領先汽車配件 (AAP) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Q3 2003 Advance Auto Parts earnings conference call.

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

My name is Mike, your conference coordinator.

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

Before we begin Eric Margolin, the company Senior Vice President and General Counsel will make a brief statement concerning forward-looking statement that will be made on this call.

In attendance will be Larry Castellani, Chairman and Chief Executive Officer, Jim Wade, President, and Jeff Gray, Chief Financial Officer.

Please proceed, Mr. Margolin.

Thank you and good morning.

Certain statements that will be made during this conference call will contain forward-looking statements that incorporate assumptions based upon 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 & Exchange Commission.

Due to changing conditions, should any one or more of these risk factors materialize or if 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, including a complete reconciliation of our GAAP to comparable results can be found on our press release and 8 K filing and are available on our website at www.Advance Auto Parts.com.

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

Good morning and welcome to our third quarter conference call.

On August 14, we made some changes to our management structure, which are having a positive impact on our team.

Because of the changes, the format of our quarterly conference call will be slightly different.

I'll start with a summary of our third quarter, Jim Wade, our President, who is now responsible for the execution of our operational and strategic goals and objectives will discuss our operations and key initiatives.

And Jeff Gray, our recently promoted CFO, will outline our financial results.

After those remarks, we welcome your questions.

All of us at Advance Auto Parts are focused on effectively building our business by increasing our sales productivity, expanding our operating margins, and increasing our return on investment capital. at Advance Auto Parts, we understand that we need to invest to grow and during the third quarter, we did just that.

Instead of taking all of the 143 basis points of gross margin improvement for the bottom line, we invested a portion of it to grow our Advance Auto Parts grand recognition through increased advertising and to expand our customer service levels to a slight increase in store labor hours.

We are intently focused on building stronger comp store sales.

We believe that these investments will continue to generate strong rewards for us as we continue to differentiate ourselves in the eyes of the consumer.

Some of the other things that we're doing to differentiate Advance Auto Parts include our 2010 store format, our category management initiatives that are having a profound impact on the way we run the business, our private and control label programs, and our APAL, our proprietary peel-offs and electronic parts catalog system.

We believe these initiatives will give us the tools to continue to grow our sales and produce industry leading results.

As we look at the third quarter we believe these initiatives are truly generating results.

In fact, our same-store sales rose 3.1%.

Our gross margin increased 143 basis points and we invested a portion of that gain, as I said, as planned, resulting in a 77 basis point increase in comparable SG&A.

As a result, we generated a comparable operating margin gain of 66 basis points to 9.6% in our comparable earnings per share rose 34.8% to $1.24 per share.

As we look to next year, we will continue to build on all that we've achieved this year and our prime objective will be to enhance our points of differentiation to our various initiatives.

Based on mid single digit comparable store sales gains, we anticipate producing earnings per share of $5 to $5.10 in 2004.

Before I hand over the call to Jim and Jeff, I'm pleased to inform you that due to the strength of our results and the confidence that we have and that we will meet or exceed our long-term goals, our Board of Directors declared a two for one stock split for the company's common stock, which will be effective as 100% stock dividend.

The new shares will be distributed on January 2, 2004, to shareholders of record on December 11.

The stock will be trading post-split, on January the 5th, the next trading day following the distribution date.

Now I'll like to turn the call over to our president, Jim Wade, who will elaborate on our operational and key initiatives.

Jim?

Thank you, Larry, and good morning.

As Larry mentioned, since our last call, we have made changes in our executive management.

This executive team certainly will lead our efforts to continue to take Advance Auto Parts to the next level, Mike Coppola, who spent 34 years in the retail grocery industry before joining Advance about two years ago was promoted to Executive Vice President and Chief Operating Officer and brings a wealth of merchandises and retail experience.

As you may recall, Mike launched the category management initiatives as a driver of growth in sales and gross margin.

This is just one of many very successful initiatives that Mike has lead in his time at advance.

As Chief Operating Officer, we know Mike will continue to find innovative ways to take Advance Auto Parts to the next level.

We also promoted Paul Klasing to the Executive Vice President of stores.

He's well respected by the store team and with his extensive merchandising and operational experience, we know he'll drive the execution of our stores to even higher levels.

Now, I'd like to further elaborate on our operations and initiatives in the third quarter.

We're pleased to report a strengthen be in our comparable store sales growth in the third quarter and feel we have solid momentum entering the fourth quarter and 2004.

We produced a same-store sales gain of 3.1% in the third quarter, compared to 5.5% last year.

This has about double the 1.5% achieved in the first two quarters of this year.

Most encouragingly, we experienced an increase in both average ticket and in customer count.

Year-to-date same-store sales have now grown 2%, compared to 6.2% last year.

In the third quarter we saw increasing in both areas of our business, as our DIY comps increased 2.3%, compared to 5.4% last year, and our commercial comps are up 7.6%, compared to 5.7% last year.

Our Advance Auto Parts stores also produced same-store sales increases of 3.2% in the third quarter, compared to 5.5% last year.

This is where we saw the most strengthening in the third quarter, with the 3.2% increase being significantly higher than the .07% achieved in the first two quarters of this year.

We're pleased to say we're continuing to see the effects of all our efforts as our sales trends in the first three weeks of the fourth quarter have accelerated to mid single digit comp levels.

We believe we have the opportunity to maintain this rate throughout the quarter as we prepare for 2004.

Our commercial program is performing strongly as we continue to properly grow our customer base as planned.

We're also showing strong progress in commercial sales in our Florida stores.

Formerly, Discount Auto Parts didn't have the depth and breadth of brand name parts.

Therefore, servicing the commercial customer needs was difficult.

Due to enhanced product selection and additional staffing, we've been growing this business in the Florida market.

We've also added 135 new commercial programs in our advance stores year-to-date.

Bringing the total number of programs to 1,546, or approximately 62% of the chain.

About half of the new programs added are in new stores that are not in the comparable store base yet.

And most of the remaining additions arrived in the third quarter would have no significant impact on third quarter sales.

We'll see the benefits of these programs in the quarters to come.

The stores acquired in Discount Auto Parts acquisition generate comparable sales growth of 3.1%, on top of 6.3% last year with the stores outside of Florida continuing to produce double digit gains.

As you may recall, the third quarter last year was the strongest comp quarter of the year for these stores, as we just completed the merchandise alignment process and hadn't yet begun the store system conversion.

Comparisons get easier as we move into the fourth quarter, as the store system conversion impacted our results last year when we produced a comparable store staple gain of 3.3%.

As a reminder, we've now completed all the major aspects of the Discount Auto Parts integration, except for the physical remodeling and name change of 251 remaining stores out of the net 538 stores acquired in November of 2001.

These stores will be remodeled to the 2010 format, market by market at the rate of about two to three stores per week until completed in 2005.

Our Florida team has focused on growing sales and servicing their customers now that the integration disruption is behind them.

We couldn't be more pleased with how well we're positioned for the future in these markets because we have the number one position in the market as well as a strong leadership of Curt Schumacher, our Senior Vice President of Operations for Florida, who is leading the growth and development of our team and our business.

And as I mentioned earlier, we also have tremendous opportunities to increase our commercial penetration out of the Florida market.

During the first portion of the third quarter, we finished the APAL systems rollout in the Florida stores.

We're now concentrating on finishing the rollout of the electronic parts catalog and POS system to the remaining stores.

We're converting 20 to 30 stores per week, anticipating that all of the stores will have APAL by the end of the second quarter of next year.

We believe these investments we made in APAL, including enhanced levels of training will continue to generate strong results.

We're happy to inform you that the APAL converted stores continue to produce stronger same-store sales gains than the unconverted stores.

At the end of the third quarter, over 72% of the chain had APAL, which uses a windows based platform which gives us the opportunity to continuously add information and modules.

This state of the art system put at our finger tips a tremendous amount of information to serve our customers better.

During the third quarter, we opened 19 new stores.

We also closed five, ending the quarter with 2,496 stores.

Year-to-date, we've opened 79 new stores and closed 18.

We do continue to produce record sales in our new stores, and we're on track to open approximately 125 this year and close approximately 25 underperforming stores, resulting in a net gain of about 100 stores.

In 2004, we anticipate owning 125 to 135 stores and closing 10 to 15, which translates into a growth in square footage of about 4% to 5%.

Year-to-date, we also relocated 24 stores and anticipate relocation locating approximately 40 stores for the year.

Also, as a result of our new stores, our relocations and remodels, we now have 618 stores with the new 2010 format and are on track to have over 700 stores by year end.

By the end of 2004, we expect to have over 1,000 stores with this format.

In October, we re-grand opened the Charlotte, North Carolina and Melbourne and Daytona Beach, Florida, markets and remodeled all the stores in the markets to the 2010 format.

We found remodeling an entire market produces a significantly positive sales increase as well as being a positive motivator for your teams especially as we grand re-open the market.

Our 2010 format, we believe, is one of the most exciting and upbeat store formats in retailing and will help us to continue to track customers and drive our growth for years to come.

We expect to remodel the stores on a market by market basis over the next several years to achieve this format.

During the third quarter, we produced 143 basis points of gross margin expansion.

As Larry said earlier, we reinvested a portion of the gross margin gain to increase the momentum of our sales growth.

The gross margin increases continue to come primarily from our category management initiatives and leveraging of our logistics expense.

As part of our category management initiatives over the past year, we've expanded our Advance Auto Parts private and controlled label programs.

We're experiencing solid results from the products we rolled out to our stores.

Our customers are voting with their purchases and are embracing the [inaudible] offered by the exciting new products.

Although our private label program has generated customer response, we're also reaching out to consumers in many other ways to drive store sales.

As Larry mentioned, we increased our level of advertising in the third quarter to drive greater consumer recognition of the Advance Auto Parts brand.

In the first quarter of this year, we introduced our new national advertising program with the tag line "we're ready in advance."

Our tests indicate we're gaining traction with this new program.

As a result, we decided to use a portion of our gross margin increase to accelerate our advertising spend in the third quarter.

The response has been very positive and we'll continue to invest in more advertising where we believe it produces the most results and when we can positively measure results being achieved.

We also gave our store operations team the opportunity in the third quarter to slightly increase store staffing hours where they felt there was an opportunity to drive store sales.

This too is being closely measured and where it has shown results we're continuing it.

This is being done through the use of MPT, our labor management program.

In effect, we're giving our stores the opportunity to earn more labor hours if they can leverage those hours into more sales.

As we look forward, we do not anticipate a labor expense percentage will be higher than the prior year now that comps have returned to expected levels.

Finally, on October 6, we announced we'll no longer supply merchandise to the independent Western Auto Dealers after 2003.

We've historically reported this business as our wholesale segment.

In a few minutes, Jeff will report how this will be reported going forward.

When we purchase the approximately 535 parts America retail stores in 1998, we also acquired the Western Auto wholesale business.

As with you may recall in the early '70s, there were almost 5,000 Western Auto dealers in the United States and in 1998, it declined to about 700.

During the last five years, it's further declined to approximately 300.

With the small number of dealers remaining and the large geographic dispersion and merchandise diversity, it's no longer practical to continue the program.

We have in place a solid transition program for the remaining dealers and are team will be able to focus entirely on the core retail business.

The wholesale segment will generate sales of approximately 50 to 55 million in 2003.

We don't anticipate any revenue from this business in 2004.

Now, let me turn the call over to Jeff Gray, our Senior Vice President and Chief Financial Officer, who will review our financial results.

Thanks, Jim, and good morning.

Our continuing to produce increase in sales to 849.3 million in the third quarter, an increase of 5.3% to date The retail segment produced a revenue gain of 8.6%.

Our wholesale segment, which is being discontinued, attracted 36% to $10 million.

During the third quarter, gross margin rose 143 basis points to 45.8%.

As discussed earlier this gain came primarily from our category management initiatives and leveraging of our logistic expenses.

We incurred the a LIPO charge of 360,000 this quarter, compared to a LIPO credit last year.

Resulting in a year over year negative impact to gross margin of 19 basis points.

Year-to-date, our LIPO credit was $2.3 million, compared to $10.2 million for the same time last year, resulting in a 29 basis point negative impact to gross margin.

As you recall, last year, we benefited from the lower acquisition costs, resulting from the acquisition of the Discount Auto Parts.

Gross margin for the retail segment rose 122 basis points to 46.1%.

In the third quarter, comparable S.A.G.

Was up 77 basis points.

As Jim described earlier, this increase is attributed to the two areas where we invested gross margin gains to grow the business.

On a GAAP basis, SG&A was flat with last year at 36.4%.

As expected, integration expense associated with the Discount Auto Parts acquisition declined to 2.5 million for the third quarter.

Year-to-date, integration expenses were 8.8 million and we remain on target to achieve our goal in 10 million in integrations expenses in this year.

As we stated in the part, we'll no longer break out integration expenses next year because they won't be material.

Comparable operating margin for the third quarter rose to 9.6% due to enhanced gross margins offset by operating expense investments.

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

Interest expense declined to 5.9 million in the third quarter, compared to 16 million last year as we benefited from strong free cash flow in the first quarter repayment of high yield bonds and debentures. .

Our tax rate for the quarter year-to-date was 38.5% and we anticipate that for the remainder of 2003 and 2004.

For the third quarter, comparable earnings for diluted share rose 34.8% to $1.24.

This exceeded by two cents our guidance range of $1.18 to $1.22.

GAAP earnings per diluted share were $1.20, which included $1.6 million in after tax integration expenses.

Year-to-date, comparable earnings per share were up 52.2% to $3.44.

Our GAAP year-to-date earnings per share was $2.52 and include 14 cents of integration expenses and 78 cents in debt retirement expenses.

As Jim mentioned earlier, at the end of 2003, we will no longer supply merchandise to the independent Western Auto dealers.

We have historically reported this business as our wholesale segment.

However, beginning in the fourth quarter, we reported as a discontinued operations.

As mentioned in the press release dated October 6, 2003, we anticipate a net after tax loss from discontinued operations for 2003 of approximately $2.3 million or 6 cents per share.

This also includes both the results of operations as well as certain expenses associated with discontinuing the wholesale supply program.

During the third quarter of last year, we produced earnings per share of three cents from the wholesale business, compared to slightly above break-even this year.

In 2004, we anticipate there will be minimal expenses associated with the completion of our exit from the wholesale supply business.

We will now review the company components of the balance sheet and cash flow statement.

CAPEX for the quarter was 19.7 million including 3.6 million related to the physical conversions of the Discount Auto Parts stores.

Year-to-date CAPEX was 70.3 million, including 11.5 million for the conversion of the Discount Auto Parts stores.

As previously announced, we anticipate CAPEX for the year to be approximately 95 million.

In 2004, we anticipate owning approximately 20% of our new stores, where the [inaudible] will provide a greater return, resulting in CAPEX of approximately 130 million.

Inventory at the end of the third quarter was 1 billion, 103 million, which was up year over year only 2.2% with a 7.7 increase in sales.

Inventory last year was higher due to the process associated with the Discount Auto Parts acquisition, which will [inaudible] completed at the end of the third quarter.

As we go forward, we anticipate inventory and sales will grow at approximately the same rate.

Net inventory, which is inventory less accounts payable, declined 5.3%, compared to last year, as our accounts payable inventory ratio rose to 55% at the end of the third quarter, compared to 51.4% last year.

Primarily due to better terms from our vendors.

Due to this up tick, we're raising our year end expectations for this ratio to 50%, compared to 44.9% last year.

At the end of the fourth quarter we plan on launching the vendor factoring program, to further enhance opportunities to generate free cash flow.

In 2004, we anticipate in incremental improvement in the account payable to inventory ratio, which could further be increased to 4% to 5% upon successful implementation of a vendor factoring program.

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

During the third quarter, we generated free cash flow of 67.8 million and year-to-date of 265.2 million.

The seasonality of the free cash flow, we anticipate being a user of cash in the fourth quarter.

However, we're raising the previous free cash flow guidance from 170 million for the year to 210 million because we've been able to raise the accounts payable ratio faster than anticipated.

In 2004, we anticipate generating 170 million in free cash flow, which reflects the increase in CAPEX associated with us owning a greater percentage of our new stores.

Also during 2003, we benefited from the utilization of deferred tax assets associated with the a acquisition of Discount Auto Parts and prepaying our bonds and debentures.

Due to our strong free cash flow generation we have a debt to total capitalization ratio of 43.3% as our total outstanding debt was only 456 million at the end of the quarter.

We're extremely proud of our ability to pay down 279 million in debt since the beginning of the year when the debt was to 135 million.

Our debt to capitalization ratio of 43% is quite an improvement from 77% at the end of 2001, when we had just completed the Discount Auto Parts acquisition.

As we had anticipated, our improved leverage ratio resulted in a further 50 basis point reduction in the interest rates we pay under the terms of our credit agreement.

As we're modeling out our expectations for next year, we're anticipating a slight up tick in rates.

As a result of generating strong free cash flow, and reducing our debt levels, standard and [inaudible] upgraded our debt rating during the third quarter.

At the end of the year, we anticipate that our return on invested capital will improve to 14.5%.

Now, let me reconfirm our guidance for the remainder of 2003.

We anticipate our comparable earnings for diluted shares to be 74 cents to 80 cents in the fourth quarter, compared to 43 cents last year, this include approximately ten cents for the positive impact of the 53rd week and seven cents or $2.8 million loss associated with the discontinuance of the Western Auto wholesale program.

Comparable earnings per [inaudible] share exclude Discount Auto Parts integrations expenses of approximately two cents per share.

We anticipate SG&A to be flat or slightly leveraged in the fourth quarter.

Naturally, the fourth quarter and next year guidance previously presented by Larry is based on a pre-split share count.

Again, as we noted earlier, our results include a complete reconciliation of our GAAP to comparable results are available in the press release and 8K filing and can be found on our website, www.advanceautotoparts.com.

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

Thanks, Jeff.

Thank you for listening.

Now we'd like to open the floor to questions.

Operator, would you please open the floor?

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.

Once again, please press star 1 to ask a question.

Please stand by for the first question.

The first question comes from Gary Balter with UBS.

Congratulations on a nice quarter, with nice elements for the future.

Two questions.

One, you talked about just now, Jeff, the expenses leveraging or being relatively flat in the fourth quarter.

What assumption is built in on gross margin for that quarter, and in that, this is all part of the same part of the question, is LIFO look like it hit you by about three cents in the third quarter, what is the assumption on LIFO?

The fourth quarter gross margin, again, we would expect to be up year over year from the fourth quarter of last year.

Not quite as strong as what we've seen in the first three quarters.

And again, I think we'd expect our LIFO credit to return to more normalized levels.

Again, the charge this quarter was in the -- in the second quarter was associated more with commodity pricing.

We don't expect that to continue in the fourth quarter so I would think the LIPO credit would be normal than what it's been historically.

Not expect to be a charge but slightly positive for the fourth quarter.

On Discount Auto Parts, was most of that, the commercial program being put in.

To the extent it was, how do you drive retail?

Is retail maxed out because the store sizes in many cases?

Do you see opportunities there as well?

Thank you.

Gary, I'll take this one.

This is Jim.

In the third quarter, we saw growth in both the DIY and commercial portion of the business there in Florida and we fully anticipate that will continue.

There is no limitations on how much DIY business we can do in those stores.

There's plenty of opportunity with the selection of products we now have in the store and the staffing and the systems and everything else that we have to run the stores.

We do -- the reason we mentioned commercial side, we do feel like we have a tremendous opportunity in commercial in Florida, and we're just now reaching the point with most of the integration behind us where we can focus or efforts on that and drive the business there as well.

So when you talked about mid single digit comps, that was for DAP and advance?

That's correct.

Thank you very much.

Absolutely.

The next question comes from Alan Rifkin with Lehman.

Please proceed.

Congratulations gentlemen. .

Just one point of clarification and then a question or two.

Your official guidance is 74 cents to 80 cents for Q4.

That does not include the one-time seven cent negative impact from the exiting Western Auto wholesale supply business, is that correct?

No Allan that includes both the 53rd week impact as well as the loss associated with the exit of the wholesale business.

So on a continuing operations basis, we're really talking about 81 to 87 cents?

Is that the right way to look at it?

With the 53rd week included, yeah.

Yes, okay.

And then how much of the gross margin improvement, either in -- either in basis point terms or absolute terms, did you reinvest in the advertising line?

This is Jim.

As Jeff mentioned, the total increase in SG&A came from these two areas of advertising and store staffing.

When you look at the individual pieces, it was about half and half of the total increase.

Okay.

And Jim, any sort of color as to how much better the stores in Florida that have the APAL program are performing, versus the rest of the chain?

As I said in my comments, the total group of stores that have APAL are outperforming the stores that don't have it, which is a major reason why we want to obviously get APAL into all the stores as soon as we can.

We're seeing the same trends in Florida as well.

It's a little harder to see in Florida, because we have other things going on there with physical remodels and those kind of things at the same time.

But all the stores in Florida do have the APAL system as of the beginning of the third quarter and they're clearly benefiting from that additional tool to sell parts.

One more question if I. Larry, your official guidance next year of $5 to $5.10 implies as 20% earnings growth.

A couple months ago, you articulated about 25% growth for '04.

Is there something that's changed in the last couple months, or is it just a little more conservatism on your part?

Alan, bear in mind in 2003, we've achieved very strong results.

We benefited from earlier than anticipated Gaines in gross margin and operating profit and as well as improved free cash flow generation from the prepayment of high price debt.

Clearly we still have the opportunity to generate strong earnings, but we feel much more comfortable with the range of 20% to 25%, especially since we've not yet completed the budget process for next year.

Our guidance is based on mid single comparable store sales growth with, as you heard Jim say, we're now running in the first few weeks of the fourth quarter as well as improvements in gross margin.

So we believe we can continue to produce very strong results as we narrow the gap in operating margins versus our largest competitor, but feel more comfortable with the guidance we gave with the $5 and $5.10 range.

Thanks, Larry.

Thanks, Alan.

The next question comes from Brett Jordan with Advest.

Please proceed, sir.

Good morning.

A couple quick questions.

One, on the comp store sales benefit, do you have a feeling for what the impact from the incremental hours of operation were and then, I guess, to follow up on an earlier question what was the DAP commercial comp number?

Brett, when you look at our comp store sales growth, obviously, it's hard to break out how much incrementally came from which initiatives.

But I think clearly, the opportunity for our store team to add some hours in some places not only caused us to increase our customer count, increase our cost, but I think certainly reinforced our message to our store and our teams that they are running their stores and we want to make sure when there's an opportunity out there that we make full advantage of it.

In terms of commercial in Florida, we haven't broken those numbers out and don't anticipate breaking out to that type of detail as we go forward.

Having said that, I'll tell you that the commercial trend in Florida has picked up, but at the same time, it's not dramatically different than what we said for the company as a whole.

One last question.

On the strategy on the real estate going forward to own a greater percentage of it, could you give us more of the thought process behind that decision and are there specific markets you expect to own in, versus others?

Brett, what we've done is as we've looked at the cash flow that we're generating, which is, as Jeff outlined, very substantial, and we have looked at how can we invest some of that free cash flow within the company, this is an area where today, we own between 20% and 25% of our total real estate, and we lease -- have leased most of the stores that we've opened in the last several years.

When we've looked at that, basically, what we're going to do be doing next year is maintaining the percentage ownership of new stores that we have for the entire company to date.

And there won't be specific geographic areas or anything like that in regard to where we own stores, versus lease.

But we're looking at them on an individual basis as we approve the sites to see where, based on our belief of the growth of the market going forward, the favorability of real estate values in some of those markets, we're making a store by store decision about where we own versus lease.

And we anticipate doing that going forward and we'll see whether we make the decision at some point to own more real estate or less, for that matter.

But it's an individual, store by store decision.

Thank you.

Thank you.

The next question comes from Jerry Marks with Raymond James.

Please proceed, sir.

Good morning.

Good morning.

Just a couple quick questions.

The 19 stores that you opened, new stores, seems like store closings were a little higher this quarter.

You get to the hundred, probably want to be tracking around 25.

Is this some seasonality that happens?

You close more during the summer months?

Why does that seem lower than you're trying to get your hundred?

There is no real trend to that.

How we decide to close stores is we go through the process of looking at the operations of the store and what we think the future of that is.

A lot of tied to lease expirations as well.

So it just coincidentally fell like that in the third quarter, but there's no change in strategy or in our plans as to how that happened.

Okay.

And then really sounds like you had a pretty good up tick from the third quarter average to what you're experiencing now, over the last few weeks.

Some of your competitors have also been indicating that the environment is a little bit better.

Could you comment on how much of this you think is from a better industry environment, or if you're seeing a better industry environment, or if you think it's more specifically related to the investments you're making?

We think they're directly related to the investments we're making.

Bear in mind that the industry has got very strong dynamics behind it.

It has for the last few years.

We don't see a reason why it's going to continue.

It's not going to continue into the foreseeable future and we're very bullish on the dynamics behind the industry but honestly believe the things we're doing internally are making the difference for the improvement in comps that we're [inaudible] .

Jerry, what we're seeing, as we went through the third quarter, we saw the momentum picking up as we went through the quarter.

In other words, comps got better as we went through the quarter and that's just continued to accelerate in the first three weeks of the fourth quarter.

Is part of that, that you have to go through training as you bring on, you know, to add store labor hours and so you start seeing the results as you, you know, train them over a month or two and then you put them in the stores?

I don't think it's that.

I think it's a matter of the accumulated things we've done, which Larry has touched on as well.

The additional advertising some flexibility on store staffing, the APAL systems, all the other things we've done over the last year to position ourselves for this.

I think the most encouraging part about it from our standpoint is we're seeing more customers in our stores, which is exactly how we want to see the major reason that we grow comps to be.

Jerry, I think Jim said it best.

It's very difficult, with the number of positive initiatives that we have going on to break it down and pinpoint to the percentile what is causing what.

If we even told you earlier in the year what we were doing with our Hispanic advertising and the like, you roll that into the number of positive initiatives we've got going, the only thing I ask you to do, bear in mind we've just begun with many of these things so we're very excited about the fourth quarter and '04 and beyond.

Right.

Now, it seems like a pretty big bump up from, you know, what the quarterly trend was.

It didn't happen in a week.

It started gradually building a half point or point at a time.

Joust continues to have positive momentum.

Okay.

Thanks.

The next question comes from Sid Wilson with Whitaker Securities.

Questions for you, congratulations on your quarter.

Regarding your long-term debt to cap, you guys have made a great deal of headway as you mentioned going from [inaudible] in the 77% area to down to 43.

You know, with the expected free cash flow that you're looking for this year and next year, is there a target, long-term debt to cap, that at that level you start feeling more comfortable where now you're going to start using the free cash flow for other areas?

Sid, we're continually evaluating the use of free cash flow and it's certainly something we spend a lot of time evaluating.

But I think the thing you have to realize is as we've [inaudible] the company, more and more opportunities become available to us.

So we will continue to evaluate what we're doing in debt repayment, versus more owned stores, accelerated relocation of stores and things like that.

It's something that's under continual evaluation as we go forward, enhancing shareholder equity and value.

We'll continue to report on it as we go forward.

There's nothing specific to share with you right now.

Okay.

My second and last question is, one of your competitors, Riley Automotive, yesterday, you know, also indicated that they decided to increase their advertising .

So I guess hearing that from both you and O'Reilly, I'm just wonder if this is in any way a function that the environment is getting more competitive.

Can you comment on what you're seeing in terms of pricing between you guys and your competitors and that area?

Well, certainly, the pricing environment, the retail pricing environment has been very stable.

We just see a continuation of the rationalization that has developed over the last couple of years.

We just believe that we're doing the right thing on a targeted basis.

We're doing the right thing in targeting our product mix, our advertising, our Hispanic advertising.

We're reevaluating, continuing to implement where we're getting better returns, electronic versus print and the like.

I certainly can't comment on what our competitors are doing.

We're doing what we know is in your best long-term interest and continuing to build off of it.

In regards to advertising, let me add as I commented earlier, we put together, at the beginning of this year, our first national advertising campaign with a new tag line, "we're ready in advance" and started rolling that out in the early part of the year.

Obviously, when you do those kind of things, you're going to measure the response and how people are perceiving the campaign and we went through that process and felt very good about what we were hearing, which drove us to take the opportunity to increase the spend and get the message out faster to work towards building the Advance Auto Parts brand not only short-term but long-term as well.

So this is a really a next step in the process of truly having a national advertising campaign that we launched earlier this year.

Thank you.

Thank you.

The next question comes from Bill Fimms with Smith Barney.

Please proceed, sir.

Good morning.

Two quick questions.

One regarding the labor hours.

Are we seeing shift in headcount per store on the number of hours that your current employees are working in those stores..

Two, no not to belabor the Advertising point, is this- the increase in advertising spend is that sustainable in the long term are we seeing a shift more toward radio advertising, or maintain your television budget?

Talking about the hours, with the MPT program, we have the capabilities to look at the optimal level of staffing.

That includes all three dynamics, the total number of hours, the given number of hours allocated on a given day, not just a week and the time of the day.

Number three, the optimal set of circumstances relative to seasonality that comes back to optimizing part-time versus full-time.

Last, but not least, something that is built right into MPT, that is actually critical to our success and we think will be fundamental in driving stronger comps, is the complete breakdown and definition of the quality of the people that are there.

So we have the ability now to measure and experiment with different ratios of part-time/full-time, parts pros, the number of them, how many a day and the like.

We're going through the planned experimentation and evaluation, with or team, and I think they're doing just an outstanding job although we're pleased with the results we see so far.

The advertising?

The advertising, Bill, I think the way we're going to look at that, as we always do, continue to measure the response we get from our customers and, certainly, again the major measure is how many customers are coming through the stores.

In addition to that, we have the ability, through measurement, to determine how they're respond to get advertising and, from there, how much we should be spending.

We do anticipate, as we go forward to continue to have the major thrust of our advertising program towards TV, which again is focused primarily on greater recognition of the advance auto parts brand, which translates into top of mind when the consumer does needs to buy an auto part, which translate into more customers in our stores.

Alright Thank you.

The next question comes from Lee Cooperman with Omega Advisor, please proceed sir.

I'll add my congratulations but show you my academic bent.

You got big free cash flow, you got low interest rates, rapid pay down of debt.

I don't see how a stock split evidence is confidence in the future.

I understand how a stock split company by dividend action would evidence confidence in the future.

Kind of tell me why we're not paying a cash dividend.

Is that it you have such greater use of capital internally, or what?

Anything you can help to elaborate on that would be appreciated.

Appreciate your question, Lee.

Again, it's something we continue to talk about.

Right now, under the set of circumstances that we're in, we think we've got plenty of good uses with our capital in growing our business and opening more new stores.

Like I said earlier, continuing to leverage the company as well as expanding our ratio of relocated and remodeled stores.

Clearly, Lee, it's something we'll continue to evaluate as we go forward.

Thank you.

Good luck.

Thank you.

The next question comes from Maurice Danen with Janis please proceed.

Thank you.

Nice quarter.

Speaking of opportunities to open up more now stores I was disconnected for a moment.

You said you plan to open the same or slightly more stores next year.

My next question would be why not step it up a little more.

When do you plan to?

It's not only opening more new stores, it's also owning more new stores that will be part of it.

Jim you want to - Jim heads up our real estate as well and I think he would be please to tell you our plans.

Maurice, we see a lot of opportunity for new stores in our markets we're currently operating in.

There are lots of places in the markets where we don't have the market share we'd like yet that provides us plenty of opportunity to open stores.

The major reason, as you mentioned, we're going to incrementally increase that next year is there is certainly a pipeline for real estate that we have to continue to fill before we can increase it.

Having said that, we do see opportunities as we go forward, beyond next year, to eventually increase that number more than it is today.

Great.

Quick follow-up question.

If you could just clue us what you're expecting for sales and profit impacts in that 53rd week what your assumptions include.

The 53rd week would be, again, you'll have to remember that's a holiday week for us.

And, you know, we'd be expecting a normalized sales with the appropriate labor in the stores.

Again, we have some benefits in the 53rd week in terms of rent and of that nature.

But its holiday week and it works out to approximately ten cent a share impact to the fourth quarter.

Great.

Thank you.

Thank you.

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

Hi, Jim I want to ask you this question since you initiated the track auto acquisition.

Seems to me that acquisition has been very productive when I look at the numbers where you're up 8.6% total retail sales, take down 3% comp, about 5.5% contribution from new stores, when square footage I think is up about 4% year over year.

I was wondering if the calculation I made is roughly good, which is perhaps the annualized volume on the average track auto store might be in the range of 1.3 to 1.4 million.

Jack as we commented, all of our new stores are doing very well, we're seeing greater productivity in all the stores we've opened.

I think it's a combination of a lot of things that are heading in the right direction in regard to all of the new stores opening with the 2010 format, the fact that we're opening stores in markets that Advance Auto Parts is well known.

All of the merchandising and marketing initiatives that are underway, the training and everything else we're doing to develop the people.

So on an overall basis, wee seeing the best results in new stores we've ever signed fully anticipate that's going to continue.

Underneath that, certainly, the track auto parts stores continue to perform very well.

We look for and will continue to look for those kind of tuck-in acquisitions out there when we get the opportunity.

But the Track stores, although doing well, are part of our total new store group that are doing well as an entire group.

Would the Track stores have a higher average volume than other new stores?

The answer to that would be yes.

And I think we've commented over the past few months that those stores came out of the box pretty much at our average company sales per store from the beginning and certainly are building on that.

First year is very strong.

That's correct.

Regarding [inaudible] for 2004, if you do mid single digit comps on an overall basis, including corporate SG&A, would there be any positive SG&A leveraged in 2004, assuming mid single digit comps?

Jack, this is Jeff.

We are anticipating some SG&A leverage as we get our comps back to the mid single digit range.

So we'd be anticipating some amount of SG&A leverage in 2004.

Okay.

My final question, Jim, in terms of tuck-in acquisitions in 2004, right now, what do the opportunities look like and theoretically, is there a potential for, say, 10 or 20 additional tuck-in acquisition stores?

Jack, there is that potential.

Certainly, we continue to look at potential tuck-in acquisitions all the time and as they become available and they match our real estate strategy, which is mean that tuck-in acquisition is a better opportunity for us than organic store growth, we'll take advantage of those.

Certainly, there is that opportunity next year.

You mean the tuck-in acquisitions would not be net additions?

They would replace organic growth if you found them?

We'd look at, as I said, tuck-in acquisitions are another way to grow a given market.

And again, the criteria that we use is, is it better to do a tuck-in acquisition than to do organic store growth?

It varies by market as to which is the best and how good are the real estate locations for a tuck-in acquisition versus what we can find organically.

To your question, we do see the opportunity to add some store count next year to that if we come across the right tuck-in acquisitions to do.

Okay.

Thank you.

Thank you, Jack.

The next question comes from Michael Weissberg with ING.

Please proceed, sir.

Good morning, everyone.

Good morning Michael

Just to go back to the step-up in advertising which you certainly indicated you were going to do well in advance, is that sort of a permanent change to a higher level of advertising relative to sales, or have you stepped it up and will maybe it will diminish some next year?

We'll continue to evaluate that.

I think the -- again, this is a -- we have a major opportunity this year with our first national advertising program and with a tag line that I think consumers are latching on to very well, and we'll continue to measure that.

Most likely, we'll continue to spend some additional advertising beyond what we've historically spent.

But that will be based on the results in terms of customer count as we go forward.

Certainly, we have the ability to measure that and determine the effectiveness of the proper spin.

The number you gave out, Jeff in terms of -- it was 50% up from 45%.

Was that the payable to inventory ratio?

yes.

How far along are you in the factoring program?

What inning are we at and how much more is there to do there?

We are still in the process of working out the details of that program, and we anticipate being able to launch that program here at the end of the fourth quarter and be able to grow or mature into that program over the first half of next year.

Okay.

Is there sort of a -- if we were to look out , is there a two-year target of where you can take the -- that payables to inventory ratio?

I think we'll have to evaluate that as we get into the program and start to gain traction on it and build momentum in that program.

So I think we're starting with we think reasonably four to five percent.

We think as wet get out into the future, we'll reevaluate that and could potentially drive it higher.

One final thing.

In talking to you, the difference between an owned and leased store can mean about two percentage points in operating margins?

Is that about right?

Again, that percentage will vary based on how many stores you actually own as a percent to the total.

Again, clearly, owning stores becomes more beneficial from an operating perspective over the long-term.

And again, it's hard to put a number specifically on that, because it depends, to a great extent, on what percent of your total you end up owning versus leasing.

What was the ratio of owned stores this year?

You said it's up to 25 next year.

It's approximately 20% to 25%.

For next year?

For currently.

Oh, it is.

So that ratio is not going to change that much?

Let me clarify just a little bit.

Of the 2500 stores we have today we own between 20% and 25%.

All the stores that we open in 2003 were leased stores.

oh, okay.

In 2004, we're looking to own somewhere in the same ratio, 20% to 25% of our new stores.

I got it.

Great.

Great job, Is.

Keep it up.

Thank you.

The next question comes with David Taylor of Taylor Capital Management.

Please proceed, sir.

Third quarter gross margin increase, how much of that mate have been from favorable vendor are pricing?

It's not something we break down publicly, but it's been a good mix from vendors, as well as change of vendors, as well as working on -- as we will continue to -- with our leveraging of some supply chain savings that we see as a result of the initiative as well.

Still more of that to be had going forward?

No question about it.

Please remember, ladies and gentlemen, we are in the very early innings of this company's benefit with long -- the long-term benefit of category management.

Category management is driving the opportunity to get better pricing from our suppliers, in many cases, because it's identifying ways that we and the vendor can operate more efficiently and better align our goals, which result in less cost for them as well.

Bear in mind, anytime you're doing more business with less suppliers, there certainly is a huge mutual benefit involved.

And we're working diligently on that.

We're very, very pleased and very excited about not only the results so far with category management, but most important of all, with the development of our people to actually use the financial tools and I.T. systems we've put in place.

Like I said, we're in the very early stages of rolling this out.

This becomes a way of life for the company and certainly changing the dynamics by which we operate the company and impacts everything from the way we select product, price product promote product, display product put everything through our supply chain systems and the like.

So we are clearly excited about the upcoming few years with the rollout and development of our people and the support and coordination with our suppliers on category management.

Great.

Going back to Jack's question on acquisitions, are there any potential acquisitions on your radar screen that represent more than just a handful of stores?

We're looking at regional tuck-in acquisitions that would fit in under our existing CAPEX program.

That's the extent of our radar screen.

Thanks a lot.

Thank you.

The final question is a follow-up from Sid Wilson with Whitaker Security.

Fine we have time for one more question so go ahead, Sid.

It's an honor to be the last question.

Regarding sales by categories, can you give us an idea of how sales were between hard parts, accessories, and chemicals?

And what do you expect to take place, you know, going into the fourth quarter, whether there's any shift between hard parts and chemicals, for example.

Sid, this is Jim.

We have not seen any significant change in our balance of sales over this year and do not expect to as we go forward.

I think, again, our objective is to drive more customers in our stores, sell more to the customers that do come in our stores, and do that across the entire spectrum of what we sell within our store base.

So as we go forward, we see growing the -- all the categories and maintaining, in general, the same balance of sales we have historically.

Okay.

Thank you.

Thank you.

Very good.

And with that ladies and gentlemen, we have to wrap up the call.

But we want to thank everybody for participating, and again, Shelia Stuewe is always available for follow-up calls.

Thank you.

This concludes your Q3 2003 Advance Auto Parts conference call.

Thank you for your participation today.

You may now disconnect