領先汽車配件 (AAP) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Advance Auto Parts fourth quarter and year end 2005 earnings conference call.

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

You may go ahead, Mr. Bergman.

Thank you.

Good morning, everyone, and thank you for joining us to 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 re locations, comparable store sales, sales per store, operating margin, free cash flow, stock option expense, capital expenditures, tax rate, share count, cash dividends, and earnings per share for the first quarter and fiscal year 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, dependency on foreign suppliers, acts of terrorism, 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 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 8-K filing, which are available on our website at www.advanceautoparts.com.

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.

Also for planning purposes, our first quarter 2006 earnings release and conference call are both scheduled for the morning of Thursday, May 18th, 2006.

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

With that I would like to now turn the call over to our President and CEO, Mike Coppola.

Mike?

Thanks, Adam.

Good morning and welcome to our fourth quarter conference call.

Joining me on our call today are Jim Wade, EVP of Business Development; and Michael Moore, who recently joined us as our CFO.

I would like to extend official welcome to Michael.

Some of you already know Michael and have been as impressed as we are with his very experienced background, both in accounting and finance disciplines, as well as in operational areas of retail.

During his 30-year retail career, Michael has served in a variety of management positions for small start-up companies as well as large, mature retailers.

His experience will be invaluable to us and I am confident Advance now has the right senior executive team in place to take our Company to the next level of performance.

Switching to our results, let me begin by thanking our team for the hard work they've but in to achieve another quarter and another year of record performance.

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 6.3 same-store sales increase for the quarter: this on top of a 9.7% increase in last year's fourth quarter, a healthy result, especially as viewed on a two-year basis.

For the quarter we achieved earnings per diluted share of $0.36, a 24% increase in EPS compared to the $0.29 we earned in the same quarter last year.

This is the top end of our guidance range of 33 to $0.36.

For the quarter we showed continued gross margin improvement.

I am a bit disappointed that we did not show SG&A leverage.

While some of the headwind in SG&A is a function of our plain investments and strong return projects, like adding advertising and commercial programs to our stores to help drive sales for the long-term; however, some of this quarter's SG&A performance was driven by other items, including higher fuel and utility costs, expenses related to our CFO change, and changes in tax-related expenses among others.

Michael will discuss some of these in greater detail later in the call.

Importantly, we remain committed to further improve both our gross margin and SG&A going forward.

We already have specific initiatives in place to achieve those goals.

Our industry dynamics remain strong, continuing to drive solid underlying demand for products that we sell.

As we mentioned in last quarter's call, we believe there are very few discretionary miles being driven in the United States, and the latest government data supports that view.

After a brief shallow dip following Hurricane Katrina, miles driven for the most recent months are higher year-over-year and are again positive year-to-date.

Gas prices are still significantly higher than a year ago.

Nonetheless, we have achieved strong results in spite of these high gas prices, which reflects a number of important factors.

Aside from the non-discretionary nature of most miles driven and our ability to sell customers products that enhance the fuel economy of their vehicles, we saw solid contributions for a number of these initiatives that we've talked about in previous calls.

Our commercial business continues to show significant growth and our DIY business produced a very healthy 4.8% comp increase for the year, which is among the best in all retail.

And I am pleased to report that a number of new initiatives we've launched in 2005 are contributing to our success as well.

We continue to see tremendous opportunities to grow both our DIY and commercial business.

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

We're gaining solid market share in both segments of our business.

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

Raising average sales per store in and of itself is helping us drive the other three metrics and we continue to make excellent progress in that regard.

We will achieve our long-term goal of growing our DIY comps by continuing to differentiate ourselves in many ways in the eyes of our customers.

This is simple in some respects but challenging in others and ultimately depends on excellent execution at every store.

The look of our stores is one of the compelling statements we make to our customers.

We continue to make good progress toward our vision of having all of our stores converted to the innovative 2010 look.

This store design helps us fulfill our promise to our customers, taking great merchandise and displaying it with high impact in a format that customers find easy to shop.

Our team members also find these stores easier to work in because of better product adjacencies, ease of getting out from behind the counter to assist customers, and fewer footsteps needed for basic activities such as selecting and stocking merchandise.

In the fourth quarter we completed remodeling all of the former Discount Auto Parts stores in Florida.

I am pleased to to say that since acquiring Discount we made significant progress within these stores financially, as well.

Kudos to our entire team for such a remarkable job.

Our category management process also continues to help differentiate Advance in the marketplace.

We've made good progress in this regard over the last few years, but it's a never-ending process to make sure we're continuing to meet customer's expectations.

Within our stores we have made excellent progress toward our goal of improving our store in-stock position.

In the fourth quarter we improved upon last quarter's record store in-stock level and I would like to thank or logistics, replenishment, and merchandising and operations teams for a job well done and challenge them to maintain our in-stock percentage at our current record levels.

This enables us to provide legendary customer service with the product customers want on hand.

In addition, with in-stock now at solid sustainable levels, our store teams are focused on other operational areas where they can make a positive difference, whether it is improving merchandising, shrink control, or labor management, all to maximize customer satisfaction.

One of the areas where we believe we can drive significant improvements in efficiencies by fine tuning our standard operating procedures, an example of which is our truck put-away process, where our expectation is that all merchandise received on the store's weekly distribution center delivery will be put on the shelf within 24 hours of delivery.

As we've mentioned before, we measure these blocking and tackling metrics to drive strong results long into the future.

We've still got plenty of room for improvement in many areas of the Company and that's why we continue to have great confidence about the future.

Likewise, we continue to focus on recruiting, training, supporting, and retaining high performance team members, especially those that are ASE certified or bilingual.

We need more of these team members because they speak the customers' language.

This remains a high priority for us in 2006.

We have also implemented a number of programs to better motivate and reward our team members for providing legendary customer service.

One example of this implementation is the implementation of the successful incentive, or SPIF program, for the sale of premium products.

This encouraging our team members to be knowledgeable about the features and benefits of premium product parts and share this information with their customers to determine whether a premium part is appropriate for the customer's vehicle application.

These products typically retail for more than the basic product because they carry longer warranties and/or have an advanced performance characteristics, making them a win for our customers, a win for our team members, a win for our vendors, and a win for our Company.

Beyond the implementation of our initiatives, many of you are aware of the very strong fundamentals that are providing tailwind to our business.

It's tempting to over-complicate, but the simple reality is that older vehicles have a greater need for replacement parts and the average age of vehicles on the road today is at a record high at roughly 9.5 years compared to 8.5 years just a decade ago.

A recent report by the federal government confirms this, showing an increasing number of passenger cars are now surpassing 150,000 miles, while SUVs and pickups are exceeding 180,000 miles, due to better engineering and quality control.

Within this overall vehicle data there are large pockets of vehicle population that are particularly profitable for us.

For example, SUVs and pickup trucks that were sold in the mid- and late 90s are reaching their high repair cycle.

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

Put simply, there are more vehicles on the road that contain more parts than ever before, being driven greater distances, resulting in terrific dynamics for our industry.

In addition, the pipeline of vehicles not yet in our sweet spot for repair is also strong. 2005 was the third strongest year on record for new vehicle sales.

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

Specifically, in 2006 we are targeting earnings per diluted share in the range of 2.37 to $2.47, which includes approximately $0.12 of stock option expense.

For comparative purposes, 2005 GAAP EPS of 2.13 do not include $0.09 of stock option expense.

Our path to achieve our EPS goal is to drive mid-single digit or better comps and continue improving gross margin and SG&A.

For the quarter we're targeting EPS in the range of $0.68 to $0.71, inclusive of approximately $0.03 of stock option expense.

For comparative purposes, EPS of $0.63 in the first quarter of '05 do not include $0.02 of stock option expense.

Our guidance is predicated on a mid-single digit comp assumption, a slight improvement in gross margin, and flat SG&A after stock option expense.

Through the first six weeks this year we are running low single-digit comps against 14% comps in the same six weeks last year.

For the ten weeks remaining in the quarter, however, we expect to run high single-digit comps against 7% comps we ran in the same period last year.

Also, keep in mind that in the first quarter of 2005 we experienced strong gross margin growth.

Our margin comparisons ease as the year progresses.

In summary, we've made solid progress toward our four key goals in 2005 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 now at record levels for us; generating strong free cash flow and deploying it appropriately; increasing ROIC, which continues to march steadily higher; and continuing to develop our team to enable us to accomplish these goals.

Advance has always worked on developing a great culture with the objective of becoming an even more highly productive organization.

Advance has come a long way in terms of financial performance in our four years as a public company, yet we have much left to accomplish in order to meet our longer term goals.

Now, Jim Wade will first take us through a review of our sales and store growth.

Jim?

Thank you, Mike, and good morning.

I will start by reviewing in more detail [technical difficulty] achieved by our team in the fourth quarter in 2005 year.

Again, we believe the combination of solid industry fundamentals and the execution of our key initiatives produced our continued solid sales growth.

For the full 2005 year, our sales rose 13.1% on a comparable store sales increase of 8.7%, and that was our best comp performance as a public company.

This comp increase was on top of a 6.1% increase in 2004.

For the year our DIY comps rose 4.8% while commercial comps were up 25.2%.

For the fourth quarter, our sales rose 13.5% compared to last year's fourth quarter.

This figure includes Auto Part International, which was included in our results for the entire fourth quarter and contributed 25.6 million to our sales growth.

Comparable store sales increased a healthy 6.3% over our 9.7% increase in the same quarter last year.

In the fourth quarter we achieved solid increases in both DIY and commercial comps in the quarter, with DIY producing 3.1% comps.

That was on top of a 5.6% increase in last year's fourth quarter.

And Commercial produced a 19.4% comp, and that was on top of 29.7% in last year's fourth quarter.

Our fourth quarter comp increase, while lower than the increase for the 2005 year in total, was actually higher on a two-year basis.

Regarding the initiatives that Mike discussed, our store teams continue to execute well and we're achieving both a higher customer count as well as increased average transaction.

Our average ticket size is growing for a number of reasons, including our growth in Commercial, which has a higher average ticket, selling complete solutions to our customers, and raising our balance of sale and premium parts.

And many of our initiatives, including monthly DIY clinics as well as our Commercial programs, focus on increasing our customer count.

We continue to experience solid comps across all areas of our Company in the quarter, all achieved in our core automotive parts and accessories categories.

In regard to our Commercial program, our team continues the disciplined execution of our commercial plan.

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

These garages need access to a wide selection of inventories such as ours to serve their customers.

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

During the quarter we added 47 new commercial programs to our stores, bringing the total number of Advance stores with commercial programs to 2,192.

For the quarter our commercial sales as a percent of our total sales was 21.8% compared to 19.3% in the same quarter last year.

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

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

Meanwhile, even within the stores that have commercial programs, we see hundreds of opportunities to add additional delivery trucks to better support and grow these existing programs.

Also, keep in mind that we've added approximately 800 of our total 2,192 commercial programs over the past four years.

We have ample history to know that as these relatively young programs move up the maturity curve we'll continue to grow our business.

The vast majority of garages purchase parts from multiple sources and as we've added a significant number of new commercial programs over the last few years we've had good success establishing ourselves in these markets.

Initially our customers often try us for certain brands that we offer.

These represent great opportunities for us to satisfy their needs and earn our way up their call list.

By becoming a more significant supplier we deepen our relationship with our customers, which is a win-win proposition.

The more a customer buys from us, the more we can offer them in terms of service and pricing.

These opportunities and the opportunity to continue adding commercial programs to existing stores are what gives us such confidence that our commercial business can continue growing at the double-digit levels we've articulated in our prior calls.

Including Autopart International, which we acquired in September, we eclipsed $900 million in annual commercial sales in 2005.

As we mentioned on last quarter's call, we believe we'll achieve our goal of $1 billion in commercial sales in 2006, a year earlier than we originally expected.

But keep in mind that as much 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's still a highly fragmented industry.

As Mike mentioned earlier, we also 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 the key driver of our strong sales growth and profitability and will continue to be in the years to come.

During the fourth quarter we opened 48 new stores and closed five, bringing our total store count to 2,872.

For the year we added 231 stores consisting of 151 new and 80 stores acquired through the Lappen and AI acquisitions.

We also closed 11 stores for the entire year.

This resulted in a total store count increase of 8.3%.

In 2006 we expect to open 170 to 180 new Advance stores, consistent with our expectation for 6 to 7% organic square footage growth for the year, a pace that we believe is sustainable for the foreseeable future.

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

Any acquisitions completed in 2006 will likely be on top of our guidance for 170 to 180 new stores.

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

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

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

At the end of 2005 all but 7 stores closed as a result of hurricanes Wilma and Katrina had reopened.

We anticipate four of these stores will reopen in the first half of 2006 and we'll continue to evaluate the remaining three stores, which are located in the New Orleans area.

Meanwhile, our stores in the surrounding areas are benefiting from population shifts and achieving strong results.

During the fourth quarter we relocated 10 stores and 54 for the entire 2005 year.

These relocations are perhaps under-appreciated in terms of their significant contribution to our performance.

With our relocation program we're strategically assessing our entire store base and evaluating where we have older locations where the market may have changed.

By relocating about 50 stores per year and reopening as brand new freestanding locations, we're essentially taking 50 of our stores that had limited upside potential and repositioning them with a new long-term growth curve.

On a cumulative basis, over the past five years or so, we've done this with about 10% of our store base.

We see these as low risk, high return investments that we'll continue to make.

During 2005 we also remodeled 189 Advance and former Discount Auto Parts stores to our 2010 format.

As we've discussed previously, we are remodeling all of the stores in a particular market, then re-grand opening the entire market and that market will typically respond with a double-digit sales gain in its first year post-conversion relative to preconversion.

These remodels have an impact on our SG&A in the year they're completed, but generate a healthy return on investment over their life, which achieves our 15% after tax internal rate of return hurdle.

At the end of the year, we had a total of 1,531 with the 2010 format, or more than 54% of our Advance stores.

With the 200 to 225 remodels we have scheduled in 2006, along with new stores and relocations, well over 60% of our stores will have this format at the end of 2006.

We believe our current pace is sustainable for the foreseeable future and it is part of what differentiates us in our customers' eyes.

We'll continuing remodeling our stores until the entire chain features the 2010 format.

Now let me turn the call over to Michael Moore to further review our financial results.

Thanks, Jim, and good morning.

It is a pleasure to be here and I look forward to getting to know each of you in the months and years ahead.

I am very pleased to be joining such a well-run company with a solid financial position.

Let me turn to our fourth quarter financial statements.

For the fourth quarter, gross margin increased to 46.7% compared to 46.4% last year.

This 30 basis point improvement was driven by our category management and supply chain initiatives.

Two items on the gross margin line are worth expanding on.

In the quarter, our warehousing and distribution expense was favorable to last year.

Our new distribution center in Pennsylvania, which opened in March 2005, has reduced the cost of delivering merchandise to our stores in the Northeast.

We continue to see opportunities for further improvements in our logistics network, which should improve our gross margin rate in the future.

As most of you know, Advance uses LIFO inventory accounting.

In the fourth quarter we recognized a $4.5 million LIFO charge compared to a $4 million credit last year in the fourth quarter.

This reflects cost increases in some commodity product lines such as oil and antifreeze.

Although this increased our cost of goods sold, we were able to increase our retails in these product categories in order to maintain our normal gross margin rate.

We view fourth quarter as an exception.

In 2006 we continue to anticipate cost deflation as we have generally experienced over the last ten years.

The SG&A expense rate for the quarter was flat to last year.

While expenses related to our self insurance programs were lower than last year, there were several items that increased our SG&A rate.

In the quarter we experienced higher fuel and utility costs, which we expect to continue going forward.

Depreciation increased compared to last year's fourth quarter, reflecting additional new and remodeled stores.

Costs associated with the CFO change increased G&A in the quarter.

Also we had increases in tax-related expenses, primarily personal property, real estate, and franchise taxes.

And lastly, we invested funds in additional commercial delivery programs, additional store remodels to our 2010 format, and additional advertising.

We expect to see strong increases in sales and operating income as these programs mature.

On a total sales increase of 13.5%, operating income dollars increased 18%.

Our fourth quarter operating margin rose to a record 7.3% compared to 7% last year.

Interest expense, net of interest income, was 7.2 million in the quarter versus 7.5 million last year.

Interest expense was up, due to higher interest rates and higher average outstanding debt levels, but was more than offset by refinancing costs of 2.8 million last year.

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 costs.

We continue to view this relatively low cost debt as playing an important part in our over all capital structure.

We continue to amortize about $32 million of principal per year, resulting in improved debt to capitalization ratios.

Our fourth quarter income tax rate was 37.7% compared to 38.5% last year, due to lower state income taxes and some tax credits.

Going forward, we expect our tax rate to be in the 38.0 to 38.2 range.

Our total debt at the end of the quarter was $438.8 million, and our debt to total capitalization ratio was 32.3% versus 39.4% a year ago, a reduction of 7.1 percentage points.

During the fourth quarter we repurchased approximately 1 million shares of our stock for $39 million under our share repurchase program.

In 2005 we returned to shareholders $102 million through our share repurchase program.

Since the inception of our first buyback program in August 2004, we have repurchased 8.5 million shares for a total of 248 million at an average price of approximately $29 per share on a split adjusted basis.

This program has been a very effective way for us to return to shareholders a portion of our free cash flow.

We have 241 million remaining on our current 300 million repurchase authorization.

In 2006 we estimate our diluted share count to be approximately 110 million shares, which includes our annual option grant and share repurchases.

Earnings per diluted share for fourth quarter were $0.36, an increase of 24% over last year's $0.29.

Now let's review the results for the full year.

For the year, sales rose 13.1% on 8.7% comps.

Gross margin improved 73 basis points, reflecting category management initiatives and distribution efficiencies.

SG&A improved 13 basis points as a result of leverage achieved from strong same-store sales.

This resulted in an 86 basis point expansion in operating income to 9.6% in 2005 compared to 8.7% in 2004.

On a total sales increase of 13.1%, operating income dollars rose 24%.

Earnings per diluted share increased to $2.13 versus $1.66 last year, a 28% increase.

Our actual EPS of $2.13 compares to our beginning of year guidance of $2 to $2.07 on a split adjusted basis.

In terms of the key components of our balance sheet and cash flow statement, we ended the year in good inventory position.

Excluding AI, which we owned for less than half the year, sales grew faster than inventory, with sales up 12.3% and inventory up 11.4%.

Our accounts payable to inventory ratio improved to 54.8% compared too 53.7% last year.

This represented our fifth straight year of improvement.

Our vendor financing program currently has $119.4 million outstanding and accounted for the majority of the increase in this ratio.

We continue to expect modest year-over-year improvement in the accounts payable to inventory ratio, driven by growth in our vendor financing program.

CapEx for the quarter was 56.8 million as compared to 54.5 million last year.

For the year, our CapEx totaled 216 million, in line with our guidance of 200 to 220 million.

For 2006 we expect CapEx to be in the range of 260 to $280 million.

This increase over 2005 reflects more new stores, more owned stores, and more remodels in 2006 versus 2005.

We also plan to invest more CapEx in 2006 in technology and logistics to enhance our service levels and efficiency in the future.

We estimate free cash flow, which we define as operating cash flow less CapEx, to be in the range of 140 to 150 million in 2006.

At year-end our cash balance stood at $40.8 million.

Our strategy continues to be investing back into our business subject to our 15% after-tax internal rate of return hurdle.

If we exhaust those opportunities and there's still additional free cash flow, we would look to deploy it in the most optimal way to increase shareholder value, which could include additional share repurchases or more small tuck-in acquisitions.

As reported in today's press release our Board of Directors approved the initiation of Advance's first ever cash dividend.

The quarterly dividend will be $0.06 per share or $0.24 per share on an annualized basis.

At this rate the dividend yield would be just over half a percent and would represent an annual cash outlay of approximately 26 million.

It is our expectation that we will be able to grow this dividend in future years.

Advance is in a strong financial position that enables us to accelerate our growth while returning capital to shareholders through share repurchases and now through dividends.

We believe paying a cash dividend will benefit our shareholders in a number of ways.

First, we believe it is a sign of the strength of our financial position and our confidence in the future.

And second, it enables us to expand our shareholder base to firms whose investment criteria require a cash dividend.

Our strong balance sheet enables us to accelerate our growth and invest for the future while also returning capital to shareholders.

Our goal is to maintain this flexibility going toward.

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 advanceautoparts.com.

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

Thanks, Michael.

Before we open 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 and SG&A expenses.

Finally, I would like to again reiterate my pride and thanks to all of our team members for another terrific year of execution.

Together we will raise the bar further in 2006 in terms of performance.

We are now ready for questions, Operator.

Operator, we're ready for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Matt Fassler from Goldman Sachs.

Matt, you may go ahead.

Thanks.

Good morning.

It's Matt Fassler.

How are you?

Good morning, Matt.

Let me ask you a couple different quick questions here.

First of all, on the product inflation theme, can you talk about how broad this is?

When you suggested that this was an exception, were you talking about the negative LIFO swing being the exception or the product inflation dynamics being the exception?

Well, I think they're really mutually the same, Matt.

And I think you all read the newspapers and see what's happening to the price of oil, and that's reflected itself in the higher cost of motor oil as well as products such as ethylene glycol that are in windshield washer solvent and antifreeze, also had significant inflation.

At this time of year particularly we have large stocks of inventory of that type of product because of the winter season.

We really don't see that as an ongoing issue from a cost of goods inflation.

And again, remember, that inflation is the inflation in our inventory, not the inflation at retail.

Understood.

So in other words, you think it is kind of a seasonally pronounced trend.

Yes.

I think it was exacerbated by the season of the year.

Got it.

Let me follow up on that with a question about seasonality.

I don't want to talk about the weather typically, but we had a really peculiar weather dynamic this winter and typically you're a sector that does quite well in inclement weather and we didn't have as much of it, in January in particular, as we typically do.

Did that move the needle in either direction?

Well, again, Matt, we really can't talk to January other than the guidance we've given.

Certainly weather impacts our business and extreme hot and extreme cold can be either positive or negative.

Certainly this year's weather has not been optimal for our sales, and I think on a relative basis to last year you can see that in the first six weeks of the guidance we've given.

Got it.

That's helpful.

And a final question about expansion.

If you could shed some light on the distribution of stores, kind of geographically in 2006 and in particular I'm interested in how your stores are doing in Houston and some of your other newer Texas markets.

Matt, this is Jim.

Our strategy for 2006 remains the same as in prior years.

Our objective is to continue to fill in, increase our market share in the existing 40 states that we're in, so there is going to be new stores in many of the different states that we're operating in currently.

When you look beneath that a little bit, there will be certainly more stores in those markets where our market share is not as high, which is primarily still the Northeast and the Midwest, and we'll continue to fill out those markets as we have the last several years.

Our entry into new markets are going well.

That's part of our strategy that those new markets we consider to be within our existing states and really extensions of what we're doing already.

So that's progressing well and we anticipate a consistent strategy again for 2006.

Understood.

Thanks a lot, gentlemen.

Thank you.

Your next question comes from David Cumberland from Robert Baird.

You may go ahead, David.

Good morning.

Following up on the weather question, what was the impact of weather, in your view, on your sales and mix in Q4?

I think we look at weather in Q4 probably more neutral.

I think last year we may have had a little benefit from weather.

This year was probably more normalized and I think you can see on a two-year basis our comp was very strong and again, our sequential comps, going from third quarter to fourth quarter as well, were much stronger.

Thanks.

And then longer term, can you give an update on how you view the operating margin target of 11 to 12% that you've talked about in the past?

Again, I think we're consistently on a path to achieve that, albeit obviously we need to adjust that now for the impact of stock option expense.

So we still foresee that happening, albeit with stock expense it will probably happen in 2008 rather than 2007.

Thank you.

Your next question comes from Gary Balter from Credit Suisse.

You may go ahead, Gary.

Thank you.

First of all, congratulations on a very solid quarter.

Thank you, Gary.

Just following up on the LIFO question, what's the LIFO for the full year?

I don't know if you gave that when Matt was asking the question.

Michael, do we have that number?

Just -- if we did the math right, there is a nickel a share of cost in your fourth quarter from your LIFO charge versus your credit; is that correct?

Well, Michael is looking for it.

Yes, I'll have to get back to you.

Okay.

But the nickel, it works out to about $0.05, so without putting words in your mouth, it is like you could have reported $0.05 more had you not had the LIFO charge.

Or you had the same credit as a year ago.

I believe that's fundamentally correct.

Okay.

So then, nice quarter, even nicer quarter.

Could you talk about the new stores, again, following up on a question Matt asked, as you move -- you mentioned how strong the new stores are.

Are you seeing that in the newer markets where you're less concentrated as well as in the old -- in the markets where you have more concentration?

Gary, certainly our performance varies from market to market, and generally when we open stores in an existing market that we have a high market share and are best known, we're going to have better results.

When we enter a market that we haven't been in before, it is going to take us a little longer to increase our sales.

But underneath that, again, our sales in all of these markets relative to where we were performing a few years ago are considerably better, and it will vary by the age of the market.

And then the last thing is just gross margin.

Does your gross margin get helped a little bit by the fact that you probably sold less batteries and less antifreeze in a period of time when the weather was a little bit warmer?

Not necessarily.

And again, antifreeze and batteries are kind of the opposite from a margin standpoint.

Batteries tend to be a higher margin and of course antifreeze a lower margin.

So it kind of evens out.

Okay.

Yes.

Thank you.

Oh, Gary?

Yes.

On the LIFO question, for 2005 for the full year we had a charge of less than a $1 million and last year we had a credit of about 11 million, credit last year.

Okay.

Thank you very much.

Your next question comes from Jack Balese from Midwood Research.

Jack, you may go ahead.

Hi.

First of all, I just wanted to see if my math is right.

If we take out the impact of the stock option charges, which is a non-cash charge, you would be about $2.54 a share in 2006 versus $2.04 a share excluding the -- is that right? 2000 -- no, I think I got that wrong.

The $0.09 -- oh, right, right.

Okay.

So you're still going to go about 20%.

So that means that in 2006 you should be over a 10% operating margin?

I think you can do the calculations and see where we'll come out, but certainly with the 20% per year you can actually obviously calculate that.

Okay.

Regarding inflation, excluding the chemical impacted areas, in hard parts and accessories, was there any change in inflation there?

No, we're not seeing any change in those categories, Jack.

No change there.

And I was just wondering, in terms of your retail comp store gain for the fourth quarter, was that below your expectations?

No.

In fact, I think if we look at where we budgeted the year it was probably slightly above our expectations.

And again, Jack, if you look on a two-year basis it was a very strong quarter for us.

Okay.

Thank you.

Your next question comes from James Baker from Neuberger Berman.

You may go ahead, James.

Yes, thank you.

Good morning, gentlemen.

I'm at a little bit of a loss to fully understand the SG&A ratio in the quarter because I know last year the self insurance issue was a pretty big one and I think you guys suggested at the time that the SG&A ratio would have been close to 100 basis points lower in the fourth quarter of '04 but for the true-up in that self insurance.

So it seems as if you're sort of saying, given it is about flat, that we're really up 100 basis points.

And so I want to understand better what the elements of this year's SG&A ratio was that you would consider sort of non-recurring or one-time in nature, such as the CFO issue.

Can you quantify some of these issues that may not recur?

Well, let me answer part of it and then I'll give you, maybe, Michael to give more specifics.

As we've always said, we look at opportunities to reinvest back in the business.

And we look at our sales trends and look at our comp trends and look at the rates of margin and SG&A that we're incurring and when the opportunity exists for us, as it did in this fourth quarter, we plan to make some additional investments such as in advertising.

We cognitively spent more money in advertising, we cognitively spent more money in the commercial programs as such, as well as we had some issues that were outside of our control, such as utilities, that had an impact.

And of course we knowingly made a change in our CFO.

So I think it is a combination of those.

Michael, if you want to add any color to that.

Yes, a couple other things, probably nonrecurring items.

There are some additional franchise taxes which increased SG&A in the fourth quarter, which reduced our income tax rate, was a shift between franchise and state income tax.

There was a -- expenses associated with the Lappen conversion and the AI conversion in the quarter.

Okay.

And again, as I say, could you quantify some of these things so that we could understand maybe how that might have come out otherwise?

We typically don't do that, but again I think if you just take the number initiatives and look at the difference, it probably is pretty even among all of those that we've listed.

Okay.

Maybe just if you could maybe just focus on the CFO change?

Can you just give us an idea how much just that was?

It is something less than 10 basis points.

Thank you.

Your next question comes from Gregory Melich from Morgan Stanley.

Gregory, you may go ahead.

Gregory, your line is open.

Want to move to the next question?

Your next question comes from Tony Cristello from BB&T Capital Markets.

You may go ahead, Tony.

Thanks.

Good morning, gentlemen.

Good morning, Tony.

I guess I have a question on the AI and sort of -- have you given any more thought on disclosure of plans for what platform growth might look like for that concept?

Tony, this is Jim.

As you know, we made that acquisition in September and certainly we're continuing to work with Roger Patkin, who runs AI, to over time develop plans for growth, and we certainly do see the opportunity to grow that organization.

As those plans become a little more finalized and we're able to talk about those in a little more detail, we will on subsequent calls.

But things are progressing very well with AI.

We're very pleased with what we've seen so far and very excited about the potential in the future to grow that organization.

And that, you said that was a $25 million contributor in the fourth quarter?

$25 million in total sales in the fourth quarter.

And is that a good run rate to use when you're looking out this year?

Or can you see that grow a little bit faster as you -- your sort of leverage with what you do with your existing business?

You'll see that increase some in 2006.

In 2005 the total sales for the year were around $100 million, and we'll see that increase to some extent in 2006, and again, we'll talk about that in more detail as we go through the year.

Okay.

And is there anything you've kind of learned?

I know it is early, but in how they operate in their business with sort of a focal on the commercial side that you can now incorporate into your existing stores that you think could be some added benefit?

Sure.

I think there is a lot of opportunities in that regard, and the team at AI do commercial, and that's all they do, so that's -- their focus is on commercial.

We're learning from what they're doing.

We continue to see how Advance Auto Parts goes to market from a commercial standpoint as being different than how AI goes to market because they're focused strictly on commercial.

But we're sharing best practices in both companies and taking advantage of the learnings as well as the synergies that we're achieving as a result of owning AI.

Okay.

And I guess lastly, when you look at -- you talked about the maturity curve, and it takes awhile to sort of move up on the call list with installers and such.

Where would you categorize your stores now on a maturity curve basis?

Does it take two to three years or four to five years to get a store to where you're on a daily flow and have gained traction and such?

Well, certainly there is a maturation curve, and we have many programs at many levels of maturation.

We feel pretty comfortable and I think our comp sales numbers very easily demonstrate that we're moving up the list on a typical basis across all of our stores.

I was just going to say, I think the other thing we're learning as well is that as we do more commercial business we're finding that we can do more commercial business.

The market is bigger.

There is more to be done out there, so programs that we added even two or three or four years ago, we're continuing to go see the opportunity to add more trucks and develop the program and do more business as we're better known in commercial and as our customers realize the extent of what we offer.

So then it would appear that where you're seeing strong comparisons in this category, that should continue with -- as these stores continue to mature?

Yes.

And again, as we've said, we anticipate continuing to run double-digit comps in the commercial business and we see a very clear path to achieving that.

Okay.

Great.

Great.

Thank you.

Thank you.

Your next question comes from Alan Rifkin from Lehman Brothers.

You may go ahead, Alan.

[Technical difficulties] for Alan.

How are you guys doing?

Good morning.

I just had a quick question about the commodity costs.

I know that you had indicated that you're anticipating cost inflation throughout the remainder of the year, but given the wide swings that we've had, at what point would you consider passing through price increases if commodity prices were to continue to increase up?

And would that be easier to pass through on the commercial or DIY side?

As we've said many times in the past, we generally find that we can pass through cost increases, not just commodity cost increases, but all cost increases at our typical margin for those categories.

Okay.

Thank you.

And just wondering if you could provide some more color on the full year, possibly with regard to comps or even margins, where you expect them to go?

Do you expect SG&A to be flattish again for the full year or -- if you could just provide some additional color there?

Very clearly, I think we've demonstrated this year-over-year-over-year, that we believe there is opportunity for us to improve both our margin and leverage our SG&A, not only in 2006 and going into the future, and again, continue to invest where appropriate and take advantage of swings in margin or SG&A to optimize our results, both short term and long term.

Okay.

And just one final question.

The dividend pay-out that you announced today, will that have any impact on the size of acquisitions that you will be willing to look at in the future?

No.

Certainly, as we've talked about, our focus on acquisitions is in -- with the types of things that we did in 2005, with the tuck-in acquisitions and the commercial related acquisitions like AI, and certainly our strategy has not changed as a result of the dividend in regard to that.

Great.

Thank you very much.

Thank you.

Your next question comes from Danielle Fox from Merrill Lynch.

You may go ahead, Danielle.

Thanks.

Good morning.

I have two quick questions.

First, can you just remind us what happened last year in the first quarter, why it started out so strong and then slowed, so going from the 14 to 7?

What was happening last year in the first quarter?

I think we had what you might call very optimal weather last year.

We had cold weather when it was important to have cold weather and we had warm weather when it was important to have warm weather, which got us off to a great start in the quarter.

But again, if you look at the overall quarter, that tended to average out, and again, we think that will happen as well this year.

Right.

So maybe it was just more a timing issue last year.

Yes.

And I think, Danielle, over the years we've seen that in our fourth quarter and we've had many years that we've started the first half of the quarter on a very soft basis and came through very nicely for the remainder of the quarter, and vice versa.

But it tends over time, certainly over a year's period, but generally even in the first quarter that weather tends to average out over the 16 weeks.

Okay.

Great.

And then one other question, just about the commercial program.

Now that you have some stores that have had it for four years, are you finding that you need to add SG&A in order to drive incremental growth at those stores?

You mentioned potentially adding more delivery trucks, for example, to some of the older stores to grow the business.

In other words, what I am trying to get at is whether -- how quickly the profitability of the stores with the commercial initiative can improve and when we might actually see some SG&A leverage simply from the sales increases that the investments are producing?

I think that's certainly something we've been doing for a number of years as we've added these programs.

Our team has a very disciplined process that they look at where they are from a sales per truck in the various stores and they make a decision about when is the right time to add a truck and they do that consistently over the years so that at any given time there is trucks that are being added and trucks that are already covering their cost of -- at least with the additional business that they're doing.

So you'll continue to see that as we go along.

On a broader view, the same thing is going to occur.

We're going to continue to add programs to stores that don't have commercial, and we're looking at where the opportunities are to do that and consistently doing that, again in a way that we can manage our expense and manage the additional sales that are coming from those stores.

So the process will continue and certainly over time there is going to be fewer new programs, now that we're at 78%, than there have in the past, which overall is a positive to our expense ratios.

Okay.

Thanks.

Very helpful.

Thank you.

We have time for one more question.

Your next question comes from Michael Cox from Piper Jaffray.

You may go ahead, Michael.

Good morning.

Congratulations on a strong quarter, guys.

Thanks, Michael.

My first question is on the -- if you could give us an update on your direct import program, what that is as a percentage of the mix at this point and what kind of progress you expect in '06?

Well, we really haven't talked about that yet as a percent of our sales.

We're continuing, as you can see in our stores, to bring in additional items on a direct import basis.

And again, as we treat store brands, grow that as we believe it is appropriate for our customers and our customers demonstrate a need and a want for that product, we'll continue to grow that program.

Okay.

On the store front, I was wondering if you could provide us a little more detail on store openings by quarter or how you see that shaping out in '06, and you mentioned more owned stores in '06, what type of break down we should look for.

And then lastly, how you're viewing the real estate availability in some of your fill-in markets.

Sure.

The new stores, as they consistently have been, will be spread throughout the year.

We should anticipate in the first quarter opening probably around 50 stores.

Again, in 2006 we will expect to own about 25% of our total stores and lease the remaining 75%, but again, that's on a bigger base than last year. 170 to 180 stores versus 150 in 2005.

Availability, we continue to find locations for our stores, real estate is certainly more expensive today than it was a few years ago, but the good news is our sales in those stores are higher as well, so we're not seeing a change in the economics of our stores.

So we would anticipate the availability in 2006 to be basically the same as what we've seen in the last year or so.

Okay.

Great.

Thanks a lot, guys.

Thanks.

Thank you, everyone.

We'll be talking to you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a wonderful day.