領先汽車配件 (AAP) 2003 Q1 法說會逐字稿

Welcome to the Advance Auto Parts first quarter 2003 conference call.

Later we will conduct a question and answer session.

If at that time you have a question, you may get into the question queue by pressing star 1 on your touch-tone telephone keypad.

Before we begin, Eric Margolin, Senior Vice President and General Counsel will be make a statement.

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 including our future free cash flow and earnings per share.

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.

The company intends these forward-looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available.

Our results can be found on our press release and 8-K filing and are available on our website at www.advancedautoparts.com.

I will now turn the call over to Larry Castellani, our Chairman and Chief Executive Officer.

Thank you.

Good morning.

With me this morning is Jim Wade President and Chief Financial Officer, Jeff Gray Senior Vice Press and Controller, and Sheila Stui (ph) Director of External Communications.

During first quarter, our team proved by it's strong earnings performance that our strategy to increase our operating margins is generating strong results.

In fact, we generated a 167 basis point increase in comparable operating margins in the quarter.

With comparable store sales gains of just 1.1%, our team achieved a year over year gross margin improvement of 179 basis points.

We also managed our expenses extremely well during the first quarter's tough sales environment, resulting in comparable SG&A being up only 12 basis points.

As a result, our comparable earnings per diluted share reached 98 cents, an increase of over 78%.

Let me point out that our comparable results do not include the non-recurring expenses associated with the early prepayment of debt and the integration of Discount Auto Parts.

The increase in gross margin was the primary driver of our strong results.

We sold a better mix of products and we further benefited from purchasing merchandise at lower overall delivered acquisition cost.

Needless to say, our category management initiatives are paying off.

During the quarter, we sold more higher margin hard parts and batteries as a percentage of our sales mix and sold a reduced percentage of our mix in lower margin categories such as chemicals, oils, washes and waxes.

As we've discussed before, over two-thirds of our sales consist of non-discretionary purchases, and most of these items carry strong gross margins.

This merchandises strength differentiates us from other forms of retailing.

We often say, our customers do not consider a dead battery a discretionary purchase.

Our gross margin improvement was also impacted by realized efficiencies in our supply chain.

A positive initiative that will continue to generate cost savings as we implement our long-term supply chain efficiency programs.

Needless to say, we are on track to meet our target of expanding our operating margins by 400 basis points over the next four to five years.

We are very pleased with our gross margin improvements and our ability to manage expenses in a challenging sales environment.

We are not pleased with our same-store sales results for the first quarter, but we believe we can improve our comparable store sales results due to our sales-building initiatives and the return to normalized weather patterns.

During the first quarter, our sales were affected by the severe weather.

However, when the weather was favorable, we achieved strong sales results.

We were also up against our strongest comp comparison of 7.8% in the first quarter last year.

We saw some of our Advance Auto Parts markets perform stronger than others, and where this was the case, we have identified opportunities to improve our execution, and we have taken the steps to maximize our opportunities going forward.

Lastly, as we've discussed before, the rollout of the in-store systems in our Discount Auto Parts stores in Florida caused some sales disruptions which we addressed by slowing down the rollout and enhancing our training initiatives.

We're seeing stronger results from these stores, and we thank our team for their dedication through this huge integration process.

We are on track for continued improvement in sales.

I'd like to point out that as we progress through the second half of the first quarter, and the beginning of the second quarter, our sales trends were stronger, in the range of 2% to 3%.

Based on results to date in our second quarter, this trend has continued.

Although we do not believe the industry fundamentals have changed, we have decided to build our guidance on comparable store sales growth of 3% to 4% for the remainder of the year.

We'd like to clarify that our internal goals have not changed, and I'd also like to point out that our management team's bonuses are based on a higher same-store sales level.

Although we are adjusting our comparable store sales guidance, we are raising our comparable earnings per diluted share guidance to a range of $3.85 to $3.95, primarily due to the sustainability and the strength of our gross margin improvements.

The guidance implies a 44% to 47% increase in comparable earnings per share.

We also feel very strongly about our opportunities to continue to generate sales and operating margin improvements.

Therefore, we are reiterating our 25% earnings per share growth target beyond 2003.

Jim will elaborate further on our guidance later in the call.

As we move forward in 2003 and beyond, we will continue to reap the benefits of enhanced sales and operating margin improvements due to our key initiatives.

These initiatives include MPT, our labor management system, category management, our supply chain initiatives, and the rollout of APAL, our advanced parts and accessory lookup in-store POS and electronic parts catalog system.

MTP, our Management Planning and Training Program, has been rolled out to all of our stores except the Discount Auto Parts stores in Florida, which will be completed by the end of the third quarter.

Last year, the program saved us considerable labor dollars and allowed us to leverage our labor expenses as a percent of sales.

During this year's first quarter, the MTP program was instrumental in helping us manage our labor during a tough sales environment.

Now we're ready to take the program to the next level by fully automating it.

The full automation of the program will reduce the amount of time a store manager needs to develop the weekly store's labor program schedule.

More importantly, it will increase our total sales growth and enhance our sales mix, as we more effectively schedule our parts pro's to meet our daily customer traffic projections.

We are testing the automated program in 16 stores and plan to begin the rollout in July 2003.

The rollout is anticipated to be completed by the end of the first quarter 2004.

The key goal of MPT is to have the right person at the right time doing the proper task to drive our top line in a cost-effective manner.

Now for an update on category management.

Our gross margin improvement demonstrates that category management is working.

By the end of July, we will have reviewed over 50% of our major categories representing almost 70% of our total sales.

In the categories that have had their initial implementation, we are seeing increases in market share for that product line as well as contribution margin.

As expected, we found considerable opportunities to refine our inventory selection.

In fact, some of our categories saw decreased SKU counts while other categories saw an increase in SKUs.

We also found opportunities to do more volume with fewer suppliers, generating efficiencies for them and resulting in less redundancy in our distribution centers.

We'd like to remind you that we are just in the beginning stages of category management, and we believe that this process will continue to help us meet our operating margin expansion goals for the next four to five years and then some.

We'd like to thank our merchandising team for doing such a great job.

Keep up the good work, team.

We're also experiencing significant progress with our logistic initiatives.

We are ahead of schedule with the operating margin improvements that we are anticipating from these initiatives.

We continue to find opportunities to increase labor productivity and reduce transportation expenses even with higher fuel costs.

We are leveraging the existing capacity in our distribution centers as we open more stores in our existing markets, and we believe we have sufficient capacity for several more years.

Our APAL system rollout is also on track.

Currently 1,252 stores or 51% of our stores had the APAL system.

One hundred and eighty-five stores were converted in the first quarter.

We anticipate the pace of the rollout will increase in the second quarter, and the total company rollout will be completed in 2004.

In 2003, we have the same three goals that we had last year, and we are on track to achieve these goals.

One, significantly expanding our operating margins.

Two, prepaying our debt.

And three, the successful integration of Discount Auto Parts.

Just an update on the in-store systems integration at the Discount Auto Parts stores in Florida.

We've completed the system integration at 237 of the 395 stores, leaving only 158 stores to be completed.

We plan to complete all the stores by the end of the third quarter, and the stores that have received the enhanced training have shown better results.

Curt Schumacher, our Senior Vice President of store operations in Florida, and Paul Placing (ph), our Executive Vice President of Marketing and Merchandising, are heading up the integration process, and together they are working to ensure the proper communications, leadership and follow-through for us to achieve our goals.

All in all, we are proud of what our team has accomplished this quarter, and we'd like to thank them for their dedication to our customers.

Now I'd like to turn the call over to Jim Wade to discuss our financial results.

Jim?

Thank you, Larry.

Good morning and thank you all for joining us on this morning's call.

Our team produced an increase in sales of 2.9% to a billion, thirty-three point five million in the first quarter.

Sales for our retail segment including both our DIY and commercial increased 4%, to $1,006,000,000 offset by a 25% expected decrease in our wholesale segment, which generated only $27.6 million in sales for the quarter.

The wholesale segment is made up of the declining Western Auto dealer base and does not include sales to our commercial delivery customers.

Our same-store sales gain of 1.1% in the first quarter was up against our toughest comparison by far for the year of 7.8%.

Our DIY counts in the first quarter were 0.6% compared to a very strong 8.5% last year.

And our commercial comps were up 3.6%, compared to 4.9% last year.

During the first quarter, the increase in our comparable store sales came from an increase in average ticket as the severe weather affected our customer traffic.

Last year in the first quarter, we had a very strong customer count increase.

This year, the ice and snowstorms kept customers indoors rather than outside working on their vehicles as they did in last year's warmer, more milder weather.

During the quarter, we added 56 commercial programs.

From year-end, we've increased the number of commercial programs to a total of 1467.

Our Advance Auto Parts stores excluding our Discount Auto part stores had a same-store sales increase of 0.5%.

The discount stores, included in our comparable base for the entire quarter, generated comparable store sales gain of 3.2% on top of 5.1% last year with the stores outside of Florida continuing to produce double digit gains.

During the first part of the quarter sales at the Florida discount stores were impacted by weather and as we discussed previously, store system conversion disruption.

As the quarter progressed, our sales results improved.

During the first quarter, we physically converted 41 stores and grand-opened both the Tallahassee and Jacksonville markets, and we are very pleased with the results we're seeing.

We have a total of 92 stores in Florida already converted to the advanced/Discount Auto Parts format.

During the first quarter, we opened 33 new stores and closed 12, ending the quarter with 2,456 stores.

We're on track to open approximately 125 new stores this year, and close 25 under-performing stores, resulting in a net gain of 100 stores.

You may recall in the first quarter of 2002, we closed 119 Discount Auto Parts stores which overlapped with Advanced stores as part of the integration, we also continued to achieve record sales in our new stores opened in 2002 and 2003.

During the quarter, we also relocated 12 stores, and we anticipate relocating approximately 40 to 50 stores during the 2003 year.

As a result of our new stores, our relocations and remodels, we now have 447 stores fully converted to our new 20/10 look and are on track to have over 700 stores remodeled by year-end.

We're also pleased to announce that last week, we contracted to purchase 8 stores from Car Part Auto Parts in New Jersey.

These stores will add to our growing market in the Northeast and will be converted to Advance Auto Parts over the next 45 days.

During the first quarter, our gross margin rose 179 basis points to 45.3%, due to our greater mix of higher margin items, better buying and leveraging of our logistics expense.

As Larry explained earlier, our category management initiatives led by Mike Capola (ph), our SVP of Merchandising, is generating strong results.

Our logistics team is also making significant progress in increasing the productivity of our supply chain, and we see this area providing additional improvements for a long time yet to come.

Although some of the gross margin increase in the first quarter came from the effect of the weather, we believe our gross margins for the full 2003 year will increase a full 100 basis points over last year.

We also like to point out that during the quarter, we again experienced deflationary acquisition cost from our suppliers, resulting in a (inaudible) credit of $3.8 million.

While we're talking about gross margin, I also wanted to add that we have adopted the new EITF 2-16 which is titled "accounting by reseller for cash consideration received from a vendor," without any need to change our existing policies for recognition of vendor income.

You may recall we pro actively moved our unrestricted co-op funds from SG&A to gross margin in 2001 and have aggressively been moving to net costing for all of our merchandising since then, as part of our category management program.

Our comparable SG&A increased only 12 basis points to 37.7% in the first quarter.

We've managed our expenses in a tough sales environment, showing our ability to flex up and down as we need to.

On a GAAP basis, SG&A declined from 38.7% to 38.1% due to the reduction in year over year integration expenses associated with the Discount Auto Parts acquisition.

As we expected, Discount Auto Parts integration expenses for the first quarter were 3.4 million.

This year integration expenses will be front-loaded as we complete the store systems rollout by the end of the third quarter.

The only remaining expenses after the third quarter will be the ongoing physical store conversions and the conversion of the Florida distribution center to our warehouse management system.

As we've previously said, we anticipate integration expenses of approximately $10 million in total for 2003, and will not break out integration expenses in 2004 because they will no longer be material.

Comparable operating margins for the first quarter rose 167 basis points to 7.5%, due primarily again to the enhanced gross margins.

Our GAAP operating, margins which include the Discount Auto Parts integration expenses rose to 7.2%.

Interest expense declined to $19.6 million in the first quarter from $27.6 million last year as a result of our strong cash flow, much lower debt levels and lower interest rates.

Our debt to total capitalization has improved to 58% from 61% at the end of 2002, and from 77% at the end of 2001, and we anticipate reaching approximately 50% by year-end 2003.

During the first quarter, we retired all of our $417 million in face value of our high interest bearing notes and debentures.

Early on in the quarter, we purchased $12 million in the open market and all of the remaining $405 million were redeemed on April 15th, which was the earliest call date possible.

The early prepayment of this debt resulted in non-recurring charge of $46.9 million, or $28.8 million net of taxes, or 79cents per diluted share.

These charges included cash outflows of $26.6 million for cash call premiums and refinancing expenses, and $10.5 million of unamortized bond discounts, as well as a non-cash charge of $9.8 million of deferred debt issuance cost write-offs.

The $26.6 million in cash call premiums and refinancing fees are the only incremental costs for this transaction.

When calculating the reduction of interest expense and the related tax benefits, the retirement of this debt will be cash flow neutral within 12 months, making the cash flow dynamics of this transaction highly favorable going forward.

In simple terms, we replaced our debt costing us approximately 11% with debt costing us less than 5%.

Our original estimate of 72 cents for the non-recurring charge reflecting us leaving approximately $30 million of bonds outstanding, but with our strong free cash flow trends we elected to redeem the total amount.

Our tax rate for the quarter was 38.5%, and we anticipate that as our approximate tax rate for the remainder of 2003.

This was a decrease from 38.8% in 2002, due to our continued focus on tax planning, especially at the state level.

For the first quarter, our comparable earnings per diluted share rose 78.2% to 98 cents.

GAAP earnings per diluted share declined to 14 cents, which included the 79 cents in expenses associated with the retirement of our high yield notes and debentures.

GAAP earnings also included the 5 cents of integration expenses associated with the integration of Discount Auto Parts.

We'll now review the key components of our balance sheet and cash flow statement.

You'll see we made tremendous progress again in the first quarter in generating free cash flow and higher return on invested capital.

Our Cap-ex for the quarter was $30.3 million, which included $5.7 million related to the physical conversion of the Discount Auto Parts stores in Florida.

Cap-ex for the year is anticipated to be about $95 million.

Accounts receivable declined by $13 million from the same time last year, as receivables from vendors from the discount merchandise conversion continued to decline as we expected.

Inventory at the end of the quarter was $1,066,000,000, up 5% compared to last year.

Inventories were up slightly more than sales, largely due to the Discount Auto Parts inventory conversion process, where we expanded the selection of hard parts in those stores, increasing the overall inventory levels in line with Advance Auto Parts stores.

We began that inventory conversion in the first quarter last year and didn't complete it until the end of the third quarter.

Inventory was up 1.7% from year-end, reflecting new stores and seasonality.

As we anniversary the inventory conversion process, we anticipate inventory will continue to grow at a slower pace than sales.

Our accounts payable to inventory ratio declined to 48.8% from 50.9% last year.

We had very strong sales in the first quarter last year, and as sales volumes normalized this year, we anticipate the ratio will exceed last year and will be approximately 48% by year-end compared to 45% last year.

Our total debt decreased by $54.4 million during the first quarter to $681 million.

We generated $94.1 million in free cash flow during the first quarter, which was used to prepay the debt.

Not deducted from that figure is the $36.9 million of cash outlays associated with early retirement of our debt as I outlined earlier.

After deducting the non-recurring cash outlays, free cash flow was $57.2 million for the first quarter.

Because we look at our free cash flow as the amount of funds we generate that can be used to pay down debt, we believe the $57.2 million more accurately reflects our true cash flow for the first quarter.

We anticipate free cash flow for the full year of $150 million after the $36.9 million cash out-flow retired debt, or an additional $92.8 million for the remaining three quarters, which will result in a year-end debt level of approximately $590 million.

Our return on invested capital rose significantly to 15.1% on a trailing 12-month basis compared to 14.3% last year.

We continue to focus on enhancing our operating results, reducing our debt levels, and effectively managing our working capital.

Now I'll wrap up by providing some guidance for 2003.

For the year, we are raising our comparable earnings per diluted share guidance to $3.85 to $3.95.

This guidance excludes the expense associated with the debt refinancing, integration expenses, and the positive effect of this year's 53rd week.

For the second quarter, we are raising our guidance for comparable earnings per diluted share to a range of $1.01 to $1.05, compared to 77 cents last year, generating a 31% to 36% gain.

As we've said earlier, these comparable earnings per share gains can be achieved with comparable store sales gains of 3% to 4%.

Lastly, our guidelines do not include the expensing of stock-based compensation, which will be implemented when the accounting rules are finalized.

Based on the current (inaudible) method, the effect on our 2000 results would be approximately 8 cents per diluted share.

We remain very excited about the opportunity for the remainder of 2003 and beyond.

Again, as we noted earlier, our results including a complete reconciliation of our GAAP to comparable results are available on our press release and 8-K filing which can be found on our web-site at www.advancedautoparts.com.

Now I'd like to turn the call back over to Larry.

Thanks, Jim.

Overall, we hope we've demonstrated we're on track to continue to produce strong operating margin improvements.

We're moving forward with category management, enhanced logistics efficiencies, MPT and APAL.

We will keep you updated on our progress.

Thank you for participating in the call today, and we look forward to taking your questions.

Operator, would you please open the floor for questions?

At this time if you have a question please press star followed by 1 on your touch-tone phone. * 2 to withdraw your question.

The questions will be taken in the order they are received.

The first question is from Brian Nagel of UBS Warburg.

Congratulations on the great quarter.

I had a few questions.

First off, what was the LIFO credit last year?

Brian, if you go on with your other questions and we'll give that to new a second.

The next one is with regard to gross margin, you talk about the potential for your target of 100 basis point improvement this year.

What is your ultimate target when you look further out than that, what do you think you can ultimately get gross margins to?

Brian, I think we're comfortable with the guidance we gave.

And I think that that's something -- it's work in progress, it's something we work on an ongoing basis, continue to evaluate.

We've given the guidance that over time, we'll increase that number by two hundred basis points and it will come through the initiatives that I talked about in our call.

On the timeliness and the basis over time, as we've said in our previous calls, we've gone through it as part of the 400 basis points margin improvement that will come over the next few years.

Brian, the LIFO credit in the first quarter of last year was $5.5 million.

Great.

And the final question I have is, given all the initiatives you guys have, it seems as if your comp guidance is a little conservative for this year.

Would you like to comment on that?

Brian, we think that in the environment that we're in, it's something that we think we have to be realistic about and we're managing our expenses to a very tight level, and we think if all the initiatives fall into place the way we should, we think we're going to have a terrific future.

We're very proud of our past, but clearly, Brian, we're more excited about our future.

Thank you very much.

Good quarter.

The next question is from Alan Rifkin of Lehman Brothers.

Your question, please.

Congratulations, everyone, on an outstanding quarter.

Couple of questions.

While there were many drivers to your gross margin, can you maybe quantify or even prioritize the impact between mix that are purchasing in the category management initiatives?

And secondly, Larry, I know you've spoken about the 400 basis points of property margin expansion opportunities going forward which include 200 basis points on the gross margin line.

Do you feel comfortable in saying that you believe you can realize 200 basis points of gross margin opportunities irrespective of what your comps are?

Thanks a lot.

Alan, thank you.

We will accomplish the gross margin improvement, and I think we've demonstrated it in the first quarter of this year, with all the initiatives we have going on of where we grow with our comps.

And clearly our vision is to drive the top line proportionately.

We're very comfortable with what we're doing.

To answer your first question on a relative basis, the majority of our margin enhancement really came from category management, and then a smaller part of it from our logistics savings.

Would you say maybe half of it came from category management or would you not want to comment?

It's safe to say that more than half came from category management.

And I would like to also point out that not only did more than half come from category management and a lesser degree from the supply chain savings, but I think it's important to point out, we're just starting this initiative.

Ok.

One more question if I may.

While you're still keeping the same time horizon with respect so the Florida conversions and getting the system implementation and the training done by the third quarter, are you more comfortable today than you were at the beginning of the first quarter with the training implementation down there?

Absolutely.

There's no question that Paul Placing (ph) and Curt Schumacher (ph) have identified the opportunities we had, put corrective measures in place in support of the whole team.

We've got the right things in place, the right people doing the right thing, and we're very comfortable with it.

That's great.

Thanks again.

The next question is from Mike Weissberg (ph).

Your question, please.

Good morning.

Larry, are the management bonuses tied to the comp level for this year?

The original budgets for the year, not the lower guidance that we gave.

Right.

So the original budget for comps would be --

We have an internal budget that is considerably higher than what we've discussed with you today.

So if you don't do better comps, you guys are going to starve then.

Our team across the board has a tremendous incentive to significantly improve our comp store sales.

What did you say, if I could, what was the DIY comps last year?

I missed that.

It was 06 this year versus what?

8.5.

8.5, did I hear?

8.5, yes, that's correct.

Great.

And what is the guidance for this year implies what SG&A level excluding the restructuring?

The guidance would result in SG&A percentage being relatively the same as last year.

Ok.

Because of the lower -- because of the lower comp guidance?

That's correct.

And obviously as you've seen in the past, when we do have the opportunity to have a higher sales level, we can really show some solid leverage on the SG&A line and that really flows through well.

Great.

When does the 53rd week flow in?

Is that fourth quarter?

Fourth quarter.

Fourth quarter.

Great.

And the DAP conversion, how will that play out for the next couple of quarters in Florida?

As far as the integration expense?

No, converting the remaining stores.

Ok.

The system conversion of the remaining stores will be spread pretty much equally between the second and third quarter.

Great.

Great job.

Thanks a lot.

Thank you.

The next question is from Jack Balos (ph) of Midwest Research.

Good morning.

Regarding your sales trends, you said that in warmer climates, I assume that might be southern regions, that you had stronger sales.

I was wondering whether in the first quarter or so far in the second quarter, you could quantify how much stronger they are.

Jack, let me qualify that.

We had stronger comps in different areas of the country, not necessarily in the Southeast.

Where the weather was good, where we had an opportunity to sell a better mix of product, we also had stronger comps.

It was rather unusual for us to have the disproportionate comp growth that we had in the first quarter of this year versus the other parts of the country.

We've identified some execution opportunities we had in various parts of the country and have made appropriate changes to improve our comp run rate, but clearly, we had a difference in comp growth rate in the different parts of the country this past quarter, which is unusual for us.

So the differences were not solely due to weather differences?

No, that's correct.

Jack, the comment was that the -- when we saw more normal weather during the first quarter, we saw stronger results.

That was the comment that Larry had made earlier.

Right, right.

So how would you characterize the weather so far in the second quarter?

The weather is starting to normalize, Jack.

One way or the other, historically, spring and summer may come early or may come later, but eventually, they come.

And with the initiatives we put in place and all the work that we're going through and everything we covered on the call, we believe significantly improves our ability to take advantage of the traffic count that we believe will be generated in our stores.

Regarding gross margin, you said that most of the improvement took place due to category management.

Does that flow from that that that's primarily due to utilizing category management to get lower acquisition costs or better merchandise mix?

A combination of both.

And also in addition to that, those two items, is the lower cost that we bought product for and also the lower cost at which we laid it into the store from a supply chain savings.

It's all rolled into the reviews that Mike Capolla (ph) and our team is using with the vendors as we go through our SKU count and inventory turns and the costs affiliated with laying the product into our stores.

It's got to do with everything, Jack, from our pricing, our promotional activity, what SKUs we carry, what SKUs we don't, our warranty programs.

It's a totally inclusive program, Jack.

And that is why as we mature this method and go through our reviews -- our annual and quarterly reviews, taking a look at the results of our effectuated plans, we get an opportunity with the category management program to refine those efforts and these initiatives as we go forward.

And that's why these efforts are producing the kind of margin improvements they are.

That's why they're sustainable, and that's why they'll continue to grow as we go forward and that's why we're so confident we'll gain the other 200 basis points.

So far as Discount Auto Parts is concerned during the second quarter, you have easier comparisons, I think you were up 3.6 last year in the second quarter versus 1.8 the prior year.

So what would be your expectations in the second quarter for comp store sales gain for Discount Auto Parts?

We're looking in the 3 to 4 range, Jack.

Remember, we're going through the remainder of the conversions as well.

Right.

Right.

Ok.

Just one last thing, Jim, and that is, you had obviously excellent expense control, SG&A control.

I was just wondering, given your higher level of earnings, if during this quarter, you accrued higher management bonuses that you would expect for this year.

Good question, Jack.

We have a plan within our company so that when our team members don't make a given level of bonus in a quarter, if they do achieve it during the year, they have the ability to roll that up.

So we certainly have provided our team members the opportunity to achieve and exceed the bonus objectives in our plans.

So are you saying that there was a higher level of bonus accrual in the first quarter?

I would say the proper level of bonus accrual was in the first quarter.

Ok.

Thank you

The next question is from Brett Jordan of Advest, Inc.

Your question, please.

Good morning.

A couple quick questions.

One on the inventory, you talk about some expansion of the hard parts at DAP.

If you could break out the inventory growth, what was the DAP contributor on that inventory growth?

Yeah, in the first quarter, the vast majority of the increase in inventory over last year is coming from the additional inventory availability we put in the Discount Auto Parts during 2002.

The increase in inventory levels for the base advance stores over last year was very minimal.

Your comp forecast you said is mostly ticket verses traffic on the first quarter.

What are you factoring pricing verses traffic on the balance of the year?

Pricing has been very stable.

We've seen an awful lot of continuation of the rationalization that we spoke with before in our previous calls relative to pricing, and it's our belief it will continue on through the remainder of the year.

You don't see any change in pricing on the competition on the commercial side?

Is anybody else getting more aggressive out there?

We look at it market by market, and there are some areas where there's been some adjustments but nothing of a major consequence.

On your acquisition in New Jersey, what type of multiple are people capitulating at these days?

Brett, this transaction was similar to some of the tuck-in acquisitions we've done before where we basically have purchased the inventory, taken over the leases and paid an amount for the stores that we're taking.

So, it's not similar to what we've done before.

We anticipate as we put the availability in the stores and convert to the Advance name, the results there are going to be very strong.

It's really not a situation where you can look at the existing multiple and value of the going business currently.

In a competitive market, are you seeing people getting less price sensitive, giving up easier, or just same as it's been?

Can you repeat that?

I guess the small players were selling to you, sell willing selling for less these days or are they pretty static?

Well, I think as we've talked before, the way we look at tuck-in acquisition opportunities is when we are looking at a given market, if there's a acquisition candidate in the market that has a good solid business, a good team -- group of team members in place and real estate that works for us, we'll look at that as compared to organic growth.

And certainly we continue to see a number of good opportunities as we go forward to do these type of tuck-in acquisitions.

And I think that will continue to be the case.

All right.

Thank you.

Over time, we've always found it beneficial, when it makes sense, as Jim said with the right location to displace existing square footage as opposed to just adding more.

Right.

Thanks.

The next question is from Lee Cooperman (ph) of Omega Advisors.

Your if question, please.

Congratulations on a very nice quarter.

When you spoke about your 25% growth target, I'm assuming that -- obviously lots of uncertainties about the world, but 2004 would fall within that area of expectation relative to what you're looking for in 2003, or is there a reason to expect different performance from your trended growth rate?

The same, the guidance that we gave was over a protected period of time for the next few years.

If you focus on the points we covered on the call, bear in mind, Lee, that many of the initiatives that we are starting to see the benefits from, we're just rolling out and just now developing the systems, and the people, and in an awful lot of cases, it's a lot easier to develop the IT systems than it is the people to use these systems.

We're really in the development stage and the embryonic stage in many cases in these areas, and we're very confident that, the margin improvements, the logistic improvements and the like, are not only sustainable, they're something very comfortable that we can grow with.

My other questions are answered.

Good luck.

The next question is from Wayne Cooperman (ph) of Cobalt.

Your question, please.

Good morning, guys.

How are you?

We've clearly gotten much more margin improvement much faster than I would have thought.

Have you sort of increased your ultimate margin target based on what you're seeing, or are we just getting where we wanted to get to faster than we thought?

I think it's safe to say that we're gaining a little faster, but we're comfortable with the guidance that we gave and the overall 400 basis points margin improvement that we committed to.

I guess now that you're in this process of re-merchandising and so forth, do you think you'll get more than that?

We'll evaluate it over time, but it's certainly our ambition to get there as fast as we possibly can.

We're comfortable with the guidance that we gave, and please know we're in a full court press to maximize every opportunity as our people develop and our systems develop to support them.

Great.

Thanks.

The next question is from Morris Dane (ph) of Janus.

Your question, please.

Thanks.

I remember the comps in your overall comps, if I try and strip them out, it seems like the other stores were up about 0.8% more or less for the first quarter.

Could you confirm that?

And sorry I got on the call a little late, but maybe repeat your comments, if any, about the trend through the end of the quarter and quarter 2 to date.

Could you repeat the first part of your question?

Sorry.

I'm on a cell phone.

It was about the Discount Auto Parts, I remember that the comps -- now, and if you strip out their 3.2%, it seems to imply that the other stores are up about 0.8 for the first quarter, and just would like some confirmation of that.

And comment on the trend.

We said earlier on the call that the Advance Auto Parts comps excluding the discount stores were 0.5 for the first quarter.

Ok.

And I think there are about -- well, all right.

There are about zero for the first six weeks.

That means that they were running up about 0.8 or so for the last two weeks of the quarter?

Is that right?

Probably a little bit more than that.

Ok.

All right.

And finally --

What we said earlier in the call was that after the first eight weeks, our sales trend overall has been in the 2% to 3% range, and certainly when you say 2% to 3%, that would reflect a higher sales for the Advanced stores as well.

Sure.

Ok.

And just, sorry, comments about Q2 so far.

We commented that we're seeing the same trends in the first few weeks of Q2 that we saw in the second half of Q1, which is in the 2%to 3% range.

Thank you.

Thanks for repeating.

The next question is a follow-up question from Jack Balos of Midwest Research.

Your question, please.

I forgot to ask this.

My question concerns the impact on total sales to the closings of Discount Auto Parts stores which were part of -- as they were closing, they were part of the sales mix in the first quarter of last year.

But probably much less in the second quarter.

So my question is, if you attain your comp store sales gain of 3% to 4% in the second quarter of this year, what would be the total increase in total sales for the stores in the second quarter?

The approximate total increase would be in the 7% to 8% range.

Plus 7% to 8%?

That's correct.

Ok.

And insofar as the first quarter gross margins were concerned, if I eliminate the LIFO credit, the gross margin improvement gets closer to 200 basis points.

Is that correct?

That would be approximately right, yes.

So that the real underlying trend in the gross margins even stronger on a FIFO basis, first of all, I assume that you would expect -- going forward, what would you expect your LIFO trend to be versus a year ago?

Would it still be less of a LIFO this year?

It would continue to be likely less of a factor than last year but continuing to see reduced acquisition cost from our suppliers.

Ok.

Thank you.

Jack, that's a very big part of the ongoing refinement of category management.

Last year we had a stronger LIFO credit as a result of the discount acquisition and the lower acquisition cost that we were able to achieve as a result of the synergies there as well.

It's probably a very small thing but just to make sure, the decline in wholesale sales -- to what degree does that at all affect your reported gross margin?

Does it help it a little bit?

It helps it a little bit, Jack.

It's not a significant factor, but that business is a lower gross margin business so it has a minimal effect as the total sales come down, but obviously it's at such a small level relative to our total sales that it's not material.

Ok.

Thank you.

The final call is from Alan Rifkin of Lehman Brothers.

Your question, please.

Just one follow-up, if I may.

Larry, as you kind of look at your strategic direction and given the fact that NPT and APAL and the category management is all, you know, solidly on plan if not ahead of plan, has any consideration been given to maybe like stepping up the advertising in an effort to boost the comps if, in fact, you know, comps going forward continue to be, you know, in the 1% to 2% range, let's say?

Alan, our new advertising program has just been fully rolled out and we evaluate it on a week to week and a period by period basis.

Certainly we'll make the appropriate adjustments where we see we get a better return for it.

Bear in mind that, you know, with the 37 states that we're in, we don't have to bet the ranch to experiment on something, so we can do certain things in certain geographic areas, test it, try it and do more of what works and less of what we don't get a return for.

But it's certainly a consideration that we evaluate on a week to week basis.

Ok.

Thanks a lot, Larry.

Thank you.

We have one more question from Rob Schwartz.

Hey, guys.

Congratulations on a great quarter.

The inventories look like they're in a lot better shape.

Was just wondering if you can give us color on the difference between Discount and core base.

Rob, at this point, there's very little difference in the inventory levels in Florida and the rest of the company.

As you may recall, as we went through the process of aligning the merchandise last year, the discount stores have less hard parts availability in those stores and as we went through the alignment, we increased the availability of parts to those stores which has brought those store inventory levels to the same approximate level as Advance.

That has positioned us so much better from an availability standpoint to grow the parts business, grow the commercial business and everything related to that in Florida.

That's great.

Congratulations.

Thank you.

There are no more questions at this time.

Very good.

Ladies and gentlemen, once again, we want to thank you for participating in our call.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.