領先汽車配件 (AAP) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2004 Advance Auto Parts earnings conference call.

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

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

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

As a reminder, this conference is being recorded for replay purposes.

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

Please go ahead, sir.

Thank you.

Good morning.

Certain statements that will be made during this conference call will contain forward-looking statements that incorporate assumptions based on information currently available to the Company.

These statements discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance, including our future free cash flow and earnings per share.

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

Due to changing conditions, should any one or more of these risk factors materialize or any of the underlying assumptions prove incorrect, the actual results may materially differ from anticipated results described in these forward-looking statements.

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

Our results, including a complete reconciliation of our GAAP to comparable results for 2003, can be found in our press release and 8-K filings and are available on our Web site at www.AdvanceAutoParts.com.

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

Thanks, Eric.

Good morning and welcome to our first-quarter conference call.

We started 2004 with strong momentum, as sales rose 11.6 percent and comp-store sales grew 6.9 percent, which included a 19.3 increase in commercial comps.

Gross margin expanded 26 basis points, and we achieved 20 basis points of operating expense leverage, even with the incremental investments we've made in advertising.

Our operating margins, therefore, were up 46 basis points to 8 percent.

All of this added up to a 38.8 increase in earnings per diluted share to 68 cents, compared to 49 cents last year on a comparable basis.

Also, we further strengthened our balance sheet and paid down $65 million in debt during the quarter and our Accounts Payable to inventory ratio grew to 54.1 percent from 48.8 last year.

This also includes the impact of our recently launched vendor factoring program.

In 2004, Advance Auto Parts will continue to get good at getting better.

Over the past few years, we've built the infrastructure to take this company to the next level, as well as integrated Discount Auto Parts.

Now, we are poised to move forward and execute our numerous initiatives to drive sales productivity and enhanced operating results.

These include category management, our 2010 store format, APAL, MPT, our nationwide advertising program and strong new store productivity.

These initiatives have been tested, launched and are either rolled out or in the process of being rolled out.

Now, we need to continue to build on them.

This morning, I'd like to speak to you about APAL.

Later in the call, Jim Wade, our President, and Jeff Gray, our CFO, will discuss our other initiatives.

APAL, which stands for Advanced Parts and Accessories Look-up, is our proprietary, state-of-the-art POS and electronic parts catalog system.

On April 15, with much celebration, we finished the rollout of APAL to our Advance and Discount Auto Parts stores.

During the last few months, we accelerated our roll-out and we finished ahead of schedule.

APAL is helping us to generate better results.

In fact, we believe that APAL is helping us generate a sustainable average uptick in sales of 2 percent.

We believe that by putting the right tools at our team's fingertips, we give them the opportunity to provide our customers with legendary service, resulting in stronger relationships with our customers.

APAL is not only helping us build a stronger relationship with our customers, it is also helping us to enhance our quality image.

With one keystroke, APAL brings up the related items our customers need to effectively complete their repair applications.

By suggesting these items, our customers don't have to make numerous trips to the store and we are achieving an uptick in our average ticket, a win-win situation for all involved.

Our customers have also made numerous favorable comments about the detailed graphics we have in our system.

These graphics can be printed out for the customers' convenience to ensure they are buying the right part.

APAL is augmenting our quality brand image and is just one initiative that is driving more customers to Advance Auto Parts.

Before we move to our industry dynamics, I would like to thank Craig Anderton, our Director of Strategic Store Systems, and his team for developing APAL and ensuring its successful roll-out.

Great job, Craig.

Along with our operating initiatives, the positive dynamics of our industry are generating strong tailwinds.

There are more vehicles coming into their high-repair cycle, SUV are aging and scrappage rates remain favorable.

The DIY market is growing at about 3 to 4 percent per year and the DIFM market is growing at about 5 to 6 percent a year.

All in all, given the positive industry dynamics and our operating initiatives, we're well-positioned for strong mid-single-digit comparable store sales growth in 2004 and beyond.

As I stated earlier, we will continue to get good at getting better by executing our initiatives to drive sales productivity and enhanced operating performance.

Our key four goals for 2004 and beyond remain the same, and they are to, one, raise our average sales per store; two, expand operating margins; three, generate strong free cash flow; and four, increase ROIC.

Our team is ready to offer our customers legendary service, and we believe we're giving them better tools and resources to meet this goal.

Thanks, team, for all your efforts!

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

Jim?

Thank you, Larry.

Good morning to all of you on the call.

Let me start as well by thanking our 35,000 team members in our stores, our distribution centers and our offices for producing another strong quarter.

At Advance Auto Parts, our team is focused on increasing the sales productivity in each of our stores and enhancing our operating results.

They've consistently focused on these goals and the first quarter was no exception.

We continue to execute on our initiatives and invest in growing our business.

As we examine our operating results, I will discuss with our investments and initiatives that are driving those results, so let's get started.

During the first quarter, our sales rose 11.6 percent due to a strong comparable store sales gain of 6.9 percent.

This performance followed the 7 percent comp in the fourth quarter of 2003 and we believe reflects our strong sales momentum.

Although we achieved a 6.9 percent increase in same-store sales, we still have tremendous opportunities ahead us.

We believe that our numerous initiatives will continue to drive our results.

About 40 percent of our same-store sales gain came from increased traffic and about 60 percent came from increased average ticket.

We are especially pleased with the increase in traffic and believe that our 2010 store format, category management and our enhanced nationwide advertising program are building momentum and will allow us to continue to attract more customers in the future.

Our average ticket was also up in both commercial and DIY.

Our team is increasing our DIY average transaction by executing on our initiatives, including APAL and category management.

On the commercial side, we are also growing our average ticket as we continue to build stronger relationships with our commercial customers.

As commercial becomes a slightly larger portion of our sales mix, it also has a positive impact on average ticket because commercial customers typically place larger orders.

We continue to focus our full attention on our core business of parts and accessories to drive our strong same-store sales growth and we believe that by focusing on our core product lines, we will continue to grow our business consistently in 2004 and beyond.

Although we've added a few non-core items to our stores as a service to our customers, their effect on our comps has been negligible.

Our DIY comps grew 4.5 percent in the quarter.

We believe this growth has been driven by our merchandising and marketing program, our 2010 remodel format as well as our investments in advertising.

We are investing to grow our core DIY business on a consistent and sustainable basis and we believe that the investments we've made will pay off for years to come.

In regard to our nationwide advertising program, we continued, in the first quarter, to spend at a higher rate.

As we have discussed before, we believe we have a tremendous opportunity to achieve better recognition of the Advance Auto Parts brand.

Keep in mind, we're still a very young company.

Today, we have operated Advance Auto Parts in almost 50 percent of our markets for less than five years.

Feedback on the success of this additional spend has been positive and we anticipate continuing to spend at that current rate.

We also generated strong returns from the continued investments we are making in our commercial business.

In the first quarter, our commercial team achieved a 19.3 percent comp.

This increase came from both existing programs and our new programs that are progressing up the maturity curve.

We have a huge opportunity to continue to grow our commercial business due to the dynamics of this 73 billion a year industry.

The industry is growing at 5 to 6 percent annually and is highly fragmented with the top five players having only about 10 percent of the market share.

Our business plan for commercial has remained the same and we see it as a perfect complement to our core DIY business, as it helps us to leverage our fixed costs and inventory investment.

So, why is the growth in our commercial business accelerating?

Since the middle of last year, our team has developed better tools to identify both customers and stores in each of our markets that meet our commercial business model.

As a result we've added programs to stores that have a strong base of potential commercial customers in their market area, as well as strengthened our commercial sales team and increased local inventory availability.

At the end of the first quarter of 2003, approximately 60 percent of our stores had commercial programs.

Today, we have 1,700 stores with commercial programs, or about 67 percent of the chain.

Although our commercial comp has been enhanced by the additional programs, our stores that have had the program for a full year are producing double-digit comps as a result of these new tools as well.

Along with adding more programs, we've strengthened our outside commercial sales team in several of our markets.

They are helping to grow our business effectively by concentrating on commercial customers that we can service most profitably and that are within a manageable delivery radius of our stores while our store team focuses on running the store.

We believe we have the opportunity to produce double-digit comparable store sales gains in the commercial area for a considerable period of time as our existing programs move up the maturity curve and we identify opportunities to add more programs.

We want to thank our entire commercial team for providing our stores the tools and the assistance that produced these strong results.

While I'm talking about sales, I also wanted to touch on inventory as well.

During the first quarter, our sales grew by 11.6 percent while our inventory grew by 10.1 percent.

With our strong cash flow, we've invested in inventory in certain markets through our local area warehouses and hut (ph) stores to continue to move inventory closer to the customer.

This has contributed to our sales growth in both our DIY and our commercial segments.

We will continue to do this where we see an opportunity to accelerate our average sales per store.

We would anticipate inventory growth to still be in line with sales growth.

We continue to open new stores and aggressively remodel and relocate our stores to the 2010 format.

During the first quarter, we opened 20 new stores and closed six underperforming stores, bringing our total store count to 2,553.

As we have discussed before, our new store productivity is stronger than it's ever been.

Our average one-year-old store now has a 1.1 million revenue run rate, an increase from 900,000 in 2001.

All of our new stores are opening with our new 2010 format.

They are opening primarily in existing markets where we are underpenetrated, and our site location process is ensuring our stores are optimally located.

We are on track to open 125 to 135 stores in 2004 and close 10 to 15 stores, resulting in an expansion of our square footage of 4 to 5 percent.

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

As we move into 2005, we expect to accelerate our square footage growth to 6 to 7 percent.

We have many years of future growth ahead of us in these markets, where we believe we can open in excess of 1,500 stores and continue to grow our market share.

During the first quarter, we relocated five stores.

In 2004, we anticipate relocating approximately 40 stores as we continue to upgrade our store locations.

We are also making great progress with our 2010 store remodel program.

During 2004, we will remodel over 100 Advance Auto Parts stores on a market-by-market basis.

As part of our 2010 remodel process, the physical remodel of the former Discount Auto Parts stores in Florida is right on schedule.

We will remodel over 100 stores in 2004 and we currently have just 176 of the 394 in-state 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.

As a result of our new stores, our relocations and remodels, we ended the first quarter with 822 stores with this new format.

By the end of 2004, we plan to have over 1000 stores with the 2010 store format with the remainder of the chain being totally converted over the next several years at a rate of approximately 200 to 250 stores per year.

Our 2010 stores are producing, on average, a sustainable double-digit comp increase and we believe it will be a key driver of our sales growth for many years to come.

Not only is our team driving sales, we're also executing on our plan we first presented to the public in 2001 to expand our operating margins by 400 basis points to over 11 percent.

Through 2003, we had already achieved 130 basis points with 270 or more to go.

As planned, in the first quarter, we achieved both an expansion in our gross margin as well as operating expense leverage.

In a few minutes, Jeff will elaborate on those specifics.

Some of you have asked whether we're seeing any inflationary pressures in our product procurement costs.

During the first quarter, we continued to experience a slight deflation in overall pricing, resulting in a LIFO credit of 1.9 million, compared to a credit of 3.8 million last year.

Although the general trend has remained flat to slightly deflationary, like everyone else, we are closely watching commodity prices.

To date, we've experienced some very minor price increases specifically due to the rise in commodity prices.

If commodity and raw material prices were to remain strong, we believe that prudent overall retail pricing management will allow us to maintain our gross margin on the affected SKUs.

Before I hand the call over to Jeff, I want to update you on our plans to open a new distribution center to support our growth in the Northeast.

Since our last call, we've identified an existing but (ph) new distribution center that would serve our growing store count in the Northeast.

We are currently in a due diligence process to purchase this facility and if all goes well, we would anticipate closing during our second quarter.

If that occurs, we anticipate the facility will open in the spring of 2005.

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.

I will continue by discussing the remaining lines of our income statement, as well as go into more detail on our balance sheet and cash flow statement.

Our gross margin expanded 26 basis points in the first quarter to 46.4 percent, due to our category management initiatives and continued supply chain leverage.

We continue to refine our category management process and we believe that we still have a tremendous opportunity to drive gross margin through enhanced merchandising initiatives and increased efficiencies within our supply chain.

We achieved 20 basis points of SG&A leverage in the quarter, as SG&A declined to 38.4 percent from our comparable results of 38.6 percent last year, which excluded integration expense of 3.4 million.

Last year, our GAAP SG&A percent was 38.9 percent.

Within this year's SG&A results, we leveraged our store labor expenses, as we indicated we would on our last two quarterly conference calls, while maintaining the flexibility to invest in labor where the opportunity arises.

With MPT, our store labor management system, we have the ability to measure our labor investments and make adjustments accordingly.

And as Jim mentioned, during the quarter, we continued the increased advertising spend, as we planned, to enhance our brand awareness.

We'd also like to point out that, in 2004, we will not be breaking out expenses associated with the remodeling of our Discount Auto Parts stores.

These expenses, although not material, are being absorbed in SG&A.

There were no one-time items in the first quarter and with the refinancing and integration charges behind us, there are none planned on a go-forward basis.

Our operating margins rose 46 basis points during the first quarter to 8 percent, versus last year's 7.6 percent on a comparable basis.

Last year, our GAAP operating margin, which included integration expenses, was 7.2 percent.

Our interest expense declined significantly to 6.3 million in the first quarter, compared to 19.3 million last year.

At the end of the first quarter last year, we pre-paid all of our high yield bonds and debentures.

Along with prepaying our high yield debt, we've also generated strong free cash flow, resulting in a year-over-year decrease in debt of over $300 million.

The average cost of our debt is currently 3.6 percent.

And although our debt structure is variable, we've taken prudent steps to hedge potential interest rate increases in interest rates.

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

Earnings per diluted share rose 38.8 percent to 68 cents for the first quarter, versus our comparable earnings per diluted share of 49 cents for the first quarter of last year.

In 2003, our GAAP earnings per diluted share were 7 cents and included 3 cents from integration expenses and 39 cents of expenses associated with prepaying our high (technical difficulty) bonds and debentures.

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

CapEx for the first quarter was $32 million.

We now anticipate capital expenditures of approximately 180 million for 2004, which includes 50 million for the Northeast distribution center.

In our previous call, we had not included the DC in our CapEx guidance because of the uncertainty as to its timing.

At the end of the quarter, we had 1.174 billion in inventory, up 10.1 percent compared to the same quarter last year, which compares favorably to our sales growth of 11.6 percent for the quarter.

Our ending inventory per store was up 5.9 percent with a comp-store sales increase of 6.9 percent.

We continue to prudently invest in inventory to meet our customers' needs and to move more parts closer to our customers.

As Jim mentioned, we anticipate growing inventory in line with sales in 2004.

Our net inventory, which is inventory less accounts payable, declined 1.4 percent to 538 million, as our accounts-payable-to-inventory ratio rose (ph) to 54 percent from 49 percent last year.

These results include our vendor financing program that was launched at the beginning of the year and has been broken out separately on our balance sheet as financed vendor accounts payable.

The program has ramped up quickly and currently has 32.5 million outstanding.

Under our current banking agreement, we have the opportunity to take the program up to 50 million this year and 100 million next year.

We are evaluating opportunities to further expand this program, given its strong ramp-up.

Our vendors have been very receptive to this program because it is a win-win for both of us; they leverage off our lower borrowing rates and we reduce our working capital.

During the first quarter, we produced 64 million in free cash flow and paid down 65 million in debt.

In 2004, we anticipate generating 130 million in free cash flow, including 50 million in CapEx associated with the Northeast distribution center.

In 2003, our free cash flow was 233.6 million and there are two primary reasons why our free cash flow projections are less in 2004.

First, in 2003, we benefited from the utilization of deferred tax assets resulting from the retirement of our discount debentures.

Secondly, we have higher CapEx expenditures planned for 2004, including our Northeast distribution center, and owning about 20 percent of our new stores.

As I stated earlier, we paid down 65 million in debt during the quarter, bringing our total debt to 380 million.

During the past twelve months, we paid down 301 million in debt, reducing our debt-to-cap ratio from 58.4 percent last year to 35.6 percent this year.

We are moving up our 2004 earnings per share guidance to $2.53 to $2.58 from $2.50 to $2.55 to reflect the amount of our first-quarter results exceeded our previously quarterly guidance.

We continue to remain prudent in our guidance in managing our business for the long-term and remain extremely confident about the remainder of this year.

Our guidance for the remainder of the year is based on mid-single-digit comps, a slight increase in gross margin and a proportionate decline in SG&A expense.

We'd also like to reiterate our guidance of 69 to 72 cents for the second quarter and initiate guidance of 73 cents for the third quarter.

Again, as noted earlier, our results, including a complete reconciliation of our GAAP to comparable results for 2003, are available in our press release and 8-K filing and can be found on our Web site at www.AdvanceAutoParts.com.

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

Thanks, Jeff.

Before we open the floor to questions this morning, we'd like to review with you the results of our Board meeting and annual stockholders meeting.

To begin, each of our nominees to our Board was elected, including our new Board member, Jack Brouillard.

Jack is the Chief Administrative and Financial Officer of H.E.

Butt Grocery Company, a large, privately owned grocery chain based in Texas.

Jack will also serve on our Audit Committee.

We welcome his expertise and experience in accounting, finance and in the retail business overall.

At the annual meeting, our stockholders also approved an amendment to certify our certificate (ph) of incorporation increasing the number of shares authorized to 200 million shares.

They approved our 2004 long-term incentive plan and ratified the appointment of our auditors, Deloitte & Touche.

At our Board meeting after the annual meeting, we elected a new lead director, Bill Salter.

Bill is the retired President of Sears Specialty Retail Division, a position he held from '91 to 1999.

He joined our Board of Directors in April, 1999.

Bill has made many contributions to our company during the past five years and we look forward to his continued leadership.

To wrap up, the first quarter was a solid quarter and our team is ready with the right initiatives and tools to take our company to an even higher level.

Remember that our goals do not waver and they continue to be -- raising average store sales productivity, expand operating margins, generate strong free cash flow and increasing our ROIC.

We look forward to sharing our accomplishments with you on future calls.

Operator, would you please open the floor to questions?

Thank you, sir. (OPERATOR INSTRUCTIONS).

Bill Sims from Smith Barney.

Good morning, thank you.

I have two questions this morning.

The first one is can you discuss the pace of retail comps during the first quarter and how comps are trending quarter-to-date?

And the second question is in regards to gross margin guidance.

You indicate that you're expecting a slight increase in guidance for 2004 relative to the 26 basis point improvement you reported in the first quarter.

Are you implying a slowdown in gross margin opportunities, going forward, or how should we look at the guidance relative to what we've seen in the past?

Thank you.

In terms of the pace of our retail sales, they were relatively consistent during the first quarter.

There was no real trend there in one direction or the other; we had consistent results.

Quarter-to-date, we really are continuing to see what we feel are very solid results and no real change in what we've seen before.

In terms of the gross margins guidance, we certainly did not intend to signal one way or the other in regard to a change in trend in gross margin guidance.

We expect to continue to grow our gross margin as we go through the year and feel very confident that we have everything in place we need to have in place to do that.

Danielle Fox from Merrill Lynch.

A couple of questions -- first, if you could discuss the vendor accounts payable item?

It looks like a portion of that you are treating as a debt equivalent, and I am wondering why that is.

Jeff Gray.

That's right, Danielle.

We've broken it out separately on the balance sheet so you're able to track our progress towards that program.

And again, we're treating it more as a debt issue because it's a legally binding obligation to a financial institution but it's really a working capital initiative that we've put in place to help us drive our working capital out of the business.

Okay, because I noticed on the cash flow, as well, it's also part of the financing section -- (Multiple Speakers) -- operating results.

That's correct.

So is that discretionary or is that at the request of your auditors to carry it in that way?

We think it's the appropriate accounting treatment.

Okay.

My second question is just -- you mentioned that you were seeing positive results from your stepped-up advertising.

I'm wondering if you have seen any meaningful changes in the competitive landscape with that regard, because we've heard a lot about your competitors advertising more as well.

Danielle, I think it's safe to say that we're pleased with our results, and I think that each of us, as competitors, do their own thing.

We are comfortable.

Every day in the retail business, you come to a fork in the road; we go our way and run our business and our competitors do the same.

We are very comfortable with the results we see and we recognize that some of our competitors are doing other things.

But as Jim and Jeff and I said earlier, we remain very comfortable with the forecasted results for the whole year as a result of our advertising initiatives.

So you feel like the current level of planned spending is adequate to respond to whatever you're seeing competitively?

We believe so.

Alan Rifkin from Lehman Brothers.

Congratulations, gentlemen, on a nice quarter.

A couple of questions, if I may?

Given the success of the 2010 format and realizing that you guys are doing a lot of things with respect to your capital appropriation, is there any opportunity to possibly accelerate the conversions after 2004?

I know you said that you do 200 to 250 a year, but that would imply some time before they're all converted.

Obviously, Alan, that's an option that we look at and weigh accordingly, and we will be talking more about that as we get further into the year but clearly, as we generate the kind of free cash flow Jeff Gray just went over with everybody, we have several -- more than one option of what to do with the free cash flow, and clearly, that's one of them.

Okay.

And just a couple of more questions, if I may, Larry?

On the advertising line, going forward for the balance of the year, what will be the incremental spending there?

Will it remain a constant percent of your revenues for the next three quarters, year-over-year?

What we would anticipate seeing there is, in the second quarter, higher advertising as a percent of sales than we did last year but then, starting in the third quarter, the third and fourth quarter, our percent of sales for advertising would be in line with what we did last year.

That's when we started the additional spend in 2003.

Okay.

One last housekeeping question -- the comp for the DAP stores?

Our plan there is that, since this goes back to 2001, we would not continue to disclose that region of our company separately.

We will say that we are very satisfied with what we are seeing there; everything we described in terms of the conversion of the stores, the growth in the commercial program and the solid performance overall is certainly in line with what we expected.

So, Jim, are you still seeing post-conversion comps at the conversion stores down in Florida in the double-digit range?

Is that -- (multiple speakers)?

We mentioned in our notes earlier that as we convert our markets to 2010 format, we're seeing that type of increase.

Certainly, that would be on average across all the markets that we converted.

Thank you.

Alan, we are very comfortable with what we said, where we are at, what we're doing.

We are very -- (technical difficulty) -- the leadership of Kurt Schumacher, who is doing -- the whole team down there is doing just a terrific job.

But after three years, we don't believe it's in our best interest to be reporting a particular state's comp.

Okay.

Thanks, Larry.

Chris Svezia from Wells Fargo.

Good morning and congratulations on a great quarter.

Two quick questions -- just first with regard to your fiscal '04 guidance, I guess if we kind of assume, at the second and third quarters, if we go to kind of the high end of the range that you're providing, it would assume that the fourth quarter is essentially flat on an EPS basis, year-over-year.

Is that primarily just attributable to the 53rd week last year, which I believe accounted for about 10 cents in earnings, or is there something else that we should be aware of?

No, Chris, I think that's right.

I think you're seeing the impact of the extra week in the fourth quarter of last year, which was a 13-week quarter versus a 12-week quarter.

Okay and --.

We broke that out at that time.

That's correct.

Okay.

With regard to the Alabama DC, which I believe was supposed to close I believe in the first half, possibly during the first quarter of this year, and I believe, on your prior conference call, you mentioned it would cost roughly about $2 million, pretax, to close that facility.

Did that take place during the first quarter?

And was that embedded in your 68 cents in earnings during Q1?

Chris, we did move forward with the closing of that facility, although it did service some stores during the first part of the quarter, but we did start the closing process in that Alabama distribution center, and we did absorb some of those closing costs during the quarter.

So there will be some additional costs that will be absorbed in the second quarter as well and that's reflected in your guidance?

That is correct.

Nothing there is changed; we're still on plan as we originally planned to move forward with that facility.

Thank you very much and congratulations.

Derrick Irwin from Advest.

Good morning.

A quick question regarding the APAL roll-out -- I guess that's in all of your mainland stores at this point.

How is the adoption rate by people in the stores?

I know that the computers are sitting there, but are people still stuck on the legacy systems or are they taking to the new APAL system pretty well?

Derrick, it's a normal maturity curve, but we spent a lot of money as we went through '03 and then the first quarter of '04 to see to it that we doubled up on the training in order to shorten that curve, but we're very pleased with the progress our people have made.

And I would like to suggest to you that one of the key elements of it, it does make selling related parts, the whole transaction, displaying the good/better/best, the warranty, all the related parts and everything else that comes with it much easier for newer and less-tenured team members.

So as a result of that, the refinements that our team made in the last year in its implementation and the training process has accelerated the acceptability and the true grasping of the whole program.

It looks like a good system.

One more quick question -- new store count -- I guess 20 new stores this quarter.

Any sense for the timing of the rest of the stores you plan for the year in terms of the next three quarters?

Our plan there is, as we mentioned, we will open 125 to 135 stores for the entire year.

That count will accelerate as we go through each of the quarters.

We will open more in the second quarter than the first, and then the same thing for quarters three and four.

We are opening a lot of stores in the Northeast and Midwest at this point, and that changes, to some extent, our opening schedule because of the weather in winter, but we're where we need to be and certainly on track to open the stores we committed to.

Great, thanks a lot.

Jack Ballos (ph) from Midwood Research.

Jeff, I have a couple of questions for you.

The first is, in the second quarter of this year, what do you expect the LIFO charge to be?

Your LIFO credit was down about $2 million.

I don't know what implications that has for the second-quarter LIFO charge.

Jack, that's hard to predict but at this point, as we've talked about, we've still seen slight deflation out there but the anticipation is that we would continue to have a more normal pricing environment out there and there could be some inflationary prices on some commodities.

But at this point, we don't really see anything that would change dramatically on the LIFO side as we moved through the second quarter.

Would the direction be down?

Yes.

Okay.

The other thing is, you reported a total sales gain of 11.6 percent and comps of 6.9.

According to my calculations, there was about 4 percent more stores in operation than a year ago, so how do you account for a greater total sales gain then when you add up the comps and the average new stores, which is lower than the total sales gain that you reported?

Jack, that difference is being driven by the impact of the 53rd week last year.

I thought -- (multiple speakers) -- first quarter -- (multiple speakers).

Our comps are being calculated on a comparable calendar quarter basis versus the physical quarter basis.

So, in other words, we are mismatched a week.

Our comps are calculated off the comparable week 2 through week 17 of last year.

Okay, so what does that mean in terms of the total sales gain of 1150?

You're staying that you're one-week further into the -- so you have a bigger last week this year (multiple speakers) -- a bigger seasonal last week?

If we can take that off-line, I'll try to explain to you the mathematics behind that.

Okay.

The last thing I wanted to ask you was that I believe that in May of last year, there happened to be a lot of rainy weather in the Southeast.

I was wondering how things are going so far this year.

Jack, we are on target for what we've said and what we've told you but again, we would prefer not to give out regional comps or give any direction relative to regional areas or particular states for competitive reasons.

We think it's in our best interest and see no benefit to get down to how the individual states are doing.

Okay.

One last thing for you, Jeff -- I was just wondering if you might have calculated to what degree your earnings per share were adversely affected by the additional advertising expense.

I am estimating around 3 cents.

We haven't calculated that, Jack, at this point, nor do we plan to disclose for competitive reasons what we're spending on a quarter-to-quarter basis from an advertising perspective.

Gary Balter from UBS.

I have just a couple of parts.

One is, you sounded overall more positive on the comp outlook for the rest of year.

Larry talked about the mid single digits and then you talked about double digit in the commercial business.

Is there something behind that?

Obviously, it's not scooters, because you mentioned that had no impact.

Are you just more comfortable with the trends you're seeing?

We're very comfortable with the trends that we see.

Gary, you do bring up scooters.

Let me take the opportunity to reiterate to everybody -- we're growing our comps, both in commercial and DIY, with our core competencies, and that's where our real focus is.

We want to be best-in-class at selling brakes, starters, alternators, the core competencies of our business.

That's what's driving both DIY and the commercial growth.

Because it seems like the trends are better, like you just feel more comfortable.

Is it a competitive issue?

Is it just you feel that all of the systems and investments are working -- (Multiple Speakers)?

I think it's exactly what we said throughout the call.

We've covered with you many of the initiatives that we put into place.

I think it's important to point out to you that, for the most part, either as I said we have either just completed rolling them out or are just starting to get better at what we have put into place but we're in the early stages of most of these initiatives, and we believe it's our core competencies that are driving our growth.

I think, Gary, as well, we've seen what we feel like are some good, solid results in the fourth quarter of last year and the first quarter of this year.

As we look forward into the rest of year -- I think from a guidance standpoint as Jeff said, we want to be prudent in our guidance, but we feel good about what we're seeing and the indications are very positive in terms of the results that we're seeing from our initiatives.

That's really the approach we're taking to our business.

Thank you.

The second thing, we all look at the oil impact on pricing.

How do you measure the potential impact of gas prices on your demand?

Do customers just drive less and come in less?

Has there been any correlation in the past?

Gary, over a long, trended period of time, we've looked back and tried to analyze that on a very definitive basis.

In spite of higher or lower gas prices, our sales continue on very strong in higher times.

The only time this company has ever seen an impact was in 1974 when there was a gas shortage and people couldn't get gas.

Other than that, this company has done very well in high gas prices or lower gas prices.

We see it as an opportunity for us to continue charging along and teaching people how to get better fuel economy.

But we don't see a negative impact at all; we see it as an opportunity to inform our customer base how to get better mileage, and our promotional activity, our pricing, our product mix supports that.

That is based on a lot of years of data that we have here where we graft out very carefully the price of gasoline versus miles driven, and there's just no direct correlation.

I think our customers are the type that have to drive their cars; they have to go to work; they have to do the things they do.

They may cut back in other areas but their car has to be used like it was before.

I'll look back at our notes that we wrote in 1974 -- (Multiple Speakers).

I have just one last thing.

On the vendor factoring program which Danielle already asked you about the breakout, and we appreciate that from our side, but is there any financing -- any other impact on the earnings statements, in terms of either -- does it show up in interest, or do you put it in SG&A?

Is there any benefit from you from doing this other than obviously the benefit to the vendors that are selling to you?

No, there's really no net impact on the P&L.

Thank you very much and good luck in the next quarter.

Michael Weisberg from ING Investment Management.

Good morning.

A couple of questions, if I could?

First of all, this is the most positive I've heard you in terms of your expectations on the commercial side, which in the past I didn't think had significantly different comp potential than the other business.

Is there something different?

Because I heard you say you expected double-digit comps, going forward, on the commercial.

Is there something that's really changed?

Because that's much stronger guidance than I would have thought in the past.

Michael, I think the approach, as I mentioned, that we've taken to commercial hasn't changed in that DIY is our core business and we use commercial as a very solid and profitable complement to that in growing our sales per store.

But as I mentioned, what we're doing, as we develop our tools better internally to identify potential customers and we drive towards achieving sales from those customers, we're getting better at it, as Larry said.

And as a result of that, we see the opportunity to grow our commercial business at a somewhat faster rate that we probably would have a year or two ago.

As we go forward and we continue to develop those tools and roll them out, we just feel very good about the industry.

The commercial business is a very big business, it's extremely fragmented, and as we execute our model, we have the opportunity to continue to gain market share.

What change does that have on gross margins?

I forgot.

What are commercial gross margins like relative to DIY?

Very close between the two.

I guess, in the guidance, what I heard was -- and correct me if I'm wrong -- about a 20-basis point improvement in the gross margins for the year?

Did I hear that correctly?

On the guidance?

Yes.

Yes, we're looking for continued improvement in our gross margin as we move through the second, third and fourth quarter on a year-over-year basis.

And as we said earlier, the gross margin expansion this year will be slightly less than it has been in the previous years, but we're looking for gross margin to continue to grow over the next several quarters.

Does that mean, going forward, Jeff, we should look for the improving gross margins to moderate a bit relative to the last few years?

That's correct.

Great.

Again, the comment about SG&A guidance -- are you going to leverage that slightly this year?

We anticipate to leverage SG&A as we move through the balance of this year as well, so we're continuing to see both -- expect gross margin improvement as well as SG&A leverage as we move through the balance -- (Multiple Speakers).

I think you said that advertising expense for the year would be flat as a percentage of sales?

No, we said that we would be spending at the current rate (multiple speakers) on a go-forward basis, which is at a higher rate than what we would have spend last year.

Okay.

Do you care to quantify what kind of decrement that means in SG&A, just a higher level of advertising?

We have not.

We said that we would be maintaining the current spend rate.

Again, we do disclose how much we're advertising for the year but we haven't that broken down on a quarterly basis.

Great, thanks a lot.

Jim Baker (ph) from Neuberger Berman.

Good morning, gentlemen.

I actually had a similar question.

The advertising as a percent of sales in this quarter alone -- if you could give us some feel for how much that hurt the SG&A leverage.

That's my first question.

Was it 30 basis points, 20 basis points?

You don't have to give me the level, just the comparison.

Second, on the interest expense, I think you mentioned a 3.6 percent average cost of debt, and it looked to me like you ought to be annualizing something like a 14 to $15 million rate of interest expense at this rate, but it was over 20 million annualized in the first quarter.

So, if you could comment on that.

Also, as a philosophical matter, the vendor accounts payable program, putting that into free cash flow yet sort of having it on the financing section of the balance sheet -- of the cash-flow statement -- I just want to understand that better because it seems to me that either you should view this as an extension of your terms, in which case it really is a reduction of working capital and it is free cash flow, or it's a borrowing, in which case it isn't.

And you seem to -- talking about it inconsistently, so if you could explain that.

Finally, on the commercial area, shouldn't SG&A in that area be a little bit lower?

As that business grows faster than your DIY, shouldn't that help your SG&A leverage?

Let me take the first one.

From the standpoint of advertising, again, as we've said, we're looking on a quarterly basis at how much we want to invest in advertising and what type of results we're getting from it.

We just don't feel comfortable, from a competitive standpoint, talking in detail about how much we're spending on a quarterly basis.

We will evaluate as we go along, but as long as we are seeing a return that's proportionate to or in excess of the spend we are making, we would continue to do it as we talked about.

Jeff, do you want to take the next two?

Yes.

Jim, on the interest, I think the current 3.6 percent is our current weighted average cost of interest.

Again, I think, if you take our free cash flow guidance and flow back out, you'll get a number -- again, I would hedge it.

We have assumed as well in our guidance some uptick in interest rates over the back half of the year.

On the factoring program, we have -- really, we are looking at that internally from a business perspective as an extension of terms from our vendors because essentially we are getting a free cash flow in that the working capital is being taken out of the business and we are able to extend those terms at really no additional cost to us.

That really is on -- the vendor is funding the carrying cost of that extended terms.

I think, from a technical standpoint, from an accounting perspective, from a GAAP standpoint, it's really more a form of debt but really it's zero-cost debt from our perspective here, in that the vendor is paying the funding on that.

That's sort of how we are trying to keep (ph) -- predicate (ph) that out to the market in that we really look at it as an extension of terms and a reduction in working capital.

Okay, so you would sort of have us add the vendor -- (multiple speakers) to the other payables in terms of how we should look at the business as a practical matter?

That's correct.

It's just a technical matter on the back end of how we are having to flow it through the statements.

Jim, on your last question, relative to commercial and SG&A -- commercial, as we build it, will help us leverage our SG&A.

I think it's important to point out to you that when we put a commercial program in our store or we have accelerated growth of that commercial program, the fundamental cost to the store is the truck.

It's just a leased vehicle; it's a nominal cost that we put into the store.

That's our opportunity to leverage the inventory, our complete supply chain and our staffing at store level as well as our investments in IT.

Therefore, on a go-forward basis, it's an excellent opportunity for us to continue to leverage SG&A.

That's great.

So do you see the second half of the year maybe it being possible -- I know your guidance doesn't necessarily say that -- but to see materially more SG&A leverage, say, in the last two quarters of the year?

Maybe something approaching, well, let's say 75 basis points instead of 20 basis points?

Is that within the realm of possibility as you look throughout the second half of this year?

Jim, what we're comfortable with is staying with the guidance and know that we make every effort to do the right thing over the long term.

And long-term, we will continue to leverage out SG&A as we build the business.

Thank you very much, Larry.

Jerry Marks from Raymond James.

Good morning.

Just one question -- how big do you think the vendor accounts payable, you know, the finance vendor accounts payable can get over the next year or two?

Again, Jerry, we said that we have the ability to grow that to 50 million this year and 100 million next year.

You know, we've got to get there first and we will see how fast the program can go above that.

I think we are looking at opportunities to figure out how to ramp that up quicker because I think there is an awful lot of interest from the vendor community out there for it.

So compare it to at least 100 million, but we have the ability I think to take it even higher than that.

Bryan Knoepp from FTN Midwest Research.

Good morning.

Could you talk about this sustainable 2 percent growth from APAL that you're talking about in your comments?

Is that based on what you have seen from actual results so far, or is that sort of a guesstimate of what it could be?

Also, could you just sort of give us a generic example of what type of -- I guess you would call them adjacencies there are associated with APAL? (multiple speakers) What's somebody going to recommend that somebody buy if they are getting a battery or something like that?

I think it's a good question, Bryan.

First of all, we see the 2 percent because that's the experience that we had, not only when we tested it, did the beta and rolled it out to the first three regions, but we saw that as we continued on and we're seeing that today.

We are very confident that will continue into the future.

The specific example -- I'll pick an SKU.

Clearly, if somebody came into one of our stores and wanted to buy a radiator, they obviously want them to leave with the store with the radiator of their choice.

At the same time that comes up, we want our team member to see right on the screen the opportunity to sell the necessary hoses.

After all, the hoses, the clamps have to be just as old as the radiator.

When our people make these recommendations to the customer at that time, it's something that the customer at the end of the day doesn't feel like they are being oversold.

They're being told the truth.

As long as they're pulling a radiator out of the vehicle, they ought to be replacing the hoses and the clamps, and they probably need fresh coolant to go in there as well, as opposed to putting the years-old coolant that they have obviously drained when they pulled the radiator.

So, related parts come up.

Another thing that comes up that's a very big opportunity for us is the differences in the not only just good/better/best in related parts but the differences in warranties built into the system as well.

When our customers see the difference and the screen is available for viewing, not only for our team member but also for the customer, all of this is in the front of the customer; it's turned on an angle; both view it at the same time as these things come up.

So, it's an opportunity for our people to see the different opportunities for additional purchases, good/better/best selection, differences in warranty selection and the like.

All of that rolled together is what gives us the sustainable 2 percent increase in comps.

I've got a quick follow-up on that.

You guys sort of accelerated the square footage growth expectations starting in '05.

You said now it's 6 to 7, something like that?

That's correct.

I know a lot of times that a retailer like yourself has to sort of build at a certain rate because there's just sort of a lack of qualified people out there to run your stores.

Are you increasing your rate of square footage growth because something like an APAL makes it easier to find workers who are capable of doing the job well, or is there something else explaining that?

Bryan, what we've done is, you know, we certainly don't want to get out in front of our -- we don't want our real estate to get out in front of our people, nor do we want to minimize the opportunity to grow the topline of this company.

We've got very strong in-house organizational development programs and we clearly have the opportunity to continue on with the guidance that we've given.

But we've got the people to support our new store growth; we've given this direction and guidance over the long-term because we have been planning for it and we built the infrastructure to execute that plan.

Great, thanks a lot.

Greg Melich from Morgan Stanley.

I will just follow-up on that last point on the square footage.

The acceleration -- is that linked to getting the new DC or being close to that?

And as you think about where you want to put real estate, is it now becoming less of a fill-in thing and actually trying to go to new markets?

Could you give us a little more insight as to how the acceleration is picking up?

Sure, Greg.

The increase in real estate new store openings is not related directly to the new DC.

As you recall, we purchased Discount in 2001, so we have had a lot of our resources focused on that, and that was over 600 stores.

And as we're -- finished that last year, as Larry mentioned, as planned, we're starting to ramp up our new store growth.

The Northeast DC is a part of that because it's going to support the growth but it's not dependent.

In regard to the philosophy, our philosophy remains the same as it has been before.

We have, over the last several years, expanded into a lot of new markets.

Many of those markets we've only been in for three, four, five years and we still have just tremendous opportunities to add additional stores in those markets.

We are underpenetrated because of the length of time that we've been there, and we still have a lot of backfill to do.

So our focus is going to be on backfilling in our existing markets and there's a clear relationship between backfilling the markets, increasing our market share and then the profitability of the markets.

And that's what we're looking at doing.

Greg, if you just look at the inside of the front cover of the first page or two in our annual report, you'll see our mapped geographic area.

You'll see how many stores are in each given state.

It's pretty obvious the tremendous opportunity we've got to fill in.

As Jim said, that is our best opportunity to leverage the existing expense we've already got in those states -- that is advertising; that is supply-chain, our management team, our regional field teams are all there; our commercial sales team is there; our inventory is there.

It's a tremendous upside opportunity for us, and it's part of our plan, as we've said in the past, to execute accordingly with a very well-defined military-drill-type plan to march through those stores and go through the 1,500 stores we mentioned earlier.

That's okay, so the 7 percent is really just the same strategy but more where you are -- leveraging it more?

That's correct.

Then the second -- did I hear that the -- on the new stores, you are owning 20 percent?

Was that the number I heard?

Yes, that's correct.

We have historically leased most of our new stores over this year and going forward, we're looking to do a combination of owning and leasing where it makes sense, again, because of the significant cash flow that the business is generating and we're making the economic decision store-by-store as to how best to do that.

But generally, it's coming out about 80 percent leased, 20 percent owned?

That's correct.

And then in terms of how that ends up with the CapEx and cash flow and debt targets, do you have updated debt-to-capital target for us or -- as we try to back into this?

We would be somewhere at the end of the year in the 25 to 27 percent range in terms of the debt-to-cap rate.

Do you think, structurally, that's the right number?

We continue to evaluate that but yes, we're moving closer to where we need to be from a debt-to-cap rate.

We have time for one more question.

Our last question this morning comes from Tim Fullman (ph) from Omega Advisors.

Along the same lines, on the free cash flow generation, assuming no acquisitions, and no dividend, you will be --.

Tim, can you just repeat that again, please?

I'm sorry.

Along the same lines on free cash flow generation, assuming no acquisitions and no dividend, you will be out of debt relatively soon.

It is a plan?

We continue to evaluate that plan and as we go forward, we will give more guidance relative to our anticipated use of the free cash flow count.

Ladies and gentlemen, I'd like to once again thank everybody for joining us on the call.

Goodbye now.

Thank you, sir.

Thank you, ladies and gentlemen, today for your participation.

This concludes your conference call.

You may now disconnect.