O'Reilly Automotive Inc (ORLY) 2002 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CSK Auto, Incorporated, first quarter fiscal 2002 conference call. Certain statements contained within this call are forward-looking statements. They discuss among other things expected growth, store development, and expansion strategy, business strategies, future revenues, and future performance. The forward-looking statements are subject to risks, uncertainties, and suppositions including but not limited to competitive pressures, demand for our products, the economy in general, inflation, consumer debt levels, and the weather. Actual results may differ from anticipated results described in these forward- looking statements.

At this time all parties are placed on a listen only mode and the floor will be open for your questions and comments following the presentation. I'd like to turn the floor over to your host, Mr. Maynard Jenkins. The floor is yours, sir.

Good afternoon. And welcome. With me this afternoon is Martin [Frazier], our President and Chief Operating Officer of the company, and Don Watson, our Chief Financial Officer of the company. I'll make a few brief statements concerning the company overview, and then I'll turn it over to Don Watson, who will review the financial results if the first quarter of fiscal 2002, which ended May 5. Total sales for the first quarter 2002 were $376 million which represents a 7% increase in same store sales. That income for the quarter was ten cents per diluted share as reported, but 12 cents per diluted share if you assume that the 50 million of convertible debentures that were converted to common stock on May 20th had been converted to common stock on February 3rd, the end of fiscal 2001. The 12 cents is three cents higher than previous company guidance and two cents higher than the average of analysts surveyed by Thompson Financial First Call.

We are pleased with our first quarter financial and operational results. With the completion of our refinancing in late 2001, the company has had the flexibility to more effectively merchandise our stores and to undertake a range of key business initiatives to improve our profitability. Since January, when the company increased marketing expenditures with new promotional activities, and had improved liquidity, our sales have continued to exceed our expectation. With the strong support of our vendors we have continued to offer a broad selection of trusted brand name products, and in the first quarter we continued to execute several new and innovative merchandising programs. Our newest merchandise program includes garage maintenance and garage organization products such as automotive power tools and accessories.

Industry trends remain strong, and we believe with the continued increase in the average age of vehicles, the favorable demographics of young drivers coming into the marketplace, and the increased number of SUVs and light trucks, which cost more to maintain, we will continue to see good sales growth. Separately, net income is meeting our expectations, and strong same-store sale trends have continued into the second quarter. The company continues to focus on our customer service program called [GREAT] providing our customers with a better in-store shopping experience.

Associate turnover in our stores is it down from last year, giving us more experienced associates. These two factors have helped to improve service and productivity in our stores. As a result of comparable customer count, which had been flat and declining in recent years, is now positive. This trend of positive comparable customer counts and an increased dollar average per customer indicate the potential of our business going forward. We also believe these improvements reflect our improved inventory position and the general - generally favorable dynamics of the current automotive after-market business.

Regarding our commercial sales program, CSK's commercial business continues to grow with total sales of over $66 million for the quarter, which represents 18% of our total business. The commercial business increased 7% on a comparable basis in the first quarter of physical 2002 when compared to the same quarter in the comparable period of 2001. Our continued growth and our ability to gain market share are very encouraging.

Our focus for the remainder of the fiscal year will be to maintain our revenue growth and continue to improve our profitability through margin expansion, expense control, and debt reduction.

At this point I'd like to turn the call over to Don Watson. He'll review the financial performance for the first quarter of fiscal 2002.

Thank you, Maynard, and good afternoon. Net sales for the 13 weeks ended May 5th, 2002, totaled $375 million which represents a same store sales increase. Gross profit for the 13 weeks ended May 5th, 2002, was 165 million, or 44% of net sales, compared to 168 million, or approximately 147 - or approximately 47% of net sales for the same fiscal - period of fiscal 2001.

The decrease in gross profit was anticipated, in light of the steps we took during the quarter to encourage former and existing customers to return to our stores and to attract new customers who may have never previously shopped in a CSK store. These steps included an increased emphasis on promotional activities and promotional pricing to stimulate customer awareness, the commencement of a new merchandising program that features garage maintenance and organizational products items that the companies had never previously stocked, and I replenishment of inventory to return the stocks to more normal levels of product availability.

While these steps were successful in increasing our customer counts, average sales amount, and total sales level, they expectedly produced lower gross profit margins.

Operating profit for the 13 weeks ended May 5th, 2002, was 23 million, or just over 6% of sales, compared to 20 million, or 5.7% of sales for the same period of fiscal 2001.

Operating and administrative expenses were lower in the first quarter of fiscal 2002 than in the same quarter of fiscal 2001, reflecting the impact of the profitability enhancement program and the operational of fewer stories.

Interest expense for the first quarter of fiscal 2002 totaled 17 million. If interest on the 50 million of 7% convertible notes that were converted to common stock on May 20th, 2002, is excluded, the interest expense for the year would have been consistent with the prior year of about 16.7 million for the same quarter last year.

Net income for the first quarter of fiscal 2002 was just over three million, or ten cents per diluted common share. But assuming the weighted average share base of 32.5 million, that's assuming that 32.5 million shares - assuming the conversion of the 50 million of 7% convertible notes had occurred on February 3rd, 2002, which was the last day of fiscal 2001, net income for the first fiscal quarter of 2002 would have been over four million, or 12 cents per diluted common share on a weighted average share base of 38.2 million.

The outlook for the future is lower turnover, our improved customer service, success putting in place new capital resources, and the operating initiatives we've implemented as a part of our profitability enhancement program, have strengthened the company operationally and financially going forward. As a result, the company expects fiscal 2002 same-store sales to increase at mid-single-digit rates for the remainder of the year.

For the full year, we expect earnings before interest and taxes to increase approximately 20% and net income to increase to the level of 20 - to the 27 to 29 million range, which is higher than the previous guidance.

We also expect to generate EBITDA of approximately 147 million and generate free cash flows in excess of 55 million for the year, which will be applied to reduce our outstanding debt.

With that, I'd now like to open it up to questions.

Patrick?

Ladies and gentlemen, the floor is now open for questions. If you do have a question or a comment please dial the numbers 1 followed by 4 on your touch tone telephones at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. Once again that's 1 followed by 4 to bring yourself into the question queue.

Thank you. Our first question is coming from Brett Jordan of [Advest]. Your line is live.

Good afternoon, guys.

Hi, Brett.

A couple questions. One sort of relates to the new merchandising focus and some of the garage tools and toolboxes. Do you have a feeling for what the increase in average store inventory is? And I guess to some extent on the same theme, if there is a margin impact in the quarter associated with the new merchandising initiative, is there a sustained change in the margins fundamentally as you carry these new lines of product?

Well, the answer to that, if you look at the inventory level last year at the end of the first quarter on a FIFO basis, Brett, we had just over 550 million of inventory. So when you look at it, we've been able to replace the - a slow-moving product with this new assortment, and we actually have 546 million, so we have actual less inventory per store year over year. In relationship to the gross profit margins, there's a couple things that are going on there. We always assumed that to bring customers back in our stores, we were going to be a little bit more promotional early on in the year. We also assumed that the - we wouldn't be in a position to get cash discounts until the end of the first quarter, of which we are now getting. But if you look between end of the first quarter to the end of the fourth quarter, we would expect over a 350 basis points increase in the gross profit. So you'll see each quarter increase throughout the year.

Okay. The question on the first part of the merchandising was more of what dollar commitment are you making to this garage focus merchandise? Some of this seems to be relatively high ticket as you get into the toolboxes and the tools. Do you have a feeling for what each store's percentage inventory represents in this new merchandise category?

First of all, if you take a look at the new category, we're sticking our foot in the lake of risk and rolling this thing out slowly. We don't have complete garage centers in every one of our stores, and the initial phase was 29 SKUs that we were adding to most of the stores. Now, in the arrange review process that we go on continually, the challenge to the buyers is if you want to add 10% SKUs in your total assortment, you delete ten SKUs in total. We think that we can attack this whole garage category, build a destination shop for a consumer that's got automotive product relationships in his brain that's different than the hardware buyer, [via] destination shop, and really not increase the inventory substantially in the shores at all. As a matter of fact, we want to do it on a flat basis ultimately.

Okay. And then one last question. I guess on a regional basis if you look at the northwest and the north-central states, essentially the acquired units, how were they performing relatively to the balance of the units?

The northwest is - the [Pacar] acquisition is performing outstanding. The northern plains not as well, but having said that in the first month of the year, they had comp increases that were the best in the company, and then they hit that unusual weather period where they, you know, had all kinds of snow and rain and everything else for the last 60 days, and they've been affected by that. Now, most recently, they had a dry week a week ago, and their comps snapped back. But between the two, the [Pacar] is the best operating area that we have currently year to date in the company, in the northwest.

Great.

This is Martin. One real encouraging thing in the northern plains is the employee turnover there, which was the highest in the company, is now down to one of our lowest rates in the company, so we've managed to stabilize the workforce back there over the last year, and we look for good things in the future.

Great. One last question and I'll pass it along. On the comps, the contribution from customer count versus check average?

The increase is about 50-50, 50 of the 7% is coming from increased customer count, and the other 50% is coming from dollar average. It's almost identical.

Thanks a lot. Nice quarter, guys.

Thanks.

Thank you. Our next question is coming from Jack [Balos] of [Midwood Securities]. Your line is live, sir.

Yes. Regarding promotional activities could you more fully describe where the promotional pricing took place and was nonhard parts accessory type things in what kind of promotional pricing was it?

Well, essentially it was incremental product sales that the company didn't have a year ago. As an example we have sold thousands of the air compressor that would be used for the automotive type - repair type person, and the hundred-dollar price point that a year ago we didn't carry at all. Typically in our advertising format we try and cover the gamut between easy-to- do-it-yourself maintenance items crossed over into the heavy do-it-yourselfer mentality. What we were talking about in the implementation of this garage concept was promotional activity on incremental merchandise we are offering to the consumer base.

What are organizational products?

Well, there are things from toolboxes to units of what we call mechanics table to storage units that will go in the store. As an example we have a toolbox that's never been sold before in our type of store. Matco - what did you say? The - what did you say, Martin?

Mac toolboxes is one we just put in. Mac has never sold for retail before, so they're the first person to have us on the retail side. The other thing on the organizational side is garage storage unit that are designed for automotive so they're kind of a heavy-duty wire steel, been very well received by the customers.

As an example, you can go into a store that we've got this complete garage center rolled out, and you can see oil resistant grooms tied to the automotive type mentality, and you take a look at the compressors that we offer in our store, they're vertical type compressors, and most typically when you go into a Home Depot or a Lowe's, you will see a horizontal offering. In other words, the compressor bottle lays flat to the ground with the wheels at the back and it's just a different mentality, and it appeals to a different type of customer, different type of repair and maintenance customer.

So these new products carried a lower gross margin than other products?

Yes. Some of them did. Some of them don't. When you take a look at what - trying to penetrate a new product category, we have to do somewhat of a litmus test out there and see what the price sensitivity is on lines of merchandise that we haven't sold before, how the customer accepts it, and where we go with it going forward.

They have a higher average ticket than the company average, so obviously as average ticket goes up, its price goes up, margin rate goes down a little bit.

You had said before that your gross margins would improve going forward because you'll be getting, what, better cash deals from vendors going forward?

One of the problems we had in the past is without the liquidity we were not in a position to pay vendors totally current and take advantage of cash discounts.

Right.

And on an average contractual cash discount it's about a million dollars a month that we were losing. We put in place during the first quarter we negotiated new terms with all of our vendors and in the second quarter you will see us - an improvement in gross profit margins because we'll be in a position to take advantage of cash discounts that were not previously - you know, that we couldn't take advantage with our liquidity. You know, that's over 1% of the margin change a year over year.

Oh, I see. I see. Just one last thing. Was there any impact in California in terms of weather? I didn't think there was. I just wanted to see.

Well, the - in California, you have mild weather generally compared to the rest of the country.

Right.

But when you do get unseasonable rain and everything else, it affects business it. Not only affects our business, it affects the home and garden business, the hardware business, and everything else. And there's no question in northern California, or the Bay Area, in the last few weeks we've had a bit of a weather effect, but we think, you know, that all washes out at the end of the year, and we're going to be fine. As an example, this weekend we're going to have the highest temperatures we've had in a while in all of California and the west, and we expect our business to be very vibrant.

So what about southern California? Was business there pretty steady?

Southern California business was not affected like the Bay Area or Sacramento was with the weather effect, and the business has been pretty steady.

And if you take the whole state of California in general, their comps were very consistent with the total comps of the company.

Okay. Thank you very much.

Thank you. Our next question is coming from [Carla] [Cassello] of J.P. Morgan. Your line is live.

Hi. I have a couple housekeeping items. Could you provide the debt number at the end of the quarter as well as cash and capital expenditures?

Yeah. At the end of the quarter we had the - we had 170 million on the terms, $30 million outstanding on the revolvers and 230 million in senior credit facility, we had 280 million of senior sub notes that we - or senior notes, and then the 81.2, so you had $361 million of senior notes, cap leases of 35.4. So that gives you a total debt of, you know, five - just over 590 million. The capex for the quarter was 2.1 million, and was there another question?

The cash at quarter end.

The cash at quarter end was $15 million.

And then on a more qualitative basis, you'd mentioned at year end that there were still eight stores in your store closure program that were remaining. Where do those stand now? Have those all been closed to date?

Yes. Six of those eight have been closed, and there's two remaining, and those leases expire over the next 90 days.

Okay. And that ends your store closure program at this point, or do you think there's some more to be closed?

We always review stores, but the stores that are associated with the profit enhancement program will all be closed. There are other stores during the year we estimate five to six as lease expire during the normal course of business will close and be replaced with another store in the area.

Okay. So your build-out plans for the year, then, would that be just those five to six replacements in general?

We're projecting 25 incremental or relocated stores.

Okay.

So you might say 25 from the ground up or taking over an existing building, and then ten or 12 that you might relocate.

Okay. Is there any - any specific market you're targeting for the store additions?

It's all the way across- the-board.

Okay.

In all areas, fill-ins in California, relocations in California, relocations in the northwest, new stores in, you know, incremental fill-in markets everywhere.

Okay. Great. That's all my questions. The others have been answered. Thank you.

As a reminder, ladies and gentlemen, you may enter the question queue by dialing the numbers 1 followed by 4 on your touch tone telephones at this time. We do have a question followed by [Alan Rifkin] of Lehman Brothers. Your line is live, sir.

Congratulations, gentlemen, on a got a quarter.

Thanks, Alan.

Couple of questions. To look at the increased emphasis that you put on the promotional activities in another way, Maynard, could you maybe just quantify as a percent of revenues what the advertising budget was in Q1 year over year? That's question number one. And question number two, if you will, relates to the replenishment of inventory. Can you maybe provide some color as to where you see that today relative, you know, to where you'd like to be?

Well, in the last few weeks, we've had the highest service levels to our total operation than we've had in the last two years. Our in-stock replenishment percentage is up in the 97 and have area, and we think that's optimal. We will never be 100% in stock, or we'll have so much inventory we won't be able to deal with it.

When you take a look at the advertising load, we said that we were going to invest 6 to $8 million in the year on increased promotional activities. That is really front-loaded into the first part of the year, and more so in Q1 and out of the $8 million we may spend for the entire year, 4 million is going to be spent in the first quarter.

Okay. So that incremental $4 million that you spent, you know, that in and of itself, you know, hurt the operating margin by about 120 basis points or so. Is that a correct assumption on my part?

That's a fair assumption.

Okay. Okay, great. Thank you.

Thank you.

Thank you. Our next question is coming from Andrew Berg of Financial Management Advisors. Your line is live.

Hi, guys. Just want to go back to the new store question. Maybe perhaps I missed something. Can you tell me what's the expectation for the net number of new stores you're going to add?

It would be 15 net new stories and ten relos.

And the timing on those?

It's mostly probably nine of them are in the second half of the year.

And that always generally happens when you take a look at your organically grown stores because it's difficult to keep things on a schedule where you can open everything up in the first few months of the year because of weather effects across the country, and those effects on building stores.

And then just going back to your comment about gross margins, that 300 basis point margin improvement, that was 300 basis point expectation where you are - in the first quarter to where you expect to be in the fourth quarter, correct?

Yeah, we would expect 44% to be running in excess of 47 1/2 by year end.

And the key point here is this is not pie-in-the-sky stuff, this is stuff we've already achieved in the past, and our planned reduction of margin in the first quarter was exactly that, and we had a mission to return customers to our stores, and we will get back to the margin levels that we've achieved in the past.

And would you expect that that would mainly happen in the second and third quarters you'd get the bulk of that improvement?

I think you'll pick up about 75 basis points gross profit margin from first quarter to second quarter, and then when you take rest of that, it's about 125 and 125 the next two quarters just on the gross profit line.

Thank you, guys.

- expenses.

Thank you. Our next question is coming from Matthew [Flasser] of Goldman Sachs. Your line is live.

Thanks a lot. Good afternoon. A couple questions. I know you did it a bit on this prior question, but if you could just kind of itemize the drivers of the gross margin for the first quarter only, you expected that you saw 300 plus basis points of the [unintelligible]. Can you tell us how much might have come from mixed, how much might have come from other factors.

And the second question, you know, really just looking for a little spoon feeding, if you will, on the raised guidance to the extent that you're kicking income guidance up, you know, during what part of the year and from what drivers would you expect the stronger earnings growth?

I'll answer the - on the margin.

Sure.

It's about 120 basis points that we lost year over year due nothing more to cash discounts.

Yeah.

If you look at the other misses along the - what should say reductions year over year, there's about 125 to 150 basis points that came from just the change of mix of doing the higher price, lower margin, another 50 basis points came from, you know, increased promotions on oil and chemicals to drive customer count, which is, you know, if you look at our numbers where we gave guidance originally at 5%, it's been very successful, we've got the customers back into stores much quicker.

And the last piece, if you look at rebates and that we usually get from the vendors, we negotiated our annual contracts last year in August and September when we had the absolute worst liquidity that we could possibly have, and in a situation where previous years we were guaranteed flat amounts for vendors, for each vendor, and this year all of our deals are percentage deals, so, therefore, when you straight-lined the numbers last year per gap, which you could do if they were guaranteed amounts, this year we recognize them based on a percent of purchases, and that hurts you because your first quarter is your lowest volume quarter, and that probably costs you about 75 basis points.

So as the year progresses, those numbers continue to increase and you get - you get a better number there.

Okay. And then the second question in terms of the change of guidance.

Well, if you looked in the last call, we gave guidance of 25 to 27 million. We've moved that to 27 to 28 - or 27 to 29 million. Part of that, half of it came in the first quarter already. I think the second, third quarter, mostly the third and fourth quarter I would expect a little bit of upside, but we also - our guidance is assuming a 5% comp for the remainder of the year.

Gotcha. Thank you very much.

At this time there are no further questions.

Okay, if there's no further questions we'll terminate the call. Thank you all for participating.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thanks for participating. Have a good day.