領先汽車配件 (AAP) 2009 Q3 法說會逐字稿

Welcome to the Advanced Auto Parts third quarter 2009 conference call.

Before we begin, Joshua Moore, Director Finance and Performance Management 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.

I'd like to remind you that our comments today contain forward-looking statements subject to risks and uncertainties that may cause the results to differ materially.

The most important of these risks, as well as the reconciliation of any non-GAAP financial measures mentioned on the call with corresponding GAAP measures, are described in our earnings release and our SEC filings.

These can be found at our website at AdvanceAutoParts.com.

For planning purposes, our fourth quarter earnings release is scheduled for Wednesday, February 17th, 2010 after market close and our quarterly conference call is scheduled for the morning of Thursday, February 18th, 2010.

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

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

Now let me turn the call over to Darren Jackson, CEO.

Darren?

Good morning, everyone.

Welcome to our third quarter conference call.

I'd like to begin by congratulating the team on another successful quarter.

Their focus and commitment to the customer, our strategies drove our success for the quarter and year-to-date.

Let me review with you where we are in our turnaround and transformation work.

We're moving into the final stages of the turnaround in demand.

I am very proud of our team members and their ability to drive continuous improvements in our customer satisfaction and team member engagement.

Their ability to revitalize our core values and drive our four strategies resulted in our strong top line growth, a 53% increase in our free cash flow, and a 19% EPS improvement versus a year ago.

Strategy in its simplest form is the art of making a choice.

Our turnaround strategy was principally focused on commercial acceleration and availability excellence to accelerate both growth and profitability.

We are pleased with our choice, the results, and the long-term potential of that decision.

Strategy is also the art of choosing not to do things.

Our third quarter results reflect the discipline of making hard choices.

Specifically, we accelerated our store closures, cut our investments in DIY including marketing and labor to fund the commercial and availability work.

Ideally we could do all things at the same time, but that's just not possible.

We entered fiscal 2009 focused on investments that would position us to accelerate and rebalance our four-wall growth and profitability over the long term.

This meant investing more in parts pros, labor, parts availability, and merchandise capability while moderating our level of spend in DIY.

Arguably this choice constrained our profitability in the near term in favor of the long term.

Yet the results of this strategic choice we have made, fueled our commercial performance and enabled us to generate our seventh consecutive quarter of double-digit organic growth in commercial.

Our choices narrowed our focus on parts availability and core merchandising capability that ignited four consecutive quarters of over 100 basis points of comparable gross profit expansion.

Collectively, these choices drove our 4.7% comp core sales gain during the quarter while delivering a 19% increase in earnings per share, excluding the $0.04 EPS impact from store divestitures.

Our sales per square foot increased roughly 5% versus third quarter a year ago and we have generated a 15.1% return on invested capital, reflecting 100 basis point improvement from just a year ago.

Our collective strategic choices have allowed us to increase our total market share and we remain committed to our strategies which will balance growth and returns over the long term.

As we start preparing for 2010, our transformation will be more purposeful in its approach.

We look to build on our momentum in commercial and availability excellence through our commercial wave effort and global sourcing capabilities.

We are begin to strengthen the capabilities and fundamentals of our field operations.

Our long-term success will come from our focus on the systemic and sustainable improvements in our customer experience.

We will ensure that our two customer facing organizations have the necessary leadership, technology, process and training to deliver on our value proposition on a consistent and profitable basis.

We will continue to focus on our four strategies.

However, we will place a higher level of emphasis on the pace and effectiveness of change and consistency of our customer experience through our superior experienced strategy work.

Practically, this is very hard work, which includes virtually all the team members.

Specifically, we have just completed the nationwide education program for all of our general managers, assistant managers, commercial parts pros and retail parts pros to level set them on the roles, responsibilities and goals for the Company.

We have launched a national training and development program dedicated to each region to accelerate major change in field execution capabilities.

We started in some basic areas to work through process and the learning curve.

Our preliminary focus has been in areas like shrink, battery returns and commercial pricing which will help strengthen our gross margin.

Our future focus will be in commercial operations include staffing, sales force effectiveness and other sustainable customer experience benefits.

Our goal is to build on a customer satisfaction commitment with proven capabilities.

I am realistic that this will take time, but the benefits are sustaining and large.

I'd like to share with you how the team embodies and embraces our Advance values.

Recently, we recognized a group of 35 high performing general managers based on sales growth, margin performance, profit growth, as well as team calibration and customer satisfaction scores and finally, their ability to live and teach our values.

This group was recognized for delivering the top results in the country in those areas over the past 12 months and achieving the top 1% of all performance measures.

These GMs demonstrate a high standard of operational excellence, reflect the diversity of our team and our customers.

They have excelled at driving our key strategic initiatives, living our values while focusing on team development, creating synergy in the workforce and engaging the teams on a consistent basis.

After meeting with these leaders, learning from them, and getting to know them, I have no doubt that each of them went back to their respected stores even more inspired and motivated about how they are personally contributing to the turnaround and transformation of our Company.

Team, I would like to thank you again for serving our customers better than anyone else and growing the business and profitability.

Now I'd like to turn it over to Jim Wade, our President, to provide progress and an update on commercial acceleration and our DIY transformation strategy.

Thank you, Darren and good morning.

I'd also like to thank our team for another strong quarter.

This morning I will update you on our overall sales results, along with our progress with our commercial acceleration and DIY transformation strategies.

Our total comp sales growth for the third quarter was 4.7% compared to flat comps in the same quarter last year.

Our 5.2% comp after adjusting for the calendar shift was slightly higher than the 4.8% comp in the second quarter.

Again this quarter, we achieved an increase in both customer transactions and average transaction size.

We also outgrew the market for the quarter by approximately 300 basis points.

Looking at our commercial performance, this is our seventh consecutive quarter of double-digit growth with an 11.8% increase in comp store sales for the quarter.

This increase is on top of a 10.8% comp increase during the third quarter last year.

As a result of the comp growth, our commercial sales mix as a percent of our total sales increased to 32% towards our goal of 50% or more of our sales in commercial over time.

We continue to gain substantial market share in commercial as our double-digit growth exceeded the market increase that was in the lower single digits.

Even with accelerated growth, our market share in the total commercial market of over $40 billion is less than 5% which provides us much room for continued growth.

Sales of parts continue to fuel our commercial growth.

Parts have increased as a percent of total commercial sales while growth in lower margins -- commodities was lower and is decreased in overall sales mix versus last year.

Our commercial gross margin rates continued to increase driven by increased mix in parts sales and better merchandising and operational capabilities.

Now I'd like to take a moment provide an update on the areas of focus that are leading our acceleration in commercial.

We continue to invest in parts, pros, trucks, drivers and upgraded inventory.

These investments provide our stores the capacity to grow faster and our largest comp growth is coming from our markets where these investments have been made.

By the end of this year, we have made these investments in parts, pros, trucks and drivers in approximately one-third of our stores, providing us a long run rate for growth over the next few years.

We are making good progress in redefining and aligning the roles and responsibilities of our field and store teams to prepare us for a 50/50 commercial and DIY sales mix.

Our initiative to raise the overall operational consistency of our service to our garage is on track.

This includes improved inbound phone and response time, accurate order fulfillment and consistent customer delivery time.

We are testing technology in our stores to measure our delivery time and other key predictive indicators of success.

This will continue to be a focus in 2010 as we build the operation infrastructure to excel in service.

Finally, we continue to build and strengthen our commercial sales force.

Through the third quarter, we have increased our sales force by over 140 team members, representing nearly a 50% increase from the beginning of this year.

Additionally, we continue to make good progress with the installation and integration of our commercial customer database.

Now turning to DIY transformation, our third quarter comp store sales grew 1.7%, marking our third consecutive quarter of positive comps ahead of our original plans despite lower investments.

We believe the industry remains favorable for continued DIY growth.

Consumers are saving money by maintaining their existing vehicles rather than replacing them and miles driven have also started to grow again.

Our DIY market share at the end of the third quarter declined 0.25% compared to the same time last year.

Even with our greater focus on commercial, we believe our lower share in DIY compared to the market the last two quarters albeit small, is a trend we can and will reverse.

We have several DIY initiatives that are underway to increase the number of customers that visit our stores as well as to drive the conversion rate of existing customers.

We believe these actions will improve our results and position us to grow share in DIY.

I want to briefly touch on a few of those initiatives.

In regard to consideration rates, we made significant changes to our marketing program that we believe are now beginning to drive more customer traffic.

Last year we decided to move marketing money out of DIY in order to fund certain initiatives within commercial and availability excellence.

This decision was based on the need to redefine our marketing strategy, as evidenced by the low returns our our advertising spend and our ability to generate significant returns from investments in both commercial and availability excellence.

As a result of this decision, we've spent significantly less in advertising in the second and third quarters compared to the prior year.

Our marketing team has now revamped our advertising and marketing programs.

Our new DIY advertising was launched in late August is producing results that meet our expectations.

Our spending for the rest of the year will still be basically flat with last year, however the initial results from the campaign are showing our advertising efforts are much more effective.

We are confident that our new strategy and approach will position us well for 2010.

In regard to conversion rates, we know we still have a tremendous opportunity in DIY to fulfill the needs of the customers who are visiting or calling our stores each day.

To increase our conversion rate, we have been taking several actions.

We are installing traffic counters and updated phone systems to measure and drive our conversion rate by store.

We are targeting stores with specific R&D efforts to identify sales development opportunities.

We are implementing staffing initiatives to ensure we have the right staff in the right place at the right time.

We are doing extensive sales development coaching classes across the Company.

And lastly to better leverage our parts availability and merchandising improvement, we are implementing initiatives to close the sales.

We also have been providing you an update on our superior experience strategy over the past several quarters.

This strategy is focused on initiatives that will enable us to serve our customers better than anyone else.

We are measuring our progress with our superior experience strategy through our customer satisfaction scores.

We are pleased to report that our customer satisfaction scores have increased for both DIY and commercial the past year.

We've now been collecting this scores for each store for both DIY and commercial for a full year, so we have established a good baseline for comparisons and we believe we have a great base to build upon.

Our current focus is on learning from those stores that have great scores and gaining a better understanding of the stores with low scores and engaging them to ultimately improve performance.

Many of the initiatives that I've mentioned that are driving our DIY and commercial growth are being rolled through this superior experience strategy.

Some of our best field leaders are leading the rollout throughout the Company in a very disciplined and focused way.

These initiatives include improved staffing, field organization designed to more effectively serve both DIY and commercial customer, providing sales development and coaching and driving improved gross margin by making better pricing decisions and improving strength control.

In closing, thanks again to our team for what you are doing each day to serve our customers and drive our results.

We continue to believe we are making solid progress in providing both our commercial and DIY customers a superior experience and look forward to keeping you updated as we continue with our initiatives.

Now I'd like to turn the call over to Kevin Freeland, Chief Operating Officer, to review our availability excellence strategy.

Thanks, Jim and good morning.

I would also like to congratulate the team on a great quarter.

I will briefly highlight the initiatives to improve our gross profit rate as well as our key focused areas and our availability excellence that continues to drive long-term value.

During the first quarter, our gross profit rates increased 190 basis points versus the third quart last year.

This reflects our continued progress in improving our availability of parts, the strengthening and developing of our price optimization and merchandising capabilities, decreasing inventory shrink and improving store execution as a result of the changes that better align key member incentives from this beginning of this year.

During the quarter, we added two PDQs and 25 hub stores.

PDQs are parts delivered quickly warehouses located in major cities and hub stores serve a neighborhood of stores immediately around them with a expanded assortment.

We also upgraded the inventories at 389 stores during the quarter, well ahead of our forecast of 250.

We were able to reassort 38% of the plan-o-grams using the custom mix tool, bringing the total reassortment to 83% of our plan-o-grams year-to-date.

With respect to our main distribution centers, we have been working to improve productivity, increase efficiency and ultimately reduce distribution expenses.

In order to accomplish this, we have been focused on implementing engineered standards for order selection.

I am pleased to announce that we now have implemented these changes in all eight of our DCs.

I will work to increase the synergy and collaboration between our inventory and merchandising teams, as well to increase the productivity of our supply chain is paying off.

We have been successful in improving our overall parts availability and employing more effective inventory management.

We are on track to completely dispose of the slow moving inventory identified in the fourth quarter of last year.

Our inventory first quarter has decreased by 4 -- 5.4% while our comp sales have increased 4.7%.

Our adjusted accounts payable to inventory ratio of 59.7% is down slightly versus 60.3% at the end of third quarter of last year, as a result of the favorable impact of the [moves and wagner] inventory buildup at the end of third quarter of last year.

We remain on track to improve our AP ratio this year, and I continue to see this as an opportunity for future years.

Combined with our 190 basis point improvement in gross margins, our gross margin return on inventory improved substantially in the quarter.

At this time, I would like to congratulate Scott [Boharper] and our entire e-commerce team on the October launch of the Company's new e-commerce website at www.AdvanceAutoParts.com.

The team has been working tirelessly to deliver a virtual store fronts that delivers on our promise to be the customer experience leader.

Our customers can now easily purchase more than 100,000 auto parts and accessories through this user friendly site around the clock.

We will continue to make site enhancements as needed and expect our business-to-business site to go live early in 2010.

I would also like to thank our merchandising and IT team on the implementation of our core merchandising system.

We are very excited about this new capability as it will strengthen our category performance and drive significant benefits in the future.

I am excited that I am now leading the auto parts international team and happen to report that they turned in another strong performance with comp store sales gains of 11.9% during the third quarter.

AI has now opened 27 stores this year and their footprint has expanded to include 13 states from New England down to Florida.

Seven of the locations are now co-located in the same building as Advance stores, allowing us to maximize space and test the possibilities of more fully leveraging our collective inventory.

We are very pleased with the AI team's year-to-date increases in both revenue and profit growth and we continue to see AI as a key driver in our future growth.

In closing, I continue to be encouraged with both the strategic and financial progress of our availability excellence strategy.

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

Thanks, Kevin.

Good morning, everyone.

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

Our team again delivered a strong financial quarter.

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

One, provide some financial highlights of our 2009 third quarter.

Two, update you on the key financial dimensions of our transformation around growth, profit, and value creation.

And three, share some insight into how we are thinking about 2010.

Overall, we are pleased with our third quarter financial results that were primarily driven by the 190 basis point increase in our gross profit rate versus prior year as a result of our continued strategic investment.

Our third quarter earnings per diluted share of $0.65 included $0.04 related to store divestitures.

Excluding the impact of the store divestitures, our earnings per share were $0.69 versus consensus estimates of $0.67 or a 19% increase from the third quarter of 2008.

On a year-to-date basis, our earnings per share have increased 17% on top of a 16% increase in EPS last year excluding the $0.15 impact of store divestitures.

Some highlights of the quarter include a 4.7% comp store sales increase comprised of an 11.8% increase in commercial and a 1.7% increase in DIY.

On a calendar adjusted basis, our comp store sales increased 5.2%.

Our total revenue grew 6.3% during the quarter.

During the third quarter, our gross profit rate increased 190 basis points versus last year, primarily due to continued investment in merchandising capabilities, parts availability, decreased inventory shrink, and better store execution.

We continue to realize the benefits from the investments we have made over the past year.

These investments have allowed us to develop new capabilities to improve our assortment, better execute our pricing strategies, and better position us from a cost standpoint.

Additionally, our store team members continue to respond well to our new incentive structure.

Overall, we are extremely pleased with our 167 basis point increase in gross profit rate year-to-date.

During the third quarter, our SG&A rate increased 110 basis points excluding the impact of store divestitures.

The 110 basis point increase was driven by higher incentive compensation, increased store labor, continued strategic capability investments to improve our gross profit rates and accelerate our commercial business, and build in new areas such as global sourcing and e-commerce.

These increases were partially offset by lower advertising expenses and occupancy expense leverage as a result of our 4.7% comp store sales increase.

All in, our operating margin increased 79 basis points during the third quarter, after removing the impact of the incremental store divestitures.

We have previously shared that 2009 would be another year marked by investments required as part of our turnaround and transformation.

While this has manifested itself in our SG&A rate, we are very pleased with the 79 basis point improvement in our operating margin in the third quarter and the 50 basis point increase year-to-date.

Free cash flow through the third quarter was $414 million or a 53% increase over last year.

This increase was primarily driven by an improvement in working capital management, increased deferred taxes, and an increase in net income.

Our rent adjusted leverage ratio at the end of the third quarter was 2.4 times which was in line with our internal target.

From a capital structure perspective, we continue to manage the business to a maximum adjusted debt to EBITDA leverage ration of 2.5 times, using 6 times capitalized rent.

During the third quarter, we purchased approximately 880,000 shares of stock for $35 million at an average share price of $40.

We remain committed to managing to a maximum rent adjusted leverage ratio of 2.5 times and will continue to be opportunistic with share repurchases.

Our third quarter marked our seventh consecutive quarter of double-digit commercial comp sales growth, our third consecutive quarter of positive DIY comps and our fourth consecutive quarter of strong gross profit rate improvement.

These results yield our third consecutive quarter of double-digit operating income and EPS growth on a comparable basis.

We are pleased with the $414 million year-to-date cash flow we generated and the fact that we continue to strengthen our balance sheet while making solid progress on our goal to obtain investment grade ratings.

Now I'd like to share with you the progress we are making on the key financial dimensions of our transformation.

As we have shared, our strategic investments are being made to accelerate our growth, improve our profitability and increase the value of our Company.

This will result in improved operating performance and provide a strong financial foundation for future growth.

Turning to growth, we have targeted a significant portion of our spending to customer basing parts of our business.

This represents our largest driver of SG&A growth from last year and includes more trucks, drivers, parts pros, sales force, inventory upgrades and tools which is are translating directly into increased sales growth.

We see an opportunity and remain committed to growing both our DIY and commercial businesses, but also realize growing both will require investment trade-offs at various times.

We have seen this in our DIY business performance, as we have made trade-offs to fund our commercial growth.

Over time we will continue to balance our investments between our two businesses and engage our performance by increases in sales per square foot and increasing our total market share.

At the end of Q3, our sales per square foot grew 5% over last year to $217 and our total business grew 300 basis points in the quarter greater than the remaining market as reported by MTV.

Turning to profit, we continue to make significant strategic investments in our availability excellence and superior experience strategy.

This includes investments in merchandising capabilities and systems, global sourcing, supply chain capabilities and network, margin drainer improvements, e-commerce and enhanced field incentive programs.

While we are continuing to leverage on our SG&A line from these investments, this is more than offset by the gross profit improvements..

We are encouraged that our operating income per team member increased over $10,000 on a rolling quarter adjusted basis which is the highest level in over three years.

This is being driven by our operating margin which continues to expand as evidenced by our 79 basis point increase during our third quarter.

In addition to the progress we are making in growth and profit, we are also focused on value creation.

This includes more focus around capital deployment, working capital management and cash flows.

We are pleased with our record free cash flow that was driven by our improved operating performance, improved inventory management, increased deferred taxes and growing supply chain financing to expand our AP ratio.

On a comparable basis, ROIC has increased 100 basis points to 15.1% and 14.1% during the same period last year.

This increase reflects a sharper focus on the investments we are making relative to the returns generated.

We also are pleased with our debt level and the impact they're having on our leverage ratio which tie to our goal of obtaining investment grade ratings.

This value creation elements build a strong financial foundation platform, create opportunities, and position us well to drive future shareholder value.

Next, I want to provide you visibility into how we are thinking about 2010.

Although we will share our 2010 outlook when we report our fourth quarter earnings in February, we believe it is important to provide a financial preview for 2010.

We will continue to expand our store base and anticipate new store openings will increase in 2009 levels for both Advance and Auto Parts International brands to roughly 150 stores.

We will continue to make investments to grow our commercial business and improve our DIY sales performance versus the market.

We also see opportunities for a continued gross profit rate expansion as a result of our previous investments, and merchandising and inventory management capability, and from our more recent investment in capabilities such as global sourcing.

Turning to our cost structure, we do expect that our SG&A growth will decelerate in 2010.

While our transformation requires continued investments in key capabilities I just mentioned, we intend to reduce growth in our fixed cost structure while ensuring we get the right yield and flex with our variable costs.

For example, we expect to see reduced costs in some of the areas we invested in this year, such as outsourcing, goods not for resale and our DC fleet.

Additionally, we expect some of the capability initiatives for 2010 in areas such as labor management, commercial operations and field implementations will help us improve our productivity and yield in areas such as labor, our commercial programs and our variability in our store performance.

We also expect that our investment spend will moderate in 2010.

Over the past two years, we have been in the highest investment cycles in order to build the foundational strategic capabilities needed to transform our business.

While we expect to see a deceleration in spending compared to the higher levels, we are still in a transformation that requires strategic investment in areas such as e-commerce, commercial and our global sourcing, along with the fact that we will be annualizing partial year investments from 2009.

This balance and sustainable cost structure will position the Company to leverage SG&A at lower comp store sales levels in 2010.

We believe this investment profile is prudent and it will better position us to deliver on our long-term financial objectives.

All in, we see a pathway to improve our operating margin as a result of this continued gross profit rate expansion and decelerating our SG&A growth.

We will share with you more on our 2010 outlook during the fourth quarter earnings release in February 2010.

Looking ahead, we continue to be opportunistic -- continue to be optimistic about our long-term growth prospects.

I would like to remind you that over the next two quarters, we will be up against more challenging comparisons.

Additionally, in our fourth quarter last year we had a 53rd week which increased our sales by $88 million and EPS by approximately $0.10.

As a result of last year's 53rd week, and as previously shared, we experienced a calendar shift which benefited comp sales in our 2009 first quarter and will result in a 50 basis point and a 70 point headwind in the third and fourth quarters of 2009 respectively.

In closing, we are pleased with the financial and strategic results we delivered in the third quarter as well as our year-to-date performance.

We are proud of our dedicated team members for delivering these results and who are passionately leading our transformation.

Operator, we are now ready for questions.

(Operator Instructions).

Our first question is from Matthew Fassler.

You may ask your question.

Thanks a lot.

Good morning.

It's Goldman Sachs.

As you speak to the balancing act that the revenue you are executing, DIY versus commercial, what do you think the impact of the investment will be (inaudible) and to sustain double-digit commercial comp growth and is that still essentially part of the game plan for you?

Matt, you are breaking up, my friend.

Do you want to try that one more time?

We got about one-third of that question.

Can you hear me now?

A little better.

Can you hear me better now?

That's terrific.

Yes.

Okay.

Sorry about that.

My question was the impact of moderating SG&A investment on your ability to generate double-digit commercial sales growth.

We know that you have (inaudible) and the general moderation in investment levels impact your ability to generate commercial sales (inaudible).

Hey Matt, you are breaking up, but I think what I heard is how does the moderating of our spending as I shared with you some of the things we are thinking about next year and how does that relate to our commercial growth.

Is that your question?

Yes.

We will give you an answer and move to the next question.

Here is how we think about that.

There are two different things.

First of all, we are -- the past two years we've said our heaviest investment years in terms of spending as we had to build new capabilities such as our new merchandising systems and we invested in some of the things in the business we needed to in terms of our four strategies, commercial, availability, excellence and those things.

As we now anniversary that higher spending, we believe that we will be able to moderate the growth in terms of SG&A spend.

I think we are still going to invest and we still see opportunities to invest in our business.

As it relates to commercial, we will continue to grow our commercial business.

We still see a large opportunity with that $40 billion market that is out there and we will continue to invest in that business.

Got it.

Thank you so much.

Thank you.

Our next question is from Scott Ciccarelli.

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

Hi guys.

RBC.

Hi, Scott.

How are you?

What I am trying to figure out is pace of sales trends.

I don't know if you want to make comments about what you saw during the quarter, but we did see a slow down this quarter if we look at the two-year stack rate from what we saw in the first half.

Can you just comment maybe what you are seeing on -- in the industry and any changes that you guys might be making to make your sales growth better or worse than what you are seeing broadly in the market?

That's a good question.

Generally speaking, if you look at total market, commercial and DIY together, second quarter, third quarter, it is about the same in terms of total growth rate.

In terms of our DIY versus commercial, it is tricky in terms of if we pick on DIY for a minute.

There are things that are absolutely helping us in terms of unit share in DIY and hurting us in dollar share.

Probably the best example we have is batteries.

Is that we are seeing continued improvement in unit share as we price the batteries appropriately with market -- with the market.

We are seeing the benefits of our pricing strategies and margin.

The other side of the cost of those strategies and pricing is getting some our key categories priced right and priced competitively.

Sometimes when you look at it two-year stack-on-stack number, you have to back up and ask yourself, what are all of the things the Company is pursuing.

And some of the things we are pursuing, investments and applications parts, beefing up that part of our business, is clearly showing up in our commercial comps, our commercial market share.

Our growth in the third quarter, continue to be, in terms of share numbers, huge.

It was consistent with trends we certainly saw in the second quarter.

Overall, I think we are going to have these quarters where -- as Mike outlined that we will look at overall share trends and we will stack the numbers.

The way I would think about it is when you back up and look holistically at what we are trying to do, I feel real good that we have less than $500,000 per store invested in inventory.

And we will lead the industry in terms of sales per store.

That will show up in our cash flow statement.

That will show up in our sales per square foot going up $10.

And you know what, some of the market share stuff will be a little off quarter to quarter because it is absorbing all of those things that we trying to make happen holistically in our business.

Okay.

Just related to the mix there, I know you had invested -- let's call it extra heavy in the second quarter on the commercial side.

It took away maybe some advertising labor from the retail side.

Did we see any shift in that in the third quarter?

Our DI -- go ahead.

Scott, I can answer that.

What we have done over this past year is as we did shift some advertising money in the second and third quarter this year, we have been working really hard on what our program looks -- needs to look like going forward.

Our team here has done that work and we've made some changes.

What we have seen so far in regard to our advertising since then has been positive.

As we mentioned in our comments, in the fourth quarter we'll actually spend about the same as we did last year.

But I think probably more importantly we think those dollars are going to be considerably more productive than what we spent last year..

And Scott, it is Mike.

I want to just remind you, we're managing the whole business so when we think about growth -- we talk about the four walls.

And one of the things we shared is that we prioritize growth and returns -- our four gauges.

In terms of growth, we saw our sales per square foot over last year grow by 5% to $217.

When you think about the total box and our total business, in the third quarter we grew over the rest of the market by 300 basis points.

On a year-to-date basis, we have outgrown the market -- the rest of the market by 450 basis points.

Again, we're thinking about growing the four walls in the total business.

Great.

Thanks a lot, guys.

Thank you.

Our next question is from William [Truelove].

You may ask your question and state your company name.

UBS.

To following on -- earlier in the call you said added about 140 sales people, up about 50%.

How close are you to reaching your full year goal in terms of commercial sales people?

This is Jim.

We have been adding the additional salse force as we've been making the investments in stores.

And just because of the seasonality and how we cycle the work we've done this year, wee pretty much are currently today where we are going to be at the end of this year.

We certainly as we go into next year, and we continue to grow commercial, we will start to make some additional investments as we go into the season.

We have -- as we've looked at the business from a seasonal standpoint, it doesn't make as much sense productivity wise to make those investments late in the year and the very first part of the next year.

Great.

My follow up question relates to your 2010 preliminary -- internal planning numbers that you provided.

When you said 150 stores, I just want to clarify.

Was that a net addition of stores or a gross addition of stores?

Thanks.

That was a gross addition of stores.

That includes Auto Part International and Advance Auto Parts stores.

Thanks so much, guys.

Your next question is from Colin McGranahan.

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

Good morning.

Sanford Bernstein.

Hey, Colin.

Good morning.

Fist question on SG&A.

Let me just throw out a hypothetical -- but then given that what the SG&A impact might be.

Here in the current quarter, the two year average comp was around 2.5%.

If the comp for all of fiscal '09 ends up at 5% and if two years stays the same, that would imply a comp next year of -- let's call it flat, give or take.

You may do better than that.

But just hypothetically, if that were to happen, can you help us understand what the leverage on incentive comp would be, given how that program is structured on absolute comp levels, either in terms of dollars or rates?

Just to help us dimension and quantify that a little bit.

Colin, let me start.

First of all, we are not going to -- I think we have shared as much as we can in terms of next year so I'm not going to give you our leverage ratio and things like that.

But let me tell you how our compensation program works at a high level without getting into the details because we don't disclose that.

We changed our bonus program this year -- incentive comp to pay stores based on growth which means if they grow over last year, you get paid a percentage based on growth.

Using an example, if you grew 2% this year over last year you would get paid on that 2% growth.

Next year, if you grow at 2%, you would expect to see some leverage in terms of SG&A because the dollars -- and again, we are going to have more stores, more team members so you would expect that you are going to pay a little more bonus dollars.

But in terms of leverage, you would expect to see some leverage on the sales.

Okay, Mike.

And I think conceptually I understood that.

I was hoping for a little bit of help with some dollars around it.

But if you're not going to provide that, that's fine.

Secondly on gross margin, could you just maybe step through this current quarter's gross margin drivers in a little more detail in whatever level of comfort you have in quantifying that?

I know you mentioned shrink as a specific and then merger capabilities and inventory availability.

I have a hard time putting numbers around that stuff or really sometimes even understanding what that is.

This is Kevin.

The majority of the change in margin, both in the quarter and year-to-date is in merchandise margins.

A series of activities that we have gone through everything from price optimization to category management as we look for how to manage our relationships with our vendor partners, a favorability in mix as the Company is mixing into parts is the majority of -- essentially the lion's share of that change.

We also saw favorability in terms of shrink.

There has been a good story that we have been able to tell for a year now.

But essentially between those two categories, the -- that is what is been the story throughout the last four consecutive quarters.

Then you sounded encouraged you think there's more opportunity going forward for gross margin expansion.

Obviously, you anniversaried against some much more difficult compares.

What do you think is the most significant driver going forward as you come up against some of those successes you've already had?

As we've disclosed in the past, the price optimization to-date has focused on the front room and we'll begin focusing on the back room.

It has focused predominantly on the regional side of the business and we have work yet to do on the commercial side of the business.

The category management in our ability to be competitive on our cost of acquisition of products will continue into next year.

And then the global sourcing impact will have a very modest impact on our business this year and that will grow in years ahead.

Okay.

Thank you.

Good luck.

Yes.

Thanks, Colin.

Thank you.

Our next question is from Gregory Melich.

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

It is Greg Melich with Morgan Stanley.

Two questions, first on the commercial side and then on the finances.

On commercial, Jim, you mentioned you're one-third of the way through in terms of having the full program.

Could you give us some insight as to how much of a lift you got in the first 10% or 20% and what you expect as you do the next one-third of the stores with the full program?

And then I had a follow up for Mike.

Yes, Greg.

We are not in a position to give you specifics in regard to the increases we have seen.

I think that what we have -- tried to say is as we have developed the process that we are using to grow our commercial business and we go out into a market and we put in some of the basics within the store in terms of resources and additional sales force resources to go out and attract new customers, that we have seen a significant increase in our business in those stores.

And as we go into the next couple of years, we will continue to see that.

I think one of the other positives that we are seeing as well at this point is that as we're doing this and we're adding parts availability and we're adding additional resource, we are starting to see some positive effects on the end line as well on those stores.

As we continue to refine the model, we are in a position where we can carry out a commercial business and it can actually have some synergies on the DIY side as well.

We are excited about that.

On the commercial side, general parts -- just talked about selective price reinvestment and that helping them out and potentially giving back the positive trends by the fourth quarter.

Have you seen that in the market?

Has that had any impact on your slight deceleration in commercial or -- ?

No.

We haven't seen any significant changes in the market.

Certainly, different things happen in different markets with pricing in both directions.

But on overall basis, we haven't seen anything different.

We have talked before that our primary focus is based on increasing the service level to those garage customers and show them that we have the part.

We can get it to them quickly.

We can provide them great service.

And when we do that, we find that they're certainly willing to pay a reasonable price for that product.

Great --

We have seen competitors reacting with price, Greg.

We wouldn't want to miss that.

But to Jim's point, we certainly haven't gone to -- we have got to react with price.

You can see it in our quarter, in terms of our gross margin this quarter, commercial was every bit as good.

I think that's just part of making sure that we remain committed to the strategy.

In terms of the service levels, we continue to build our parts assortment.

I think we did what -- we're on pace to do 1500 upgrades this is year.

I think part of that it continues to build over time.

If we exit this quarter going into next quarter -- next quarter, that level of consistency, I think is worth a lot to us in terms of both building the relationship with the customer that ultimately translates into the consistency of the growth of that commercial business for us.

And Mike on the finance side, we know the importance of trying to get upgraded.

What is it that the rating agencies are really looking for?

What else do you think you really need to do to get that upgrade so you can improve the AP ratio?

Yes.

Thanks.

First of all, we are already at investment grade ratings, in terms of the finances.

Just in terms of the technical aspect.

And when -- the rating agencies, they look at all kinds of things.

That's one of them.

They look at the technical things and the business things and sometimes it is just points of time.

And unfortunately, those are things we can't control.

However what we can control is what we are doing.

And what we have said is, we want to get to investment grade.

The technical aspects, they typically -- probably the largest thing to look at is the debt to -- adjusted debt to EBITDA ratio of which we are -- we have set a maximum of 2.5.

We are coming in at 2.4.

We see that number getting better.

The other aspect, and I think maybe the other aspect of your thing is well is that stopping you from being able to do some of the other aspects.

And one of the things is we still have the capacity to stay within the 2.5 times and still do other things like buy back shares, like look at great real estate opportunities.

It is not hampering us in any means at all.

As it relates to supply chain financing, clearly, one of the big advantages of getting to investment grade is it allows you to tap into more capacity out in the marketplace.

That's what some of the banks and other things -- they look at.

And we see a tremendous opportunity.

We continue to see our AP ratio grow.

We see a tremendous amount -- we see a tremendous opportunity there.

I think that's one of the benefits of getting to investment grade.

Great.

Thanks.

Thank you.

Our next question is from David Schick.

You may ask your question and state your company name.

Hi.

Good morning, Stifel Nicolaus.

David.

Hey.

Let's go back to the beginning and you talked about hey, we are investing in the parts pros, trucks, drivers or any of the stuff you're doing around field execution.

You talked about just a whole group of things that are being pushed at operations to drive some return.

How should we think about your measurements of those?

Is it there are groups and you are measuring groups?

And can you report some of that?

Is there an IRR on specific sleeves of initiatives?

With all of the moving pieces in spend and then you are pointing to some inflection downward in spend, it would be helpful to think about almost an individualized -- at least for me, ROI on sleeves of these programs if that makes sense.

Can you say what parts pros, trucks, drivers, this is what we are spending.

The IRR on that is this year, et cetera?

We can go through -- I appreciate where you are going with the question.

Here is the way you might think about it is three levels.

If you actually -- you can pull this from the publicly available data and just see our spend to date in relation to our capital investments because that's going to capture both what we're putting in the inventory, how we are managing cleaning up the store base, how we are increasing productivity in our DCs, those parts pros and everything.

If you just look at the trailing last 12 months in terms of incremental IRR on our spend, you will see a number that is well over 30% and approaching 40%.

At the highest level in terms of -- if you think about it [no pack] versus the overall change in our capital investment as a company.

And you know what, I think that's pretty good.

The other way to measure it -- I've got to take this all the way back to the beginning of time is we've said, boy, one of the biggest challenges we have as a company is our productivity is unacceptably low.

You can measure productivity to your point many different ways.

Those parts pros, those commercial sales team members, the inventory that we're putting in -- you know what, before we got started on this process, we were delivering $207 a foot.

And today we're delivering $217 because we continue to work the numerator and the denominator.

Understandably, a lot of focus is today on the numerator.

We feel real good about the progress we're making on the numerator.

And the numerator driver principally has been our commercial sales growth.

In terms of the denominator, the capital, the clean up of the store base, the clean up of the inventory, the clean up of all of those things are manifesting itself in a $10 improvement in sales per square foot.

You can look around at the industry leader that may be $239 for two years in a row.

We feel good ant that $10 pick up and we are not close to where we need to be.

This is taking time, but those are the two key measures you can see from the outside in.

Part of the IRR -- I wouldn't expect the IRR in the first 12 months of adding sales people -- the sales people, the parts pros and the trucks to be positive in the first 12 months.

As a matter of fact, the breakeven on that is probably closer to 18 than 12 months.

Part of the upfront conversation today in terms of -- you might as what have you learned over the last two years.

What we are learning is that the field operations have a lot coming at it.

My comments earlier were we have to actually begin the process of getting out into the field.

We just finished a nationwide education program from parts pro to general manager to help them to be able to absorb that chang and be effective.

Part two, which you'll hear about are things -- it sounds like consultant language.

It's just simple things like we need to upgrade and focus on our capabilities and labor management.

We need to upgrade and focus on our capabilities in processing the perfect order.

We think that there's a lot of productivity benefits in that.

The energy of our company as we turn the corner on next year, we'll become more balanced in terms of -- we've got to continue to roll out the commercial programs.

We call that the wave process.

We have to get behind it and begin to work the productivity programs.

It is not unlike what we did on inventory.

When we got started on this journey we said, what to we have in inventory.

We have to begin the process to add parts.

Then we have to come back in underneath and begin to rationalize parts.

That's how you can $500,000 in terms of inventory per store, change the mix of it and drive the productivity to the highest sales per store in the industry.

It is not easy work, but if I am on the outside looking in, I'm saying how is that sales per square foot and how is at that translating in terms of returns.

Those are the best ones.

We will have puts and takes in the middle.

And what happens inevitably is that we can pick out any one of those programs and there's certain ones, we won't like the return.

There's in service of other ones that the return is fantastic.

I apologize for going real long on that.

But that's the best way to continue to think about where we are going.

We are at a new stage as we go into 2010 into 2010 as we have talked about that is going to have to continue to push us a little harder on productivity and not lose sight of the biggest opportunity we have and that's growth.

Thanks a lot.

Thank you.

Our next question is from Tony Cristello.

You may ask your question.

Please state your company name.

Yes.

BB&T.

Good morning, gentlemen.

Hi, Tony.

One point of clarification, Mike, when you discussed the SG&A and how we should look at it for next year.

I'm assuming you are talking about rate of SG&A moderating , but not necessarily on a dollar basis.

Is that

Yes.

It's a dollar.

We are -- when you think about our dollar growth, you guys always remind us that in the first quarter, we're growing about 14%.

If you look at Q3, we grew at about 9.3%.

We are talking about dollar growth.

And again, we think about the three bucket, right?

We think about fixed.

We think about investment.

And we think about variable.

Variable will flex up and down.

When you think about investment and when you think about fixed, some things that we invested in this year is we built new capabilities -- will now become part of fixed next year.

You won't see -- in terms off the dollar growth next year.

That will moderate.

Mike, we're also taking dollars out of fixed that were legacy dollars so we outsourced trucks.

We outsourced G&A.

We've got to also continue to drive down legacy costs that are not part of the fixed cost base that need to be with us going forward.

If you look at the 629 that you had this quarter on a SG&A per store, you're basically saying it is not going to go up much more than that as we enter next year?

Dollar growth will decelerate.

It will.

I think we have to balance to -- you can leave this call, write down 629.

We wouldn't recommend that.

What might Mike saying is look we are going to continue to grow that number, but we're also going to continue to drive productivity to bring that number down.

To Jim's point, that we are one-third of the way through the stores.

Are we going add more parts pros.

Are we going to add more drivers.

Are we going to do that to continue to build -- essentially having the team members there to serve the customers.

As we've said before, in those commercial program an average store probably has the opportunity to do north of 20,000.

We are doing below 10,000 today.

The difference between those in many stores is we have to be there to service the customer.

Yes, we will have to see parts of the first store go up.

On the other hand, in the programs where we'ved already added, we've got to get in there and begin to build productivity through perfect order programs and other types of productivity programs.

That doesn't mean shooting people in order to drive up the average order size while we are bringing down the overall cost of doing business.

That will continue over time.

It is Mike.

Just to put a bow on that.

You will see our SG&A per store -- you will see that decelerate -- the growth decelerate on that.

We will share more with you when we give our outlook at the end of our fourth quarter.

Okay.

Just one follow up as it pertains to that, and maybe this is more of a philosophical question for Darren.

Darren, you made the conscious effort it seems like to pull out resources from DIY.

Can you help me understand how you view the DIY business, in terms of where that comp needs to be versus -- you are obviously pushing growth into the commercial side.

Does there come a point where you have to accelerate investment into DIY to maintain that DIY comp?

Or are you comfortable enough that you think you have enough levers going now that there shouldn't be any issue with that down the road?

Tony, I should probably just clear this up.

When we think about the DIY business, it is 70% of our business.

It is very important to us.

When we came into this year -- you have watched us for a couple of years now.

What we couldn't figure out, to be honest, is that we were spending a bunch of marketing -- we had some productivity numbers in terms of DIY's sales.

A year ago at this time, what you heard us saying is gee, we are just not seeing the foot traffic, the transactions, the return on those dollars.

I think like many businesses you have to make a choice.

It wasn't a choice about abandoning DIY.

It was a choice about I have to try to figure out in terms of optimizing where I can put that next dollar, in terms of driving overall productivity of our box.

In the course of the year, we have pulled the DIY spend back in marketing principally.

We can tell when we've done that -- we've actually hurt share in terms of where we are going.

We replaced the entire marketing team because the return on our advertising was unacceptably low.

In the meantime, we took those dollars and we put them into a place where we thought we could make some money.

That does not mean we are abandoning DIY.

Over the course of this year, we have been doing several -- and I know you travel our stores.

I would just ask you to travel our stores and just -- as you go in next time, just ask them how the gas two training is going.

It is specifically DIY oriented.

Ask them how -- what they're learning from some of the traffic counters that we're putting in to help them see conversion rates in their store.

Ask them how things are going in terms of the other tools that we are putting in, in terms of staff demand to help position team members to be there when the customers are there.

Ask them how it's going in terms of the new promotional materials in terms of pricing that is more of a target marketing impact than where we were before.

Ask them how it is going in terms of what the new website is doing, in terms of where we are going.

We had a moment in time in DIY where in my position I just couldn't justify spending those dollars when I had other choices to spend them on while we were doing the work to figure out how to best position that business going forward.

I don't want people to think that, gee, this is about I'm going to get to 50/50 by taking DIY down.

This has nothing to do with that.

This has everything to do with building sustaining capabilities, to build sustaining customer relationships on both sides of the business, to grow share.

We paid a little bit of a price in terms of modest, modest -- it is almost -- if this was the Grammys, they would say it's statistically almost -- it is very low.

But I have to tell you, I'm very excited about the team, Greg Johnson and his team, Dan Peterson and their team in the stores, how we are thinking about the investments in our field operations going forward.

It is not easy to figure out how to balance both of those businesses, but I am confident we will get there.

My confidence comes from a year later, you will see our DIY customer satisfaction scores continuing to grow.

A year later, you will see our team member engagement scores continuing to grow.

A year later, you will see our turnover as a company -- it is down another full 10 points this year.

That's a long answer, Tony.

But that's what's I am thinking about it.

That was very helpful.

I appreciate it, Darren.

Thank you.

Thank you.

Our final question today comes from Vincent [Sinicci].

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

Hi.

Good morning.

Thanks very much for taking my question.

This is Vincent Sinicci in for Alan Rifkin at Banc of America.

Two quick questions if I may.

First, Darren, last quarter you folks had eluded to the fact that your CapEx plans for this year of that $180 million to $200 million could be modestly increased based on 105 planned stores, but potential for opportunistic purchases.

Just wondering if there's any update to your CapEx figure or your store plan.

It's Mike.

Let me just give you a high level.

We anticipate we are going to be in the range of $200 million this year.

Okay.

All right.

And that 105 stores is still a good number at this point?

Yes.

That's the gross number.

Okay.

Great.

Then secondly, just going back to Tony's question on the DIY focus.

While you have made it clear that you are certainly still -- the opportunities are still there.

And you will certainly continue to focus on the business over time.

Just wondering if you have seen any trends, whether it be third quarter or even prior to that, whether it be by geography or on a monthly type basis, to help better target your initiatives on a go forward basis.

This is Jim.

I think just in terms of what we are doing internally, we certainly are feeling positive about the things that we are seeing happen.

That doesn't turn into a forecast.

But some of the things we have talked about already and the changes we've made in advertising and marketing and the initial results we are seeing are positive.

A number of the merchandising related things that the team is leading are showing positive signs.

The staffing initiatives, the parts additions, and I could go on.

I think -- the things -- the hard work we are doing on the DIY business and I would say in building on Darren's comments, we are are not at the same place in DIY today that we are in commercial.

We have some time to make up and that's what you are seeing in the business.

But the work is going on behind the scenes.

We have got some really talented people doing it and we feel positive about what we see as we go forward.

Yes.

Maybe just to finalize it.

Absolutely, our most recent marketing tests are very encouraging.

Very encouraging in terms of what we are seeing in terms of results and marketshare.

As the third quarter played out, it got -- in terms of the marketing results, just got better.

The other thing that is encouraging, too, is our parts business in DIY.

Part of that is economy, but one of the things for context is that you have to go back three years.

And the truth is three years ago, our DIY business had a very strong DIY, nonapplication -- arguably the leadership here had a view that they were competing against Wal-Mart.

And you know what, we may have lost a little bit of brand equity in terms of the parts business with some of the core DIY customers.

And over the course -- and I think Jim said this and it is a nice result.

As we roll out the commercial programs, rolling out the parts programs, using custom mix to get the right assortment, the upgrade of our merchandising capabilities led by Charles [Tieson] in that whole parts area is very encouraging.

To be honest, we were working ourselves out of a little bit of a hole in terms of DIY parts.

Like many things, you have to reearn the customer's trust in that space.

Many of new customers that show up in our stores are -- they are very smart.

They are focused and they understand the parts business.

Our team members understand it and rebuilding that trust is something that doesn't happen necessarily in a month or a quarter and it happens over time.

I would say that is underneath an encouraging trend that we are seeing in terms of our parts business in DIY as well.

Thanks very much.

Thank you.

At this time, I would like to turn the call back to management for any final comments.

Thank you, Wendy.

And thanks to our audience for participating in our third quarter earnings conference 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.

That concludes our call today.

You may now disconnect.

Thank you for joining us.