領先汽車配件 (AAP) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Advance Auto Parts second quarter 2003 conference call.

At this time all participants are in a listen-only mode.

My name is Mike and I will be your conference coordinator today.

If at any time during the call you require assistance please press star followed by zero and a conference coordinator will be happy to assist you.

You will be able to ask a question during the question and answer period by pressing star 1 on your telephone.

You may withdraw your question by pressing star 2.

These instructions will be repeated at the time of the question and answer session.

As a reminder this conference is being recorded.

Before we begin, Eric Margolin, the company's senior vice president and general counsel will make a brief statement concerning forward looking statements that will be made on this call please proceed, sir.

Thank you.

Good afternoon.

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 a 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 if any of the underling 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 including a complete reconciliation of our GAAP to comparable results can be found on our press release, and AK filing, and are available on our website www.advanceautoparts.com.

I will now turn the call over to Larry Castellani, our chairman and chief executive officer.

Thanks Eric, Good afternoon and welcome to our second quarter conference call.

With me this afternoon is Jim Wade our President, Chief Financial Officer and Jeff Gray our Senior Vice President and Controller.

During the second quarter we produced positive results.

Our same store sales rose 2% our gross margin increased 140 basis points and comparable SGNA was flat with last year.

This generated a comparable operating margin gain of 140 basis points to 9.6 and our comparable earnings per share rose 57.1% to $1.21 per share.

As you may recall, our comparable results in the second quarter do not include the nonrecurring expenses associated with the integration of discount auto parts.

For a complete reconciliation of our comparable to GAAP results please see our press release in 8-k located on our website, www.advancedautoparts.com.

Gross margin improvements continues to be a key driver of our enhanced operating performance.

Our category management initiatives are truly yielding strong results.

During June we completed the third wave of product reviews, completing 50% of our major categories which represent 70% of our total sales.

Due to these reviews we have seen strong contribution margin-expansion in the majority of the reviewed product categories.

This ongoing process continues and we're yielding sustainable results more quickly than originally anticipated.

Not only are we producing strong gross margin increases, we also managed our expenses effectively.

With 2% comparable sales growth, we kept our SGNA and percent to sales flat with last year.

One of the main drivers for managing our expenses was mpt.

Mpt our management planning and training labor utilization program has given us the opportunity to more effectively manage our labor expense by giving our store managers the right tool, they have the right team member, at the right time, doing the right thing.

Mpt has been rolled out to all our stores except the discount auto parts stores in Florida.

As planned all these stores will have mpt by the end of the third quarter.

We are also in the last stage of testing the automated version of mpt and plan to begin the chain-wide automated mpt rollout in the latter part of August.

The rollout of the automated version of mpt is scheduled to be completed in 2004 in conjunction with the completion of the Apal rollout.

On this call there is one area I want to concentrate on and that is sales clearly a 2% comparable store sales gain is not as strong as we would like to achieve.

So we are focusing all our attention on taking steps to drive higher comp-store sales.

As always we continue to look at how we can ensure we have the strongest team in place to maximize our sales results.

We know that having the right team in place is the key to our success.

With a well trained highly motivated staff we'll be able to continue our progress toward taking this company to the next level.

We are clearly focused on it.

We are also reviewing all aspects of our business.

We are in the process of developing new initiatives.

As we roll these new initiatives out we will continue to keep you abreast of our progress.

The initiatives that are currently in process of being rolled out are yielding good results.

In fact, category management is driving sales in a majority of the categories that have been reviewed.

Our Apal stores are comping ahead of our non Apal stores and we are very pleased with the sales results of the remodel 2010 new store formats.

Our plans to improve sales are beginning to show results.

We have experienced improved sales trends in the last four weeks of the second quarter and the first three weeks of the third quarter.

Those sales have improved in the last 7 weeks.

We are still slightly below our plan of 3 to 4% comp-store sales growth.

However, during the first portion of our third quarter last year we had stronger comps and our comparisons get easier as we move through the remainder of the quarter and the year.

As you have heard us say now for over 18 months at Advance Auto Parts we are focused on three goals: Significantly expanding our operating margins.

Needless to say we continue to demonstrate we are ahead of plan in achieving the 400 basis point increase that will take us over 11%.

Second, prepaying our debt which is now at $536 million compared to its highest point at the beginning of 2002.

When our debt was at $956 million.

And third, the successful integration of discount auto parts.

We are extremely excited to announce that we are reaching a key milestone in the integration of discount auto parts.

In less than two weeks we will complete the conversion of all the store systems to our proprietary Apal system.

By the end of September all integration will be done and going forward we will only be remodeling the remaining of the stores to the 2-10 store format and renaming the stores advance discount auto parts.

We are very proud of the tremendous job our team has done throughout the entire integration.

From its beginning, in November of 2001, to date, every milestone has been hit on schedule with only the extension of the store system conversion by four months and every financial commitment has been achieved or exceeded.

The final stage of our Florida plan which is the remodeling of the stores is progressing right on schedule.

We have physically remodeled 121 of the approximately 400 stores in Florida to our new 2010 format.

Including all the stores in the Jacksonville, Tallahassee, Ocala and Gainesville markets.

We continue to make progress moving southward through the state.

In fact, in the next few weeks we will be grand opening the Daytona and Melbourne markets.

As we move forward we anticipate completing the remodeling of all the stores in Florida during the next two years, right on plan.

As demonstrated by this quarter's comparable store sales gains, we are focusing all our attention on driving comps in Florida.

We see tremendous opportunities and bright future.

I would also like to update you on the Apal store's system rollout.

Currently over 1500 stores or 60% of the chain have the Apal system.

We have picked up the pace of the rollout and are on track to have Apal in all stores by the end of 2004.

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

We look forward to stronger store sales in the future.

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

Jim?

Thank you, Larry.

Good afternoon.

Thank you for joining us on our call.

Our team produced an increase in sales of 5.9% to $839.2 million in the second quarter.

Sales for our retail segment including both our D-I-Y and our commercial sales increased 6.8% to $827.4 million which was partially offset by a 34% expected decrease in the wholesale segment which generated $11.8 million in sales.

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

We produced the same store sales gain of 2% in the second quarter compared to 5% last year.

Year to date, same store sales grew 1.5% compared to 6.5% last year.

Our D-I-Y comps in the second quarter were 1.9% compared to 5.2% last year and our commercial comps are up 2.7% compared to 4% last year.

During the second quarter the increase in our comparable store sales came from an increase in average ticket.

On a year to date basis, our D-I-Y costs were 1.2% compared to 6.9% last year.

Commercial comps were up 3.2% year to date on top of 4.5% last year.

Year to date we have added 66 commercial programs bringing the total number of programs to 1477 or about 60% of the chain.

We remain very pleased with the consistent profitable growth in our commercial program and continue to see significant opportunities to further draw comp growth in this part of our business.

Our advanced auto parts store produced same-store sales increases of .9% in the second quarter compared to 5% last year and .7% year to date compared to 6.5% for the same period last year.

This is certainly an area of great opportunity and Larry outlined earlier some of the steps we are taking to accelerate our comp store sales growth.

The discount auto parts stores generate a strong comparable store sales gain of 6.6% on top of 3.7% last year.

With the stores outside of Florida continuing to produce double-digit gains.

Discounts cost year to date were 4.7% compared to 4.5% last year.

During the second quarter we opened 27 new stores and closed one ending the quarter with 2482 stores.

Year to date we opened 60 new stores and closed 13.

We continue to produce record sales in our new stores and we're on track to open approximately 125 for the year and close 25 under-performing stores resulting in a net gain of 100 stores.

During the quarter we relocated six stores, year to date we have relocated 18 stores and anticipate relocating 40 to 50 stores for the year.

Also as a result of our new stores, our relocations and our remodels, we now have 531 stores fully remodeled to our 2010 look and are on track to have over 700 stores converted by year-end.

In may we regrand open the Richmond, Virginia market where all of the stores now have the 2010 format.

We are very pleased with the performance of all out stores that have the new format and we believe this will be a strong comp driver over the next several years.

During the second quarter our gross margin rose 140 basis points to 45.4% due to our category management initiatives as well as leveraging of our logistic expenses.

We would like to point out that during the quarter we experienced a lyfo charge of 1.2 million due to increases in certain of our commodity prices.

The lyfo charge reduced our gross margin by 14 basis points.

Last year in the second quarter we had a lyfo credit of 3.5 million which benefited gross margin by 44 basis points.

Year to date, lyfo increased gross margin by 14 basis points compared to 50 basis points last year.

Overall, year to date gross margin was up 160 basis points to 45.3%.

Once again we would like to mention that in 2001 we proactively moved our co-op funds from SGNA to our gross margin.

Since then we have been aggressively moving to net costing for all of our merchandise as part of our category management program therefore we experienced no impact from adopting EITF 02-16.

In the second quarter comparable SGNA was flat with last year at 35.8%.

As Larry explained earlier we managed our expenses especially our store labor through our mpt program.

On a GAAP basis, SGNA declined to 36.1% from 36.8% due to the reduction of year over year integration expenses.

As expected integration expenses associated with the discount auto parts acquisition declined to $2.9 million for the second quarter, year to date integration expenses were $6.3 million.

We're on track to meet our target of only $10 million of integration expenses for the year.

As we stated in the past, we won't be breaking out integration expenses next year because they will no longer be material.

On a year to date basis, comparable SGNA was also flat compared to last year on.

A GAAP basis SGNA declined to 37.2% from 37.8%.

Comparable operating margin for the second quarter rose 140 basis points to 9.6%.

Due primarily to the enhanced gross margin and our solid expense management.

GAAP operating margins which include the integration expenses rose to 9.3%.

For the year, comparable operating margins were up 160 basis boints to 8.5%. again, GAAP operating margins were 8.1%.

Interest expense declined to $7.2 million in the second quarter compared to $19.1 million last year as we reap the benefits of retiring all $405 million at face value of our high yield debt in April.

Our interest expense also declined due to our strong year to date free cash flow of $197.4 million which included $36.9 million of nonrecurring expenses in association with the high interest bearing debt in the first quarter.

Our tax rate for the quarter and year to date was 38.5%.

And we anticipate that 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 second quarter, comparable earnings for diluted share rose 57% to $1.21.

GAAP earnings per diluted share were $1.16 which included 5 cents in after tax and integration expenses.

Year to date, comparable earnings per share was up 65% to $2.20 and GAAP earnings per share was $1.31 and included 10 cents of integration expenses and 79 cents in debt retirement expenses.

I will now review the key components of our balance sheet and cash flow statement.

You'll see we've made tremendous progress again in the second quarter in generating free cash flow and increasing our ROIC.

CAPEX in the quarter was $20.3 million including $2.2 million related to the fiscal conversion of discount auto parts.

Year to date, CAPEX was $50.6 million including $7.9 million for discount auto parts.

We still anticipate CAPEX for the year to be approximately $95 million.

Accounts receivable were $93.4 million at the end of the second quarter a decrease of $9.2 million from year-end.

As expected, our vendor receivables have returned to normal levels 6 after reaching a peak in the third quarter last year due to the return of merchandise to our suppliers during a discount auto parts merchandise realignment.

Because of the higher vendor receivables our allowance for bad debts as a per-cent of total receivables was lower last year.

At the end of the second quarter of 2003, our allowance for bad debt was 9.5% of total receivables up from 8% at the end of the year.

Inventory at the end of the second quarter was 1 billion 80 million which was up year over year only.5% with a 5.9% increase in sales.

At the same time last year, we were in the midst of a discount auto parts merchandise realignment process that inflated our inventory slightly.

As we moved through the year we anticipated inventory and sales will grow at closer to the same rate.

Our accounts payable to inventory ratio was 54.8% at the end of the second quarter compared to 54.4% last year.

Historically during the second quarter this ratio hits its seasonal peak for the year.

As we move toward the fourth quarter we expect to see the ratio decline to approximately 48% at year-end compared to 44.9% last year.

We continue to make tremendous progress in generating free cash flow and prepaying debt.

During the second quarter we generated free cash flow of $140.2 million.

As I mentioned earlier we generated free cash flow of $197.4 million year to date.

Because of the seasonality of our free cash flow, we anticipate being a slight cash user for the remainder of the year.

However, we are raising our previous free cash flow guidance from $150 million for the year to $170 million.

The free cash flow that we generate was used to prepay our total debt down to 536 million from 735 million at the beginning of the year.

At the end of the second quarter our debt to capital ratio was at 50% which is quite an improvement from 77% at the end of 2001 when we just completed the discount auto parts acquisition.

As a result of our improved leverage ratio we anticipate a further 50 basis point reduction in interest rate after the end of the third quarter.

The upcoming down tick in our interest rate is a built in hedge for any potential up tick in short-term [INAUDIBLE] rates.

Also over 50% of our debt is now hedged against interest rate increases.

Now that our debt structure has changed so dramatically, we do anticipate we will be implementing an accounts payable factoring program over the next several months, although it is still too early to be specific about the amount or its specific affect on our accounts payable ratio.

We continue to see improvement in our return on invest to capital on a long-term basis, l-t-m basis.

Our return on invest to capital has increased to 16.2% as compared to 12% last year.

Now let me wrap up by updating our guidance for 2003.

Due to the strength of our results in the quarter our guidance for comparable earnings per share for the year has moved to $4.01 to $4.11 from our previous guidance of $3.85 to $3.95.

This guidance assumes our same store sales grow in the 3% to 4% range for the remainder of the year and our gross margin grows to approximately 130 to 135 basis points for the year.

We also believe our SGNA may be up slightly 20 to 30 basis points as we invest some of our gross margin gains into enhancing and developing new initiatives.

This guidance also excludes the positive affect of the 53rd week in the fourth quarter.

For the third quarter we anticipate comparable earnings per share of $1.18 to $1.22.

Looking forward into 2004 we want to again reiterate our competence and guidance for a 25% increase in comparable earnings per diluted share.

We remain extremely excited about our opportunities for the future.

Again as we noted earlier the results including a complete reconciliation from GAAP to comparable results are available in our press release and a-k filing and can be found on our website, www.advancedautoparts.com.

Now I would like to turn the call back over to Larry.

Thanks, Jim.

Thank you for participating in the call today.

We look forward to taking your questions.

Operator, would you please open the floor to questions?

Sure.

Ladies and gentlemen if you wish to ask a question, please press star 1 on your telephone.

If your question has been answered or you wish to withdraw your question, please press star 2.

Again, please press star 1 to ask a question.

And our first question comes from Gary Balter with UBS.

Please proceed.

Thank you.

A couple questions if we can.

The discount auto part comp looked really, really solid.

As you go forward can you discuss a little bit what you are looking for to happen?

What do you think drove it?

Because these last three quarters didn't show that type of comp.

And second question just numerically, interest expense was obviously pretty good.

What should we be assuming for the third and fourth quarter?

I'll take the first debt comp.

Just basic fundamentals, Gary.

I wish I could tell you there was something creative, but there wasn't.

This was just the rollout of our prod-- it was the affects of the rollout of our product mix.

Some of the affects of the conversion of the stores.

I think we made it clear on the call throughout the year that we added additional staffing and additional advertising to the entire state of Florida as well.

We are starting to see the effects of those benefits and as we work forward into the future, we look forward to building on that success.

Comparisons will get easier, right?

As you go through the year and into the first quarter of next year?

For the DAPS stores.

Third quarter comparisons are actually a little bit more difficult then in the fourth quarter become easier.

Okay.

As far as interest expense is concerned our third quarter and fourth quarter interest expense would be very close to what we saw in the second quarter.

Okay.

Thank you very much.

Thanks, Gary.

Our next question comes from Alan Rifkin with Lehman Brothers, please proceed.

Congratulations, gentlemen, on a great quarter.

Just a couple questions if I may.

Can you show the quantification of how much better the stores that have been converted to Apal or mpt are doing than the non converted stores?

And secondly Jim do you have any idea of what impact on your lyfo credit the DAPS stores in and of themselves had on that?

Thank you.

Allen, your first question, the comps on Apal versus non Apal stores, as we said before, we have consistently comped better with the Apal stores than those without.

We have not broken out separately and it is not something we want to do on an on going basis.

We are just confident it will continue to build.

And as our people become more and more experienced with the system we think it will be fundamental to our ability to sell more add on parts.

Increasing our average ticket as well as increase the customer account in the store with it.

In terms of the lyfo credit, the lyfo credit comes from us continuing to be able to purchase better from our suppliers.

Last year the credit would have come certainly more from the discount auto parts acquisition and our ability to purchase at greater levels.

This year we are pretty much back on a normal run rate.

Okay.

One more follow-up, if I may, you continue to generate, you know, significantly more free cash flow than you had originally anticipated.

The guidance that you are giving continues to literally move up on a quarterly basis.

Any thought as to what you may do with the excess cash flow?

Is there any possibility that maybe the conversions down in Florida will be accelerated?

Alan we are always looking for every opportunity to accelerate top line growth.

We are always looking for every opportunity to get a better return with the free cash flow we are generating.

We have a number of different initiatives, a number of different options.

As we go forward we will report on our progress.

But clearly, bear in mind we are looking at every alternative.

Thank you, Larry.

Thank you, Allen.

And our next question comes from Bill Sims with Smith Barney.

Please proceed.

Hi, Good afternoon.

Two questions if I may.

Can you share a little more of your vision for the 25% eps growth in 04?

Previously we have seen a lot of the growth come from growth margin opportunity.

As we start cycling the huge lists in growth margin we've seen.

Do you still see category management drive in significant gains in gross margin?

Or do you see the upside coming from more SGNA management or sales growth opportunity?

And the second question is with regard to the current pricing environment.

You mention you are seeing some increases in commodity prices.

Can you comment on the rest of the spectrum in terms of hard part pricing?

Thank you.

Bill, let me take your first question.

We have gone through this before and given a little break down on it.

The 25% eps growth going forward is a combination of continued refinement with our category management initiatives and a supply chain savings from greater efficiency.

Some leverage with SGNA on a go forward basis as a result of the higher comp stores that we are confident we are going to get as well as deleveraging the company.

Thank you.

And the current pricing?

We have seen just an on going stablization of the rationalization of priceing that has been in the market place.

All right.

Thank you and good luck on the current quarter.

Thank you.

And our next question comes from Bret Jordan with Advest.

Please proceed.

Good afternoon.

A couple questions, one on the comps, I guess as you look at the prior year quarter performance I think you are up 5 1/2%.

Your current quarter target you mentioned you are behind your 3 to 4% target on the current quarter to date.

Can you give us a little more color on the progress on the prior year?

How it eased up in the later part of last year's quarter to get you comfortable with a 3 to 4 for this quarter?

Yeah, Brett as I mentioned in my comments, the strongest comps last year were in the first part of the third quarter.

And as we complete the first four weeks of this third quarter we will be up against less strong comps the rest of the quarter.

I guess what order of magnitude if you came up with a gross comp of 5.5 last year?

Obviously we don't report them on a period basis, but at least a couple percent higher in that first four week period.

I guess as far as your full year guidance goes this year, assuming we pick up the gross margin improvement and then leverage SGNA expense up a bit, and clearly a very low interest expense relative to the prior year period, is there something changing that would keep the numbers as low as the 411.

It seems that back in the envelope here.

There seems to be quite a bit of upside from what you just gave from a forward looking number.

Are you being conservative or is something changing at the share count?

Tax rate you're saying 38.5 going forward.

We think the 25% is a very aggressive number to begin with and we think it's consistent with everything we said in the past and also it gives us the opportunity to take some of the initiatives that we're enjoying benefits from now, and reinvest them into driving the top line.

I'm talking about this year really.

There is nothing changing share count wise or tax rate?

Go ahead.

There is nothing significant changing with regard to share count or tax rates.

I think Brett, as you look at the progression of the earnings per share last year you will see that the -- certainly the third quarter was a good solid quarter last year relative to the second in terms of earnings per share.

And certainly as we got into the third quarter last year we were achieving more of the benefits of category management.

We were seeing the positive effects of some of the things we were doing in regard to our loan agreements and debt pay back and that is really what's driving us as we go through the rest of the year.

I think certainly the upside is our ability to continue to drive comps.

And as we have talked before on these calls in the end that's how we can really accelerate the growth earnings per share.

Okay.

Thanks.

And our next question comes from Jerry marks with Raymond James.

Please proceed.

Good afternoon.

Good afternoon.

You mentioned the average ticket price with the comps, does that mean on a retail basis volumes were essentially flat?

What we meant by that was, when you look at our -- how we got our comps in terms of average transaction compared to customer account the average transaction primarily drove the increase in comp.

Did we answer your question?

The average transaction price?

It draws the comp?

No, we sold more to each customer that came in the store.

Our retail price was overall -- it certainly didn't change significantly.

I think through our team's efforts in the stores and the things we are doing around category management add-on sales and all those things together certainly drove the higher average transaction.

Okay.

I wanted to clarify you mentioned 140 basis points, I believe, Jim, that's for the year?

For gross margin?

Gross margin improvement, is that right?

No, gross margin increased for the quarter by 140 basis points.

Our guidance for the year is 130 -- 130-135 basis points.

130 to 135?

Yes.

And your same store sales for the remainder of the year, now you are assuming runs similar to the second quarter.

3 to 4.

You still are keeping that target?

Yes.

Okay.

Thanks.

Please also bear in mind though and we have shared this with you before, that the management teams' bonus programs are certainly based on a higher number.

A higher number in terms of --?

34 percent comp.

Absolutely.

Thanks.

Thank you.

Our next question is from Sid Wilson with Whittaker securities.

Please proceed.

Hi, congratulations another great number.

Thanks, Sid.

My question is can you give us a feel as to how comps were in various regions of the country, most notably I guess in your -- I guess the southeast market versus the northeast.

And also can you give us an idea in terms of -- mainly an idea of how sales trended for hard parts and accessorys and chemicals?.

Sid, we don't break out for competitive reasons the various parts of the country.

We do Florida solely because of the conversion and because of the acquisition.

We told everybody we were going do that from the very beginning and are certainly sticking to that.

For competitive reasons we don't break out areas of the country.

The parts balance of sales have been a little bit stronger as a percent to sales.

We attribute many of the things we are doing in category management to have an impact on the balance of sales in our company.

But we don't give out specifics by category.

Okay.

Can you give us an update on, you know, on the role out of -- the roll out of a plus I think is what you called it?

Is that something coming out soon?

You are referring to the electronic version of mpt?

Yes.

We are finishing up the beta testing in about 25 stores and that will be starting the roll out -- actually it will be this month.

We will continue to roll it out across the company.

Great.

And my last question is, can you give us an idea in terms of what we can expect in terms of advertising expenses going forward since this is your first year doing national advertising?

It will be very close to percent to sales as it was last year.

Okay.

Thank you very much and congratulations.

Thank you.

And our next question comes from Lee Cooperman with Omega Advisors.

Please proceed.

Thank you.

I got late into the call.

I will congratulate you like everybody else.

This question may have been asked, but given the prodigious cash flow you are generating, have you thought about the appropriateness of a new tax law given the policy in I guess it is a policy but it is not the paid one.

Thanks for participating in the call.

We certainly appreciate your input.

I will tell you we are constantly looking at things to improve our return to our investors.

There is a number of different options our company has.

You can rest assured our board is weighing everything accordingly.

Okay, I'll take it at faith.

We appreciate your input, Lee.

Thank you.

Thank you.

And our next question comes from Greg Melick with Morgan Stanley.

Please proceed.

Thanks, guys.

Two questions that are really sort of clarifications.

In terms of the traffic versus ticket, and the average transaction was driving the increase in comp, does that mean was the traffic actually down in absolute terms?

Or was that still positive, just not as much as transaction?

Greg, over all traffic was about flat with last year and the comp we saw came from the average ticket.

Okay, and sequentially would you say that's an similar trend?

The trend has not changed significantly.

We had a slight increase in customer count.

And the second question is on converted stores.

I think the question was about apal, but I was actually more interested in the discount stores.

I can't remember if you answered that, which was on the stores -- the discount stores that have been converted, do you have any sort of estimate or what sort of road map can we look at to see what productivity loop or jump you get with those stores.

Do you have any numbers or sort of guidance or magnitude you can give us that to try and sort of split out what's driving the improvement in discount comps?.

Greg, that's difficult to do because we are doing so much at one time.

The additional product mix, the additional inventory across the board we added, the additional advertising, the additional staffing, as well as the conversions.

I think it is important, Greg, to understand that with the wrap up of the store system's conversion the stores can now function and focus all their attention on driving sales.

As far as the remodels are concerned, we are really only touching two or three stores a week.

So it is the majority of the stores by far are not being affected by the integration on a weekly basis going forward.

So most of it is all the other things your'e doing, not necessarily the remodeling.

That's correct.

Thanks.

And our next question comes from Maurice Diyan, with Janis Capital.

Please proceed.

Thank you.

Thanks for all the detail, gentlemen.

Just to follow-up on a previous question, the comps in Florida, can you give us an idea what the difference may be between the markets where you have converted everything, Jacksonville, Tallahassee, Gainseville and the other markets where you haven't?

We have not been giveing out comps by region for competitive reasons.

Wethink that's the appropriate thing to do.

Okay, I guess we just presume as good as the comps are at the former discount auto parts store they are a little better in the markets that you totally converted?

Yes.

I don't know if you -- I guess it is self-evident that the impact of rain that we had through the middle of the quarter and things trending better the last 7 weeks which is what you said which is I guess when we got out of the rain on the east coast --.

yeah, that's true.

The comps were, as Larry said, better as we came out of the last four weeks of the quarter and certainly our team is on driving sales and focused on driving sales and working with whatever weather conditions we happen to have.

I guess we have seen traffic picked up I presume. that's a big part of the comp increase, not really average transaction, but traffic that picked up the last 7 weeks, is that right?

That's correct.

Thank you.

My other questions were answered.

Thank you very much.

Thank you.

Our next question comes from Jack Bellows, with Midwood Research please proceed.

Hello.

I wasn't clear about this.

Was something said that the SGNA ratio going forward like the third quarter was going to be up 20 basis points?

Did I hear that correctly?

Jack, the guidance we provided for the remainder of the year is SGNA may be up slightly 20 to 30 basis points as we go through the rest of the year.

That's really coming from looking at opportunitiess as Larry mentioned to potentially invest some of the gross margin gains we are getting more quickly than we had really anticipated to further enhance and develop the initiative we have going on and provide more opportunity to drive up sales.

Right, but I'm not clear as to what initiatives would increase SGNA if advertising is going to be similar to last year.

What are the other -- where else are you going to be investing?

Jack, there are certain things we are looking at in the store and we will report on them as we go through it but we think we identified some other opportunities that may have a short-term slight bubble in the SGNA that will enable us to enhance our availability and service to both the I-Y and commercial customers.

Right, that's another thing I was wondering about do you have any other particular initiatives to improve your commercial delivery sales, any new initiatives there?

Yes, we are working diligently on several things the team has identified.

We see that as good upside opportunity.

As we go a little further through it, we are beta testing certain things right now.

As we get a better grasp on them, we will be reporting on the results in upcoming calls.

Okay.

My final question is -- excuse me.

You're saying that you might do 3 to 4% comp in the third quarter.

If you just broke out the Advance Auto Parts stores, what would their comps be?

Both the advance comps as well as the discount comps would be driving some of that increase the overall comp for the quarter.

Wouldn't the discount be stronger than 3 to 4%?

Again, as you look at each of the quarters, discount was going through a lot of things last year and some of the quarters were stronger than others.

In fact the third quarter was a little stronger in terms of comps.

So I wouldn't --to answer your question I think- as we see comps increase certainly we would anticipate that they are primarily coming from the increase of the Advance Auto Parts stores.

Thank you.

Thank you.

Our next question is a follow-up from Mr. Gary Balter with UBS.

Please proceed.

Just a clarification.

You mentioned the lyfo charge, that mathematically is about 2 cents, is that right, Jim?

The earnings are about 123?

that's.

Well after tax it would be -- that's about right.

Yes.

Just wanted to make sure I got that.

Thanks.

Thanks.

And our next question comes from David Berman with Berman capital, please proceed.

Hi, gentlemen.

Just was wondering, you know, you did a -- congratulations you did a great job in the first and second quarter of exceeding gross margins by 179 basis points year over year, 141 basis points for the second quarter, and now you are expecting gross margins to increase 75 basis points roughly for the third and fourth quarter to get you 135 for the year, correct?

Roughly.

That's correct, yeah.

What I'm trying to understand is this: It seems like you are doing really, really well on the gross margin side.

And been a little weaker than you would have hoped on the top line.

With the comp store sales.

So two questions, first of all, aren't you being overly conservative yet again for the third and fourth quarter given how much you -- in this quarter for example you beat the gross margin expectation by 80 basis points roughly.

So aren't we being too conservative?

And secondly, why not sort of claim down your expectations for sales a little bit increasing the expectations for gross margin since that seems to be the trick?

I think you have to bear in mind we are hitting the anniversary date of the some of the initiatives we had last year.

So we think we are being realistic in our projections and also we recognize the significant upside opportunity that we have in driving our same store sales and increasing average sales per store and average square foot sales so we can start over the long-term to leverage our SGNA.

So in the third and fourth quarter, is it fair to say you are being extra conservative and assuming only a 75 basis point increase year over year when you had 150 to 160 in the last two quarters? .

We believe we are being realistic and we believe with the success of the category management we have had to date there is room to invest and plans I have alluded to that will help us drive our comps.

Let's assume you deSided to invest in helping your comps by being more price competitive.

Right?

So you could still get the 75 basis point increase because you've got room to maneuver there.

But being more price comparative, does price competition help maybe some lost leaders or drawing people into the store.

Would that help your top line?

If so, if you should, why wouldn't you be doing that?

We think it's a balance.

It is work in progress.

It is something we are always evaluating.

We have certain things we do with our commercial account in the light.

Bear in mind there is not a lot of elasticity in consumption with a lot of our product.

Therefore there is not a lot of elasticity in pricing.

But there is opportunities for us to do certain things with our commercial accounts and in some aspects with our D-I-Y.

What you are saying if you advertise lower prices you don't believe you will get the benefit in terms of the top line and that you would rather just not do that then?

We are priced very competitively now to begin with.

Right.

Okay.

But you do feel very comfortable with your expectation of 3 to 4 -- now I know you were slightly below that in the last quarter and that was probably due largely to weather.

Right?

Weather wasn't our friend last quarter but there are certain things we know we can do to enhance our sales and profitability and that's what we are working on and hopefully that's what we gave clarity to in the call today.

Well done and thank you very much.

Thank you.

Our next question is from David Taylor, with Taylor Capital Management.

Please proceed.

Considering thatyou're reasonably close to completing the successful integration of the discount auto parts stores, could you give us any indication to the degree to which you might be exploring additional acquisitions at this point, and if so, what's the size range of things that might be on your radar screen?

David, we are always looking for good regional tuck and acquisitions.

I think you are aware of the fact that not long ago -- last year we did the track auto.

We have done local tuck and acquisitions.

We recently have done an acquisition car parts in the New Jersey area that was very successful.

These are small groups.

We are interested in local tuck and regional acquisitions that fall under our existing CAPEX program.

When we do an acquisition like car parts where we acquire 6 or 10 stores or from a regional player it falls right in under out existing CAPEX program and we open those stores.

The total new store count stays right on target and right within our CAPEX.

Would there be any orientation for going for more than local tuck ins?

The answer to that questions no.

If you look around at the 37 states we are in --

there is not much left.

You'll see we have a lot of room to fill in and back fill the states we are in.

One of our big side opportunities is leveraging the SGNA in this company.

When we can back fill in the 37 states we are in and utilize the existing supply chain that's in place, leverage our advertising it gives us our best opportunity to get a good return on our invested capital.

Great.

Thanks a lot.

Thank you.

Our next question comes from Justin Boisio with Gates Capital Management.

Please proceed.

Yeah, this is actually Doxell Axis.

What do you expect your depreciation, amortization to be for the full year?

Jeff, do you have that?

It 's about 100 million.

About 100 million?

Okay.

And do you -- it seems were you able to defer a good portion of your provision for taxes in the first half of the year.

What is your current N-O-L and when would you expect to start paying real cash taxes?

We have been benefiting as you have noted from the -- from some of the deferred taxes, some of the current deferred tax assets we realized.

And we continue to realize some as we move through to the third quarter and we will move to a cash payer sometime in the fourth quarter.

Would you expect to pay the full provision for 2004. -- 2004?

Yes.

Thank you.

And our next question comes from John Sikes with Nomura.

Please proceed.

Yeah, hi.

Actually a little bit of a follow-up to that last question.

The swing in free cash flow from year to date, 197 to your guidance of 170, what is -- why is that going down?

Is that an inventory bill toward the end of the year?

John it is hard to hear you.

Can you just repeat your question?

Sure.

With respect to the free cash flow, year to date, you have done 197, you are guiding 170 for the year.

What is the reason for this this swing down?

Is that an inventory build?

Is that the cash taxes or, why are you guiding 170 when you have done year to date 197?

There is a portion that is cash taxes, but primarily it is the-- the pattern we see each year as we go through the first half of the year, our cash flow is very strong.

We are in the part of our strongest season as we go through the second quarter.

The third quarter continues to be cash secretive.

And the fourth quarter that is our least strong quarter we are cash use neither that quarter.

There is nothing unusual with how we arrive at that numer for this year.

That's the normal pattern we have seen.

And just one other question, has there been any find of significant shift in merchandise mix sales over the last, you know, say first half?

Are you selling more hard parts or less hard parts and more of the other stuff?

I'm just trying to get a sense of what that mix is, or has it been relatively constant?

Overall we have seen an increase in our hard parts categories.

Okay.

And I know that you added I guess some new merchandise in the stores.

How is that going?

Some I think was promotional, but some was other tools and other things like that.

We are please with the initiatives that are coming from our private label, controlled labels, premium labels and other items such as the additional tool mix we have added to the stores.

Thanks.

Thank you.

And our next question is a follow-up from Sid Wilson with Whittaker Securities.

Please proceed.

How are you doing, just two quick follow-up questions, actually three easy ones.

One, can you give us an update on how sales were trending at the track auto parts stores?

And also my other question is regarding store opening plants for 2004.

Sid we are not breaking out segments of the country and we gave you --

I'm sorry.

We gave an indication as to how we were doing with track, when we first did that and completed it and now we would prefer not to I will tell you we are overall very pleased with the track auto acquisition.

Okay.

And any idea -- any guidance in terms of what your store opening plans may be for next year, for 2004 at this point?

We will be providing more detail certainly on the 2004 year on our next conference call.

I think we'll have a better opportunity to get into it and walk through what we see for next year in more detail at that point.

Okay.

Thank you.

Thank you.

And our next question is a follow-up question from Justin Boisio with Gates Capital Management.

Please proceed.

Yeah, this is Doxell Axis again.

I just add a question on your capital structure.

Could you review where the pricing is today and where you expect it to go and just kind or review the hedges and where you expect your cost to capital to be on a normalized basis going forward?

Yeah, we have as we refer to in the call, all our debt is under a single facility today and it is all priced the same and it is tied to a pricing grid that is tied to leverage ratio.

So as our leverage continues to improve we have an opportunity to step down on the pricing grid.

As Jim alluded to, we have an opportunity to have a 50 basis point step down after the end of the third quarter and that would be across all of the currently outstanding debt.

And from a hedge perspective we do have three different instruments out there, that we have about 50% of our overall debt hedged at this point.

Okay.

I guess have I to ask it a different way.

What is the pricing today?

It is a lob over plus 275.

Okay.

And where -- and 50% of the live -- 50% of your debt is hedged on lifo?

At what rate?

It varies.

There is actually three different ones.

If you refer to our last 10 q filing or even 10 k you can find that in a fair amount of detail.

Okay great.

And then what is your restricted payment basket at the end of the quarter?

We don't have an issue with that.

I was just wondering what your availability would be if you wanted to buy stock or, you know, start paying in dividend.

What is your flexibility with respect to your debt covenants?

We have adequate flexibility to do what we currently got a plan to do from a capital structure and our existing debt agreements.

Okay.

Thank you very much.

Okay, operator if there are no further questions we would like to thank everybody for participating today and we are always available for follow-up.

Thank you very much.

This concludes your conference call.

Thank you for your participation today.

You may now disconnect.