領先汽車配件 (AAP) 2007 Q1 法說會逐字稿

Welcome to the Advance Auto Parts first quarter 2007 earnings conference call.

All parties have been placed on a listen only mode until the question and answer session.

(OPERATOR INSTRUCTIONS) Today's call will be recorded.

If you have any objections you may disconnect at this time.

Before we begin Eric Margolin, Senior Vice President, General Counsel and Secretary will make a brief statement concerning forward-looking statements that may be made on this call.

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

Certain statements contained in this 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 and future performance, including new store openings, remodels and relocations, comparable store sales, sales per store, gross margin, SG&A, operating margin, return on invested capital, free cash flow, accounts payable ratio, capital expenditures, tax rate and earnings per share for the second quarter in fiscal year 2007.

These forward-looking statements are subject to risks, uncertainties and assumptions including those disclosed in the Company's 10K for the fiscal year ended December 30th, 2006, on file with the Securities and Exchange Commission.

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

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

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

For planning purposes, our second quarter earnings release is scheduled for after market close on Wednesday, August 8, and our second quarter conference call is scheduled for the morning of Thursday, August 9, 2007.

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

Finally, a replay of this call will be available on our website for one year.

With that, let me now turn the call over to Jack Brouillard, our Chairman, President and Chief Executive Officer, who will be followed by Jim Wade, Executive Vice President of Business Development, and Michael Moore, Executive Vice President and Chief Financial Officer.

Jack?

Good morning, everyone, and welcome to our first quarter conference call.

First, I'd like to start by thanking our Advance Auto Parts team for everything they do to serve our customers every day.

Each of you is the key to our continued success.

I look forward to meeting many of you over the next few months, as I have the chance to visit our stores, distribution centers, and store support offices.

As was announced last week, I am proud to have taken on the role as CEO while we undertake a nationwide search.

I'll be working full time with a very talented and experienced management team to pursue the many opportunities we believe we have to continue our growth and improve our performance.

During our comprehensive strategy review, we have taken an in-depth look at the industry and our customers and those who should be our customers.

We believe the insights we have gained from this process will enable us to create a leaner, a more cost effective business model that will enhance our sales and allow greater profit flow through as well.

I want to let you know about some of our goals over the next several months.

First, we intend to drive sales in both DIY and DIFM.

To accomplish this, among other things, we will intensify our focus on the parts business.

Second, we plan to accelerate our focus on SG&A.

Third, we will take a fresh look at all of our capital spending and reduce or eliminate projects which have not delivered the returns we desire.

Fourth, we will also begin implementation of initiatives identified in our strategic review.

Some of these initiatives can be implemented in the short-term and some will need to be tested, measured and implemented over a longer term.

We plan to provide more details on the results of our strategy review as time goes on.

We do, however, believe we can gain a greater share of the DIY market while further accessing the DIFM revenue stream.

Our efforts to achieve this growth will be to concentrate on what we know and what we do best, which is to provide the parts and accessories along with the service and parts knowledge that our customers need.

Jim and Michael will now review our first quarter results.

For the first quarter, we achieved sales and earnings per share within the guidance that we had provided, and we're also reaffirming our previous guidance for the remainder of the year.

We have a high performing team at Advance that is not happy with our recent sales trend and is committing to improving our sales results.

With that, I'd like to turn the call over to Jim to review our sales and store growth in greater detail.

Jim?

Thank you, Jack, and good morning.

Let me start by saying on behalf of our management team, that we all look forward to working with Jack to accomplish everything our Company is capable of achieving.

I'll provide further color on our sales for the first quarter as well as our store growth plans and Michael will discuss gross margin, SG&A as well as the balance sheet and cash flow.

As Jack said, our same-store sales for the first quarter came in at the low end of our guidance at 1.1% compared to 3.9% last year.

During the quarter our sales results were mixed both geographically and by month.

We saw our strongest sales in February and March and our weakest sales in January and April.

As with much of retail, sales in the month of April were weak for us.

We believe the cold, wet weather adversely impacted our results during these weeks along with the significant increase in gas prices.

On a geographic basis, sales were strongest in the northeast and midwest and weaker in the Florida and Gulf Coast markets that benefited last year from a post-hurricane sales surge.

We believe most of this surge has now cycled.

Although we're tracking over easier comparison for the balance of the year, we're keeping our same-store sales guidance at low single digits for the second quarter and full year 2007, which is where our comps are tracking for the first three weeks of the second quarter.

Until we see consistent improvement in our sales trends, we plan to base our business on these sales run rates.

During the first quarter our DIY comps were negative .2% compared to positive .5% last year.

DIY comps and specifically customer count remains our biggest sales challenge.

Our commercial comps were 5.2% over a strong 6.

-- 16.3% last year.

This was a lower commercial comp run rate than we had had experienced over the last several quarters, and although it was a strong comp last year, we know we need to renew our focus on getting our commercial comps back to the double digit run rate we previously achieved.

We're the third largest industry player in commercial sales, but even as we approach our goal of having 85% or more of our stores with commercial programs, we continue to see significant opportunity to grow our commercial business.

Specifically, we should expect greater growth from our programs that have been added over the the last five years.

Historically, these programs have shown the most growth.

Commercial sales including Autopart International represented 26.1% of our total sales for the quarter and for the quarter our total commercial sales were approximately $383 million, a 9.9% increase over last year.

Commercial is the fastest growing segment of the auto after market and we expect it to continue to become a larger portion of our business as well.

During the first quarter we added 54 new commercial programs, most of which were in our new stores, bringing the total number of Advance stores with commercial programs to 2,493.

Today, about 82% of our Advance stores have commercial programs which is slightly up from this time last year.

Autopart International also continued to grow in the first quarter.

We significantly accelerated AI's new store growth rate in 2006 with 25 new stores.

We opened an additional 8 stores in the first quarter bringing the total store count to 95.

For the first quarter, AI contributed $36 million in total sales.

The AI team also successfully opened their new distribution center in Norton, Massachusetts, in the first quarter which provides them the capacity to serve up to 300 stores.

Transition to this new DC and the close of their old facility, somewhat impacted AI's operations during the first quarter, but with this opening behind them, we're pleased with the results we've seen in the last several weeks.

Shifting back to Advance, we had another strong quarter with our new store growth, with new store productivity comparable to last year.

We continue to expect new stores to generate approximately 70% of an average stores volume in their first full year of operation.

During the first quarter we opened 70 new stores, 62 of these new stores opened as Advance Auto Parts and 8 opened as Autopart International.

We closed 2 stores in the quarter.

Our pipeline of new stores remains solid as we completed the first quarter.

We still anticipate opening 200 to 210 new stores in 2007 through a combination of Advance and AI stores.

This represents a 6.5% rate of unit growth, which is down from our 7.5% last year growth.

That's lower growth rate translates into less CapEx and less SG&A for new stores.

In 2007, we anticipate all of our new stores will open within our existing 40 state footprint.

We also remodeled 34 stores in the first quarter.

As we mentioned last quarter, we reviewed our remodeled program scope and identified opportunities to reduce this investment.

All remodels are now being done with this new approach which reduced our CapEx per store by more than $60,000.

Over the next few months, we'll be measuring the sales increase produced by this new remodel program.

The sales results we achieve will determine the pace and the scope of remodels for the remainder of this year and 2008.

In the first quarter we also relocated 8 stores and foresee a total of approximately 35 relocations in 2007.

We ended the quarter with 3,055 Advance Auto Parts stores and 95 Autopart International stores for a total count of 3,150 stores.

Our comprehensive business review is helping us to reassess how we approach the DIY and commercial business to help us prioritize our uses of capital.

As our review progresses and we reach other decision points about the business, we will communicate more in the quarters ahead.

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

Thanks, Jim, and good morning.

First let's review our income statement.

For the quarter gross margin was 48.3%, a 57 basis point improvement over last year.

This was primarily due to improved procurement costs and somewhat due to lower logistics costs.

Our improved procurement costs were due to continued efforts to lower costs with domestic suppliers and an increase in direct sourcing.

As a result of this, LIFO was a $10.3 million credit in this year's quarter compared to a $2.9 million credit in last year's first quarter.

These lower procurement costs will benefit our gross margin for the balance of the year, however to a lesser degree.

Turning now to SG&A.

Our SG&A expense rate for the quarter rose 46 basis points compared to last year's first quarter.

This increase was primarily a result of deleverage on fixed expenses as a result of low comp store sales.

This represented a 70 basis point increase.

In addition, incentive compensation increased 35 basis points as compared to last year.

First quarter SG&A as compared to last year benefited by two noncomparable items.

Last year, we held our biannual store managers conference which represented 30 basis points of expense last year.

In addition, last year included 20 basis points of expense related to the resolution of certain legal matters and property damage costs.

While our expense rate increased in the quarter, we deleveraged SG&A to a lesser degree than in the fourth quarter as we expected.

Looking forward, there are a number of programs that will help leverage SG&A and improve return on invested capital.

Our commercial growth will consist primarily of leveraging existing commercial delivery programs.

Also, we will be remodeling fewer stores at a much lower cost per remodel and we are planning to open and relocate fewer stores in 2007 than we did in 2006.

As we have stated before, we expect to leverage SG&A on 3% to 4% comps going forward and as Jack stated we are looking to accelerate our SG&A reduction initiatives.

For second quarter, assuming a low single digit comp store increase, we would expect SG&A to deleverage to a modest degree.

Interest expense, net of interest income, was $10.9 million in the quarter compared to $9.5 million last year.

Approximately 50% of our debt is hedged to fixed rates and our current borrowing cost is approximately 6% at today's rates.

Our first quarter income tax rate was 38.5% as compared to 36.6% last year.

Last year's tax rate of 36.6% included a $1.8 million tax benefit related to the favorable resolution of certain tax contingencies.

This reduced last year's tax rate by 150 basis points and favorably impacted earnings by nearly $0.02 per share.

With the adoption of FIN 48 on certain tax positions, which took effect in first quarter, our effective tax rate will slightly increase.

Going forward we expect our tax rate to be in the 38.4% to 38.6% range.

Approximately 30 basis points of this increase is a reclassification from interest expense to tax.

In terms of the key components of our balance sheet and our cash flow statement, in the first quarter, we generated free cash flow of $105.1 million.

For the quarter inventory increased 9.5% on a sales increase of 5.4%.

The rate of inventory growth in the quarter was greater than the sales growth due to, one, an inventory build in the new AI distribution center, two, first quarter sales coming in below expectations, and three, several merchandising initiatives, including an expanded parts assortment in selected stores.

For the remainder of the year, we expect that inventory will be more in line with sales.

Our accounts payable to inventory ratio was 57.0%.

This ratio grew 3.8% in the quarter versus a 3.1% growth in last year's quarter.

As a result of working with our suppliers, we expect this ratio to exceed the prior year's corresponding quarter for the remainder of the year.

In the quarter, we spent $75.9 million in CapEx as compared to $78.0 million last year.

We have taken a number of steps to curtail CapEx growth in 2007, with fewer new stores, relocated stores and remodels as compared to 2006, and our lower cost remodel program, we continue to expect CapEx for the year to be approximately $250 million to $270 million, as compared to to $259 million in 2006.

Also, this year's estimate includes approximately $30 million for our ninth distribution center, which we expect to open in 2008, and as Jack said, we are taking a fresh look at all capital spending with a focus on improving return on invested capital.

With nearly flat growth in CapEx for the year, we would expect free cash flow to grow more than 50% in 2007 to a range of $125 million to $145 million.

Looking forward, we are are keeping our sales guidance at low single digit comps for the second quarter and full year 2007.

Based on this guidance, second quarter earnings are expected to be $0.65 to $0.69 per diluted share and full year 2007 earnings are expected to be $2.38 to $2.48 per diluted share.

Now, I would like to turn the call back over to Jack.

Thanks, Michael.

In closing, I'd like to again thank our team for their committment over this past quarter, and I look forward to seeing them in my travels over the next few months.

For the investment community, I look forward to meeting and talking to as many of you as I can.

And I look forward to keeping you up-to-date on our results as we begin our strategic plan implementation.

We're now ready for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question today is from Armando Lopez.

You may ask your question.

And please state your company name.

Thanks.

Armando Lopez.

Morgan Stanley.

Good morning, everyone.

Just a couple of questions.

I guess first, in terms of the new strategy review, historically, Advance has talked about an operating margin target of 11% to 12%.

I guess could you just provide -- provide a little color on how you're thinking about that now with the review that was ongoing?

And then second, if you could maybe provide a little more color in terms of, you talked about more cost effective and better top line growth.

About -- if you could provide color around what you expect or what you see as maybe some of the low-hanging fruit or opportunities that you could implement more in the shorter term, and then maybe a little bit on the longer term?

Thanks for the question, Armando.

I'll take the first part, and then I'll ask Jim and Mike for their comments.

We still feel the strategy -- the strategic plan did not do anything to make us feel that a 12% or so operating margin target is what we're shooting for.

We're depending on how you look at it, 300 basis points away from that now and our plan is to build towards that margin.

I'll turn it over to Mike and Jim now.

On the SG&A, we're taking a hard look at all of our spending.

We're looking in the advertising and marketing area, certainly capital is a very focal point for us to look at.

Obviously, over the last four quarters with a comp of 1% to 2%, our many capital investments are are not returning an adequate capital return, so we think there's an opportunity to further look at capital spending and make some further reductions.

Okay, thank you.

Thank you.

Our next question is from Scot Ciccarelli.

You may ask your question and please state your company name.

Hi.

RBC.

How are you guys?

Good.

Good morning, Scot.

This has never really been a price elastic category, so I guess the question becomes, how or why do you think you can drive better sales growth?

It's something that Advance has done, some of the competitors have talked about at different times, but it's always been proven more difficult to actually execute than talk about.

So, I guess I'd just want to get a little better feel for what are the specific plans and why do you feel confident that you can drive better sales growth?

Scot, this is Jim.

I'll take -- I'll start and I think from an overall standpoint, as Jack mentioned, the focus certainly will be on our parts and parts availability and sort of the core business that we've been in for a long, long time.

Looking at that by the two segments of the business, I think commercial we've demonstrated that we can grow that sales comp at a significant rate over the last several years and we've got to refocus and make sure we get that back to the double digit types of rates that we've experienced, and we still have plenty of opportunity to do that, just by focusing on our business model for commercial and taking advantage of the growth in that market.

On DIY, the focus clearly has got to be on getting more customers back in the stores, and that starts as we mentioned with parts availability and our team having the knowledge to sell parts to our customers, and we've got a good base and we just got to grow on that but those are the key things that I think we're prepared to talk about today.

But, Jim, is that something that becomes a conversion issue?

Are you gaining the bodies and not converting them, because if you're looking to pair back advertising expense, it seems to me, it's going to be difficult to kind of convey that message to customers to drive more customers in the door, isn't it?

Let me -- let me take that.

This is Jack Brouillard.

Let me take another perspective.

We get a great number of phone calls that precede any visit to our stores related to the parts business, and what we're learning from the phone calls is that we need to deepen and improve the assortment.

We do -- we do a nice job if we carry the part, but if we're not carrying the part in that particular store, or can't get it there quickly, we lose some business.

We've had a lot of people within the company give us some very good ideas about how to improve what is a pretty good system already, but make it even better, and we think that's a source of business that we're losing now.

Okay, and is that going to require further inventory build in that particular category?

Well, in some cases it will, but it's very selective.

It's not a wholesale inventory build, but it's a fine tuning more of the inventory.

Okay, thanks a lot, guys.

Thank you.

Thank you.

Danielle Fox, you may ask your question and please state your company name.

Thanks, good morning.

Danielle Fox from Merrill Lynch.

I have two questions.

First, I was wondering if you could go into a little bit more detail on the trends in new store productivity, because we actually got -- our calculations showed a different trend.

We calculated that new store productivity was less than 60% versus over 70% for most of last year, and I'm wondering if you could share some of the numbers with us.

Yes.

Danielle, this is Jim.

The -- we mentioned this last quarter as well, and it's the same type of situation where our new store productivity is comparable to last year, the numbers are almost identical to this time last year.

Some of the other categories of sales that we have, which include AI, as a starting point, which has a lower -- somewhat lower sales per store.

Our Puerto Rico operation that we're doing some things there that our sales are lower and some of the other categories of sales that aren't actual Advance Auto Parts sales are affecting that.

And we can talk more about that as well, but the -- that's what's causing the calculation to not come out quite like it would have in the past.

Okay, and do you have a stated target in terms of sales per square foot for the traditional -- the traditional Advance Auto Parts store?

Well, we don't look at it necessarily as sales per square foot, but the target obviously -- I think our average sales per Advance store now is approximately $1.550 million.

Roughly $1.550 million.

We look to continue to grow on that and certainly the new stores we're opening we think have the potential to make and exceed that number over the course of their ramp up.

Okay, thanks, and one other question.

I think, Michael, in your comments you mentioned that incentive compensation, delevered SG&A.

I'm wondering why that was, what's different last year versus this year?

Before I answer that, I want to speak about an item that was raised by someone.

On our cash flow statement, we brought in -- we had insurance proceeds from damaged property due to a hurricane of $3.2 million in the quarter.

That was a cash only transaction and there was no P&L impact in the quarter due to those proceeds that were received -- received.

And in terms of the incentive compensation, we delevered incentive compensation by 35 basis points.

That was primarily -- our incentive compensation is based on achieving sales and operating income to budget, and last year we missed those metrics in the first quarter, so we paid less incentive compensation than we did this year.

This year, a portion of those metrics was achieved and we will pay out more incentive compensation.

Okay, thank you.

Thank you.

David Cumberland, you may ask your question and please state your company name.

Thanks.

With Robert Baird.

With the greater focus on some newer areas due to the strategic review, are there any initiatives that you've had going on in the past that you might deemphasize?

David, I think it's safe to say that we'll be looking at all of the initiatives in every department to -- as Jack -- as Jack had mentioned earlier to look at what return we're producing from that, as well as how well that aligns with our new strategy.

And certainly, there will be things that will be stopped because of the return or because they don't align, and in some cases there will be things that are started that will better support what we want to go going forward to a greater level.

For the store remodels, in the last call you talked about a plan of 150 for 2007.

It sounds like that number may not apply any longer.

Is that right?

We're going to take a look, as I talked about in the notes.

We're going to take a look at the return now that we've done several of these using the new strategy and see what kind of return we're getting, and from there, I believe the remodel program like it is or change it depending on those returns.

So to your point, the 150 is not a number that's absolute.

It could change certainly in either direction depending on the returns we're getting, as well as we'll continue to define the scope of the remodel based on what we're seeing happening with these stores.

Thank you.

Thank you.

Tony Cristello, you may ask your question and please state your company name.

Thanks.

BB&T Capital Markets.

Good morning, gentlemen.

Good morning Tony.

I guess, first question I wanted to talk a little bit about is the parts assortment.

And when you look at your mix, in terms of wanting to get more aggressive perhaps on the commercial side of the business, what are you using to determine what parts the professional installer is wanting you to have versus what parts the DIY customer is requiring?

And how are you going to balance that mix?

If you're -- because if you're definitely going to dedicate more toward the commercial side, it is going to shift in terms of which categories you're going to need to strengthen or build inventory in.

Tony, this is Jim.

It's a, I think, somewhat of a complicated question that our team will continue to work through over the next several months, but on a general basis, the model we followed for commercial over the last several years, which has proved to be I think overall pretty successful, is we have not changed our store mix significantly as we've added additional commercial business.

We've basically leveraged off of the business and the inventory that's in the stores.

We don't anticipate that's going to change dramatically, but it could change on a category-by-category basis where we look at as we do more and more customer research, we're able to look at the parts we have in the stores and the lines we have in the stores and see if they can both -- if they can support both our DIY objectives as well as our commercial, and I think in most cases the answer will still be yes, but in some cases it may not be, and if so our team will be looking at how we address that.

The same thing is true I think about the logistics network in terms of how many parts are in our stores versus in our local area warehouses and other places of trying to insure from a commercial standpoint that we have the parts as close to the customer as we need to, to insure that we can deliver quickly.

And I think through our strategy review on an overall basis, our program has been reaffirmed as being a pretty solid program.

Having said that, we know we've got to continue to adapt it and change it to access a greater stream.

How -- when you look at the inventory now, and obviously you identified it being up inventory build, weaker sales and such, but is some of the increase in inventory simply related to you just not being able to fill commercial customer demand because you had the wrong part at the store?

And do you have the systems, one, in place right now that's telling you that, and two, is there some type of IT spend that you'll need to generate a better look or at least accountability in terms of which inventory needs to be at which store?

I think on an overall basis, the inventory increases that you saw in the first quarter and likely, the changes in inventory as we go forward over the next several quarters are supplements and improvements to what we have already.

It's not a situation where we think we have to change things dramatically.

As part of that initiative, certainly we expect to get better and better at our whole custom mix process of being able to see on a store-by-store and a local level what's there that shouldn't be there and what we should have that we don't have today, and that IT capability is something that is certainly on our list of initiatives that we'll be looking to get better at over the next several quarters.

Okay.

And when you look at the commercial efforts, are you comfortable with 25% mix of your business or could you see ultimately commercial representing 30% or 35%?

Before it was a situation where you certainly wanted DIY to represent and commercial would supplement, but now it sounds like you're not opposed to a more aggressive approach.

Is that a correct assumption?

I think on an overall basis that's a correct assumption.

We've always said that we haven't set a target for commercial to be X% of our business.

We've allowed the customers to decide that for us and we've driven the business.

I think as we look out, certainly the same types of trends we've seen over the past few years probably will still be the case where commercial will grow faster, and as it grows faster our intent is to still grow DIY, but the combination of those two will likely result in commercial being a total percentage higher than it is today.

Okay, and one -- just one other thing, Michael.

The cost related to the relocation of the DC, what was that in the quarter?

Was it significant?

And then secondly, is the strategic review with [Baines] officially completed or do you still have a few more items to discuss with them?

Yes.

I would say on the -- as far as the inventory for AI oud of the three items I've listed, the inventory growth, the build up in inventory, AI's inventory was I think more than -- $10 million more than last year.

Okay.

AI from an expense standpoint as well was impacted in the first quarter with the fiscal move of the inventory from one facility to another and those related expenses and that was not material certainly to the first quarter in dollars, but it was an additional expense.

In regard to the status of this -- of the strategy review, I think the way we would describe that is the large -- most of the general review has now been completed.

We're analyzing and getting those results and from there, we'll be identifying specific things within that that we want to do more work on, but the first phase that we identified, I guess, when we first talked about it last November, has basically been finished and we're looking at next steps in regard to what areas require additional work.

Okay, thanks, guys.

Thank you.

Thank you.

Our next question is from Gary Balter.

You may ask your question and please state your company name.

Hi, it's Gary Balter and Seth Basham.

Good morning.

First of all, we were the ones that put that in late, so thanks for correcting it.

We'll own up.

Just a question, first of all one thought is maybe you should limit people to one question and one follow up, so other people could ask questions.

But AI has been kind of separate and as you know, I met with them, Mike, with you.

Could you discuss and I don't know if the Baines study had anything, but thoughts about using their knowledge better in your commercial business outside of AI and other thoughts about integrating?

Thank you.

Gary, this is Jim.

It's a -- your question, I think, has a lot of opportunities with it still.

We -- probably the area that we've used AI the most so far from a commercial standpoint is to help to leverage off their expertise in foreign car part sales, as well as sourcing of product, and that has been a significant positive for Advance Auto Parts as a whole in regard to the knowledge we've gotten there.

The two companies, AI operates generally separately.

We look at whether there's an opportunity from a shared service standpoint to leverage both company strengths.

Certainly, as we look to grow commercial even further going forward, we will continue to use some of AI's expertise in regard to that.

That's happening already, and there's a bigger opportunity for us to do that as we grow both companies.

Okay, and just if we could step back and your thoughts on the macro, like obviously you mentioned already that you're running low single digit comps for this quarter.

You had that last quarter.

Gas pricing is going back up.

What are your assumptions about where gas is going to go and how important from our side should we be thinking about the impact of gas pricing on your potential to improve comps in the second half of the year?

Well, I think the first part of that as far as where gas prices are going to go, we unfortunately don't know the answer to that.

I think that certainly gas prices have gone up very rapidly over the last few weeks and months and they are are at a high level although they aren't significantly different at this point than they were this time last year.

I think what has happened over the last several weeks is just the fact that they've gone up at a very rapid rate has certainly had some impact.

Having said all that, certainly we would prefer to see gas prices lower, but they are going to be what they are going to be, and within our business, the comments that we've made in the past are still true, that customers that shop auto parts stores still have to have the parts that they have to have to operate their cars.

And I think within our business trends, we've continued to see the categories that are most nondiscretionary, things like batteries, are the ones that are typically the strongest because our customers still have to replace those types of things.

In regard to sales, just as somewhat of a clarifier, in the comments I made earlier, our business was stronger through March than it was in April.

April, the business dropped off quite a bit, and then last three weeks we've seen the business return back to the levels it was prior to the April run rate, so -- and again, I think this is sort of the second time around that we've seen gas prices spike, at least twice, and as that happens, the customers adapt.

We've seen, in terms of miles driven, that the trends in the run rates have still stayed generally positive, so customers at the end of the day adapt and adjust and they still have to keep their cars on the road, and I think that's -- we have to make sure that we're capturing a greater portion of that business.

Okay, thank you, and Jim, it's great to hear you again.

Thank you, Gary.

Thank you.

Matthew Fassler, you may ask your question and please state your company name.

Thanks a lot, and good morning.

Two questions today.

To begin, Jim, you made reference to essentially the custom mix process and systems.

Can you give us a sense as to how far along you are on that road?

I know it's been a priority for the company for a number of years.

Is this a question of going outside to get new software, if you will, and to kind of reconceive the whole thing and what steps do you need to take to I guess take the infrastructure that you already have and fine tune it to get the store specific parts assortments that you want?

I think on an overall basis, Matt, we're not in a situation where we have to go outside and start over.

We've made some significant progress over the last several years in regard to custom mix, but on a scale of 1 to 10, we have a -- we have a ways to go yet, and we have a team in our IT area and merchandising areas that understand the opportunities we have there, so we anticipate being able to make some solid progress on that internally, certainly sooner rather than later and then continuing to refine from there.

So you'd say it's an intensified effort at this point rather than a new effort?

Absolutely.

And in terms of cost to you?

Will that be a significant drag on capital or on SG&A?

Unfortunately, everything in IT costs a lot of money, it seems like, but it will be within our capital budget numbers that Michael talked about, and as we look at how do we use all of our capital better, there certainly could be cases where IT gets more money than it might have before, but we don't anticipate that being a major blip in the capital investment.

And --

-- capital for IT earmarked a significant amount for this year and significant amount over the next few years, we're going through and prioritizing projects -- those projects to where they can most benefit the business.

Got you.

You might have addressed this a moment ago, but just to recap.

When this process is all said and done and you optimize custom mix, do you feel like the inventory dollars per store need to go up, or do you feel like the product just needs to be moved around?

We think -- we think that there's an opportunity to grow sales by selectively adding inventory at the store level, so it may, directionally, it most likely will result in increased levels of inventory, but we -- with that we should generate increased levels of sales.

Got you, and one other point, just kind of an accounting point, Michael.

If you could help us out on the LIFO front.

I know sometimes there's confusion when there's a significant increase in the LIFO credit.

Should we think of that as being incremental year-to-year $8 million benefit to earnings or is that over simplifying the impact of LIFO?

On a year-to-year basis it improved by about 50 basis points over last year, about $7 million over last year, but it's a result -- it's a result of working with our suppliers, lowering our procurement cost and since we're on LIFO accounting, we get a benefit to those lower costs as we put them in place.

So this will show up through the year to a lesser degree as you said on the LIFO line if you will?

Yes.

This will continue to be a benefit because our costs are lower and it will be lower going throughout the year.

And then finally, Jack, if I could ask you one question.

Yes.

The company has outlined a number of strategic initiatives.

You have the seat on an interim basis.

To what degree are you going to move forward now with the company under your interim leadership to address some of these things, and what would you say you would wait to run by the new permanent CEO before you start to push harder?

Well, that's a good -- that's a good question.

We've got a number of things that is a a very clear pathway and we have a deeply experienced management team here so we will be moving forward on parts availability.

We'll be moving forward on the focus on SG&A.

We're going to put all of the capital back on the table, and so most of those things are pretty clearly outlined at this point, and there's a lot of talent here to help us do it.

So I intend to be active in full time, and while we're doing the national search, we've reaffirmed our guidance and we intend to move on, parts availability, all of that.

Great.

Thank you so much.

Thanks, Matt.

Thank you.

Our next question is from Dan Wewer.

You may ask your question and please state your company name.

It's Raymond James.

Jack, could you tell us the type of skill sets that you're looking for in a new CEO, and specifically if you're looking for an executive coming from inside the industry or in other areas of retail?

Thanks for the question.

We're beginning the search process actually this week.

We're working on refining the job description, and particularly, the skill sets.

This will be -- this will be a nationwide search and we're looking for a top high-powered person.

We can't say in advance where that person comes from and we expect that the process will take a certain amount of time, but we're very optimistic that this is a great opportunity, a great company with a great future, that will attract some very, very fine candidates.

At the beginning of your presentation, you suggested you'd like to cut back or eliminate spending on projects where the returns are less than you had expected.

What would be an example or two of such a project?

Well, an example of something that we would look at, that's already been brought up, is the store remodeling program, and what aspects of it are really driving sales, and what aspects of it as the customer willing to pay us to do, and what parts of it is the customer not willing to pay us to do, and what has been the experience of the recent remodels, and what have we learned from it?

And so something like that, Dan, is on the table to be looked at, and if we don't have a remodel program that meets our needs we're not going to keep rolling out remodels that don't produce.

And then the -- just the final question I had, with the Board's decision to change CEO leadership, does that suggest that there was not a total buy-in to the conclusions from the strategic review, and what changes are necessary going forward?

I wouldn't say that, Dan, no.

It was a mutual decision reached between the Board and the former CEO, and we're looking ahead now.

Okay, great.

Thanks.

Good luck.

Thank you.

Thank you.

Our next question is from Nancy Hoch.

You may ask your question and please state your company name.

Thanks.

JPMorgan.

Just a question on cash deployment.

Consistent with the back half of last year, it looks like you've decided to forego on share repurchases to focus on debt paydown.

Do you have specific financial targets in mind that you're waiting to hit before you return to a repurchase program, or do you see a more balanced program moving forward?

Well, the way I look at it number one, we have been over the last 2.5 years, we've repurchased over 12 million shares, in 2006 we repurchased over 3.7 million shares.

This is a capital policy that the Board continually looks at and we will continue to look at it in the future.

Okay, great.

And I think you laid out some opportunities for near term cost cutting.

Longer term, are there opportunities specifically to take costs out of the stores, whether it's through labor optimization or do you feel like you're at a near optimal point right now?

We believe -- we are reviewing our entire business model and we think there are elements that business model that we can further refine and take further costs out of the model.

And we're looking at all -- all of those elements that are not valued by the customer.

Okay, great.

And then just one last question on, I guess, the acquisition forefront.

I mean there's been a lot of discussion in the DIY space.

Focusing on the commercial side, do you see -- what does the market look like right now in terms of opportunities to grow AI maybe a little more aggressively through acquisition?

That's something we continue to look at from AI standpoint and we did make one small acquisition in the first quarter.

It was just a couple of stores, but our -- part of our program there at AI is to develop that model in such a way that we can use it as a opportunity to do some of the roll up of other commercial providers out there.

And I would hope that as the year goes by, we'll be able to talk more about that and demonstrate what we can do there.

But our first -- one of the first things we needed to get through with AI was getting into a facility from a distribution standpoint that would support more growth, and the good news is we have that behind us and what we're seeing is very positive.

So we want to look at acquisitions as part of their growth strategy.

Great.

Thank you.

Thank you.

Thank you.

Our next question is from Bill Sims.

You may ask your question and please state your company name.

It's Citigroup.

Thank you, and good morning.

Good morning.

Couple quick questions, first, on the hard parts availability.

First, you commented inventory might go up associated with the increase in hard parts availability.

Can you talk about the working capital impact?

Is there any opportunity to improve your payables to offset that increased inventory?

Yes, absolutely.

As we increase the inventory we expect our payables ratio -- our AP ratio will improve.

So should we see very little working capital impact?

Is that the case?

Yes, just very minor working capital impact.

Okay, second, regarding parts availability.

What you're going through right now sounds similar to what AutoZone has been going through the six quarters, and it's taken them six quarters to improve their inventory position.

What is it about the industry -- if you're not meeting demand in certain categories and they were not meeting demand in certain categories where is the demand being met in the categories?

Do you see any other type of shift to another channel or another retailer?

I don't know that we're seeing any significant shifts.

I think this business is about parts, and the better we can be at the parts that we have available for our customers, the better we're going to do at the Company, and the good news is parts is a high margin business and it's profitable.

I think what's occurring is as we do more commercial and as the DIY customer base continues to change some the types of parts the customers expect to see changes to some extent.

The vehicles that are coming into the market have different needs than the ones that might be dropping out on the back end, so it's an evolving process, and the better we can be at that, the more DIY business that we're going to be able to do and the more commercial revenue stream that's going to open up to us and that's our objective.

Jim, as I've mentioned, it took AutoZone about six quarters to get through a deeper parts assortment.

What's your forecast?

How long do you think it will take to improve your parts assortment?

Well, as Michael, I think, mentioned some things are starting to happen already.

We had some increases in the first quarter.

There will be short-term things that occur over the next several months, and then some will be longer term, and that's part of the evolving process I think that we have to go through.

Okay.

And then just one last question for Michael.

In regards to the insurance proceeds, it sounds like the hurricane-related settlement.

Why did it run through cash flow from investing activities as opposed to cash flow from operations?

That's correct.

Why investing activities and not cash flow from operations?

Is that normal accounting treatment, or is that -- did any of your advisors advice you to shift it there versus cash flow from operations?

This is proper accounting treatment.

Okay.

Thank you.

Thank you.

Our next question is from Jeff Sonnek.

You may ask your question and please state your company name.

Thank you.

FBR.

I think last quarter, you commented, this is with respect to the remodel program.

I thought you said you guys were achieving something like 40% reduction off of the $150,000, so kind of in the $100,000 range per store.

Number one, is that correct?

If it is, can you just kind of provide some color around what is it -- where are you getting those savings specifically?

What would I notice if I walked in a store or would I notice anything for that matter?

Historically, we've spent more than $150,000 per remodel and we've been able to reduce that to less than $90,000 per remodel today.

We're in the process of our -- rolling out our reduced scope remodels over the last 30 days.

And what we did, we looked at all elements of the scope of the remodel and we identified those elements that were important to the customer, such as exterior signage and interior signage, which did a better job of branding our store, upgraded lighting and floor resets, but there were some elements of the remodels which -- where we were moving counters that we didn't believe were leading to incremental sales.

So those are the elements that we eliminated.

And the intent certainly of all of those changes is from a customer standpoint for them to still get the appreciation of a remodel -- refreshed store but doing it more effectively and we'll measure the result the we get from that and depending on those results, we may change it yet again.

And then can you also just comment, you kind of talked about the weakness being kind of some poor weather and then the ramp in gas, but in February and March -- just kind of talk about what was going on then that kind of seemed to improve things in the customers eyes?

Yes.

I think we tend to see the month of April probably as the exception rather than February and March.

I think as we mentioned, the last three weeks, our trends have been back in line with what we saw in February and March, which was better than April and better than our results for the entire first quarter as a whole, so it's early and time will tell, but I think we like so many other retailers, all business being very tough in April.

And then, finally, if I could just ask one more.

Regarding advertising, I think it's fairly clear that you guys spend a little bit more than some of your competition.

Are there kind of obvious areas here that you guys have targeted where you -- where we may see some of those savings come from?

We are -- we are doing a complete review of our entire advertising marketing spend, and so as we go through that process we will expect to identify elements that we can rechallenge or refocus how we're spending our dollars.

To be just a little clearer, we're studying the impact of our advertising in a much greater depth and which media and what mix makes the best sense for us given our objectives.

Alright, thank you.

Thank you.

Our last question today comes from Rick Weinhart.

You may ask your question and please state your company name.

Hi, it's Rick Weinhart.

BMO Capital Markets.

Good morning, Gentlemen.

Good morning.

First, just one quick clarification.

It sounds like the sales weakness was generally an industry trend, so is it safe to say that you don't believe you lost any market share in the quarter?

We don't believe we did.

In fact, April, although it was weak, was particularly weak in one particular week within the month that had a significant effect on the quarter overall, and it was a heavy storm week up and down the east coast.

Okay.

As we stated before, the first 13 weeks of the quarter were much stronger than the last three weeks of the quarter.

Okay.

And just one question on your store base.

If -- as you look across the portfolio of stores, do you have a meaningful number of stores that are underperforming at this point, and if so, is -- are you looking at possibly closing a larger number of stores?

Is that part of your strategic review?

Rick, this is Jim.

We don't believe we have a significant number of underperforming stores.

It's something that we look at by store, by market continuously, and we have not closed very many stores over the last several years.

Will we close more?

We might -- we might close a few more, but we would not see a significant change certainly at this point in what you've seen before.

Okay, thanks, and my last question, just on the -- I understand the payables were up, but the finance vendor payables, I think was down in the quarter.

I'm just wondering, Michael, that's a trend we've seen the last couple quarters.

Should we see that start to level off, or is there a reason that may continue to decline?

No.

We don't expect it to continue to decline.

We're actively working with our vendors to put them on that program, but as I stated before, we're working with our suppliers for improved terms and we expect the AP ratio to be better than last year for each quarter for the remainder of the year.

Okay, thanks very much.

Thank you.

Thanks -- thanks to all of you for being with us today.

We really appreciate your interest and support of the Company, and we look forward to talking with you in the future.

Thanks again.

Thank you.

That concludes our call today.

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Thank you for joining us.