O'Reilly Automotive Inc (ORLY) 2002 Q4 法說會逐字稿

Good afternoon and welcome to the CSK Auto Incorporated fourth quarter and fiscal year 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, assumptions, 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 participants have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. It is now my pleasure to introduce your host, Mr. Maynard Jenkins, Chairman and CEO of CSK Auto Corporation. Sir, you may begin.

Good afternoon and welcome. We're pleased to have you all on the telephone with us this afternoon and especially in light of all the current events in the world. Joining me this afternoon is Martin Fraser, our President and Chief Operating Officer of the company and Don Watson, our Chief Financial Officer of the company. CSK Auto is very pleased with our financial results for the full year fiscal 2002. The beginning of the year, we just completed a total restructuring of our balance sheet. Physical 2002 was labeled by many in the financial community as our turn-around year. Could the management team in CSK Auto produce the results now that the liquidity problem was behind them? I think the results speak for themselves. We began this year with guidance of net income between 27 and $29 million. We ended the year producing net income just over $34 million, excluding certain non-cash charges described in our earnings release. At the beginning of the year, we gave guidance that we would use comparable store sales increases of between 4 and 5%. We achieved 7%. We said we'd produce EBITDA of $145 million, we produced EBITDA over $150 million. In 2002, we were focused on de-leveraging of our balance sheet. During the year, we reduced our total debt by $146 million. We said we would leverage our expenses, selling in general administrative costs were reduced on a comparable basis from 40.2% of net sales to 38.8% of net sales. Finally, we said we'd increase the productivity of our assets, such as inventory. Sales increased 7% on a same-store basis and FIFO inventory increased only 3.3%. This is a company that in 2002 exceeded all expectations. We are very pleased with the positive impact of our marketing efforts and our new product offering. These initiatives resulted in both increased sales per customer and increased comparable customer counts. CSK continues to be the industry leader in executing new and innovative merchandising programs that have attracted new customers to our stores. These initiatives have resulted in the increase associated enthusiasm for our business, our customers are now more satisfied and they have a new reason to visit our stores. The sales of garage maintenance and garage organization products, such as automotive power tools, storage, and general purpose tools, have continued to perform very well. These initiatives, along with strong support of our vendors, will allow us to continue to offer a broad selection of innovative and trusted brand name products. Increased margins and improved inventory turn further support our beliefs in these initiatives. The industry remains strong, positively affecting the after market are demographic changes including the increasing average of age of the vehicles, the increasing number of new licensed drivers, the increasing number of SUVs and light trucks in the marketplace, which cost more to maintain and the reintroduction of high-performance and muscle cars, such as the GTO, the Nissan 350Z and the Mercury Maraudar. We expect this increased demand to continue and result in strong industry growth over the next several years. Although the industry is now copping against strong comparable store sales in 2002, we would expect two-year blended comparable store sales to be between 10 and 12%. CSK was encouraged by the increases in our comparable customer counts. Over the past several years, DIY customer counts had been flat or declining. But now remain positive. These increases demonstrate the strength in the DIY market. At CSK, we're focused on customer service with associate turnover down from last year, our associates are more experienced and more knowledgeable. Our research tells us that our customers value the knowledge and responsiveness of our associates. The bottom line is more experienced associates increase our store's productivity. At the end of the fourth quarter, CSK operated 1,109 stores. During the year, we opened 12 stores, relocated 5 stores and closed 33 stores, which included the sale of 13 stores. We continue to dominate the western United States and the Northern plains region. This domination is evidenced by having the No. 1 market leadership in terms of store counts in 25 out of the 28 markets in which we operate. In summary, the company begins a new year focused on continuing our strong performance for physical 2003. We will focus on the confirmed excellence and execution and improving our profitability to further increases in top-line growth, margin expansion, expense control and debt reduction. At this point, I'd like to turn it over to Don Watson, he'll review the financial performance for the fourth quarter and the full year of physical 2002.

Thank you, Maynard and good afternoon, everyone. Net sales for the fourth quarter ended February 2, 2003 were $350 million and 1,507,000,000 for the full year, compared to $334 million and 1,439,000,000 on respectively for the prior year. This represents a fourth quarter comparable sales growth of 6% and a full year comp sales growth of 7%. Gross profits for the fourth quarter ended February 2, 2003, was $172 million and $700 million for the full year, compared to $161 million and $648 million respectively for the prior year. On a percentage points basis, the gross profit rate for the fourth quarter was 49.2% and 46.5% for the full year. This compares to 48.3% and 45% respectively for the prior year. On a sequential basis, from the third quarter to the fourth quarter of fiscal 2002, this is an increase in gross profit of 200 basis points. The increase in rate is reflective of a continued strong increase in comparable sales which results in the company receiving higher volume rebates from the vendors and higher contractual vendor allowances. In addition, greatly improved liquidity has resulted in the company being able to take full advantage of all available cash discounts. Operating and administrative expenses for the fourth quarter were $152.4 million and for the full year were $597.7 million, compared to $142.5 million and $609.3 million on the comparable basis for the periods of last year. Operating and administrative expenses on a comparable basis as such terms describe in our earnings release, were $141.4 million for the fourth quarter and $585.6 million for the full year. This represents a leveraging of our operating and administrative costs on a comparable basis of 186 basis for the fourth quarter and 132 basis points for the full year. This is a result of the profitability enhancement program that the company put into place near the end of last year and our continued focus on being the low-cost operator. Operating profits increased to $19.8 million for the fourth quarter and $102.5 million for the full year, an increase of almost $64 million. On a comparable basis, operating profits for the fourth quarter were $30.8 million or 8.8% of sales and $114.6 million or 7.6% of sales for the full year. This compares to $19.9 million or 6% and $93 million or 6.5% of total sales for the full year of fiscal 2001. Reported net income increased $5.2 million to $3.7 million or 8 cents per fully diluted share for the fourth quarter of fiscal 2002 compared to a loss of $1.5 million or 5 cents per fully diluted share in the fourth quarter of fiscal 2001. For the full year, net income increased $39 million to $21.8 million or 54 cents per fully diluted share, compared to a loss of $17.2 million or 61 cents per fully diluted share for the prior year. But on the comparable basis, net income for the fourth quarter was $10.8 million or 24 cents on a fully diluted share basis which is 5 cents higher than the company's previous guidance. For the full year, on a comparable basis, net income was $34.2 million or 81 cents on a fully diluted share basis. This compares to $2.8 million or 9 cents per fully diluted share for the fourth quarter of 2001 and $20.7 million or 64 cents per fully diluted share for the full year fiscal 2001. This is after giving the fact of an increase of over 10 million shares year-over-year on a weighted average basis. This is an increase in net income for the full year of over 65% compared to the prior year. The company is also extremely pleased with our $146 million reduction of debt during the year, which brings our debt to EBITDA leverage down to 3.5 times. Our EBITDA for the year was just over $150 million. Our free cash flow for the year was just over $30 million, compared to a use of cash last year of approximately $20 million which is a $50 million improvement in free cash flow, this is even after the company's strategic decision to pay vendors more current than normal terms for additional discounts. This decision resulted in an average of 1% additional discounts for 30 days of reduced dating or a 12% ROI compared to the company's current borrowing rate of approximately 5%. As a result, accounts payable was reduced by about $25 million. CSK's outlook for the future is as follows: In fiscal 2003, the company expects to gross sales between 3.5 to 4% on a comparable store basis. We also expect to report net income of between 45 and $47 million. Of the estimated annual net income, we would expect approximately 16% of that to be earned in the first quarter. Our outstanding share base for diluted earnings per share during fiscal 2003 will be approximately 45.3 million shares. This results in an increase in earnings per share of about 60% in the first quarter of the year and a net income increase of over 30% on a full-year basis. The company would also expect to pay down our long-term debt by an additional 60 basis -- 600 million -- sorry, by an additional $60 million during the fiscal 2003. In addition, the company expects to open or relocate between 20 to 30 stores during the fiscal year. The company's outlook for the fourth quarter does not reflect -- for the first quarter, does not reflect the potential adverse effects of the recent military actions in Iraq, which could have an effect on the consumer's short term shopping patterns. With that I would like to open it up for questions.

Thank you, the floor is now open for questions, if you do have a question or a comment, please press the numbers one followed by four, on your touch-tone telephone 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. We do ask that while posing your question, you pick up your handset to assure proper sound quality. Please hold the line while we poll for questions. The first question is coming from Robert Bears of ESL Investments. Sir, please pose your question. Mr Bear, your line is live, do you have a question? We have a question coming from Brett Jordan of Advest. Sir, please pose your question.

Good afternoon, a couple quick questions. One, on the inventories it was nice to see that inventory growth was less than sales growth. Is that something you're projecting to continue as a trend into '03 as you look at sales growth in the low-mid-single digits, do you think inventory growth will be in the same range?

Yes, the -- we're going to continue to leverage our inventories. I know in previous conference calls there was a multiple question asked by different people on -- with the infusion of new categories, are you going to be building your inventories? I think the indication was we might build inventories faster than sales growth. That has not happened. We said it wouldn't happen and we're going to continue to lower our inventories in the future.

Okay. Don, for Cap Ex in '03 and depreciation and amortization and the tax rate, as we're doing housekeeping here on the model, are you expecting a relocation or new stores? What do you expect for a gross new store count and then the Cap Ex number?

We would expect gross new stores of between I'd say 12 to 17 new stores, another 10 relos and we would expect about 8 stores to close, Lon? About 8 stores to close as the leases expire. We've also assumed $15 million of capital expenditures for the year and that's going to include the maintenance Cap Ex. We're also doing some upgrades to our POS system to make sure that we stay on the leading edge of the technology to give the customer the best possible service levels. And that's in there. But we don't -- we would expect this year and next year to be next year will probably be 15 to $20 million. So, we would expect that to be consistent. We'd expect interest for next year to be about $53 million and that's on a cash basis. You know, that's got about $5.5 million of amortization for refinancing costs. So, you should assume on a cash basis, about a 47.5, almost $48 million of cash interest for the year. The depreciation and amortization for the full year is going to be about $33.7 million.

Okay.

Did I get all the questions?

Tax rate?

The tax rate, if you look at our tax rate for the fourth quarter, we were at about just over 39% and we would expect us to stay about 38.7 to 38.75 for the next year.

Okay. And then one big picture question. I guess as you see fuel prices spike, particularly on the west coast, are you seeing any change in utilization or miles driven? Clearly it hasn't been a long-term trend yet, but are you seeing any movement there?

The answer is no. Other than what we read in the press, just like you do. We haven't really seen the change in the consumers' pattern, especially on the buying side, but the one fear that we have is this people staying home and watching all the cruise missiles fly around the Iraqi region over there, we don't know how that's going to affect business in the future in the next couple of weeks. We think it will be short-term if it has any negative effect, but we just don't know.

Okay, thanks.

Your next question is coming from Doug Neviar of Merrill Lynch. Sir, please pose your question.

Yes, good afternoon. Don, of the 6% comp, I believe you mentioned a customer count was positive. Do you have a more specific breakdown between customer count and average ticket? And secondly, looking forward into next year, the 3.5 to 4% comp expectation. Would that be more of an even split there?

Well, to answer the first question, we've seen positive trends in both sides of that equation, I don't have the exact numbers with me right now, but on the trends on the comps, I would expect we're going to be that 3.5 to 4 each quarter pretty evenly. The comps for us were 7, 7, 7 and 6.7 for the full year and as we said, we would expect two-year blended comps to run between 10 to 12%, which would indicate pretty flat comps during the year.

Sure.

And we're going to have -- we'll have a pretty balanced average ticket increase along with customer counts.

Okay. Great. Good luck next year.

Yep.

Your next question is coming from Richard Diamond of Inwood Capital. Sir, please pose your question. question.

Yes, good afternoon. One of your well-capitalized competitors believes in a strategy of negative working capital. Vis-a-vis the vendors. Do you believe that they would have better pricing on components in CAO, which, you know, makes them paying more aggressively, less attractive?

The -- I think better pricing is always a equation of volume. For us to sit here and say that we're buying as well as anybody in the business on everything we buy I think would be a misnomer. I can tell you that we're buying better than we did a year ago and we're going to continue to drive the cost of the goods sold down through payment of our vendors and also doing more volume. Whether the pay on POS sales, I guess is what you're asking about --

Yes.

-- ultimately applies. I think it's a big question mark. And I think that ultimately, if the vendors offer it to one, it will be offered to all and it will be a decision of the company, whether you partake or not. One of the big problems we see in this entire industry is especially on slower moving parts, in parts offering, there can be a slow return, so, if vendors are willing to consign merchandise on slower moving parts, that may make the entire industry vulnerable. So, we just don't know where it's going to go.

Okay. Thank you very much.

The next question is coming from Matthew Fasler of Goldman Sachs. Please pose your question.

Thank you, good afternoon. I'd like to run through some of the one-time charges just to get a sense of their composition, how they emerged, et cetera.

Hi, Matt, this is Don.

Hi, Don.

One thing that has happened to just about every retailer that's in -- or anybody who operates in California. There's been a lot of regulation out there and the actualareles looked and said hey, the cost of medical is going up very quickly and we think you should look back into the years 19 -- in the worker's comp side, they said the medical costs associated with the runoff of those claims for 1999 to 2001 definitely are rising. So, they said hey, we think you're in good shape for the year, you're doing because actually that's a pretty accurate cost. That's one piece of it. The second piece is of the acquired pack hire stores, because of the cost of medical, they had previously agreed upon caps in their worker's comp of $1.5 million per claim and some of those have run off a little bit higher. So, those are older claims, also. We have historically had $250,000 caps and we just raised it to 500, but I got to tell you, the people that run our worker's comp, we've put some pretty aggressive safety programs in there. The number of claims have continued to go down, but the cost of medical -- medical costs --

The severity.

Yeah, and the severity, has been a little bit higher. So, we've been pretty aggressive. We've also forecasted a pretty good increase in that reserve and we felt it to be a one-time charge because we don't really know whether that -- it was a non-cash charge at this time, whether that runs off or not and how we can manage the claims, but it goes back to two to three years ago. The closed stores, we've been very aggressive on leasing stores. We've reduced the number of vacant stores by about 50% year-over-year. We've been very aggressive, but if you look at all over the nation, you know the time it takes to sublease the stores is taking about 12 months longer than we had anticipated and we felt that to be conservative, we needed to have that charge in there because we're talking about stores that were mainly closed as a part of the profit enhancement program. But I'll also tell you at the same time, now, we're generating a lot of cash. I have about $70 million of availability on our revolver at this time. Lon Novatt, our Chief Administrative Officer and Counsel, runs the real estate group, is now going back to buy out of it and buy out of some of these stores of which we haven't had the liquidity to do that prior.

Okay. I guess there are two more items? I guess the third -- the fourth item, you know, the second one is self-explanatory, the $1 million presumably for management retirement plan, if you could give us detail on that?

Well, on the serp, there was a little bit of confusion there on the serp, part of that we believe is a one-time cost because the vesting period really started in the year 2000 and should have been amortized over the last year and a half and it was kind of a catch-up allowance there. About $230,000 of it is expensed in the fourth quarter and we would expect about, and it's in the plan that we expect about 500 to $600,000, of this previously disposed serp to be expensed each year.

So, this is in essence a catch-up. The part of it that would be ratabley amortized in the past quarter was actually run through the full P&L?

Yeah.

And just to backtrack on the worker's comp to make sure I understand it, all of this relates to incidents that occurred in prior years, in other words, not in 2002?

Yes --

Correct.

The 2002 year we actually spent about $3.5 - we've increased our 2002 reserves by about $3.5 million and, from over the prior year, and that runs right through the normal course of business.

Matt, this is Martin, remember in California, you have an additional aspect there that claims can be re-opened after they've already been closed.

Uh-huh.

That's another factor we face in California.

And I guess historically to the extent that that happened, I realize that the costs have escalated more rapidly of late than they might have in years prior, so the magnitude might be greater. In the past, if a claim reopened did you flow it through the P&L or did you break it up?

Well, what we did, Matt, we rolled it through the P&L, but two years ago -- or 1999 was the first year we were self-insured and furthermore, based on the cash payouts we've had during the year, we really have no facts that says that this is an actualual thing, hey, these expenses are going up so I should raise the reserve, and we said maybe we should raise the reserves, but we're going to manage the expense in the cash flow and not see any additional costs.

Gotcha. That's very helpful. And a final question on operating trends. Any prominent geographic trends in the contest of your business?

None with the exception that in Colorado we have over 30 stores that continue to be closed because of the dump of snow they got there in the last two days.

But nothing in the fourth quarter then?

No.

Okay, thank you so much.

Your next question comes from Christina Bonni of Credit Suisse First Boston. Ma'am, please pose your question.

Yes, good afternoon, everyone.

Hi.

Hi. Many of my questions have been answered, but I guess one housekeeping question, just in terms of your EPS guidance, could you translate that for us into EBITDA, your target for 2003?

We will clarify your name, first, it's Christine Bony, but we really translate that into next year of just over $157 million.

$157 million --

I'm sorry, 1 -- it's a range of 157 to $159 million so you can pick the range in between, how about that?

Perfect. Okay. And just in terms of your free cash flow target for 2003, you said you did $30 million of free cash flow this year, just to kind of bridge the $60 million -- the additional 30 that you hoped to get. Part of that obviously will be your savings and interest expense. Some of it will be the incremental DBAs. Is the rest, just given that you have the offset of your accelerating cap ex, is it working capital? Maybe you could just clarify on that?

What we've assumed still is working capital being negative. We strategically made the decision this year to pay the vendors more current than their contractual terms because you're able to get a great return to do that. Next year, if you just look at the pure net income, add the depreciation and amortization there and assuming working capital is neutral, you can do the calculation pretty quick that says that's way in excess of $55 million.

Christine, we could have achieved over $50 million if we hadn't have made a strategic decision in the last month to speak to what Don had just talked about.

Yeah there, were some nervousness in the vendor community coming off from, liquidity problems, but I think there was another question that was asked earlier in this call that we felt strategically to partner up with the vendors was a much better approach and help them out as much as we could, as they had helped out us in the past.

But the Cap Ex range you said...

About $15 million next year and about 15 to $20 million the following year, 2004.

Okay. Great. Thanks very much.

Your next question is coming from Jeff Kobilars of Salomon Brothers Asset Management. Sir, please pose your question.

Hi, about the garage maintenance product, can you say, is this merchandise unique? For example, does Auto Zone or Pep Boys carry this product?

Well, the answer is yes, we think the strategy was unique. Some people are starting to offer some of this merchandise. As we spoke before, we are trying to appeal to the garage or tool-oriented-type mentality of a customer rather than the "home repair" or "do-it-yourself" Home Depot or Lowe's type of mentality. And it's working. The customers are responding very well. We're keeping the assortment fresh, rotating product in and out and doing a lot of things right.

Can you say how big this category is for you?

No, no. Other than it's been very positive to the company.

All right. But it hasn't run its course, do you think?

It hasn't done what?

Done what?

Run its course?

no, no, not at all.

And in the first half of '02, I believe that was the time period when you were going to increase your advertising to get the customer back so they would that see that you're better in stock. Could you elaborate on what your advertising and promotion calendar looks like for this year?

One thing we did, we did do, Jeff, this is Don. We said we were going to spend 6 to $8 million more last year, we'd start with a lower gross profit in the beginning of the year and ramp up as you kept running the number of promotions but didn't have to be as low on the price. We made a decision here with the strong comps and the momentum that we had that we were going to continue this year spending that comparable levels to the prior year and that we were able to take expenses out of the P&L so we could continue to leverage SG&A but we didn't want to reduce the number of promotions during the year that we, next year that we had this year. So, we think we're going to continue to spend about the same amount.

And in addition to what Don's talking about, for 2003, we're going to make a major push in over 100 stores on hispanic marketing and we think it's the right thing to do for that consumer base.

Will that be incremental, the hispanic marketing?

No, it's in the numbers Don's talking about.

Okay. All right, thank you very much.

Your next question is coming from Wayne Cooperman of Cobalt Capital, sir, please pose your question.

Hi, guys.

Hi, Wayne.

I guess first question, just on the interest expense for '03, what kind of -- where are you as far as your ability to drive down your average costs with redeeming some of your high yield debt or anything like that?

Well, you know, we've already started the process of looking at ways to restructure our credit facility. We do in our current credit facility get a 25 basis points reduction for hitting 3.5 to 1 debt to EBITDA. So, I would expect to see some improvement there. But we also think that we can refinance and take about 50 basis points out of our current facility and extend it three to four years based on competitive bids that we've had out there and we will start that process, I would expect, next week, now that we have the audited numbers done.

But, Wayne, don't take that to the bank, we haven't done it yet.

I guess the bigger issue is really calling or repurchasing some of the high yield paper that's out there.

You know, I think at this time, Wayne, it's a little premature, but let's -- one of the things we will highly focus on is being able for -- first of all to build in our credit facility the ability to take out the higher debt, especially the 11% senior notes, the $9.5 million that's out there and then we're going to have to make an evaluation of do you call 12% notes and pay 108, 8% premium in the market or do you use the money to get better discounts from your vendor, which is a much better return and wait until the following year and call those things at 102?

When are they callable?

They're callable in December of 2004. But if I can continue to get 1% discounts for paying 30 days prior or more current than what the terms are and I'm borrowing at 4.7 rate after, in the following quarter, that's a pretty good return versus paying out an 8% premium just to get out of the higher yields.

Do they trade in the market at all?

They're trading in excess of 108 right now.

That seems kind of dumb because they will get 102 next year.

Well, there's a lot of -- well, we're -- we've done a lot of the thinking the same way you have. It's still premature and there's an awful, awful lot of options out there. And first, our goal is to pay down as much debt as we can possibly do because zero interest is the best that you can do anywhere. That's the number 1 focus. And so if you don't have debt, you don't pay anything. But there are a lot of options out there right now.

Gotcha. Okay. Thanks.

Thank you.

Your next question is coming from Andrew Berg of Financial Management Advisors. Sir, please pose your question.

Actually, I was going to ask you roughly the same question about the 11s, but I think I know what the answer is now. Thank you.

Andrew, what will you sell them to us for?

You just said they're 108 bid, right?

No, no, that's the 12%! The 12%s are at 108.

We'll talk about it.

Okay! All right.

Thanks.

Your next question is coming from Reed Anderson of Piper Jaffray. Sir, please pose your question.

Good afternoon, Don, you know, on the gross margin, I was just wondering, were there any mixed related factors that were also a positive influence or was it just a sales leverage and the cost piece?

I think if you look at the gross margin profits, Reed, we've always talked on every road show that we negotiated a lot of step-up allowances during the year and you start to get those in the third quarter, but you can't recognize them until you actually turn the product, so as our sales continued to be strong we maintained our inventory levels, you started increasing for the year 7% comp and those step-up allowances were a little bit higher than we thought they were going to be. Now, next year, instead of starting at 44% in the first quarter, you're going to start at like 45.5% in the first quarter. But, we think that we have an awful lot of momentum and we didn't think it was best at this time to eliminate some of those step-ups, so you're going to see a similar ramp-up in margin next year, but not as dramatic.

As you recall, going back to the first quarter conference call, there were questions on the 44% margins and Don explained how we would ramp up during the year and the bottom line is the fourth quarter, the ramp-up was greater than we anticipated, nor gave guidance to. And it's strictly a matter of where the business was going and how we were treating the vendors and how these step-up deals kicked in.

And I think what's happened with the whole industry, we're very dominant in the western half of the United States and we have a great relationship with our vendors, so, I think we have the opportunity to increase those gross profit margins another 50 to 60 basis points next year. But it's not going to all come in the first quarter, it will come during the end of the year.

And then the other question I had was just to clarify your comments on advertising, you said you're basically going to continue to spend at that level, does that mean on the dollar basis or as a percent of sales you're going to spend the same?

Basically it's slightly higher on the dollar, but maybe like $2 million higher on the pure dollars. But, you know, we were able to leverage our expenses very, very well and manage those expenses so we think it's better to keep the momentum. So, we will spend just slightly more, but a little less on a percent.

Great, thank you.

The next question is comes from John Curdy of Principal Global Investments. Sir, please pose your question.

Good afternoon. I was wondering if you could give us a time frame as for the $60 million of debt to be paid off, how that will be paid off throughout the year?

Well, I think if you look during the quarter, we would expect, maybe -- and I really don't want to get into a lot of quarterly information, but I would expect slightly, if you -- it's not going to be 25% in each quarter, it would probably be 10% in the first quarter and then it would, as you sell through the summer season, it will ramp up and then stay pretty consistent for the rest of the year. I would expect after the first quarter it would be almost equal to the other three quarters.

Okay. And then what about additional debt retirement in '04, depending on various factors in terms of either calling bonds or anything like that, if we exclude all that, is there additional debt that you could pay down on a working capital line or something like that?

Well, one of the things that as you look at what's happening, you look at our cash flow, you can see at year-end, we had only drawn $30 million on our revolver and during the course of the year, if you generate another $60 million, then you'll get a bunch of options. But I think you're really premature and we think we can generate at least that $60 million but I also want to look at all of my options. There's -- it's very premature to say you've got a very good financing market out there right now. But, until you get the deal done, there are no guarantees out there.

Uh-huh.

Like I said, our focus is to get the best deal for the company and reduce the amount of interest or cash out of the pocket for us, which will increase the earnings.

Right, okay, thank you very much.

Okay.

Once again, if you do have a question or a comment, please press the numbers one followed by four on your touch-tone telephone at this time. We have a question coming from Brett Jordan of Advest. Sir, please pose your question.

Don, just a question on the SG&A trend in next year, looking at 3 to 4% top line growth and maybe 50 to 60 basis points of improvement at the gross level, unless you're going to delever the SG&A,and spend significantly more, I don't see where you just come out at 47 net income given interest expense line of something around $50 million, is there a change, and it didn't sound like you expect a change in the tax rate. The big variable seems to be SG&A, do you see that shifting one way or another, or is 47 -

I think there's 50 basis points improvement gross profit and there's continued improvement, 20 to 30 basis points in the SG&A and the 47, if you do that, it calculates out to about 47 -- 45 to $47 million of net income and I was trying to understand your question, is there room for a lot of upside? Is that what you're asking?

I wondered, I'm getting a number that's a little bit higher than that, maybe I will -- maybe I will get my calculator fixed.

I knew exactly what you were saying, but --

Okay, so I can think about positive leverage at the SG&A level, you not looking at something that's going to grow here?

No, absolutely. We think we will continue to leverage SG&A. Where the company is comfortable with is the 45 to 47. If there is any indication of anything else in my voice, it's not to be read as anything other than what we're comfortable with right now because that's where we're at.

Okay.

The next question is coming from Amir Shakid of Global Asset Management.

Hi, guys, what could be the source of additional upside in '03, if anything?

There is a lot of upside that's possible. I mean sales could be higher than we expect. Gross margins could be higher. We could pay down more debt than we expect. But as I just explained to Brett, you know, this company has two years -- the two years prior to our liquidity problem, we continue to beat every single quarter. We're not a company that settles for mediocrity, we do what we say we're going to do, but right now I say we're going to do between 45 to $47 million and, I see no benefit of over-promising at this point in time.

You know, the -- just getting down to reality, everybody knows what's going on in the world and if this thing over in Iraq winds up quickly, I think the market's looking for better things. Everybody knows there is a lot of cash on the sidelines and if the consumer responds well on the reside there's upside for business and along with things we're doing, there is upside for margin improvement and the combination of those two things can leverage expenses and we can do better. Now, on the downside of all of that, if for the next month the people are sitting in front of their televisions and aren't shopping any retail stores at all that, could be downside to the whole equation. We're comfortable with what we're projecting on sales for the year and sales for the two-year blend and we're thinking -- we think we'll get there.

AMir, we're really forecasting a 30% increase in net income and three to closer to 4 on the comp side and the store growth for a company, that's a pretty good promise for a company that's trading at eight times earnings, which I think probably a hell of a lot of retailers out there would be happy with that, but, you know, I can't forecast that. We're in the business of running auto parts business and generating the best possible returns that we can do.

Uh-huh. What about store openings? Is there any upside there?

We are projecting the 25 to 30 new and relocated. If we can get 40, we'll take 40. You know, that's -- That's what we said in the past. If we can put more in the pipeline and get bullseye sites, we're going to take them.

Okay, thank you.

Thanks.

Your next question is coming from David Theno of Gabelli and Company. Sir?

Yes, two quick questions, both on the commercial business. Can you give the split in '02 of what was retail versus commercial and how the comps looked between those two?

If you look at, we've maintained 18% of sales in commercial and 82% in the retail side of the business. That trend is continued. We were just over 7% comp in the commercial business and we're continuing to grow commercial just by taking market share. So, we would -- and we forecasted that trend 17.5 to 18% to continue for next year.

Okay, thank you very much.

Once again, if you do have a question or a comment, please press the numbers 1, followed by 4, on your touch-tone telephone at this time. Gentlemen, there appear to be no further questions at this time.

Okay, thank you all for participating. We'll talk to you next quarter release.

Thank you for your participation. That does conclude this afternoon's teleconference. You may disconnect your lines at this time and have a great day. Thank you.