領先汽車配件 (AAP) 2009 Q4 法說會逐字稿

Welcome to the Advance Auto Parts fourth 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 a reconciliation of any non-GAAP financial measures mentioned on the call with the corresponding GAAP measures, are described in our earnings release in our SEC filings.

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

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

I'd like to remind you that our fiscal 2009 results include the impact of store divestitures and our fiscal 2008 fourth quarter and full year results include the impact of both a 53rd week and a non-cash inventory adjustment resulting from a change in inventory management approach.

Results on this call will be on a 12 week and 52 week comparable operating basis as that provides a more transparent and relevant year-over-year comparison.

We have provided both GAAP and comparable financial results in our press release.

For planning purposes, our first quarter earning release is scheduled for Wednesday, May 19th, 2010, after market close and our quarterly conference call is scheduled for the morning of Thursday, May 20th, 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, our CEO - - Darren?

Thanks, Joshua.

Good morning, everyone.

Welcome to our fourth quarter conference call.

First I'd like to begin by thanking our 49,000 team members for their hard work during the fourth quarter and fiscal 2009 year.

Their contributions have produced many accomplishments this year both financially and strategically.

Since we began our journey to turn around and transform our company, there have been several quarters in which the financial results significantly outpaced our strategic results.

However, during the fourth quarter, our strategic results outpaced our financial results.

Overall, we had many strategic successes in the quarter, but quite frankly our fourth quarter performance did not meet our financial expectations.

As an organization, we don't measure success by the results of one quarter.

However, our organization will never be satisfied with under performance.

We believe that the fourth quarter performance is more of a short-term setback than a long-term trend.

That said, both our strategic and financial results for fiscal 2009 were very encouraging.

Results can mean different things to different people.

Our results include improvements in customer satisfaction, team member engagement, increased average store sales growth and double-digit gains in both our operating income and economic profit.

These results translated into return on invested capital of 15.1% which is up 110 basis points over last year.

Collectively our balance between long-term and short-term improvements reinforce our positive outlook for 2010 and beyond.

Fiscal 2009 ended the turnaround phase of our Advance Auto Parts strategic plan.

Over the past two years our focus has been on setting clear strategic direction for Advance through our four key strategies, closing material capability gaps and accelerating our top line growth.

Simply put, we focused on reigniting our core values of our team, inspire, serve and grow to deliver legendary customer service.

To this end, we began rebalancing our business to pave the way for an integrated 50/50 DIY commercial model.

We overhauled our merchandise and supply chain capabilities to grow both our top line and our margin rate.

We developed our first truly integrated e-commerce website to provide a multi-channel experience for customers and, we strengthened our hard parts business, which had been neglected over the years.

Finally, we accelerated our commercial grow which resulted in eight consecutive quarters of double-digit commercial [com] sales growth for Advance stores.

The breadth of pace of this change can be both aggressive and challenging at times, yet it has been necessary.

Fiscal 2010 opens a new year and the next phase of our strategic plan.

We continue to see positive trends for our industry with the strengthening of our garage customers as a result of dealer closings.

Increases in average vehicle age, and increases in miles driven, combined with these positive signs in our industry and the breadth of our change over the past two years, our focus will now move from depth of change to focusing on fewer priorities that deliver a bigger impact.

That focus will be squarely on our customer facing capabilities, primarily retail, commercial and store operations.

The specific areas we will focus on are leadership effectiveness, customer engagements and operations excellence.

We will ensure our field leaders and our stores are prepared to manage an integrated service model providing legendary customer service to both our DIY and our commercial customers and ensure our team members have the tools in the form of systems, standardized processes and training to deliver service consistently each time and every time.

Jim, Kevin and Mike will outline some of these priorities later in the call.

In early January, we held our annual leadership conference with all of our General Managers, District Managers and other key leadership.

Nearly 4000 AAP front line leaders, our ability to harness 49,000 team members to understand, embrace, execute our strategies and priorities, will drive our success in the long term.

I am confident we are moving in the right direction.

That confidence comes as a result of the feedback from our leadership conference, where 95 plus percent responded that they are both clear about what is expected of them, and are excited about the future of our company.

We have a focused agenda to accelerate growth and I'm encouraged with our start to 2010.

During the conference, we recognized store General Managers and our field teams for their accomplishments over the past year.

As part of that recognition, we also acknowledged one Regional Vice President in each of our three areas, as RVP of the year.

Our three award winners for 2009 were Joe Gonzales, Frank Miller and Mike Cox.

These leaders and their teams are great examples of leaders who teach our values by serving our customers better than anyone.

Congratulations to all of our award winners including Joe, Frank and Mike for their contributions.

Now I'd like to turn the call over to Jim Wade, our President, to provide progress update on our commercial acceleration and DIY transformation strategies.

Thank you, Darren and good morning.

I'd also like to thank our team for a successful year in 2009.

I'll start my comments by reviewing our total sales growth, and then talking about our progress with our commercial acceleration and DIY transformation strategies.

Our total comp sales growth for the fourth quarter was 2.4%, compared to 3% during the same quarter last year.

We are not satisfied with our overall fourth quarter sales results.

However, we did again achieve an increase in both customer transactions and average transaction size, and our sales growth rate was close to two times the market growth during the quarter which has positioned us well for successful 2010.

Looking at our commercial performance, our total comp sales increase was 9.5% and for our Advance stores, our comp increase was 10.2%, which represented our eighth consecutive quarter of double-digit growth.

When adjusted for the calendar change from last year, our total commercial comp sales increased 11.3%.

This increase was on top of a 13.7% comp sales increase, including AI, and a 14.5% comp increase for our Advance stores during the fourth quarter last year.

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

We continued to gain significant market share in commercial during the fourth quarter and, even with accelerated growth, our market share in the $40 billion commercial market is less than 5%.

Our team knows we have a lot of room for continued growth.

Our commercial gross profit rate also continued to improve, driven by the increased mix in parts sales and better merchandising and operational capabilities.

Since we are at the end of our year, I wanted to take a moment to look back what we accomplished with our commercial initiatives in 2009, as well as where our focuses will be in 2010.

As we have said in previous calls, we focused our commercial initiatives on what our customers tell us is most important to them, have the part I need, deliver it to me quickly and accurately every time.

We have now completed investments in additional parts pros, trucks, and drivers, in approximately one third of our stores.

These stores have produced comp sales increases significantly higher than our double-digit company average.

We will use the return on these investments, as they mature, to make investments in additional stores in 2010.

We have made investments in inventory upgrades across many of our stores over the past two years.

Kevin has been keeping you up to date on both key brands added, as well as increased parts availability.

These improvements have contributed significantly to our commercial growth and will continue in 2010.

We made good progress in 2009 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.

Being a leader in commercial requires changes in how our General Managers and our key store leaders do their jobs to enable them to serve both DIY and commercial customers effectively.

We also made progress in 2009 in raising the overall operational consistency of our service to our garages.

This will be a key focus in 2010 as we expand our use of technology in our stores to receive, track, and deliver orders consistently and quickly.

We believe this will be a key to increasing our retention of existing customers while continuing to add new customers.

In 2009, we built and strengthened our commercial sales force.

For the year our sales force grew by over 120 team members, representing a 45% increase from the beginning of the year.

While we are not completely where we think we need to be in the size of our sales force, we made substantial progress towards that goal.

In 2010, we will focus on making our sales force more productive by continuing to refine our focus on our most important customers and to build deeper relationships with those customers.

In addition to sales growth, we track our customer satisfaction scores to measure our progress in commercial.

We are pleased that our satisfaction scores have increased significantly over last year.

Also, our net promoter score, the percentage of customers who say we almost always have the part they need, and the percentage of customers who say we almost always deliver the part on a timely basis, all showed strong gains.

We are also pleased that our customers gave us high scores for taking the time to understand their business, which we believe measures the deep relationships we are building.

With these initiatives, we believe we have the potential to grow this business in low double digits again in 2010.

Now turning to our DIY transformation.

Our fourth quarter DIY comp store sales were a negative .8% after three consecutive quarters of positive comps.

After adjusting for the calendar shift, our comp store sales decreased by roughly .4%.

Although our fourth quarter year-over-year comparison became significantly more challenging, we are not happy with our fourth quarter results.

For the 2009 year, we delivered a comp of 1.7%, which was our first full year of positive DIY comps since 2005.

Our DIY market share decreased just slightly about 10 basis points at the end of the fourth quarter, compared to the same time in 2008.

To put that in perspective, our growth in DIY in 2009 was impacted by the acceleration of store closings, the deceleration of new store openings, reduced marketing spend in the second and third quarters, and the absence of an e-commerce platform.

However, we have made significant steps to strengthen our core capabilities including marketing, real estate, and the establishment of our e-commerce platform, which provide us confidence in our ability to strengthen our relationships with our DIY customers and grow our business with them.

As I did with commercial, I want to take just a moment to look back at what we accomplished with our DIY initiatives in 2009, as well as where our focus will be in 2010.

We have focused our DIY initiatives on what our customers tell us is most important: friendly and knowledgeable people who can solve my problem are available when I need them, and have the part I need when I need it.

The parts availability initiatives I described in regard to commercial apply equally with DIY.

We will continue to increase our parts availability in 2010.

In order to ensure our customers have team members available when needed, we are improving the staffing of our stores based on a demand driven model that focuses on customer transactions and traffic patterns.

The next phase of this process will be rolling out to our stores in the first half of 2010 and will provide them more tools to have their staffing available at the right time.

We focused significant resources in 2009, and especially in the second half of the year, on DIY sales training and development.

This reinforces the basic greeting and problem solving skills of our team.

Likewise, the next phase of this train rolls out in the first half of this year.

We are also working to employ more effective strategies to increase the number of customers who come to our stores.

As we discussed last quarter, we made significant changes to our marketing program and approach.

We have implemented a more targeted approach to attract our highest potential customers.

Through this work, we established a title sponsorship with Monster Jam, which we announced in the fourth quarter.

We believe that Monster Jam is a perfect fit for us, as their tour footprint aligns very well with our store footprint.

Our customer satisfaction scores for DIY have also continued to increase over last year on an already strong base.

Again, we are receiving high marks for our increased parts availability and our net promoter score has increased as well.

With these scores, and with the initiatives that we are focused on, we believe we can maintain and grow market share over time with our DIY customers who are continuing to aggressively grow our commercial business.

As Darren highlighted, we held our annual General Managers conference during the first week of January.

This meeting is always a great opportunity for all of us to deepen our focus on building and coaching great store teams and recommitting ourselves to doing those things that are essential to meeting our customers' needs.

We always come away from this meeting excited by the passion and commitment of our team to serving our customers better than anyone else, which is what makes Advance Auto Parts a special company.

Our team's energy and customer focus will be what leads us to another successful year in 2010.

Thanks again to our team for what you're doing each day to serve our customers and drive our results.

We look forward to a great 2010.

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 thank the team for their hard work during the fourth quarter in 2009.

I'll take a minute to highlight a few of the accomplishments during the quarter end year, as well as update you on our initiatives to strengthen our gross profit rate and improve our inventory availability.

During the fourth quarter, our gross profit rate increased 78 basis points versus the fourth quarter last year.

This increase was on top of 140 basis point increase during the same comparable period last year.

For the year, our gross profit rate increased 149 basis points to 48.9%.

During the quarter, our improvement was driven by increases in both front room and backroom categories resulting from the roll-out of our price room - - price optimization strategies, strengthening our merchandising capabilities, and the impact of our rapidly growing global sourcing capabilities.

For the year, we made significant progress increasing our availability through the net addition of 6PDQs or "parts delivered quickly" warehouses and 80 hub stores.

We also upgraded inventories in nearly 1500 stores and were able to re-assort the vast majority of our plan-o-grams using our new custom mix tool.

Through the course of the year, we have substantially disposed of the slow moving inventory identified in fourth quarter of last year.

Aggressive management of slow moving inventory in 2009 resulted in no material inventory write-offs this year.

Major enhancements in inventory management processes led to improved DIY and DIFM availability, and a decrease of over $60 million in owned inventory.

The 9% decrease in owned inventory, year over year, combined with the 149 basis point improvement in gross margins, contributed heavily to the 110-basis-point improvement in return on invested capital.

Our adjusted accounts payable to inventory ratio of 61.2% is up 400 basis points compared to 57.2% at the end of fourth quarter last year, and is at an all time high.

This significant achievement was evenly split between fewer days of supply and greater days of payables.

We are on pace to achieve our long-term goals, and expect to see a continued improvement in 2010.

As I announced during the third quarter conference call, we have implemented engineered standards at all of our main distributions centers.

Engineered standards drove double-digit productivity improvements in the quarter.

To date, we have exceeded our expectations through this initiative.

We are also exceeding our expectations with respect to our fleet outsourcing we announced earlier in the year.

We expect that we will generate significant savings from transportation perspective going forward.

The combination of engineered standards and fleet outsourcing allowed us to fund our same day availability investments and positions us to reduce our supply chain costs, as a percent of sales, in 2010.

While the absence of an e-commerce platform in 2009 reduced our DIY sales in the first three quarters of the year, I'm delighted to announce that our e-commerce launch that occurred in October, is going well.

Our sales in the quarter surpassed our Q4 2008 sales despite spending the previous seven months as an information only site.

Based on our current trend, we believe e-commerce business will contribute positively to our DIY business in 2010.

We launched a test of our new business to business e-commerce site in Q4 and expect to begin a national roll-out in 2010.

Ultimately, our combined e-commerce platforms should prove to be a significant growth engine for us in the future.

In third quarter, I assumed responsibility for Auto Part International Team in addition to my existing responsibilities.

Over the past quarter, I have been working with Roger and his team on developing strategies to accelerate their growth while further identifying opportunities to integrate our supply chain, IT and other back office capabilities.

In 2009, AI's revenue grew 19.6%, which was driven by a comp store sales increase of 9.9% and 31 net new stores opened in 2009.

We are very pleased with the AI team's results, and I'm excited to announce that in 2010, AI will add approximately 40 new stores.

Overall, 2009 was a very successful year for our team and I'm thrilled by the strategic and financial progress we have made through availability excellence strategy.

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

Thanks, Kevin and good morning, everyone.

I'd like to start by thanking all of our talented and dedicated team members for the financial progress we made in 2009.

I plan to cover the following topics with you this morning; one, provide some financial highlights of our 2009 fourth quarter performance, two, put our fourth quarter results into context with our 2009 full-year performance and our turnaround, and three, provide you with our annual financial outlook for 2010.

Before I comment on our results, I would like to remind you that 2009 includes the impact of store divestitures and our 2008 fourth quarter and full-year results include the impact of both a 53rd week and a noncash inventory adjustment resulting from a change in inventory management approach.

The 53rd week increased the loaded EPS by $0.10, while the noncash inventory adjustment decreased EPS by $0.25.

I will speak about our 2009 results on a 12 week and 52 week comparable operating basis, as that provides a more transparent and relevant comparison to 2008 results.

We have provided GAAP financials as well as comparable operating results in our press release.

Turning to our fourth quarter, earnings per diluted share of $0.36 included $0.03 related to store divestitures.

Excluding the impact of store divestitures, earnings per share were $0.39 versus $0.41 last year, and analyst consensus estimates of $0.46.

For all of 2009, our earnings per share increased 14% on top of a 16% increase in EPS last year, excluding the $0.17 impact of store divestitures.

We shared our third quarter call, that our fourth quarter would be more challenging because we were up against stronger comparisons to last year.

Well, this was the case.

We are disappointed that we did not meet our internal expectations for our fourth quarter top line and bottom line performance.

That said, we are pleased with the sequential improvements we made in our financial measures for the full year 2009, which I will speak to later in my remarks.

Some of the highlights for the fourth quarter include a 2.4% comp store sales increase comprised of a 9.5% increase in commercial and a .8% decrease in DIY.

As previously communicated, our comp store sales were impacted as a result of a calendar shift.

On a calendar adjusted basis, fourth quarter comp store sales increased 3.1%.

For fiscal 2009, our comp store sales increased 5.3% over a 1.5% increase in 2008 and our total revenue increased 7.1% on a 52 week adjusted basis.

During the fourth quarter our gross profit rate increased 78 basis points versus last year primarily due to continued investment in pricing and merchandising capabilities, increased parts availability, and improved store execution, partially offset by the impact of shrink benefits we reported during fourth quarter last year.

The 78 basis point increase was on top of 140 basis point gross profit rate improvement in the fourth quarter 2008.

On a full-year basis, we are pleased with our 149 basis point increase in gross profit rate as a result of the investments we have made over the last two years.

During the fourth quarter, our SG&A rate increased 165 basis points, excluding the impact of store divestitures.

The 165 basis point increase was driven by commercial investments, including store labor, higher benefits expense, additional advertising expense, and new capabilities such as global sourcing and e-commerce, partially offset by reduced incentive compensation.

The SG&A rate increase is somewhat magnified given our softer sales performance and Q4 being a lower volume quarter.

Q4 SG&A dollar growth increased 7.8% which is - - which represented the lowest SG&A growth in any quarter in 2009.

For all of fiscal 2009, the SG&A rate, excluding store divestitures, was 125 basis points unfavorable to last year due to investments in store labor, higher incentive compensation, strategic initiative expenses and higher medical expenses, partially offset by lower advertising expense and store occupancy leverage driven by the 5.3% increase in comp store sales.

Free cash flow for all of fiscal 2009 was a record $410 million, which represents a 46% increase over last year.

This record cash flow increase was $130 million more than 2008, primarily driven by improvements in inventory management, working capital management and increased net income.

Adjusting for the 53rd week in 2008, our free cash flow increased $160 million, which represented a 64% increase over last year.

Our rent adjusted leverage ratio at the end of the fourth quarter was 2.2 times, which is down from 2.7 times last year, driven by less debt outstanding and increased operating income.

During the fourth quarter, we repurchased approximately 1.24 million shares of stock for $50 million, at an average share price of $40.24.

As mentioned in our fourth quarter earnings release, we have cancelled the remaining share repurchase authorization and our Board Of Directors has authorized a new share repurchase program.

We will continue to be opportunistic with the share repurchases in 2010 and are committed to managing our rent adjusted leverage ratio to a maximum 2.5 times.

Overall, we are disappointed that our fourth quarter results trailed our financial expectations from both a top line and bottom line standpoint.

We have previously shared that our financial performance would not be linear quarter to quarter given the breadth of changes we have made as part of our turnaround.

And, we saw this with our results in our fourth quarter.

As we now end our turnaround phase, it is also important that we put our fourth quarter financial results in context with our full-year 2009 financial performance.

In 2009, our comp store sales grew 5.3%, our total revenue growth outpaced the rest of the market by 390 basis points, our operating income grew 10%, our return on invested capital increased 110 basis points and we delivered record-free cash flow of $410 million.

Sometimes these improvements can be lost when we focus on just one quarter.

As previously shared, our turnaround has been about positioning the company to accelerate growth, improve profitability and drive shareholder value.

These three dimensions will continue to be how we measure the path ahead, and our performance thus far shows we are trending in the right direction.

Turning to growth, we are pleased with the 5% improvement we made in sales per square foot in 2009 and the fact that our total business growth, as measured by NPD, was 390 basis points better than the rest of the market, driven by our strong commercial growth.

Looking ahead, we are focused on building an integrated store that serves both our DIY and commercial customers, and we will measure our performance based on the total four wall sales growth.

Turning to profit, we are pleased with the 149 basis point gross profit rate expansion and the sequential growth we have seen in our operating income in 2009 versus 2008.

Looking ahead, we expect the significant investments we have made in our capabilities and infrastructure will drive continued operating income expansion.

Turning to value creation, we are pleased with our $410 million record-free cash flow in 2009, improvements in our balance sheet driven by our inventory management and reduced debt, and the 110 basis point increase in our return on invested capital.

Looking ahead, we expect to turn and leverage the strong financial platform we have built into continued growth in economic profit.

Turning to fiscal 2010, we provided a more robust annual outlook in our press release, which is included in our 2010 estimated EPS range of $3.20 to $3.40 per share.

I would like to remind you that our first quarter has the most challenging comparison to last year, which will limit our ability to grow first quarter operating income which is factored into our annual outlook.

Now I'd like to provide you with the key financial assumptions applied in our annual financial outlook.

In 2010, we will continue to expand our store base and anticipate new store openings will increase from 2009 levels for both Advance and Auto Part International brands to approximately 150 stores.

We will continue to make investments to grow our commercial business and to improve our DIY sales performance, which we expect will result in total four wall comp store sales increase in the low to approaching mid single digits.

We also see the third straight year of continued gross profit rate expansion as a result of our previous investments in merchandising and inventory management capabilities, and from benefits as a result of recent investments in capabilities, such as global sourcing.

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

The past two years required large SG&A investments to build the foundational and strategic capabilities needed to turn around our business.

A large portion of these investments have now become part of our 2010 cost base, which will result in reduced growth in our SG&A.

We must also ensure we get the appropriate yield from both our fixed and variable expenses.

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

Additionally, we expect to see reduced costs from some of the areas we invested in in 2009, such as outsourcing goods not for resale and our DC fleet.

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

Before investments, we expect SG&A to leverage at low single digit comps.

All in, with investments, we expect SG&A per store to grow approximately mid single digits in 2010.

We expect higher SG&A dollar growth during the first two quarters of 2010, which will result in higher comp sales leverage point as a result of investments we made during the second half of 2009.

In closing, we are disappointed we did not deliver the financial results we expected in our fourth quarter, yet our full-year 2009 financial results show we are on the right path.

As we enter 2010, we remain committed and focused on our four strategies that are allowing us to build a differentiated model to serve both DIY and commercial customers.

We continue to see a pathway to improve our operating and financial results and continue to be optimistic about our long term growth prospects.

Most importantly, we are appreciative of our talented team members, who are passionately leading us through our transformation.

Operator, we are now ready for questions.

Thank you.

(Operator instructions).

Our first question today is from Tony Cristello.

You may ask your question and please state your

Thanks.

Good morning, DB&T Capital Markets.

Good morning, guys.

Good morning, Tony.

Good morning Tony.

Darren, there were a few references made this morning about being disappointed in the fourth quarter financial performance and I'm just curious from your standpoint, what disappoints you most of the fourth quarter, relative to what your expectations were?

Tony, I would say it's a couple of things.

I would say we are thrilled with our commercial progress.

That being said, we probably finished a couple points lower than what we would like to in terms of comp store sales.

On the DIY side, naturally we would want to see positive comps in the fourth quarter, and we didn't see them.

Now, that being said, I would tell you that when I look at what was going on in the market, you saw something interesting in the overall market trends.

The DIY, based on our NPD data, says the fourth quarter was about the weakest year-over-year growth that we have seen all year.

So, maybe I shouldn't be as disappointed, but we did see some contraction in that business, albeit still positive, it was probably the weakest - - it was the weakest of the four quarters on an overall market basis, and I'm sure that's a piece of it.

But, you know what, a piece of it as we think about it was, you know, we can always execute a little bit better.

Commercial, on the other hand, strengthened in the fourth quarter sequentially on an overall market basis and I think we probably should have participated in that a little bit more.

That being said, we had a lot, and I can't emphasize, and it's part of my learning in this job, we had a lot going on in terms of training in the field, working with our commercial sales team and I bet we distracted them a little bit.

And I think, as I said, I think more about a short-term set back in terms of things that we were doing, versus a long-term trend because, as I said in my comments too, we felt good particularly about period 1, January, as we came into the quarter and saw life come back into both of those businesses.

So when you look, then, at the guidance that you've given and what happened in the fourth quarter, is there any issue of the initiatives and you talked about being - - maybe having a lot going on - - Is there the risk that you still have a lot going on that would prevent you from maybe meeting your expectations, or perhaps creating some further disappointment relative to where this guidance is that you've given for the full year?

Well, here's what I would say to this, is that we wouldn't give guidance that we weren't confident in.

You know, is it a guarantee?

Nothing is guaranteed.

But I would say what I'm confident about is that we have taken some time out.

Jim talked about it in his comments, particularly in the fourth quarter, here again in the first part of the year, I would say our energy is going into things that are field facing.

So, we are in the process of bringing our team's new tools, and whatever we are touching the broader 49,000, in terms of better ways to schedule our labor as opposed to just control it.

Now, that doesn't mean we are going to overspend our labor, but we are giving our teams new tools as we did last year to better see gaps in their coverage on the floor.

We are doing - - boy, I think we touched just every district last year in what we call our gas square training process and this is just, you know, you can pick many different clues.

I think for the first time in at least eight quarters, what we saw are simple things like our units per transaction, even in DIY, go up in the fourth quarter.

Our attachment rates increased 300 basis points in the fourth quarter.

You know, we had some inflation, deflation pressure, but what I look for are the things that we are putting energy into that need to translate into the field.

Are those going to make a difference?

And, I think we are seeing some encouraging results, whether it be in our proof of concepts in our commercial operations - - Jim talked about it in terms of, how do we make sure the teams have the tools to get the orders to our commercial customers on time every time with the right order?

I mean, one of the exciting things we have going on is we just were literally 10 minutes into an e-commerce platform and, that e-commerce platform, not just in terms of what will sell, but that ability to pick up in our store and navigate, is going to help our teams in terms of sales.

We had one customer in the fourth quarter that went up on our new B-to-B commerce platform.

So, that's one.

And so, and we think that is a huge opportunity for many of our business partners that we have been constrained from doing business because you couldn't do business online with us on a B to B space.

So, I would say our energy is really focusing on, how do we narrow our efforts on the highest priorities that our teams in the field are looking for us to support as a way of driving those outcomes.

And, that's, if you said what sits underneath the numbers, it's more of those efforts than hoping the market goes one way or another.

And just one last follow-up.

When you look at, then, the level of spend and I think Mike sort of framed it as mid-single-digit SG&A spend sort of through the first half of the year, are you going to see the traction with initiatives, you know, because of the distraction, because of the spending, be more accelerated in the second half of the year, once your investment starts to wind down?

Is that how we should think about it?

I want to make sure I understood that.

Just basically, it still seems like you're spending - - even though it's decelerating to some degree, you're still spending mid-single-digit growth in SG&A, is what I think Mike kind of guided to as a result of initiatives underway.

And what I'm wondering, is the level of initiatives and such has not yet peaked, and so the ability to get the full benefit, to me, seems more weighted to the second half of the year.

Yes, I would say a way to frame that and think about it, Tony, and tell me if this doesn't answer your question, is that you're going to have two things going on in the first part of the year, one, we will finish the annualization because we didn't add every commercial salesperson on the first day of last year, and we will feel the weight of the annualization of our sales force, we will feel the annualization of we put our retech commercial system into operation in the third quarter, salesforce.com, so you're going to have some annualization that will be felt more in the first half.

We will do some more commercial waves in the first half of the year.

In the second half of the year, I'll tell you what we are spending time working on is that, how do you give the organization time to absorb it.

We recognized last year, and a lot of our customer data says it, we created extraordinary demand in terms of new customers and even growing our business with existing commercial customers, but unfortunately, we gave away a lot of business because we didn't hold onto them.

Net, it was still a 14 comp.

It could have been double that if our operations side of the business - - and it's not a criticism of our team members, but it's a recognition that we have to get out into the field and make sure those teams are supported, not just in growing demand, but being able to sustain those customer relationships going forward.

So, I would think about this year, that the first half, and Mike said this, will experience some annualization, it will experience another wave of commercial growth and as we are going through the second half of the year, as we are going through the entire year, but it will be more emphasis, is that how do we allow the organization to absorb that change and be effective with it.

And so, the back half of the year as Mike alluded to, is where it's not just the third and fourth quarter, I would say second, third and fourth quarter, we would expect to see a larger portion of those benefits flowing through.

Thank you.

Our next question is from Gregory Melich.

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

Mr.

Melic, please check your mute button.

We will move onto the next question, Matthew Fassler, you may ask your question and please state your

Goldman Sachs and good morning, thanks so much for taking my call.

My first question, based on your sales color and on the guidance that Mike just gave about SG&A spending up mid-single-digit per store on the year, the implication to get to your numbers would be gross margin up substantially, again, in 2010 over 2009, something in the neighborhood of 100 basis points or more.

I want to make sure that my arithmetic is right on that and then if so, if you could just recap the drivers, if they are any different, or if they are changing in composition of gross margin improvement of that magnitude.

Matt, this is Kevin Freeland.

Essentially, the numbers that we looked at in the quarter or the year and what we are looking to in terms of 2010, is if you look at the 2008 and 2009 combined, we picked up 220 basis points for the year over that two-year period of time, and 218 basis points in fourth quarter for the two years back to back.

We don't believe that the margin rate for 2010 will be in that league, but will be a substantial improvement, and at least your math is directionally correct that we are expecting that.

What sits underneath that is a very rapid expansion of our global sourcing capabilities and impact on margin.

Last year, we drove a lot of incremental margin by optimizing the prices in the front room and that work will move to the backroom next year, and continuing improvements in the category management and the merchandising capabilities.

We also spent a lot of time last year, and put a lot of investment in, making sure that our prices were competitive and that was actually a drag on the 149 basis points that we picked up, and that work is done.

And essentially, we are at the level with the market that we desire and that should not be a headwind for us in 2010.

Got it.

My second question relates to SG&A, and you discussed leverage without investments, or deleverage without investments or leverage points without investments, and then the leverage with investments.

Should we interpret that to mean, in any way, that the investments reviewed as being a bit more discretionary this year than last year or are you simply doing that so we understand what happens when the investments are in fact done?

Yes, I think it's the second, Matt.

I want to be really clear, the investments we make continue to be strategic based, primarily in areas of commercial.

I think Jim mentioned in his comments, that we are one third through our commercial changes, so that's a big part of our incremental investments next year that we are going to see, and then the other areas going back to margin, things like global sourcing, our dot com capabilities.

So, just a frame to think about is, we have just come out of a turnaround phase that we have had the highest piece of our investment spend in growth as we invested new capabilities in our strategies, and as now a lot of those costs become part of our fixed cost base, you would expect our SG&A growth to decelerate.

And Mike got it.

Cost base comes with a lot of additional capacity, so we are not in capacity with all of our parts pros, we're not in capacity with our trucks.

So, part of it Matt, as you look out and I know - - I don't know if it's painful, but you end up dropping a new parts pro and new trucks in, and you've got a runway of capacity there that typically we think it should be, what, almost 18 months that, you know, until they reach the next full capacity level.

So, we still have a ways to go, but as we said earlier, we are going to try to think about how do we bring that to our organization more rhythmically, and, as Mike said, in a more decelerated fashion.

Got it.

Thank you so much.

And thank you our next question is from Greg Melich, you may ask your question and state your company name.

Hi, hopefully, you can hear me now.

Yes, Greg, we can hear you.

Excellent, it's Greg Melich with Morgan Stanley.

I wanted to follow-up on the gross margin and then also get into the commercial roll-out.

On the gross margin side, you said the front room is done but the more the backroom this year.

Where is custom mix in that, and if you were to put a percentage of the store that's really been sort of reset to where you want it to be, Kevin, could you give us an update on that?

Sure.

The - - we essentially rolled custom mix out in two fashions.

We referred to, you know, nearly 1500 custom mix upgrades, and that's literally changing the entire store at that point and secondarily, that as we reset each plan-o-grams in the stockroom, we actually affect all stores for that one plan-o-grams.

The intersection of those two efforts is summarily, all of the stores have been impacted by custom mix, by the tale end of the year.

Now, that said, what we did in terms of upgrades in 2008, we upped the ante with the custom mix upgrades in 2009 and there's a series of changes as we move into 2010 that should further fine-tune the assortments that we carry in our stores.

But, I think it would be fair to say that the majority of that benefit was in place by the end of the year.

So there's still some carry-through to this year, but that's one of the reasons that gross margin would be - - the expansion going forward will be less than it was in the past.

Is that fair?

I would say that the larger impact would be, and we had made this statement in the past, the largest opportunity for us in terms of price optimization was in the front room, which is why we started there.

(inaudible) moving to the backroom, but that's a smaller overall impact for us.

And that's then, partially offset by the growth in global sourcing but we are in a - - in a year where we are ramping that up very quickly, but the net net of the two is, what we were able to accomplish in 2009, is not likely to be repeated at that scale.

Kevin, isn't it also fair to say in custom mix, Greg, we are never done?

Right.

I think by example, Charles will do breaks four times this year.

That's correct.

And last year we did it once.

And so I think it's, you know - - it's a building capability for us, and as Kevin - - we sometimes measure it just in terms of 1500, but you can imagine as we are getting smarter and the teams are learning, you know, our, the way we will use that tool will become even more effective with each and every quarter and year.

And, are the systems now in place to have that inventory at the store level per SKU, where you look at the cars in each trade zone?

Are we finally there?

Essentially, the mechanism is even more sophisticated than that.

It's looking at numerous factors including the actual sales in the area, things that we can see in the interaction with customers that don't show up in sales, the vehicles in operation.

It's a relatively complex tool, and what we are able to then see is how much of the demand actually gets satisfied and that is coming up very nicely.

Right.

And, then there's a follow-up.

I think Jim mentioned that a third of the stores now have the additional drivers and that you'll leverage those benefits as you really - - and improve it in 2010.

Is there a goal now on the number of stores that you think will have the additional drivers and commercial program, or it seems like this year you may add some more, but it's not going to be near as the rate it was, and it's more about making sure the ones your rolled work.

Could you just put some numbers around that or something to help?

Greg, this is Jim.

I think how you're describing it is basically right.

We, in 2009, you know, we finished our eighth consecutive quarter of double-digit comps in commercial, and we did investments across roughly a third of our stores with the basics of parts pros and trucks and drivers.

We ramped up significantly our sales force, we had for the first time we have a database of our commercial customers in place that are now allowing us to start to leverage that.

And, over the next few years, we will do all of our commercial stores in terms of those investments.

I think right now, about 88% of our total stores have commercial, so we will be doing it across that group.

But, at the same time while we are doing that, we are going to be doing the things that Darren talked about earlier, that not only helps us create demand, but helps us retain that demand at a greater level.

So, there's going to be a lot of work going on inside the store in terms of how we receive that order, how we make sure we track it and deliver the right part in the time frame we promised every time to our customers.

We are continuing to do a lot of work just teaching and training our team how to do a greater level of commercial in the store from the standpoint of the General Managers' responsibilities with those commercial customers, and the partnership with the sales force.

So, it's an ongoing process that, this year, will continue the investments in stores for parts pros drivers, trucks, et cetera, but emphasize to a greater level that operational consistency and the productivity of our sales force to retain customers.

And Jim, you would expect by the end of the year, we would be at least at 50% of our stores having gone through the wave or the upgrade process?

That's correct.

So that's the way to think about where we are in the journey, and similar to upgrades and custom mix, Greg, I would say with each wave we are learning and getting smarter as to where to deploy those trucks, where to deploy those parts pros, how the interaction and how we are organized between our sales force and our teams too.

Thank you.

Our next question is from Scott Ciccarelli.

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

Hey guys.

Sorry about that.

Hey, Scott.

How are you?

Good.

Two questions.

The first just a little bit more color on the gross margin performance in the fourth quarter.

And, what I'm trying to figure out is, did we actually see shrink increase in the quarter or were there any change to maybe volume rebate accruals?

Because, it just seems like you guys have experienced about four to five quarters of very strong progress on the gross margin line, and yet this quarter wasn't quite what we had gotten used to seeing.

So, I'm just trying to figure out if there's anything else going on there.

Sure, Scott and again, as I said a moment ago, if you look at the two-year gross margin improvements for the whole year, we picked up 71 basis points in '08, 149 in '09, so it's 220 basis points for the combined years.

We picked up 218 for the combined years in fourth quarter.

It was 140 in '08 and 78 in '09, so essentially we were exactly where we had expected to be.

In the - - the composition of the gross margin has literally changed each quarter, and we have mentioned this in previous calls.

There's a number of initiatives that we have positives and negatives as we compare year over year, but if you add it all together in total, we essentially were on a track in fourth quarter that was little changed from where we had been all year.

Your gross margins actually came in line with what your expectations have been?

Yes, essentially, yes.

Okay.

And then my other question, and this is a follow-up on a previous question about the inventory customization efforts, it seemed to me like one of the big opportunities for you guys was to drive conversion rates and, you know, it's something you kind of emphasized a number of times, particularly at your analyst meeting.

And, now that we have kind of gone through the inventory customization progression, is there any way to quantify the impact that you have seen, if indeed we have seen any impact so far?

We have seen impact and it's been a material amount of what we have been focused on as a team and executing nearly 1500 upgrades in the year as many, many times what it had been two years prior.

But, we have not in the past disclosed what that impact is other than the fact that the payback on the program is high if you can imagine this, we upgraded 15 - - nearly 1500 stores' inventory, materially improved availability as is measured by our DIY and commercial customers, and dropped total owned inventory $60 million.

So, the payback on that program is considerable.

Is there only - - I don't know if it's a group of stores, a test stores or something where, you know, conversion rates have moved from X to Y, you know, after the inventory customization had been implemented?

We have all of those internal numbers, but no, we have not disclosed those in the past.

Okay.

Thanks a lot, guys.

Thank you, our next question is from Kate McShane, you can ask your question and please state your company name.

Good morning, Citi Investment Research.

Hi Kate.

You had mentioned that this quarter SG&A benefited from lower incentive compensation, and excuse me if I've missed it, but did you say when we can expect for this to resume?

The incentive compensation to resume?

For it to go higher.

Yes, so the reason you saw that is, and I think we shared it with you at the beginning of 2009, all of our incentive programs are based on growth, sales growth and profitable growth.

And so, you know, our anticipation and our belief in the confidence in our field, is that we will be able to grow the top line and bottom line and our incentive compensation will grow accordingly.

What I'll also expect is that if we don't grow as much as we did last year, we would expect to see a little bit of leverage on incentive compensation, and if we grow more than we did last year, we would expect that number to grow.

Great.

That's helpful, thank you.

And then, my other question is just on the competitive environment.

I was wondering if you could give us a little bit of color on the DIY side, if you have seen any more competition in the pricing environment and in what form is the most competition coming from in the DIY business?

I think that, as we look at promotional pricing through the quarter, I think there were fairly rational pricing across all of the competitors.

I think a couple of competitors have increased the amount of exposure that they have done in certain DIY categories but not deeper discounts in pricing, they have just expanded the amount of exposure they have done for the customer but I don't think we have seen any deeper discount than we have seen in previous quarters.

Now Charles, would you say that maybe the one thing we saw in this quarter is we did see Wal-Mart act up a little bit on oil.

When I say act up, be a little louder on oil than we have probably seen in the other three quarters?

They took one 30 day period where they were exposing through TV and then they moved off that going into December where we saw some changing in pricing back to prior levels that they were at.

Yes.

Thank you.

Thank you, our next question is from Michael Lasser, you may ask your question and please state your company name.

Good morning, Michael Lasser from Barclays Capital, thanks a lot for taking my question.

Within your comp lines for the year, what have you assumed for growth in the market and, how might that change if we continue to see a rebound in new car sales?

Michael, I would say this, is that that's one of the hardest numbers that we try to track down, say that, you know, our best view right now is that we would be surprised, and if the overall market trends in 2010 were worse than 2009.

And so, I got to tell you I've been in three different industries and I've never seen anything jump around quarter to quarter with such volatility, but this market on a total market, commercial and DIY together, you know, it seems to be a three - - you know, in good years it feels like a 4% grower, in bad years it feels like a 2% grower, so I think you're probably safe that when we see the combined market, and that's to be honest, that's what we focus on, 3% is probably a safe bet on year-over-year growth.

But here again, we are better operators of the business, than predictors of the future, but that's what the historical data would say, you know, we did a little bit better in '09.

We certainly see the characteristics of the industry still being favorable as we go into 2010.

And a real quick follow-up.

How is the recent performance on the DIY side compared in markets where you have a more densely saturated or concentrated store base versus other markets that are perhaps less saturated?

In those areas that it might be more concentrated, are you seeing any more of a lift from recent increase in advertising investments?

This is Jim.

I don't think from the standpoint of different regions, we really don't talk that specifically, but we don't see things in general would be significantly different.

I think promotionally, if I understood your question right, we did in the fourth quarter, you know, we have talked about the improvements that our team led by Greg Johnson had been making in that area, and the fourth quarter itself is not a big quarter in terms of advertising impact by any of us because it's our lowest volume and typically our most volatile quarter.

But, what we are seeing is that our customers are responding very favorably to the changes that we have made and we feel good about what we see going into next year in that regard.

Great.

Thanks.

Best of luck.

Thank you.

Thank you and our final question today comes from Dan Wewer.

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

Thanks, it's Raymond James.

I have a question on some of the pricing initiatives.

I recognize the strategy is to identify items where demand is relatively priced and elastic and pursue that opportunity, but it does appear that once you began to push pricing in the do-it-yourself category that did coincide with near the beginning of some weakness in your do-it-yourself sales.

Is there any concern that perhaps you've gone a bit too far on the pricing initiative on the do-it-yourself segment?

We certainly don't believe that, and again you have to look at the two halves of the whole.

Exactly to your point, we have identified items that price is unimportant, or relatively less important to the customer and those are the categories that we have optimized.

There are other categories that the customer benchmarks and makes their decision based on price, and we have been sharper in price last year than we had been in the two preceding years.

The net effect of those two is overall prices is up slightly year over year.

But as we are fine-tuning in this, the - - you know, I think if you look at the multiple-year DIY performance, and if you look at the total DIY performance for the company last year, it was a better performance than we have seen in a couple of years and to a certain extent we - - where we had struggled a couple of years back, it was an even - - a year of largely breaking even.

And I know that in, I believe this year in 2010 is when you began to focus on the backroom and pricing initiatives.

Trying to think what are the opportunities given that, you know, NAPA appears to be getting a little bit more aggressive in pricing and therefore, do you see fewer benefits from pricing optimization on commercial?

The work that we have referred to of optimizing the prices behind the counter refers to specifically DIY pricing.

We have a separate approach that we have for commercial customers, and as you well know, the margin differences between those two businesses, the commercial accounts have always historically gotten sharper prices than what a walk-in customer would achieve.

We have not, at this point, made a material change in the pricing strategies for commercial accounts and most of what we are seeing at this point has more to do with what Jim has updated you in terms of the wave process, the improvements, and the growth in that business as we are better able to serve customers, and are not actually prices changes or change in price strategy.

Okay.

Great.

That's helpful.

Thank you.

(Operator Instructions).

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

If you have additional questions please call me at (952)715-5076.

That concludes our call.

Thank you.

This concludes our call today.

You may now disconnect.

Thank you for joining us.