領先汽車配件 (AAP) 2007 Q4 法說會逐字稿

Welcome to the Advance Auto Parts conference call.

Your lines will be in listen only until the question and answer session of today's conference.

This call is being recorded, if you have any objections please disconnect at this time.

Before we begin, Judd Nystrom, Vice President Finance and Investor 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 this conference call are forward-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, and comparable store sales along with many others.

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 30, 2006, which is 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 the press release and 8-K filings which are available on our website at www.Advanceautoparts.Com.

For planning purposes, our first quarter earnings release is scheduled for Thursday, May 15, after the market close and our quarterly conference call is scheduled for the morning of Friday, May 16.

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

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

Now, let me turn the call over to Darren Jackson, our President and CEO; who will be followed by Elwyn Murray, EVP Customer Development Officer; Jim Wade, EVP, Customer Experience Officer; and Mike Norona, EVP and Chief Financial Officer.

Darren?

Nice job, Judd.

Good morning and welcome to our fourth quarter conference call.

I'm honored to be joining the Advance Auto Parts team today.

Ideally we would be reporting and forecasting stronger results than we did this morning.

The top line and the bottom line results for the quarter came in below our expectations.

Our sales shortfall in the last six weeks of the quarter was the principal driver of the earnings miss for the quarter, simply put there was a step-change decline of 5 percentage points in our DIY customer traffic during the holiday season.

Yes, the economic environment and the customer are very volatile, that isn't a surprise, however the severe dip during the holidays days was surprise.

It's a blunt reminder that we must turn around elements of our strategy, business model, and our focus in order to be successful and increasingly volatile in a complex environment.

You win in a volatile and complex environment by relentlessly focusing on the customer with superior talent and differentiated capabilities including supply chain and IT .

Our future at Advance will require a more adaptive customer driven model to succeed in the future.

I'm realistic about the road ahead and encouraged about what I'm learning.

In my first few weeks here I've had an opportunity to meet many of our team members in our stores, distribution centers, and our offices.

I have been very impressed with their committment to serving our customers.

I thank them for their committment and look forward to listening to them as we continue to grow our Company.

My confidence and optimism about our future starts with our AAP team members under the leadership of Jim Wade and Elwyn Murray.

In addition, I'm very excited about Kevin Freeland our head of Supply Chain and IT, Mike Norona, and Judd Nystrom, our VP, Head of Investor Relations and having them join our leadership team.

Our focus on superior talent is not just words but has already begun to manifest itself with this team.

Jim and Elwyn have been instrumental in leading the strategy development and initiative prioritization process.

Kevin brings a world set of leadership and supply chain experience with companies like Dell, Best Buy, and Pet Smart.

Mike Norona brings leadership, finance, and strategic implementation capabilities that will allow us to turn abstract things into action, and Judd brings strategic and financial decision support skills that will benefit all of us.

We are in a turnaround mode.

I am confident our leadership team and the AAP team members as a whole will embrace this sense of urgency.

So you might ask, where are we and where are we going?

I purposely chose turnaround mode to define the state of our business.

You must turnaround the business and it begins with a focus on the customer.

We must embrace a customer focused culture and strategy.

We must embrace our turnaround mentality in terms of speed, simplicity, and prioritization.

The prior focus on our 2010 format instead of the customer has us playing catch up on parts availability, parts knowledge, and our cost structure.

Our biggest opportunity is driving top line sales growth.

Our sales per square foot and per employee are in the bottom half of the industry despite all of our capital investments over the last several years.

This productivity gap in combination with our cost structure will be a key focus of our team.

Our strategy is a simple focus on our people.

Our customers and our employees, specifically our strategy will be guided by the DIY and commercial customer needs.

The needs will require us to prioritize availability excellence whether it's parts and solutions, having a superior experience, whether it's employee knowledge in the delivery needs and an efficient enterprise whether it's the customer cost focus structure in our stores or overall corporate center.

Jack Brouillard, Jim, and Elwyn have been reporting on a number of specific initiatives over the last several conference calls.

Elwyn and Jim will projected a further update today on our progress.

Suffice to say I think we're off to a good start.

There is evidence that parts availability is starting to have a positive impact on our commercial business.

The streamlining of our cost structure in the corporate offices, the elimination of Advance television and improved trends in self-insurance are starting to pay dividends.

On the other hand, simplification of our store operating model, the transformation of our supply chain and the organization around the customer are all in the initial stages.

These initiatives collectively are all focused again on our largest opportunity which is our top line growth.

Turning to our guidance for this year, there are many things that I think we would all agree on for FY '08, including the economic backdrop, the volatility of the customer, and our inability to predict the future with accuracy.

The first six weeks of 2008 have modestly perked up.

Our view of the year is that the customer and the related trends continue to be fragile.

We're going to focus on simple ways to build our top and bottom lines.

Those things which are in our reach, specifically growing our commercial business, building the sales productivity of our inventory and sales floor while taking costs out and work out that the customer is not interested in.

There will be considerable change that we will be navigating as we focus on turning around the business.

This change will add more volatility in 2008 as you would expect.

Our best view at this time is that our annual sales will be just over $5 billion, driven by 115 new stores with comp store sales that are flat.

We would expect the bottom line EPS to be approximately $2.55 per share, if our comps are flat with last year, though our comparable store sales are up 1% year-to-date.

This is our best view today based on the current trends and economic volatility but we believe that we have upward potential if our internal plans take hold.

It is early and we will still have favorable interest rate and tax rebate benefits ahead of us which we hope offset higher fuel costs.

We would expect EPS to fluctuate $0.10 per share for every 1 point change in comp store sales.

EPS will fluctuate $0.03 for every 10 basis point movement in our operating margin rate.

Mike will talk about this more in detail.

Here are a few final thoughts.

You can count on us to tell you how we see it.

We are all disappointed that Q4 and FY '07 were below our financial expectations.

The good news is our business has perked up since the steep holiday decline and DIY sales are approaching their pre-holiday levels.

Our commercial business is approaching a 10% comp; however these trends still reinforce the need to realign our business model.

We are making progress on our initiatives that the are focused on the customer.

The environment is what it is and we do not like it.

We are focused on maximizing what we can improve both in terms of our business model today and in the future.

We appreciate your support and your patience.

Now I'd like to turn it over

Thank you, Darren, and good morning everyone.

First of all I'd like to begin by expressing on behalf of the management team at Advance our genuine excitement and enthusiasm about the appointment of Darren as our new CEO.

In a few short weeks it has become evident to all who have interacted with Darren that he brings a tremendous amount of passion and energy to understanding the customer.

He has excellent framework and experience to clean customer insights, develop relevant strategies, and identify and implement practical and impactful initiatives that we believe will make a difference in serving both our DIY and DIFM customer segments in the coming months and years.

In my remarks today, I will touch on three points.

First, how we are igniting our top line sales growth by focusing on the customer.

Second, provide you with an update on the tangible progress we are making on initiatives focused on the most important customer needs.

And finally, share with you how we are organizing and building capabilities to support our customer driven model.

In an effort to ignite top line sales we are repositioning the Advance Auto Parts brand and are launching a new brand campaign in support of this change.

In recent months we have worked hard to define what matters most to our customers.

This feedback has come from extensive research, and our team members.

As a result, we are redefining how we, as a Company, think about ourselves and how we want our customers to think about us.

Our focus on the customer manifests itself in our new brand vision which defines our promise to keep the wheels turning.

This promise speaks to both our DIY and commercial customers.

For DIY customers our promise means Advance is here to help them keep their lives on track.

For commercial customers, our promise means Advance is a partner that will help them build their sales.

Our new television and radio commercials connect this promise with the dominant customer needs of parts availability and parts knowledge.

Overall we are very excited about the new look and feel that this campaign conveys about us.

This part-centric promise is resonating strongly with our team members and we are confident it will connect with our target.

Traditionally DIY customers, core commercial customers and with the all-important and growing number of Hispanic DIY'er s as well.

This campaign launch will be supported by heavy electronic media, funded from reallocated print spending, which we determined to be of minimal value in 2007.

Introduced in select markets in February the campaign will roll nationally the first week of March.

For those that have not seen or heard the new ads I invite you to visit our website at www.keepthewheelsturning.com which we established augmenting our internal launch of the campaign.

Now I will provide you with an update on the tangible progress we are making on initiatives focused on the most important customer needs.

First, we continue to make great strides in improving our parts availability.

We are focused on enhancing our late model and foreign vehicle coverage as well as taking aggressive steps in order to get parts closer to our customers.

In the fourth quarter alone we introduced over $33 million of incremental hard parts into our supply chain and store network.

This compares to $25 million of hard parts introduced in quarters two and three of '07 combined.

We are currently planning to place over $125 million of incremental hard parts inventory into our network in 2008 compared to $63 million total in 2007.

And will aggressively work with our supply chain to store network in order to optimize the product location for serving our customers.

We are enhancing our custom mix capability which enables us to optimize our market and store specific product assortment decisions.

As communicated in previous calls, we have and will continue to fund a majority of this increase by making our existing inventory more productive through the removal of slow moving inventory.

For the year 2008, we anticipate our net increase in inventory to be in line with our projected sales increase.

We are pleased with the incremental sales and productivity of the inventory we added in Q2 and Q3 and look for our Q4 2007 and 2008 incremental investments to produce similar returns on a larger scale.

Our parts availability initiative is helping to drive our DIFM business in the near term and ultimately will aid the DIY as well.

Second, we continue to intensify our commercial focus.

While we achieved strong 5 to 6% comps in the first half of 2007, we continue to see meaningful opportunities to drive commercial sales.

We accelerated our growth rate to 8% plus in the second half of the year.

We saw an improvement in commercial comps as we went through the fourth quarter and comps continue to run above this rate for the first quarter to date.

We continue to look at staffing and training compensation policies, truck utilization, route optimization and many other areas to best structure us for further commercial sales and profitability growth.

You will continue to hear more about this over the next several quarters.

Third, we are changing our previous focus on the front room.

As part of our ongoing business review, we are improving the productivity and efficiency of our sales floor or front room of our stores.

We are continuing the process of rationalizing and removing SKU's within sales floor categories as well as full categories that do not align with our focus on parts and related items.

In the fourth quarter we introduced our first iteration of a 6,000 square foot store that can support our highest level of car parts inventory.

Our previous prototype was 7,000 square feet and as previously merchandised, inhibited our parts availability.

We will continue to refine this model and it will shape the future design of new store and remodels.

In addition to supporting our hard parts coverage we are aggressively looking at incremental auto related category opportunities that will enhance our front room offering for our retail customers as well.

Finally I would like to share with you how we are organizing and building capabilities to support a customer driven model in 2008 and beyond.

While we continue to execute upon many initiatives in form of our strategy review which concluded last May, we are bolstering our internal capability to continuously refine and deepen our customer insight, develop strategies and lead initiative implementation.

Specifically, my role will be changing to concentrate on what we are calling customer acceleration, for both DIY and DIFM segments.

I will be leading our efforts to organize around DIY and DIFM customer segments respectively and envision staffing to further deepen our customer insights, develop new value propositions, prioritize investment decisions based on customer profit pools, and lead implementation through the organization for these respective businesses.

Much like the output of our strategy review conducted in 2007 informed a strategic direction and initiatives of our functional areas, we envision these groups focused on DIY customer segments and DIFM customer segments respectively to provide new insights and strategic direction and to help lead strategy implementation throughout the organization on a continuous basis.

We believe these organizational changes will be catalytic in our journey to becoming a customer driven organization.

We will provide more color in the coming quarters as these organizational changes progress.

I will conclude by saying that I am very encouraged by the progress we are making and our early results we are seeing from the many initiatives that we have underway.

And lastly, I am very excited about our newly intensified focus on the customer and the internal capability that we are building in order to create greater value for our customers and competitive advantage for Advance.

Now, I would like to turn the call over to Jim.

Thank you, Elwyn, and good morning.

I too would like to express my enthusiasm as Darren has begun his role as CEO of our Company.

Particularly exciting is that Darren's committment to learning about the culture that was so critical to our success as Nick grew our Company to be an industry leader.

This committment to serving our customers better than anyone else and building the success of every team member will certainly form a strong base for our future profitability.

I'll spend my time this morning reviewing the steps we're taking within my responsibilities for store operations and store development to maximize our customers experience in our stores as well as key initiatives we're taking to further support our store team and increase our productivity.

As we look at our evolving business, and our anticipated increased level of commercial business, we're reevaluating everything about how we operate and staff our stores.

We know today that our sales per square foot and our sales per employee are both lower than most in our industry.

At the same time, our occupancy costs are higher.

As we go forward we must provide high levels of customer service while achieving a higher level of productivity from our labor and asset investment.

Our review includes identifying opportunities to simplify our stores, by evaluating all of the tasks and processes to ensure they're necessary and add value to the customer experience.

As an example, we're upgrading our systems network in our stores which is both enhancing the speed, with which our team can serve our customers while reducing our technology costs.

Elwyn also mentioned in his remarks our focus on simplifying the front room and removing unnecessary tasks to increase our productivity.

We're reviewing our retail based staffing model to align it better with our rapidly growing commercial business.

We're also reviewing our level of execution of our standard operating procedures.

We're not satisfied overall with where we are in executing the basics.

Our shrinkage is an example.

And we're also redefining and measuring the key customer metrics that drive our sales and productivity.

Our recently implemented Enterprise Data Warehouse is providing us many tools to drive these metrics.

In regard to our commercial business, our strategy review shows that we have a tremendous opportunity to increase our share of this large consistently growing market beyond its current levels.

Our research has provided us a solid understanding of the customer driven capabilities, we must develop to take full advantage of this opportunity.

We know we have some strengths and we also know we have some opportunities, but even with these opportunities, we're still growing the business at nearly 10% comps year-to-date, which gives us a very positive view of the long term potential.

Over time we believe it would be easier to grow our commercial penetration from 25% of sales to 50% of sales than from 50 to 55%.

Elwyn spoke about the importance of increased parts availability especially to the commercial business and we know we're well on our way to closing this gap.

We also know that both our DIY and commercial customers expect our team to have a large base of parts knowledge so they get the right part every time they call or visit.

We're implementing a strategy to raise the level of parts knowledge our customers have a available to them.

As part of that plan, we recently completed a baseline assessment of the level of parts knowledge of all of our team members.

As we anticipated we found that overall we have a strong team of parts knowledgeable customer advocates.

However, from this information, we know we have opportunities, and we now know which parts categories and which markets we need to supplement that knowledge with more training or more resources within the stores.

We're now further developing our training tools to close these gaps.

A key part of our sales driving efforts in the commercial area is the maximization of the effectiveness of our commercial salesforce.

Our team of over 200 professionals has has done job growing this business in conjunction with our store team.

We recently focused -- we're focused now on putting in place the capabilities that will maximize our teams talents.

We're reviewing the optimal organizational and leadership structure for our commercial salesforce, and anticipate having this in place in 2008.

We're developing enhanced tools so that our salesforce can better target key customers, identify trends, and quickly address opportunities.

With our relatively young commercial program, we know we have the opportunity to substantially leverage our investment in commercial parts pros and delivery fleet by increasing sales.

We're exploring opportunities to better align the incentive structure to maximize our team's productivity.

We recently rolled out our first ever incentive plan for our commercial parts pros.

This plan has been great, created with enthusiasm and we see the opportunity to expand it further.

We're also developing tools to leverage our commercial delivery fleet across all our stores.

We know that long term retention of our store team is critical to achieving our desired customer satisfaction levels.

We're pleased to say that in 2007, our overall retention increased over 2006.

Now we're taking steps to further increase store team retention.

In 2008 for the first time all of our bonus plans include a significant component based on increasing the retention rate of our store managers.

Our experience has shown that high store management retention leads to higher retention of the entire store team, higher customer service levels, and higher profits.

We mentioned last quarter that we are doing a complete review of our new store strategy and related occupancy cost.

We've identified a number of opportunities to more closely align our go forward focus on what matters most in being a parts store while reducing our new store site and building cost.

We've Incorporated our updated DIY and commercial sales growth assumptions from our strategy review into our new store research to determine where in markets to best locate stores.

We know our DIY customers rate us high in the convenience of our stores and our commercial customers rate us high on our ability to deliver the part they need quickly.

Our updated data is helping us to further refine our store locations to maximize the strength.

As we're adjusting our new store strategy we're identifying significant opportunities to reduce our occupancy cost over time by as much as 10 to 20%.

We know we don't need to be located at the Main on Main site to achieve our customers desire for convenience and speed of delivery.

That site is also typically the most expensive and as we move away from the corner, our site costs are significantly reduced.

We made a number of changes to our building specifications which will further reduce our costs.

Lastly we've tested smaller prototype buildings and different store layouts, to optimize parts availability and sales floor needs.

In mid 2008 we will begin rolling out our 6,000 square foot prototype as we open new stores in many of our markets.

As we said on our last call we've reduced our new store openings from 196 stores in 2007 to 115 stores in 2008.

We made this decision primarily to provide us with time to incorporate our strategy changes into our new store model.

We believe the current challenges in the economic environment even further support this decision.

We will consider potential ramp up of openings in 20009.

Now let me turn the call over to Mike to review our financial results.

Thanks, Jim and good morning.

I'm happy to be joining the Advance Auto Parts team an starting my first few days of work with you.

I plan to briefly cover the following four topics.

1) an overview of our Q4 results; 2) insights regarding key trends in our business; 3) connecting our strategic priorities with our financial measures; 4) providing the context and assumptions to our annual FY '08 forecast.

Let's get started.

In the fourth quarter, our sales were $1 billion, driven by 196 new stores and partially offset by our comp store sales which declined by 0.4% compared to an increase of 1.6% last year.

We had forecast our fourth quarter sales to be flat to 2% positive for the quarter, overall for the reasons Darren outlined.

However our commercial sales grew consistently in the 8 to 9% range through the entire quarter as we had expected.

The disappointment in the fourth quarter was our DIY comps were negative 3.1% compared to negative 0.3% last year.

There was a step change in December in our DIY sales.

In the beginning of the quarter until Thanksgiving our DIY comp was down 1%.

The day after Thanksgiving, until the end of the quarter, our DIY comp was a negative 6%.

We believe our DIY business was negatively impacted during the holiday season as consumers shifted their limited purchasing dollars to other priorities during this time.

The DIY business is currently running down 2% versus the 6% decline we saw over the holidays.

The bottom line is DIY comps are still not where we want them to be.

We believe that the tough economic environment continues to hamper DIY sales and we believe we have opportunities to turn this business around as Elwyn and Jim discussed.

Our commercial comps were 8.2% in the fourth quarter over 7.9% last year.

Our focus remains on getting our commercial comps to consistently sustain a double digit run rate.

Year to date we are just shy of 10%.

Commercial sales, including Auto Part International represented 27% of our total sales.

For the quarter, our total commercial sales including AI were $288.1 million, a 13% increase over last year.

Today, about 83% of our Advance stores have commercial programs compared to 81% for the fourth quarter last year.

It's a good start, but miles to go.

On a geographic basis, our comps continue to be stronger than North and Midwest and weaker in our other markets.

The trends in Florida and the Gulf Coast in fourth quarter continue to lag the Company weighing down the comps by 0.5 percentage point.

Our gross profit margin was 47.1% in the fourth quarter which was flat compared to the prior year.

This was in line with our expectations for the quarter and reflected a significant improvement from the third quarter.

Overall, the mix of business or product sales helped offset strategic price changes to become market competitive in the parts business.

Our core shrink and defective inventory cost 40 basis points in the quarter.

Jim spoke of our efforts to fix these types of issues in his remarks.

SG&A deleveraged by 24 basis points in the quarter.

I'm not surprised because it's hard to leverage expense with negative comp store sales growth.

Actually, we had forecasted that we would leverage with our 0 to 2% comp guidance, and the deleverage resulted from the lower than anticipated DIY sales that came in the second half of the quarter.

There's some key insights from my view.

The Company took out over 100 basis points in non-productive media, corporate overhead, self-insurance, store development, and logistics, but gave it back in fixed occupancy costs, store selling payroll, and the absence of insurance recovery processes which were included in last years results.

I hope this transparency helps.

In addition it also highlights our sales productivity issues.

Interest expense was $8.2 million in the quarter or slightly higher compared to $7.8 million last year.

Our boring cost in the fourth quarter averaged approximately 6%.

In the fourth quarter, we repurchased 2 million shares or approximately 2% of our total outstanding at an average price of $37.10 for a total expenditure of $75 million.

Since the end of 2007, we have repurchased another 4.6 million shares at an average price of $34.04, for a total expenditure of $155 million.

We now have $105 million left on our share repurchase authorization approved by the Board of Directors in August.

As a result of our share repurchases, our fully diluted fourth quarter share count was 100.7 million shares a reduction of 2.5 million shares from the third quarter.

For 2008 we're using a share count of 96 million in our guidance assumptions.

Our fourth quarter income tax rate was 37%, as compared to 38% last year, primarily due to one-time tax credits.

We anticipate the tax rate in 2008 to be approximately 38%.

Earnings per share were $0.35 for the quarter, compared to $0.33 for the fourth quarter last year, which was slightly below our guidance range of $0.36 to $0.40 as a result of the things we have discussed today.

Let me highlight a few items in our balance sheet and our cash flows.

For the quarter, inventory increased 4.5% on a sales increase of 3.2%.

This increase in inventory was due to our parts availability initiative somewhat offset by our focused plan to improve inventory productivity.

Specifically we are funding a majority of our parts availability initiative through several inventory reduction initiatives.

There's more to come as Kevin Freeland and his team focus on our our supply chain and inventory management optimization.

Our capital expenditures were $73 million for the quarter and $220 million for the year.

This compares to $259 million in 2006, a reduction of $39 million.

We estimate capital expenditures for 2008 to be 170 million to $190 million.

The largest portions of our 2008 CapEx budget will be approximately $55 million for store development, $60 million in maintenance capital for our stores, distribution centers, and corporate infrastructure, primarily IT related and $50 million for new IT and logistics investment initiatives.

Our accounts payable to inventory ratio was 55.1% compared to 53.2% last year.

We continue to see opportunity to grow our AP ratio over time.

We anticipate our ratio in 2008 will be in line with or slightly higher than 2007.

The big win for 2007 was $151 million improvement in free cash flow, the increase to $234 million resulted from lower capital spending and working capital improvements.

All in all, a 280% improvement.

We anticipate free cash flow in 2008 to be in the range of 175 million to $195 million.

Beginning this quarter we have decided to change our policy in regards to how we provide earnings guidance.

We will continue to provide annual guidance as we have in the past, but we will discontinue providing guidance by quarter.

We believe this policy will still provide you the information you need to evaluate our progress while properly aligning our internal focus.

You will also note we increased our transparency this morning and added some additional metrics to our release.

In terms of guidance for 2008, we continue to see a challenging sales environment where we believe it is prudent for us to forecast comps to be flat until our trend and the economic environment show sustained improvement.

We are cautiously optimistic that lower interest rates and tax rebates will provide a positive look yet the escalating price per gallon of gas forecasted for 2008 tempers our optimism.

We anticipate gross margin to improve modestly as we continue to pursue lower cost and leverage our logistics work.

With our SG&A reductions we believe we can leverage SG&A in 2008 at the 1% comp levels.

With these assumptions, we anticipate diluted earnings per share of $2.55 in 2008 as compared to $2.28 in 2007, for an increase of 12%.

We are focused on achieving higher levels of comp sales and bottom line improvement with our strategic initiatives.

Our guidance is based on the prevailing environment.

We anticipate that a 1% improvement in our comps versus guidance will add $0.10 to our FY '08 bottom line, similarly an operating margin rate of improvement of 10 basis points would add $0.03 earnings per diluted share.

As we mentioned on the last call 2008 includes 53 weeks and our guidance is for that time.

We anticipate the 53rd week will have an approximate $0.10 positive impact on our 2008 earnings per share results.

The best use of our time is to focus on our strategic priorities to deliver the results that will satisfy all of us.

Darren?

We are now ready for questions, Operator.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Gary Balter.

Thank you, it's Gary and Seth, so we are with Credit Suisse.

Hi, Gary.

Hi, how you doing?

Just a question, first of all thank you for the guidance and the details.

Just a question on the guidance, because playing with the math, it looks like you're basically assuming flat to slightly down margins if you take out the extra week.

Are we reading that right?

So Gary if you take out the extra week the margins are down a little bit.

Part of that, part of what's underneath that is that as we look out over the balance of this year, we're not assuming particularly in the gross margin as we continue to adjust our prices, we'll become more market competitive as we grow the commercial business, that will put a little more pressure on our gross margins and I'll be honest with you.

Part of it is in the expenses we put some money in because we think we think we're going to have to make some investments in our supply chain and a our IT going forward in order to make the changes in the business model that the we need to going forward so that's what you're experiencing a little bit as you pull out some of the extra week.

Okay, but we heard a lot of very positive developments that are going on so really some of that's just investments for the future, maybe we don't see it this year but basically what we're hearing is we'll see it down the road?

Yes, we're doing a 10 comp in commercial today, and this is, I think that's fabulous and when you get into this supporting capabilities whether they be how we're doing the delivery, how we're supporting the call systems, how we're actually -- we're architected from a supply chain point of view to be a retail Company and we do, we built the Company to this level being a very good retail DIY Company, it's going to take some different types of investments in order to continue to enjoy the growth in commercial and be able to support the strength of the DIY business going forward.

Which raises the other question I wanted to ask which is we heard one of your competitors also in the Southeast Auto Zone talk about adding inventory into their commercial and we saw that in their comp last quarter, obviously O'Riley has been focused and structures its Company around commercial and now you're talking about moving a little bit away as Jim said from Main to Main in the real estate side which raises the whole issue about all of the stores you currently have, but we'll skip that, but how much room is there in commercial for everybody to focus on it?

Jim, do you want to talk a little bit about that?

Yes.

I think the market we've talked in the past to some extent that the commercial market on an overall basis is large.

It still remains fragmented and it's still growing, and I think as you look at the overall market, over time there's an opportunity for us to be a much bigger player in that business than we are today, and as Darren said, we're taking the steps to help us further address the capabilities that the we need to do to be a bigger player.

I think in regard to store location specifically, the majority of our stores over our history has been not Main on Main locations, and as we've done our research around commercial over the last year or so, one of our strengths actually is the convenience of our stores to deliver to garages.

Okay.

And to have DIY customers as well, so we're stepping away to some extent from what the we've done in the last three or four years back to a location that's more compatible for both DIY and commercial.

Okay, and then one last thing and I'll let somebody else ask is you didn't mention Florida specifically anywhere in the release or in your comments this morning.

Is that still the biggest drag on your business?

Yes, during the quarter, it's Mike.

During the quarter, Florida and the Gulf Coast definitely lagged behind.

It wasn't mentioned in my comments.

We saw about 0.5%.

It caused about 0.5 point drag in the comp in the quarter here.

Okay, thank you very much and good luck in the next quarter.

Thank you.

Matthew Fassler you may ask your question.

Please state your company name.

Goldman Sachs.

Thanks and good morning.

Hi, Matt.

I'd like to ask two questions.

The first relates to buyback and capital structure.

Did the guidance that you issued include any buybacks for '08 including the substantial buyback it sounds like you've completed year-to-date, and also related to that, can you just talk to us about the floating rate exposure that you have in your debt book, that which is not swapped out which I would think would work in your favor given the recent rate cuts?

Yes, it's Mike.

I'll take the first half of that question.

I think what you saw last year is we bought about 8% of our stock back, and in the first month of this year, we bought back about a little over 4% of our stock back, and that is built into our forecast in our guidance.

I think as we look forward, we will be opportunistic and look for opportunities but we have not built anything further into our guidance.

So in other words what you've done so far is in there but nothing else?

Yes.

Actual is in there, Matt.

Understood.

That's the theme of today's guidance is many of the things that might be a little different, the people have to process through in the guidance that I'd say our philosophy around guidance is to the best of our ability, put in actual experience and not aspirational experience because when you put in aspirational that goes with it, sometimes things like building expenses go to the aspiration that don't show up so the cost structure issues that we faced maybe in the past a little bit.

Got you.

And philosophically in terms of stock buyback, I think last year, most of that happened in the back half of the year, and this year, we became a little more aggressive right out of the box and you shouldn't read into it we're done, but on the other hand, we thought it was prudent to tell you what the actual is and I think Mike's characterized it correctly that we will be opportunistic going forward.

Understood, and with that, any impact on interest expense from Fed cuts?

Basically how we're structured now, Matt, is similar to how we've been structured in the past which is we have hedged roughly I don't know the exact percentage but roughly half of our interest rate exposure and the other half float, so that's consistent with what we've done for the last several years.

So assuming that today's LIBOR rate for instance is consistent, stays consistent through the year, who knows where it goes, but one would think that your cost of debt would come down below the 6% that we saw in Q4?

Yes, a little bit.

Second question Darren is for you.

You talked a lot about the increased focus on customers and perhaps customer segments, I know this was a practice and philosophy that Best Buy espoused.

Can you talk about how you apply it to the the auto parts sector, what differences there are, what kind of customer segmentation you might see and how you would differentiate within your stores to try to reach out to those customers?

Thanks for that question, Matt.

It will be Darren and Elwyn.

I'd say first and foremost, we need to be simpler here, in terms of it's very simple to begin with, and the good news is Jim and Elwyn already got us going on it in terms of as we focus on the commercial customer, I'd say historically this is not a criticism.

We may have thought of the commercial customer as an additional product offering or an accessory in our business as opposed to beginning to understand which commercial customer, we want to win with so this is talking out of school but many of the retailers I've been with, you can see this in our commercial business, if we just start to gravitate towards who our top 10 or our top 20 customers in -- commercial customers in each store, and how are we retaining them, how are we reducing the churn and how are we growing our relationship by focusing on those customers, we happen to know that the top 10, without giving away secrets but they 're going to be not less than 50% of our business, and if we can simply hold on to them, we can tell within our own data, our comps grow double digits, and in our DIY business, the example I've used with the group, I mean all of us talk about the Hispanic customer, and the growth potential, the margin potential and everything, and all of us and I'll say I think AutoZone has done a better job than many of us in the industry don't know necessarily how to reorganize to when I say take advantage actually serve that customer better so we do it in small incremental ways and we get excited about a little more bilingual in our stores.

If we had a part category that was growing at 20% and the margins were 200 basis points, we would know how to go get that part, but when it comes to a customer set and part of reorganizing Elwyn's responsibilities to include essentially what we've learned in the Bain process, the Bain process actually started us with a commercial set of customers.

They did the same work in the DIY under Elwyn we will integrate merchandising and we'll integrate market going holistically we'll have everything from how we identify customers, how we understand but more importantly how do we ignite demand, and maybe Elwyn you might want to?

Malt just a few additional points and I'll pick up on that the DIY from a Hispanic standpoint.

Obviously we see that as about 15% of the population growing 20% a year and twice as likely to DIY and to Darren's point, it's a missed opportunity for us, so we clearly see that and our targeting that.

Likewise, you'll hear us talk more about what we call the traditionalist in the DIY segment and it's that hard core traditionalist that's doing the big jobs and spends a significant amount of money and from some of our research, we have not scored as favorably there as we would like and part of our brand campaign is really creating a platform that resonates with these target audiences and also provides a relevant platform to talk more specifically about parts and parts availability and some of the functional attributes that we will be enhancing.

From a commercial standpoint, clearly to date, we have pursued that opportunistically rather than strategically and a lot of our commercial segments, if you will, are the smaller bay operations and clearly we think in order to grow we're going to need to win with some larger bay operations, so those will become a strategic focus of ours.

Great, thank you so much.

Thanks, Matt.

Thank you.

Our next question is from Tony Cristello.

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

Thank you, BB&T.

Good morning, gentlemen.

Hi, Tony.

Just one follow-up to the customer sort of centric focus.

What at the store level when you look at what's going on, how is morale and how is the training and the approach being transitioned to focus more on that customer and then Darren, maybe also touch on some of our checks seem to be improved morale and then also notice that there's a $3 million pool set aside to sort of incent store managers as well.

Maybe touch on a few of those items?

So there's a bunch there, Tony, so why don't I have Jim, Jim has been here the longest and in his new role he's connected to the stores but I think he has the best sense of what store morale is and how they're absorbing some of what they're hearing today.

Yes.

Tony, I would start by saying we've got just a huge number of great people in our stores that have made us very successful over the years and history has always been that if we provide them the right tools and listen to the stores that we're going to be successful and I think what we've seen over the past six months or so is a lot of the things around the parts initiative simplifying the front room and a lot of other things that we've done, we've heard a lot of good feedback from our stores in regard to how that's being accepted and I think the other thing that -- there's nothing that makes any of us feel any better than being successful and I think as we get into 2008 and our sales start to respond as a result of some of the initiatives that are going on, that the stores will certainly reflect that.

You heard me talk quite a bit about a lot of the things that we're doing to make the store teams job easier to better align their compensation with their customers and a number of other things, so I think we're well positioned and our team is ready to respond to the initiatives that we have under way.

Yes, what the I would build on, Tony, is a couple things.

So I'd say we're real early in terms of the tools to help our store teams, our DM's, our RVP's to actually begin to manage a business and have tools around the business to do a better job with the customer.

So for example, and I know you walk a lot of our stores so when you walk in, just ask them, how many commercial calls they get a day and you'll get a wide range of answers and then ask how many they convert on a day and you'll get various ranges of answers and then ask them what tools they use to know, boy is my traffic going up or traffic coming down?

Is my conversion changing and they will say, we don't have that , and we're working on tools today and capabilities that will allow us to assess just how is our traffic moving?

So I have a traffic issue, a conversion issue, what's happening in the marketplace to help me have tools.

We're building top 10 customer reports so we can begin to have conversations with our, all the way down to our commercial pros to our DCSM's to the field teams about conversations that speak to how are you doing with your top 10 customers because they're very valuable to us on a store by store basis, and we're building into our incentives, so if you looked at our incentive system today, different than other years, you would see four key things.

We've actually taken sales and putting them into two buckets and we're compensating you for DIY and DIFM, and we're doing that purposely to send a message around they're two different customer segments.

Still there's a huge portion on making the bottom line and everybody including myself is compensated on store manager turnover, and that turnover, we know when we see our low turnover stores we have roughly 11to 15 people, it's a small family environment and when we get that right, the stores just hum.

As to the $3 million, I mean it's all public information.

It's part of my contract when I came here I agreed with the Board to set aside $3 million of my compensation to be paid out to employees who are not eligible for stock options, and not eligible for stock, and we are putting together a program today that essentially will reward our top 10% performers in our stores, our corporate centers, our DC's, we think that that's roughly a 15% or so bonus for them for those who perform best with the customer, best with their employees, and best in terms of their bottom line, and what sits behind that honestly is that, in the last couple companies that I've been at, and we value our store manager by having stock at that level and having rewards at that level, but more importantly, having recognition at that level that we're all aligned as a team is a very powerful thing and it really goes back to before I started the job, I spent a half a day with Nick Taubman, our Founder and he taught me many different things.

Probably the most important thing he left me with is probably our first value as a Company is how do we inspire self-confidence and build the success of every AAP team member every day.

And so I think if we can reawaken that around our culture, we will be able to do many great things in terms of the business but we've got some work to do to build the morale and reawaken that part of

It definitely seems like you've got a lot of initiatives in place.

Are there certain benchmarks or bogeys that you will look to to say, hey, this is working and is that a six-month or a 12 month or an 18 month process?

And I'm assuming it's not just going to be a comp number that's going to indicate you're having success.

No, that's true.

There will be a couple things and maybe I'll do, there will be new metrics that come into the system that help us understand, are we working with the customer?

We're actually interviewing companies right now that will help us get a, I don't have a better word for it Tony than a customer engagement index and what we find is those that are most engaged that have the most satisfied customers, are those -- those will be the stores that will help lead us.

I've seen that in other companies.

I'm confident that's the case here today.

We're putting in employee measures to understand who does the best work, of not only recruiting the best parts pro and store team members and corporate members but who does the best job of developing them, and making them productive and that will become part of our measurement system too.

We're taking time honestly, as I said to break out the metrics a little differently and reward them a little differently.

We talked about store turnover, and I think what you've seen in terms of the parts availability that Elwyn has talked about we've taken an approach where it's not just about layering more stuff without taking out things, that the customer is voting no on.

And I think probably the other and that's showing up in net inventory being about the same, we're actually seeing improved margins as a result of taking out things that I'll call the slow moving stuff.

I think there is still a big opportunity and we haven't measured this yet as to what do you do to actually and Elwyn touched on this, to actually think about our business, there's parts that have been shrinking.

The industry has been challenged.

Where do we put metrics in and incentives to actually grow the pie?

To look for different places as to different things that we can do for a customer, because all of our competitors can get the same parts.

So if we can all get the same parts we have to find a different way to grow our business with the customers and things that the we may not be selling today and I can tell you, it's not pickles and nuts.

Okay, thanks, guys, I appreciate it.

Sure.

Next question?

Our next question is from Gregory Melich.

Hi, it's Greg Melich with Morgan Stanley.

A couple questions.

Darren, you led off by saying that ultimately it's just the Company is sort of getting the culture back, and getting the sales per square foot and the sales per store up for closing the gap with a lot of the peers.

Of all of the things we've talked about what the do you think are the two things that if we're looking three or five years out, we'll look back and say that's how we closed the gap.

Is it commercial?

Is it store operating procedures?

Inventory Management?

Yes, so, Greg, I'll start with what customer needs do we have to work on and when we look three years out from now, what will change pretty dramatically.

Our data from the customer tells us, you know what?

If you don't get availability right, you can't play, and so getting availability right and the related supply chain that goes with getting availability right and the custom mix right and our team members have been telling us that for awhile but that is at the top of the list.

Parts knowledge is a close number two.

And I would say getting parts knowledge right and aligning our team members with our customers, I mean, I was out visiting our Charlotte store the other day and I met a young man who is on our commercial parts pro that that guy does more business than a store, and what you found is this young man connects very well with our Hispanic community.

He's only had two years of experience but there is no one who works the technology better than this young man, and he has a partner next to him, Gary that talks to him but together they're a team but they understand and collectively have a group of parts knowledge but they have great relationships with our customers.

So I would say parts knowledge and customer relationship management capabilities would be right up there in terms of the two things that, and we could, there's probably 10 other things that the we could list but I think if we hit those two out of the park, we'll be in a great place.

And the third one would be and you'll experience this from us and I don't know how this will come together yet, is that the we have to find a way to expand our imagination around what we can do with the car.

You bet we want to win under the hood.

We want to win under the car, and under the glass too, but there are other things that we can be doing for everyone.

Everyone was 16 and got a car once, and it's -- in some form and figuring out what we're not doing for the customer that the we can do differently than our competitors is to be determined but part of the growth story and I think principally in the DIY space that is to be determined.

Great, and a second question, in terms of capital structures.

You did do a big buyback last year and you talked about what you've done this year already in the free cash flow.

But going forward, how should we think about, what do you think is the right capital structure for the business, either debt-to-cap or debt to EBITDAR?

However you want to look at it.

I would say there's a couple things.

I'm not ready to tell you it's three point this or two point that or all that the to be real honest with you, Greg.

What I would tell you is part of what we're balancing right now is that you could see in the first quarter, we came out real aggressive and bought back a little over 4% as Mike said.

I think as we go forward we'll be balancing -- what I don't want to do is tip over our credit rating and have all of our lease costs increase and our future costs and there will be a little bit of a balance in there, because I'm also not going to sit on the other side of it and be held hostage to that too.

So I think as our business starts to show sustained improvement, we get more room in that space and when opportunistic times come we're going to take advantage of that and our capital structure right now, we're real comfortable with and so -- nd our free cash flow allows us a lot of flexibility.

Okay, great.

Thanks.

Okay.

Thank you.

Our final question today comes from Scott Ciccarelli.

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

Thank you, guys, Scott Ciccarelli, RBC.

Two questions.

The first is, Darren, you've certainly emphasized parts availability as something that's key.

If we were to run the theoretical exercise of if you had the parts exactly available as you want them, what do you think the impact on the comps would be today?

Jim, do you have a guess?

We know they would be better.

No, I don't know I would have a guess.

I think we do know from history that we're in the parts business and the more availability that we have in our stores and have close to our customers the better our sales are going to be and I think Elwyn alluded to that in his comments that we're starting to see what the we did in the 2007 year starting to show up especially on the commercial side already.

Well, maybe we could take it a little different angle.

Maybe just talk about what impact it could have on the conversion rate because that's really where it has the impact, right?

Yes, we would agree with that.

What we're seeing, Scott, on the, particularly with commercial as we've enhanced our late model as well as foreign coverage is definitely contributing to driving our commercial sales, and that's been happening across the -- Companywide.

What the we've also been doing and last year we touched on just over 400 stores of specific upgrade and specific stores, to get the mix right in given stores and we are anticipating doing a significant amount of that as well in 2008 and we are seeing nice comps in those stores specifically.

So that will be a key part of our strategy going forward.

Okay, and that kind of address the conversion issue, but Darren, you're coming from an industry that was incredibly price elastic to one that doesn't appear that there's a whole lot of price elasticity and now that you're kind of in this new seat, how do you drive traffic into the stores or is there a way to drive traffic in the stores on the DIY side?

I understand growing the commercial side is a little bit different but is there a way to kind of address the traffic issues on the DIY side?

Well, Scott, I think when you hang up, go to www.keepthewheelsturning.com because what I would say over the last couple of years, we have seen a challenge in the DIY business in part, we would say we're not reaching some of the most important customers and our attempt to go to keep the wheels turning as Elwyn said it's our part centric type of message to people that we're all hobbyists at heart at something and we're all committed and passionately to something at heart and this is our attempt to reach those customers on an emotional level and on a pragmatic level as to what we're selling, and I think part of what we realized and Elwyn and his team did a terrific job, when we were looking at where we were spending our advertising, for every dollar we spent in print we got pennies back in terms of return and what we're finding in the electronic media and guiding that the to specifically the customers we're trying to win with and the customers we're trying to grow with, it's real early.

We're cautiously excited about some of the markets that the have started to lay down and when I say lay down, I mean lay out the new ad campaign, the team members have given us good feedback, so I think that is a good first step and I think actually focusing on the customers we want to win with and targeting them is the next big step.

We know traditionalists shop with us 15 times a year, which is much higher than other types of customers, so again, figuring out how we communicate, who we want to win with and building our team members to be successful with them is how you build traffic and it's going to take time because we've got the to win them back.

Okay, great.

Thanks, guys.

Thank you, to our audience for participating in our fourth quarter earnings conference call.

If you have additional questions, please call me, Judd Nystrom at 540- 561-8450.

Reporters, please contact Shelley Whitaker at 540-561-8452.

That concludes our call.

Thank you.

Thank you.

This concludes our call today.

You may now disconnect.

Thank you for joining us.