領先汽車配件 (AAP) 2006 Q2 法說會逐字稿

Welcome to the Advance Auto Parts second-quarter 2006 earnings conference call.

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

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

Certain statements contained in today's conference call are forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements discuss, among other things -- expected growth in future performance including new store openings, remodels and relocations; comparable store sales; sales per store; operating margin; return on invested capital; free cash flow;

Accounts Payable ratio; stock option expense; capital expenditures; tax rate; share count; cash dividend; and earnings per share for the third quarter and fiscal year 2006.

These forward-looking statements are subject to risks, uncertainties and assumptions including those disclosed in the Company's 10-K for the fiscal year ended December 31, 2005 and the 10-Q for the fiscal quarter ended April 22, 2006 on file with the Securities and Exchange Commission.

Our 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 third-quarter earnings release and conference call are both scheduled for the morning of Thursday, November 2, 2006.

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

Joining me on the call today are Mike Coppola, our Chairman, President and CEO;

Jim Wade, Executive Vice President of Business Development; and Michael Moore, Chief Financial Officer.

With that I'd like to now turn the call over to Mike Coppola.

Mike?

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

While we are certainly disappointed with our second-quarter results we are still very optimistic about our future and the future of our industry.

Our second-quarter comps were 1.2% on top of 9% in last year's second quarter.

There is no question that the macroeconomic environment remains quite unfavorable especially when compared to last year.

Our core lower and middle income customers have been challenged with rising energy prices, higher interest rates and higher required credit card payments.

These factors continue to weigh on their ability to spend and now have been further impacted by a slowdown in refinancing activity and inflation and in many other day today expenses further challenging these customers.

While comparable store traffic for the quarter was negative our average transaction size hit another record level this quarter.

This validates our view that customers are being pinched economically and are consolidating their shopping trips, but recognize the value of what we offer when they shop with us.

Indeed evidence throughout the auto aftermarket suggests customers are deferring some nonessential maintenance.

So we do not view these challenges unique to Advance.

Our DIY comps for the quarter were negative 1% while commercial comps grew 9.1% for the quarter.

Both of these reflect slower run rates from our first quarter and both fell short of our expectations.

However, our commercial business continues to produce relatively strong results even in a tough environment.

This I believe is a reflection of the many growth opportunities in commercial where we continue to have less than a 2% marketshare.

I believe I speak for our entire team when I say we are not satisfied with these results.

We are working hard to turn them around.

While improving macro conditions would certainly help, we are not waiting for those to occur.

While our store operations are good, they can always be better.

I'm confident that we can improve our execution and in doing so continue to increase our marketshare even if macro conditions remain challenging.

I'll discuss some specifics in a few minutes.

For the quarter we achieved earnings per diluted share of $0.59 which includes stock option expense of $0.03 per share.

In last year's second quarter earnings per share of $0.60 did not include pro forma stock option expense of $0.02 per share.

Let me address a number of issues that we believe are of interest to you.

First, our financial goals.

Many of you have asked whether we will continue to target our 11 to 12% EBIT margin goal.

Obviously our 2006 results could delay our schedule for achieving 11 to 12% EBIT margins.

Although the likelihood of achieving 11 to 12% margins by 2008 is less likely, our team is still working to achieve this goal.

We are working to develop a leaner expense structure to enable us to achieve this goal in a lower comparable sales expectation.

In fact, many of our more mature stores are already exceeding this level of profitability.

Second, team member strength and retention.

Particularly important to us is our field retention because we have found a high correlation between team member tenure and good store level execution.

In that respect I am pleased to report that our retention at field level is running better than it was last year, which I believe is a function of Advance's winning culture and our competitive compensation and benefits package.

We analyze our turnover a number of additional ways to distinguish between good turnover and bad turnover.

For example, we monitor turnover in recently hired team members to validate whether we are making good hiring decisions.

We also monitor turnover of high performing team members as measured by their annual performance review to make sure we are doing a good job of retaining those high performers.

While our performance, again, can always be better, we are pleased with our results in these key areas of attracting and retaining quality team members.

Finally, as many of you know, we have strengthened a number of key positions in the Company.

This I believe is necessary for us to give an outstanding -- to give us an outstanding team of leaders throughout the organization.

And while there has been a fair degree of change, I am very satisfied with the team that we have assembled and the positive impact they are having and will have on our success.

Third, price competitiveness.

For years we have measured our pricing on a large basket of items, both in the parts department and the sales floor.

Our surveys show that our pricing remains competitive and, if anything, a bit more competitive of late against our major auto parts chains as well as other classes of trade.

Our strategy is to be a price leader and we are committed to doing that in ways that make it easy for customers to do business with us by emphasizing our everyday low prices and not using promotional gimmicks.

As we've mentioned on many prior occasions, while being competitive with price is important, becoming highly price promotional does not drive additional business in our industry.

Customers simply will not buy a starter or an alternator if they don't need one regardless of how compelling the price is.

We continue to see rational pricing by our competitors and we continue to price our products rationally as well.

Fourth and perhaps most importantly, we received a number of questions about our strategic initiatives.

Certainly in its 74 years of operation Advance has experienced many temporary periods of sales office.

These have not nor will not deter us from pursuing the many high return investments that have made Advance what it is today.

Our commercial business, for example, continues to grow nicely and our 2010 format stores continue to grow our DIY business and handily outperform our nonconverted stores.

As a result we continue to open new stores and, in fact, we are accelerating our new store growth rate this year.

We will also continue to remodel stores to our 2010 format, add commercial delivery programs, relocate stores and advertise our brand, all of which are appropriate for the short, intermediate and especially the long-term health of our business.

All of these investments which are subject to our minimum 15% after-tax IRR hurdle rate continue to generate very strong returns.

While we remain committed to our strategic priorities, we are however looking to optimize CapEx in areas of the business where we can achieve the highest returns.

Let me now speak to two areas of SG&A that represent high priorities for us.

In this low single-digit comp sales environment we are aggressively working to lower our cost of doing business.

First, improving corporate leverage.

We are optimizing a number of job functions by consolidating work among existing positions and improving efficiency and selected areas.

We are also reevaluating all third party service providers.

We have reduced the scope of and have competitively rebid many of these services in areas such as telecommunications, alarm monitoring and financial service providers and maintenance and repairs just to name a few.

We are also being more selective in areas such as meetings and travel.

Second, non sales activities at the store level.

As mentioned in our last conference call, we're rolling out energy management systems to approximately 1,000 additional stores.

These systems automatically control our stores temperature and lighting and have produced impressive utility savings in the stores that already have them.

We are also evaluating all non sales-related activities including simplifying our store in, end of date process.

This eliminates paperwork and labor and improves team member morale by getting our team members home to their families sooner.

These, again, are just a few examples of the many SG&A initiatives that will help us improve our results in a soft sales environment.

And there are additional SG&A opportunities we are working on that we will discuss in the future once we have fully validated their potential and begun their implementation.

With that said ultimately retailing is all about sales.

I know it, the leaders of our company know it, our stores know it and I am pleased that sales continues to be the first, second and third topic of our store and headquarter level meetings.

Some of our new sales driving initiatives include -- additional incentives for our team members to sell premium products and complete solutions for our customers; driver push out as to give commercial drivers and cashiers opportunities to produce add-on sales; more focused advertising to convey Advance's image of being the value leader in the auto aftermarket; exciting, innovative approaches to our monthly print campaign to drive additional customer traffic; targeted training to ensure our store team members are providing legendary customer service to drive more traffic to our stores, take full advantage of the traffic that's already in our stores and close potentially missed sales opportunities.

New traffic driving convenience items that build on our reputation of offering unique products that make shopping trips more satisfying.

And certainly last but not least, in using new technology to deliver our customers' education content on iPods and cell phones which extends our reach to our customers and generates potential revenue streams for us.

Individually many of these may seem modest, but collectively they represent a large opportunity for us.

In addition to these programs many of the initiatives you've heard us discuss on previous calls are in various stages of maturity and continue to grow offering significant sales upside over time.

These include our special order center which offers customers now almost 1 million SKUs not stocked in our logistics network; e-scheduling, an enhancement to our MPT system which provides greater oversight of store labor scheduling to ensure that we have the right team members and the right numbers available to assist our customers at the right time; free installation of batteries and wiper blades and free electrical assistance checks give us a competitive advantage particularly relative to big box retailers that sell these products.

We believe we have a significant opportunity to expand these services and to increase our customers' awareness of these services.

And consistently high in stock levels which improved again in the second quarter to a new record high.

Obviously we must have the parts our customers want when they shop our stores and our team is doing an excellent job ensuring that our on-hand quantities are appropriate to satisfy customer demand.

Certainly these efforts will be the key to helping us power through a tough macroenvironment and especially as we lap 10% comps in the third quarter.

Michael Moore will discuss our gross margin in greater detail in a few minutes.

For now I think it's important to highlight that we continue to improve our gross margin rate even in a soft sales environment.

That's largely because we're driving improvement through direct importing, category management and logistics efficiencies to name a few.

We continue to see opportunities to grow our margin rate over time.

I've already discussed a number of our SG&A areas of focus.

Obviously it is very difficult to leverage SG&A in a 1% comp quarter, especially when the quarter started off with 4% comps as the second quarter did.

We did react to this change in sales, but we have a large number of fixed expenses that require more strategic approaches to optimize.

This environment has created an opportunity for us to strategically lower our cost of doing business and I believe we are now much more prepared for low single-digit comps.

With that said, leveraging SG&A at that level will still be a challenge.

Importantly, when business returns to a more healthy level our new SG&A discipline will allow us to convert more to the bottom line.

Let me conclude by reminding you that our industry dynamics remain strong with a growing and aging vehicle population in need of replacement parts.

Customers can defer some maintenance but ultimately they can not neglect it.

We will be ready for them with parts, service and advice and we will continue to work hard to earn their business.

And we also continue to remind our customers that we are part of their solution to high gasoline prices, with many of the products we sell actually helping to enhance the fuel economy of their vehicles.

As always we remain committed to our four key financial goals -- one, raising our average sales per store; two, expanding our operating margins; three, generating strong free cash flow; and fourth, increasing our ROIC.

Due to the macroeconomic conditions affecting our customers and the strong comps we are lapping from last year, we are projecting our comp store sales at flat to 2% for the third quarter where we were up against 10% comps last year, and slightly higher for the fourth quarter where we were up against 6.3% comps last year.

For the year we are targeting earnings per diluted share in the range of $2.10 to $2.20 which includes approximately $0.12 of stock option expense.

For comparative purposes 2005 EPS of $2.13 did not include $0.09 of pro forma stock option expense.

We believe that during times of uncertainty because of consumer confidence, fluctuating gas prices and other factors it is prudent to reflect those factors into our guidance and widen our range.

For the third quarter we are targeting EPS in the range of $0.50 to $0.55 inclusive of $0.03 of stock option expense.

EPS of $0.55 in the third quarter of 2005 do not include $0.02 of pro forma option expense.

During the first four weeks of the quarter we are up against our most challenging comparison to last year's quarter, 14% consolidated comps and 33% in commercial.

Quarter to date we are comping negative 1% against the strong start to the quarter last year.

However, we are projecting flat to 2% comps for the quarter as our business has strengthened over the past week and our comparisons ease through the balance of the quarter.

While we are not expecting SG&A improvement in the third quarter, we expect to see better performance in our SG&A rate for the fourth quarter and beyond.

I would now like to turn the call over to Jim to review our sales and store growth in greater detail.

Jim?

Thank you, Mike and good morning.

I'll further review our sales for the second quarter as well as some of our growth plans.

Our total sales rose 8.3% compared to last year's second quarter.

This reflects 1.2% comps and approximately 9% square footage growth including the Auto Part International stores.

This is the highest rate of square footage growth we've achieved since 2002.

Our DIY comps were negative 1% and that's compared to a positive 4.9% in last year's quarter.

As Mike mentioned, our average transaction size continues to be strong while customer count is our challenge.

Our commercial business continued to expand at a healthy rate in the second quarter both in our Advance Auto Parts stores and with Auto Part International.

For the quarter our commercial sales as a percent of our total sales was 24.7% including AI.

This represented $247 million in combined commercial sales, but on an annual basis represents only 2% of the large and growing $58 billion addressable commercial market.

We have significant opportunities to further penetrate this market and I'll talk in more detail about our plan to maximize those opportunities.

We achieved 9.1% comp in commercial in our Advance stores during the second quarter, over a 27.1% increase in the same quarter last year.

During the quarter we added 49 new commercial programs, most of which were in new stores, bringing the total number of Advance stores with commercial programs to 2,353.

Commercial was 22.9% of sales in our Advance stores compared to 20.9% in the same quarter last year.

Today about 81% of our Advance stores have commercial programs compared to 77% at the same time last year.

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

While commercial is not totally immune to an economic slowdown, we continue to see significant opportunity to grow this business in our Advance stores for a number of reasons.

First, in spite of our significant growth in this area in the last several years we still have relatively low marketshare.

We also have introduced about 800 new commercial programs in the past several years which are still in the early stages of their growth.

These programs continue to show healthy growth and we believe have a long runway ahead of us.

We continue to invest in additional delivery trucks, commercial sales managers and other resources as needed to continue this growth of commercial and existing stores.

And the commercial market itself is growing at a somewhat faster rate than the DIY market.

Although we fell slightly short of our double-digit comp target for commercial in the second quarter, we still see the opportunity to achieve that target on an ongoing basis once consumer spending begins to strengthen.

I want to spend just a few minutes updating you on our plans for Auto Part International since they've now opened 11 new stores since we acquired them in September of 2005, which brings their total store count to 72.

For the quarter AI contributed $26.5 million of sales and did so profitably even as this new store growth rate and the infrastructure needed to support that growth accelerated significantly.

Strategically we believe AI's complementary model allows us to grow its commercial business alongside our Advance commercial business while also providing us a more in-depth perspective on the commercial market and its unique product sourcing opportunities.

In fact, some of our gross margin improvement this quarter resulted from AI's direct sourcing relationships which we believe will contribute to additional gross margin improvement going forward.

AI's new stores are performing well and are achieving the new store model we developed as part of the acquisition.

As expected, we're finding that AI stores can operate successfully in the same markets as an Advance store without either being cannibalized by the other, allowing us to capture a greater share of the total commercial business available.

We believe this is because of the highly complementary nature of our businesses which serve the commercial market in very different ways.

In our Advance Auto Parts stores our DIY business is core and we're significantly increasing our sales and profitability per store by capturing a significant portion of the commercial market that fits our commercial model in these stores.

AI's business is completely commercial, their stores are optimally located to serve the commercial customer and they can emphasize their competitive strength on sourcing parts for foreign vehicles which are the fastest-growing part of the vehicle population as well as their growing domestic parts availability.

We believe over time AI stores can achieve sales productivity comparable to an Advance store and do so at solidly profitable levels.

Occupancy costs for AI locations are less than an Advance store and advertising expenses are also less than in the Advance model.

Now nearly a year post acquisition we believe we validated this model not only works but also is scalable.

We recently signed a lease on a new 350,000 square foot distribution center for AI located in Norton, Massachusetts which will replace its existing facility in early 2007.

This DC provides a base for more capacity and will support our growth plan for AI for the next few years.

Our goal is to continue ramping up AI store openings.

The pace will be dependent on the level that the team can execute successfully.

We believe that the team can open in excess of 20 stores in 2006.

The growth of AI also provides us the vehicle with which we can better participate in the consolidation of the commercial industry through acquisitions over time.

Shifting back to Advance, we continue our progress towards having the newest, freshest store base in the industry, not only with our new store growth but also through our aggressive remodel and relocation program.

During the second quarter we opened 44 news stores bringing us to 102 year-to-date. 38 of those 44 new stores opened as Advance Auto Parts and six opened as Auto Part International.

We did not close any existing stores in the quarter.

Our pipeline of new stores is strong as we prepare for 2007 and we see great opportunities to open more stores in our existing 40 states and over time continue our contiguous growth.

With the success AI is achieving in opening new locations we again are raising our guidance for new stores for 2006 to 205 to 215 stores.

This is an increase of approximately 20 stores compared to our prior guidance of 185 to 195 stores.

This increase in square footage of 7 to 8% even in a soft sales environment illustrates our commitment to growth for the long-term.

During the quarter we also remodeled 56 Advance stores to our 2010 format and 121 year-to-date.

At the end of the quarter we had a total of 1,765 stores with the 2010 format or about 61% of our Advance stores.

These bright and new looking stores provide a significant point of differentiation to the consumer relative to competitors.

We anticipate remodeling approximately 200 stores in 2006.

With these remodels along with new stores and relocations approximately two-thirds of our stores will have this format at the end of 2006.

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

Year to date we've also relocated 21 stores and we continue to target 50 relocations for the year.

With this activity we ended the quarter with 2,899 Advance Auto Parts stores and 72 Auto Part International stores for a total store count of 2,971.

With our plan growth we're gearing up to celebrate the opening of our 3,000th store, a momentous achievement for our team which we expect will occur later this month.

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

Thanks, Jim and good morning.

Let me turn to our second-quarter financial statements.

For the second quarter gross margin was 47.6%, a 50 basis point improvement over last year due to the positive impact of category management and lower logistics expense.

In the quarter LIFO was a $5.6 million credit but was offset by a corresponding $5.3 million debit for capitalized logistics costs resulting from less purchases as a result of lower sales and improved logistics and transportation efficiencies.

Turning now to SG&A -- our SG&A expense rate for the quarter rose 150 basis points compared to last year.

Noncomparable stock option expense represents 41 basis points of the SG&A increase.

Deleverage on fixed expenses due to low comp store sales represents 60 basis points of the increase.

These fixed costs include rent and appreciation both of which were pressured by the acceleration of our new store openings.

Other areas of SG&A deleverage include increases for fuel, property insurance, worker's compensation and medical which in total represented a 55 basis point increase.

We have implemented programs to mitigate increases in these expenses; however, we expect these items to pressure our SG&A rate in the third and fourth quarters by a similar amount.

One of the challenges I was given when I joined the Company was to help improve our SG&A performance.

While below plan comps may be masking it a bit, I believe we are making progress.

In the second quarter sales came in at the low end of our revised range while earnings came in at the high-end primarily due to lower expenses.

Also, this is the second quarter in a row that our SG&A per store has grown less than 3% on a reported basis and less than 2% excluding the noncomparable stock option expense.

This compares favorably to last year when our SG&A per store was growing in the mid single digits.

We are reevaluating all expense lines for the balance of 2006.

We are regressively evaluating all discretionary spending including areas such as supplies, travel, meetings, all outside services and others.

Our austerity message is being embraced throughout the organization.

In the second quarter we actually spent significantly less than we budgeted, but it was not enough to offset our sales shortfall and deliver our planned operating income.

Looking forward we expect a gradual improvement in SG&A, assuming a zero to 2% comp increase, we expect SG&A deleverage in the third quarter to be comparable to the second quarter.

We expect our deleverage to improve in the fourth quarter and in 2007 we expect to leverage SG&A.

Operating margin was 10% or 100 basis points less than last year's second quarter due to the noncomparable stock option expense and other expense items previously mentioned.

Interest expense net of interest income was $8.8 million in the quarter versus $6.5 million last year due to higher interest rates and lower cash balances.

Our average cash balance was significantly lower this year primarily due to the return of capital to shareholders through the payment of $13 million of dividends and $196 million in share repurchases over the past year.

Our total debt at quarter end was $430.4 million and our debt to total capitalization ratio was 31.2% versus 34.3% a year ago, an improvement of 3.1 percentage points.

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

We have in place interest rate swaps that effectively fix our interest rate exposure on approximately 40% of our debt.

The remaining 60% of our debt is subject to higher interest cost.

We continue to view this relatively low-cost debt as appropriate in our overall capital structure and we are looking at ways to lower our borrowing cost.

Our second-quarter income tax rate was 38.1% compared to 37.8% last year.

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

During the quarter we continued to repurchase stock under our $300 million share repurchase authorization.

For the quarter we repurchased 2.4 million shares of our stock for $84 million.

Since inception of our first share repurchase program in August 2004 we have repurchased over 12 million shares for a total of $385 million at an average price of approximately $31.

These repurchases enable us to return capital to stockholders and improve our return on equity.

Our repurchase methodology is price sensitive such that the lower the price the more shares we'll buy.

With that said, we do not anticipate levering up significantly to fund share repurchases.

For the third and fourth quarters we would expect our fully diluted share count to be in the range of 106 to 106.5 million.

We paid our first quarterly cash dividend earlier this year.

On Tuesday our Board of Directors declared a regular cash dividend of $0.06 per share to be paid to stockholders of record as of September 22nd.

Already this year we have returned to shareholders our projected 2006 free cash flow through our dividend and share repurchase programs and continue to expect to return a significant portion of our future free cash flow in this manner.

In terms of the key components of our balance sheet and our cash flow statement, we ended the quarter in a solid inventory position and did a good job managing inventory in a soft sales environment.

Inventory increased 8% on a total sales increase of 8.3%.

Our accounts payable to inventory ratio was 57%, slightly less than last year's 57.6% and reflects our efforts to lower inventory to match our sales trend.

We continue to expect steady year-over-year improvement in our accounts payable to inventory ratio even with growth in direct sourcing.

We will achieve enhanced AP to inventory levels primarily through growth in our vendor financing program.

This program currently has $128.5 million outstanding, nearly an $8 million increase compared to last year.

CapEx for the quarter was $54.1 million as compared to $60.3 million last year.

For 2006 we now expect CapEx to be in the range of 245 to $255 million -- compared to our previous guidance of 260 to $280 million.

This reflects lower than planned spending particularly in areas such as IT and logistics.

We estimate free cash flow to be in the range of 100 to $110 million in 2006 primarily reflecting our revised guidance for net income.

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 top line and especially in our DIY business which is certainly our top priority.

I believe our team recognizes we must grow our business and spend less money while doing that, allowing us to achieve operating margin growth even with a lower comp rate.

While we're still investing in high return projects that drive the business for the long-term, we are also being more conscious of the short-term impact our decisions have.

As I tell our team members frequently, we must pick up the pace in our intensity to get the job done, and we're up to the challenge.

Operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS).

Danielle Fox, Merrill Lynch.

Good morning.

I have a couple of questions.

First, if you could just talk a little bit more about commercial.

I'm wondering whether the 9.1% comp gain was actually accretive to EPS or do you need a certain -- do you need to actually exceed the double-digit goal or can you meet the double-digit goal in order for the commercial business to be accretive?

Danielle, this is Jim.

No, we would expect the 9.1% comp to be accretive to EPS.

Again, we ran a very solid comp in our existing programs and have had the program for more than a year.

We continue to add trucks and other resources, but we're taking advantage of the opportunity that those existing programs have given us in terms of continuing to grow sales and profits at an accretive level.

Okay, thanks.

And then Mike, maybe if you could review the major components of CapEx.

You mentioned that it was coming down a little bit because of lower IT spending, but if you could just sort of explain what the major components of even the revised number are in terms of store growth versus IT and things like that.

Our major components of CapEx would be new store openings and relocations and store remodelings.

And then we have large amounts scheduled to spend for IT and logistics.

Those would be the primary categories of CapEx spending.

We had a lot of CapEx earmarked for IT and logistics, we've reduced that but it's still a substantial amount of capital that we expect to spend.

And is there some spending for that Massachusetts DC in this year's CapEx or is that yet to come?

I guess I'm trying to get a sense of what the ongoing level of CapEx could be since it seems like you stepped it up relative to history more recently?

The new DC in Massachusetts is a leased facility and we will have some material handling investments there during 2006 and some during 2007, but those are built into the numbers that Michael talked about earlier.

Okay, great.

I have one final question.

Just was there any SG&A benefit this quarter from lower compensation accruals?

Yes, there was a benefit due to incentive compensation.

Okay.

And about how much was that?

Hold on one minute.

We'll get right back to you, Danielle.

Great, thanks a lot.

We'll move on to our next question and we'll answer Danielle's when we get the number.

Bill Sims, Citigroup.

Good morning.

Can give us a little bit more color on your strategy to accelerate new store growth?

Can you share with us where these stores will be opened and in what type markets they fill in or new markets?

And I appreciate your commitment to growing the top line, but is new store growth coming because the rest of the business is maturing or slowing?

In terms of the growth beyond our initial estimates for the year, it's really occurring in two areas, one being in the Advance Auto Parts stores.

Our pipeline is very solid and we've seen the opportunity to open a few more stores at Advance, and those are really spread throughout our 40 states.

Our overall opening plans haven't changed, we're just dropping in a few more stores in certain markets.

The bigger portion of our increase in new store openings is coming from the success we're seeing in Auto Part International.

As you recall, we didn't really talk publicly about anticipated store openings there because we wanted to ensure that we could in fact achieve store openings so early in the process from when we acquired the Company.

And as they've started to open stores this year we've seen that they can in fact execute at a solid level and as a result of that we're taking advantage of that opportunity.

All of that store growth that Auto Part International is achieving will be in the northeastern markets where they're located today.

We would see over time that they would show contiguous growth out of those markets as well, but certainly in 2006 it will be in those existing northeastern markets.

Thank you, Jim.

One quick follow-up relative to -- I appreciate that the macroenvironment has been quite challenging throughout retail and auto parts specifically.

What do you think from a competitive landscape perspective?

Have you seen any shift in how your competitors are going to business?

No, I think there's a rational reaction by all of our competition.

I think we all have a similar problem.

And when you look at our comps and mixes I think we are seeing similar downward pressure.

By the same token I think we all recognize that the fundamentals of this business are sound.

The metrics of more new cars and more expensive parts are still there and we all I'm sure believe that long-term our business will return to more normal comp levels.

Thank you very much and good luck.

Before we go on to the next question I want to answer Danielle's question on incentive compensation.

Lower incentive compensation versus last year leveraged SG&A by about 50 basis points.

Next question.

Matthew Fassler, Goldman Sachs.

Good morning.

A couple questions.

Also on the decision to open more new stores, clearly you have a strategic opportunity with AI and probably more broadly speaking.

But how did you balance that against I guess the increased focus that you need to stabilize the cost structure, intensify execution given the tough sales environment?

It seems like at this moment if anything you'd probably want to focus more on the existing units?

I think they're somewhat independent of each other, Matt.

Certainly at the Auto Part International level, which is where the majority of the additional stores are coming from, AI is operating as a separate operation from our Advance Auto Parts team and they are driving the growth there and that doesn't affect certainly execution at the Advance store level at all.

So that's independent and, as I mentioned before, at the Advance level we're opening a few more stores.

Those are spread over a lot of different markets and certainly overall don't have any impact on what our team is focusing on on a day-to-day basis.

I think clearly the team understands and realizes the need to focus on execution at every store every day and that's what they're working to achieve.

Understood.

Second question if I could, on gross margin when you preannounced on June 29th you talked about essentially all line items coming in light including gross margins.

Your margins were actually up 50 basis points which was a solid performance, sales were I guess at the low end of the revised guidance.

So if you could just give us some color as the quarter came to a close and then you went through the books what the surprises were if any on gross margin because (multiple speakers).

Let me answer that, this is Mike Coppola.

Matt, I really believe last call we did advise you that we were against some very strong comparisons in Q1 and that we expected to see margin improvement for the remainder of this year.

So that was not a surprise to us at all.

We have many initiatives underway in logistics particularly that are helping us as well as certainly store brands, direct importing all surrounded by the category management process.

Got you.

And then third and final question.

Jim, you talked about commercial being 24.7% of sales including AI.

Just to clarify, is that consistent with how you had disclosed a commercial percentage in the past couple of quarters, are those comparable numbers?

It is, Matt.

Since we bought AI we've been disclosing both the combined commercial percentage as well as the Advance stand-alone commercial percentage.

Thank you very much.

Alan Rifkin, Lehman Brothers.

Mike, of the initiatives that you have described to address the SG&A line can you maybe go into a little bit more detail how those initiatives together with the 30 that you have spoken about in the past are going to -- what potential within those initiatives can be realized over the next six months or so and which ones are longer-term in potential?

I think as we've said in the last call, we have some that obviously as we roll them out are paying dividends like the energy management system.

We're rolling 1,000 systems up so that's going to be a gradual improvement in, for example, our energy costs.

Many other ones whether it be meetings or travel have had an immediate impact.

Certainly from a headquarters staffing standpoint we're looking at attrition as an opportunity to take some costs out and are looking to support some things.

Some of those have immediate impact, some of them have longer impact.

From a more strategic standpoint, we are looking at some of our structure and formats that we've had in place to see if we can do things effectively at a lower cost and maybe improve this more next year.

I think we may have mentioned -- we will be clarify in the future as we go -- that we do expect to see leverage in 2007 as these initiatives kick in.

Okay.

Now just taking a step back, we had always thought the beauty of this space was its resiliency to some extent to the macroeconomic environment.

And now you're citing higher credit card payments, you're citing higher gasoline costs, you're citing higher interest rates.

When most of those things have really been with us for one and two years, why do you think all of a sudden it's having such a greater impact on your business today whereas it didn't one and two years ago?

Well, I think, Alan, and I've said it in the past that consumers tend to adjust over time whether they work a few extra hours, get some overtime in, they send their spouse to work or find other ways to take a second job or another part-time job.

But I think you can stretch that rubber band so far and I think that our belief is that there's just a lot of fatigue with the lower income customers -- things like medical and cost-sharing by their employers and, in fact, many of their employers' businesses have slowed down as well I think which makes it more difficult for them to adjust.

Gasoline is, if you look at over three years now, has doubled in price and I think there is a concern there.

I think there also may be some conservatism due to what's taking place with world affairs.

I've seen that happen many times over my career in retail that creates some concern.

That all being said, I think the resiliency in our business is still there and I think we all believe that eventually much of this deferred maintenance has to take place and consumers will appropriately adjust.

I think where some of the upside will come in the future is many of these large purchases that a number of consumers have been making, whether it be flat screen TVs or other technology, I think are an option for them to reduce to take care of the necessities of spending that they really have to do on things like automobile maintenance.

Okay.

So is it safe to say that your outlook for a sequential improvement in comps is really more so due to the fact that compares ease a little bit more -- after obviously a very tough third quarter -- but that compares ease significantly in Q4 and Q1 as opposed to an improvement in the macroeconomic environment?

I think there's a little of both, although we don't see a huge obvious opportunity and ease in the macroenvironment, I think that that potential does exist for some.

On the other hand, you could see gasoline prices rise dramatically and make that more difficult.

But certainly the comparisons ease, but I think also we are doing some things here to help our sales ourselves through merchandising, marketing, pricing, advertising initiatives that we think can help us grow our share and therefore grow our comps.

Okay.

And one last question if I may, then I'll turn it over -- maybe for Jim.

Jim, with respect to the 2010 format, are we seeing a similar deceleration in the performance out of those stores as what was reported on the corporate line?

Alan, generally the answer would be, yes.

Certainly it varies by market.

The 2010 stores continue their performance relative to nonconverted stores, but we have seen some amount of shortfall in those stores as well.

Okay, thank you.

Gary Balter, Credit Suisse.

It's actually Seth Basham for Gary.

Mike, first question is it seems like you guys are underperforming your peers on the top line.

Is there one or two things that you can point to other than the macroenvironment that you think is causing that?

Well, I'm not sure if you can draw that conclusion.

I think if you look at our mix versus our competitor's mix you'll find out that the comp difference not only may not be negative but actually may be positive that our mix does affect that a bit.

We again assess our share as best we can through sources like NPD and we have some pretty good comfort that not only are we holding our share but that our share is actually continuing to grow.

Okay.

On the commercial side, Jim, are you seeing new programs ramping as fast as the older ones did when they were new?

We are, Seth.

And again, the majority of our new programs over the last quarter and really this year have been in new stores.

So they're part of the new store when it opens.

There have been fewer in existing stores.

So that's where we've been adding primarily the most programs.

But having said that, the ones we are not adding we're continuing to see solid ramp up as they're added.

Is there a point where you might expect cannibalization from some of the new programs given their larger installed base?

Not to any great extent.

I think as we've rolled out commercial programs over the years to existing stores and certainly new stores we look at the surrounding stores to ensure that we determine how best to serve those commercial customers.

And as a result of that when we open a new program we see very little cannibalization.

Okay.

And finally on the merchandising side, you're ramping up the direct importing, can give us a little bit of color what categories you're importing directly more of now?

I think if you go into our stores I think you can see an awful lot of them, particularly in our front room and that's where our emphasis has been over the last couple of years.

Brands like Mechanic's Choice, Joe's Garage, Endurance are all examples of direct importing and we're continuing to look for opportunities to do that and expand that.

From a part basis we have not really had any significant change in our direct importing as of this point.

We believe quality has got to be our number one criteria and until we can see sources overseas that fulfill our quality we're basically going to stay with our current mix.

That being said, I think we're seeing tremendous improvements in technology offshore that will allow us hopefully next year at the latest to begin to see more parts coming in from overseas.

Okay.

Specific to AI thought, their relationships are primarily hard parts based overseas and you're leveraging those relationships to improve your direct sourcing in those areas?

That's absolutely correct.

Okay.

Thank you, guys.

Tony Cristello, BB&T Capital Markets.

Good morning, gentlemen.

I was wondering if you could talk a little bit more about the retention rates.

Is that on the management side?

And you also answered a question talking about opportunity for savings with attrition.

And I'm just wondering how is the morale now at the store level and with respect to labor hours has that declined over recent months and are you flexed down about as much as you think you should be not to jeopardize customer service?

Well, Tony, I think we have a proud team and I think our team recognizes that what's happening to us is not by things that we have done.

We have certainly managed our store payroll in line with our business.

We look at that very diligently and if anything we lean on the side of putting a little extra labor in relative to our sales decline so that if you look on a productivity basis we've actually got a few extra hours in our stores relative to what we think they need.

Business will come back and we want to be ready for that when it comes back.

From a turnover standpoint we are seeing record levels of retention in our company both at the store level and at the headquarters level, but you always have turnover.

People move, spouses move and we do lose some people that way or people do move on to additional jobs.

We think that our compensation benefits and I think what was well recognized and our team recognizes the tremendous upside still within our company and within our industry and I think we've demonstrated that by relatively low turnover.

And I realize it's important to have retention on both the employees focused on DIY and/or commercial.

But commercial especially, since it's such a relationship oriented business, is there better retention on either side or would you say that one is about equivalent to the other?

I think they're very similar and both have shown improvements over the last year.

Okay.

And maybe -- I don't know if you or Jim want to just talk a little bit about this.

The AI store -- the sales levels that you're seeing there, our they in line with what you're seeing for sort of the core commercial?

I know they weren't in your store base last year, but would you guess that they're outperforming the commercial at your AAP locations?

I think overall they're basically in line.

The AI team has the 60 stores as the base and they've been working to ramp up to add the additional stores this year, but the underlying trends I think are pretty much the same relative to the geography that they're in up in the Northeast.

Okay.

And the new facility, how many stores do you think that can support?

I would anticipate over time that it could support probably 300 stores or so.

That will take us a few years to get to that point, but its capacity should be somewhere in that range.

And I'm assuming that you might manage the AI stores or the commercial stores a little bit different, maybe expanding around the DC and then before you really target a new geography you may invest in another DC.

Is that a possible approach?

That's a reasonable approach.

I think our first objective is to continue to prove out the model, open stores in the regions they're in and fill up the capacity of that facility.

Then over time we'll be looking at both the other regions to grow into.

And as I mentioned in the call, the AI platform allows us to better participate in potential acquisition opportunities over time in the side of the market that is still extremely fragmented in terms of the commercial business and the many players that still make up the commercial business.

Okay.

And one last question.

From a geographic standpoint would you say that there are any markets that you're seeing better performance over others or a more improved performance than what you have seen over the last few months?

No, the performance has been generally consistent.

Certainly there are some markets that do better than other markets, that's always the case.

But it's usually as a result of the age of the market or the number of new stores or whatever.

And the general trend has been relatively consistent over all of our markets.

But the Northeast though in general has been a tougher market for everyone and I'm just wondering if that market were to come back a little bit does that help you a little bit more disproportionately than say the South Central or a different market that you might be in right now?

I think we have a significant number of stores in both of those markets and the Northeast was a market that certainly performed very well last year, as any of our markets did, and has an affected this year.

Certainly as business does improve we would expect to see that happen in that market as well and certainly benefit very quickly from it.

Okay, thank you.

Thank you.

Jack [Baylose], Midwest Research.

First of all, I was wondering in terms of your long-term expansion program, would you sat it is now at a higher level, perhaps 7 or 8% on a longer-term basis?

Jack, this is Jim.

It certainly could be.

I think we continue to look at that and determine what the best relative level is, and we certainly see the opportunity for Advance stores to continue to open at the level we have this year or higher.

And then the Auto Part International opportunity is a potential addition to that.

So we'll provide additional guidance as we go through the rest of the year for 2007, but we certainly have the opportunity to maintain a very strong square footage growth going forward.

You had said that so far this month you were comparing against I think very strong numbers.

What was it, 14% comp or something?

Yes, that's correct.

And you said last week things had improved.

What were you comparing against comps for last week?

I think we are getting some pretty strong comps very close to 14% level last year, and I think that's giving us some confidence.

And again, as we said, our comparisons ease as we go through the quarter.

Actually, the last seven or eight days we probably had our best two-year comp in the last few months.

When you were talking about improving customer service or training, could you expand upon that?

And also I was wondering if you might also advertise that as an addition to value, being at the value equation?

Well, Jack, I think that we have set our target and we talk internally about legendary customer service, and I think we have an opportunity to fulfill that pledge better, and our operations team is committed.

We have a lot of customers that come into our store that we think we can convert at a higher rate, and there is a very strong initiative out there to do just that.

I think our advertising, all of our messaging tends to focus to a degree on our team, but the real where the rubber meets the road is in the store when a customer goes into our store that we service them properly and take advantage of that visit to maximize our conversion and our sales.

Regarding commercial sales, after you have had a commercial department in a store let's say for four years or so and it's more mature, what kind of comp sales do you get from that point forward?

Probably the best way to answer that is we ran a 9.1% comp in the second quarter for all of our stores, and for those stores that have a program for more than a year, the total comp was I think right about 1% less than that.

That is all?

Those stores ran a very solid comp for the quarter.

Just have one last technical question.

This is for the other Michael, and that is what is the $5.3 million capitalized logistics cost?

Had that ever occurred before or can it occur in the future?

What are the circumstances?

Well, the 5.3 is really a reclassification on capitalized cost into inventory.

So the net benefit, the combination of LIFO and those capitalized costs was $300,000 or only 3 basis points to the quarter.

There were some differences to last year.

Last year we were wrapping up inventory at the Northeast D.C. is one item, and then our logistics and transportation efficiencies are much better this year relative to last year.

Anything further than that, Jack, I would be glad to take offline and speak to you one-on-one and we can go through that.

Last question, Mike, and that is based on the Company's history, 74 years or so, in terms of deferred maintenance what is the usual time period when you've been in a period of deferred maintenance, like is it months, how many months before people have to then spend that money?

Is it like three months, six months?

What is your guess in terms of how people can wait before they spend again?

Jack, first of all, I am not that old so I can't tell you what has taken place for all 74 years.

But I think if we look back over the last couple of years in particular, we have seen periods, if you go back to 2004, where in our second quarter we kind of fell off the wagon as we've mentioned the last four weeks of the quarter.

And by the end of the third quarter, business had come back, and fourth quarter was very, very strong.

Again, we had had some hurricane impact there.

I think each instance is a little bit different.

The thing that we do know for certain is that as Larry Castellani used to say, car parts are not like fine wine; they don't get better with age.

And the parts are going to have to be replaced at some point.

Okay, thank you very much.

Thank you everyone.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.