領先汽車配件 (AAP) 2011 Q4 法說會逐字稿

Welcome to the Advance Auto Parts fourth quarter 2011 conference call.

All participants are in a listen-only mode until the question-and-answer session.

(Operator Instructions) Today's call is being recorded.

If you have any objections please disconnect at this time.

Before we begin, Joshua Moore, Director of Finance and Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

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

I'd like to remind you that our comments today contain forward-looking statements we intend to be covered and we claim the protection under the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, will, plan, forecast, outlook, or estimate, and are subject to risks, uncertainties and assumptions that may cause the results to differ materially.

Including competitive pressures, demand for the Company's products, the economy in general, consumer debt levels, dependence on foreign suppliers, the weather, business interruptions and other factors disclosed in the Company's 10-K for the fiscal year ended, January 1, 2011 on file with the Securities and Exchange Commission.

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

The reconciliation of any non-GAAP financial measures mentioned on the call with the corresponding GAAP measures are described in our earnings release and our SEC filings which can be found on our website at AdvanceAutoParts.com.

For planning purposes, our first quarter earnings release is scheduled for Thursday, May 17, 2012, before market open.

And our quarterly conference call is scheduled for the morning of Thursday, May 17, 2012.

To be notified of future dates of earnings reports you can sign up for 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 President and Chief Executive Officer.

Darren?

Thanks, Joshua.

Good morning, everyone.

Welcome to our fourth quarter conference call.

First, I'd like to thank our 52,000 team members for their hard work and congratulate them on an outstanding performance in the fourth quarter and for fiscal 2011.

The team's focus and dedication enabled us to achieve new record levels of performance this year.

Our continued investment in service and availability translated into industry-leading service, experience, as measured by NPD, while improving the efficiency of our operation.

Together these investments resulted in record profitability as reflected in our 90 basis point improvement in our operating income rate, which reached an all-time high of 10.8%.

We remain on track to achieve our goal of 12%.

Our improved operating performance enabled our full-year earnings per share to grow 29.4% to $5.11, while our return on invested capital reached a record 19.5%.

Mike will provide more specific details on the fourth quarter and our full-year results in a few minutes as well as the outlook for 2012.

Our heritage is grounded in our commitment to service and is reflected in our promise, Service Is Our Best Part.

Just as important our values inspire, serve and grow are critical to how we deliver on our promise on a consistent basis.

Together, our team's dedication to our promise and values resulted in record levels of customer satisfaction, team member engagement and financial returns in 2011.

Operationally, we set new standards of achievement in delivery speed, reliability, inventory on hand and e-commerce sales, to name a few.

Finally, we finished the year slightly below double-digit comps in our commercial business and saw sequential improvements in DIY throughout 2011.

We entered 2011 by simplifying our strategies to service leadership and superior availability.

Service leadership in simple terms is to help customers buy through delivering on customer expectations, which requires a relentless focus on service basic and behaviors.

We made material investments in our district leadership team, the measurement of commercial delivery speed and reliability and our service leadership assessment.

Ultimately, our goal is to maximize the value of each customer engagement, whether it's when a customer walks into one of our stores, calls us, or clicks on our website, superior availability is focused on building an industry-leading supply chain, through our efforts to build out our hub network and implement our new Warehouse Management System.

This new Warehouse Management System is a critical element of our state of the art distribution center set to open in the fall of 2012.

Kevin Freeland will provide you with more insights on our progress under our superior availability strategy shortly.

I am pleased with the strategic progress we made as well as our financial results that accelerated throughout the year.

Specifically, we were able to generate a 2.9% comp store sales gain during our fourth quarter, and a 2.2% for the fiscal year.

Overall, our business continues to be impacted by regionality, but was less so in the fourth quarter.

Our performance for the year was driven by solid results in both our failure and maintenance products.

In our fourth quarter, we saw positive growth in both DIY and commercial.

In 2011, commercial comps were strong, giving us at near double-digit comps for four years in a row.

We slowed the pace of our commercial [ways] in 2011 to focus on and achieve better execution, which enabled us to better manage our integrated service model.

We are delighted by our ability to turn the tide in DIY, despite a very tough comparison through improved execution and increased average ticket.

Overall, we continue to outperform the market and gain significant market share in our rapidly growing commercial business, which represented 37.2% of our total sales in the fourth quarter, versus 35.1% during the fourth quarter last year.

Additionally, we are pleased with our improved top line and bottom line performance of our commercially focused Auto Parts International business.

AI grew to nearly $295 million in sales, with an 8.6% comp store sales increase while increasing profits nearly 3 times to $12.3 million for the year.

We continue to see significant potential to grow our commercial business and to gain market share.

By contrast, we under-performed the industry and our expectations for DIY market share in 2011.

Our team is focused on the basics of execution, merchandising and marketing to build on our Q4 gains in DIY.

We are pleased with both our DIY and commercial sales trends as we start 2012.

A special highlight is our continued effort to serve the communities in which we operate.

This is reflected in our work to increase awareness and seek a cure for Juvenile Diabetes.

Our team once again continued our strong efforts in support of JDRF by raising roughly $4 million this year.

Our fundraising totals since 1994 is now over $30 million, and we continue to be JDRF's number one corporate partner.

Looking to 2012 and beyond, we continue to see strong structural elements of our industry, including the increasing average age of vehicles, which is nearly 11 years, with two-thirds of those cars on the road being over seven years old.

With over 240 million cars in the US, this continues to be a major driver of the long-term growth and stability of the industry.

Our economy continues to be tempered with high unemployment and low consumer confidence.

As a result, we expect to see an economy of necessity where consumers will continue to favor and seek value through local garages or performing needed repairs themselves.

In the shorter term, and with stabilization of gas prices, we expect the industry in 2012 to perform comparably to 2011.

However, increases in gas prices at the pump will have a negative impact on the growth potential of the industry as evidenced in 2011.

As we start a new year, we remain focused on service leadership and superior availability in the elements that support our strategies.

Our success will be determined by our ability to run the business with excellence which is based upon providing outstanding service, growing DIY and accelerating commercial, effectively managing our inventory levels, continuing to increase the effectiveness of our team member training and development, while allowing us to retain, hire and ignite the performance of our outstanding team members.

In 2012, our key organizational priorities include the continued focus on improving our end market availability, through the continued expansion of our hub network, and the opening of our new DC during the back half of the year.

We continue to enhance our e-commerce offerings in order to increase the retention and acquisition of larger sized commercial customers.

We will continue our efforts to increase the penetration of B2B, which has been very well received by our commercial customers.

Finally, we will work to maximize our return on every customer visit by providing the service they want and expect from every team member.

In closing, I'd like to acknowledge our team's everyday heroics, simply serving their customers better than anyone else.

These acts of heroism happen every day in one of our stores such as Millsboro, Delaware, where T.J.

[Marshlak] and Thomas LaCase deliver on our promise despite the cold temperatures by installing a battery for a mom and her young son and testing the car's charging system to ensure the job was done right, and we gained a customer for life.

Or in Topeka, Kansas, where General Manager, Chris Anders, takes great pride in being available for our customers, connects with them in a meaningful way by taking them from an ordinary transaction and turning it into a memorable interaction.

Thank you to all of our everyday heroes, as your acts of heroism are what makes Advance a great place to work and will continue to drive our success way into the future.

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

Thanks, Darren, and good morning.

I would also like to congratulate the team for a strong fourth quarter and year.

I'll take a moment to highlight a few of our accomplishments during the quarter, as well as update you on our initiatives to support superior availability strategy and new store growth.

Over the course of the year, we worked to increase the breadth and depth of our end market product assortment and availability, through our efforts to increase the number of hubs in the market place as well as providing delivery capabilities from strategically positioned hubs.

As a result we worked aggressively to add our number of hub stores in 2011, which now sits at 294, or an increase of 68, since Q4 of 2010.

We upgraded the inventory in 47 stores for the quarter and 814 stores for the year.

As a direct result of our hub strategy and our inventory upgrades, our in stock levels were up nearly 90 basis points over last year and are at a record high.

Despite our start to 2011, when our inventory levels increased 21% during the first quarter, our inventory levels at the end of the year were up only 9.6% versus the prior year.

This was a great accomplishment and I want to congratulate our inventory team as their focus on disciplined inventory management allowed us to exceed our goals by sequentially decelerating the rate of growth each quarter, while continuing to build on our already high level of customer perception of availability.

Additionally, we continue to expand our supply chain financing program and have reduced our owned inventory per store by 29.8%, with our total owned inventory decreasing $150 million, versus the fourth quarter of last year.

Our work in this space has led to an increase in our AP ratio of nearly 1,000 basis points, versus the fourth quarter last year and now stands at 80.9%.

We continue to be encouraged by our progress and will continue to work to expand our AP ratio in the future.

Turning to gross profit, our gross profit declined 39 basis points to 49%, versus the fourth quarter of the previous year.

This anticipated decline continues to be impacted by increased supply chain costs driven by our investments in hub stores and increased deliveries.

Additionally, our gross profit decline was impacted by unfavorable shrink.

However, we continue to make great strides with respect to our shrink management.

Our shrink performance has improved since second quarter, and we anticipate this headwind will subside in the back half of 2012.

Partially offsetting those headwinds in 2011, were continued improvements in DC productivity and continued benefits from our merchandising, global sourcing and pricing capabilities.

While gross margin declined 24 basis points in 2011, it increased 312 basis points over the last four years.

Our new Remington, Indiana DC, will begin receiving product in second quarter of 2012, and is anticipated to begin shipping product the following quarter.

Remington will provide us with much-needed capacity and will be by far the most advanced DC within our supply chain.

Once this new DC is up and running we'll be able to benefit from additional productivity improvements and continue to increase our overall availability.

We continue to reach new customers and grow sales through successful expansion of our e-commerce capabilities and through new store openings.

During the fourth quarter, we opened 19 stores, closed one Advance store and closed one Auto Part International store.

For fiscal 2011, we opened 95 Advance stores, 9 Auto Part International stores, closed four Advance stores and one Auto Part International store.

As of December 31, 2011, the Company's total store count was 3,662, including 202 Auto Part International stores.

Overall, our fourth quarter as well as 2011 was very successful for our team, and I'm thrilled by the strategic and financial progress we've made as we focus on providing superior availability.

Now let me turn the call over to our Chief Financial Officer, 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 their contributions to the strong financial outcomes we delivered in our fourth quarter to close out another very solid year.

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

One, provide some financial highlights from our fourth quarter of 2011.

Two, put our fourth quarter results into context with both our full-year performance and the key financial dimensions we use to measure our performance.

And three, provide you with our annual financial outlook for 2012.

Looking at our fourth quarter, we are pleased with our strong end of the year with earnings per diluted share increasing 57.9%, to $0.90 per share, versus $0.57 for the prior year.

For all of 2011, our earnings per share increased 29.4%, to $5.11 on top of a 31.7% EPS increase in 2010.

Our comp store sales increased 2.9% during the fourth quarter, which was on top of an 8.9% comp increase during the fourth quarter of fiscal 2010, representing an 11.8% two-year comp store sales increase.

We are very pleased with this result, as it marks our strongest comp performance for the year despite challenging comparisons.

For the year, our comp store sales increased 2.2% with total sales increasing 4.1%, to nearly $6.2 billion.

As Kevin mentioned, our gross profit rate in the fourth quarter was 49%, versus 49.4% in the fourth quarter 2010, or a decrease of 39 basis points.

This was in line with our expectations.

The decline versus prior year was primarily driven by increased supply chain investments in hubs and slightly higher shrink expense.

For the year, our gross profit rate decreased 24 basis points to 49.7%, which was in line with our previous outlook and expectations.

Turning to our cost structure, our SG&A rate was 40.6% during the fourth quarter, versus 42.8% during the fourth quarter of 2010.

This 221 basis point decrease was driven by productivity improvements from the Company's variable customer-driven labor model, which includes the anniversary of investment rollout expenses, reduced incentive compensation, as a result of the Company's lower comp sales growth versus the fourth quarter of 2010, occupancy cost leverage and a significant decrease in overall support costs.

The expense reductions were partially offset by continued strategic investments in areas such as commercial, availability and e-commerce.

As a result of our cost management efforts, and a continued commitment to building a more competitive cost structure, our SG&A per store decreased 2.2% in 2011 to $666,000 per store.

As a direct result of our team's execution and commitment to achieve both top line growth and improve our cost structure, our operating income increased 33.3%, versus fourth quarter of 2010, while our operating income rate increased 182 basis points to 8.4%.

Our full-year operating income increased 13.6%, versus fiscal 2010, to $664.6 million.

Our operating income rate increased to a record 10.8% of sales in fiscal 2011 which represents a 90 basis point increase, which was on top of a 100 basis point increase in 2010.

We are delighted by these results, and pleased with our team's progress in growing our business and profitability.

Free cash flow was a record $507.2 million, which represents a $40.9 million increase over last year.

This increase was primarily due to our strong growth in net income and reduced owned inventory.

As Kevin mentioned, our reduction in owned inventory was driven by our efforts to increase our AP to inventory ratio, which is now at 80.9%, up nearly 1,000 basis points from 71% in 2010 and our work to decelerate the pace of growth of our overall inventory levels, which grew 9.6% for the year.

These improvements to our free cash flow were partially offset by our increased capital spending, which was up $90.6 million driven by our strategic investments in supply chain, to improve our efficiencies, to complete our Remington DC and investments in our e-commerce business.

At the end of Q4, we had $416 million of debt on our balance sheet, and our adjusted debt to EBITDAR was 2 times, which was below our previously stated ceiling of 2.5 times.

Last month we obtained long-term funding through our $300 million unsecured senior notes offering which will be used to pay off short-term debt, and for other general corporate purposes.

This was part of our capital structure plan to continue to improve our financial foundation by securing longer-term funding at favorable terms, which will help fund our future growth.

With respect to share repurchase program, we repurchased approximately 9.9 million shares of stock for $609.6 million, at an average price of $61.51 per share during fiscal 2011.

These repurchases continue to reflect our confidence in the Company's ability to grow profitably and to create long-term shareholder value.

Strategically, we continue to position the Company for growth and improved profitability.

Our performance in our fourth quarter and 2011 demonstrates we are on the right path and reinforces our commitment to accelerate growth, improve profitability and drive shareholder value.

We continue to measure our performance based on these three dimensions.

Our commitment to grow our business is reflected by our fourth consecutive year of strong commercial sales growth, which continues to drive record sales per store.

Over the past four years, our sales per store have increased $181,000, to $1.71 million, driven by increased commercial sales per program, which has grown 45% over the same period.

Our ability to grow profitably is marked by our 190 basis point improvement in operating income rate in the past two years driven by the structural improvements we have made to our gross profit in the area such as parts availability, inventory management and new capabilities such as global sourcing and e-commerce and through the improvements we have made in our cost structure.

We continue to be on pace to achieve 12% operating margins.

Turning to shareholder value, we continue to maintain our disciplined approach to managing our balance sheet and capital structure as reflected in our 19.5% return on invested capital, which increased 200 basis points versus 2010, and 580 basis points over the past four years.

The increase in ROIC and the 116% increase in our free cash flow over the past four years were primarily due to our improved operating performance as well as our continued efforts to reduce our owned inventory.

Turning to 2012, we believe it will be another strong year given the solid industry fundamentals Darren mentioned, and we look to build on our 2011 momentum with our relentless focus on service, to meet our customers' needs and continued investment in commercial, availability and e-commerce.

We estimate our 2012 EPS will be $5.55 to $5.75 per share.

This annual outlook reflects a weighted average share count of approximately 74 million outstanding diluted shares, and includes additional interest expense from our recent unsecured notes issuance.

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

In 2012, we anticipate new store openings for both Advance and Auto Part International brands to be approximately 120 to 130 stores.

Service leadership and superior availability will fuel continued sales per store growth.

We expect comp sales to grow low- to mid-single digits driven by continued growth in commercial.

We expect a modest improvement in our gross profit rate as we continue to reap the benefits of our previous investments, our focus on excellence in terms of inventory and shrink management and the anniversary of supply chain efficiencies.

Partially offsetting these margin benefits, are headwinds associated with the ramp-up of our new Remington DC that will come online during our third quarter of fiscal 2012, our new Warehouse Management System and the increased mix of commercial sales.

Turning to our cost structure, we continue to see opportunities to increase our productivity, reduce the variability of our store performance and reduce support costs furthest away from the customers.

We expect to continue the progress we made in 2011.

However, our focus on growth will continue to require us to make investments in areas such as commercial, supply chain, global sourcing and e-commerce.

Based on our comp sales outlook, our incentive compensation may be leveraged as a result of slightly higher sales to year-over-year growth in 2012.

All in, our strategic investments, combined with more normalized incentive compensation, will be partially offset through our continued efforts to improve our cost structure and simplify our operations.

We anticipate that our SG&A per store will increase in the low-single digits.

Turning to capital expenditures, we expect our capital expenditures to be approximately $275 million to $300 million, which is slightly higher than 2011 driven by new store developments, supply chain investments and store systems.

We expect free cash flow to be a minimum of $400 million, driven by areas such as increased net income and continued improvements to working capital, partially offset by higher capital expenditures.

We anticipate the phasing of our quarterly operating profit will be somewhat different than our historical performance.

We expect that our operating income growth will be the strongest during our first quarter and will be more constrained for the balance of fiscal 2012.

This is driven by our first quarter comparisons, versus the very weak start in fiscal 2011, the pacing and timing of our strategic investments in 2012, which are more focused in our second and third quarters, and the anniversary of expense savings from 2011, which started in the second quarter of fiscal 2011 and accelerated throughout 2011.

In closing, we remain focused on our two strategies of service leadership and superior availability and continuing to generate long-term growth, profits and shareholder value.

Our strategic investments, relentless focus on service and operational excellence, are key ingredients to achieving these.

We want to thank our talented team members for the meaningful impact they made in 2011, and look forward to an exciting 2012.

Operator, we are now ready for questions.

Thank you.

(Operator Instructions)

Our first question today is from Gary Balter with Credit Suisse.

Thank you.

First of all, congratulations on a really great quarter and a great year.

I was going to ask you if you thought the Golden Eagles will win the Big East Tournament before you get to your 12% operating income, but that's probably not a fair question.

So I'll phrase it differently.

I think they're both in good shape.

When we say the goal of 12%, given the guidance, you're not looking at that for this year.

Right?

That's something that you're looking a couple years out?

Yes.

Gary, it's Mike.

That's right.

We haven't changed our view on that, and we've said over the next few years we're going to get to 12%.

We've made great progress in 2011, and we continue to be on track to achieve that goal.

Now I'll ask that question.

Gross margin was stronger than we expected this quarter, it was down 39, but it came off down 80.

What -- you mentioned also higher shrink.

Could you discuss what were the components of the stronger gross margin and what gives you the confidence because you mentioned you expect it up next year as well?

Hi, Gary, it's Mike.

Maybe I'll give you the components and then Kevin can give you some of the insights.

The two big drivers were supply chain, and the story hasn't changed there.

As we've been putting in more hubs as part of our strategy to improve our market availability, a little bit higher gasoline prices and investments that we'll be making in our new DC and WMS systems.

So that was the biggest part of the drain.

And then our shrink year-over-year was down, but it was down less of a level than it's been in Q3 and Q2.

So we're really pleased with the progress that were making -- that the team members are making on our shrink.

But that was less of a component, but those were the two components.

This is Kevin.

The other elements essentially all netted to an even number.

We've been aggressively ensuring that we're staying price competitive with our key competitors, continuing to work to lower cost of acquisition of product through category management and global sourcing.

As Mike said in his prepared statements, it appears to us as though the shrink headwinds will abate as we get into the back half of next year.

But the other elements that sit underneath gross margin, we expect to continue to march ahead.

Thank you very much.

Thank you.

Our next question is from Tony Cristello with BB&T Capital Markets.

Thank you.

Good morning, gentlemen.

Wanted to talk a little bit about your targeted share repurchase, how you're going to manage your leverage.

Down to 2.0 times, which is certainly below your target and your guidance reflects no share repurchase.

Is there something we should consider as we look out for the balance of this year?

Or is this all systems sort of go, but you're just going to be targeting it when it's most beneficial to you?

Yes.

Thanks, Tony.

It's Mike.

First of all, we're really pleased with what we did last year.

We bought about 12% of the Company back on the heels of 13.6% the year before that in 2010.

Our philosophy on share buyback hasn't changed.

I think we bought back about 40% of the Company since 2004 and we continue to talk about being opportunistic.

And that really is our confidence in our ability to continue to create long-term value.

So we'll continue to be opportunistic.

We have confidence in our ability to continue to grow that value and our historical performance, especially when you look at things like our top line growth, our bottom-line growth and our return to ROIC that's up over 500 basis points over the last four years.

And then some other pieces is obviously maintaining our leverage ratio under our maximum 2.5 times is important to us.

Year-over-year, we kept that thing at 2%, and we were at 2.0 times in 2011.

And then I think the most important thing for us is share buyback is one available use of our capital.

Our first options are always, how do we grow the business?

And looking at options and how we grow the business.

So over the last number of years we've put money into commercial.

We put money into e-commerce.

We've been very pleased with the returns we've gotten.

Kevin's talked extensively about supply chain and the opportunities we have there.

Our new Remington DC, our new WMS.

I think Kevin said it, we're going to have one of the most automated supply chains and we'll have an opportunity to see what that does in the efficiencies that gives.

So the first choice is obviously to look at where we put our capital to grow our business.

And if there's other little tuck-in acquisitions and things like that, kind of second.

And then third, a great way to pay back our shareholders.

So our philosophy hasn't changed.

And I'll just remind you we had an open to buy of 300 million.

We have 200 million left on that so going into the quarter.

Yes.

Tony, just maybe to build on that.

To answer your question directly, Tony, each year we just make a deliberate decision not to include stock buyback in our guidance and that hasn't changed from prior years either.

I think in a word, we haven't changed our philosophy in our approach.

We do plan to be opportunistic and that opportunistic -- you've been watching us for a long, long time.

As Mike said, we've bought back $2 billion of stock since 2004 at about an average price of $45, so we feel pretty good about that strategy and don't see really any need to change it.

And the good news is we're well below our targeted leverage ratios.

That gives us a lot a flexibility.

Okay.

And maybe if I could just have the follow-up on prioritizing growth.

It seems like as we move through phases of 2011, you sort of pulled back on some initiatives and were focused on delivering profitability.

And based on where sales trends were, it seems like you've seen a little bit maybe more of an acceleration of investment, And I'm just trying to understand how much of that was intentional?

How much of it was sort of -- what wasn't spent last year as sort of pushed into this year?

And what's sort of the timing of this next phase of investment?

Thank you.

Here's -- when I think about last year, a couple things.

We got out of the first quarter and admittedly, we did not perform the way we thought and had hoped to perform.

Quite frankly, the trends were just very different than when we started the year.

And to your point, historically, we go into the year with heavy, heavy investment in the first quarter.

I think in Mike's prepared comments, we're investing in the first quarter this year but not at the same levels that we have in historical years.

And that phasing has moved, I would say to be more evenly spread throughout the year.

Because one of our learnings last year, I think we've talked about this every conference call is that the teams can absorb so much change in a period of time.

And so what we've tried to do this year is even that out.

And you're right, last year, I would say if -- did we pull back on some investment in the second, third and the fourth quarter?

Yes, we did a little bit.

But it was really in the greater good of getting the process right and allowing the teams to absorb and execute.

And you can see that playing out.

And from my vantage point you can see it playing out in the fourth quarter in particular that we were able to turn the tide on DIY, still grow the commercial business at rates that we're happy with, and improve our margins, improve our shrink and all those things that come with that consistency of running the business.

And we've gone into this year, recognizing that's a big value to us.

And we're spreading it out.

As Mike said, our first quarter is a quarter that quite frankly we feel really good about and we tried to signal in the guidance for sure.

Second and third and fourth, we feel really good about.

But, you know what, it will experience more investment this year than it did a year ago just because of the lapping effect that we talked about.

And, Tony, it's in my remarks, but maybe I'll add a little color to it.

We are going to have a little bit of pacing and timing with our costs throughout the year.

So for instance, we have our large GM meeting that always occurs in our first quarter.

That's going to get moved to the second quarter this year.

And advertising it last year, as you remember, our advertising we got out of the blocks last year with some strong advertising in Q1.

That's going to be spread a little bit more evenly through second quarter through Q4.

Those are a couple of examples.

Very helpful.

Thank you for your time.

Thank you.

Our next question is from Matthew Fassler with Goldman Sachs.

Thanks a lot.

Good morning.

Congratulations.

I would like to start out by asking about traffic and ticket trends, particularly for DIY, but for the business more broadly as well?

Yes.

So I don't know that there is any new news, Matt, in terms of traffic and ticket trends versus Q2, Q3, Q4 for us this year.

Most of the growth, if not all the growth in DIY, has come from larger ticket.

Though we have seen, as you would expect from the first quarter of the year last year to the fourth quarter.

Our traffic's improved but we have been as Mike alluded to, we did turn to some more traffic-driving marketing as we got into the year last year versus brand advertising which we did heavy in the first quarter of last year.

So there's no new news in terms of what those trends look like.

As we look to this next year, one of the things we think about is we know regionality was a drag on our business in 2011.

That regionality we felt obviously in the traffic.

And if you think about it, that just meant there was probably more deferred maintenance.

And so if we're slightly optimistic, we're slightly optimistic around the fact that we'll see a little better traffic trends this year, and we believe that those ticket trends will continue as we get into 2012, too.

That's very helpful.

And then as you think about commercial, I guess in the context of what turned out to be a pretty good year, commercial, it was a bit later double digits.

As you think about a sustainable growth rate for commercial, both based on the market and based on your willingness to invest, how should we think about the next couple of years for that space?

We haven't changed our view on that either, Matt.

We still see that as a double-digit comp grower for us.

I would say that if I backup, we did, as I talked about in Tony's question, we did taper off some of our commercial investments last year, in lieu of focusing on the execution.

So as we come into this year, you'll experience -- we've got still more wave markets to do and we built those into our plans.

But we've built them in a way that we're spreading them across the year this year.

And we think -- and we know from experience that those tend to certainly boost our comps and have multi-quarter effect.

So we don't have a different view, either structurally about the commercial market that, that seems to be as strong as it's been over the last several years.

And this year, we must continue that investment pattern in our wave markets, our drivers and our delivery speed, things that we're focused on.

Got it.

Thank you so much.

Thank you.

Our next question is from Greg Melich with ISI Group.

Thanks.

Just a follow-up on the traffic and ticket trends, just to be clear.

As I back out, it looked like DIY was still around a negative 1, but it's fair to say it improved a couple hundred BPs through the year?

So we still assume that traffic was down in DIY a couple percent?

Is that -- my math --?

Greg, fourth quarter or for the year?

For the fourth quarter.

Yes.

Traffic was down.

Still down.

And on gross margin, in terms of the outlook you guys provided, beginning up a little bit.

How important is getting the DC up and running and getting the inventory built for that to helping the gross margin start to grow again?

And how should we think about that in terms of beginning to extend the payables, which obviously has done such a great job to help free cash flow?

Yes, Greg, this is Kevin.

We -- essentially the investments that we're making to bring Remington online are being offset this year through some efficiency programs that we launched that are literally taking effect in the first quarter.

So that should be relatively neutral in the overall picture.

Mike, in his comments mentioned that we expect the shrink to abate across the year, and no longer be essentially a topic in the back half of this year.

We're continuing to expand the global sourcing program, and while it was incredible percentage numbers early on, it is a substantial base at this point.

We're putting large percentages on top of large dollars, so that will continue to fuel the numbers.

In terms of the supply chain financing, I would just ask you to look back at the last three years of how that program has unfolded.

It is a day by day negotiation by negotiation process that is a multi-year program.

We're certainly proud of how that has played out and proud of the teams that are working on that.

We're also proud of the speed at which we've deployed it.

Other competitor in our space, certainly ahead of us.

But it took them over a decade to accomplish what they were doing as they were blazing a trail, so to speak.

But our plans would see improvements in that area for this year, and likely beyond.

So at the end of this year, 2012, would you expect inventory to grow at a similar rate to what it did in 2011?

Much of the investments that we made this past year, so substantial increase in the number of hub stores, we continue to see opportunities there, although we leapt ahead last year.

Did far more than we had historically done.

Our plans for this year would look more similar to what you would have seen prior to 2011.

So our inventory plans for the year would not -- which in total outgrew our cost of goods sold.

As we go into next year, or as we go into the balance of this year, it would be not likely that we would continue to aggregate inventory at that same rate, but instead would be a more modest growth in inventory.

The intersection of that with improved supply chain financing, we would expect to see similar cash flow going back to the Company through improvements of reducing owned inventory.

That's great.

Thanks, guys.

Congrats.

Thank you.

Our next question is from Chris Horvers with JPMorgan.

Last year at this time, your sales were really hurt by geography and timing of the calendar given really heavy storms in January and April.

So is it fair to say that's working in your favor this year, and perhaps comps have accelerated?

And then related to that, can you talk about how the regionality changed sequentially in terms of the drag, 3Q to 4Q?

Yes.

I can do this.

So as I said in our prepared remarks, Chris, that both DIY and commercial are off to a good start this year.

And certainly, we've all been doing this long enough to know that last year, and we said this last year, January was tough in terms of the weather and particularly in the Northeast.

So there's no doubt that, that's in there.

The way I think about it is that over the course of the year, I would say this weather evens out.

So to your comments about regionality, it was Q3 to Q4, my recollection is that Q3 regionality was 300 basis points, this Q4 was probably closer to 100 basis points.

Unfortunately, this is probably the last time we'll be able to talk about it because the NPD data related to that is going away.

We see a high value in that.

Others see it differently.

So we're done.

I think this is last time we will be able to talk about that.

That's very funny.

And then as you think about -- (laughter).

Surprise.

As you think about the DIY acceleration, and what happened with traffic and ticket.

Was the acceleration mainly a function of your ability to pass price through that you were holding back on in prior quarters?

That you mentioned, and was there any relationship between that and the gross margin trend looking better sequentially?

Yes.

This is Kevin.

We've had a similar approach to pricing both on the DIY and the commercial side that we built in the first few years that we came together as a team.

As a very simple concept, which is we benchmark our prices at a very detailed level, DIY versus commercial, right down to the street address.

And it is critical that we remain competitive and that hasn't changed for years.

That all said, there are certain items in the assortment that appear in elastic, and those are areas that we look for margin enhancement.

But as we go into a head-to-head, what are the key categories, customers that are price shopping, what are they discovering?

Our analytics would suggest that we've been quite competitive for the last several years.

And we've maintained that way through last year.

Now, one of the elements is we get a certain level of price inflation and deflation at the landed cost level, predominantly driven by commodities.

Oil would be an example that has changed dramatically in the years we've been together as a team.

Steel would be to a lesser extent.

Those reflect in our gross margin based on our accounting practices faster than they do with some of our key competitors.

So the price that the customer sees has remained competitive and consistent.

How that actually flows through and impacts different people in our channel is -- to Darren's point, weather kind of evens out over the year, and so does pricing.

But it negatively affected us on the front half of the year, and at this stage we don't see any material movements in the moment that would be noteworthy to report in terms of an outlook.

The other small thing to build on Kevin's point, Chris, in the fourth quarter, we did have a weather benefit.

So what I mean by that is you could change your oil.

And so when I look at the mix now, the other side of that is we didn't sell as much anti-freeze and some of the chemicals for cold weather.

You could change your brakes.

So when you peer into what was occurring is that mix certainly played a role in terms of the DIY improvement.

But I don't want to underestimate, or undersell, or under appreciate the team's execution.

I've felt in my four years exiting this year and entering next year that focus on execution, we say running the business with excellence, and what our field teams are doing, I must say it's at an all-time high.

It really is in terms of their focus around our oil business, brakes, batteries, the key front room categories.

And that played a huge role in it because when I look at the absolute comparisons as you pointed out, the DIY comparison in our fourth quarter was about as tough as we've had all year.

And so it's not just luck or circumstance.

They've done a nice job actually bringing it home in the fourth quarter.

So if I were just going to summarize that response, it sounded like, yes, it helped gross margin sequentially, but it wasn't as if the acceleration in DIY was solely price driven ticket increase?

No.

I think some of your peers would tell you that our pricing was below others in the fourth quarter.

Fair enough.

Thank you.

Our next question is from Dan Wewer with Raymond James & Associates.

So, Darren, on your guidance of low- to mid-single digits.

For the 5% scenario to possibly come into play, what would have to change?

Would it be a pick-up in do-it-yourself growth?

Or could you achieve that 4%, 5% comp sales gain even if do-it-yourself remains flattish?

Well, I'll start one level above that, Dan, because that is a relatively wide range.

I'd say what's underneath that is that I don't know where gas prices are going to go this year.

Is that -- if we have stability throughout the year in gas prices and depending on who's projections you read, it could go to darn near $5.00 in some places, other people will tell you that you know what, we're probably safe somewhere around $4.50.

I think about the overall cloud that's out there is understanding where overall gas prices will go.

I think we saw that lesson this year.

Miles driven tend to have a lesser effect this year as we look at failure and maintenance.

Below that, between -- so that overall, that has a disproportionate effect on our DIY business, I think as we've learned.

And I think DIY, whether we do 5 or above or 1 or below, it's two-thirds of our business.

So your instincts are right, it's that the stronger we finish on DIY historically the stronger we finish on that comp.

What do I look at, is store execution and externally what am I looking at?

I'm looking at gas prices and I'm looking to a lesser extent at miles driven to actually think about where will finish in that range.

Do you think that given you've reduced the amount of selling space to the front end of the store, and you've taken out some of the do-it-yourself oriented inventory, that type of ramp in do-it-yourself is possible even if gasoline prices were to stay flat or drop?

Yes.

I have Charles with me.

But, year-over-year there's not a material difference you see in what we have for the (inaudible) consumer in DIY.

And when we came together as a team early on, we went in and looked at rationalization in our assortments, and took what was unproductive and took about 18 months to take that out.

But on a year-on-year sequential basis, we've expanded our assortments from better utilization of the backroom space.

And put more inventory into our parts business to actually build that capability to serve the DIY customer.

And not at the expense of taking away from further front room categories that they expect us to carry.

And, Mike, just one real quick question for you.

Can you tell us why the Company did not buy back any shares during the fourth quarter?

I think we answered it previously.

We bought back 12% of the Company and we're pleased by that.

That was it -- I meant in the fourth quarter.

That's what I mean.

I mean, we look at it over the year.

I think in the fourth quarter we did some other things around our capital structure, we were planning for a bond offering.

We were focused on executing our business.

There's also certain blackout periods that we had, it's a longer period of time that we run into a little bit, but we're pleased.

There was no -- I wouldn't read anything into it of why we didn't buy back shares.

Okay.

Thank you.

Our final question today comes from Scot Ciccarelli with RBC Capital Markets.

I know you guys have touched on this but obviously SG&A has been a pretty big swing factor for the last couple of quarters.

Mike, I know you tried to highlight a couple of items.

But it looks like the change that you're looking for in SG&A per store is pretty sizable.

We've had down 3% to 5% by my calculations the last couple of quarters.

Now we're expecting positive low-single digits.

Can you talk about what you mean in terms of normalization compensation?

And then just the sequencing, I think Darren, you had actually referenced this a little bit.

Should we actually expect flat to down SG&A dollars in the first quarter followed by sizable increases in the balance of the year?

So two questions there.

Yes.

So, Scott, great question.

First of all, kind of the pockets that we've been taking costs from are really threefold.

And we started the work in 2010, and we really saw it happen in 2011.

Where we're seeing better productivity in areas like our labor.

So we're leveraging labor.

We're spending the same dollars, a little bit more actual dollars but we're getting more leverage around those labors, around efficiencies and some of the excellence that Darren talked about.

Our commercial programs, our commercial productivity on our commercial sales per program's up 45%.

So I think the number's $637,000 per program, and back three or four years ago, it was closer to $430,000.

So we're seeing productivity.

We're also seeing reduced variability across our chain in terms of our performance, we're trying to variablize some of our fixed costs.

And then we're also taking out costs furthest away from the customer, some of our discretionary, our occupancy, in areas like that.

The way to think about it is this.

Where we started, we were starting from a high SG&A rate.

And I'm really pleased by the team's progress of pulling costs out, and better leverage.

But the other thing you saw last year is our incentive compensation.

That played a pretty big role in terms of our leverage last year, because what happened is we pay on growth.

We have a very competitive program.

We share material more amount of our dollars and our success with our team members.

And just last year, when you do a 2.2 comp versus an 8% comp, the incentive compensation, so that created a little bit of -- some of the SG&A we picked up last year.

Also, and I think Darren talked about it last year, is the investments compared to historical levels were down.

So you saw the benefit of the year-over-year change with investments being a little bit -- I'll call it decelerated last year.

When you put that together, last year we saw more leverage come out.

So you think we did a 2.2 comp, and we leveraged SG&A, about 114 basis points.

I think last year was a repositioning year.

The way we look at it going forward now is, and I haven't felt confident enough to say this, but I feel confident saying it now.

Going forward we're probably going to leverage SG&A in more of that 3% to 4% range.

So next year the dollar's going to increase.

And what we've said is that next year, our SG&A per store is going to grow at low-single digits.

And what I'd read into that is we're going to continue our work to improve our cost structure and productivity, reduce variability and taking costs out furthest away from the customer.

That's going to be offset by the investments that Darren referred to, because we're committed to getting to 12% operating growth, and that is going to come in two ways.

We've got to do to grow the business so we need to still invest in commercial, availability and areas like e-commerce and global sourcing.

So the offset to the SG&A will be investments in those areas, and we'll continue to demand the same kind of returns that we've been getting, so that's how we think about it.

So we would anticipate that we're going to leverage in roughly that 3% to 4% range in SG&A per store is going to go up in that low-single digits.

Okay.

And then in terms of the cadence, should we actually think about kind of flattish dollars in the first quarter followed by sizable increases in the back?

Scott, I think you're on track, we began the process really aggressively in the second quarter of last year.

We're going to anniversary a lot of that work and you know how expenses work.

We'll anniversary them through the first quarter of this year.

As Mike said, we will have some unique things, we're moving a managers meeting.

That those aren't hundreds of thousands of dollars, those are millions of dollars that go from Q1 to Q2.

We've spread out the investments, we still have investments in Q1, but we're trying to as I said earlier, even those out throughout the year, so the team can absorb them.

We're upping our store count this year.

That will add a little bit more to our expense in terms of the flow, principally in the back half of the year.

So, and that's what we tried to clearly articulate in our prepared comments as well.

All right.

Very helpful, guys, thanks.

Thank you.

I will now turn the call back to Joshua Moore for any final comments.

Thank you, Wendy.

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

If you have any additional questions, please call me at 952-715-5076.

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

And that concludes our call.

Thank you.

Thank you.

That concludes our call today.

You may now disconnect.

Thank you for joining us.