領先汽車配件 (AAP) 2004 Q4 法說會逐字稿

Welcome to the Advance Auto Parts fourth-quarter 2004 conference call.

Before we begin, Adam Bergman, the Company's Vice President and Investor of Media Relations (ph) will make a brief statement concerning forward-looking statements that will be made on this call.

Mr. Bergman, you may proceed.

Thank you and 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 revenue and future performance, including our future free cash flow and earnings per share.

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

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

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

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

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

Larry?

Thank you, Adam.

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

Joining me on our call today is Mike Coppola, our Chief Operating Officer and designated CEO who will replace me upon my retirement as CEO in May at our annual shareholders meeting.

Also with us is Jim Wade, our President, Jeff Gray, our Chief Financial Officer.

In addition, I'm pleased to announce that Adam Bergman, our new Vice President of Investor and Media Relations, is also with us.

Adam brings both investor relations and investment analyst experience and we look forward to him helping us be even more proactive in communicating the Advance story.

We are very pleased with the sales momentum our team produced in our fourth quarter, as shown by our strong 9.7 same-store sales increase, over a 7 percent increase from the same quarter last year.

As we begin to discuss our results, please remember the fourth quarter last year contained an additional week, which produced 63 million in sales and added approximately 7 cents to our prior-year diluted earnings per share.

For the fourth quarter of '04, we achieved earnings per diluted share of 43 cents, including our refinancing cost of 2.8 million.

Excluding the fourth-quarter refinancing cost, earnings per diluted share rose 21.1 percent to 46 cents, versus our comparable earnings per diluted share of 38 cents from continuing operations last year.

This was at the top end of our guidance range of 42 to 46 cents.

For the 2004 year, we achieved earnings per diluted share, excluding refinancing costs, of $2.51, an increase of 20.7 percent over our prior-year comparable earnings per diluted share from continuing operations of $2.08.

Overall, we're pleased with our results for the fourth quarter and the '04 year.

We certainly could have had a much stronger fourth quarter if not for 2 items that significantly impacted our expense ratios, as Jeff will discuss.

However, we believe our results reconfirm our initiatives are working and we continue to gain market share while producing record sales and record earnings.

We also believe we're very well positioned for '05 and beyond to continue our strong growth.

Before I turn the call over to Mike Coppola to lead our review of the quarter and our plans for 2005, let me just say how pleased I am that our CEO transition is proceeding so smoothly, as planned.

Mike has been the chief architect of many of our corporate initiatives over the past several years, and I anticipate he will continue to drive the Company's performance to an even higher standard.

Mike?

Thank you, Larry, and good morning as well.

As Larry mentioned, we're very pleased with our strong 9.7 percent comparable store sales gain our team produced over the 7 percent in last year's fourth quarter.

We are also pleased that we have sustained strong sales increases in the first 6 weeks of fiscal 2005.

Jim will review in more detail the breakdown of our sales results, but we believe our results reflect a combination of the initiatives that we've been working to implement over the last few years, as well as the positive fundamentals of our industry.

We believe the benefits of our initiatives are only beginning to be realized, and we will continue to benefit from these initiatives and our strong industry fundamentals for many years to come.

The implementation of our initiatives remain on schedule.

Their specific focus is to drive higher average sales per store and thereby leverage our fixed expenses.

Let me touch on some of the initiatives that are driving these sales increases.

Our 2010 remodeling program, which we believe results in Advance having the newest, freshest store base in the industry, continues to move along as planned.

By the end of 2005, over half our chain will be operating with this new format.

Our market-by-market conversion approach continues to produce, on average, double-digit sales increases in the first year post-completion.

We are also continuing to refine this program to improve its performance, as well as its cost efficiencies even further.

Again, our category management program, which is the basis of our operation's ongoing improvements in merchandising and operations, we believe our use of best-in-class practices and approaches in category management has moved us ahead of our direct competition as well as other classes of trade that sell auto-related merchandise.

We believe this process is helping us to continually and consistently grow our market share.

Our store payments (ph) program continues to gain momentum.

We've added private-label products to save our customers more money versus the leading national brands.

We are also adding a number of SKUs to our premium exclusive label, Professionals Favor (ph).

These products are enhancing our quality and variety differentiation.

Further, we have added a number of proprietary brands and SKUs in a number of categories such as Endurance electrical products, Mechanic's Choice lighting, Joe's Garage impulse tools, and SoundXpress and AutoXpress accessories.

Our store brands program has and will continue to contribute to the improvements in our gross margin.

Also, our Advance Auto Parts brand awareness continues to improve, due in large part to our national advertising program.

This has helped the consuming public see the positive differentiation between us and our competitors.

The consistent execution of our commercial program is driving 20 percent-plus comps.

We foresee our approach producing double-digit comp increases into 2005 and beyond.

In addition to the investments we are making in the latest technologies, such as continuing to upgrade APAL, our store point-of-sale system, and MPT, our labor scheduling program, are helping us better serve our customers as well as optimize our payroll investments.

I am most proud of our operations team headed by Paul Klasing and our SVPs of Operations, who have and continue to lead our store level execution and discipline improvements.

We wanted to execute at the higher levels in order to operate the finest and most efficient retail facilities in the auto aftermarket.

Also, our consumer education program, which is another exciting area that differentiates us from our competitors, will help us expand our market potential by improving our customers' knowledge on how to more easily perform DIY projects.

Our first phase, including a customer information center containing 128 how-to and why-to brochures as well as a monthly video clinic broadcast on our in-store proprietary Advance TV network to better educate our customers.

We believe our TV network is a competitive advantage in helping us to better communicate with our customers and our team members.

We're continuing the implementation of our custom mix program to give more of the right parts to the right stores, as well as remove less-productive inventory from our stores.

We have currently completed about one-third of the first phase of this program's planograms and believe it has already started to contribute to our comp sales growth.

We will further be enhancing its efficiency with more robust analyst tools -- analysis tools in the future.

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

Our new 650,000 square foot northeast distribution center will open on-budget and begin shipments to our stores before the end of the first quarter, as planned.

This will allow us to better serve our stores in the northeast as well as optimize our transportation costs and make our entire logistics network operate more efficiently and more productively not only this year but also in the future.

Finally, as we have mentioned previously, we have a major initiative underway called 2020.

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

It is driven by ideas formerly solicited from team members at all levels of our organization on an ongoing basis.

There are currently over 300 initiatives that are in some phase of being evaluated or beginning to be implemented.

We foresee an upside in our sales productivity and improvements in our SG&A as a result of this program over the next few years.

Beyond the implementation of our initiatives, we remain as positive as ever about our industry dynamics.

The average age of a vehicle continues to increase and is now over 9 years old, and the population of SUVs and light trucks continues to age.

Today, over 60 percent of the vehicles on the road are at least 6 years old, 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 enhanced quality of the exterior and interiors, but all parts fail and need to be replaced, especially our core items that include items such as batteries, brakes, filters, starters, alternators, water pumps as well as belts and hoses.

Again, in 2004, miles driven continue to increase as they've done for each of the last 20 years, based on 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.

These customers have to keep their vehicles running to get to work, the grocery store, and to carry out daily activities.

Their vehicles are a critical part of their lives and we do not see that changing. (indiscernible) our initiative to grow our business and our solid industry dynamics, we continue to believe that we will drive our earnings per share 20 percent or more for the next several years.

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.

We are initiating guidance for the first quarter of 85 to 90 cents for earnings per diluted share, based on the strong sales trends we are currently seeing.

This would be an increase in EPS of 25 to 30 percent for the quarter over last year.

We are also initiating earnings guidance for 2005 year of $3 to $3.10 per diluted share, an increase of 20 to 24 percent for the year.

We're basing this annual guidance on 5 to 7 percent comps as well as an increase in our gross margin percentage and leverage of our SG&A expenses.

If the strength we are seeing in comps continues past the first quarter, we could potentially see further upside to annual EPS.

However, we're not far enough into the year to reflect higher comps into our guidance for the last 3 quarters of the year.

Within our annual guidance, we're also issuing the second-quarter earnings guidance of 82 to 88 cents per diluted share, an increase of 17 to 26 percent.

In summary, as we end the 2005 year, our team remains focused on 4 key goals.

They are to, one, raise average store sales; secondly, expand our operating margins; third, generate strong free cash flow; and forth, increase our ROIC.

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

Jim?

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

I will begin my comments by reviewing, in more detail, our sales results for the fourth quarter and 2004 year.

As Mike described, our strong sales reflect the combination of solid industry fundamentals and the strong results from the key initiatives we are implementing.

We believe these industry fundamentals will support us for many years to come and we're still early in realizing the benefits from these key initiatives.

I very much look forward to working with Mike and our team to achieve and exceed our 2005 guidance and to grow our earnings per share by 20 percent or more over the next several years.

During the fourth quarter, our sales rose 3.4 percent.

Excluding the 63 million in sales from the extra week last year, our sales grew 11.9 percent due to a comparable store sales increase of 9.7 percent plus the sales from our new stores.

This 9.7 percent increase was over a strong 7 percent increase for the fourth quarter last year.

Our comparable sales increase for the 2004 year was 6.1 percent over an increase of 3.1 percent in 2003.

Our DIY comp increased 5.6 percent for the quarter and increased 2.8 percent for the year, while our commercial or DIFM comps increased 29.7 percent for the quarter and 22.9 percent for the year.

We're pleased that our increase in comps for the quarter was driven by solid increases in both customer count and average ticket, which is our objective.

Our costs and market share increased solely across all regions of our company in the fourth quarter.

As expected, we did achieve somewhat higher comp growth in those areas most affected by the 4 hurricanes in the third quarter, as those customers repaired their vehicles.

Although it's impossible to precisely measure, we believe the higher comps in those areas contributed approximately 1 to 2 percent to our overall comps for the quarter.

Because the damage was so extensive in many of these areas, we believe the rebuilding effort will continue to positively affect our comps for several more quarters.

As we've mentioned in previous quarters, our 9.7 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.

No new merchandise categories contributed significantly to this quarter's sales increase.

We believe the primary driver of our 5.6 percent increase in DIY comps for the quarter over a 5.4 percent increase in the same quarter last year was the execution of the initiatives that Mike describe earlier.

You've heard us describe these initiatives as we've implemented them over the last few years, and we're now starting to see their benefits accelerate.

Our commercial team once again received strong results in the fourth quarter and produced a 29.7 percent comp over a 15.4 percent increase last year.

For the year, we produced a 22.9 percent commercial comp.

Great job, team!

As we 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 our enhanced tools for identifying new customers and stores in each of our markets that meet our commercial model, our flexible logistics network, which provides fast access to a large variety of parts to both our DIY and our commercial customers in each market, our expanded 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 high our level of service and speed of delivery.

During the fourth quarter, we added 32 new commercial programs to our stores, bringing the total number of stores with commercial programs to 1,945.

For the year, we added 320 new programs.

Today, 73 percent of our stores have commercial programs compared to 64 percent at the end of last year.

Our percent of commercial sales to our total sales was 18.4 percent for 2004 compared to 15.8 percent in 2003.

We continue to expect double-digit comps in our commercial business throughout 2005 over the double-digits this past year as our existing programs move up in maturity curve and we identify opportunities to add more programs.

As we said on our last call, we believe that, by the end of 2007, we will pass the $1 billion mark for commercial sales, compared to 693 million in 2004.

We also believe the strength 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 our industry.

Moving onto our inventory investments, during the fourth quarter, our sales grew by 11.9 percent, excluding the impact of the extra week last year, while our inventory grew by only 7.9 percent.

Due to the strong comp in the quarter, we were able to leverage our inventory growth at a greater rate than planned.

Even with this significant leverage, we continue to prudently invest in inventory, primarily by focusing on 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 will have the right part available for customers when they need it.

We entered 2005 with strong order fills through our stores and our inventories well-positioned to support our planned sales growth.

As we progress through 2005, we anticipate our sales growth to moderately exceed our inventory growth as we continue to invest where we believe we can achieve the expected sales returns.

As Mike mentioned earlier, we believe we are well on our way to having the newest, freshest store base in the industry as we continue to open new stores and aggressively remodel and relocate our stores to our 2010 format.

We believe this was a key driver of our strong sales growth in 2004 and will be in the years to come.

During the fourth quarter, we opened 43 new stores and closed 3, bringing our total store count to 2,652.

For the year, we opened 125 new stores and closed 12 stores, as planned, resulting in an expansion of our square footage for the year of approximately 4.6 percent.

Our new stores continue to open with strong sales.

As we reported previously, our average stores open 1 year have a 1.1 million sales run-rate, up from 900,000 in 2001.

Our enhanced site selection process, our 2010 format, our national advertising campaign and our opening of stores primarily in existing markets are the key drivers of the higher productivity of our new stores.

In 2005, we expect to accelerate our new store growth to 150 to 175 stores and close approximately 15 stores, resulting in square footage growth in the 6 to 7 percent range.

We have tremendous opportunities 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.

During the 2004 year, we also relocated 34 stores.

For the 2005 year, we anticipate increasing our relocations to approximately 50 stores.

Store relocations are a key part of our program to upgrade our store base.

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

In 2004, we remodeled 98 existing Advance Auto Parts stores on a market-by-market basis.

We also continue to move southward in the state of Florida with our remodeling of 130 of the former Discount Auto Parts stores to our 2010 format in 2004.

We currently have just 93 Florida stores remaining to be converted and anticipate completion before the end of 2005.

At the end of our fourth quarter, we had a total of 1119 stores with 2010 format.

As Mike mentioned, by the end of 2005, we plan to have over half of our chain operating with this 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 remodeled stores continue to produce, on average, a sustainable double-digit sales increase as we convert by market.

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 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 details on our balance sheet and cash flow statement.

Before we review of the results of our 2004 quarter, let me again remind you that the fourth quarter of 2003 includes an additional week, which produced 63 million in sales and added approximately 7 cents in diluted earnings per share.

In the fourth quarter last year, we earned 41 cents on a GAAP basis.

Included in the GAAP earnings was a positive 7 cents from 53rd week, a negative 3 cents from the discontinuance of the wholesale business and a negative 1 cent in integration expense from Discount Auto Parts, which produced a comparable fourth-quarter earnings per diluted share of 38 cents last year.

Our gross margin increased 83 basis points in the fourth quarter to 46.4 percent compared to 45.6 percent last year.

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

During the fourth quarter, our SG&A expenses increased 64 basis points to 39.4 percent versus our comparable results of 38.7 percent last year.

GAAP SG&A expenses were 38.3 percent for the fourth quarter last year.

The increase in SG&A as a percent of sales came from 2 areas.

Excluding these 2 areas, SG&A expenses would have leveraged as a percent of sales to 103 basis points based on the strength of our 9.7 percent same-store sales increase.

The first area of deleverage in the quarter was our self-insured programs, which include Workers' Compensation, general and auto liability and medical.

These combined areas rose 127 basis points over last year or approximately 10.8 million.

During the fourth quarter, through our internal claims review and receipt of an independent actuary report, we determined that projected ultimate costs of closed claims under our Workers' Compensation, general and auto liability programs were trending higher than we had estimated as a result of several factors, including increasing medical and permanent disability costs.

Our self-insured workers' compensation, general and auto liability programs are relatively new programs which began in 2001.

Accordingly, our historical experience in these programs is still developing.

During the fourth quarter, we determined the need to increase and accelerate our recognition of costs in certain cases for these programs.

We believe our year-end estimate -- reserve estimates are adequate to cover any claims (indiscernible) claims incurred prior to our fiscal year end and we do not anticipate significant changes in our estimates going forward.

Our 2005 guidance reflects our current trends of costs in these areas.

In addition to incurring the necessary expense to reflect these trends, we're strengthening our safety awareness and prevention programs and our loss control procedures in an effort to minimize our future expenses by ensuring we're managing these costs as efficiently as we can going forward.

We believe these programs will reduce the frequency of claims as well as the costs associated with closing these types of claims.

Also, as we mentioned in our third-quarter call, we've experienced significantly higher medical costs in our health insurance program for our team members driven by inflation in the healthcare sector.

This trend continued into the fourth quarter.

Effective in the first quarter of 2005, we have changed our medical plan structure in an effort to help minimize these increasing costs going forward.

The second area of deleverage relates to the incentives earned by our team during the fourth quarter, which increased 40 basis points over the prior-year quarter or approximately 3.4 million.

Our incentive plans for our team are paid each quarter based on their sales and operating income performance compared to budget.

There is also a provision that allows our team to roll up any bonuses they missed during individual quarters if they make their annual sales and operating income budgets.

Due to the team's tremendous performance in the fourth quarter in achieving strong same-store sales growth, many team members achieved not only their fourth-quarter incentive but rolled up their bonus for the year, creating more incentive expense for the quarter.

We are pleased that our team performed so well in the fourth quarter and the incentive plans worked as intended.

Our extremely motivated teams drove sales and operating income right up to the last day the year and are seeing a strong run-rate for 2005.

For the 2004 year, SG&A expenses were 37.8 percent versus the comparable 37.5 percent last year.

Our self-insurance programs costs drove this SG&A increase for the year.

Our GAAP SG&A was 37.7 percent last year.

Operating margins rose 20 basis points during the fourth quarter to 7 percent compared to 6.8 percent on a comparable basis last year.

Last year, our GAAP operating margin was 7.2 percent.

For the 2004 year, our operating margin increased to 8.7 percent or 28 basis points from last year's 8.4 percent on a comparable basis.

Our GAAP operating margins were 8.3 percent last year.

Our interest expense was 4.9 million in the fourth quarter, flat with the prior year.

As we discussed on our last call, during the fourth quarter, we successfully closed on a new 670 million credit facility that lowered our borrowing rate, increased our finance vendor accounts payable program and provided a new delayed draw term loan to fund potential share repurchases.

The expense in the quarter associated with this refinancing was 2.8 million.

Our tax rate for the quarter and year-to-date was 38.5 percent and we anticipate that approximate tax rate for 2005.

Earnings per diluted share from continuing operations were 43 cents.

Excluding the loan refinancing expense, earnings per diluted share from continuing operations rose 21.1 percent to 46 cents for the fourth quarter versus our comparable earnings per diluted share from continuing operations of 38 cents last year.

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

CapEx for the fourth quarter was 54.5 million and for the year, our capital expenditures were 179.8 million, in line with our $180 million plan.

This includes approximately 50 million from the Northeast distribution center, which is opening on time and on-budget.

For 2005, we anticipate CapEx of 180 to 200 million.

This investment reflects our acceleration of square footage growth, including ownership of approximately 25 percent of our new stores, acceleration in our relocation programs as well as investment in other areas to drive our sales and profitability.

Our first priority for our free cash flow is to re-invest it back into the business for the long-term and we believe our success in growing market share is a reflection of this focus.

All of our CapEx investments must meet our 15 percent after-tax hurdle rate before they are approved.

Our Accounts Payable-to-inventory ratio improved to 53.7 percent compared to 51 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 currently has 56.9 million outstanding and accounted for the majority of the increase in this ratio.

Under our new loan (ph) agreement put in place in the fourth quarter, we now have 100 million available for this program and have the opportunity to increase the program to 150 million in June of 2005.

We anticipate our Accounts Payable inventory ratio to grow approximately 56 percent by year-end 2005.

However, depending on the success of growing our finance vendor accounts payable program, we could see this ratio grow higher.

For the year, we produced 153.9 million in free cash flow, higher than our $130 million projection due to the strength of our fourth-quarter sales.

This included 50 million in CapEx for the Northeast distribution center.

In 2005, we anticipate our free cash flow will be in the range of 150 to 170 million as we continue to invest in the Company to grow our business for the long term.

Our total debt at the end of the quarter was 470 million and our debt-to-cap ratio was 39.4 percent compared to 41.3 percent at the end of 2003.

During the fourth quarter, we purchased 2.3 million shares of our outstanding stock at an average price of $41.72 for a total of 96.4 million.

Because of the timing of the repurchases, the effect on EPS for the quarter was less than half a penny.

For the 2004 year, we repurchased 3.7 million shares of our outstanding stock at an average price of $39.52 for a total of $146.4 million.

As of the end of 2004, we had 53.6 remaining under our $200 million share repurchase authorization.

Since the beginning of 2005, we have repurchased approximately 900,000 additional shares, which leaves approximately 13.7 million remaining on our $200 million authorization.

As a result of our activity, we expect our diluted share count in full year 2005 to be approximately 73 million shares and this has been reflected in our guidance.

As a reminder, in regards to the guidance Mike provided for 2005, we've not included within our guidance any stock option expense.

We are evaluating the new accounting literature as it relates to expensing of options.

We currently anticipate the expensing of options to approximate 2 cents to 3 cents per share each quarter.

With regards to Section 404 of the Sarbanes-Oxley Act of 2002, we have assessed that our controls over financial reporting are effective and we will not have any material weaknesses or significant deficiencies to report.

On a final note, in light of the recent -- (Multiple Speakers) -- in the financial community about lease accounting, I want to reassure that we've reviewed our lease accounting and have validated our accounting treatment for leases as appropriate.

Again, as we noted earlier, our results, including the complete reconciliation of our GAAP to comparable results for 2000, are available in our press release and 8-K filing and can be found on our Web site at www.AdvanceAutoParts.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 would like to reiterate our commitment to meeting our long-term goal of driving our earnings per share of 20 percent or more each year for the next several years.

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

Needless to say, we cannot 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 on future calls.

At this time, operator, we'd like to open the call for questions, please.

(OPERATOR INSTRUCTIONS).

Alan Rifkin from Lehman Brothers.

Congratulations, gentlemen, on a great quarter and a great year.

A couple of questions -- you mentioned that the incentives earned by the team members on the commercial side impacted your SG&A by 40 basis points.

Can you maybe provide some color as to where some of those hurdles are and if in fact you do expect, in 2005, to get better leverage, or will you continue to invest on the sales team side of the business within the commercial area?

That's my first question.

Alan, the incentives for the quarter -- really our team members really our incentive based on topline sales growth and operating income and as I said in my prepared remarks, if the team members -- if the individual stores achieve their annual targets and for some reason have missed an earlier target earlier in the year which they are able to make up some of that lost opportunity, and that's really what we saw in the fourth quarter.

When you look at it on an annual basis, the incentive costs were not that different from last year as a percent of sales, but it's just the timing of it in the fourth quarter just based on the strength of the fourth quarter.

Our teams obviously earned quite a bit of the incentive, which is obviously motivating for the team and it set us up to have a nice 2005. (multiple speakers).

Alan, just as a clarification, this was not directly related to our commercial program; this was across our stores in general.

Will the targets in '05 be similar to the targets in '04 or will those targets be raised a little bit?

No, the targets for our team are based on our internal 2005 budget, which obviously would be raised over the 2004 targets.

Okay.

Mike, you mentioned that, with respect to the 2010 program, that you made some refinements in the program and you've realized some cost efficiencies.

Can you maybe just elaborate on those 2 items?

Well, everything we do in our business we're looking to continuously improve.

One obvious thing you'll see changed in the 2010 store, for example, is we found a less costly sign package.

The sign package, as a matter of fact, is a large percentage of our cost, and I think that's a very easily visible change in cost.

We are also again continuing to work on all our planograms, all our adjacencies and fine-tuning to make them more appropriate as we garner data from the implementation of what we've got.

Okay.

Lastly, if I may, Jim, you mentioned that you continue to believe that you'll see positive effects on your comps in future quarters from the effects of the hurricane.

Do you expect those positive effects to be as strong as what you saw in the fourth quarter, you know, namely 1 to 2 percent, or do you think that they will diminish as we progress throughout the year?

Alan, We would anticipate they would diminish to some extent as we go through the year.

They probably would not be quite at the 1 to 2 percent level.

Having said that, there's a lot of rebuilding to be done yet in Florida especially, and that will have a positive effect on our business as we work to serve our customers in those markets.

Okay.

You mentioned that sales have been very strong still in the first 6 weeks of the first quarter.

Any quantification as to what the 85 to 90 percent -- 90 cent guidance is predicated on with respect to comps?

Yes.

Alan, as we said, the annual guidance is based on 5 to 7 percent comps and obviously based on the strength of the first 6 weeks, the first quarter would be slightly higher than that.

Gary Balter from UBS.

Thank you.

I will echo the congratulations that Alan just gave and limit it to less questions than Alan just asked!

One of the things -- if we could just follow up a little bit on the commercial programs, which has clearly been one of the drivers.

You mentioned some of the new programs and you mentioned how many -- you said 73 percent of stores versus 64.

How many stores -- what percent of stores do you see putting that in?

Maybe you could describe one of the new programs just to give us an idea of what some of the drivers are?

Thank you.

Gary, this is Jim.

In regard to the number of stores that we believe we can ultimately put the programs in, as we've said before, we will probably never have the program in every store because we think we can serve markets without having the program in every store from the standpoint of transportation and distance.

Having said that, we clearly see the opportunity to be significantly north of where are today, certainly probably -- certainly north of 80 and possibly as much as 90 percent of our stores.

Typically what we do is we have a lot of data available to us and we are able to look at every market in our company and determine how we can best serve that market based on the demand for commercial business in that market.

With that information, we can lay out a strategy as to which market -- which doors in that market should have the program, how many trucks we should put in each of those stores, and how most effectively to drive our sales and our profit in serving that market.

So it's a very structured process that's a combination of the data that we have internally, as well as external data, as well as the input that our operations team in the field provide us to make those decisions.

But we still see a lot of upside opportunity, as we talked about, in the commercial business, driving the model that we've laid out and our team is executing so well.

Danielle Fox from Merrill Lynch.

Good morning.

I guess my question is on the gross margin.

It looked like the gross margin gain was the largest this quarter of all 4 quarters and I'm wondering.

You mentioned category management and shrink improvement as the drivers.

Could you give us some more specifics on sort of how those 2 contribute relative to one another, and then also what specifically you're doing in category management that's allowing you to continue to post such big gross margin gains?

Danielle, without getting really specific, I would say probably about a third of our margin growth is coming from each one of those areas.

Within category management, we are looking at our merchandising, our adjacencies, how can we improve our mix.

Certainly, that's contributing a good chunk of that third (inaudible) category management.

In addition, as part of our category management initiatives, in conjunction with our logistics team, we're looking to take costs of our logistics network.

From a shrink standpoint, we're working very diligently and have implemented a reverse logistics IT-supported system this past quarter, which we believe is (indiscernible) in the fourth quarter and will continue to improve our cost, going forward.

Last but not least, we continue to work with our vendors to take costs out of the system in order to reduce our cost of goods.

Danielle, also bear in mind that many of the initiatives that Mike just covered with you are also key to driving our topline sales as well.

My next question is just whether or not -- what you're seeing in terms of the pricing environment and if that had any impact on your gross margin.

Again, I think the market is very well-rationalized and we all have increasing costs with nominal inflation.

So we've found, in most cases, we've been able to pass through any vendor increases in the form of retail at our normal margin.

Again, as I think you can see from our LIFO adjustment, we still have deflation in our overall cost of goods.

Matthew Fassler from Goldman Sachs.

Thank you very much, good morning and terrific quarter.

We've got 2 questions.

First of all, I'd like to dig into the custom mix initiative.

If you could go into a little more detail about the kind of impact that you think you're seeing about the timing of the completion of that, and also what kind of systems work you're doing that you think could facilitate progress through that program.

Basically what custom mix does, it puts our stores into geographic and demographic clusters.

We are able to look at those clusters, determine the vehicle population based on tolk (ph) data and appropriately we tailor our mix.

We've completed, as I said, about a third of our planograms under the first phase of the program.

We're looking to enhance the decision-making tools as part of that program with longer-term sales history data and other information from other sources, such as NPD (ph), which is our market share, to better fine-tune those decisions.

Mike, have you seen business in that one-third of the store, if you will, track better than the rest of the store?

Yes and that is what basically has been reflected as part of the reason for our increased comp growth.

I got you.

In terms of getting to the rest of the business, the other two-thirds, what is the timing that you think up for that?

We should finish that by fall if next year but that again is the first phase and then we go at it again all over.

So the program is never really going to be done and we can see continuous program as we go forward for many years.

Is that fall '05 or fall '06?

Fall of '05 this year, we will finish the first wave.

Then we will begin doing them all over again.

I got you.

The second question just relates to the expensive front.

Obviously you've been investing in the business pretty aggressively.

We calculated, even when you backed out the healthcare charge in the fourth quarter, expenses per square foot up more than 5 percent.

You've been generating the comps to leverage that but as you think about going forward, do you anticipate the same level of expense investment or would you expect to pull back anytime soon?

Matt, this is Jeff.

Again, we continue to see opportunities to invest in the business, to grow our business for the long term and I think you'll see us continue to reinvest back in the business in order to grow our business for the long term.

But as we said, that we do expect to have SG&A leverage going forward into 2005, but you'll see us continue to reinvest in the business.

Again, we have a very disciplined ROI (ph) process internally for those investments and they have to hit our internal hurdle rate of a 15 percent after-tax return.

But where we see opportunity to grow the business, we're going to take advantage of that.

Ken Fillman (ph) from Omega Advisors.

Good morning.

What kind of inflation do you observe on (indiscernible) of your products?

We are seeing a mixed bag.

Obviously, there's been some increases in select categories due (indiscernible) supply issues.

On the other hand, we are continuing to aggressively manage our costs in a number of other vendors.

So it's really a mixed bag though -- some up, some down.

Can you quantify or -- how much are you pricing up your products to reflect inflation, say, in commodities?

Again as I say, some have gone up and some have gone down.

We don't see a significant change in our retail pricing from an inflationary standpoint.

Jack Ballus (ph) from Midwood Research.

First, I was wondering.

Since the weeks for the fourth quarter of this year I don't think were similar seasonal weeks to the fourth quarter of last year, in terms of 13 weeks versus the same 13 weeks on a seasonal basis, I was wondering if total sales gains on that basis would've been higher than the 11.9 percent that you're saying it would've been without the 14th week.

No, Jack, the 11.9 percent is a 12-week to 12-week comparison when you back out the additional week in the fourth quarter of 2003.

I realize that, but are they the same seasonal weeks?

They are the same calendar weeks in the 9.7 percent comp.

Right, but I don't think they have the same calendar -- (Multiple Speakers).

They are off a week because of the additional 53rd week last year.

Right, right, right, but I think that the weeks this year, particularly the latter weeks, have slower sales per week than a year ago because it's later in the quarter.

Yes.

Okay.

What is the LIFO adjustment?

It was approximately 4 million for the quarter.

Which way?

Continued deflation, so it was a LIFO credit.

Oh, it was a LIFO credit?

Yes.

Okay.

So far as 2005 is concerned, considering your expansion plans and being up 5 to 7 percent comp, would that translate into total sales expanding about 10 percent or better each quarter?

Yes, that's approximately right.

Correct, Jack.

Okay.

I have a question for you, Mike.

That is obviously your initiatives are bearing fruit and having traction.

I was just wondering if there was any particular reason why in the fourth quarter they particularly accelerated sales that quarter.

Again, Jack, I think you'll recognize and as we said to you in the third quarter, we did have 4 hurricanes, and I think we would have seen a little more strength in the third quarter had that not happened.

So it wasn't like it was a miraculous turnaround.

I think, by the same token, a lot of the initiatives we've put into place over the last 2 or three years are really coming to fruition and as they roll into place, we are seeing the returns.

Right, right, but the fourth quarter, you had the toughest comparison with a year ago.

Yes, I think we had more programs coming to fruition at that time.

You had more programs coming to fruition in the fourth quarter of '04 compared with earlier quarters?

Yes.

The initiatives are in place.

For example, in reverse logistics, we started phasing in.

Custom mix, we started phasing in in Q3 and it came (indiscernible) in Q4.

Jack, as we told you, as we went through the last 2 or 3 years with the significant investments we've made in this company, we are only now starting to see the beginning of a full-year run rate on those initiatives.

In effect this team is only now starting to get good at getting better.

I think a real clear example of that is commercial, which we did confirm the number for you.

You can see the improvement in the commercial comp number itself.

Right, right, right.

Going into the first quarter, what share of the business is commercial now?

At the end of 2004, Jack, it was 18.4 percent of our total sales.

That was for the year as a whole.

Wasn't it accelerating during the year to a higher percentage?

It would have been slightly higher at the end of the year.

It would not have been significantly different.

It would not?

Okay.

One last question -- regarding the stores that are the 2010 stores, do you have an idea of how many of those stores are in your comp-store base?

No, Jack, the number of stores includes our new stores that we've opened over the last several years as well, so you'd have to pull those down.

I don't have the number in front of me in terms of the number of stores that are in the comp, but it would be approximately two-thirds, somewhere in that ballpark.

Two-thirds of the 1100 -- (multiple speakers).

(Multiple Speakers) -- stores would be in the comp base.

Are there 1100 stores in the comp base?

No, the 1100 stores that have the 2010 format, about two-thirds of those would be in the comp base.

How many stores are in the comp base in total?

Virtually all, but about 125 to 150 are not in the comp base.

Keep in mind, Jack, that we've been converted stores and opening new stores with 2010 format now for between 2, almost 3 years, so some of those stores have been in comp certainly more than a year.

You would need to take that into consideration as well.

Jeff, just one last thing -- the additional expenses for Workmen's Comp and medical -- how much higher do you expect that to be in dollar terms for '05 compared to '04?

Again, we've reflected the higher trend rates in those areas already into our '05 guidance.

We obviously wouldn't anticipate it to be as high as what we saw in 2004.

So was the 10.8 million a cumulative thing or was that a one-shot -- what does the 10.8 million represent?

It relates to changes in estimates that we made relative to the cost of closing these claims that related both to '04 occurrences and to prior-period occurrences.

Right.

So what I meant was, going into '05, would you have, like, I don't know, whatever it might be -- $5 million a quarter additional expense, based on the new assumptions compared to what it had been for the first 3 quarters of '04?

No, Jack, it would not be near that high.

Also bear in mind that we have significantly, as Jeff indicated on the call, significantly addressed our program practices and everything we can do in the business to run in a more cost-effective manner as well.

Thank you very much.

Steve Mortimer (ph) from Wellington (ph).

Hi, guys, great quarter.

Just a bookkeeping question for you sort of to follow-up on that last question.

What was the LIFO credit or debit last year in the fourth quarter?

It was roughly flat in the fourth quarter of last year.

Okay.

I think you said shrink helped you 20 basis points in the third quarter.

What was that magnitude in the fourth quarter?

As Mike said earlier, it accounted for about a third of our margin increase.

I guess following up again to that last question, so if it was 10 million for the self-insured program adjustments and you said 5 million is too high, are we talking a couple of million a quarter or is it not even that much in incremental SG&A through each quarter of '05?

Again, having quantified that number and again, we've reflected in our 2005 guidance what we anticipate those charges to be.

I think what you'll see in general, though, is the first 3 quarters will be higher, although not nearly at the 5 million level, and then the fourth quarter will be lower than it was in 2004 (ph), significantly lower.

Okay, great.

Keep up the good work.

Michael Cox from Piper Jaffray.

Congratulations on a great quarter!

Just a couple of questions -- based on your comments early in the fourth quarter, is it safe to say that comps accelerated through the quarter and were tracking significantly higher than your reported 9.7 percent by the end of the quarter?

Again, I think there was slight uptick but we had strong comps really throughout the entire fourth quarter.

Okay.

On the private-label program, you talked about that quite a bit here on the gross margin side.

Could you give us a percentage as to what private-label currently makes up and where you think that could go down the road?

Our store brands program is about 20 to 25 percent of our sales.

We don't like to get any more specific than that.

Again, my standard answer to that is where the consumer takes it and what the consumer demand is, we will add or take away private-label or store branded items.

Then my last question regarding the commercial program -- you talked about taking that up to 80 to 90 percent of the store base.

Is there any long-term target as to where you think commercial could go as a percentage of your total sales?

Just extrapolating out to your billion dollar-plus number in '07, it looks like north of 20 percent.

Have you talked about a long-term target there?

We really haven't focused on a long-term target in that regard.

I think the key point there is that we anticipate our DIY business continuing to grow strongly, as well as our commercial business.

As we add stores and grow the commercial business, it certainly could pass the 20 percent mark over the next few years, but the key is that we are driving both businesses and we expect to see strong increases in each.

Okay, great.

Thanks a lot, guys.

Brian Postol from A.G. Edwards.

Thanks and good morning, everybody, and congratulations on a great quarter.

Back in the first quarter, you guys introduced a new program to your team entitled 2020 initiative designed to take cost out.

Could you update us on where that program is and give us any examples of areas where you've seen some improvement?

Well, the 2020 program was really based on not only taking costs out but also driving our sales increases.

Again, we really don't want to get specific with the number of the initiatives, but we look at every process we've got in the Company, from our team members' perspective, and have looked to and in many cases taken waste out of those to getting down to use of paper, to how we schedule some activities within our facilities.

But certainly, from the sales standpoint, I think you can see, with our stronger comps, that some of those initiatives have also contributed in that area.

Okay, thanks.

Operator, if there's no other questions, we would like to thank everybody for participating.

We look forward to talking to you as we go throughout the year.

Thank you very much.

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

This does conclude your presentation.

You may now disconnect.

Good day.