O'Reilly Automotive Inc (ORLY) 2003 Q3 法說會逐字稿

Welcome, ladies and gentlemen, to the CSK Auto Incorporated conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. Before we get started I've been asked to read the following Safe Harbor. Certain statements contained within this call are forward-looking statements. They discuss, among other things, expected growth, store development, and expansion strategy, business strategy, future revenues, and future performance. The forward-looking statements are subject to risks, uncertainties and assumptions, included 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. Unless otherwise noted, the company indicates that the following financial information is presented on a non-GAAP basis for purpose of accessing the comparability of its financial ability with prior periods. The corresponding GAAP measures and reconciliation with the non-GAAP numbers are available in the company's earnings press release which is posted on the company's web site at www.cskauto.com, under company and Investor Relations and press releases. It is now my pleasure to turn the floor over to your host Maynard Jenkins, Chairman and CEO of CSK Auto, Inc..

Good afternoon, thank you for joining us for your 2003 third quarter conference call. Joining me this afternoon is Martin Fraser, our President and Chief Operating Officer and Don Watson, our Chief Financial Officer. We'll each make a few comments and then we'll try to field any questions you have.

We're pleased to report financial and operational reports for third quarter fiscal 2003 have exceeded the company's previous earnings guidance. The company reported same-store sales increase of 8% for the quarter on top of a 7% same-store sales growth for the same quarter last year. While same-store sales grew 8%, the company continued to focus on inventory management with FIFO inventory growing only one and a half percent year over year. As a result, inventory turns continue to increase. In addition to exceeding our sales plan, we also exceeded our projected growth profit dollars and continued to leverage our selling general and administrative and expenses over our increasing sales. We increased our third quarter net income to 15.2 million, compared to 10.7 million for the third quarter of fiscal 2002. An increase of over 40%. Net income for the third quarter was 33 cents per diluted common share. Based on previous guidance of a 5% sales store -- same-store sales increase, and forecasted sales of almost 400 million, the company has been able to convert all incremental sales to a pretax profit at a rate in excess of 25%. This resulted in exceeding prior guidance by 3 cents. Net income for the third quarter fiscal 2002 was 24 cents per diluted common share. In addition to the increase in net income, the company has generated free cash flow of 48.5 million for the first three quarters of the year. We will continue to reduce debt, which in turn will reduce our future interest expense, and allow us to obtain the lowest available cost of capital. Since the end of fiscal 2001, the company's net debt has been reduced from over 654 million, to just over 460 million, a reduction of 194 million, or 30%.

At the end of the quarter, the company operated 1,108 stores, including 559 commercial centers. During the first three quarters of fiscal 2003, CSK opened ten stores, relocated five stores and closed 11 stores in addition to the stores closed due to relocation. The company will open or relocate between 20 to 30 stores during the full fiscal 2003 year. Now that we've reduced our debt levels and put in place a new credit facility, we are increasing the rate of new store openings. We are now forecasting to open or relocate approximately 45 stores in fiscal 2004. For the first three quarters of the year, we increased net income to 36.1 million, a 53% increase over the same period of the prior year. Earnings per share for the first three quarters were 79 cents per diluted common share, compared to 57 cents per diluted common share for the first three quarters of fiscal 2002. At the same time, our outstanding share count increased by more than 4 million shares. For the remainder of fiscal 2003, the company will continue to focus on top line growth by continued focus on increasing sales of existing product offering and offering new products to bring new customers into our stores. As sales growth -- as sales continue to grow, we will expect to take advantage of lower product costs and the increased dollar average of the sale. Which will increase our operating margins to new levels. At the same time, the company will continue to pay down debt and further explore alternative methods to reduce our cost of capital. We are currently engaged in discussions with the lead lenders under our existing credit agreement regarding further reduction in our interest margin under that agreement. Now I'd like to turn the call over to Martin Fraser and he'll pick up the tempo here.

Thank you, Maynard and good afternoon. We were very pleased with our operational performance in the third quarter. Our merchandising department has continued to improve our category management and keep us in an industry leadership position with new and innovative planagrams that continue to enhance our product offering. The new categories and items give our customers quality, automotive-related products at exceptional value. These new items also enhance the customer experience inside the store, giving our customer additional reasons to shop in our stores. Our marking program continues to drive sales. Weekly print advertising featuring exceptional values and new products has been very well received by our customers. Our new Spanish language marketing campaign that we started last year continues to be effective in communicating with our Hispanic customers. Our promotional activity remains strong in the fourth quarter helping the company continue to drive strong comparable store sales.

As discussed on last quarter calls, new product offerings with higher average retail and margin dollars come with a lower margin rate. This has had a moderating effect on year over year growth of our margins. The company has been successful in leveraging operating expenses on the higher sales to more than offset reductions in margin rate. Comparable sales were strong in all regions of the company. The southern California market continues to lead in comparable store growth but only by a small margin. Our northern plains stores also exceeded the company average, showing our continued progress in our newest market. We believe the balanced growth across all of our region shows the underlying strength of the business, and the success of our customer service and merchandising efforts. In the second quarter the company rolled out our free automotive systems test called FAST diagnostic program, to the majority of our stores. This program allows customers to rent diagnostic equipment that reads their -- reads their vehicle's on board computer and retrieves diagnostic information. It is uploaded to the store and the customer receives a printout of the results. By assisting DIY customers with this information we can get them the right parts the first time, improving customer service and lowering returns. Commercial sales finished the quarter with a 7% comparable store sales increase. This is significantly better than the 2.4% comparable stores commercial sales increases achieved in the first 26 weeks of fiscal 2003. Our national accounts business continues to exceed our expectations with higher year over year growth. With the return of many of our services personnel, our military business has also been strong. We remain dedicated to the profession alibis and are optimistic about the future of this business. Now I'd like to turn the call over to Don Watson, the company's Chief Financial Officer.

Thank you, Martin. Net sales for the third quarter ended November 2nd, 2003, were 409.8 million, compared to 383 million for the third quarter of fiscal 2002. This represents a third quarter same-store sales growth of 8%, comprised of a slightly higher than 8% increase in retail sales, and a 7% increase in the commercial sales area. Gross profit for the third quarter ended November 2nd, 2003 was 192.2 million, compared to 180.8 million for the third quarter of fiscal 2002. On a percentage points basis, the gross profit rate for the third quarter was 46.9% of net sales, compared to 47.2% for the third quarter of fiscal 2002. This is a slight decrease in rate, which is consistent with our strategic decision Martin just talked about and we referenced in our second quarter conference call to offer new products to attract new customers to our stores. These new products have resulted in higher dollar average transactions, but with slightly lower gross margin rates and much higher gross margin dollars. This has allowed the company to further leverage our store selling, store level selling and general and operational costs.

Operating administrative expenses for the third quarter were 154.9 million, compared to 149.4 million for the comparable period of fiscal 2002. On a percentage points basis, the operating administrative costs were 37.8% of net sales in the third quarter of fiscal 2003, compared to 39% of sales for the third quarter of fiscal 2002. This is 120 basis points reduction is a result of our ability to leverage our fixed operating costs over the increased sales base, and the higher dollar average per sale. Operating profits increased to 37.1 million for the third quarter and 18% -- an 18% increase over the 31.4 million reported for the third quarter of fiscal 2002. This is a 86 basis point improvement when compared with the prior year. Interest expense for the third quarter declined to 12.4 million from 14.2 million for the same period of fiscal 2002, primarily as a result of our reduced debt and more favorable terms under our new credit facility. Net income on a comparable basis for the third quarter of 2003 increased 42% to 15.2 million from 10.7 million, in the third quarter of fiscal 2002. Earnings per fully diluted share for the third quarter of fiscal 2003 increased to 33 cents on a base of 46.2 million shares, as compared to 24 cents on a base of 45.3 million shares for the comparable period of fiscal 2002. This is 3 cents higher than the revised company guidance provided at the beginning of the third quarter and 9 cents higher than the third quarter of fiscal 2002. Net sales for the 39 weeks ended November 2nd, 2003 were $1,206,000,000, compared to $1,157,000,000 for the same period last year. This represents a same store sales growth of 5% for the first three quarters of fiscal 2003, which is comprised of a 6% increase in retail same store sale and a 4% increase in the commercial sales area. Gross profit for the 39 weeks ended November 2nd, 2003 was 561 million, compared to 528 million for the prior year. On a percentage points basis, the gross profit rate for the 39 weeks was 46.5% of net sales, compared to 46.5% of net sales for the prior year. Also as mentioned previously, we expect to continue to introduce new, higher retail and lower gross margin priced items which will cause a moderating impact of our gross margin rate for the short-term. However, this will allow the company to generate higher gross margin dollars which will result in the lower operating costs per transaction increase in the operating margin rate. Operating administrative expenses for the 39 weeks were 462.1 million, compared to 443.6 million for the comparable period of fiscal 2002.

On a percentage points basis, the operating and administrative costs were 38.3% of net sales for the 39-week period of fiscal 2003, and fiscal 2002. Adjusting the 2002 period for the adoption of EITF-2-16 would increase last year's SG&A costs by 10.2 million. Operating profits were 98.5 million, or 8.2% of net sales for the 39 weeks, a 17% increase over the 83.9 million, or 7.3% of net sales for the same period of last year. This is a 90 basis points increase in the operating margin year over year. Interest expense for the 39-week period fiscal 2003 declined by 8.6 million, to 39.6 million, from 48.2 million for the same period of the prior year. Net income for the first three quarters of fiscal 2003 increased 53%, on a comparable basis, to 36.1 million, which is up from the 23.7 million for the same period of the prior year. Since the end of fiscal 2001, the company's net debt has been reduced from over 654 million to just over 460 million, a reduction as Maynard said before of 194 million, or 30%. In addition, the company generated 48.5 million of free cash flow for the first three quarters of fiscal 2003. CSK's outlook is as follows. Our third quarter sales trends have continued into the fourth quarter. Barring any unforeseen circumstances and assuming same store sales increases of between 5 to 6%, we expect full year net income to be between 49 million and 51 million, which is approximately 1.05 to 1.08 per diluted common share, which is assuming 47 million shares outstanding at year end. The increase in shares outstanding reflects the impact of our share price increase under the treasury method of accounting for stock options, in addition to the stock option exercised over the period. As compared to the fourth quarter of fiscal 2002, we would anticipate slightly lower gross margin rates associated with our new product offerings during the fourth quarter of fiscal 2003. In addition, our diluted share count will be higher in the fourth quarter of fiscal 2003 than the fourth quarter of fiscal 2002. We are forecasting free cash flow for fiscal 2003 of between 70 and 75 million. We would also expect full year reduction of debt in the same amount between 70 and 75 million. For fiscal 2004, we are forecasting same-store sales increases of between 3 to 4%, and an approximate 20% increase in net income and in earnings per share next year. That's compared to fiscal 2003 full year. Free cash flow in fiscal 2004 is expected to be between 65 and 75 million, we would expect this cash to be used primarily to reduce our outstanding debt, and to accelerate our store growth to approximately 45 new or relocated stores during the quarter. At this time I'd like to open it up for questions.

Ladies and gentlemen, the floor is now open for questions. If you have an odd owe yes, press 1, followed by 4 on telephone keypads. If your question has already been asked and you would like to remove yourself from the queue, press the pound key. We ask you pick up your handset when posing your question to provide optimum sound quality. Press 1, followed by 4 on your telephone keypad. Our first question of the evening comes from Bret Jordan with Advest.

Good evening.

A couple quick questions and a bit more granularity on the comp number. Don, if you could give us a feeling for the impact of ticket versus traffic on the comp and a little bit of a feeling of the ticket side, how much of that was from the new products that are being offered and the merchandise mix.

Well, Brett, I can comment that the majority or basically all of the comp increases coming from an increase in dollar average with flat retail customer count increases.

Okay.

The retail side, Martin. The increase in the dollar, retail. Brett, the last time we looked, and we do it quite a bit, is of the 8%, about two and a half or 3% is coming out of the increase in the retail from the offering of the new products.

Okay. And then on the commercial side. Pardon?

Hold on one second.

Let me interrupt here for one other strategic thing the company did we talked about this in the past. One of the things that has driven customer counts in this industry in the past has been low prices on oil. And strategically with our product offering and what we were doing, we thought was exciting new offerings, we took the strategic position that we were going to try and take the needle out of our arm and giving oil away. We've done exactly that. Through our systems, we're able to see how many people come in and buy oil and don't buy anything else and we think it's productive for the business and long-term it would be productive for the entire industry.

That has an effect of suppressing counter a little pit.

Right.

Lower dollar average, more customers.

No more 58-cent Quaker state?

We're not saying we're not going to have it, but we've taken the emphasis off of that. We use that to drive sales in our business. We've got a better product mix and are getting new customers into our stores because of that mix.

On the pricing commercial side of the market, just sorted of -- just sort of an overview any change in competitive level?

No.

and Don, just trying to understand, the net store gain you expect this year and next, you know, netting out the store closures, where do you see the numbers ending up?

We would expect this year we'll have 17 new, eight relos and three expansions for a total of 28. We'll have 12 closures, so you're going to get net new of about five this year. If you look at next year, we're expecting 45 new or relos, and 12 closures, so we'd have net new of about 23.

Okay. And then, one question as it relates to the balance sheet and your alternatives to reduce cost to capital. I guess as we get into the second half of next year that 12% of debt is something that's going to be economically viable to retire. Where do you see, looking out into the out year, a cost to capital weighted average and where you see interest expense getting down to given the rate of cash generation?

Well, Bret, just to look at that, as Maynard said, we have entered into discussions right now on a repricing event that could save us some money there. We also, have the opportunity, and actually have the cash, to buy back some of our high yield now. Unfortunately, I guess you can look at it both ways, but unfortunately for us, it's trading in the marketplace in excess of 1.14, so just doesn't make sense to buy it right now. We think, you know, we can call that back in December of '04, at 6%, we think sometime during the year it probably will make sense to replace the 12% out there with 7 to 7.5% high yield, somewhere out there. The impact of that would probably be 20 to 22 cents in the future, you know, just taking the difference of a 12% rate to a 7 to 7.5% rate. And you would end up with your term loan somewhere in the neighborhood of three and a quarter percent, so you'd get a blend in the neighborhood of 5%. You start looking at that, you know, that's pretty significant, you take 5% on $450 million, it's a $20 million reduction there.

Okay.

Also highly speculative.

)) 4 Okay, take it with a grain of salt.

We haven't got that done yet.

Okay. And two last questions. Q3 cap ex and where do you see full year cap ex?

When you get to Q3, the capex was $10.8 million. For the first three quarters. 5.8 of that was in the third quarter. And we would expect still to be somewhere at 14 and a half to 15 million full year.

Okay, great, thanks.

Okay.

Thank you, Mr. Jordan. Our next question comes from Chris Vezia with Wells Fargo.

Good afternoon, gentlemen. And congratulations on a greater quarter.

Thank you.

Just two quick questions. First, on the gross margin, the 30 basis point decline during the quarter, if you exclude the impact from a lot of your new product initiatives, did you still see margin gains on other product sales, and did you get leverage off of your occupancy costs during the quarter?

Yes. Chris, if you just took, if you excluded the new products that come with the lower margin rate, we are still on same-store, same-product mix, we're getting that 60 to 65 basis point improvement by getting the available vendor allowances and rebates. And the other thing that happens, you know, if you take your dollar average up, you know, you have a pretty fixed cost of operating a store, so if you increased your dollar average $1.50 and do that with the same labor, that's why you're getting that 120 basis point leverage in SG&A.

Okay, great. And just one last question. On the 45 new stores you have planned for next year, how many of those are in new markets and how many of those are backfilling into existing markets?

All backfilling.

Okay, great, thanks.

Our next question comes from Matt Fassler with Goldman Sachs.

Good afternoon, it's actually Jacob Grosen on behalf of Matt.

Hi, Jacob.

How are you. My first question is can you give us a sense, follow up on the new products, what specific products you are introducing? And in general, if possible, how much exactly lower your margins are in these products? I can probably back into it based on the last gentleman's question but I was wondering if you could provide some color.

Well, as we've said before, we are offering new products through a rotational type strategy that appeals to what we would call the wrench head type mentality, or person that would like to work around or in under the hood of their automobile. Some of the products that we've offered and added, like floor jacks and ramps and higher numbers of selection have ended up being standard everyday product and are going to be existing SKUs going forward because of the success. There are other products that we've offered that we rotate through and we're keeping the mix fresh to keep new customers coming into the store. Now, as far as the margin rate -- you want to answer that?

If you look at a blended number, it's coming at about 100 to 120 basis points lower in gross margin rate, but significantly better in dollars.

I think it's important to note that a lot of these items that have high retails on them, they're not all new items. Some were in the mix originally. Through our category management emphasis we've had here we've been able to just emphasize some of the items that we haven't before. Change the presentation and layout in the store, the way we promote them. Combination of new items, existing items, but in general to replace the oil, which we were selling before, these items do have higher retails.

I understand, thank you. My second question is how are you handling your head merchant spot and merchandising team in general? And related, how far out is your merchandising lineup set, if possible?

Well, our plans are in place going into the third quarter to next year. When you are marketing your program through print, most generally things are printed 12 to 14 weeks out. So, as you can see, we're already printed into January of next year. As far as the position of Senior Vice President on Marketing and Merchandising, we're not replacing that position. We've got a guy that heads up our merchandising area, and an individual who heads up our marketing area.

Okay, I appreciate it. My final question, then I'll pass it along. Regarding your fourth quarter share count outlook. What sort of share count are you assume for your fourth quarter guidance?

We're assuming share count of between 46.8 and 47 million for the fourth quarter.

Okay. I can follow up off line. I was doing quick calculations from the year to date and backing into the fourth quarter and I come to a lot higher number share count so I'll just follow up. I appreciate it.

Of the one thing that most of the change in share count happened in the third quarter just due to options that were exercised that were expiring. So, we expect, you know, probably, I want to say close to 46.8 for the -- I think is about where we'll be at the end of the fourth quarter.

Okay, I appreciate it, thank you very much.

the next question comes from Jerry Marks with Raymond James.

Good evening.

Hi.

Just a couple quick questions. Most of my questions have been answered. Just to follow up on the share count question, you indicated a lot of it was associated with options that were being exercised. When we look at next year, is this really a seasonal thing and won't hit until the end of next year if the stock price keeps going up?

Most of the large share counts were changes or options exercises, were associated with the initial IPO that was done with five-year grants that were exercised in October of 1998. Those things were expiring, there's not a lot of large numbers that were out there at this point. So I wouldn't expect to see huge option numbers coming through in the future.

Okay, so it's not -- I mean, aside from the coming next, you know, four quarters --

It was a seven-year vesting deal, and it was October of '96.

'96.

Okay. After we get through this kind of rolling four-quarter basis, you don't anticipate, then, that comes up again?

No.

Okay. And then, I guess I just wanted to follow up. Don, I thought you heard you mention something like on a run rate, the impact from this new approach with retail focusing on the lower gross profit margin but higher dollar volumes, I thought I heard you throw out a 120 basis point number. If I kind of calculate -- if I exclude out from last fiscal year quarter, the (inaudible) impact I get a 80 basis point run rate. Did I misunderstand something?

If you look at the third quarter, you end up leverage basically 20 or 30 basis points lower gross profit rate. But 120 basis points in leverage of SG&A, which gets you a blended 90. And I think that's maybe where you're at.

Oh, I see what you are saying. All right. Then I thought I heard you say something about continuing to trend 60 to 70 basis points but last quarter on the operating, on a blended basis, you trended at 100, this quarter at 90 basis points. Is your guidance for the 20% earnings growth based on a kind of 60, 70 basis margin improvement or this 90 to 100 in.

If you do year over year, you would assume that it's based on the 60 to 70.

Okay. Thanks.

the next question comes from Brian Renteria about Balasani Asset Management.

Congratulations on another stellar quarter. The first is on the margin gross rate side. Any initiatives in ‘04 to counteract the negative impact on the gross margin from the introduction of new products. Anything on the category management side or, you know, mix side or anything else?

Well, we are continuing to work in conjunction with our vendors to try and take the cost out of -- and streamlining the line of merchandise from the vendors to the operation. Along with that, the more we increase our top line and continuing to focus there we believe it puts us in a stronger and stronger position. In addition, we've got some system work going on which we call the shopping basket, and we can tell by individual category and SKU when we market something, whether a customer goes out essentially empty-handed with add-on merchandise or what percentage of them are buying add-on merchandise on a given product. And by leveraging this information, we believe that we can market to our customer more directionally, like a rifle shot, and put more and more product out there that we know we can get add-on sales with, with the ability to increase our margin on the total shopping experience. That's what we're working on.

And we're also continuing to press to leverage these higher dollar aments against the labor overset costs. Obviously there's more labor because it's a unit to unit. They don't take any more labor hours to sell them than the lower price items do.

Gotcha.

And many cases they take less labor because you don't have to look the product up on the electronics parts catalog.

Brian, this is Don. One other thing. We would expect on a full year '03 to '04, gross margin rates will improve year over year, approximately 30 basis points, and at the same time SG&A will be leveraged about 30 basis points to 30 to 40 basis points, so you would see a 60 to 70 basis points improvement in the operating margin year over year.

Gotcha. Okay. The second question is, on the factoring program, is that still in place to be implemented by the end of the year and is any sort of payables incorporated into our '04 free cash flow?

That's a little difficult for us. We have started the test. We have a couple of vendors signed up for this, this plan. We would expect to see the improvement in accounts payable in the cash flow generation at some time during the second half of next year, where you could see, you know, the payables to inventory grow 15 to 20%.

Gotcha. A couple housekeeping questions. The potential to refinance the high yield debt, is that -- have you taken sort of a conservative posture and not included that in your 20% in.

Absolutely not. Nobody knows what the market is going to do out there. We will always pursue opportunities to do that, but this model would not assume that. You know, it's pretty premature yet to assume we would do that.

Gotcha.

But if there was the market out there, we would do that.

Okay. The last housekeeping question, I know you said that the share count, you would end the fourth quarter about 46.8 to 47 million. Do I have it right from the release that you expect your weighted average shares for the year to be 47 million?

We think the weighted average share count at year end will be maybe 46.2, would that be about right? Yeah, 46.2 would be the full year weighted.

Gotcha.

47, and so you just take 47 at the end of the quarter and weight it. I think it comes out 46.2, 46.3.

Gotcha, fantastic, thanks again.

Thanks.

Thank you.

Once again, ladies and gentlemen, to pose an audio question, press 1, followed by 4 on your telephone keypads. Our next question comes from Leo Harman with F. management.

Hi, good afternoon.

Good afternoon.

You guys talked to guidance next year same-store sales to be 3, 4%, and this quarter you indicated new products were about two and a half to 3%. I was wondering why there's a certain level of conservatism on next year's same-store sales numbers given the impact of the new products haven't been felt for a full year yet and you seem to be relatively easy comparisons on the first and second quarter of next year.

Well, remember that you got to go back a year ahead of this year, and we had 7% comps for the year, and then now we're trending in excess of 5, and if we continue to run like we did in the third quarter, that year end number will be better, some of these products we've had in our stores more than a year and it's not like it's all going to be incremental increase. So, we think that it's very objective to peg our planning process around 3 to 4%, and we'll continue to focus on the top line, and take any incremental above that hopefully through leverage of our expenses to the bottom line.

And to Maynard's point, the only quarter that, you know, was a little lower, was the first quarter which was just over 2%, and due to the Iraq conflict, and once you get to the -- and that still was a two-year blended comp of 10% -- you get the rest of the year where the two-year blended comp, 15%. So, we want to make sure that we manage the business and expenses to a level that continues to get good returns for the shareholders.

Okay. Second question is, the 23 store openings, what's the startup cost impact on the income statement next year from those store openings on a net basis and the relocations?

If you look at it from a cash standpoint, a cash standpoint, you know, assuming the soft costs, the, you know, cost of inventory that's not in accounts payable, the furniture, the fixtures, any leasehold, is about 300,000 per store. We are not in the business of owning any stores yet, as some of our competitors are. We think it's a better return right now to pay down debt, so we've done sale lease transactions or leases on new stores. So, you have about 300,000 of cash for each store that you open, so just based on, that you got about seven and a half million dollars of cash or capital associated with those stores.

Okay. But no direct costs to you? Just direct income statement costs to you?

(inaudible) per store of cash.

Per store?

Yeah.

And the payback on that cash on cash is about 22 months.

Okay. Thank you very much.

Our next question comes from AMIR, with cobalt.

Hi, fantastic quarter.

Thank you.

I have two questions. The first one is, what do you expect inventory per store at year end to be?

Hold on one second, he's dividing it out.

Okay. I think the number was roughly 510,000 at the end of last year. I'm just curious how much of a reduction there will be year over year. .

I'll say it's going to be about 45,000 per store.

Reduction?

Yeah.

That's great. Okay, I think that's even a little better than you had suggested earlier this year. Does that mean that working capital management is ahead of expectation?

Yeah -- yes, the answer yes. One thing, though, Amir that we've talked about a lot, is that with our cash situation, you know, we have a 200 million term facility in place. We have no borrowings on the revolver. We have 46 million, almost 47 million of cash out there. The company is it not want to pay down the term loan right now because you don't want to lose it in the event an opportunity comes out to take out the high yield, so we've had to go back to vendors and negotiate favorable take terms for example our average term was 2% 90 we negotiate 3% 60, 4% 30, or 1% 120, to offset the cash short-term. So, you know, when you start looking out there, the opportunity next year as the company puts a factoring in place and gets the opportunity to do the high yield, you know, we think we have some opportunity to internally generate a lot of cash.

Okay. My second question, similar to the question that was just asked, centering on the comp guidance for '04. You're doing a great job, basically blowing the doors off comping 8%. 3 to 4% next year seems quite conservative. What could be pockets of upside?

Well, the -- when you take a look at 3 to 4% in a planning process, we don't think that's conservative based off of where we are on a two-year blend, and you know the driver of this business is a top line in comp sale. Now, we continue to refine our inventory mix in the stores, we continue to look at what's producing for the company, and we'll continue to do that, and offer exciting products for our company. The upside could be just like the upside is to this year, where we gave guidance in the three and a half to four and a half percent range, and we're running in excess of that. We're able to take, you know, 25 to 30% of the incremental to the bottom line.

Okay. Well, thanks.

Thank you.

Our next question comes from Bret Jordan, with Advest.

Just a couple quick follow-ups. One on the commercial sales growth. Where do you see the commercial store count being at year end, and the end of -- and into next year and you discussed regional comps with the California and the north central states being better than company average. What's below company average and what's the dispersion?

The -- Brett, they're all very, very close. We've struggled a bit in the southwest region, part of the southwest region, which includes the Arizona area, but having said that, that was one of our strongest region a year ago. So, you know, the two-year blend, southern California is in great shape, and leading the pack, and then central California has done very, very well for us, and northwest has done very well, and the northern plains is coming on. But it's not like there's 300 basis points between any of the regions.

Even when we say we're struggling more in the southwest, southwest is still very positive positive from a comp basis.

Okay.

And Bret, on the commercial centers, you know, we ended the quarter at 559, assuming that we're going to have 20 to 25 net new stores, we usually do 35 to 40% of the stores we open will have commercial centers.

And the commercial business, we were happy with our performance of the commercial business in the third quarter. Certainly outperformed the comparable sales increase in the first half of the year.

Okay.

Continue to be very optimistic about the commercial business.

All right, thank you.

Sure.

Our next question comes from Chip with Kramer Rosenthal.

Just a couple follow-ups. I wanted to see if you could give us the average selling price of the new products, just so we can get a dollar number. And then, I think you said that the same-store sales kind of (inaudible) new products would be up 60 to 65 basis point. I wonder if I heard that right.

What we said was on the comp store growth of the same products, let's say we were 8% comp, it would be 5 and a half without the introduction. The new products. That five and a half percent of a comp came with a 60 basis points increase in gross profit rate.

Okay. So --

Year over year.

Year over year.

and as far as the average ticket of the new product, we don't have that number.

All right. But it's safe to say it's -- you know, from what you said, like floor jacks and ramp, those could be 200-dollar items.

Some of the product we've added in the broadening of our SKU mix, some are higher priced than we carried before.

Okay, thanks a lot.

Once again, as a final reminder to pose an audio question, press 1 followed by 4 on your telephone keypads

If we have no more, we'd like to thank everybody and we'll terminate the conference call

Sir we have a question coming from Sid Wilson.

Okay.

Good afternoon. Excuse me if you've answered this question, I didn't hear it. But can you give us a breakdown in terms of how sales trended between hard parts, accessories and chemicals?

No. We don't break all that out.

Okay. Okay, that's fine.

Look at our annual report, we do break out replacement products.

As compared to everything else.

As compared to everything else. And that's about one and a half percent. So if you go in there and look at it, you would see a little bit higher blend of accessory type products.

Okay, thank you very much.

All right.

At this time we show no further audio questions.

Okay, we would like to thank everybody for participating, and we'll talk to you next quarter.

Ladies and gentlemen, we would like to thank you for your participation in today's audio telephone conference. You may disconnect your lines at this time and have a pleasant evening.