quarter.

Thank you, Rob.

A couple of quick questions. First of

all, gross margin up 170 basis points; what

particularly is contributing to that? I know last

time we spoke about, you know, contracts with your

vendors and seeing improving terms there. and

while you expected most of the benefits in 2003,

is it fair to assume you're receiving some

benefits earlier than expected?

Yes, we did roll with the

renegotiation of our contracts with the vendors.

Bear in mind that we did have contracts prior to

discount that did not lapse until we got further

into this year. So 2003 would really be our first

full year run rate with all the negotiated

programs with our suppliers. We saw very good

balance in margin improvement, front room and back

room, and again we spent an awful lot of time on

price checking and looking at every area of

opportunity. But bear in mind, Rob, we price our

goods and services to maximize contribution yield.

So some of the items that we price, we price for

traffic draw, some for margin enhancement and some

for what they do and representing add on sales.

Great. Thanks. And secondly,

regarding your interest expense, can you briefly

just run through when you renegotiated it, your

credit agreement a month or two ago, can you

discuss the change in interest rates for that

tranche?

Sure. As you recall, when we

put it together, the financing that we had in

place for the discount acwhich circumstances it

was last September, October of 2001 when the

conditions for financing were certainly as

favorable as they've become. and at the same time

our creditworthiness has improved substantially as

well. So the biggest single change that occurred

we were paying [inaudible] plus 300 basis points

with a floor of 4 percent on our tranche B loans.

We were able to renegotiate primarily with the

same lenders as we had before a new package that

gives us a live work plus 2 and I a half percent

with no floor. I think it was a substantial

change that was a reflection of both the market

that we were working in as well as our

creditworthiness that has changed since last year.

That's great. That was on

approximately 300 million of debt?

250.

Great. Thanks, guys. Congratulations

again.

Thank you.

Your next question comes from jack

bill owes with mid wood securities.

Hi. I have a question on Discount

Auto Parts stores. You said you converted 108 out

of I guess 165. How many Discount Auto

Parts stores are there currently and how

many stores remain to be converted?

There are a couple of

approximately 546 stores total of which we've

converted 108. and again as I've explained, we

primarily look at these groups of stores in and

out of state so the out of state group is a total

of 165 stores to be converted and the balance

would be in Florida. and we'll be moving into

Florida in the fourth quarter beginning to convert

physically the actual building.

What's been the experience in terms of

sales gains for the Discount Auto Parts stores

that were converted first?

Jack, this is Jim. For

the stores, as I've said in the notes, the stores

that are in the overlap markets that we converted,

we're saying sales of over 20 percent increases.

For the discount stores that we're converting to

Advance and all other markets, they're running -

that are within our plan or slightly ahead of our

plan as we had projected out for the year and I

think we're starting to meet our expectations

there.

I think that the 3.7 percent comp that

was reported for the stores in the second quarter,

wasn't that negatively impacted by some rainy

weather in June in Florida?

I think overall for the

quarter it probably basically balanced itself out.

There was a period of time in the - for really

two or three weeks if not more in Florida where

there was really a lot of rain that affected the

business. But when you look at the entire

quarter, I don't know that was an overall

significantly negative pack factor.

Okay . I guess what I'm getting at I

would expect that Discount Auto Parts comp store

sales for the third quarter should be in the

middle comp - middle single digit range?

Well, what we've said in our

previous guidance is we had budge fed and

anticipated low single digit comps in the

discount stores for the entire year of 2002 and

and I think what you'll see in the third quarter

is that there is some significant positives in

that the merchandise integration process is almost

done . I think clearly there will be some

positive effects from having that in place. At

the same time we're now in the system conversion

process in the stores we're changing the POS

system and the electronics parts catalog. So we

had to change the direction that we've given, but

we certainly feel very comfortable what we're

seeing in other stores as we are going through the

integration.

Just one last question regarding Track

Auto. With the conversion for Track Auto stores,

what condition are they in compared to Discount

Auto Parts? And also are you paying rent on the

Track Auto stores prior to their opening?

I'll answer both of those

questions. The first one, I'll answer your second

question first. We are not paying rent on

those stores until we take them. The way we have

set up the conversion plan is that track continues

to operate those stores until we take as I said

approximately five per week. When we take the

five, we'll take responsibility for them and start

paying the rent. But prior to that we don't have

any obligation for rent or any other expense of

operating the stores. As far as the condition is

concerned, first of all as I said they're good

solid real estate locations in a market that's

difficult to get real estate at a reasonable

price. So the base from which we can operate is

very good. As I also mentioned, the sales in the

past have been very solid and strong. They have

not been as good in the last year or so because

track has been in bankruptcy as a result the order

fill has not been where it needs to be and the in

stock position in the stores has not been what

we'd like to see. I think I would add to that as

well, having been in those markets over the last

several weeks, there's a lot of good people in

those stores. and with the proper inventory

levels and the Advance name and the Advance

branding and the benefits that comes with - I

think there's huge pore tension in that market.

So the conversion of two weeks in

terms of converting it to Advance auto

parts stores will be similar tasks as you would

for Discount Auto Parts stores?

Jack, when we take ownership

of those stores, unlike discount we're going to

close the store for two days - two weeks, I'm

sorry, and do a complete renovation at that time.

Like a new store.

Consider it taking the store

dark and us taking over a vacant building and

converting it look a new store.

Okay. Thank you very much.

Good enough. Thank you, jack.

Your next question comes from Renee

Shaw with Morgan Stanley.

Hi, a couple questions. On the

inventory levels, do you expect, given you're

about 75 percent due to merchandise mix

inventories to grow slower than sales in the third

quarter or for the full year? And second can you

talk about the payable inventory ratio how high

you think that can get since that improved this

quarter? And just finally on new store openings,

could you talk about some of the target markets

that you're looking at? Thanks.

Let me take the new stores.

All of our new stores, as we've said before and

I'd just like to reiterate, all of our new stores

are in our existing [inaudible] in the states we

operate in now. It is not our intent in the

foreseeable future to be spring boarding into new

states or drastic new marketing areas. We have

plenty of room to fill in the marketing areas that

we're in right now. There's plenty room for us to

continue opening new stores in Florida [inaudible]

and we're starting construction on new stores in

Florida. So we've got plenty of room for the

foreseeable future to continue to open new stores

and dense up DMA's where we are poorly

represented. So for the time being in the

foreseeable future we will not be going into new

states. Jim?

Renee, as far as the inventory

is concerned, we anticipate being back in line

with our sales growth by the end of the third

quarter. and as I've said in our remarks, we

still feel that by the end of the year we'll be

growing sales at a rate faster than our inventory.

As far as the payables to inventory ratio, also

mention in my remarks that at the end of the year

we should be at 48 percent accounts payable ratio

compared to 43.7 last year. and as I've said, the

our year-end set to fall at the end of December is

a [inaudible] weaker time frame for us our account

ratio is less than it is in the middle of the

summer but it will also at the same time be

significantly higher than it was at the end of

last year. Lastly, I think our single biggest

opportunity to increase the accounts payable to

inventory ratio going forward is to increase our

inventory terms which is going to come back to a

lot of the [inaudible] we are working on in term

of custom mix and category management and a number

of other things that we anticipate driving sales

faster than inventory growth as we go forward.

Great. Thanks a lot.

Thank you.

Your next question comes from Nafar

Nazeem [phonetic] with J.P. Morgan.

Hi. It's actually Carla Casello

[phonetic] J.P. Morgan. I'm wondering about

competition for the commercial business. Are you

seeing any pick up work? We've heard of of a

number of players starting to increase their focus

on that business.

I think that we recognize that

as well and I think that our plan as Jim and David

articulated to you, something we're very

comfortable with. We have plenty of room to

continue right sizing our programs taking

advantage of the close in location. Please bear

in mind when it does come to the commercial

program, the two things that really matter most is

availability and time. and we think that we can

really fine tune that expertise with the locations

that are close to our stores and continue to

refine our product mix so we have the right

product and getting it to the commercial account

and that hot shot half hour that they really

request and require. Balancing that with the

expense ratio to support that kind of program is

something we're working diligently to refine. As

Jim indicated, we're not rolling out hundreds of

programs or hundreds of trucks, but rather, as

David indicated, a reallocating the trucks,

drivers, and product mix to support those programs

so we can get good density and increase our rate

of return and profitability on a buy program

basis.

So you're not seeing any increase in

price competition as players enter that market?

We believe that the

rationalization in pricing that I indicated

earlier carries through to the commercial end of

the business as well.

Okay. I'm also - if you have any

insight into the trend in DIY versus D I S M. I

would assume that that could be a risk if the -

we're seeing greater sales of new cars lately

instead of used cars and if that hurts the DIY

market, I'm curious.

We don't think so. I think

the thing you have to realize is when somebody

buys a new car and they trade-in a used car, it

doesn't matter if that used car is two years old

or six years old, the car is not going to the

scrap yard. I think it's important to not only

look at new cars the way you do, but you should

also look at the scrappage rate. That's what's

important to us. More vehicles are out there

today than there ever was before and I think that

when you look at that continued growing rate,

according to the U.S. Department of Commerce and

the 123 and 124 million registered vehicles out

there today versus 1991 when there was a

considerably less number than that, the thing that

drives that is the scrappage rate versus new cars

coming out. So we just see more vehicles out

there. I indicated earlier the huge increase in

cars that are six years old and our customers'

willingness to maintain those cars on a going

forward basis. But clearly when somebody buys a

new car, the vehicle that they're trading in is

not going to the scrap heat, it's going into the

secondary market. Many people buy those vehicles

turn right around, put batteries in them, put

shocks on them, have to do the belts and hoses to

maintain them and oftentimes it's break time and

things like that. That's when they fall right

into being our core customer.

Okay. Great. I one other question.

We've noticed it seems like increased auto parts

sections at Wal-Mart super centers and I'm

wondering if that's a new force of competition for

you or has that been an ongoing dynamic?

26 percent of our SKU's not

our sales or tonnage, but about 26 percent of our

SKU's are sold in other classes of trade, we're

growing our market share against these other

classes of trade as well as the market share

growth we're making with our core competitors.

Okay. Great. Thank you.

Thank you very much.

Your next question comes

from Stephanie Rogers with B.N.P. Merriman

[phonetic].

Hello, gentlemen. Thank you for the

best news I've had in a couple of weeks.

Thank you for participating in

our call.

Absolutely. I have a question about

the Track stores. Why did they file for

bankruptcy?

You know, as we presented in

the past in our different group meetings, I think

that - I'd like to go back and focus on one

fundamental point and that's the fact that in this

industry, size matters. It's no different than

why and how we acquire the [inaudible] stores.

It's very difficult for a player of that size to

have the kind of economy of scale from a

purchasing standpoint, from a logistics

standpoint, the whole supply chain is very

expensive for them. They certainly don't have the

IT support to find the parts in the system. and

what they do have, they don't have the advertising

or the field team to support it as well. It's the

kind of leverage best in class the top three or

five retailers in this sector that can

disproportionately take advantage and leverage

that on a go forward basis and give the customer

better availability, better value, better service

and in the commercial end of the business which

track did not participate in, having the right

part in the right place and doing it quickly makes

all the difference in the world. So I don't think

there is any one thing that drove them into

bankruptcy. I think it's just the aspect of the

cost of doing business today and the efficiencies

that go with the size and scale that we're able to

accomplish that they couldn't.

And the second question regarding that

region, are you going to have any price

flexibility in that area since it's so difficult

to get an inroad? Are you going to be able to

charge higher prices? Margins in those stores

will be better?

We have different pricing

zones. It's something we have to look at on an

individual basis and we're looking at maximizing

our pricing zones on a value orientation and where

we can get the best contribution deal. I think

you also have to bear am mind there are higher

expenses associated with the D.C. market as well.

the rents are higher, the shrinks are higher, cost

of labor, cost of doing business overall is a

little bit heighter and we have to balance that

with our margins and our promotional activity, but

it's something I have to tell you we're very

excited about.

Thank you very much.

Thank you.

Your next question comes from Steve

Kartrat [phonetic] with Berman Capital.

Hi. This is actually Christina Henry

with with Berman Capital. I had two questions.

The first one is while you achieve SG and A leverage

in this quarter, it was less than had been

achieved year to date. I was wondering why it was

such strong sales there would be less SG and A

leverage. [why with such strong sales]

I think there are a couple

reasons for that. One is in the first quarter we

had almost an 8 percent comp, this quarter we had

a 5. So we are the type of business that has a

fair amount of fixed cost and when we do run even

higher comps than we did this quarter we have the

ability to leverage more. But secondly, we are

seeing leveraging in a lot of categories in our

P and L, and I think we anticipated Larry said in his

comments that we can leverage a lot more going

forward. We're not happy today where we are with

SG and A and it's a matter of attacking each

individual line and making sure we're growing

those lines at a rate that are reducing those

lines at a rate much less than our sales growth.

You can rest assured that

we've identified that opportunity and it's a very

important part of our L TB. and as we go forward

implementing our long term plan and budgeting

process for '03 we see that as a significant

opportunity, as I indicated in my remarks.

Uh-huh, okay. Thank you. And the

other question that I had was what would you

estimate to be the pretax flow through on comps

above the 2 to 3 percent range?

I don't know that there's a

real simple answer to that question. I think,

clearly, looking at actual numbers, if you look at

the first quarter and second quarter where we ran

in the first quarter almost 8 percent comps, at

that level there is not much additional expense

incurred to generate the sales. If the sales are

being generated at the same margin level at the

expense line there is just not very much expense

associated with it. So when there is a

substantial flow through of 25 percent or more, it

depends on how the additional comp is getting -

is coming and what expenses or margin effect it

has to get there. But substantial ability to

leverage our business as we have higher comps.

Thank you very much.

Your last question comes from Susan

Jensen with Lehman Brothers.

Finally. Let me add my

congratulations to a great quarter as well.

Thank you.

Larry, going back to something you

said in your initial remarks, I'd just like to

follow-up a little bit on your longer term gross

margin increase of 200 basis points. Part of that

is going to come out or I guess the largest part

is going to come out of the marketing and

[inaudible] your category management. How are you

doing on that so far? I know you've made great

progress, but can you give us any specifics?

I think it's safe to say that

since we wrote an entire marketing program

last year, started implemented at the end of

last year, it's based around category management.

There's certainly no rocket science to what we're

doing. It's nothing more than the best in class

marketing merchandising, performance measures,

[inaudible] one year foot contribution yield by

category and the like that are being rolled out.

Huh-uh know part of this is IT, part of it is

personnel development, part of it is the

implementation of the higher and turn^over rates

of return that we have for the different

categories. It's an ongoing process. Please know

that it's not something that we have a time line

that says we're finished. These line enhancements

and category review programs, big part of the

development of our people. Has an awful lot to do

with how we buy our product, promote our product.

We're moving along going through the stores.

We've done this through probably 30 percent of our

mix implemented at store level. We've got an

awful lot more to do and as we do it and go

through the rest of the store front room and back

room, when we come back and do what we did the

last part of last year and start it all over again

after annualize the dates of the roll outs of

those first categories.

Great. Are there any particular

categories that you've had enormous success with

or any categories that conversely you've been

disappointed with as you [inaudible]?

Some of each. We don't

disclose by particular category what we're doing

well in or not. We know that our core business

doesn't change from year to year. You know how

important batteries and hard parts are in this

business. And you also know some of the

fashionallable trends that we've introduced into

our front room [Fashionable]. We're doing very

well with a lot of these new categories.

Conversionly perhaps we over^did some of the

other. I think we had very keen eye on what's

working and what isn't working. We have to

balance that with Jim's remarks relative to the

inventory buildup that we had and on a go forward

basis we have to leverage our sales against better

inventory turn as well.

Great. Thank you very much. and my

congratulations to you.

Thank you for participating on

the call.

I would now like to turn the call

back over to management for closing remarks.

Well, we're very proud of our

progress to date. We are pleased [inaudible] we

don't confuse effort with results. We've reached

a new plateau, but clearly looking at the top of

the mountain as best in class, we know where we

have to go. We know what we have to do to get

there. We have the deepest resolve to make it

become reality and we certainly appreciate your

support and participation with our company as we

go forward with it and I'd like to close just by

saying that we really believe we have - this

company has a long runway ahead of it and great

legs understand it and we're very excited about

our future. Thank you very much for participating

today.

Ladies and gentlemen, that concludes

our conference call for today. You may all

disconnect and thank you for participating.