領先汽車配件 (AAP) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Advance Auto Parts fourth-quarter and fiscal-year 2003 conference call.

My name is Carol, and I will be your coordinator for today.

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

We will be facilitating a question-and-answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, 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.

Sir, please go ahead.

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 our future free cash flow and earnings per share.

These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to competitive pressures, demand for the Company's products, the market for auto parts, the economy in general, inflation, consumer debt levels, the weather and other risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission.

Due to changing conditions, should any one or more of these risk factors materialize, or 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 in our press release and 8-K filings, and are available on our Website at 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 fourth-quarter and 2003 fiscal year-end conference call.

In 2003, we produced strong results but, more importantly, we built momentum to drive our results in 2004 and beyond, including an accelerating trend in our comparable store sales gains, enhancements to our category management and merchandising strategies, a step-up in building our brand through our nationwide advertising campaign and increased efficiencies in our supply chain.

This momentum is clearly exemplified in our operating highlights for 2003, which include generating a fourth-quarter comparable store sales gain of 7 percent, our strongest performance in '03.

For the year, we generated a 3.1 increase.

We also improved our comparable operating margin throughout the year, resulting in a 131 basis point improvement to 8.5 percent.

Comparable earnings per share from our continuing operations rose 65 percent, to $2.15 per share.

We paid down 291 million in debt, reducing our total debt to 445 million, allowing us to end the year with a 41.3 debt-to-cap ratio.

All in all, we are proud of what our team produced in 2003, and we believe that we have just begun to get good at getting better.

And getting even better in 2004 and beyond is what we are all about.

Our four key goals for 2004 are raising our sales productivity per store; expanding our operating margins; number three, generating a strong free cash flow; and, fourth, increasing our ROIC.

Raising sales productivity is clearly at the forefront of all of our initiatives.

These initiatives include category management, APAL and our 2010 store format.

Our category management process was developed to maximize sales and gross profit dollars, not just to augment gross margin.

By thoroughly reviewing each category, we're finding opportunities to meet or exceed our customers' needs by having the right products, value-priced and properly merchandised to maximize sales.

In 2003, our category management initiatives were one of the key reasons our gross margin improved 116 basis points for the year.

In 2004 and beyond, we believe our category management initiatives will continue to meet our ultimate goal of driving sales and gross profit dollars.

APAL, our proprietary POS and electronic category system called Advance Parts and Accessories Lookup, is also driving incremental sales by putting all the information that our team members need to provide outstanding customer services at their fingertips.

This system assures that our customers get everything they need to complete their repair project the first time they come into our stores.

The system includes good, better and best ratings, product information and specs, a list of related items, as well as complex graphics to make sure that we are selling the customer the right product.

We will continue to add information and functionality to APAL as we move into 2004, 2005 and 2006.

And finally, our 2010 store format, with its improved adjacencies, signage and layout, is driving more customers into our stores.

Our customers are telling us that they like this new format, and it's easier to shop.

All in all, we are pleased with our fourth-quarter comparable customer count growth.

But rest assured, we see tremendous opportunities to continue to build customer footsteps into our stores in 2004 and beyond.

The positive dynamics of our operating initiatives, along with the improving industry dynamics, will benefit us in 2004.

The improving industry dynamics include more vehicles coming into their high-repair cycle, the aging of the SUV population and favorable scrappage trends.

We believe that the DIY market is growing at about 3 to 4 percent per year, and the DIFM market is continuing to grow at about 5 to 6 percent a year.

Given these positive industry dynamics and our operating initiatives, we believe we are well positioned for strong mid-single-digit comps, as well as the opportunity to gain market share in 2004 and the years thereafter.

Before I turn the floor over to Jim Wade, I want to inform you of some changes to our Board of Directors.

In our Board meeting today, we elected a new Lead Director, Stephen M. Peck.

Stephen has had an illustrious career in the investment industry.

Currently, he's a general partner of the Wilderness Partners, LP.

He joined our Board in January of 2002, and has made significant contributions to our Company.

Due to his appointment as Lead Director, he will be relinquishing his responsibilities as Chairman of our audit committee to Carlos Saladrigas.

Carlos has a strong background in finance and accounting, and joined our Board in May of 2003.

Carlos is currently the Chairman of Premier American Bank.

It is a privilege to have these two gentlemen take leadership positions on our Board.

Their leadership and business acumen is a guiding force for our team.

It's also a great honor for me to announce that Nick Taubman, the Company's former Chairman and Chief Executive, will rejoin our Board.

Nick's knowledge of our business is invaluable.

It was his vision that took this Company from a small regional chain of automotive and home stores to the industry leader that it is today.

All of us on our Board of Directors, and especially myself, look forward to continuing to learn from Nick and his experience.

And, Nick, if you are on the call, welcome back.

Now, I would like to turn the floor over to our President, Jim Wade, who will go over our operating initiatives and results.

Jim?

Thank you, Larry, and good afternoon to all of you on the phone.

On our last conference call, we reviewed with your our strategies to enhance our sales growth.

They included increasing our advertising expenditures to support our new national advertising campaign, which is accelerating our brand recognition.

We also talked about investing incremental labor in certain markets.

We believe the results of the fourth quarter show these investments, along with our numerous operating initiatives, are generating strong results.

During the fourth quarter, our sales rose 19.2 percent, including the 53rd week.

Excluding the 53rd week, we achieved a 10 percent topline growth, due to strong comparable store sales gains, as well as a 4.2 percent year-over-year increase in square footage.

During the fourth quarter, we achieved a 7 percent comparable store sales increase, on top of 3.1 percent last year.

This gain came almost equally from an increase in customer accounts and average transactions.

We calculated our comparable store sales gains based upon our 13-week quarter this year, compared to the equivalent 13 weeks last year.

Year to date, our same-store sales grew 3.1 percent, compared to 5.5 percent last year.

We're also pleased to report that in the fourth quarter, we generated a strong increase in both DIY and commercial comps.

Our DIY comps grew 5.4 percent, on top of 2.7 percent last year.

We believe this accelerated growth is being driven by our operating initiatives, especially in merchandising and marketing programs, as well as our investments in advertising.

For the year, our DIY comps grew 2.4 percent.

Our commercial comps grew by 15.4 percent in the fourth quarter.

This increase was driven by strong commercial sales in our stores with existing commercial programs, as well as the continued addition of new programs.

During the fourth quarter, we added 79 programs, bringing the year-end total program count to 1,625 stores, representing 64 percent of our chain, compared to 58 percent at the end of 2002.

For the year, our commercial comps rose 7.2 percent.

Commercial made up 15.8 percent of our total sales in 2003, up from 15 percent in 2002.

We continue to target stores and markets with commercial opportunities, using our database of potential customers.

This database is telling us that there are plenty of opportunities to continue to add programs in 2004 and beyond.

Our goal is to achieve optimal coverage in each of our markets, and as a result, we anticipate continuing to profitably grow our market share.

Sales in our commercial business are growing as we concentrate on the basics, including offering our customers a wide selection of quality, brand-name parts with broad availability, due to our flexible logistics network; delivering these parts quickly, so that our customers can turn their bays; targeting potential customers in our trade areas who we can best serve profitably; leveraging our APAL and training programs, and doing all of these things with minimal investment, while leveraging our fixed costs.

Just as an update on our current sales trends, in the first few weeks of the first quarter of 2004, our overall comps remained solidly in the mid-single-digit range.

We remain comfortable with that range for all of 2004, as we continue to gain traction from our numerous operating and marketing initiatives.

During the fourth quarter, the stores acquired in the Discount Auto Parts acquisition also produced strong results.

Total comparable-store sales rose 7.5 percent, on top of 3.3 percent last year.

DIY comps for these acquired stores were slightly better than our total Company's results, and our commercial initiatives in these stores began to really take off as we generate commercial comps at almost twice the Company average.

We believe we have tremendous opportunities to expand our sales in the former Discount Auto Parts stores in 2004 and beyond, especially in commercial.

In 2001, before we acquired these stores, they were generating significantly lower sales in our four Advance stores.

During the past two years, we focused on putting in place the additional inventory availability, IT systems and team members with added parts knowledge needed to expand our sales.

Our teams in these stores have worked diligently learning our new systems and the brand-name merchandise we now carry.

They are now taking on the challenge to expand our commercial penetration.

These stores are approaching the commercial markets in the same way that all of our stores do, by earning our customers' business one by one.

In Florida, we remain on schedule and have completed the physical remodeling of 43 percent of these stores to our 2010 format.

We have just 223 stores remaining to convert in 2004 and 2005.

These stores are being remodeled to the 2010 format, market by market, at the rate of about two to three stores per week.

In 2004, we look forward to the complete physical conversion and the re-grand opening of the Orlando, Tampa and Naples/Fort Myers markets.

We have met our new-store opening goal for 2003, opening 125 stores, as planned.

During the fourth quarter, we opened 46 new stores.

Our new stores continue to produce record results.

We also closed 21 underperforming stores during 2003, bringing our store count at year end to 2,539 stores.

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

These stores will be opened primarily in existing markets, where we will continue to leverage our advertising, our distribution and our field support teams, and take advantage of our growing brand recognition.

During 2003, we also relocated 32 stores, including eight in the fourth quarter.

In 2004, we anticipate relocating approximately 40 stores.

We mentioned earlier our new 2010 format as being a driver of our sales growth.

As a result of our new stores, our relocations and our remodels, we ended the year with 714 stores with this new format.

We plan to convert our entire chain over the next several years, and are on track to have over 1,000 stores with this format by the end of 2004.

We believe this will be a driver of our sales growth for many years to come.

During the fourth quarter, we not only met our new-store opening goals, and generated strong sales results; we also saw the benefits of our initiatives on our gross margin.

Gross margin continued to expand, primarily due to our category management initiatives and improved efficiencies in our logistics network.

While we're talking about gross margin, I also wanted to mention that we continue to implement changes to our logistics network to increase our service to our stores, improve our productivity in our distribution centers and leverage our costs.

During 2003, we completed a logistics review, which shows that as a result of the Discount Auto Parts acquisition, we had excess distribution capacity in the South.

Just as a reminder, Discount Auto Parts had two distribution centers, one in Florida and one in Mississippi.

As a result of this excess capacity, we announced in January that we would close our Alabama distribution center in 2004.

We want to thank the dedicated team who made this DC a success over the past 10 years, and hope that many of these team members will continue to join us at our other facilities.

The cost of closing this facility will fall in 2004, but is included in our guidance that Jeff will talk about, and will not be broken out as a nonrecurring item.

Also, as part of the logistics review, we have also begun preliminary planning for a new distribution center in the Northeast, to better support our growth in this region.

Currently, we are targeting this facility to open in 2005.

We will update you further on future calls on our progress.

The balancing of our capacity through these changes will allow us to better leverage our logistics expense as we go forward.

With our stronger sales growth, we have leveraged SG&A in the fourth quarter.

Included within this total, we continue to invest more dollars in advertising and labor, as we discussed before.

In 2004, we expect to continue to spend more on advertising as a percent of sales, until we anniversary the additional expenditures in the third quarter of 2004.

But with our stronger comps, we expect to leverage our store labor.

As you may recall, we did not leverage our SG&A in the third quarter, when we began the additional investments.

The key to our SG&A leveraging is the increase in sales productivity of our stores that we saw in the fourth quarter.

Let me give you a quick update on APAL, our proprietary POS and electronic parts catalog system.

It continues to help our team generate stronger sales and better gross margins.

Over 85 percent of the chain was completed at year end.

We are pleased to inform you that, as of today, we only have 140 stores, or less than 6 percent of the chain, left to convert, and we expect to finish the rollout by the end of the second quarter of 2004.

But the excitement won't end with the completion of the rollout.

Because of its Windows-based architecture, we will be able to continue to add information and modules to APAL that will allow us to serve our customers better for many years to come.

Lastly, as we explained on our last call, we discontinued the Western Auto wholesale program in the fourth quarter, as planned.

The transition plan was completed as expected, and the cost of discontinuing the program was slightly less than we'd estimated.

As a result, there will be no sales from this program in 2004, and we'll expense (ph).

We want to thank Greg Nance (ph), our Vice President of the wholesale business, and his entire team for their dedication to our customers and to our Company as we went through this transition.

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 afternoon.

During this call, our discussions will concentrate on ongoing operations.

As Jim previously said, in December of 2003, we discontinued supplying the independent Western Auto dealer business, and are reporting this portion of our results as discontinued operations.

I will specifically cover the discontinued operations later.

Other than that segment of the call, my remarks will concentrate on our ongoing retail operations.

Also, all references to earnings-per-share amounts reflect the two-for-one stock split that became effective January 5th, 2004.

During the fourth quarter, our team produced an increase in sales of 19.2 percent to 821.3 million, including the incremental 53rd week, which added 63 million in revenue.

On a 52-week basis, sales increased 10 percent.

For the year, our sales rose 9 percent, including the 53rd week, and 7.1 percent on a 52-week basis.

In the fourth quarter, gross margin rose a solid 49 basis points to 45.6 percent, due primarily to our category management initiatives and improved supply chain efficiencies.

For the year, our gross margin rose a strong 116 basis points.

Needless to say, we are extremely proud of this improvement.

Mike Coppola, our Chief Operating Officer, and his team, in the last two years, have transformed how we buy, promote and merchandise our products.

These are textbook category management methodologies.

This team has enhanced all aspects of our product merchandising to meet our customer needs.

As we move forward in 2004, we anticipate that our category management initiatives will continue to drive sales and gross profit dollars.

We also anticipate continued improvement in our gross margin coming from improved efficiencies in our supply chain.

During the quarter, we experienced a minimal LIFO credit versus a 2.9 million credit last year, which added 43 basis points to gross in the prior year.

For the year, we booked a LIFO credit of 2.3 million, compared to 13 million last year.

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

In the fourth quarter, comparable SG&A declined 82 basis points.

Some of this decline related to leveraging of our fixed costs in the 53rd week.

On a 52-week basis, we estimate the comparable SG&A declined approximately 25 basis points.

On a GAAP basis, SG&A was 38.3 percent, compared to 40.3 percent last year.

Included in the GAAP results are the integration expenses associated with the Discount Auto Parts acquisition.

This will be the last quarter where we break out integration expenses, because they will no longer be material in the future.

During the fourth quarter, integration expenses declined to 1.6 million, as we completed the majority of the integration, other than the physical conversion of the remaining 223 stores.

For the year, integration expenses were 10.4 million, in line with our $10 million estimate for 2003.

Comparable operating margins rose 131 basis points during the fourth quarter to 7.4 percent.

Excluding the 53rd week, operating margins rose approximately 70 basis points to 6.8 percent.

For the year, comparable operating margins rose 131 basis points to 8.5 percent.

Excluding the 53rd week, comparable operating margins rose approximately 120 basis points to 8.4 percent.

GAAP operating margins, which include integration expenses, rose to 7.2 percent for the quarter and 8.3 percent for the year.

Interest expense declined to 5.4 million in the fourth quarter, compared to 15.4 million last year, as we benefited from our strong free cash flow and the first-quarter repayment of our high-yield bonds and debentures.

Our tax rate for the quarter and year to date was 38.5 percent, and we anticipate that approximate tax rate in 2004.

In the fourth quarter, we reported an after-tax loss of $2 million, or 3 cents per diluted share, from discontinued operations related to the Western Auto wholesale business.

This loss included 1.7 million in exit-related costs.

For the year, we reported an after-tax loss of 0.4 million, and we anticipate no expenses in 2004 associated with the discontinuance of this business.

The wholesale business results of operations for fiscal 2003, 2002 and 2001 will be shown as discontinued ops in our 2003 annual reports.

The 2001 financial statements were audited by our former auditors, who have subsequently ceased operations.

As a result, our current independent auditors are in the process of completing the audit procedures required to incorporate 2001 in their report for our Form 10-K to be filed on March 18, 2004.

GAAP earnings per diluted share were 41 cents for the quarter.

Excluding the 1 million in integration expenses, comparable earnings per diluted share were 42 cents.

This exceeded by 2 cents the top end of our fourth-quarter guidance range of 37 cents to 40 cents per diluted share.

Excluding the 3 cent loss from discontinued operations, comparable earnings per diluted share from continuing operations rose 114 percent in the fourth quarter to 45 cents.

Excluding the impact of the 53rd week, comparable earnings per diluted share from continuing operations rose approximately 81 percent to 35 cents.

For the year, our comparable earnings per diluted share from continuing operations rose 65 percent to $2.15.

Excluding the impact of the 53rd week, comparable earnings per diluted share from continuing operations rose approximately 60 percent to $2.08.

Our GAAP diluted earnings per share for the year were $1.67, which included 8 cents of integration expenses, 39 cents in debt retirement expenses and a 1 cent loss from the discontinued operations.

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

CapEx for 2003 was 101.2 million, including 14.2 million related to physical conversions of the Discount Auto Parts stores.

We anticipate capital expenditures of approximately 130 million for 2004.

This does not include expenditures for a new distribution center in the Northeast, which could fall in 2004, and would be in the range of 35 to 50 million, depending on the size and location of the center.

We will update you further on future calls on our progress in CapEx related to this facility.

We ended the year with 1.1 billion in inventory, up 6.2 percent compared to last year.

This compares favorably to our sales growth of 10 percent for the quarter.

Our year-end inventory per store was up only 2.2 percent, with a comp-store sales increase of 7 percent.

As we have in the past, we anticipate growing sales faster than inventory in 2004.

Our net inventory, which is inventory less accounts payable, declined 5.6 percent to 546 million, as our accounts payable inventory ratio rose to 51 percent, compared to 45 percent last year.

We anticipate that at year end 2004, our AP to inventory ratio, including the impact from our vendor financing program, will rise to approximately 54 percent.

We are pleased to announce that we just launched our vendor factoring program.

We believe that by the end of 2004, we can have as much as 50 million outstanding on this program.

During 2003, we produced 233.6 million in free cash flow, a 68.6 million increase versus last year's 165 million.

In 2004, we anticipate generating 180 million in free cash flow, including the impact of our vendor financing program.

Our cash flow in 2003 was higher because of the benefits realized from the utilization of our deferred tax assets and higher CapEx expenditures planned for 2004.

Due to our strong free cash flow generation, we now have a debt to capitalization ratio of 41.3 percent, as our total outstanding debt was only 445 million at the end of the year.

We are extremely proud of our ability to pay down 291 million in debt since the beginning of this year, when our debt was 736 million.

On December 8, 2003, we announced that we had completed an amendment to our credit agreement, resulting in a reduction of 25 basis points to the interest rate margins we pay over the base LIBOR rate.

As we model out our interest rate assumptions for 2004, we are including a slight uptick in rates beginning in the second quarter.

Due to our improved operating results and the prudent management of our assets, our return on invested capital rose 15 percent, compared to 13.4 percent at the end of 2003.

We are reiterating our guidance for 2004 year, given on our third-quarter conference call, of $2.50 to $2.55 in diluted earnings per share, which is a 20 to 23 percent increase compared to our 52-week results this year.

We are also initiating a first-quarter and second-quarter guidance.

Based on mid-single-digit comparable store sales gains, we believe we can achieve earnings per diluted share of 62 to 65 cents in the first quarter and 68 to 72 cents in the second quarter.

Again, as we noted earlier, our results included a complete reconciliation of our GAAP to comparable results, and are available in our press release and 8-K filing, and can be found on our Website, www.AdvanceAutoParts.com.

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

Thanks, Jeff.

We are very proud of what our team achieved in 2003.

We are even more excited about what the future holds for Advance Auto Parts.

As our electronic advertising says, we have the best parts, people and price; we are ready in advance.

In 2004, we are ready to meet our goals of increasing our sales productivity, expanding our operating margins, generating strong free cash flow and increasing our ROIC.

We look forward to serving more customers than ever before in 2004.

We want to thank you for listening, and now we will be happy to take questions.

Operator, would you please open the floor?

(OPERATOR INSTRUCTIONS).

Alan Rifkin, Lehman Brothers.

Just a couple of questions, if I may.

Larry, looking at your fourth quarter, which exceeded your expectations, and if you take that together with your guidance of 2.50 to 2.55 for '04, that implies 16 to 18 percent earnings growth.

Why is your guidance for 2004, in terms of growth and earnings, lower today, after the fourth quarter in which you beat expectations?

Jeff, do you want to just qualify the numbers that we gave him on --

Yes.

No, Alan, the earnings per share growth is 20 to 23 percent, based on a 52-week comparison.

We have got an extra week that you need to make an adjustment of about 7 cents, so it's actually a 20 to 23 percent increase.

So you are still backing the 20 to 25 percent?

Yes.

That's correct, Alan.

I was a little confused on how you came to that, because it's consistent with the 20 to 23 percent guidance that we gave.

And then, Larry, any commentary on the performance of the 2010 stores versus the non-2010 formats, in terms of same-store sales in the quarter?

I'll be happy to answer that.

The process that we go through with our 2010 store remodels is to remodel the entire market, all the stores that are in that market, at one time.

And when we do that, we then have a re-grand opening of the market to introduce ourselves to our existing customers and attract new customers who have not shopped with us before.

And what we're seeing is that that really creates a new look to the stores, but also a new group of customers that come shop with us.

So we're seeing higher customer counts and higher sales, and we are not in a position to disclose the exact increase in comp-store sales that we get from the remodels.

But I will tell you that we are experiencing sustained comp-store sales increases that are significantly above our overall comps increases from those conversions.

Alan, it's safe to say that we are either meeting or exceeding our hurdle rates and planned expenditures in the 2010 stores.

Bill Sims, Smith Barney.

Good afternoon.

This is a follow-up to Alan's question.

At the end of the third quarter, you provided the 2004 EPS guidance that's implied 20 percent upside.

At that time, it was perceived that this guidance was a little bit more conservative, and you indicated that you did not want to be more aggressive prior to your budgetary process.

By now, I would think that you have made it through the budgetary process.

Can you give us an idea, as you look at 2004, was it the gross margin line that you felt like you needed to be more conservative on?

And should we, as we model on estimates, look for gross margins to be a significant slowdown in improvements as we go through 2004?

Or is there some other area that you want to be more conservative when you are outlining your guidance?

Our guidance has been consistent with what we gave in the third quarter, with the 2.50 to 2.55, which is a 20 to 23 percent increase in 2004 compared to the 52 weeks.

And with that, we fully anticipate comps in the mid-single-digit range.

We would also anticipate some additional gross margin improvement, as well as some SG&A leveraging, as part of that.

And if I could just quickly change gears slightly, in terms of the advertising initiatives you've pursued, can you share with us any noticeable impact of sales in the markets that have seen a significant improvement in advertising?

The approach we have taken to the advertising is to build our brand further, and we see a significant opportunity to do that.

When we do this advertising, it's not promotional in nature; it's for the purpose of building brand.

And when we started the process, we did not anticipate immediate results from it.

Having said that, we have been very pleased with what we're seeing.

We are seeing, as we measure the results in the different markets, increased customer count.

And in fact we're getting there, we think, sooner than we expected.

And that's certainly the major reason that is driving us to continue to do this.

We just see a major opportunity to increase the branding of our Company, not just in the markets that we're in today, but certainly as we go forward, to introduce customers to our Company before we open stores in those markets, as well.

Just to further add to Jim's remarks, we are also very pleased with the quality of our comps, relative to the balance across all of our marketing areas.

Jack Bellas (ph), Midwood Research (ph).

Regarding the first half of the new year, where your comps were up 1 percent in first quarter and 2 percent in the second quarter of last year, when you talk about mid-single-digit comps, can I assume that you're talking perhaps closer to 7 percent that you did in the fourth quarter, which is up against 3 percent of a year ago?

Jack, I think the guidance that we provided is mid single digits.

I think we certainly have the opportunity, as we demonstrated in the fourth quarter, to be on the north side of that.

And we would be very pleased to do that as we go through the year.

I think, in the first two quarters of this year, the results from a comp standpoint were not what we were used to experiencing.

We have run almost a 7 percent comp-store increase over the last five years, so we took the steps then to ensure that our growth in sales would accelerate.

We are pleased to say that we're seeing the benefit of that, and certainly our team knows the importance of comp-store sales in the retail business, and we're focusing on driving that sales productivity in all our stores.

When it comes to advertising expense, you have noted you're going to be increasing it in the first half of the year -- this year -- whereas that did not occur until the third quarter of last year.

Can you give us an idea as to what extent the percentage gain is in advertising expense, compared to a year ago, for the first half of the new year?

The increase would be in line pretty much with what we saw in the third and fourth quarter of this year.

The increases, I think, when it comes to brand advertising -- it's sufficient to cause the customers to see a perceptual difference in how much advertising we're doing.

And that's what we are finding as we do the research from the advertising that we did in the third and fourth quarters.

So it would be in line with what we did in those two quarters.

What was at?

We haven't disclosed the specific amount, and wouldn't.

But it's something we evaluate, certainly, every month as we plan our advertising for the future month and quarter.

And that is what we would look at doing this year.

By the way, you said that the 2010 stores had significantly above comps gains, compared to stores that are not 2010 stores.

Is there going to be some point when you reveal what those numbers are?

We would not anticipate giving specific information in that regard.

I think we certainly, from a guidance standpoint, can continue to give you an idea of what we're seeing.

And certainly now, we are seeing it in two areas, one being in the market that we're remodeling to the 2010 format.

And, as I mentioned, we are also seeing it in our new stores.

Every new store opens with the 2010 format.

And we are seeing record results, in terms of the sales that those stores are opening with.

My last question is regarding commercial delivery.

Are you going to have new initiatives in 2004 -- additional initiatives on top of what you did in 2003?

Jack, the basic program for commercial has stayed and will stay the same.

And that is to offer a broad availability of parts, brand names of parts, the ability to get it to the customers quickly.

What you will see is a continued growth in the commercial sales in the stores that have programs, and then we'll continue to add programs to some stores, both existing and new, at the time they open -- not substantially different than what we have seen in the past, but we will continue to add programs.

So what is causing the acceleration, then, in commercial delivery comp sales?

It's a combination, again, of the things that -- of the program that we have in place, which is to offer to our customers a wide selection of brand-name products, the ability to get it there quickly, a broad availability, focusing on driving that commercial business, identifying specific markets where we should be doing better, adding it to stores where we have the opportunity to grow the business further, and continuing to execute our commercial plan.

Chris Svezia (ph), Wells Fargo.

Congratulations on a good quarter.

Just a couple of quick questions.

First, I was just wondering if you could possibly provide an update on the Discount Auto Parts stores in Florida, specifically those stores that you have remodeled to the 2010 format in '03, just kind of how they are performing relative to your plan, or relative to those stores have not been converted thus far.

Those stores are performing right on plan, if not a little bit ahead of where we expected.

We started the conversion of those markets in the northern part of Florida in 2003, and have finished several of those, and we have done the grand openings, and seeing the positive sustained results that we anticipated seeing.

And I think what is occurring is that the transition of the brand from Discount to Advanced has gone very well.

The new look of the stores is causing new customers to shop with us that have not shopped with us before, and we're seeing very solid results, and fully expect to see that as we continue to convert the markets in 2004 and 2005.

And just two other quick questions.

Just uses of cash going into 2004, specifically on the free cash flow side -- I would assume the priority is, obviously, unit expansion; you will be owning, I believe, more stores going into '04 and, obviously, paying down debt.

Can you kind of rank, in terms of the priority, in terms of uses of cash going into '04?

We intend to, in '04, spend 130 million in CapEx, which is going to be invested predominantly in our new-store expansion programs and our ongoing maintenance programs, including the 2010 remodels that we spoke about.

And again, I think we continue to see tremendous opportunity to invest in the business, to grow the business.

And again, I think you will still continue to see us use our free cash flow, as well to prepay debt, as well.

And just lastly, on the free cash flow guidance that you gave -- I think, $180 million for 2004 -- I would assume any impact from CapEx on the new distribution center is not included in that number?

That is correct.

And obviously, you will provide updates as you get closer, in terms of planning?

That's correct.

Gregory Malick (ph), Morgan Stanley.

This is Jonathan Simons (ph) for Greg.

A few questions.

First, on the free cash flow guidance, the down guidance rather to '03, I was just wondering if you could sort of walk us through how much of that is CapEx-related, and any sort of working capital changes that will be notable there?

Really, Jonathan, the two big things driving that is the additional CapEx planned for 2004, which is about 30 million higher than what we spent in 2003.

And then the other significant change is, obviously, the benefits that we realized each of the last two years, related to deferred tax assets, specifically coming from the Discount Auto Parts acquisition, as well as from the early retirement of our debt in the first quarter of this year.

So, really, our free cash flow is going to be down over the prior year for those reasons.

But again, it's actually up slightly from where we anticipated we would be at the third quarter, when we gave guidance of about 170 million.

And we finished the year a little bit stronger in free cash flow than we anticipated as we moved through the last half of the year.

The second one is, Genuine Parts on their call discussed deflationary product pricing in the fourth quarter.

I was wondering if that was anything that you saw, or if there were any specific categories where you might have seen that?

Overall, we are fairly stable across the board.

And the final one -- can you discuss the pace of the quarter, just sort of how December looked versus November and October?

Sure.

As you may recall, what we saw in our comps was a beginning of an increase in sales trend in the middle of the third quarter, and we reported that on our last call.

As we went through the fourth quarter, there was not a significant difference from period to period.

Having said that, the latter periods were stronger than the first part of the quarter.

Justin Clifford (ph), Omega Advisers.

I just wanted to get some kind of sense of your potential acquisition plans for this coming year.

If you think that's -- are you going to focus just on building your own brand, or should we expect, if you see something opportunistic, you're going to go after it?

Well, I think that it is extremely consistent with what we said in the past.

And that is we are certainly very open-minded to regional tuck-in acquisitions like the ones we have done so very successfully in the last couple of years, like Trak auto and Car Parts and Car Port and the like.

Any regional tuck-in acquisitions that we do do will fit in underneath our existing CapEx program, and we will open those stores within the same store count that we forecasted as well, and just open them in lieu of new stores.

And I hope you will forgive me for this.

But, since I'm actually filling in here for a colleague who could not make this call, I'm not all that familiar.

The 180 million, you say, in free cash flow is before your 130 million of CapEx; is that correct?

No, that is after the 130 million in CapEx.

So the priority with that, then, is to pay down debt, I presume?

Correct.

And how about any plans for a significant share repurchase?

We will continue to evaluate all of our options as we go forward, but right now, we will continue to stay in the mode that we have been in and, over the long term, look forward to become an investment grade Company.

Cid Wilson, Whitaker Securities.

Congratulations on a strong comp.

My first question is, can you give us a breakdown in terms of how sales trended in the fourth quarter between hard parts (ph), accessories and chemicals?

Cid, we don't break out the actual categories.

For competitive reasons, we don't go down that way.

But overall, it was a good balance.

I think that there was no sustainable change.

There was no significant change.

It was very consistent.

And also, can you give us an update on your MPT and specifically your A+ program, which I think you're in the process of rolling out this year?

Sure, Cid.

We continue to work with that program.

It's in some stores.

The program for rollout continues to be developed, as our store team members learn the system and use it.

But we are very excited about the fact that that will be our next step in the MPT program.

It's going to save our team members a lot more time in regard to doing it, and it gives them a lot more information more quickly to make decisions about staffing.

And also, regarding your 180 free cash flow forecast, it seems to me that, as you are looking to pay down your debt, is there a target long-term debt-to-cap where you are comfortable with that?

And if you do reach that, any thoughts on what you may do with that free cash flow?

I know you indicated that you'll look at other things, share repurchase.

But any comments on a target of long-term debt-to-cap?

Cid, we don't really have a targeted debt-to-cap ratio.

I think we are extremely pleased with our ability to pay down $500 million of debt over the last two years, and reduce that from 76.8 percent down to 41.3 percent, where we ended the year, which is well ahead of where our guidance was.

Again, I think we anticipate by the end of 2004 that could be somewhere in the 25 percent range.

And again, we're focused on how best to use our free cash flow and increase our shareholder value.

But we do not really have a specific targeted ratio in mind.

And my last question -- this is my very last question -- is your commercial comp.

That was one of your strongest comps I think I've ever seen you guys report, at least recently.

Would you say that it may be coming more from the chain stores, or is it more the mom and pops?

Or what do you think is driving that commercial comp?

Our core customer is the local garage.

Certainly, we do a significant amount of business with national chains, as well.

But the largest portion of our increase is coming from what we see our core customer being, the garages and the various markets we operate in.

Barbara Miller (ph), Federated-Kaufmann Fund.

First, just a point of clarification.

I thought I heard you say that the closing of the Alabama DC is a cost that is included in your 2004 earnings outlook?

That's correct.

Is that correct?

Can you quantify that?

I don't think we have quantified it.

It's not a material number.

We'll be spending some money in the earlier part of the year, in terms of shutdown costs, and we will start to see savings from that as we go through the second half of the year.

But just from a proportionate standpoint, it is less than $2 million.

And secondly, do you have the store opening schedule by quarter?

Yes, we do.

You'll see a schedule that is not too different from what we saw in 2003, which is we will have a larger number of stores opening each of the quarters as we go through the year.

The first quarter will be probably in the ballpark of between 20 and 30, and then the later quarters will increase as you go through each quarter.

And my last question is, on the balance sheet it looked like there was a swing in the accrued expenses year over year.

Up last year, down this year.

And that related to the extra week, primarily, and accrued payroll-related costs.

And the extra week, we fell on a pay week, so it's just the timing of how the quarter ended.

Gerry Marks, Raymond James.

Just a quick question regarding commercial.

I noticed that you guys put out the comp number, but I didn't see a mix.

Do you have a mix of the fourth quarter and year end?

Didn't understand your question.

Your mix of commercial sales versus DIY's, as a percentage of total?

We didn't give it to you for the --

We didn't for the quarter.

-- for the quarter.

For the year, it was 15.8 percent commercial.

And you don't have that for the quarter?

I don't have it in front of me.

It would not be significantly different than that.

We are pleased with the progress in commercial.

Ryan Rentira (ph), Valacini Asset Management (ph).

First, congratulations on just a phenomenal quarter across the board.

I guess I'm just trying to understand something relative to your first-quarter guidance.

You reiterated your year, and your first-quarter comps are tracking mid single digits.

I guess I'm trying to understand, since you're not less bullish on the outlook, why the first-quarter guidance sort of falls below where consensus is.

Was consensus just inaccurate in forecasting quarterly, or is that distribution cost in that first-quarter guidance?

Or is there some other item that's specific to the first quarter?

We're very comfortable with the guidance.

It's consistent with what we have said before.

Up until now, we have been saying that we're going to grow 20 to 25 percent.

We have not given specific guidance.

This is really the first time we have given specific guidance for Q1 and Q2.

And we have reaffirmed for the year our comfort level in being in that 20 to 23 percent range, which we are comfortable with.

I think it's important to say that our guidance for the year is consistent.

We have not instituted guidance previously for the first and second quarter, but we feel very confident about the business.

There's certainly no change in our outlook on the business.

To add to Jim's comment, bear in mind everything we are working on -- the APAL, the customer mix, the category management initiatives -- we are in very early innings, and just coming on.

And these are not projects for our Company, these are work process and work methods that we will just continue to refine throughout '04 and beyond, and get really good at implementing them as as we develop our team.

These are the ways we will be driving our business over the long term, and continuing to refine implementation with every one of them.

After all, I think that we pointed out -- perhaps not on this, call but certainly on our last call, that we don't even finish APAL until the end of this quarter.

So it's really throughout '04 that we really start to get the benefits of our first full year of many of the initiatives we have put in place.

The second question is, at your analyst meeting last year, you talked about sort of longer-term targets of taking operating margins up 400 basis points, I think half through gross margin and half through SG&A.

I am just sort of curious -- you have got a lot of that already in gross margin, and you've chosen to reinvest some in SG&A.

Are those still good sort of longer-term targets that are still achievable for you?

Yes.

We certainly feel very good about that, and that has not changed.

I think, again, what you saw in 2003 was our willingness to, when we saw our comps not being what we have been used to, to take the steps to ensure that they were, which we have done.

But we certainly fully anticipate being able to increase our gross margin percentage and dollars, as well as continuing to leverage our SG&A.

Maureen McGrath (ph), Neuberger Berman.

Congratulations on a good quarter and a good year.

I just wanted to make sure I understood, in terms of your capital structure -- did you say that a sort of tenuous goal is to get to 25 percent debt to total cap, or debt to cap?

We said we anticipated that's where we would be at the end of 2004.

And I think, within the same context, or when you were talking about using free cash flow to pay down debt, with the goal of achieving an investment-grade rating, can you talk about some of the other financial ratios or goals that you have that are necessary to get that investment-grade?

Yes.

I think we continue to be focused on improving the strength of our balance sheet.

And again, I think if you look at our leverage ratios, they have improved over time.

And we feel very good about the strengthening of our ratios, from a debt-to-cap ratio, from an overall leverage ratio, even to interest coverage.

We have had tremendous improvement in those ratios over the last two years, and continue to be very focused on working that.

And we have been in constant communication with the rating agencies, and hope over time that they are going to recognize our performance.

And I think, if you look out there, the bank markets have recognized our performance.

And I think that was illustrated in the fourth quarter, when we were able to refinance our credit facility, or amended that and get an additional step-down in the rates.

So I think the rating agencies will, over time, recognize our performance and move us closer to our goal of being investment-grade.

And does that benefit your factoring program?

It could have some benefit to the factoring program.

It would make us potentially a little bit more competitive in the marketplace, in terms of what we have to offer our vendors.

Gentleman, there are no further questions in queue for you at this time.

Very good.

Thank you, operator.

I would like thank everybody for joining us on the call.

I would like to clarify again that we're comfortable with the guidance that we've provided, and we are pleased with last year, but certainly are not sitting back and accepting the performance from last year.

We are, rather, working diligently at improving the rate that this Company is getting better at.

And we look forward to continue progress as we report to you.

Thank you for joining us today.

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

This concludes the presentation, and you may now disconnect.

Have a great day.