領先汽車配件 (AAP) 2004 Q3 法說會逐字稿

Welcome to the Advanced Auto Parts third-quarter 2004 conference call.

My name is Andrea and I'll be your coordinator for today.

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.

Mr. Margolin, please proceed.

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 strategies; 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 the 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 free cash flow and our GAAP to comparable results to 2003 can be found in our press release and 8-K filing which are available on our website at www.AdvancedAutoParts.com.

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

Thanks, Eric.

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

With us this morning is Jim Wade our President;

Mike Coppola, our Chief Operating Officer; and Jeff Gray, our CFO.

During our third quarter we again achieved record sales and earnings as well as some of the better comps in the industry with comparable store sales growth of 3 percent.

We also achieved earnings per diluted share from continuing operations of 68 cents, an 11.5 percent increase over our comparable earnings per diluted share from continuing operations last year.

We are pleased with our results and believe they reconfirm that our initiatives are working and we continue to gain market share while producing record results.

Before I ask my colleagues to review our results in more detail I want to address some key points about our quarter, about our team and about our industry in general.

Our comparable store sales increase for the quarter was 3 percent compared to our guidance of 3 to 4 percent.

We believe we would have achieved 4 percent or higher comps without the negative effect of the four hurricanes within the quarter that disrupted our operations throughout Florida, the Southeast and the mid-Atlantic where almost two-thirds of our stores are located.

As you may recall, we have over 400 stores, or approximately 17 percent of our total stores, in Florida which was hardest hit by the hurricanes.

Although many stores were affected to varying degrees, all but seven stores were back in operation by the end of the third quarter.

Today four stores remain closed and we expect that they will reopen by the end of November.

Our DIY comps were most significantly affected by the hurricanes while our commercial comps remain consistent and strong.

Each time we experienced the same patterns where consumers were busy preparing their properties as the hurricanes approached and in many cases evacuating and then returning after the hurricanes to start the process of recovery.

The net effect was a drop in our customer comps throughout the areas affected.

Fortunately throughout these four hurricanes our team members and their families suffered no serious injuries, although many experienced damages to their homes and property.

I want to thank our entire team at our stores, our distribution centers, our drivers and our corporate officers for working so hard throughout this challenging time to support our customers, their fellow team members and the communities they serve.

These types of challenges bring out the very best in the Advanced Auto Parts team and demonstrate what is so special about our company.

Thank you, team.

And special recognition goes to Kurt Shoemaker (ph), our Senior Vice President of Operations in Florida.

Kurt, thank you for all your leadership.

As we look forward we are obviously not satisfied with a 3 percent comp store sales increase.

However, we are pleased with the mid single digit comp increase we achieved in the last 4 weeks of the quarter.

Also, we are seeing a similar positive trend continue in the first 3 weeks of the fourth quarter.

We believe this further validates the negative effect we saw from the hurricanes as well as demonstrates that our initiatives are working.

We also believe it is an indication of some of the pent-up demand that we will continue to see throughout the fourth quarter as customers repair their vehicles, especially in those areas hit by the hurricanes.

As I mentioned earlier, we achieved earnings per diluted share of 68 cents for the quarter which was also at the low end of our guidance of 68 to 71 cents.

Again, we believe we would have achieved the high end of our guidance without the lost sales from the hurricanes.

In addition, as Jeff will elaborate on further, we experienced a significant increase in our medical benefit cost during the quarter.

As you all know, increasing medical cost is an issue that is affecting all retailers.

Effective the beginning of 2005 we are taking the steps necessary to better manage our medical costs while at the same time being fair to our team and maintaining our competitive program.

We remain as positive about our industry dynamics as we have ever been.

The average age of a vehicle continues to increase and it is now over 9 years old.

And the population of SUVs and light pickup trucks continues to age.

Today over 60 percent of the vehicles on the road are 6 years and older, right in our sweet spot.

We believe this will continue to increase as the record vehicle sales beginning in 1998 are now reaching that 6 year threshold.

Vehicles are staying on the road longer partly because of the enhanced quality of the exterior and interiors.

But all parts fail and need to be replaced, especially our core items including batteries, breaks, filters, starters, alternators and water pumps as well as belts and hoses.

Again this year miles driven continues to increase as it has done for each of the last 20 years based on the data provided by the federal highway administration.

In the short-term higher fuel prices have had an impact on disposable income, especially for lower income consumers.

However, our core DIY customers work on their vehicles out of economic necessity.

And these customers have to keep their vehicles running to get to work, the grocery store, pick up their kids from school.

Their vehicles are a critical part of their lives and most of the miles they drive are not discretionary.

Unlike most retail, even if our customers delay some preventative maintenance on their car, such as a brake job or replacement of a weak battery, that deferred repair job will become a failure at some point in the future.

We believe that we will feel the benefits of this pent-up demand as we progress through the remainder of the year.

Due to our solid industry dynamics and our initiatives to grow our business, we continue to believe that we will meet our operating margin goal of 11 to 12 percent.

We will meet this goal by staying the course we have laid out -- investing for the long-term as well as managing our business to prevailing trends.

As we stated in our press release, we are optimistic about the fourth quarter and we are reiterating our earnings per share guidance.

As we look forward to next year we believe our plans for growth in the 20 percent range for earnings per diluted share can be achieved through mid single digit comp sales growth as well as increases in our gross margin percent and leveraging of our expenses.

We're still in the process of finalizing our 2005 plans and will provide more specific detail on our next conference call.

We are pleased to announce that we successfully closed on our new $670 million credit facility that lowers our borrowing rates, increases our finance vendor Accounts Payable program, and provides a new delayed draw term loan to fund potential share repurchases.

On our last conference call we announced our Board had authorized a $200 million stock buyback program.

This decision was based on our management team and Board of Directors confidence in our ability to continue to produce strong results and free cash flow.

Our strong financial position provides us the opportunity to drive shareholder value by increasing our business as well as buying back our shares at attractive valuations.

With this new loan agreement in place we now have the ability to execute the entire $200 million authorization.

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

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

On a personal note, as previously announced, I'm keeping a long-standing family commitment and must announce my retirement in the year of my 60th birthday.

Therefore at our May 18, 2005 stockholders meeting I'll be stepping down as CEO of Advanced Auto Parts.

I'm very pleased to have been asked to continue as Chairman of the Board.

The Board has designated Mike Coppola, presently our Chief Operating Officer, as my successor.

Although I believe most of you know Mike, let me reiterate his past role and contributions to our company.

Mike joined Advanced Auto Parts in February of 2001 and sense that time has been the driver of our overall strategic plan as well as the sponsor of our new 2010 store format.

In addition, under Mike's leadership we have established our category management processes, improved our pricing and procurement systems and processes.

We are very proud and fortunate to have Mike lead our team to new heights.

At this time let me ask Mike to give you a brief update on some of our key initiatives.

As you will hear throughout our call, we will conduct to execute on all our BAR (ph) initiatives on schedule and as planned as we continue to manage the business for the long-term.

Congratulations, and now I turn the call over to Mike.

Thanks very much, Larry.

I am proud to have been designated to succeed Larry as CEO and want you all to know that I'm also very proud of our entire team as well as very excited about the future we have together as we continue to grow this great company.

As we look into the future our greatest opportunity, as Larry said, is to increase our average sales per store and thereby leverage our fixed expenses.

Some of the initiatives that will be driving these sales include -- our 2010 remodeling program which continues to move along as planned.

We have converted or opened over 1,100 stores in this format by year-end.

Our market by market conversion approach continued to show us strong comp increases in the first year post completion.

We are also continuing to refine this program to further improve its performance.

Our category management program is now the basis of our ongoing improvements in both merchandising and store operations.

We believe our use of best-in-class practices and approaches will continue to move us ahead of our competition in all classes of trade that sell auto-related merchandise.

Our store brands program is gaining momentum.

We continue to have private-label offerings to save our customers more money versus the leading national brands.

We are also adding a number of SKUs of control in our premium control label, Professional's Favorite.

These offerings are enhancing our quality and variety differentiation.

Of course, this program will continue to improve our gross margins.

We continue to add SKUs to this program and will do so into the future.

In addition, we are further driving our sales with our national advertising program.

This is building the Advanced Auto Parts brand.

Our awareness continues to build as well as the positive differentiation between us and our competitors.

Our execution of our commercial program is driving 20 percent plus comps and we foresee our approach again giving us strong double-digit comp increase into 2005 and beyond.

Jim will speak to our commercial area in more detail later in this call.

Also, our investment in the latest technologies, including APAL, our advanced parts and accessories look up electronic store system and catalog, and MPT, our management planning and training labor scheduling programs, are helping us to better served our customers as well as optimize our payroll investments.

We are continuing to improve our store level operations, execution and discipline.

Our objective is to execute at high levels in order to operate the finest and most efficient retail facilities in the automotive aftermarket.

We believe another sales driver will be our consumer education program.

This is an exciting program that we feel differentiates us from our competitors and will help us expand our market potential by improving our customers' knowledge on how to more easily perform DIY projects.

Our first phases include a consumer education center containing 128 how to and why to brochures as well as a monthly video clinic broadcast on our in-store TV network to better educate our customers.

Our focus on making our supply chain more responsive is helping us ensure that we always have the parts our customers need.

We have begun implementation of our custom mix program to give more of the right parts in the right stores as well as remove excess inventory from the stores that do not need it.

As an update to our previous announcement, our new 650,000 square foot northeast distribution center will open on budget and on schedule in the spring of 2005.

This will allow us to better serve our stores in that region and optimize their transportation cost as well as make our entire logistics network operate more efficiently and more productively.

As we have mentioned previously, we also have a major initiative underway called 2020.

This program is a total company initiative focused on improving our effectiveness both in sales and expense optimization.

It is driven by ideas formally solicited from our team members at all levels of the organization.

There are currently over 300 opportunities that have been identified that are in some phase of being developed, explored or beginning to be implemented.

This will be an ongoing participative program.

We foresee an upside in our sales productivity as well as improvements in our SG&A through this program over the next few years.

In summary, I am proud of this disciplined focus our company has for our near as well as long-term future success.

I look forward to supporting our team as we execute all of these initiatives.

Before I turn the floor over to our President, Jim Wade, to review our operating results, I would like to acknowledge Jim for his many contributions to Advanced Auto Parts' success through his years here.

We certainly would not be nearly as successful as we have become without his contributions and leadership.

I look forward to working with Jim for many years into the future, continuing to work together to make Advanced -- to take Advanced to even greater levels of success.

Jim?

Thank you, Mike, and good morning to all of you on the call.

Before I begin my review let me at my personal congratulations to Mike.

Speaking for myself and our entire leadership team, Mike has our full support.

We look forward to his leadership and firmly believe the best years for Advanced Auto Parts are still ahead of us.

Now for our operating results.

During the third quarter our sales rose 6.1 percent due to a comparable store sales increase of 3 percent plus the sales from our new stores.

This 3 percent increase was over a 3.1 percent increase last year.

Our DIY comp had a slight decrease of 0.6 percent for the quarter and increased 2.1 percent year-to-date.

This decrease occurred during the four hurricanes and DIY comps were solidly positive for the remainder of the quarter.

Our commercial or DIFM comps increased 21.4 percent for the quarter and 20.9 percent year-to-date.

Our average increase in comps for the quarter was driven by our average ticket.

As we mentioned in previous quarters, our 3 percent comp increase was achieved by continuing to focus our full attention on our core business of parts and accessories to drive our same-store sales growth.

We believe that by focusing on our core productline we will continue to grow our business consistently in 2004 and beyond.

As Larry mentioned, we achievement mid single-digit comp increases in the last 4 weeks of our third quarter.

We've also seen that trend continue in the first 3 weeks of the fourth quarter and we're optimistic that the dip in comps we saw from the beginning of July through the middle of September is behind us.

Most pleasing, during the past 7 weeks our DIY business returned solidly to positive comps as customer traffic has increased and the hurricanes are behind us.

If the strength we've seen in the last 7 weeks continues we'll be prepared to maximize that opportunity.

Our commercial team once again achieved strong results in the third quarter and produced a 21.4 percent comp over an 8.2 percent comp increase last year.

Our commercial business remained strong and consistent throughout the quarter.

As we've discussed in previous quarters, we believe the tremendous results in our commercial program are due to the execution of our commercial plan which is based on several key points.

Number one, we've enhanced our tools for identifying new customers in stores in each of our markets that meet our commercial model.

This focus on the right customers drives both sales and profitability.

Second, our flexible logistics network provides fast access to a large variety of parts to both our DIY and commercial customers in each market.

We do this by placing a custom mix of parts in our stores based on their unique customer needs.

We also strategically are placing extended custom assortments and local area warehouses in our market to ensure we can get the parts to our customers so they can quickly turn their service base (ph).

Number three, we continue to expand our commercial sales teams who are reaching out every day to more new customers as well as continuing to strengthen our relationships with existing customers.

And lastly we're generating more and more satisfied customers with our high-level service and speed of delivery.

And we also continue to add commercial programs.

In the third quarter we added 104 commercial programs to our stores bringing the total number of stores with commercial programs to 1,913.

To date 73 percent of our stores have commercial programs compared to 62 percent at the end of the third quarter last year.

We continue to expect double-digit comps in our commercial business as our existing programs move up the maturity curve and we identify opportunities to add more programs.

In fact, by the end of 2007 we believe we can pass the $1 billion mark for commercial sales compared to almost 700 million this year.

We also believe the strength that we are seeing in our commercial business is due to our team's successful execution of our internal initiatives and not an indication of any overall change in the industry.

Again, we want to thank our entire team for producing these strong commercial results.

Before we move on to the rest of our report, we want to mention that we're considering no longer breaking our comp increases between DIY and commercial.

We will commit to do this for the remainder of 2004, but we will reevaluate our policy for 2005.

We are sure you can understand our sensitivity to providing this breakdown if it's not common practice in our industry.

Moving on to our inventory investment -- during the third quarter our sales grew by 6.1 percent while our total inventory grew by 8.4 percent and our average inventory store grew 3.6 percent.

This inventory growth rate above our sales growth was planned and is based on our belief that the lower comp levels we've seen are not indicative of what we expect as we go forward.

As a result we continue to prudently invest in inventory, primarily by positioning parts closer to our customers by expanding the number of stores which carry an extended mix of parts.

We believe this initiative will further enhance our brand in the eyes of the consumer because we have the right parts available for customers when they need them.

At the end of the 2004 year we anticipate our inventory growth may again slowly exceed our sales growth depending on the strength of our comps.

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

During the third quarter we opened 31 new stores and closed 2 to bring a total store count to 2,612.

Year-to-date we've opened 82 new stores as planned and closed 9 stores.

Our new stores continue to open with strong sales.

As we've reported before, our average stores that have been open 1 year now have a 1.1 million sales run rate, up from 900,000 in 2001.

Our enhanced site selection process augmented by our 2010 format, our national advertising campaign and our opening of stores in existing markets gives us confidence that we hit our long-term target for substantially improved average store sales volume.

We remain on track to open approximately 125 stores in 2004 and close 12 stores resulting in an expansion of our square footage for the year of approximately 4.5 percent.

In 2005 we expect to accelerate our store growth to 150 to 175 stores or approximately 6 to 7 percent square footage.

We have tremendous opportunity to further penetrate our existing markets where we believe we can open in excess of 1,500 stores and continue to grow our market share.

Year-to-date we've also relocated 22 stores.

For the 2004 year we anticipate relocating approximately 36 stores.

Store relocations are a key part of our program to have the newest, freshest store base in the industry.

Our 2010 market remodel program continues to be on plan and produce strong results.

Since 2003 we've remodeled Richmond, Virginia;

Charlotte, North Carolina;

Nashville, Tennessee, and most recently San Antonio and Austin, Texas.

For the 2004 year we'll remodel approximately 100 existing Advanced Auto Parts stores on a market-by-market basis.

We also continue to move southward in the state of Florida with our remodeling of over 100 of the former Discount Auto Parts stores through our 2010 format.

We currently have just 117 Florida stores remaining to be converted and they'll be completed before the end of 2005.

At the end of the third quarter we had a total of 1,022 stores with this new format.

By the end of this year we plan to have over 1,100 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.

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

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 68 basis points in the third quarter to 46.8 percent compared to 46.1 percent last year.

Our category management initiatives and our successful execution of a disciplined initiative to reduce shrinkage positively impacted gross margin.

Going forward we continue to have opportunities to enhance our gross margin through our category management process as well as continue to improve efficiencies in our supply chain.

During the quarter we had a LIFO credit of 2.9 million due to negotiated price reductions from certain vendors.

In the third quarter last year we had a $400,000 LIFO debit.

However, we want to reemphasize again that with consistent application of LIFO gross margins are comparable from year to year.

During the third quarter our SG&A expenses increased 48 basis points to 36.9 percent from our comparable of 36.4 percent last year which included an integration expense of 2.5 million in the third quarter last year.

This increase came primarily from higher medical costs driven by inflation in the healthcare sector as well as the deleveraging caused by hurricane disruptions.

Last year our GAAP SG&A percentage was 36.7 percent.

On a year-to-date basis our SG&A was 37.3 percent versus our comparable 37.1 percent last year.

GAAP SG&A was 37.5 percent last year.

Our increased investment in advertising began to anniversary in the third quarter and we plan to maintain this level as a percent of sales going forward.

We believe that this investment has increased our brand awareness and will continue to do so for the long-term.

Our operating margins rose 20 percent during the third quarter to 9.9 percent compared to last year's 9.7 percent on a comparable basis.

Last year our GAAP operating margins, which included integration expenses, was 9.4 percent.

Year-to-date operating margins increased to 9.2 percent or 32 basis points from last year's 8.9 percent on a comparable basis.

Again, last year our GAAP operating margins, which included integration expense, was 8.6 percent.

Our interest expense declined to 4.3 million in the third quarter compared to 5.9 million last year as we enjoyed the benefit of an overall lower debt level.

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

Earnings per diluted share from containing operations rose 11.5 percent to 68 cents for the third quarter versus our comparable earnings per diluted share from continued operations of 61 cents last year.

In 2003 our GAAP earnings per diluted share from containing operations were 59 which included 2 cents of integration expenses.

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

CapEx for the third quarter was 38.2 million and year-to-date our capital expenditures have been 125.3 million.

We continue to project that our capital expenditures for 2004 will be approximately 180 million.

This includes approximately 50 million for the Northeast distribution center which is on schedule and we anticipate opening in the spring of 2005.

Our Accounts Payable inventory ratio was 53.3 percent at quarter end which included our vendor finance Accounts Payable program.

At year end we anticipate our Accounts Payable ratio to be in the range of 53 to 54 percent compared to 51 percent last year due to continued growth in our vendor financing program.

We launched our vendor financing program at the beginning of this year and the program currently has 38.1 million outstanding.

Under our new loan agreement that Larry mentioned we now have 100 million available for this program and have the opportunity to increase the program to 150 million in June of 2005.

Year-to-date we had produced 137.4 million in free cash flow.

We continue to expect 130 million in free cash flow by the end of 2004 due to the seasonal nature of our working capital needs as well as the planned 55 million in capital expenditures for the remainder of the year.

As reconciled in our third quarter press release, free cash flow is defined as cash flow from operations less investing activities plus increases in our financed vendor Accounts Payable program.

Our total bank debt at the end of the quarter was down to 368 million compared to almost 1 billion at the end of 2001 and our debt to cap ratio was only 32.5 percent.

Due to our improving financial metrics, S&P upgraded our debt ratings to BB+ during the quarter.

Based on the strength of our balance sheet and strong free cash flow we feel confident that we have the ability -- the opportunity to continue to increase our investments to grow our business as well as to buyback our stock at attractive valuations.

During the third quarter we purchased 1.4 million shares of our outstanding stock at an average price of $35.86 for a total of $50 million.

As Larry mentioned, our new loan agreement now provides us the funding and the authority to purchase the remaining 150 million of the $200 million stock repurchase authorization.

We are reiterating our fourth-quarter guidance of 42 to 46 cents excluding approximately 2 cents per diluted share of expenses associated with placing our existing credit facility or any positive effects of the potential stock buybacks.

Our fourth-quarter guidance of 42 and 46 translates into a 10.5 to 21 percent increase over last year's comparable diluted earnings per share from continuing operations excluding the extra week of operations last year.

Including the cost of replacing our credit facility we anticipate GAAP earnings per diluted share of 40 to 44 cents for the fourth quarter.

As you recall, the fourth quarter of 2003 included an additional week producing approximately 7 cents in diluted earnings per share last year.

Again, as we noted earlier, our results including a complete reconciliation of our free cash flow and our GAAP comparable results for 2003 are available in our press release and 8-K filing and can be found on our website at www.AdvancedAutoParts.com.

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

Thanks, Jeff.

Before we open the floor to questions this morning, we'd like to reiterate our commitment to meeting our long-term goal of getting to 11 to 12 percent operating margins by the end of 2007.

We will accomplish this task by continuing to find opportunities to serve our customers better and more effectively.

Needless to say, we can not achieve this goal without a dedicated and talented team.

And I'd like to personally thank each and every one of them for their hard work and determination to serve our customers better than anyone.

Thank you, team.

We look forward to sharing our team's accomplishments with you in the future, on future calls.

Operator, at this time would you poll for questions, please?

(OPERATOR INSTRUCTIONS) Alan Rifkin, Lehman Brothers.

Larry, you mentioned that in 2005 one of your goals is to better manage medical costs.

Can you maybe provide a little bit more color behind that and maybe quantify what hopefully you see as some savings on the medical cost line next year?

And then secondly, if you don't mind, maybe just expand a little bit on what your goals are with respect to national advertising, how much you'll be spending in Q4 year-over-year and maybe in '05 year-over-year?

Thanks a lot.

Alan, what I'd like to do is I'm going to ask Jeff to walk through the medical part of it and -- shows my delegation skills, Alan.

I'll have Mike Coppola to the advertising as he certainly chairs that area of accountability.

Jeff and Mike?

Sure.

Alan, as it relates to your medical insurance question -- again, if you look at the third quarter, again we saw a significant increase in medical inflation like most folks are seeing and that was approximately 30 basis points of our 48 basis point deleverage of expense during the quarter.

And what we put in place is we're making plan design modifications to our current medical based program for 2005 as well as adjusting some of the premiums that we're charging our team members to better be able to control the costs going forward.

Again, when you look into 2005 we're not looking to leverage it, but we're looking to hold the percent of sales relatively flat year-to-year as we move into 2005.

But as you look to the fourth quarter we're still going to see some headwind coming from medical inflation that's driving some of our SG&A as we talked about.

Okay.

Hi, Alan, this is Mike.

Alan, I think as we mentioned before, we have universalized our uptick in advertising expenditures.

So as we go forward we're looking for approximately the same year-over-year rate as we've been at.

Okay.

Thank you very much.

Bill Simms, Citigroup Smith Barney.

My question is in regard to your stock buyback strategy.

It sounds like using debt to buyback stock sounds very AutoZone'esque (ph).

After spending the last few years deleveraging the balance sheet are we seeing a reversal of this strategy?

Can you just give us some color about what your strategy is?

No, Bill, absolutely not.

I think we did restructure our debt during the quarter and we're pleased that we were able to get that completed.

Obviously that did provide some additional cash for us to potentially accelerate our share repurchase program, but that's not our intention on a go-forward basis to use debt to potentially buyback shares.

I think we're still evaluating our 2005 plans and how best to use that free cash flow.

First and foremost we want to invest in the business to continue to grow the business for the long-term.

To the extent we have some excess cash after that we'll determine how best to use that which could be obviously taking advantage of the share repurchase program, but you will not see us going forward taking on debt to buyback shares.

One quick follow up.

Can you give us any guidance on the interest expense savings from the credit facility refinancing?

Yes, we're pleased, as I said earlier, that we were able to get the credit facility refinanced and take advantage of the market conditions and our improving balance sheet and strength and we're able to get approximately a 50 basis point stepdown on the rate on the term loan A and a 25 basis point stepdown on the term loan B. I think as you look forward it's difficult to really project the interest savings given the uncertainty of future rising interest rates, but needless to say that based on the credit facility we've got in place our interest savings will be lower than they would have otherwise been had we not been able to get the refinancing done.

But to put it in perspective, it's 50 bips on the A and 25 on the B.

Thank you, congratulations.

Danielle Fox, Merrill Lynch.

First, I was wondering if you could talk a little bit more about the comps pickup that you've seen recently following the hurricanes.

I guess what I'm trying to understand is how much of it was pent-up demand from the hurricane versus just better underlying demand.

So I'm wondering if you're actually seeing any acceleration in areas outside of the regions that were affected by the hurricanes.

We're pleased as we've looked at our comp increases over the last several weeks to see that they are broad and they reflect a higher customer count coming into our stores.

Having said that, we're very pleased with what we're seeing in the areas that were affected by the hurricanes.

I think Larry alluded to how well the team managed through that and as a result of that and how they took care of their customers during the hurricanes we are seeing some positive affects there and seeing some pent-up demand.

But on a broader basis we're very pleased with what we're seeing in all of our operating areas.

And my second question is I'm wondering how the comp composition, meaning DIY versus commercial, affects the earnings.

What I'm wondering is if for example the 3 percent had been comprised of a positive 1 and 15 or something that we would have seen the EPS range -- the EPS fallout in the midpoint of the range.

Or in other words, is there an upfront investment that you're making in the commercial business and maybe as that business matures we should see better leverage on a lower comp out of the commercial business?

That's a good question.

I think what we saw in the third quarter, as we mentioned in our notes, that our DIY comps were slightly negative during the periods of time when we were affected by the hurricanes and they were positive -- solid positive during the remainder of the quarter.

And at the same time our commercial program that was growing very strongly and is relatively early in the maturity curve was producing 20 percent plus comps.

And certainly that combination had an effect on our SG&A for the quarter.

As you look forward I think what you'll see is, again, on the commercial side the existing commercial programs are starting to mature more.

We're continuing to add programs on a quarterly basis and growing it.

As the commercial matures it has a leveraging effect on SG&A.

As DIY comps are stronger, that clearly has a leveraging effect on SG&A.

Okay.

Thanks very much.

Ken Fullman (ph), Omega Advisors.

If you see business picking up here of lately and you keep buying shares, wouldn't it be fair for us to interpret your Q4 guidance as being somewhat conservative?

Ken, I think when you look at the fourth quarter -- and again, I think if we were -- and again, we haven't given any guidance on way or the other in terms of share repurchase during the quarter just based on the timing and certainty of -- and depending on the markets to be able to do that.

But I think if you recall back on our last conference call that we gave guidance with comp guidance of 3 to 4 percent, I think as you've heard us talk about, we're pleased with the comp trends we've seen over the last 7 weeks and obviously in a position to maximize our results should those trends continue through the balance of the quarter.

Okay.

And one more question, Jeff.

What was the average price that you bought your shares this quarter if you can disclose that?

Yes, as I said in my prepared remarks, that was 35.86.

Oh, I apologize, thank you.

Good luck.

Jack Balos (ph), Midwood Research.

Regarding your financial arrangements, you have 175 million to buyback stock, another 675 million with a new credit facility, that's 850 million in total.

Why is it so large, particularly since you're still going to be generating free cash flow?

No, Jack, we only have a $670 million facility that includes part of that is a $200 million revolver -- is part of that 670 which obviously is there for short-term fluctuations in working capital needs.

But note that it's only -- the net increase was 175 million of new money that's available to us potentially to fund the share repurchase authorization previously authorized.

Oh, okay.

Because I thought you had designated the 175 specifically to buying back stock.

There's 175 new money available to us to potentially use to fund share repurchases -- but it's part of the total.

It's part of the 675?

That's correct.

It's part of the total.

Okay.

Right now percent of your sales is commercial delivery and does that vary seasonally by quarter?

Jack, it's approximately 17 to 18 percent of our business today and it does not fluctuate a lot quarter to quarter.

It does not, okay.

In the fourth quarter, including the additional expense from medical that you currently have, theoretically if you were to have say a mid single digit 5 percent comp, would that be enough to keep your SG&A ratio flat or would it still show a negative impact?

Well, Jack, I think at those levels and where we are with medical today I think it would be closer to flat, but I think it would still slightly down.

Obviously medical is a significant opportunity for us to continue to manage here, as we've talked about previously, and we have plans in place beginning January of '05 to address that.

Really the SG&A leverage for the fourth quarter, back to your point, would be based on the strength of our comps at the end of the day.

And I think at those levels we would be closer to flat -- and would be down had it not been for medical.

So it's going to be flat to slightly down due to the medical piece here in the fourth quarter.

Okay.

Just one last thing.

I know that antifreeze pricing is going up.

I was wondering to what degree are you passing that along and are you able to maintain an in-stock position on antifreeze?

Jack, this is Mike.

Certainly we've got no problem with supply; we've got plenty of product from our suppliers.

We've obviously passed some of the increases through and are monitoring that versus competition as time goes on and we'll make the appropriate decision to stay competitive at the same time trying to maintain our margin.

Thank you very much.

Jacob Grossman, Goldman Sachs.

It's Matt Fassler with Jacob from Goldman Sachs.

A couple questions if we could.

First of all on the inventory front, you talked about inventory coming up slightly more and then sales in the fourth quarter as well and it sounds like that's with a better in line sales performance.

Are you making any structural reinvestment in inventory and would that have anything to do, if you are, with the increased rollout of the commercial programs?

We're not making any structural changes in how we're allocating our inventory.

Our commercial business, as we've talked about before, doesn't require any specific additional inventory to be put in the store.

Where we're focusing our attention is, as Mike touched on earlier, really on two fronts.

One, working closer to get a more custom mix in our stores based on the specific needs of individual markets.

And then secondly, placing additional inventory closer to our customers which benefits both DIY and commercial through extended mixes in some stores and our local area warehouse program in specific markets.

I think when you look at our metrics around inventory; our metrics are pretty favorable in terms of average inventory relative to our industry.

We see that as an opportunity to invest, as Jeff mentioned, some of our free cash flow as long as we keep it in line with our sales growth and do it on a specific basis.

Second question, really as a follow-up to Jack's and that is on the topic of product pricing.

This has been for all intents and purposes a somewhat inflationary industry for some time.

I realize that commodities like antifreeze are going to rise and fall, but are you seeing any change in general of pricing trends from your vendors as they experience some commodity price increases on some of the generic inputs on the metals front or in any other cost?

Certainly our vendors are seeing increases in many of our commodities and we are taking some nominal increases at this time.

By the same token we've got an awful lot of vendors that want to do business with us that are working hard to take cost out of the system to stay competitive.

And as we mentioned earlier, we actually had a deflationary effect in our cost of goods in this current quarter.

And compared to prior quarters, was that somewhat diminished or more or less consistent?

It was pretty consistent.

Thank you very much.

Greg Melich from Morgan Stanley.

Two questions.

First on the private-label side, you mentioned that's continuing to be a focus, Mike, going forward.

Could you get a little more specific in certain categories, if it's in hard parts or is in accessories; how you're going to address that?

Then second was on the CapEx front, Jeff, probably for you.

If you look to next year, we are doing 180 million this year, but next year we are going to accelerate store growth, but we're not going to have the DC building costs.

Should CapEx be up or down next year as a result?

Let me answer the private-label question first.

We're looking at our store brands integrated throughout our store.

For many years, Advanced has had a fairly robust program of private-label in the hard parts area, and we are continuing to refine that but not making significant changes.

We have had a very good offering of good, better, best for many years, and we think it is working fairly well for us.

So the majority of our focus on store brands improvement is in our sales area with our Advanced Auto Parts brand for commodity type items, as well as many control labels and professionals favorite items that add some unique variety and quality impact to our stores.

So it's more commodities rather than hard parts?

Yes.

Greg, a thought to your second question regarding CapEx.

I think as we look to 2005, we're still in the process of finalizing our plans for 2005, in terms of how we intend to use our free cash flow, and again, we're looking at opportunities internally to continue to invest to grow the business.

And we have a plan that will put in place to leverage SG&A expenses next year, and then based on a combination of CapEx that we will spend.

But it shouldn't be materially different from what we're spending this year because we are, as you said, looking to increase square footage growth which would somewhat offset the northeast distribution center that's flowing through this year's numbers.

But we will give more specific guidance as we finalize our '05 plans on the February call.

And is the DC cost -- is that pretty much all in this year?

Yes, the vast majority of that will be in this year.

There could be some that fails in the first part of next year, but the vast majority of that will be this year.

Thanks a lot.

Cid Wilson, Whitaker Securities.

Just a couple of questions.

Relating to commercial comps, it would appear to me that give the Discount Auto Parts stores that didn't have the same commercial comp revenues that -- prior to your purchase of that -- that your pricing (indiscernible) a better commercial comp from the Discount Auto Parts stores in Florida.

And I was wondering if you could give us an idea as to how commercial comp did outside of the Florida stores?

Our commercial comps are very strong across all of our operating areas.

You mentioned, and we agree, we have a significant opportunity in Florida but in terms of growing our commercial business, and the team there has done a great job with it, but having said that that's not what's driving our strong commercial comps as a company.

Okay.

And regarding the $150 million left in your share repurchase, I know that unlike your competitor, AutoZone, where they almost buyback shares regardless of where the price of the shares are.

I was wondering, can we expect that you will actually repurchase those $150 million or do you think that -- or is it possible that you may use the financing opportunities for something else -- for example either accelerating your square footage even beyond the 6 to 7 percent rate or converting your 2010 stores at an accelerated rate?

I think our intentions right now would be to obviously take advantage, as we said last quarter, of the share repurchase authorization that the Board authorized for us and be looking to take advantage of that.

With the restructuring of the credit facility and the money that's available to us we would look to be doing that.

I think we do, as you know from your model, generate an awful lot of free cash flow and have tremendous financial flexibility internally to do both to continue to invest in our stores and grow the business for the long-term and at the same time buyback our stock at what we perceive to be attractive valuations.

Okay.

And my last question is looking ahead towards what appears to be higher heating oil prices that are coming up where demand becomes higher in the winter months, I was wondering if you'd give us any color in terms of what you may have done to hedge against the higher heating oil prices and any comments related to that?

Obviously any of this that takes money out of the economy is not good for retail or the economy in general.

On the other hand, we've got to balance the cost of heating oil with temperature and if we would have a mild winter it could have a nominal impact on retail.

Thank you very much.

Michael Cox, Piper Jaffray.

Just a couple of quick modeling questions.

Can you give us what the shrink -- the reduction in shrink on the gross margin this quarter?

Yes, it was approximately, Mike, about 20 basis points year-over-year.

And the LIFO credit or charge that you expect in the fourth quarter?

It's hard to predict that based on price changes, but we would expect to continue to see deflationary cost coming through in the fourth quarter as well.

Okay.

And then just more of a conceptual question.

Could you give a couple of examples of the opportunities that you've identified through the 2020 program?

We're looking at a lot of things for the 2020 program.

It's a companywide participatory program.

We've got all of our team members looking at a lot of the processes and programs that we have in our stores.

We're looking at standard control, for example, at headquarters down to how we make bank deposits, process customers at the register.

Again, a very large number of opportunities that we think are there and we will continue to work toward implementing.

And just lastly on May 2010 store remodel program.

The 200 to 225 number you give, is that existing remodels or does that include new stores?

And then also, what is the average cost of a remodel?

The 200 to 250 is existing stores.

And the cost in round numbers right now for our remodels, which is a complete remodel of our stores, is about $100,000.

Great.

Thanks a lot, guys.

Scot Ciccarelli, RBC Capital Markets.

Firstly a housekeeping item.

You guys mentioned the extra week last year's fourth quarter gave you a 7 cent impact.

Can you remind us what the sales impact was?

Yes, it probably was -- 63 million was what the extra week produced last year.

Okay, great.

Thank you.

Second question is payables were a little bit lower than what we were expecting even with the vendor financing program.

Was something going on there or was that just the timing of payments?

It's just the timing of the purchases and the payments that we saw in terms of how the inventory flowed during the quarter this year versus last year.

Okay, fine.

And then last question.

I think both Larry and Jim mentioned the phrase "pent-up demand" a couple times.

What has your experience been in terms of how that pent-up demand plays out or progresses, particularly in areas that were hit the way the Southeast, particularly Florida was, with presumably what was a lot of water damage?

Does that all kind of get -- do you wind up making all of that up in the next few months?

Is that something that plays out over a longer timeframe?

I'm just curious what the experience has been?

Our history has been, and in particular we've got a lot of input from our people in Florida that have gone through this unfortunately many times, but it plays out over a protracted period of time for two reasons.

Number one, the right upfront needed replacement for parts for vehicles that were damaged and that was during months to come.

And then also the entire area gets a very large economic benefit.

So there's an awful lot more disposable income on the part of our customer base as a result of all the construction workers -- everybody that's down there.

The FEMA money that pours into the state, the rehabilitation money and the employment base grows and higher paid jobs.

The work that's going on down there as a result of that, all these people that are doing the reconstruction, road repair, house repairs and everything like that, they're making a lot more money and they put more money into the very high gross profit items that helps drive our comps as well as our margins.

So theoretically this could be a tailwind not just for a quarter but for a couple quarters?

That's very possible.

Thanks a lot, guys.

Jack Valassis (ph), Gates Capital Management.

You mentioned adding certain SKUs that you thought would help your gross margin.

Were you referring to the commodity product that you were going to put your own Advanced Auto Parts name on?

Really that applies to our whole store brands program.

Not only do they provide safe to the customer differentiation from our competition, but generally all of them would carry higher margins in the branded products.

Okay.

And can you sort of help me understand the margin opportunity and that versus from a distribution improvement standpoint?

Yes.

We've had ongoing year-over-year improvement in our margin somewhat due to distribution, but the primary benefit has been mix as well as cost of goods purchasing and certainly our category management initiatives including our store brands.

I guess I'm just trying to get a sense of, from a go forward basis, where you see the most opportunity whether it's in -- coming from better purchasing or if the bigger portion of it's going to come from your supply chain?

Certainly supply chain is going to be a part, but the cost of goods and merchandising would typically have a larger effect than supply chain.

Again, next year we will be opening our Northeast D.C. which long-term will provide us with some additional leverage in our supply chain cost.

Okay.

And then my other question was with respect to your store opening program for next year, do you include your acquisitions as planned openings?

Would that be included in those numbers or is that all de novo type opportunities?

Generally that's the case.

We'll look as we go through the year at what opportunities there are and how they fall and how they affect our total openings.

But generally as we look into next year the numbers of 150 to 175 will be inclusive.

Okay.

And can you talk about the acquisition environment and your ability to -- and what sort of leverage you would accept in an acquisition?

As we talked previously, we continue to look at potential regional tuck-in type acquisitions.

We've had a lot of success with those over the past several years and we're always looking for those opportunities and we'll continue to do so.

When we do that we're looking primarily to ensure that the real estate locations at a potential acquisition in a market might have relative to us opening our own organic stores and certainly the quality of the business that's being done and the quality of the team that's running those stores.

And as a result the price we might pay for an acquisition of that type varies significantly from one to another, but we've been very successful working through those and making those part of our overall growth plan.

What size -- just from maybe a revenue standpoint or however you would define it, what size would you consider tuck-in?

Well, as we were talking about regional tuck-in acquisitions, they'd range from just a few stores up to 50 or 60 stores or so.

And if we look forward I think most of the opportunities that we see that are out there like that probably fall in that range.

Understood, thank you.

Richard Frier (ph), Delphi management.

I know you've been asked a lot about your debt and your balance sheet already, but what's with the optimal capital structure for running this company?

It looks like you've got about 50 cents of debt for every dollar of equity right now.

I think we're continuing to evolve.

I think we're working through our growth initiatives and how best to fund those and how best -- as you look at your models you can see we continue to generate an awful lot of free cash flow.

I think we've deleveraged quite a bit over the last several years.

If you look back, almost $1 billion of debt coming out of 2001 and deleveraged quite nicely over the last several years and now have just a tremendous amount of financial flexibility for us to continue to grow this business and to shape the capital structure over time based on our ability to continue to grow the business.

So you're pretty happy with where you are right now?

Yes, we are.

And then going forward, would you leverage back up to one-to-one debt to equity to make the right acquisition?

As Jim just talked about, we continue to look at our regional tuck-in acquisitions; it would be part of our ongoing normal CapEx structure.

Anything larger than that obviously we would reevaluate at that point.

Okay.

And also what's really driving the same-store sales right now?

What products are hot and what's weak?

We don't disclose by category, but I will tell you in summary -- this is Larry -- it is our core competencies.

It's the basic elements of our business that have -- we've been very successful with, and I will tell you with an awful lot pride, that our people are just now getting good at getting better and we're in the very early innings with our category management initiatives and it's driving a significant improvement in the core categories of our business -- the batteries, starters, alternators -- that we've grown the business with and will continue to do so in the future.

Alright.

And are you guys -- does the Detroit build rate or at least the estimates that come out of the OEMs and some of the suppliers, does that have a big impact on how you plan your business or whether that rises or falls?

Does that affect you a lot?

If you look back history has a way of repeating itself.

In 1994 there were 171 million registered vehicles, today there's 218, almost 220 million registered vehicles.

The more OE that gets launched, the better our business looks into the long-term future.

There's just plain more vehicles out there being driven more miles every year and being kept much longer.

And as a result of that, when you see that many more vehicles out there, as we said on the call, that is 60 percent of the vehicles on the road now are out of warranty and are right in our sweet spot.

So what you're talking about right now guarantees our long-term future in the next 6 to 10 years.

Thank you.

Operator, with that I think we're out of time.

So we want to thank everybody for participating on our call.

Thank you.

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

This concludes your presentation.

You may now disconnect.

Good day.