領先汽車配件 (AAP) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Advance Auto Parts first-quarter 2005 earnings conference call.

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

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

Before we begin, Adam Bergman, Vice President of Investor Relations, will make a brief statement concerning forward-looking statements that will be made during this call.

Thank you and good morning.

Certain statements contained in this release and presentation are forward-looking statements as that statement is used in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements reflect future events, developments, or results, and typically use words such as believe, anticipate, expect, intend, plan, forecast, outlook, or estimate.

These statements discuss, among other things, expected growth and feature performance, including comparable store sales, sales per store, operating margin, free cash flow, return on invested capital, and earnings per share for second quarter, third quarter, and fiscal year 2005.

These forward-looking statements are subject or 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 factors disclosed in the Company's 10-K for the fiscal year ended January 1, 2005, on file with the Securities and Exchange Commission.

Actual results may differ materially from anticipated results described in these forward-looking statements.

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

Our results can be found in our press release and 8-K filing, which are available on our website at www.AdvanceAutoParts.com.

Yesterday, at our annual stockholders' meeting, shareholders ratified Deloitte & Touche as our independent auditors for 2005 and reelected all 10 of our existing Board members to serve on as directors on our Board through next year's annual meeting.

Let me now turn the call over to Larry Castellani, our Chairman of the Board.

Thanks, Adam.

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

Joining me on our call today are Mike Coppola and Jeff Gray.

Mike Coppola was officially named by our Board of Directors as President and Chief Executive Officer of our Company at our Board meeting yesterday, when I officially retired from the CEO position.

As previously announced, I will remain as Nonexecutive Chairman at the Board's and Mike's request.

Also with us is Jim Wade, who has taken on the new role of Executive Vice President, Business Development.

I want to thank Jim for all of his support in our years together and express my confidence in Jim's new role having a very positive impact on our long-term future.

I want to take this opportunity to personally congratulate Mike and share with all you the strong confidence I have in Mike's leadership and marketing skills.

As many of you know, Mike is the author of our strategic plan, which we believe is driving our strong performance.

Mike, I am awfully proud you, and on behalf of our whole Board, know that you have our complete support as you grow out our Company to its full potential.

I'm delighted that our CEO transition has proceeded so smoothly and I look forward to supporting Mike in any way I can as Chairman of the Board.

We had a solid first quarter and I know Mike and the team are pleased to share our results with you today, as we turn this call over to a very, very capable new leader of our Company that I know will drive our company to greater success in the years ahead.

Thank you, Larry, for your very strong vote of confidence.

As many of you know, Larry and I have worked together for many years, so you should expect great continuity in terms of our vision for Advance.

His fine stewardship over (ph) the years has guided Company to solid improvements in performance, and I consider it a special privilege to fill Larry's shoes as the next CEO of this Company.

At this time, let me talk about our executive committee here at Advance.

First, Jim Wade, (technical difficulty) by the considerable value I know Jim will add in his new role as EVP of Business Development.

Jim will become our key executive in charge of strategic planning to create enhanced long-term value for our Company.

He will be specifically responsible for the development of our retail and commercial location strategy, potential acquisition, as well as new ventures.

Jim will also head up our Company's long-term planning.

He will continue as the senior executive of our executive committee.

Jim and I have worked together as a team over the last four years and share a common vision for the future of the Company.

Certainly without Jim Wade, Advance would not be anywhere near as successful today.

We are all committed to making Advance the value leader in the auto aftermarket, in both the DIY and commercial areas.

And I have no doubt Jim's efforts will be fundamental to accomplishing these objectives.

Elwyn Murray.

Elwyn Murray has joined our executive committee as EVP administration.

He will be responsible for a number of critical support areas in the Company initially, including IT, logistics, and corporate purchasing.

Elwyn comes to us from Food Lion, an $11 billion retailer, and we believe his skill set will add tremendous value, not only in the specific areas, but also as a member of our executive committee.

In addition to Jim and Elwyn, most of your familiar with three other members of our executive committee -- Paul Klasing, EVP of Stores, Dave Mueller, EVP Merchandising and Marketing, and Jeff Gray, EVP and Chief Financial Officer, who you'll hear from in a few minutes.

Now to our quarterly results.

I am very pleased to report that as a result of executing a number of our initiatives that our sales momentum continues, as evidenced by our 9.2 same-store sales increase for the quarter on top of the 6.9 percent in last year's first quarter.

With such solid top-line results, we were able to leverage many of our fixed costs while continuing to invest further for our future success and drive robust bottom-line performance.

For the quarter, we achieved earnings per diluted share of $0.94.

This is a 38% increase in EPS compared to the $0.68 we earned in the same quarter last year.

These results confirm that our initiatives to drive sales and profitability are working and we continue to gain market share while producing record earnings.

We believe we are very well-positioned to continue our strong growth.

In a few minutes, Jim will review our sales results in greater detail.

Certainly we continue to focus on our four key goals, raising average sales per store, expanding our operating margins, generating strong free cash flow, and increasing our ROIC.

I am pleased to say we continue to make solid progress toward each of these goals.

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.

Some of the initiatives that are driving our results include improving our store operations.

We have been working diligently under the leadership of Paul Klasing, our EVP of stores, and our four SVPs of operations ensuring the execution of the basics in our stores to help move us to best-in-class in retail.

We believe we are making steady progress in this area and have greatly improved our in-stock position in our stores in particular.

Of course, this has been facilitated by the use of our MPT labor scheduling tool, which allows us to have the right team member at the right time doing the right thing to optimize not only our payroll, but also our sales.

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.

If you have not been in one of these stores yet, I encourage you to do so.

I think you will be impressed by the bright, clean, customer-friendly look.

You will clearly see the impactful curb appeal, as well as the very bright and attractive customer-friendly interior.

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

We will continue converting stores to the 2010 format over the next several years until all stores are converted.

Meanwhile, we are continuing to refine this program to further improve sales performance and optimize cost.

Our market-by-market conversion approach continues to produce strong sales increases in the first year of post completion.

Our category and management program under the leadership of Dave Mueller is the basis of our ongoing improvements in Merchandising and Store Operations.

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

We continue to monitor each category to measure what customers want, when they want them, and how we can use our selling space and inventory more productively.

Over the last few years, we have transformed our buyers into merchants, a significant change.

No longer are we only trying to buy at the absolute lowest cost, although we certainly strive to do that; now we are looking much more strategically at what our customers need and want and fine-tuning our plans to achieve greater customer satisfaction in conjunction with our vendors.

We are continuing the implementation of our custom mix program to get more of the right parts in the right stores as well as remove less productive inventory from our stores.

This program allows us to analyze the vehicle demographics of each market and adjust our inventory mix accordingly to better meet the needs of each market.

In addition, we can customize the assortment of each store based on regional preferences, climate, and other factors.

Our store brands program continues to gain momentum.

Where category and management shows us an opportunity to do so, we are adding private-label products to save our customers money versus the leading national brands.

As we have discussed before, we are also adding a member of proprietary brands and SKUs in a number of categories we can stimulate demand of high-quality items at competitive prices.

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

In the first quarter, we introduced a new loan-a-tool program that we believe is best-in-class.

Customers can now come into our stores and borrow from an array of different tool kits to help them complete any number of automotive repair jobs.

We think this is another key way that we can help customers get all the parts they need to complete a job right the first time.

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

Over the past two months, we have refreshed this program with three new television ads that highlight our key points of differentiation relative to our competitors -- best-in-class stores, ready-to-go low prices, and the professional knowledge of our team members.

We are also seeing good results from our consumer education program, which is another exciting area that differentiates us from our competitors and expands our market potential by improving our customers' knowledge in how to more easily perform a large number of DIY projects.

We have augmented this program by adding product information brochures up and down the aisles of our stores.

In addition, we are empowering our customers by showing them that automotive maintenance can be done easily with DIY clinics in our stores, where we broadcast project specific how-to information across our advanced TV satellite network.

For customers who can't make the video clinic broadcast, this same information is also available on our AdvanceAutoParts.com website.

The consistent execution of our commercial program, of course, is driving very robust comps.

We continue to add delivery programs in stores where we see potential to serve commercial customers.

Our store and field sales teams are working hard to earn the trust of our existing commercial customers and become their first call when they need a part.

And we are targeting potential customers that don't currently do business with us but should.

We foresee our approach continuing to produce double-digit commercial comp increases into the future.

Our focus on making our supply chain more responsive is helping us ensure we have the right parts our customers need in a cost-effective manner.

In the first quarter, the largest accomplishment in that regard was the opening of our new 650,000 square foot northeast distribution center near Allentown, Pennsylvania.

This facility opened on time and on budget and began shipping to stores at the end of March as planned.

We currently have transitioned approximately 150 stores into this facility.

As the facility continues to ramp toward capacity over the next several quarters, we will improve our service to our existing stores in the Northeast, as well as support our accelerated growth in this region, optimize our transportation costs and make our entire logistics network operate more efficiently and productively.

Our existing DC network now gives us ample capacity for the next several years.

And finally, as we have mentioned previously, our 2020 initiatives continue to generate hundreds of ideas from our team that will either drive sales or optimize cost.

Many of these are small in and of themselves, but significant in terms of their total ability to generate large dollar contributions to our bottom line.

Examples include energy management solutions, paperless systems, and ideas for new product introductions.

We continue to evaluate or implement over 300 of these initiatives and expect a steady flow of new ideas from our team on an ongoing basis.

These initiatives should supply upside to our sales productivity and SG&A ratio over the next several years.

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

As many of you know, the number of registered vehicles on the road today is a record 228 million versus 182 million just ten years ago.

The average vehicle age in this country continues to increase and is now over nine years old.

The enhanced quality of vehicle exteriors and interiors is leading consumers to keep their aging vehicles longer than they did in prior decades, and aftermarket parts and accessories retailers like Advance continue to benefit from this trend of vehicles being kept longer and being driven further.

As parts wear and fail, they need to be replaced, and when they fail we are ready with the right parts in the right place, like batteries, starters, and alternators, our core competencies.

These solid industry dynamics provide tailwind to the host of initiatives we are undertaking to grow our business.

We believe we are growing our share within a growing market.

The combination of these Company-specific and industry factors gives us continued confidence we will drive our annual earnings per share growth of 20% or more for the next several years, which will lead us to achieve our goal of 11 to 12% operating margin by 2007.

We will achieve this goal by staying the course we have laid out, investing for the long-term, and managing our business as owners.

We are reiterating our guidance for the second quarter of $0.82 to $0.88 for earnings per diluted share, which would represent a 17 to 26% increase in EPS over last year's second quarter.

Our comp run rate for the first three weeks of the quarter and a more moderate gross margin suggest the midpoint of this range.

For the third quarter, we are initiating a guidance range of $0.78 to $0.83 for earnings per diluted share.

We are expecting our strongest quarterly comps in the third quarter, due to it being our easiest comparison to last year.

Based on the upside in our first-quarter results, we are raising our guidance for the 2005 year to a range of $3.04 to $3.14 per diluted share, which would represent an increase of 22 to 26% for the year.

This guidance is based on 6 to 8% comps for the remainder of the year, and that is the trend we are seeing through the first three weeks of the second quarter.

We continue to see opportunities to improve our gross margin percentage and leverage our SG&A expenses, resulting in another year of steady operating margin improvement.

In summary, we have made solid progress toward our four key goals -- raising average sales per store, expanding operating margins, generating strong free cash flow, and increasing our ROIC.

And we continue to see significant opportunities to improve these metrics in the years ahead.

Now let me turn the call over to Jim.

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

I want to begin my comments by congratulating Mike as he begins his new role.

Mike is a tremendous retailer and he and I have worked closely as a team over the last several years with a common vision and we look forward to his leadership as we continue to grow our Company.

I believe the best years for our Company are ahead of us and we have a great team in place to lead us to new heights.

I also look forward to guiding our strategic planning to drive top-line sales and maximize long-term profitability and shareholder value through the optimal deployment of our capital.

We are a leader in a great industry and I believe we have the resources and the opportunity to grow our share of the retail and commercial business as we look out over the next few years.

I will talk about several of those opportunities during my remarks today.

Let me now review in more detail the sales results achieved by our team in the first quarter.

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

During the first quarter our sales rose 12.1%.

Comparable store sales increased 9.2% over a strong 6.9% increase for the first quarter last year.

We saw solid increases in both DIY and DIFM, with DIY producing 5.1% comps, while DIFM continues to meet our double-digit expectations, with a 27.2% comp for the quarter.

During the quarter, both higher customer count and increased average transaction contributed to our comps.

Also, we experienced solid comps and marketshare increases across all regions of our Company in the quarter.

As we mentioned in previous quarters, our 9.2% 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 DIY increases for the quarter was the execution of the initiative that Mike described earlier.

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

As we have 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 relationship with existing customers; and our high level of service and speed of delivery.

During the quarter we added 56 new commercial programs to our stores, bringing the total number of stores with commercial programs to 2001.

Today, 75% of our stores have commercial programs, compared to 67% at the same time last year.

Our percent of commercial sales to our total sales was 20.6% for the quarter, compared to 17.7% in the same quarter last year.

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 the maturity curve and we add more programs.

We are well on our way to achieving and exceeding our goal of $1 billion in commercial sales in 2007, compared to 693 million in 2004.

The commercial market is an area where we believe we have tremendous potential in each of our markets to grow our share of the business very profitably as we look for opportunities to deploy our capital.

Let me spend a moment discussing the effect of fuel prices on our business.

We would certainly prefer fuel prices to be lower, but the initiatives we are implementing and the service our store teams are providing our customers has prevented higher fuel prices from being a significant obstacle to sales growth.

We produced over 9% comps the past two quarters in spite of the impact of high fuel prices on the lower-income consumer.

While fuel prices continue to be higher than they were a year ago, we believe most of the miles driven by our customers are nondiscretionary.

Driving to work, school, or day care is simply not optional for most of us, and we continue to see miles driven gradually rise, as they have for years.

Keep in mind too that our core DIY customers work on their vehicles out of economic necessity.

They have to get back on the road to get to work or school and they may not have the money to take their vehicle to a garage or dealer, let alone replace it with a new vehicle.

They view Advance as a money saver rather than a venue for discretionary spending, and we continue to promote many of the money-saving maintenance items we sell that actually help customers raise the fuel economy of their vehicles.

While on the subject of macro factors, I think it is also helpful to put our results in a broader context.

The prevailing sentiment in the market today seems to be that U.S. companies are experiencing decelerating earnings growth this year as a result of rising producer prices and higher energy costs.

Against that backdrop, we continue to distinguish ourselves with accelerating earnings growth amid stable pricing for our products, and we are achieving this despite higher energy prices.

We are also benefiting from our ability to source from a large number of high-quality suppliers, many of whom have excess capacity.

Moving on to inventory investment, during the quarter our sales grew by 12.1% while our inventory grew by 11.5%.

Due to the strong comp in the quarter, we were able to leverage our inventory growth even with the opening of our new distribution center.

Over the 2005 year we expect to continue to grow sales at a slightly faster pace than inventory.

Meanwhile, we continue to predominantly (ph) use our capital to 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 is enhancing our brand in the eyes of the consumer because we have the right part available for customers when they need it.

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 capital we're investing in this area is a key driver of our strong sales growth and profitability and will continue to be in the years to come.

During the quarter, we opened 26 new stores and closed 3, bringing our total store count to 2,675.

For the year, we expect to open 150 to 175 new stores, which will result in a 6 to 7% square footage growth for the year.

We continue to see tremendous opportunities to invest in additional stores within our existing market.

The profitability associated with opening stores in existing markets is profound relative to staking out new territory.

Contiguous growth allows us to leverage our logistics networks, our field management and brand awareness in existing markets.

In fact, we are already achieving double-digit operating margins in many of our markets where we have dense penetration of stores, which gives us confidence that there is a long runway ahead of us in terms of improving operating margins.

Speaking of contiguous growth, I am pleased to announce that during the quarter we celebrated our first store in New Mexico with the opening of our Clovis store.

This expands our footprint to 40 states in the continental U.S. as well as Puerto Rico and the Virgin Islands.

We believe new store growth is an optimal use of our capital and our new stores continue to accelerate in their sales.

As we have reported previously, our average stores open one year have a run rate of well over $1.1 million, up from $900,000 in 2001 and $1 million in 2003.

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 continued power productivity and rates of return of our new stores.

During the quarter, we relocated 19 stores, the most stores we have ever relocated in one quarter.

For the 2005 year, we remain on track to relocate at least 50 stores.

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

When a relocated store opens, we position ourselves in that market for the long-term and realize an immediate significant increase in sales that supports the capital investment.

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

During the quarter, we remodeled 36 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 32 of the former Discount Auto Parts stores to our 2010 format.

We currently have just 61 Florida stores remaining to be converted, and they will be completed before the end of 2005.

At the end of the quarter we had total of 1266 stores with the 2010 format.

We are on track to have over half our chain operating with this format by year-end, 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 remodel stores continue to produce on average a sustainable double-digit sales increase as we convert by market, and we believe it will be key driver of our sales growth for many years to come.

Now let me turn the call over to Jeff Gray, who will review our financial results.

Thanks, Jim, and good morning.

Let me continue by discussing the remaining lines of our income statement, as well as go into more details on our balance sheet and cash flow statements.

For the first quarter, our gross margin increased to 47.8% compared to 46.4% last year.

Our gross margin performance continues to be driven by our category management and supply chain initiatives.

In addition, this quarter we experienced a more favorable mix of higher margin categories coupled with the first-quarter offering (indiscernible) easiest quarterly gross margin comparison to last year.

We expect gross margin to continue to show year-over-year improvement through the balance of the year, though not at the same level of performance as we achieved in the first quarter.

During the first quarter, our SG&A expenses improved to 38.2% from 38.4% last year as we managed our expenses while continuing to invest in our business for the long-term.

During the quarter our team did good job of optimizing our payroll as a percent of sales, while staffing up our stores to accommodate the higher rate of sales.

The strength of the quarter did result in team members (indiscernible) being higher than planned, as many of our stores exceeded their plan for the quarter.

As expected, we experienced higher self-insurance costs during the quarter.

In addition, we experienced higher energy and fuel costs for the quarter, which we continue to expect to see for the seeable future.

Our operating margins rose to 9.6%, compared to 8% last year.

Interest expense was 8.9 million in the quarter, up over the prior year due to higher interest rates and higher average outstanding debt levels.

During the quarter, we executed additional interest rate swap agreements to hedge against potential future rate increases.

As of the end of the quarter, 43% of our variable bank debt had been effectively converted to fixed-rate as a result of our swap agreements.

Our tax rate for the quarter was 38.5%, and we anticipate that approximate tax rate for the remainder of the year.

Earnings per diluted share from continuing operations were $0.94, a 38 percent increase compared to $0.68 in last year's quarter.

In terms of the component of our balance sheet and our cash flow statement, our accounts payable to inventory ratio improved to 59% compared to 54.1% last year.

The increase in this ratio was driven by the inventory buildup from our recently opened northeast distribution center, which will normalize as we move throughout the year.

Our vendor financing program currently has 94.4 million outstanding and accounted for the majority of the increase in this ratio.

We continue to expect year-over-year improvement in the accounts payable to inventory ratio as we move through the balance of the year, driven by continued growth in our vendor financing program.

Our total debt at the end of the quarter was 462 million and our debt to cap ratio was 37.8%, compared to 35.5% a year ago.

CapEx for the quarter was 59.5 million, as compared to 32 million last year and in line with our plan of 182 to 200 million for the 2005 fiscal year.

These investments reflect our acceleration of square footage, increased ownership of selected new stores, and acceleration our remodel and relocation programs, and continued investments to drive our sales and profitability.

For the quarter we produced 114.7 million in free cash flow, higher than our 64.1 million last year, due to the strength of our first quarter and continued improvements in our working capital management.

Based on the strength of our first quarter, we now anticipate free cash flow will be in the range of 160 to 180 million for the year.

During the quarter, we repurchased approximately 1 million shares of our outstanding stock at an average price of $43.53 for a total of $43 million.

Since the initiation of this repurchase program last August, we have repurchased approximately 4.7 million shares at an average price of $40.36.

As a result of our share repurchase activity, we expect our diluted share count for the full year of 2005 to be approximately 73.5 million shares.

In terms of free cash flow, our strategy continues to be investment back into our business, subject to our 15% after-tax IRR hurdle rate.

If we exhaust those opportunities and there is still additional free cash flow, then we would look to deploy it in the most optimal way to increase shareholder value, which could include additional stock repurchases or acquisitions.

We currently continue to evaluate small, private company acquisitions, as we currently believe the risk-reward profile of these opportunities is more attractive than other public opportunities.

Again, as Adam noted earlier, our results are available in our press release and 8-K filing, and can be found on our website at www.AdvanceAutoParts.com.

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

Thanks, Jeff.

Before you open the floor to questions this morning, we would like to reiterate our commitment to meeting our long-term goal of driving our annual earnings per share 20% or more for the next several years.

We will accomplish this task by investing to grow our sales per store and improving our operating margins by leveraging our gross margin and SG&A expenses.

It has been my privilege to lead this dedicated and talented team as CEO for the past five years, and in closing, I again want to thank each and every member of our team for their hard-work and determination to serve our customers better than anyone.

Thanks, team, and keep up the fine work.

Finally, I would also like to thank those of you on the call for all of your confidence in our Company and for partnering with us for the long-term.

Thank you.

Operator, now we're ready for questions.

(OPERATOR INSTRUCTIONS) Gary Balter, UBS.

First of all, Larry, I want to say we will miss you, but you leave this Company in pretty good hands with Mike and Jim and Jeff and everybody else.

No question -- we have a top-notch team.

Thank you.

A question probably more for Mike or Jim.

AutoZone had good comps for a while in commercial and then it fell apart.

Could you walk through -- I have a lot more confidence, obviously, in your program.

Could you walk through the differences in the way you are approaching commercial and why you feel it is a lot more sustainable?

Gary, this is Jim.

We have been in the commercial program for quite a few years now, and I think we understand the business and have a model in place that we feel very confident that we can continue to execute for many years to come and show consistent growth.

And I think the key to it is consistency.

We are able to measure, as we have talked about, the stores and the customers in each of our markets that fit our profile the best.

And we have a consistent method of tracking our progress in each of those markets so we know when we think we need to add additional sales teams or additional inventory availability or additional trucks or whatever the case may be to continue to grow that.

And we have a long-term plan laid out that very closely tracks how we think we need to grow this program so that we can show consistent results and grow our profitability over the long-term as opposed to seeing shorter-term results.

That's great, thank you very much.

Alan Rifkin, Lehman Brothers.

I will certainly add my congratulations as well.

Larry, best of luck in your future endeavors and special congratulations to Mike and Jim on your new appointments.

Thank you.

Just a couple of questions if I may.

You continue to see extraordinary improvements in the gross margin line.

Can you maybe just try to take us through the dynamics as to how specifically category management is helping to drive that?

Are you seeing, in other words, greater gains in some of the product categories earlier in the process or do you think that these gains are sustainable going forward, specifically it relates to category management?

As Jeff referred to, maybe from a macro standpoint first, Alan, our margin was very heavily affected this year by weather conditions that caused our balance of sale to shift into higher margin categories, such as parts; as well as our year-over-year comparison against last year, we were against the softest previous year-over-year gain in margin.

That being said, we certainly have opportunity going forward in margin this year, but certainly not at the same rate that we saw in the first quarter, in good part due to not only category management but by our logistics area.

Category management, of course, is there really for the short as well as long-term.

Category management helps us focus on the mix of products we're selling.

We have worked very diligently to set our pricing based on the information we work with our vendors on to optimize our mix that helps drive our margin.

Certainly store brands and private label is a big part of category management.

Private label generally is put in to save consumers money, but almost always improves our margin.

As we talked to a couple meetings and showed you some of the branded control brands we're putting into our stores, that is significantly improving our mix, particularly in our sales area in the much higher margin goods.

Mike, maybe as just a follow-up to that, what was the percent increase, let's say, in your proportion of hard parts that helped drive the margin?

We really, again, don't want to get into that kind of breakout.

But obviously as that category shifts and especially year-over-year, while last year we had a softer balance of sales and parts, this year we had a much stronger balance of sales.

One more question if I may.

I certainly understand your desire to conscientiously plow back money into the stores, and as a result, your SG&A declines -- improvements year-over-year were only about 15, 17 basis points.

If everything goes according to your plans for the remainder of the year and third quarter suddenly produces, as you said, the best comp of the year, even north of the 9.2 that you just registered, when should we start to see even greater improvements on the SG&A line?

Again, I think we have consistently said to you we're going to continue to monitor based on our comp store growth and our average sales growth where it makes sense to continue to invest, particularly in a number of areas, commercial being one of them.

Right now, we are of course seeing some impact from fuel, energy, and particularly in this quarter, bonus, as well as the Workman's Compensation issue that we talked to you about.

So I think the answer is we think we are going to put the leverage into SG&A where it makes sense to take it, and where it makes sense to take some of those SG&A leverageable savings and invest them, we are going to continue to do that.

Okay, thank you.

Danielle Fox, Merrill Lynch.

I have a couple of questions.

First, Jim, you touched on pricing in your comments, and I am wondering if higher pricing had any impact on your comps or your gross margin performance?

Danielle, we still see very consistent pricing in our business.

There has not been any significant change in either direction there.

Okay, my second question is whether or not the commercial business contributed to the shift in favor of hard parts.

Because I think, Mike, you mentioned that weather had an impact on the business, but I am wondering if the commercial business was actually additive to gross margins or if it was dilutive.

The commercial business would have a somewhat higher balance towards the parts side, although we believe in the first quarter that was not a significant component of our balance of sale trend.

And then just my final question is about new store productivity.

What is the rate at which we should be expecting new stores to open?

Just from looking at the numbers, it seems like it bounces around a little bit, so what should we be expecting in terms of new store productivity for the remainder of the year?

You should continue to see that number increase in the second and third quarters.

Those should be the largest quarters in terms of number of stores opened.

And then the fourth quarter will be higher than the first, but not as high as the second and third.

It has a lot to do with where we are opening stores and the regions and the construction conditions, but we are very confident that our team will execute the plan that is laid out in front of them.

Thanks very much.

Michael Weissberg (ph), ING.

Our next question comes from Jack Bayless (ph) with Midwood (ph) Research.

I have some questions regarding the gross margin.

First of all, as commercial grows faster than retail, doesn't commercial carry a lower gross margin than retail and therefore on a mix basis might negatively impact the overall gross margin?

Jack, that is very true, but obviously, commercial is only one factor that affects margin, and we have other things that have more than overcome that commercial headwind.

And in terms of gross margin, was there any positive leverage from occupancy costs or perhaps shrinkage as well?

We don't have occupancy costs in our margin.

Shrinkage basically has been neutral over time, although we've made some year-over-year progress in the past couple of years.

But a good part of our margin improvement, as we alluded to, I believe, was in our logistics area.

We have made in very significant improvements in our operations logistically.

We started about midyear last year and we had some real nice improvements in the first quarter.

Jeff, was there a LIFO credit or charge for the quarter?

We had a LIFO credit during the quarter.

It was approximately 4.2 million versus 1.9 million last year.

Okay, regarding the 2010 remodeling program, is it possible to step up the activity there?

Jack, this is Jim.

Yes, we look at that on a continuous basis and we measure our results and the returns we're getting.

And to Mike's point earlier, our SG&A ratios are trending and we have the ability to change that schedule as we go forward.

We continue to see very good results from the program.

We have certainly the specific markets identified this year that we plan to convert and we are just extremely excited about what it's going to do for the next several years.

Okay, final question regards free cash flow.

You mentioned obviously what you can use that for -- paying down debt, buying back stock.

I was wondering if there might be another consideration in terms of paying dividends to stockholders, particularly considering the 15% low tax rate here.

Can dividends be considered in the future as well?

Jack, I think we are considering all our options for use of our free cash flow.

Dividends is just one of many opportunities that may be out there for us and our shareholders, so we continue to evaluate all of our opportunities in that regard.

Okay, thank you.

John Tomlinson, Prudential Equity Group.

Just a couple quick questions.

Can you touch upon supply chain initiatives in a little more detail?

I think you mentioned in your prepared remarks the excess capacity that the supply chain still has out there.

Can you expand on what you're doing there in terms and how it would impact maybe your mix of name brand (ph) products and private-label?

Again, I'm a little confused on the question there John.

Let me just talk about our logistics area in particular.

Under the leadership of Roy Martin -- Roy joined us with the Discount Auto Parts acquisition -- we have been working diligently to fine-tune our logistics network, rationalize our distribution centers.

As you are well aware, we have done that over the last couple years.

Over the last nine months in particular, we put a lot of effort into looking at our internal network regarding PDQ and the process -- we go to market with PDQ -- and to put in the processes that have changed the makeup of how we buy that product and distribute it, and that has had some very significant impact.

As well as we have made some additional capital investments within our logistics network to upgrade our equipment, our systems and our processes.

We brought in a number of new team members in the logistics area that have helped improve our process in go-to-market operations and the logistics area.

We're really just getting continually better quarter-over-quarter in our logistics area.

Maybe I should just clarify.

I wondered if there was an opportunity to still get better terms from certain suppliers.

Are you seeing any benefit from that in the quarter?

From a terms standpoint, we're continuing to work on that.

And again, as we've said, it's really a balance issue.

We're trying to drive lower cost of goods as well as improve our turns, and we're working with each one of our vendors to pick the right mix and approach as we go forward.

Thank you very much.

One last question, I know you mentioned in your prepared remarks on the comp trend that you're seeing in the quarter.

Has there been any change in the last month or so in terms of DIY comp trends at all?

I think we said it as it is.

Our comp range for the first three weeks of the quarter is consistent with what we're recommending or guiding for the rest of the year.

Our business is very heavily affected by weather; we'll have periods of a few weeks with strong comps, a few weeks with weak comps.

But over a quarter's time, they tend to neutralize to an average run rate.

Thank you very much.

Matthew Fassler, Goldman Sachs.

A couple questions.

First of all, on the role of commercial in your cost structure, to what degree is the investment that you're making in the sales force and your buildup of capacity in commercial perhaps contributing to the expense run rates?

Matthew, this is Jim.

Again, we have a very measured approach that we are using and it goes back to the question we answered before.

Certainly as new programs are added and new resources are added, they initially can be negative to our SG&A trend.

But what we're doing is balancing how we are adding programs and resources to the programs in such a way that it is incrementally very positive to our operating margins and it leave us with a lot of upside as we look out to the rest of this year and future years.

And I think our team understands our commercial model very well and they are doing just a great job of executing it.

And as we mentioned, we're doing $700 million last year in commercial and it's just a huge business.

So there's a lot of business yet to be done, and we are taking that, growing that business as it makes sense for our overall ratios for the Company.

Got you.

Second question, on the private-label and owned brand front, clearly a tremendous contributor to your profitability.

Could you just give us a sense right now if you take a bigger picture look over a number of years, how far along you think you are on the buildup and addition of private-label products?

I think as we said a number of times, we don't know where the market is going to lead us.

Our philosophy toward private-label and store brands is the reaction of the customer, how the customer looks at the product.

We will continue to add store brands and private-label where the customer tends to buy more product, as well as where we see some profit opportunity.

But it is really the decision of the customer to determine where we are going to go with private-label and store brands.

Fair enough.

Just one final one, if we could take a look down to Florida, obviously the DAP integration has been done for a little while that you, but you had, I would imagine, some ramp-up in that region as you continue to get traction with the Advance brand, and perhaps I'm not sure if the hurricane recovery process is totally finished yet.

If you could just give us some insight as to what you are seeing out of the state of Florida.

Again, I think we said before, our comps in Florida are pretty consistent with our comps overall, albeit a bit stronger.

Certainly we had a negative effect in Q3 and had some bounce back in Q4 of last year.

We are excited about our opportunity in Florida as we will have all 2010 formatted stores there, so we do expect some upside because of the new format going forward in comps over our Company average.

Thanks so much.

Scot Ciccarelli, RBC Capital Markets.

Two numbers questions.

The first is, if I remember correctly, your previous earnings guidance was before any kind of accounting for option expense.

Is it fair to assume that the new numbers you have provided now includes the option expense?

No.

The guidance we have given does not include any expense related to expense (indiscernible) options.

So was there any option expense taken in the first quarter?

No.

Okay.

Second part is in terms of interest expense, that was a little bit higher than what I think the numbers would typically dictate.

Was there anything else impacting that?

Obviously the rates have gone up a little bit.

But A, was there anything else impacting that; and B, what should our expectations be for the balance of the year?

The interest was higher than last year, driven primarily because of the higher outstanding debt levels during the quarter, as well as higher average interest rates as well.

So the interest is really the function of rates and balance outstanding.

If we want to kind of think about it in terms of going forward at this point --?

It should be at a fairly consistent rate that you saw in the first quarter.

Just keep in mind the first quarter is 16 weeks versus 12 weeks for the next three quarters.

Fair enough, thanks a lot.

David Cumberland, Robert W. Baird.

Can you quantify the improvement in in-stock positions?

Is it on the order of percentage points or basis points?

Also on in-stock, how much opportunity do you have to raise those further?

Then related to that, what is the percentage of stores with the custom mix program as of the end of the first quarter?

Let me answer the latter first.

All of our stores are participating in the custom mix program.

I think to give you some color there, we're probably about 50% through the first wave of our custom mix review on a category basis.

We will annualize that in September and then go through a next wave with a little bit more robust tools and approach.

From our store in-stock, I don't think we really talked to what percent we're running, but we have made year-over-year continual improvement in our store in-stock addition.

We believe -- and I think if you go to our stores, you'll find that we have the strongest in-stock position in the auto aftermarket.

Thank you.

Ladies and gentlemen, that is all the time we do have for questions today.

I would like to turn it back to our in management team for any closing remarks.

Ladies and gentlemen, I just want to thank you for your continued support.

I look forward to continuing as we have for the last few years with continual year-over-year progress in our top line as well as earnings per share.

I want to personally thank Larry for his leadership.

As I said last night at our stockholders' meeting, the best compliment I could give to Larry is simply that he took a great company and has made it better, and I hope to be able to continue in that vein.

Thank you very much.

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

This does conclude your presentation and you may now disconnect.

Have a wonderful day.