領先汽車配件 (AAP) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Advance Auto Parts third quarter 2005 earnings conference call.

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

Mr. Bergman, please proceed.

Thank you.

Good morning, everyone, and thank you for joining us on today's call.

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

Forward-looking statements address 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 future performance including new store openings, remodels and relocations, comparable store sales, sales per store, operating margin, free cash flow, return on invested capital, inventory growth and earnings per share for the fourth quarter fiscal year 2005 and fiscal 2006.

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 factors disclosed in the Company's 10K 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 this conference call and does not undertake to update or revise them as more information becomes available.

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

For planning purposes, our fourth quarter earnings release and conference call are both scheduled for the morning of Thursday, February 16, 2006.

To be notified of the dates of future earnings reports, you can sign up through the Investor Relations section of our website.

Please keep in mind that all per share figures referenced in today's press release and conference call reflect the Company's 3 for 2 stock split that was effective September 26, 2005.

Finally, we are conducting today's call off-site from our industry's annual conference.

After this call ends we'll return as many of your messages as possible.

Ideally we'll return all calls this morning before we head back east.

If we miss your call, we pledge to get back to you no later than tomorrow morning and we appreciate your patience.

With that, let me now turn the call over to Mike Coppola.

Mike.

Thanks, Ed.

Good morning and welcome to our third quarter conference call.

Joining me on our call today are Jim Wade, EVP of Business Development, and Jeff Gray, our CFO.

Let me begin by thanking our team for another solid quarter performance.

In addition to their day in day out hard work, our team really rallied again to support each other through two major hurricanes in the third quarter and already one in the fourth quarter.

I am particularly proud of our store operations, field, risk management, facilities and logistics teams, among others, for their heroic efforts.

Let me now update you on how the recent hurricanes impacted our business.

We have significant experience dealing with hurricanes.

We endured four hurricanes sitting in Florida last summer alone, so unfortunately we become hurricane experts of sorts.

This year we weathered hurricanes Katrina and Rita and now, of course, Wilma, about as well as can be imagined thanks to the dedicated actions of our field and store teams.

Our field teams worked vigorously to protect and locate all of our team members.

Our team is always our first priority and I am pleased that through the phone change and public outreach virtually all of our team members have been accounted for.

Many displaced team members are now working at other Advance stores far from their homes and many are staying with other Advance families who have graciously given space in their homes to those in need.

We also ship trailers of food and water and provided generators and shelters in areas where our team needed it.

We believe our strong retention of high performing team members is attributable to this great team culture, our enlightened HR practices in times like these.

And that's why so many of our team members [INAUDIBLE AUDIO] truly a special place to work.

While we have reopened most of the stores closed for the hurricanes, 11 of our stores remain closed today that were heavily damaged in hurricanes Katrina and Rita.

We expect several of these will reopen before yea-end.

However, it will take longer to reopen the remainder, for example, those in New Orleans proper.

We also we have 3 stores closed by hurricane Wilma and expect these stores will reopen before year-end.

Hurricanes typically have only a very short-term effect on retail business, but the damage to our country's energy infrastructure made this year's hurricanes more disruptive than usual.

With that said, I am pleased to report that our sales momentum continues.

The maturity of our existing initiatives as well as a host of new initiatives led to a 10% same store sales increase for the quarter.

This is the fourth consecutive quarter of 9% plus comps, reflecting the ongoing progress of our initiatives.

In several respects, this year's third quarter sales could best be characterized as a tale with two halves.

In the early part of the quarter, weather was favorable, with the hot summer contributing to parts failures and well as strong demand for air conditioning related products.

In the later part of the quarter, weather impacted our operations, with hurricane Katrina and Rita causing significant pockets of the country to evacuate their home towns, including a number of our store teams, as I said earlier.

In addition, the corresponding dramatic effect these hurricanes had on gasoline prices impacted our customers.

Like most retailers, we would prefer to see gas prices lower and we are pleased to see gas prices continuing to decline from their post-Katrina highs.

High gas prices can crimp the disposable income of our lower middle income customers.

With that said, most of your business, of course, is non-discretionary by nature.

Customers simply must keep their car running in order to get to work, school or day care.

We believe there are very few discretionary miles being driven in the country and the latest government data supports just that.

Despite significantly higher gasoline prices this year, miles driven in the country remain slightly up year-over-year.

The good news is that gas prices are now moderating.

Higher fuel prices affected our cost structure as well in many areas, including inbound freight, our distribution costs, delivery to our commercial customers.

We are particularly fortunate to have just opened our new distribution center in Pennsylvania this year which has paid for itself even faster than we first anticipated because we are saving more money by minimizing mileage between the D.C. and stores during this high period of high fuel prices.

High fuel prices are also an opportunity for us.

As an auto parts retailer it is an opportunity for us to remind our customers about the many ways they can enhance their fuel efficiency of their vehicles.

Not only have we been promoting certain gas saving items, we are proactively also providing information to customers on an ongoing basis, so that they view Advance as a partner in maximizing their vehicle's performance.

Our website, for example, is chock full of gas-saving tips as is our proprietary instore TV network.

While our knowledgeable team members will continue to help customers understand the high ROI they can earn from a small investment in a fresh air filter, oxygen sensor spark plug, tire pressure gauge or locking gas cap.

Back to this quarter's results.

Overall we're pleased with our performance in the third quarter.

Along with strong comps, we again increased our gross margin.

I am personally a bit disappointed that out SG&A was flat compared to last year.

However, this reflects our ongoing investments as well as expenses associated with the impact of hurricanes and higher fuel and utility costs.

In addition, we incurred higher team member incentive payments due to the strong sales quarter, especially relative to last year's third quarter.

We want to emphasize that we do expect to leverage SG&A consistently as we go forward.

For the quarter we achieved earnings per diluted share of $0.55, a 22% increase in EPS compared to the $0.45 we earned in the same quarter last year.

This is at the top-end of our guidance range of $0.52 to $0.55.

We continue to see tremendous opportunities to grow both our DIY and commercial business and Jim will speak to some of these in a few moments.

Our disciplined approach to identify appropriate growth opportunities is what's allowing us to show consistent results.

We are gaining profitable market share in both segments of our business.

As most of you on this call know, we continue to focus on four key goals.

One, raising average sales per store; two, expanding our operating margins; three, generating a strong free cash flow; and, fourth, increasing our ROIC.

Raising average sales per store in and of itself is helping us drive the other three metrics and we continue to makes excellent progress in that regard, such that we are fast approaching industry leading sales per store.

But our work is not done, nor will it ever be done.

We have our sights set on a significantly higher sales per store target and our merchandising, marketing, advertising, consumer education and customer service initiatives all are designed to take us there.

We also have a number of initiatives in various stages of maturity designed to drive continued improvements in our three other strategic goals.

As I mentioned in our last quarterly call, I'm going to only briefly touch on category management because it has become a mindset and a culture at Advance rather than a specific initiative.

But, if you have any questions on category management, I'll be glad to address them during the Q&A session at the end of this call.

As a retailer, we are the intermediary between vendors and customers.

Category management is about using information provided by both these stake holders to enhance what we sell, how we sell it, where we sell it, how we price it and literally every facet of merchandising imaginable.

Category management is everything from offering good, better, best alternatives in various product lines to adding convenience goods to our stores.

Giving customers what they want is what good retailing is all about.

Customers continue to show us they prefer our bright, attractively merchandise stores.

As many of you know, several years ago Advance embarked on an ambitious project to upgrade our entire store base to the new 2010 look.

These 2010 stores feature enhanced signage, colors and graphics as well as smartly designed interiors that group adjacent products logically and optimize the number of foot steps our team members must take to refill shelves and serve our customers.

In this quarter we surpassed the 50% mark in terms of the percent of our stores that now bear this distinctive 2010 design.

We began converting the Lappen and auto supply stores that we acquired in July.

And this month we will complete the remodeling of all the former Discount Auto Parts stores in Florida, bringing the integration of this acquisition to a very successful completion.

All of our new stores and relocated stores, of course, open with our 2010 format from day one and we continue to remodel 200 to 250 stores each year.

These remodels have a short-term impact on our SG&A, but provide us with the newest freshest store base in the industry.

We receive handsome return on these investments.

Through this combination of new, relocated and remodeled stores, about 15% of our chain each year has an essentially brand new appearance.

We believe this pace is sustainable for the foreseeable future and believe it to be a significant competitive advantage as we differentiate Advance from the competition.

We will continue converting our stores until the entire chain features the 2010 format.

Within our stores, we continue to focus intently on being in stock.

In order to provide legendary customers service, our stores must have product on hand.

This, of course, is a SKU intensive business, to be sure, but it is the attention to detail and a team effort that drives our instock percentage.

In the third quarter we achieved not only our best ever instock level, but also improved our instock performance at our DC's PDQ warehouses and our master PDQ.

These are some of the many blocking and tackling retail basics that we measure to drive strong comp store sales results long-term and into the future.

And while we've gotten good today, we can get better.

And that's what gives us such great confidence about the future.

We are also very focussed on giving our team members the tools they need to serve the customers better than ever.

This ranges from upgrading our hand held scanning guns to leadership skills training, to the ASE certification support.

We have a record number of applicants taking the November ASE exam and we look to continue recruiting, hiring and training these certified products experts.

More recently, we've rolled out enhanced safe driving program for our commercial delivery fleet in order to better manage our automotive liability claims.

We also have begun to rollout time-delay saves that show our teams we care about their safety.

We have a number of other initiatives like these that will be introduced in the next few quarters and we look forward to sharing those with you in the future.

We are highly committed to our core DIY business, where our comps grew 6.1% in the third quarter.

We think our DIY model is particularly relevant in times when many customers are looking to offset higher fuel costs and save money by doing it themselves.

Meanwhile, we continue to see excellent results in our commercial model as well.

Our commercial comps grew 26.5% on top of 21.4% in last year's third quarter.

And we continue to see opportunities for double-digit commercial comps well into the future.

Jim will elaborate on this and our acquisition of commercial specialists Autopart International in a few moments.

Beyond the implementation of our initiatives, our industry dynamics continue to be strong with more vehicles on the road than ever before, being driven further than ever before, conditions are right for auto parts wear and failure.

These trends have been in place for several years now.

The latest industry data show that in the most recent year, 2004, vehicle scrapeage rates declined for the fourth consecutive year to a 10-year low.

And the average age of vehicles on the road has grown again, now at a record 9.4 years.

Today industry data shows that more than 70% of the vehicles on the road have over 75,000 miles on them, clearly in our sweet spot for wear and repair.

In addition the growing SUV and pickup truck population is now reaching its high repair cycle.

These vehicles tend to contain more parts and more expensive parts, which have been helping boost our average ticket.

We continue to grow our share within a growing market.

The combination of Company-specific initiatives and industry tailwind gives us continued confidence that we will achieve our strategic goals.

We will achieve these goals by remaining disciplined, investing for the long-term and staying committed to operational excellence.

To put this in perspective, we steadily raised our operating margin from 4% in 2001, to almost 9% last year and over 9.5% in a trailing four quarter basis.

We are reiterating our earnings per share guidance for the fourth quarter of $0.33 to $0.36, which would represent a 14% to 24% increase compared to last year's fourth quarter.

Thus far, for the first three weeks of this quarter our sales are tracking to our expectations for mid-single digit comps.

We expect to improve gross margin percentage and as well leverage our SG&A expenses in the fourth quarter.

Keep in mind that already in the fourth quarter we have experienced a hurricane.

We are also up against our best sales comparison from last year when we produced a 9.7% comp increase.

We are also up against our toughest gross margin comparisons in the fourth quarter and expect to face continued pressure from energy and fuel costs.

For the year our guidance is for earnings per share to be in the range of 210 to 213, which would represent an increase of 27% to 28% for the year and our fourth consecutive year of solid operating margin improvements.

We will provide more detailed guidance for 2006 on our next earnings call.

Our preliminary expectations for stock option expense, which will begin in the first quarter of 2006, is for $0.10 to $0.14 per share of non-cash expense on an annual basis.

In a few moments Jim will also elaborate on our real estate outlook for 2006.

In summary, we continue to make solid progress toward our four key goals and we'll make strides to improve upon these metrics again in 2006.

In addition to expanding our operating margin, these goals include raising our average sales per store, which are at a record level and approaching industry leading, generating strong free cash flow significantly higher year-to-date, compared to the same period last year, adjusted of course for our acquisition of AI and Lappen, and increase in our ROIC which continues to march steadily higher.

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

Let me now turn the call over to Jim.

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

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

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

Our sales rose 14.6% compared to last year's third quarter.

Comparable store sales increased 10% over a 3% increase for the same quarter last year.

For the first three quarters of the year, sales rose 13% on a comparable stores sales increase of 9.4%.

We saw solid increases in both DIY and commercial in the quarter, with DIY producing 6.1% comps while commercial had another very strong quarter with a 26.5% comp.

For the first three quarters of the year DIY comps were 5.3%, while commercial comps were 27%.

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

Also we experienced solid comps and market share gains across all areas of our Company in the quarter.

As anticipated, our Florida markets posted strong sales increases as the anniversary of the disruption from four hurricanes in last year's third quarter.

We remain very focused on our core business of auto parts and accessories to drive our same store sales growth and no new merchandise categories contributed significantly to this quarter's sales increase.

We believe the primary driver of our 6.1% DIY comp increase for the quarter was the continued and consistent execution of the initiatives that Mike described earlier, as well as the contingent maturation of many initiatives we've discussed in recent calls, such as factory direct ordering, local purchasing, salvage body parts and custom mix to name a few.

Our sales building initiatives are benefiting both comp and new stores performance.

New store productivity continues to be very strong and our average sales per store is at a record level.

As we've discussed in previous quarters, we believe the tremendous results in our commercial program are due to the discipline execution of our commercial plan.

Our team knows which types of customers to target, namely garages with the hard parts focus, and we offer these customers a compelling value proposition.

These independent garages and service stations need access to a wide selection of inventory to serve their customers.

There is over 34,000 possible years, makes, models and sub-models of vehicles that can roll off the street on any given day and that's not to mention the huge number of potential parts they may need, including filters, breaks, starters, alternators, hoses, belts, pumps, et cetera.

That is where our trained parts experts and our broad assortment of quality parts comes into play.

We continue to see excellent results in both DIY and commercial as we move inventory closer to our customers through the use of local Advance warehouses and hub stores to service our commercial customers' needs for parts delivered quickly as well as our custom mix program.

In the commercial area, especially, having a needed part simply is not enough.

We must be able to deliver it to our customers quickly.

As we move inventory from deep in the supply chain closer to the stores where the inventory is needed, we'll continue to work our way up our customers call list, growing our reputation and our commercial business.

In September we acquired Autopart International, a privately held Massachusetts based after market parts provider with approximately $90 million in trailing year sales.

This 61 store chain operates stores throughout New England and New York, as well as ships directly to jobbers through its North American sales division.

AI specializes in commercial delivery of auto parts, particularly for foreign makes and models of vehicles.

The Company has in place a strong management team led by CEO Roger Patkin, who will operate separately as a 100% owned subsidiary, [AV] Advance, under its existing Autopart International brand.

We look forward to leveraging off AI's knowledge of the commercial business while we provide them the benefits and the scale that a larger organization like Advance brings to the table.

AI is solidly profitable and the all cash transaction comfortably met our 15% after tax IRR hurdle.

Keep in mind that we owned AI for only three weeks of the third quarter.

Under Roger and his team's leadership we look forward to the sales and profit contributions AI will bring in the future as it continues to grow and allows us to gain a larger portion of the huge commercial market that is available to us.

During the third quarter we added 73 new commercial programs to our Advance stores, bringing the total number of Advance stores with commercial programs to 2,145.

Today nearly 78% of our Advance stores have commercial delivery programs compared to 73% at the same time last year.

We continue to target commercial delivery programs in 85% or more of our stores over time.

Our commercial sales as a percent to our total sales was 22.3% for the quarter compared to 18.8% in the same quarter last year.

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

Including AI, we're now on a run rate to exceed $900 million in annual commercial sales in 2005, moving us up to the number three position in this business behind only NAPA and CARQUEST.

As a result, we now believe we'll achieve our goal of $1 billion in commercial sales in 2006, a year earlier than we originally expected.

We believe we have tremendous potential in each of our markets to grow our share of the commercial business very profitably.

Keep in mind that as strong as we've grown this business over the past several years and even with AI, we still command less than 2% market share in what is still a highly fragmented industry.

On the commercial front we also rolled out a new outsourced commercial credit program during the quarter.

Our new provider partner offers an expended range of credit solutions to our commercial customers.

These include extended payment terms, expanded credit lines and other features that our local garage customers find attractive.

We believe this is the best in class program and gives us another tool to help distinguish Advance in the DIFM channel.

As Mike mentioned earlier, we believe we're 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 the 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 third quarter we added 121 stores, including the acquisition of 19 Lappen stores and 61 Autopart International stores, bringing our total store count to 2,829.

For the first three quarters of the year we've added 183 stores, including the 80 acquired stores, and closed 6.

For the year we continue to expect to open 160 to 170 new Advance stores, including the 19 Lappen stores being converted to Advance, which will result in 6% to 7% organic square footage growth for the year, a pace that we believe is sustainable for the foreseeable future.

The 61 AI stores we acquired in the third quarter are incremental to these figures, so our actual square footage growth this year will be more like 8% to 9%, inclusive of the acquisition, and will total 220 to 230 stores.

We'll continue to evaluate acquisition opportunities as they arise, including both tuck-in opportunities like Lappen and commercial opportunities like AI.

Meanwhile, organic new store growth remains our top priority, especially as our new store productivity continues to improve.

Our new stores are now achieving first full year sales in excess of 1.1 million, which compares to 900,000 in 2001and $1 million in 2003.

Our enhanced site selection process, our 2010 format, our national advertising campaign and clustering stores primarily in existing markets, continuously improve the productivity and rates of return of our new stores.

During the third quarter we also relocated 12 stores and 44 for the first three quarters of the year.

For the full year we're now on track to relocate at least 55 stores this year, or approximately 2% of our store base, surpassing our goal of 50 relocations.

Store relocations remain a key part of our program to upgrade our store base and, with this high level of annual relocation activity, we ensure our stores are optimally located for the long-term as our markets grow and change.

We're handsomely rewarded when we invest or reposition a store to a superior location.

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

For the first three quarters of the year we've remodeled a combined 165 Advance and former Discount Auto Parts stores.

So if you add up the number of new stores we added plus existing stores that we remodeled to 2010 plus the stores we relocate, we're effectively added 2010 stores at a mid-teen's rate each year.

At the end of the third quarter we had a total of 1437 stores with the 2010 format or 52% of our Advance stores.

We intend to remodel the remainder of the chain 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 our increasingly vibrant young store base will be a key driver of our sales growth for many years to come.

As Mike mentioned, I'd like to give you a high level sketch of our store growth plans for the upcoming year.

Again, we continue to view 6% to 7% square footage growth as a reasonable objective and we also plan to continue on our current pace of 200 to 250 remodels and 50 relocations in 2006.

Now, let me turn the call over to Jeff Gray to 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 statement.

For the third quarter our gross margin increased to 47.2% compared to 46.8 last year.

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

As Mike mentioned, due to warmer weather, strong sales within some lower margin categories, such as air conditioning related products, including freon, affected our margin percent a bit, margin dollars were strong.

Our new distribution center in Pennsylvania, which opened in March, continues to be a source of cost improvement to the optimization of ton miles to our stores in the northeast.

During the third quarter our SG&A expenses were flat,as Mike mentioned, compared to last year's third quarter as we managed our expenses while continuing to invest in our business for the long item.

Despite the business disruption caused by two major hurricanes and continued higher energy and fuel costs, we maintained our SG&A percentage.

Our SG&A performance reflects strong comps generating leverage on fixed costs.

Offsetting our leverage were higher team member incentives compared to last year's third quarter when we produced only 3% comps.

In addition, last year's third quarter SG&A rates reflect aggressive expense management associated with the softer sales environment which included four hurricanes hitting Florida and the southeast.

Third quarter operating margins rose to a record 10.3% compared to 9.9% in last year's quarter.

Interest expense net of interest income was 7.3 million in the quarter, up over the prior year due to higher interest rates and higher average outstanding debt levels.

As many of you know, we have executed interest rate swaps that effectively fix our interest rate exposure on approximately 45% of our debt.

The remaining 55% of our debt is subject to higher interest rate costs with each hike in benchmark rates.

With that said, last week we were pleased that Moody's Investor Services rewarded our improving financial strength with a ratings upgrade.

This upgrade will reduce our borrowing cost by 25 basis points across all of our long-term borrowings, including the hedge portion.

As most of you know, in August our board approved a new $300 million share repurchase program which replaced our prior plan that had nearly been completed.

During the third quarter we purchased 491,000 shares of our stock for 19.6 million at an average price of 39.80 on a split adjusted basis under this new program.

Cumulative since last summer we have repurchased approximately 7.5 million shares of our stock for a total of 208.7 million at an average price of 27.75 per share on a split adjusted basis.

For the fourth quarter we expect our diluted share count to be approximately 110.5 million.

Earnings per diluted share for the third quarter were $0.55, an increase of 22% over last year's $0.45.

For the first three quarters of the year sales rose 13%, while operating income expanded from 9.2% in the first three quarters last year to 10.2% this year.

And diluted earnings per share were $1.78, a 30% increase over the $1.37 the same period last year.

In terms of key components to the balance sheet and our cash flow statement, our inventory rose 15.1% year-over-year.

Excluding the impact from the Autopart International acquisition, inventory increased 12.7% on a 14% sales increase resulting in improved productivity.

Due to the timing of the Autopart International acquisition, we acquired 28.6 million of their inventory while only recording sales for the three weeks since the acquisition date.

Our accounts payable inventory ratio improved to 56.6% including AI, compared to 53.3% last year.

Our vendor financing program currently has 117.7 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 our vendor financing program.

The preliminary purchase price allocation of the two acquisitions completed in the quarter resulted in an increase in goodwill of 51.6 million.

As Jim mentioned, during the third quarter we converted our private label commercial credit card portfolio to a new third party provider.

This conversion has resulted in a reduction to both accounts receivable and other current liabilities on the third quarter balance sheet.

Our total debt at the end of the quarter was 446.2 million and our debt to cap ratio was 32.8%, which compares to 32.5% a year ago.

CapEx for the quarter was 39.6 million as compared to 38.2 million last year.

We expect CapEx to be in the range of 200 to 220 million for the fiscal 2005 year, consistent with our previous guidance.

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

Adjusting for acquisitions net of our credit card conversion, free cash flow year-to-date was 202.4 million, compared to 137.4 million in the comparable period last year due to the strength of our business and continued improvements in our working capital management.

We continue to expect free cash flow for the year to be in the range of 150 to 160 million due to the seasonal nature of our business as well as the planned 40 to 60 million in capital expenditures for the remainder of the year.

At the quarter end our cash balance has stood at 112.7 million, significantly higher than a year ago, which we expect to moderate as it normally does during the fourth quarter.

In terms of using our cash, our strategy continues to be investing back into our business subject to our 15% after tax hurdle rate.

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

Our strong balance sheet provides us with a flexibility to accelerate our growth, reinvest in our business and return capital to shareholders.

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

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

Thanks, Jeff.

Before we open up the floor to questions this morning, we would like to reiterate our commitment to growing our sales per store and improving our operating margin by leveraging our gross margin as well as SG&A expenses.

Finally, I would again like to reiterate my thanks and my pride in all of our team members for their heroic efforts before, during and after the hurricanes.

We are now ready for questions.

Operator?

Thank, sir.

Ladies and gentlemen, if you wish to ask a question, please key star followed by one on your touchtone telephone.

If your question has been answered and you do wish to withdraw that question, please press star, two.

Again, ladies and gentlemen, it is star, one for any questions that you have at this time.

Our first question comes from the line of Alan Rifkin with Lehman Brothers.

Yes, congratulations, gentlemen, on a great quarter in a tough environment.

Couple of questions.

With respect to the 2010, Mike, can you maybe elaborate an the performance of the 2010 stores versus the rest of the chain, how the class of '05 is doing in their early days compared to the same point in time for, let's say, the class of '04?

I think we continue to see the same results that we've talked about earlier, Alan, is that we get a sustainable 10% lift in the sales base of those stores and then they tend to grow to accelerated comp rate versus the rate they're running prior to the remodels, when we do these on a market-wide basis.

And I know you spoke about your slight disappointment with not getting leverage on the 10% comp.

Where do you think, at this point in time your comps need to be for you to gain some leverage going forward?

Again, Alan, I think we've consistently said it depends on what we want to invest in.

Obviously this quarter we felt comfortable in investing, for example, more in advertising than we did last year.

In the fourth quarter we're projecting mid-single digit comps and we also feel comfortable we'll see leverage.

It really depends on some, certainly some external conditions as well, but on how much we really want to invest for the future.

And one last question, if I may.

As you go back and kind of look at your commercial business, obviously you continue to have a terrific gains there on top of terrific gains last year.

Where --you know, have you guys done like an analysis as to where you think those incremental commercial sales are coming from, from which competitors, per se?

Alan, this is Jim.

Certainly I think, as we've talked about, the commercial businesses is far more fragmented even than the DIY side of the business, so certainly I think the vast majority of our gains are coming from all of that fragmentation that's out there.

And that commercial side of the business, in some ways, is going through the same process as DIY has in the past.

And I think there is certainly no specific competitor, but just generally the opportunity to gain market share in a very fragmented market.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question comes from the line of Jack Balif with Midwood Research..

First just a small question, what was the comparison in the LIFO charge or credit this quarter compared to a year ago?

Jack, this is Jeff.

The LIFO credit this quarter was nominal.

It was basically flat year-over-year.

In the prior year we took a $2.9 million favorable, or credit, charge to the income statement.

Oh, okay.

When you were mentioning a 15% ROI on the AI acquisition, was -- technically does that mean are you getting 15% on the cash acquisition cost?

Yes, Jack, that's correct.

Wow, that's--and can AI expand in terms of its own separate niche going ahead in the future?

We believe so.

Certainly we're very early in the planning and Roger Patkin and his team are working through what they need to do to continue to grow the business going forward.

But certainly it, again, reflects our belief that in spite of the progress we made in the commercial business with Advance, there is still just a tremendous opportunity out there and there is other avenues that are available to us to continue to grow that portion of the business and AI, I think, is certainly one of those opportunities.

So a store that is almost 100% commercial can be profitable compared to a store that's just partially commercial.

That's correct.

And, again, the focus there is they are able to locate and operate their stores with that commercial focus, so certainly things like occupancy cost and those types of things are certainly a smaller cost factor than they are for retail stores.

And their business model and their service level allows them to achieve a very attractive level of total sales in those stores.

The jobbers that they distribute to, who are the jobbers' customers?

Typically the jobbers' customers would be local garages and other types of customers out there that are doing work.

But, again, just to clarify, the stores that they run are distributing directly to garage-type customers.

Their North American sales division, which is a distribution business, is distributing to jobbers who then distribute to garages and other types of customers.

Are those other types of customers and garages your customers, too, in your commercial delivery departments?

There could be in some case.

Certainly the potential to have some overlap there.

But, I think more importantly, as you look at the commercial business, Advance has a model that allows us to very attractively and profitably service the independent garages out there and a commercial business like Autopart International, whose entire focus is on commercial, is able to attract even a commercial customer that is bigger and end up more commercial business.

So we -- when we look at our total share, which is as I mentioned is less than 2%, there's just a ton of business to be done and we're certainly not in each other's way.

Okay.

Just one last question regarding the impact of hurricanes and that is, what is your experience post-hurricane, when it's over and your stores are operating, in terms of deferred demand that might temporarily boost sales more than normal after a hurricane is over and to what degree would that happen and over what period of time?

Well, Jack, again, we've had a lot of experience last year.

Certainly the quarter after the hurricane we tend to see a noticeable increase in comps.

And really for about a year after we see some uplift in comps that not only is it pent-up demand but there's generally more economic activity which helps our lower-income customer.

Thank you very much.

Thank you.

Our next question comes from the line of Cid Wilson with Kevin Dann & Partners.

Congratulations on a very strong quarter.

Good morning, Cid.

A couple of questions.

With regards to your anticipation for 6% to 7% square footage growth for next year, is it still reasonable to assume that most of those stores will be in the northeast or can you give us some idea of some guidance, as it where, geographically where you plan on opening stores.

The stores, again, will be in the 40 states that we currently operate in and they will be spread all over those 40 states as we fill in different markets.

Having said that, a greater percentage of the stores will continue to be in the northeast and out through the midwest in the states that we're still have, by far, the smallest market share and the greatest opportunity to fill-in and increase sales and profitability.

Okay.

And with regards to the conversions to the 2010 stores, are you noticing any changes at all in terms of the cost of converting these stores or they still pretty much consistent?

There has not been a significant cost.

Certainly there has been some increases in construction costs that have occurred over the past couple of years that flow through the 2010 remodels as well.

But generally the cost has stayed basically in line with where it was before.

Okay.

And then my last question is that any -- you know, given your new debt rating and you mentioned some cost savings, any other opportunities in terms of cost savings on interest or financing opportunities?

Well, Cid, we continue to look at that and, as you know, we just refinanced our debt late last year and continue to look at those opportunities and there may be some out there for us, but nothing in the short-term here for us.

Okay.

Thanks and congratulations.

Thank you.

Thank you, sir.

And our next question comes from the line of Danielle Fox with Merrill Lynch.

Thanks, good morning.

Good morning, Danielle.

I have a couple of questions.

First, I was wondering if you could just comment on the pricing environment and what you're seeing competitively.

You mentioned there was volatility during the quarter and higher fuel prices are putting a little bit of pressure on your customer.

You're able to offset it with initiatives but are you finding that you need to be more promotional to do so?

Well, Danielle, I think the pricing environment is stable.

All of our competitors and ourselves are faced with similar issues.

The good news in the industry, generally, when we receive an increase, we're able to pass that increase through with our normal margin.

Some cases, like 134A, the cost increases were very significant and we didn't pass through our full margin percent.

But we're generally able to recover that.

I think there is rationality with the rest of the pricing based on what's happening with our costs.

Okay.

Great.

And then second question, just you mentioned a number of times that the hurricane had an impact on SG&A.

I was wondering if you were actually able to quantify the drag from store closings and disruption?

Well, it's always different to try and do that, especially this last hurricane which, again as we mentioned in the call, affected the--our energy costs and that had a significant impact across the whole Company.

The good news, as we said though, is that is starting to mitigate and we're seeing energy costs come down dramatically, gasoline, in particular, this week is coming much back to more rational levels.

Okay.

Great.

And just a final question is whether or -- I know that the number of acquired stores relative to your entire store base is not tremendous, but it was a large percentage of the stores that were opened in the quarter.

So I was wondering if there was any actual EPS impact in the quarter from the acquired stores?

This is Jim.

It would be very minimal because of the timing and the size of those acquisitions relative to our total base.

Certainly there are some costs but they would be minimal.

Okay.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from line of Gary Balter with Credit Suisse First Boston.

Thank you and I want to extend my congratulations on a great quarter in what's a difficult environment.

Mike, one of the things that may be helpful for us is you spend a lot of time talking about how your customers buying more out of necessity and that's why gas prices haven't had much of an impact.

Could you help us kind of quantify that?

We've watched -- if you can, like we've watched gas pricing go way up and then come back down.

On this call you sounded a bit more comfortable than you did on the previous call in terms of not having much of an impact from gas pricing.

How do we measure?

What would your view as kind of within your sales as incremental purchases?

I think part of it is real and part of it is psychological.

Last year, if you recall, when we got into the last four weeks of our second quarter, gas prices went up radically and I think through our lower-income--our income customer as well as Wal-Mart's and many other customers, really for a big impact, I think customers have come somewhat immuned to this, although certainly what we saw after the hurricane affected us.

The good news, I said, Gary, it looks like gasoline prices are mitigating and certainly over time the data has shown, as we annualize these increases, the negative effect disappears.

Is there a way to say like, you probably won't answer this anyways, 20% of your business is that incremental that gets hurt and the rest is necessity so it doesn't get impacted on gas.

It is very, very difficult to quantify because, again, some of this is psychological impact.

If gasoline prices stay high, failures continue, batteries don't get better with age, as we've said many times, and things will fail at an increasing rate.

And customers have to come to us and get a lot of this stuff done.

And, Gary, as we said in the past, about two-thirds of our product mix are catastrophic type stuff that there's not really discretionary when the battery goes out.

To give you some range of what's out there.

And, Gary, I think part of our strength of our commercial approach to the business is those tend to be somewhat higher-income customers.

So that does give us some cushion when gasoline prices affects our DIY business, our commercial business tends to stay pretty strong?

Have you been surprised -- your commercial business has been on fire now and you've mentioned that it sounds like it is going to continue to be really strong.

Have you been surprised by how successful it has been?

Gary, this is Jim.

I wouldn't say we've been surprised.

I would say we have been pleased with what we've seen.

We have, as we put together our commercial program for growth and we started to roll it out, our team has had just a tremendous amount of success with the customers that we've identified that we can service best.

And we can go out and we carryout our program and we provide them the parts, we get there quickly, we have credibility when we take the calls from the garages.

And the business is there and we've been very successful moving up the curve with our customers.

So again I think it reflects several things.

It reflects first of all that we've got a very disciplined program for growing it.

Secondly, it reflects what a great job our team has done implementing that program.

And then thirdly, just the amount of opportunity there is out there in the commercial business that we have yet to fully take advantage of.

That is great.

Congratulations.

Good luck in your next quarter.

Thank you, sir.

Our next question comes from the line of Matt Fassler from Goldman Sachs.

Thanks a lot and good morning.

Couple questions I'd like to ask.

First of all, if you were to think about the hurricanes, obviously we've had two very peculiar and very difficult late summer, early autumn seasons, if you were to think about the hurricanes last year and the impact that they had, the drag they had on your business, if you will, while they struck relative to the benefit that you saw from rebuilding and compare them to your experience and expectations for the storms that we saw in 2005, how would you, if there's a way to measure kind of the anticipated net impact, how would you characterize that?

I think if we look at the hurricanes that hit Florida last year, although they were severe, the fundamental infrastructure of the state stayed in place pretty well and we were able to recover and, again, I think we saw sales come back pretty strongly in the fourth quarter.

Really, the three hurricanes this year were very devastating.

Obviously, Katrina has relocated an awful lot of customers to different geographies.

To Wilma, that I don't think has got enough press, has been really a very devastating storm for Florida and we're anxiously waiting to get our large number, relatively large number of stores reopened that we did not have that kind of impact with last year.

So I think these were a little bit more devastating and disruptive this year.

That being said, I think we'll see some pretty good upside as we get into the fourth quarter and first quarter of next year as well.

Understood, thanks for that.

A second question I guess I'd like to ask, you talked about you sort of implied when you were answering Gary's question, that the DIY business was the business that showed more volatility as you went through the third quarter.

Obviously, you started out at a very high level, you've moderated through the quarter.

You talked about mid-singles.

Would you say the commercial, if we're to try to look at the businesses, the two businesses separately, is the commercial business maintaining kind of a similar trajectory such that most of the deceleration is on the DIY side?

It's balanced pretty much, Matt.

I think, again, when you look at the third quarter of last year and the fourth quarter of last year, the fourth quarter comps overall were significantly higher than the third and that was reflected in both DIY and commercial.

This year, when we talk about mid-single digits versus the third quarter of this year, both segments of the business would be affected by that.

So commercial as a percent comp would probably be somewhat less in the fourth quarter than it was in the third quarter, as well.

Got you.

And finally, just a third final question, Jim, related to AI, obviously the mix of business there is tilted dramatically more towards commercial.

As we model that out, I know it barely touched Q3, as we model it out for the next several quarters, just want to confirm that we should think about the sales really being directed towards commercial and that is skewing the mix a bit more than we would see.

And also that the sales don't enter into the comp base until you cycle that deal?

That's correct.

As we said when we first announced the acquisition, the overall results of AI will not materially affect our combined results certainly here in the shorter term, including the fourth quarter.

We'll talk more about that as we give 2006 guidance in terms of how it will affect 2006 and beyond and what the growth plans are.

You're right in that those stores would not be in the comp.

Got you.

Thanks very much.

Thank you, sir.

Thank you sir.

Ladies and gentlemen, we do have time for one final question today.

Our last question comes from the line of Bill Sims with Citigroup.

Thank you very much, good morning.

Two questions, if I may.

One is can you clarify your footage growth guidance, you provided 6% to 7% footage growth, is that pure organic or does that include any acquisitions in that guidance?

Typically, the way we look at that as we plan, and again I'll talk about 2006 as an example, we're talking about 6% to 7% Advance Auto Parts store growth and we start out the year by planning that that will be most, if not all, organic growth.

If we see an opportunity that comes along from a tuck-in acquisition standpoint, we will evaluate as we go through the year and that might be incremental to our 6% to 7% or it could be partially included in the 6% to 7% depending on the timing and how things fall.

So generally the 6% to 7% would be a total growth figure which we certainly would expect to meet, if not exceed.

If you were to find an acquisition towards the end of the year, do you pullback potential organic store growth in place of the acquisition or does the store plans that are in place continue to open at the same rate?

It depend completely on the circumstances and the number of crews we have out there opening stores and timing and all those types of things.

But I will say our organic store pipeline is very good finishing this year going into 2006.

We feel very comfortable making the commitments we've made from a 6% to 7% square footage growth and if we do a tuck-in acquisition, or more next year, certainly there's a good chance that some of that would be, if not all, would be incremental to the total.

My second question is, is it possible to rank the SG&A impact from higher fuel costs, hurricane costs and the incentive payment plan?

That is really tough to do.

I think that, obviously, fuel and energy costs were very significant to us in the quarter compared to last year.

I think team member incentives, just given the strength of our quarter this year versus last year, was fairly impactful quarter to quarter as well.

And then the hurricanes, it's hard to pinpoint that.

Mike touched on that earlier.

They were very disruptive in the back half of the quarter when we were paying team members that weren't working and some other things that got us through the quarters.

So it is hard to rank them in priority.

I think that all of those were fairly significant hits for the quarter.

All right.

Thank you very much.

Congratulations.

Thank you, ladies and gentlemen, we look forward to speaking with you on our next call in February.

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.