領先汽車配件 (AAP) 2008 Q4 法說會逐字稿

Welcome to the Advance Auto Parts fourth quarter 2008 conference call.

Before we begin, Judd Nystrom, Vice President of 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 todays' call.

Certain statements made on this conference call will contain forward-looking statements and incorporate assumptions based on information currently available to the Company.

Any statements that are not related to historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

These forward looking statements are subject to risk, uncertainties and assumptions, including those listed from time to time on the Companies annual report on form 10-K and our filings with the SEC.

If any of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, the Company's actual results may differ materially from the anticipated results discussed in the forward looking statements.

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

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

For planning purposes, our first quarter earnings release is scheduled for Wednesday, May 20th, after market close and our quarterly conference call is scheduled for the morning of Thursday May 21st, 2009.

To be notified of the dates of future earnings reports, 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.

Now, let me turn the call over to Darren Jackson, our CEO, who will be followed by Jim Wade, our President, Kevin Freeland, Chief Operating Officer, and Mike Norona, EVP and Chief Financial Officer.

Darren?

Thanks, Judd.

Good morning, everyone.

Welcome to our fourth quarter 2008 conference call.

It is an honor to share with you the terrific results that our 48,000 team members delivered in these extraordinarily challenging times.

I want to thank our Advance family personally for an outstanding quarter and fiscal year.

The first year, or the first chapter of our transformation story is complete.

There was considerable suspense and success as the chapter or year unfolded.

I'm very pleased with our strategic and financial progress and the related accomplishments in fiscal 2008.

I'm energized with the revitalization of the values at Advanced and our continued focus and commitment to our customers and team members.

I'm also very encouraged about our growth and earnings potential, yet I realize our transformation is just starting to take hold and it will take time to reach our full potential, yet I'm confident we will get there.

A year ago we embarked on a turnaround and transformation journey.

We set out to define the state of the business and acknowledge that the turn around of our business had to begin with a focus on the customer.

I told you that we are going to embrace the turn around mentality in terms of speed, simplicity and prioritization.

We determined our strategy would be a simple focus on people; our customers and team members.

Specifically, our strategy would be guided by the DIY and commercial customer needs.

2008 was a year focused on foundational change.

We evaluated our portfolio of inventory, stores and initiatives.

We retired the 2010 store format strategy.

We introduced the commercial acceleration, DIY turn around, Availability Excellence and Superior Experience strategies as the catalyst for our transformation.

We are divesting of inventory and assessing stores that are not consistent with our future direction.

The economic environment is a mixed blessing.

On the one hand, we are deeply concerned for many of our fellow Americans, customers and family members on account of the crisis of unemployment.

However, our industry and our role as a company have never been more important to meet the needs of our customers.

We believe that the paradox of the economic environment is an opportunity for Advance.

The rapid decline in consumer confidence, rapidly rising unemployment, the credit crisis coupled with the single largest decline in annual miles driven, 3.7%, presented significant headwinds in 2008.

The tail winds coming into 2009 include fewer new car sales and lower gas prices.

Fewer new car sales results in customers keeping their vehicles longer, which increases the age of the vehicle and the need to repair and maintain vehicles while lower gas prices in late 2008 should begin to take some pressure off customers and enable them to spend some money on deferred maintenance.

We believe the future stimulus will add to the tail winds in 2009.

The paradox of the retail environment played out in the fourth quarter of 2008.

Specifically, retail industry comp store sales declined approximately 5% in December, representing the worst retail environment in 40 years.

Despite the environment, our comparable store sales grew 3%, which is our highest quarterly comp in 11 quarters and our EPS jumped 17% on a comparable operating basis.

I'm very encouraged that all three areas of our company posted positive comparable store sales gains for the quarter.

That consistency of performance reflects the collective effort of the field and support center executing at a high level for our customers.

Clearly the actions we took in Q4 continue to improve our business model and yielded immediate benefits in the quarter which positions us well for 2009 and beyond.

Financially, we are optimistic about our growth potential.

Overall in 2008 we completed a successful chapter 1 of our transformation story by accelerating top line growth and achieving solid bottom line results.

2009 is a new chapter in the same story.

We are committed and focused on our core strategies to turn around and transform our business.

My goal as CEO is to accelerate our success in 2009 and beyond by building and empowering a great team.

To do that, I must lead change and support the business and the team.

To this end, we recently announced the promotions of Jim Wade to President and Kevin Freeland to Chief Operating Officer.

These leadership changes will allow us to streamline our company's structure, simplify and empower decision making closer to where the work is happening, increase focus on our core key strategies and increase the speed of getting strategic initiatives to market.

We also transitioned our store managers to the role of general managers.

The changes being made to reflect the positions' responsibilities, which are broader than simply managing the store.

The general manager is responsible for supporting and growing both DIY and commercial sales in our integrated operating model.

I have tremendous confidence in our leadership team and our general managers.

Jim, Kevin and Mike will cover the strategic and financial results in more detail.

In addition, Mike will cover our annual financial outlook for the up coming year.

We continue to take action to position the business for success in 2009 and beyond.

The team's ability to live our values and serve our customers better than anyone else will make the difference.

I will close with an example of a team member who is a living example of what it looks like for growing our business.

Dave [Bearden] was recently named District Manager of the Year for his region.

Dave embraces the Advance values and strategic initiatives and as a result, has produced outstanding results.

He demonstrates performance excellence in a consistent, meaningful and timely manner.

Dave is a leader who inspires and motivates his team to reach out and achieve their full potential.

He realizes the success of each store, his division and the Company depends on his leadership in translating the company's initiatives to operational excellence.

He is a Company leader with his customer satisfaction and team member engagement results and today I'm proud to have Dave leading one of our districts.

Congratulations on a job well done, Dave.

Now, I would like to turn the call over to Jim to provide a progress update on our commercial acceleration and DIY transformation strategies.

Thank you, Darren and good morning.

Let me start by saying I'm excited about the opportunity to lead our customer and sales driving function, which include our DIY and commercial sales, marketing, customer insight and advertising, field and store operations, Autopart International and real estate.

Now I will update you on our progress with our commercial acceleration and DIY transformation strategy.

We are pleased with the overall progress we made with our commercial acceleration strategy in the fourth quarter and for the year.

We ended 2008 with our fourth consecutive quarter of double digit comp growth with a 13.7% commercial comp for the fourth quarter and 12.1% for the full year.

We made good progress continuing to improve all of our key sales productivity metrics.

We also continue to gain market share in a business that is very fragmented and still growing overall.

I want to thank our store teams, our sales force and our support function for the great job they did serving our customers and growing our commercial business in 2008.

With our less than 3% market share, we believe there is still more room for growth.

We remain committed to aggressively growing the commercial business and despite the broader economic challenges, we believe we can continue to achieve double digit comps in 2009.

As we look into 2009 our primary focus will lead to further accelerate our commercial business in the following three areas.

We've developed a database that provides us full potential commercial sales for each store that is enabling us to aggressively invest in parts pros, trucks and drivers in our stores and markets with the greatest potential and with a proven track record of strong performance.

We will continue to focus on building the basics of great customer service at each store.

That means leveraging the increased parts availability and the addition of key brands that Kevin and his team are driving.

It also means focusing on timely, accurate and consistent delivery to our garage customers and knowledgeable team members who understand our commercial business.

Finally, we will invest significantly in our commercial sales force.

We will increase the number of commercial account managers, as well as provide them more tools that will help us acquire new customers and increase our share of existing customers' purchases.

To give you an example of what great customer service looks like, I would like to share a story with you about one store's success working as a team to serve their commercial customer.

In our recent commercial customer satisfaction survey we had a few stores that actually received 100% customer satisfaction score.

General Manager Lynn [Dudley], who has been with Advance for nine years, leads one of those stores and has clearly taken full ownership of the commercial business.

Our Commercial Account Manager for that market, James [McNeese], works directly with the store team to build great relationships that calls customers to call the store for the parts they need.

Commercial Parts (inaudible) Robert [Burton] takes those calls and provides exceptional service every day.

His previous background as a shop owner helps him better understand the needs of his customers.

This store also has a great team of drivers who quickly get the right parts to the customers while expressing our appreciation for their business.

The bottom line is that the entire team has earned the respect of their commercial customers.

As a result, the customers reward them with their loyalty and that produces these excellent customer satisfaction scores.

Thanks, team, for this outstanding example of team work and commercial acceleration.

I would also like to recognize the Autopart International team for another solid performance this quarter, with a 6.4% comp sales increase for the quarter.

AI continues to see strong success with their business model and we are continuing to apply the AI's teams knowledge to help us grow our overall commercial business.

Turning now to our DIY transformation strategy.

We made progress in the fourth quarter and in 2008, but we still have a lot of work to do.

Our DIY comps were negative 1.1% compared to a negative 3.1% percent in the fourth quarter last year.

On a positive note, the DIY sales trend was a 300 basis point improvement from the third quarter of 2008.

Overall nearly 50% of our stores did have positive DIY comps in the quarter and we believe our overall market share remains roughly the same.

Although DIY sales trends improved for the quarter we are still not consistent enough with our initiative and execution to turn our comps positive in total.

We are pleased to announce that Greg Johnson is joining our team as Senior Vice President, DIY and Chief Marketing Officer.

Greg has extensive background driving sales while focusing on customers and their needs with companies including Gillet, Best Buy and Eastman Kodak.

We look forward to the contribution Greg will make to growing our DIY business as well as being responsible for our overall marketing strategy and initiatives.

In the first quarter we will continue to build on the tools to improve our execution on the DIY initiatives that we described to you in previous calls including attachment rates, bilingual staffing and weekend scheduling.

We will work harder to take advantage of the additional parts availability investment that we continue to make.

We belive our 2009 advertising plan will drive more DIY traffic to our stores as it focuses more on promotional radio and less on branding, primarily through TV.

Lastly we are looking forward to achieving more consistent customer service across our chain by learning from those stores that are getting great DIY results and from the new team member system that we have launched.

In addition it these specific initiatives, our entire team will make a stronger commitment, that we can achieve positive DIY comps by focusing on serving each customer better.

Our customer satisfaction scores, by store, are helping us gauge our progress.

Switching to new store development, we opened 26 stores during the fourth quarter.

We also closed 10 stores and relocated 2.

During 2008 we opened 127 stores, including 18 by Autopart International.

We closed 20 stores and relocated 10.

Our total store count at the end of the year was 3,368.

We previously said we are reviewing our store performance and our overall real estate portfolio.

Mike will share more information on our store closing plans as well as our plans for continuing new store growth in 2009.

In closing, we are pleased with our commercial results and somewhat encouraged by the improvement in our DIY results during the fourth quarter.

That said, we are disappointed that our DIY comps remain negative and the bottom line is; we have more work to do.

Yet, from the inside, we see potential from things that are within our control.

We are encouraged with the progress a number of our markets are making and we thank them for showing us what good looks like.

We will continue to share our progress in DIY as we further develop our go forward plan under Greg's leadership.

Now I would like to turn the call over to Kevin to review our Availability Excellence and Superior Experience strategy.

Thank you, Jim, and good morning.

I would also like to express my excitement about the opportunity to lead the Company's day-to-day operational functions including merchandising, inventory management, supply chain, full operation support, e-commerce and information technology.

I would like to update you on the execution of our Availability Excellence and Superior Experience strategies.

Availability Excellence enables to serve our customers better than anyone else by redefining the standard with breadth, depth and speed of delivery of parts.

I want to congratulate the team for significantly increasing our parts availability in 2008.

I would like to provide visibility to the key areas that will drive long-term value.

We will continue to invest in merchandising capabilities, invest in parts and reduce our net owned inventory.

The transitions toward integrated operating model in merchandising is complete and our eight category teams are in place and engaged under this new model.

We will continue to roll out our new category management process and are on track to improve the category performance in 2009.

We have recently launched the Company's global forcing capability and private brand strategy.

We have begun staffing teams in the states as well as overseas.

In 2009 we plan to begin directly forcing specific products to create a competitive position on the opening price point portion of our DIY assortment.

We will also continue the roll-out of our new price optimization process which favorably impacted our Q4 gross margins.

In 2008, we continued to upgrade inventory selections.

For the year, we added over $100 million in hard parts including the addition of Moog and Wagner and inventory upgrades in approximately 1000 stores.

We completed a new custom mix process that will produce higher sales and gross margins with no incremental inventory investment.

Our custom mix began its national roll out in the fourth quarter and we anticipate the full roll out will occur over the next 18 months.

In Q4 we completed our review of inventory productivity.

As part of that review, we decided to significantly change how we managed the end-of-life cycle of our inventory.

In the past, we devoted our return privileges to parts for early model cars with greater than five-year supply.

In an effort to significantly improve inventory productivity, we have discontinued replenishment on all early model parts with two to four-years of supply and have tightened our policy of obsolescence to greater than four years of supply.

This policy change led to a one time non-cash inventory adjustment of $37.5 million.

More importantly, we will free up shelf space in our stores to ensure the right parts are in stock.

Mike Norona will share details about this in a few minutes.

Moving onto supply chain, we continue to identify opportunities to drive efficiencies.

We successfully piloted engineered standards in one of our distribution centers in Q4 and are migrating engineered standards to the balance of our distribution centers this year.

This initiative enables us to improve label productivity in our main distribution centers and reduce distribution expenses over time.

We recently announced the out-sourcing of our private fleet to UPS Freight and Schneider.

This change will allow us to focus more attention and resources on achieving advances for key strategies and meeting retail and commercial customers' needs.

A better ability to manage transportation as the Company continues to grow, provide access to more resources and improved technology through national carriers, allow more scheduling flexibility, all of which will significantly reduce our overall costs.

These cost savings will fund our national expansion of our parts delivered quickly or PDQ network.

We recently added a PDQ in Chicago.

We will add an additional PDQ each quarter for the foreseeable future.

PDQs allow us to restock our store with critical parts within two hours versus, 24 hours in the past.

Turning to information technology, we are continuing to leverage IT in support of our business strategy.

As previously announced, we began a multi- year effort to replace our Legacy Merchandising System with Oracle [Retail] Merchandising System.

Work on this critical system will be brought online in stages, beginning in the third quarter of this year.

In addition, we are developing our own independent e-commerce site.

Our Superior Experience strategy enables us to serve our customers better than anyone else, by consistently providing legendary customer service through a relentless focus on execution.

Superior Experience translates that goal into the specific activities that our team members must perform in order to unlock their full potential, drive significant customer satisfaction improvement while ultimately accelerating sales growth.

I would like to provide an overview of the accomplishments in Q4 as well as our objectives for Q1 of 2009.

In 2004 we better aligned our labor hours with customer needs.

As sales accelerated above our initial expectations, we allocated additional hours, where needed, to fuel sales.

For the entire quarter we leveraged DIY labor compared to Q4 2007, while supporting the needs of our rapidly growing commercial business.

In addition we streamlined and eliminated several operational tasks to increase the portion of our labor hours devoted to customer service.

The plan for the continued acceleration of our commercial business, we tested a new integrated operating model in one market.

The results of this test include a doubling of our on-time commercial delivery, significant leveraging of our driver hour expense and acceleration of our commercial sales.

This new stamping model will begin a phase blowout in Q1.

In 2008 we made material improvements in strenth, workers compensation and general manager turn over.

And finally, I'm encouraged about our future, particularly after recently spending time with our General Managers and field leadership at our annual team meeting.

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

Thanks, Kevin.

Good morning.

I would like to start by personally thanking all of our talented and dedicated team members for the results we achieved this quarter.

We are in one of the most challenging and unprecedented economic environments ever.

Yet our team members found a way to take care of customers, accelerate our turn around and deliver a strong financial quarter.

I plan to cover the following topics with you this morning.

One, provide some financial highlights of our 2008 fourth quarter and annual results.

Two, put our 2008 annual results into perspective with our turn around, including sharing actions we took and are taking, to position us for success in 2009 and beyond.

Three, provide our annual financial outlook for 2009.

Turning to our fourth quarter, our results include the impact of both a 53rd week and a non-cash inventory adjustment resulting from a change in inventory management and related accounting policy change.

I plan to share some insight on both of these items and speak about our results on both a 12 week and 52 week comparable basis, as that provides a more transparent and relevant comparison to 2007.

We have also included this in our press release.

Our operating performance during the fourth quarter including, the 53 week but excluding the non-cash inventory adjustment, was $0.51 per diluted EPS, versus the first call consensus estimate of $0.37 and $0.35 for last year.

The 53rd week added approximately $0.10 to our fourth quarter results and came in higher than the $0.07 we had estimated.

The favorability was driven by better than expected sales and a higher gross profit rate.

As Kevin shared, we also made a non-cash inventory adjustment of $37.5 million which reduced EPS by $0.25 in the quarter.

This adjustment resulted from a change in inventory management and related accounting policy.

Removing this non-productive inventory from our portfolio combined with our custom mix initiative will allow us to improve the quality and productivity of our inventory.

p On a comparable 12 week basis our EPS increased 17%, to $0.41 in the fourth quarter compared to last year, driven by increased operating income, reduced interest expense and a lower share account.

Some highlights for the quarter include a 3% comp sales increase, comprised of a 13.7% increase in commercial and off set by a negative 1.1% decline in DIY, and 140 basis point increase in gross profit rate, due to improved shrink, more effective pricing and a higher mix of sales from Autopart International.

Also in the quarter, our SG&A increased 125 basis points, driven by increased incentive compensation, strategic capability investments and legal settlement costs.

On a comparable 52 week basis, excluding the non-cash inventory adjustment , our EPS increased 16%, to $2.65, compared to last year.

Some highlights from the year include opening a net 107 new stores, a 1.5 comp sales increase in price of a 12.1% increase in commercial, off set by a 2.3% decline in DIY and a 7 basis point increase in gross profit rate, due to improved shrink, more effective pricing and a higher mix of sales from Autopart International.

Additionally, our SG&A increased by 66 basis points, driven by strategic capability investments, increased incentive compensations, partially off set by lower medical expenses.

Additionally, free cash flow for the year increased 19% to $280 million over last year, primarily driven by the impact of the 53rd week and reduced capital expenditures.

Capital expenditures were $185 million for the year, compared to $210.6 million last year.

The decrease in capital expenditures was primarily due to a reduction in new store development.

To put our 2008 fourth quarter and annual financial results in perspective, we are pleased with our double-digit commercial comp sales growth, gross profit rate improvement and earnings growth we delivered.

We are also pleased with our free cash flow improvement and liquidity giving the challenging and unprecedented economic environment.

We are also realistic that we are early in our turn around and need to balance short-term earnings growth with making the required investment that will deliver long-term value.

Nowhere was this more evident in 2008 than in our SG&A per store which increased to $609,000 per store in 2008, from $601,000 in 2007.

Clearly.

this is a reminder of the structural and operational investment we made and must continue to make, to transform and differentiates our business to sustainable and consistent growth.

Now I would like to link our 2008 results with our turn around.

2008 was the first part of the journey which involved performing in depth assessment of all parts of our business to unlock our full potential.

This included determining our strategic direction, identifying fundamental capabilities needed to support the strategies, making required investments and putting the foundational elements in place to get the work done.

We also identified under-performing parts of our business that we need to divest, because they no longer fit with our strategic direction or deliver acceptable returns.

We also identified four performance gauges that will be our financial compass for our turnaround.

Our current performance in these gauges shows we are trailing the class of our competitors.

With the key insight gained, we have a 13% sales productivity gap to the leaders.

That is, our sales per square foot, $208, is 13% below the industry leader, despite the fact that we spend roughly the same SG&A per square foot.

One of the key outcomes of our turnaround is to close this productivity gap.

2009 will be about reconfiguring our business model around our customer, reducing expenses, to partially planning continued strategic investment, and improving execution through the peer group performance management.

We will continue to focus on our core strategies and build on the assessments and investments we started in 2008.

Our largest investments will be aimed at accelerating our commercial business and revitalizing our DIY business, as Jim outlined.

As Kevin shared, this also includes key investments in the enabling parts of our business which is Availability Excellence and Superior Experience to improve our operation.

One of the keys to operation is consistent execution.

Today we have a high degree of variability in our store performance.

By way of example, we shared that our sales per square foot currently lags our competitor.

Averages can sometimes be misleading, because what you cannot see is our top 10% of stores are delivering over $350 per foot while our bottom 10% are delivering less than $100 per square foot.

Therefore, the opportunity lies in narrowing this performance gap by improving our bottom poor sales performers.

To accomplish this we are in the early phases of segmenting our stores into peer groups that have similar operating characteristics that drive performance.

This approach will allow us to focus on our performance gaps within each peer group.

Turning to fiscal 2009 and consistent with last year, we are providing annual financial assumptions to help you determine your 2009 estimates with different performance sensitivity.

We believe this approach continues to be prudent, given where we are in our turn around and the uncertainty in the economic environment.

Additionally, our roller coaster ride in 2008 proved that we are better operators than we are predictors of the future.

In 2009 we expect a double digit increase in commercial comp sales partially off set by low single digit negative DIY comp sales.

We also anticipate a modest increase in our gross profit rate.

Given 2009 will again be a year where we balance growth and investment, our SG&A rate is expected to increase at an average of approximately 3% increase in comp sales.

While our destination is clearly focused on delivering long-term value to the shareholder, in the short term, our SG&A will be constrained by continued strategic investment.

One of the ways we are mitigating this impact is to fund these investments by reducing existing expenses from less productive areas.

Our 2009 store divestitures is an example of this.

From our 2008 fiscal year 52 week EPS results of $2.65, we expect each 1% increase in comparable store sales as approximately $0.07 in EPS.

In addition, a 10 basis point improvement in operating margin is expected to add approximately $0.03 of EPS.

As a reminder, fiscal year 2009 includes 52 weeks versus 53 weeks in fiscal 2008.

The additional fiscal week of business in 2008 contributed $88.8 million in revenue, $15.8 million in operating income and $0.10 of EPS.

In terms of quarterly phasing we expect the EPS growth to be limited in the first half of 2009, driven by increased (inaudible) capability investment and more difficult comparisons to the first half of last year, due to items such as savings annualization and the economic stimulus check.

Conversely, we expect EPS growth to be more robust in the second half of 2009 as we begin to realize the returns on the investments from 2008 and early 2009.

In 2009, we are planning an incremental 40 to 55 Advance store divestitures on top of the annual 15 store closures we typically do.

These divestitures were identified based on a thorough review of our real estate, store portfolio and are consistent with our approach to take action on all under performing parts of our business that are not delivering acceptable returns or do not fit strategically.

One of the key drivers of these under performing stores is their uncompetitive occupancy class.

We provide a range of store divestitures because it is a moving target based on rent re-negotiation.

We are committed to working with our landlord partners to lower occupancy costs to current market rates.

In cases where we are unsuccessful, we are prepared to make the tough choices.

Going forward, we will be performing a rigorous example of our occupancy comp compared to market rates.

Our 2009 annual financial outlook does not include these incremental 40 to 55 divestitures, our best cost estimate for the store divestitures is $500,000 per store, primarily driven by the long remaining lease term, adjusted for anticipated sublease income as well as the write-off of store assets.

The payback on these incremental store divestitures is less than three years driven by the elimination of current operating losses and inventory transfers to existing stores, along with the related tax benefit.

Conversely, we see considerable opportunities to grow our store portfolio.

In 2009, we expect to open approximately 105 new stores with 75 being Advance stores and 30 being Autopart International stores.

This mix is reflective of the growth potential we see in our commercial business.

As also can be seen, the number of total Advance stores will remain roughly flat in 2009 with the openings being mostly offset by the store divestitures.

In closing, we are pleased with our fourth quarter results and happy with our strong starts to 2009.

We are committed to our core strategies, including taking the appropriate actions and making the necessary investments required to reach our full potential.

We are also balancing our optimism with the unprecedented economic conditions and we remain vigilant to have core gauges measure our progress.

Most importantly, we are investing in and betting on our talented team members to lead us through our turn around.

I'm particularly proud how our team members responded from our third quarter performance to deliver the top and bottom line outcomes they did in our fourth quarter.

Not only does this provide momentum as we enter 2009 but it helps to enter our free cash flow which in this challenging environment builds a solid foundation to build from.

We are now ready for

(Operator Instructions).

Our first question is from Scot Ciccarelli, you may ask your question and please state your company name.

Hi guys, RBC.

Two questions, actually.

Can you describe the impact of inflation in 2008 and what the expectations are, in terms of price inflation, for 2009?

Number two, I'm not sure who this question should be centered for.

In terms of trying to customize inventory at a store level.

Where are we?

I know you guys used to do regions and now districts.

There is so much variability at the store level.

If you can give us an idea of where you are at that process, that would be helpful.

Kevin, you want to take that?

Yes, Scot.

In terms of inflation, we roughly saw about a 3% to 5% inflation in our overall products last year which certainly pushed along the sales.

We are beginning to see some changes in categories and certainly the oil category would come first to mind as that has materially changed.

We are beginning to see unit improvements as the price changes unfold.

I think we will monitor this very closely throughout the year.

Have not seen a material change in the trends but certainly will stay very close to this.

What we don't know is to what extent the change in the inflation rate will change the overall unit or movement of the Company to off set them.

As it relates to the custom mix, we are complete with the system we need to customize down to the individual store.

What we actually do is re-assorted one section at a time and this is done to manage labor.

About two-thirds of the sections change up each year.

About a third of the sections change out every other year.

It will be about 18 months before we see the full affect of the impact on the business.

What we have done is gone through and completely re-assorted two markets to see what the overall impact was and we are extremely pleased as to what this does to drive overall business is essentially their in stock on the things that customers want and pull out the products that aren't selling in the past.

That is very helpful.

That is two markets out of how many?

How many do you break it into?

Out of hundreds of divisions.

It was a market test to see the impact of this and it will be a tail wind for us for about the next year and a half.

Yes, so a small scale test.

Thanks a lot.

Our next question is from [Kate McShane].

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

Hi, good morning, Kate McShane from Citigroup.

Hi Kate.

I was wondering if you can walk through and possibly quantify some of the puts and takes in your SG&A guidance for 2009 and has your guidance changed on what comp you can leverage SG&A or has it always been 3%?

Yes.

Hi, Kate, it's Mike Norona.

We haven't specifically given details around our SG&A.

But let me hum a few bars.

First of all, I don't think our trajectory has changed, I think we came out of Q3 and I think we said we'd leverage it to around 2.5%.

2009 will be another year where we balance investment and growth.

If you are following the story of the last year, we are in a turnaround and we are looking at all fundamental parts of our business, all structural parts of our business to move ourselves to -- to move our assets to higher performing basis.

A couple of examples I would share is the inventory adjustment we made in Q4, where we have taken unproductive inventory out of the system to clear up shelf space and Kevin can hum a few bars on that, and clear up shelf space for more productive inventory.

Also, the moves we are making with our store divestitures.

We have taken a hard look at our store portfolio and we have stores that are under producing either from a profit or strategic standpoint.

What we believe is by looking at all parts of our portfolio we can move to move our assets to more productive uses.

We believe next year we will leverage our SG&A at roughly about a 3%.

Maybe the last thing I would tell you is, we made some moves last year to things like less advertising, more trucks, more parts pros.

Just an example of feeding some of our strategies with -- and they come with some costs up front.

3% has been about our historical run rate.

Last year it was a little lower due to some of the expense take out.

And Kate, just to be clear, more trucks, more parts pros, more driver hours, less money being spent on television.

More money being spent on commercial account managers next year.

So philosophically, what we're staying committed to, is how do we continue to build this integrated operating model through our focus on and our investments in the commercial space through the investments in the right inventory.

We did a thousand upgrades last year.

We will do another thousand upgrades this year to continue to build on this momentum in terms of we architecting our model and the places we think have the longer -- both are showing to have short-term immediate benefits and longer term sustainable operating model benefits.

Okay.

Thank you so much.

It is very helpful.

If I can follow-up with one other question on the do-it-yourself business.

Have you -- one of your objectives in strategy is to attachment rights.

Have you seen any up tick in attachment rates?

Do you think it is possible in 2009, when things are so difficult with the environment and unemployment?

Yes, Kate, this is Jim.

We have seen some improvement on the attachment rate.

I think we have quite a bit of work to do as we continue to look at how we best serve our customers from the standpoint of solution selling and make sure they have everything they need to do a complete job.

We are focusing a lot of attention on customer average, the average transaction that the customer has when they complete their visit to our store.

We are seeing progress in that measure and I think in many ways it is a broader look at the progress we are making as opposed to just the attachment rate.

Thank you very much.

Our next question is from Dan Wewer.

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

Raymond James.

Darren, your commercial sales obviously substantially stronger than that of NAPA.

We saw that from [O'Riley] last night, as well.

I know that, in the past, if you were asked the question of if you were taking share from NAPA, you would say no, it is probably coming from the jobbers.

Given the extent of your improvement, are you reconsidering that perhaps you are taking share from that now adays?

I will have Jim and Donna talk to you about that, Dan.

They're closer to it.

Dan, I think from an overall standpoint we would probably repeat pretty much what we have said for some time now that we are in a commercial market that is still very fragmented and there is an awful lot of suppliers of auto parts in every market that are supplying the garage customers and so as we are focusing on what we are focusing on which is providing the best customer service that we can, I think we are taking some share on an overall basis for sure.

I suspect a bigger portion of that is coming from the local market which is typically what happens.

We are pleased with where we are.

We are pleased with the progress we are making and we are not so much focused on where it is coming as opposed to just continuing to grow it and do what our customers are telling us that is most important to them.

As a follow-up, Darren, at the beginning of your comments, you noted that lower gasoline prices could change driving behavior in 2009.

I thought it was remarkable your sales were as strong as they were, given miles driven dropped 5% in November.

Do you ever ask yourself, the credibility of the miles driven data from the DOT and based on your sales results and your competitors perhaps it is not as bad as they are reporting?

Dan, I ask myself a lot of questions.

The way I think about it is there are many different factors driving consumer behavior right now.

If we reflected on it -- and I meant it -- there is a lot of pain out there.

I think there were a lot of consumers that frankly went to the dealer to get their car repaired and now the corner garage is just fine and that corner garage used to be just be fine for a number of people and that change in the DIY behavior I think is reflective of being moving down.

It's probably not unlike what McDonalds is experiencing.

It is not to diminish what our team members are doing, or the inventory upgrades, or getting all those things right.

But I think it is indicative of the environment.

I think miles driven, to your point, is only one ingredient.

Our value proposition today, how we are focused particularly in our commercial business -- we have seen an up tick in the DIY business -- make no doubt about that.

I think it is part of the holistic system, miles driven just being part of that.

You can't fight with the historical data in gas prices.

Because the correlation is very strong, but I don't know the historical data even in recession periods tends to show this sector, tends to do a little bit better.

We think we are in a terrific spot in terms of the environment and we will continue, as Mike said, to make sure that we are putting the investments, in terms of where our customers are willing to pay us for it at this point in the journey.

And just quickly, can you discuss just how you're lowering strength in this kind of economy?

Thank you.

This is Kevin.

We essentially changed the way that we audit our stores and essentially went from a cycle count process where you go one section at a time throughout a calendar of the year to doing whole audits of the stores using an outside third party.

Essentially what we are seeing is that this new process is giving us a -- probably a year of positive results as we get to a new plan anniversary, the change between the two.

We have also announced a 4 point program to improve it systemically and will attempt to use this year to ingrain that process for a longer term benefit for the Company.

The other thing I would say is -- Mike [Broult].

We were fortunate; Mike led Best Buy's efforts years ago when they were well north of one.

I think even today they probably enjoy a shrink that is less than 0.5%.

I think leadership is critical in a lot of spaces and I think it is not just -- he is bringing a lot of practices that helped that organization.

He is bringing leadership and focus in building a team.

I think we are just starting to enjoy it in part of our business.

Shrink is one area.

We have had tremendous improvement in places like workers comp this year.

That used to be a difficult area for us.

We see opportunities in the future with our partnership that we are talking about with some of our vendors in the battery area.

I think it starts with leadership and then it can grow into other parts of the business as well.

Thanks.

We are ready for the next question.

Thank you.

[Alan Riffkin], please ask your question and state your company name.

It is Alan Riffkin with Bank of America, Merrill Lynch.

Couple of questions, if I may, Darren.

With respect to the rent negotiations, other than the expenses associated with the possible 40 to 55 store closures, what do you think is the potential long-term occupancy savings on re-negotiated rents for stores that will remain open?

Mike will take you through that.

You had another question as well?

I do.

I can ask you that as well.

If I heard you correctly, you said that you leveraged DIY labor; is that correct?

Yes, that's correct.

So you leveraged DIY labor with a negative 1.1 comp and certainly you folks have made a lot of strides on the DIY side of the business.

Why then, are you raising the threshold for a comp necessary to leverage labors since DIY is still 70% of revenues and secondly, given the strides that you have made, the positive strides, why is your outlook for DIY comps still to be negative in ' 09.

Maybe what I will do is hit the first one in terms of real estate and then I will turn it over to Jim.

This is a -- the environment has changed significantly in terms of commercial real estate.

I think you have heard us say last year, one of the areas that we are just uncompetitive on is our occupancy costs.

There are two dimensions.

One is we've looked at our store portfolio and we have determined that we are going to close an incremental 40 to 55 stores this years because of primarily profitability and strategic fit.

One of the reasons we give a range is because the largest driver of being unprofitable is occupancy.

Our real estate team will work with our landlord partners and where we will be successful, we will be in the lower end of the range and where we are not successful we will be at the higher end of the range.

That's how occupancy plays into the divestitures.

Generally, across the portfolio though, the market has actually changed.

We are -- over the next number of years, we have 800 stores their leases come up for renewals.

I think everywhere you read right now, there is not a retailer that is not doing the same thing.

We think there is anywhere from a 5% to 25% opportunity.

I give you a big range because that's what I think it is.

We are a good, strong credit tenant in a market where a lot of places are going dark.

We think there is opportunities there and I think that's more a market position as well.

I will turn it to Jim on the DIY.

Allan, it is Jim.

As far as how we are looking at DIY currently, I think as you heard us talk about it in our comments earlier, we are certainly encouraged by what we are seeing in DIY.

We saw the fourth quarter certainly improve from the third quarter and we are encouraged by what we are seeing this year.

I think where we are in terms of our guidance, if you look at the last couple of years we have had negative comps in DIY.

We've got -- our team has to earn the right to be able to forecast something more than that.

We are going to be working really hard this year to change that trend, but that is where we are today, in spite of the improvement we saw in the fourth quarter.

I think your other question is somewhat related to that in that we are balancing in 2008 and as we go into 2009, a rapidly growing commercial business with a DIY business that was negative and so within the store we are balancing that staffing matrix and, Kevin mentioned earlier, we are doing some things to test and pilot some different mixing of staffing to help us manage that total labor as we grow the business but certainly a positive DIY changes the ramifications of how we run the stores.

We are working very hard on increasing the DIY business but we are forecasting, based on what we're seeing in 2008 .

Allan, I want to add one thing to your comment on de-leveraging SG&A.

One of the other reasons we are de-leveraging SG&A is not primarily just labor.

It is the investments we are making in other parts of our business, whether it is our new merchandising systems, as Kevin said, PDQs and some of the transformation things we do typically have some up front costs, but they have great [MPV's], and drive good long-term value and that is what is driving the SG&A leverage.

In other words, if you weren't conscientiously making those additional investments beyond things at the store level, what would the threshold be for SG&A leverage?

Would it be considerably lower than the 3%?

It sounds like you guys are voluntarily starting on a number of things and that's the only reason why the threshold is rising.

Is that a fair take away?

Yes, Allan, I think it will be lower.

I wouldn't take it to sub 2.

Keep in mind you have medical inflation.

Every year we give raises.

We have been fortunate to have some good performance, and just inflation in the system, whether it's on occupancy and other areas, that's why I said historically, even in good times the break even was about 3%.

I think to Mike's point, what you don't see is we are in there aggressively taking costs out whether it is through some of our -- we recently out sourced the trucks as Kevin said.

We will have some severance this year that go with that.

Going forward we will have some nice savings with that.

This year we will probably have no leverage from that transaction but next year and the following year, there will be.

We are going across the business where we can to make sure that we are taking costs out where we can improve capabilities over the long-term.

There might be a a little short-term [jump] in SG&A so we can focus on the parts of the business we want to grow going forward.

Thank you and congratulations on a nice quarter.

Thank you, our next question is from Matthew Fassler.

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

Thanks a lot.

Goldman Sachs and good morning.

I would like to ask a question about merchandising systems.

The Oracle system you are putting in place.

You have talked a lot about store level inventory customization and the impact that has had where you're implementing it on a small scale.

How will the roll out of the new system further impact or improve your ability to execute on that front and if you can differentiates the advantages that you expect to recognize when the system is rolled out from the work you have already been able to do?

This is Kevin.

I'd like to have Charles Tyson assist me.

Essentially the program will roll out in three phases starting in the third quarter this year.

The first thing we will see in terms of the tangible benefit on the Company is our ability to price product more -- to a closer local demand and what we see in terms of competitive reactions around the stores and as we go into the fourth quarter and first quarter next year, other advantages including our ability to tighten up what we are doing on category management and inventory management but I will turn it over to Charles.

Thank you Kevin.

Good morning.

I think certainly the advantages are getting a lot more granular on the way we will be able to manage our inventory.

Specifically at the category level and our ability to get into custom mix on the front room will be very significant for our merchants.

As Kevin said, our ability to drive zone pricing to a much more granular level will drive benefit to the end of ' 09 and into ' 10.

We see the investments having a material affect both on our merchandising and the replenishment teams' ability to drive and improve performance.

My second question is a follow-up on the inflation theme.

It relates to hard parts.

You discussed trends that you had seen in some of the commodity areas like oil and some of the other chemicals.

There has bee some elasticity to help defray whatever fading inflation there is.

To what degree has inflation been a factor in the hard part area, which is harder for us to see as we shop your stores and what kind of trend do you anticipate in ' 09?

Certainly in ' 08 if you look at metal pricing, commodity pricing, there was an impact driving inflation up and you have visibility to what happened in commodity pricing over the last six months, worldwide industrial slow down.

We are seeing some of the benefits and reduction and commodity pricing flowing through to a bank that's (inaudible).

I would imagine, that given the lack of transparency of pricing to consumers, there's probably less risk of prices coming down in those areas?

That is, sales prices?

I think that's a good comment.

One other comment, when Jim was talking, one of the things we have been working on is attachment selling and trying to drive the overall basket.

As he mentioned we are not as far along on that as we had hoped.

The customer average or average ticket is rising and part of that is the second activity we are engaged in which is many of our key products have a good, better, best assortment to it.

We are seeing more progress quite frankly in stepping the customer into some of the premium products than we are in our ability to manage the overall attachment rate.

Finally, as it relates to the trajectory of earnings growth over the course of the year, you alluded to slower growth in the first half and bigger expectations, presumably adjusted for the 53rd week in the second half.

How should we think about that and the concept of the shrink benefit that you captured in the fourth quarter, which obviously seems quite legit but would also seem to create a tough bar for you to cycle on the gross margin side?

Should we infer that the expense investment should be highest in the first half and then recede in the second half of the year or do you think you can cycle the gross margin benefit you saw with the unfettered momentum?

Couple things in terms of shrink and I think Kevin and Darren alluded to it.

We think we have a lot of opportunity in shrink.

We continue to see shrink as being a tail wind for us as we go forward.

We think there is the opportunity and I think Matt what we are not going to do -- what we will do this year and I think I said it in the script.

We are better operators than we are predictors of the future.

This is an unprecedented environment.

What we shared with you in the script was really what we know.

We know last year we had the stimulus which will be a little bit of a headwind for us.

We know we annualized savings from last year and we know we are making investments and we will be making investments throughout the year.

I think what changes though there is an expectation that those investments start to give us a return and we should start to see some of those start in the latter part of 2009.

Thank you so much.

Thank you.

Brian Nagel, you may ask your question and please state your company name

It is Brian Nagle with UBS.

Couple questions.

First, wanted to look at gross margins more closely.

As I look at my model Advance Auto Parts are showing a pretty nice increase in gross margin for a few quarters now.

That rate of improvement clearly stepped up in Q4.

I guess the question I want to ask is what were the factors that really helped to drive that rate of improvement higher?

As you think into 2009 and you gave guidance for a modest gross margin.

How should we think about the sustainability of those factors that drove the gross margin improvement in Q4?

I will tell you where we saw the big drivers and then I will have Kevin comment on 2009.

I think the three drivers we alluded to, one was shrink.

An that was over 50% of the increase we saw in Q4.

The second was more effective pricing and the third is a higher mix of Autopart International which typically has a higher gross profit rate.

Kevin?

Brian, we rolled out a new price optimization program in fourth quarter and it was only partially complete by the end of the year.

It will have a full impact as we go into next year and we are expecting a significant improvement.

One of the things that was commented also is what we refer to as margin drainers.

Shrink would be an example of a margin drainer.

Darren mentioned in terms of battery returns, that it is a hit on the margins in that large category.

All of those things should have a positive impact as we move into next year.

We mentioned global sourcing and our ability to private label a larger portion of our assortment should begin to positively affect us at the tail end of this year.

But at the same token we are beginning to get some momentum behind sales.

We're getting very focused on the competitiveness of the opening price point portion of our overall pricing strategy and those things will be of somewhat of headwinds as we go into the year for margin, but should be tail winds as it relates to overall sales growth.

A follow-up question if I could.

The non-cash inventory adjustment you took in the fourth quarter, does that include a mark down of goods and if so, will the flow of those goods be a positive for gross margins over the next few quarters?

Brian, no.

Essentially, this was an operational change that we made that then led to an accounting change.

We historically had taken products that were for older cars that had grown to a five-year supply and focused our return privileges on those products.

What we have moved to, and it is a part of the roll out of the new custom mix tool, is essentially, on early model parts at two years of supply is the new standard and we created what we refer to as the neutral zone, which is two to four years where essentially we will discontinue all replenishment , any sales on a store that occurs will go out of stock on that slow moving merchandise.

Any sales that occur at local stores, because our stores share inventory, we will transfer it to that store and again, not replenish it and focus the lyons share of our vendor returns in that neutral zone.

The intent is to take the products that are four years of supply and greater and we'll take this charge; our intent is to prevent the reoccurrence of this by this focus on what we refer to as the neutral zone.

Those products that we had had, $37 million, were generating about $5 million of sales per year which is about two tenths of a turn.

The products that we would be replacing on the shelves, because our stock rooms are full today, as we get these products out of the shelves and replace them with more saleable products, the actual sales rate that we would see would be a ten-

Just to be clear, what we did with the adjustment wasn't a mark down.

It was actually taking that full amount as we now have a different definition of obsolete inventory that is anything greater than four years and it was the adjustment to write off of that inventory.

It is a net adjustment of not only writing off that inventory, but what we will get from the sale that, moving that inventory and so on.

That adjustment.

When you connect both of those, Mike and Kevin.

-- Brian, if you go back to the custom mix and what we have learned in the custom mix and what is selling in those two markets, what we learned is we have to create shelf space.

We might as well yank inventory off the shelf that is turning at 0.2 and look to put the tailored merchandise or the tailored mix into those stores that are turning closer to 2.

Essentially it is a no brainer because we are cleaning up part of the portfolio -- part of the issue we have in terms of sales productivity and replacing it with things that work in those communities not unlike the change we are making in the store portfolio.

Mike, I think you would say the stores we are divesting are probably doing a hundred bucks a foot.

We are willing to relocate and find better locations in order to solve the bigger opportunity, which is getting the sales per square foot moving again.

This is part of a year long process where we said where do we have to go in and cleanup some of the legacy issues that we have so that we can position the business to grow more effectively; support our team members in the stores with the products they are looking for and get better positioned in the right markets .

Very helpful, thanks.

Thank you.

Our final question today is from Tony Cristello.

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

(Inaudible question - technical issue).

That's a terrific question, Tony.

(Laugh)

Wendy?

Yes.

I think at this stage we are past our 10 o'clock Central conference call.

Thank you everyone, for joining us on today's call.

If you have additional questions, please contact Joshua Moore at 952-715-5076.

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

That concludes our call.

Thank you