O'Reilly Automotive Inc (ORLY) 2003 Q4 法說會逐字稿

Good afternoon and welcome to the CSK Auto Incorporated fiscal 2003 and fourth quarter financial results conference call.

At this time, all participants have been placed on a listen only mode and the floor will be open for questions following a presentation.

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 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.

Unless otherwise noted the company indicates that the following financial information is presented on a non-GAAP basis for purposes of assessing the comparitability of its financial performance with prior periods. The corresponding GAAP measures and a 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 then investor relations, then press releases.

It is now my pleasure to introduce today's host, Mr. Maynard Jenkins. Sir, you may begin.

Good afternoon, and thank you all for joining our fiscal 2003 year-end conference call.

Joining me on the call today is Martin Fraser, our President and Chief Operating Officer, and Don Watson, our Chief Financial Officer.

We are pleased to report the financial and operational results for the fourth quarter and full year of fiscal 2003, that have exceeded the company's previous earnings guidance. The company reported a same-store sales increase of 8% for the quarter, and a 6% for the full fiscal year of 2003, on top of the 6% same-store sales growth for the same quarter last year, and a 7% for the full fiscal year of 2002.

While same-store sales grew 6% for 2003, the company continued to focus on the inventory management, with FIFO inventory remaining constant year-over-year. As a result inventory turns continue to increase. In addition to our continued strong sales increases we have also exceeded our projected gross profit rate and dollars for the quarter, and for the full fiscal year of 2003.

The company has continued to leverage our selling and general and administrative expenses over our increasing sales. Our net income for the fourth quarter, excluding certain non-comparable charges detailed in our earnings release, was $13.4 million, or 29 cents a share on a fully diluted basis, and was $49.5 million or $1.08 per share on a fully diluted share count for the fiscal 2003. This represents a fourth quarter increase of 25% in net income, and 45% increase in net income for the full year.

In addition, to the increase in net income, the company has generated free cash flow of approximately $74 million for the full fiscal year of 2003. At the end of the year, the company operated 1,114 stores, including 563 commercial centers. During the year, CSK opened 18 stores, relocated or expanded 7 stores and closed 13 stores in addition to the stores closed due to relocation, bringing our total store count to 1,114. With our new credit facilities in place, we would expect to open or relocate approximately 45 stores in fiscal 2004.

The company is very pleased with our operating results for fiscal 2003. For fiscal 2004 the company will continue to focus on top line growth, by continued focus on increasing our sales of existing product offerings, and offering new products to attract new customers into our stores. As our sales continue to grow, we will take advantage of lower product costs and the increased dollar averages of those sales which will increase our operating margins to new levels.

At the same time, the company will continue to deleverage our balance sheet. As we stated in our last conference call, we were engaged in discussions with our lenders regarding a further reduction in our interest rates under that agreement. We're happy to report that the company was successful in a total refinancing of our debt on January the 16th, 2004, at more favorable terms than expected. Don will give you more details in his part of this call.

Now, I will turn the call over to Martin Fraser, our President and Chief Operating Officer.

Thank you, Maynard.

Good afternoon. We were very pleased with our operational performance in the fourth quarter. Our merchandising department has continued to improve our category management and we improved the productivity of many of our categories.

These improvements have allowed the company to achieve the 6% annual comparable sales increase while at the same time inventory remained flat. Our new items give our customers quality automotive-related products at exception values. These new items have also enhanced the customer experience inside the store, giving our customers additional reasons to shop in our stores.

Our marketing program continues to drive sales. Weekly print advertising featuring exceptional values and new products has been very well received by our customers. Our promotional activities in the fourth quarter helped the company achieve the sales objectives for comparable store sales.

In addition, our new Spanish language marketing campaign that we started last year, continues to be effective in communicating with our Hispanic customers. Comparable sales were strong in all regions of the company. Balanced growth across all regions showed the strength of our merchandising and operational model.

Superior customer service has resulted in higher average tickets, fewer returns, and improved customer satisfaction. The Southern California market continues to lead the company in comparable sales growth, but only by a small margin. Our Northern Plain stores also exceeded the company average, showing our continued progress in our newest market.

As mentioned in our last quarterly call, the company rolled out our Free Automotive Systems Test we call FAST which is a diagnostic program, and it's in the majority of our stores. This program allows customers to put a security deposit down to use diagnostic equipment that reads their vehicle's on-board computer and retrieves diagnostic information. The information is then uploaded into our store's computer and the customer receives a printout of the results.

By assisting DYI customers with information, we can get them the right parts first time, improving customer service and lowering returns. Customer use of this program continues to increase, and the company remains committed to improving this new customer service. Commercial sales finished the quarter with 8% comparable store sales increase. This increase confirms that our commercial sales base and our market share continue to grow.

The company's emphasis over the last year to reduce business with customers who only buy commodities and promotional specials and emphasis business with those who use CSK Pro Shop as a top tier supplier has proved successful. Profitability has improved and bad debt has decreased as a result of these efforts. Our national account business continues to exceed our expectations with higher year-over-year growth. With the return of many of our armed services personnel, our military business has also been strong. We remain very dedicated to the professional installer business and are optimistic about the future of this business.

Now I would like to turn the call over to Don Watson, the company's Chief Financial Officer.

Thank you, Martin, and good afternoon, everyone.

Net sales for the fourth quarter ended February 1, 2004 were $372.3 million, compared to $349.7 million for the fourth quarter of fiscal 2002. This represents a fourth quarter same-store sales growth of 8%, comprised of 8% in the retail area, and also 8% in the commercial sales area.

Gross profit for the fourth quarter ended February 1, 2004, on an EITF 2-16 adjusted basis increased by $6 million to $187.2 million, or 50.3% of sales, compared to $181.2 million, or 51.8% of sales, for the fourth quarter of fiscal 2002. The company continues to offer new products with higher average dollar transactions, and higher gross margin dollars but slightly lower gross margin rates. This allows the company to further leverage our store level selling and operational costs.

In addition to the increased customer dollar averages for sale, we continued to lower the acquisition cost of inventory in our existing product categories. The company's merchandising department will continue to introduce a variety of new product offerings to our customers.

Operating and administrative expenses for the fourth quarter of fiscal 2003 were $155 million compared to $141.4 million for the comparable period of fiscal 2002. This excludes the one-time charges detailed in our press release.

Operating profits on a comparable basis increased to $32.4 million for the fourth quarter, compared to $30.8 million for the same period last year. Interest expense for the fourth quarter declined to $11.4 million, from $13.9 million for the same period of fiscal 2002, primarily as a result of our reduced debt, and more favorable terms under our credit facilities.

Net income on a comparable basis for the fourth quarter of 2003 increased approximately 25%, to $13.4 million from $10.8 million for the fourth quarter of fiscal 2002. Earnings per fully diluted share for the fourth quarter of fiscal 2003 increased to 29 cents on a base of 46,800,000 shares as compared to the 24 cents last year on a base of 45.2 million shares for that same period last year. This is two cents higher than the revised company guidance that was provided at the beginning of the fourth quarter, and five cents higher than the fourth quarter of 2002, even with the increased share count.

In January 2004, we completed a refinancing of our debt that included the redemption of approximately 94% of our outstanding 280 million 12% senior notes and the issuance of 225 million of 7% senior subordinated notes. In addition, we amended our bank credit facility, increasing our credit line by $75 million and reducing our interest rate spread by 50 basis points. As a result of this refinancing, we expect pretax annual savings of approximately $11 to $13 million in interest expense, or 14 to 17 cents per share, assuming 47 million shares outstanding.

At the completion of the refinancing in the fourth quarter of fiscal 2003, and our ongoing improvement in our operating results have increased our financial flexibility enabling to us pursue alternative strategy to reduce our current portfolio of closed stores, which includes lease buyouts and foregoing lease extensions from locations that are currently leased at marginal profits. This change in strategy requires the company to adopt FAS 146, which became effective January 1, 2003.

FAS 146 requires that the cost under a lease contract for a closed store be recognized at fair value and that the amount of remaining lease rentals be reduced by an estimated sublease income but not an amount less than zero.

The change in strategy has resulted in a fourth quarter charge of approximately $12.2 million. The charge reflects the elimination of sublease income from the reserve, partially offset by discounting of the net cash outflows. Sublease income in excess of cost of the lease will will now be recognized in the future periods, as it is earned.

Net sales for the fiscal year ended February 1, 2004, were $1.578 billion, compared to $1.507 billion for the fiscal year ended February 2, 2003. This represents a full year fiscal 2003 same-store sales growth of 6%, comprised of a 7% increase in retail same-store sales, and 5% in the increase in the commercial sales area. Gross profit on a comparable basis after giving effect to the EITF 2-16 for the year was $748.2 million, compared to $719.4 million for the prior year. On a percentage point basis, the gross profit rate was 47.4% of net sales compared to 47.8% of net sales for the prior year.

Also, as mentioned previously, we expect to continue to introduce new higher retail and lower gross profit margin priced items which will cause moderating impact on our gross margin rate in the short term. However, this will allow the company to generate higher gross margin dollars which result in lower operating costs per transaction, increasing the operating margin rate in the long term.

Operating and administrative expenses for fiscal 200 -- for fiscal year ended February 1st, 2004, were $617.3 million, compared to $585.6 million for fiscal year ended February 2nd, 2003. On a percentage point basis, the operating and administrative costs were 39.1% of net sales for fiscal 2008, compared to 39% for the same period of 2002.

Operating profits on a comparable basis for fiscal 2003 were $130.9 million, or 8.33% of net sales, compared to $114.6 million, or 7.6% of net sales for fiscal year ended February 2nd, 2003. This is a 70 basis points increase in operating margin year-over-year.

Interest expense for the year declined by $9.6 million, to $51 million from $60.6 million, for fiscal year ended February 2nd, 2003. Net income for the fiscal year ended February 1st, 2004 on a comparable basis increased 45% on a comparable basis to $49.5 million, up from $34.2 million for the prior year, resulting in earnings per share for the full year of $1.08, versus 81 cents for the same period of fiscal 2002.

Since the end of fiscal 2001, the company's net debt has been reduced from over $654 million, to just over $483 million, or a reduction of $171 million or 26%. In addition, the company generated $73.7 million of free cash flow for the year-ended February 1st, 2004.

CSK's outlook for the future is as follows: For fiscal 2004, we're forecasting same-store sales increases to the low mid single digit range on a comparable basis. The company also now expects to open or relocate approximately 45 stores during fiscal 2004. As a result of the projected sales increase and the impact of our reduced interest expense resulting from our refinancing, we expect the net income for next year to be between $66 million and $69 million. This is an increase of our prior guidance of about $1 million on the low end of the range.

This will result in diluted earnings per common share of between $1.42 to $1.47, assuming an approximately 47 million diluted shares outstanding. This assumes diluted earnings per share for the first quarter of fiscal 2004 will be in the range of 26 and 28 cents. Free cash flow is defined in fiscal year 2004 which is net debt - operating cash flow less Capex, is expected to be in the range of $75 to $85 million. We would expect to use this cash primarily to reduce ourstanding debt.

And with that I'd like to open it up to questions.

Thank you. The floor is now open for questions.

If you do have a question, please press the numbers one, followed by four on your touch-tone telephone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order that they are received. And we do ask that while posing your question, you please pick up your hand set to ensure proper sound quality.

Once again to ask a question at this time, please press the numbers one, followed by four on your touch-tone telephone. Please hold the line while we poll for questions.

Our first question today is coming from Jacob Grossman of Goldman Sachs. Sir, please pose your question.

Thanks a lot. It's Matt Fassler and Jacob Grossman at Goldman Sachs. Good afternoon.

Hi, guys.

A couple of questions.

First of all, Don, if you could talk a bit about the SG&A, you know, on a pro forma basis, the dollar increase was, I think, sharper than it had been over the first nine months of the year. How much of that related to an ETF switch? And, you know, were there increases in spending or incentive compensation or anything else that would explain that increase? Any increase in the underlying SG&A numbers?

If you just look on the EITF number for the -- just the fourth quarter.

Yeah.

It's about a $9 million swing year-over-year in the actual quarter. The other increase in the cost of SG&A, as I'm sure everybody is aware of, is that in the California market place, we've had a little bit, you know, higher increase in the cost of medical and worker's comp. Which, you know, cost us about 20% increase in that area, but we were still able to, you know, continue to leverage that against our sales by reducing the number of claims.

So Don, just to make sure that I understand, the $148 million number for February '03, or Jan '03 SG&A, in the press release, that is prior to that $9 million adjustment or after that $9 million adjustment?

It's prior to.

So, in other words, once you add the $9 million to it, you are basically level with a year ago in terms of expense dollars?

Yeah, you are basically right on the same level of expenses with, you know, an increase in sales, you know, $24 million.

Got you. Next question relates to sales.

You know, you printed 8% comps in each of the past two quarters and obviously you have an easier comparison as you come up against the April quarter, but can you talk about the pace of sales during the quarter and focus on the low to mid single digit comp range that you gave us? Is that prudence, if you will? Is it a function of comparisons or is there something that you see in the business that makes you stick a low single digit number into that range?

Our sales continue to be vibrant. We're optimistic that we are going to meet and hopefully exceed the guidance we have given. But when you take a look at our blend over a three-year period, we think the numbers are also looking at optimism and not pessimism.

Yep.

Matt, just to comment on that, the first quarter of last year, you know, obviously, with the war, we ran 2% comps, and we would expect higher this year.

Yeah.

But if you look at all the rest of the quarters, you are looking at a two-year blended comp of 14%, which is pretty robust, and we think it's prudent to, you know, project on a conservative basis as Maynard just discussed.

Sure.

And my final question for now relates to -- relates to the new products. If you could give us a sense as to how you -- or what new items have you in your categories that you have at lower margins in addition some of the products that you really pioneered.

Well, as we talked about in the past, we've had the rotating merchandise operating in this area.

Yeah.

We've taken some of the successful categories that worked and improved them, and added some additional items there for customer satisfaction.

Mm-hmm.

And then we're also taking some basic categories that, like in our tool category and offering values that have never been before offered by this company. And the customer is responding.

Matt, this is Martin. We're planned out through -- through the third quarter with a variety of new items you will see introduced in our ads on a go-forward basis.

Got you. Mostly though parts of categories that you've had in the past?

Some parts of categories, some new things.

Got you.

And just one other quick one, the tax rate this quarter was a couple hundred basis points lower than it was in the first nine months of the year, though the tax rate for the full year was higher. Can you talk about what drove the tax rate -- what drove the fourth quarter tax rate lower?

I think you really need to look at it on a GAAP basis and a non-GAAP basis. So you look at it on a pro forma basis, where, you know, we're adding back, excluding the charges, you know, you are still on that basis, still in the 38, you know.

So for on a non- -- on a comparable basis it really didn't help us in that 29 cents. What it ended up doing was just over 38%. On the actual, you did get a benefit and the reason you get a benefit is because of the cost associated with the refinancing.

Just to make sure we're with you, I mean our numbers could be wrong, we can tackle that offline, but it looked like to us to get to 29 cents the tax rate was 36.4, which was above last year's tax rate but below the 38.6 that you ran in the first nine months of the year. Is that -- if that's our error, we'll talk afterwards.

Yeah, I mean, if you look at just the individual quarter there --

Yeah.

Hold on. For the comparable basis we're at 36.4.

Yeah.

Which gives you a little bit of a credit and, you know, you do get some benefits, you know, California tax credits that you -- you've had in the prior year. So I think it is a consistent, you know, couple hundred thousand.

Got you. So the fourth quarter, a lower tax rate quarter or something that you see benefited.

Yes, you get an enterprise zone credit.

Got you. Thank you very much.

The next question is coming from Alan Rifkin of Lehman Brothers. Please pose your question.

A couple of questions, if I may.

Looking ahead to '04 and even beyond, can you maybe talk about the opportunity as to what you see for, you know, new and ancillary product introductions?

And then secondly, Don, if you hit your free cash flow generation of $75 to $85 million, where do you anticipate debt levels being at the end of '04?

Okay, I will answer that one first. And then I will move this back to Martin.

You know, currently we would expect $75 to $85 million, knowing that our debt level right now is $483 million. You know, we would like to continue to pay that down and we would expect to be somewhere in the neighborhood of, you know, $400 million. Which will put you at the EBITDA of 2.5 to one.

Without getting into any specifics about what some of the newer products are going to be to be on a go-forward basis for obvious reasons. Continue to be encouraged by the products that we are being shown by vendors and sales representatives. I think our ability to put new items in our stores and have success with those new items has certainly opened up the field for companies to come in here and try to show us new and innovative items.

Like I said we're planned out mostly through the rest of the year. So we're pretty confident that our new product offering is going to be where it needs to be.

Thank you, Martin.

The next question is coming from Christina Bonnie of Credit Suisse First Boston. Please pose your question.

Good afternoon, everyone.

Hi.

My first question was with respect to expectations for inventory levels for 2004. Could you give us a sense, given that inventory levels on a FIFO basis were flat, what you see and what the opportunities are for better turns?

Well, first of all, you know, to increase sales, you know on a full year 6% and a fourth quarter, at that 8%, and keeping inventory flat year-over-year, I think is good strategy and good, sound, management of this inventory. We also believe that there's somewhere in the neighborhood of another $15 million that we can generate by taking inventory out of the stores by -- with our management system of the inventory that's pretty store specific.

So let's -- I would expect next year to be in the 425 -- or 525, to 530 range, even with the new stores, you know, the above 45 stores.

Christine, we were very happy to finish the year flat with the amount of new you items in particular that you know that we introduced. Our category management system, we've made some pretty significant improvements to that to improve our store-specific mix and also increase our turnover in existing categories by working with our vendors.

Great.

And my second question is with respect to capital expenditures, you spoke of 45 new/relocations. Any breakdown between the new stores and the relocations? And secondly, if you can just confirm the capital expenditure budget for 2004?

Yeah, I think if you look at 2004, we would expect somewhere in the neighborhood of 32 to 35 stores new. There would be about 10 relos.

Okay.

And one expansion. And what that does is it gives you a range of 18 to 20 million dollars in total for capital expenditures for next year.

Great. Thanks very much. Congratulations on the quarter.

Thanks.

Your next question come is coming from Ryan Renteria of Balasani Capital. Please pose your question.

Good afternoon, great quarter.

Thanks.

A couple of questions. The first one is, I understand the strategy of the new products being higher gross margin dollar, lower gross margin rate. Would you expect that to sort of continue into next year or do you sort of see the better buying from the vendors outweighing that and getting a better gross margin rate next year?

We see some continuance of that, but also a recovery in the rate as we go forward for the reasons that you just mentioned. But the key point here, that Don made before, is that with some of these offerings, we can leverage our selling expenses, because it doesn't take the time to ring up these items at higher ticket, than it takes to look up hard parts that you are selling -- year, make and model specific. So we're going to give up a little margin in the short term on the rate, and we're going to continue to leverage our overall expenses because of the average ticket, and move the thing forward.

Great.

And, Don, if I understand this right, when you strip out the charges in the EITF adjustment, is it accurate that your SG&A ratio went from 44 6 down to 41 6, it was down 300 basis points year to year?

Yeah, if you strip that, if you strip all of that out and the EITF, yes.

3 00 basis points. Okay.

And the -- the savings from the refinancing look like it was about a million less than you had said previously or a couple of cents left. Did you have some extra fees come in there?

Well, I think, Ryan, if you go into it, and we've -- you know we've generally said, you know, the range of 11 to 13, and, you know, I think people go in there and they just calculate the 50 basis point savings and then going from, you know, taking the -- the high yield from 12% down to 7%, and they calculate a savings of 13 to 16 million.

Mm-hmm.

Nobody really said, hey, you know, the company plans to pay down 85 million dollars in debt, you know, in the plan that we had already given to the Street. So you've got to assume that there was already $3 to 4 million of savings in the plan.

Mm-hmm.

And then the other thing, you know, you still -- you still have 6% when we originally talked, we assumed that we would get all of the 12%.

Mm-hmm.

And we got 94% of the 12%. So that's part of it also.

Got you. Okay.

Last question, a couple of balance sheet items Don, do you have receivables and allowance for doubtful accounts handy?

Yeah, I'm going to have to dig that up, Ryan. I didn't bring that up with me.

Okay. Sounds good. Thank you.

Your next question is coming from Jack Balos with Midway Research.

I was wondering, in the new year how many stores do you expect to close?

Typically -- typically we would close anywhere from 6 to 10, and that's the same range that we'd be looking at this year.

What percent of your sales are commercial delivery? And do you expect to increase the number of stores that have commercial delivery?

We have went from 556 stores to 563 stores at the end of the quarter, and we're currently running 17% of commercial sales in total, which says, hey, you know, you're both growing at 7 to 8%, but, you know on the retail base, it kind of brought you down a little bit in total. But we would expect that to stay in the 17 to 18% for the next year.

Now --

Jack, if you look at the new stores you can assume that about -- about the same ratio, about half of those new stores will probably be commercial.

On the existing base, not looking at the new store growth for this year, you can't assume that we're going to increase that number dramatically because commercial sales just don't work in every store.

Does that mean that stores that do have commercial, just those stores alone, that about 34% of sales, in those stores are commercial and the rest is retail?

Your number is right on.

Just a couple of numbers just to see. You kept using the expression that your inventory is flat. But it looks like it's down. I see a number 559.51 versus 560. You are down about 8 million; isn't that correct, year-over-year?

Yeah, and part of that is the capitalization. You know, last year we were required to start capitalizing the cost of rebates and we moved that up into inventory in both years.

Okay but in actuality, is the inventory --

On that basis it is down.

Okay.

Well, one of the things we want to continue to reemphasize there, if you go back with us a few conference calls, there was real concern in the financial community that this company was going to take inventory levels at higher and higher paces because of the new offering. And we said through category management, and what we were doing with our offerings we were going to manage the inventory and we were going to assimilate new product offerings, and not increase our inventory levels. And that's exactly what we've done and we'll continue to lever our inventory levels and we're gonna continue to increase our return on our turnover in this company.

After this year paying off debt, you will have had about -- more than 2% increase in stores year-over-year. Do you expect to increase that percentage gain going forward longer term?

We stated last time and we continue to state that we'll be around 45 new and relocated and you can assume that there are going to be some 25 incremental stores or around that number for 2004. And we're looking to pick up the pace a bit year-over-year, because we're going to continue to focus on deleverage of our balance sheet and as that balance sheet gets delevered more and more, then we'll kick up the new opening express.

My last question is this: I see your total debt here, what is the total equity in the company?

Hold on a second.

Excuse me?

Yeh, I said, hold on a second.

I think it was like $302 million a year ago.

Yeah, if you look at the total equity, it's basically $330 million.

330?

Yeah.

Thank you very much.

Thank you. Our next question is coming from Susan Janzen of Lehman Brothers. Please go ahead with your question.

Hi, it's Scott Lehman calling in for Susan. Two questions, if I may.

First off, you guys mentioned that you are going to pick up your new store openings, I guess, after this year. Could you also comment on any acquisition plans and give us some color on the current acquisition environment, such as what current EBITDA multiples are or how many sellers are actually out there?

Well, as we stated before, there are not a lot of 20 to 30 plus chain operators out there that operate in a similar format to what we have. We will continue to pick up one, two, or five stores here and there, and what we call unheralded consolidation. A lot of consolidation has occurred over the last five years, and there's just not that many 50 to 100 store chains out there that can be picked up.

Now, we're looking in the acceleration of growth in the next couple years. We're stepping it up a bit for 2004, and then we'll step it up a bit more for 2005. Most of it to come organically and maybe some of it outside of our existing territory.

And you said you are going to get down to about two times levered at the end of this year. Is that a level that you will be comfortable with going forward or would you like to get it down further from there?

I think I stated that we would be at two and a half times, and, you know, I think, you know, the company continues -- I mean, you know, we just locked in some very long financing in place of very attractive rates.

You know, we're very comfortable at, you know, any time, you know, being -- we would like to stay somewhere between 25 and 30% of debt as a percentage of capitalization. But, I mean, it's going to be a scenario that you are going to have to look at all things in the industry to say, hey, what's the best use of the cash? Is the best use to pay down debt, when it's this rate out in the industry, or, you know, speed up your expansion? That's something you are just going to have to -- we'll have to measure during the course of the year.

And/or buy some stock back at some time if we looked at that.

Okay. Great. Thank you.

Your next question is coming from Jerry Marks of Raymond James. Please pose your question.

Hello.

Hi.

The $1.8 million in the debt refinancing that you said is operating administrative, that's going to go in the operating income line in order to get the 29 cents?

You mean the direct costs associated with that.

Yeah.

Yeah, it is in the operating and it's been taken out for the purposes of comparability.

Okay. Well, what exactly was that, that makes it in terms of operating and administrative expenses?

It was costs associated with doing the deal, which is, you know, there's some road show costs in there. There's some salaries associated with that, and -- yeah, and let's say there will be attorneys fees, there's accounting fees, there's just a lot of fees associated with doing these deals.

Okay. But if I'm trying to do the math you guys were talking about, in terms of getting the operating expenses as a percentage of sales, you get the $1.8 million and I add back the $9 million in the prior year quarter in order to get the comparability for to get the SG&A as a percentage of sales?

Yeah, if you look at the press release, we actually did a reconciliation for everybody so they could see what costs were in there both years, as far as the refinancing because we've done a lot of refinancing, you know and we've reduced our debt substantially and our future interest rates. So we did a reconciliation and I think it's at the first page on the -- well, you guys probably don't get it by pages but it's at -- It's on a schedule below the 13 weeks in the fiscal year. There's a comparability reconciliation.

Yeah, I'm actually looking right at it. I guess I will have to follow up with you offline.

The other question that I had was, you had 8% comps and your total revenues were up about 6%. Really wouldn't be, from a new store efficiency standpoint, so I'm just wondering what happened there in the quarter? Is it because of the mix of the stores that you closed earlier on created that difference?

We have 2% in the first quarter. Are you talking about the delta between --

Yes, if you look full year, it's 6%. And total growth is 6%, but understanding that last year during the year we sold 13 stores, and closed 11 more --

Yeah, no, Don, what I'm referring to is if I take the 372.3 over the 349.7 that you had last year.

Yeah?

Right. That's 6% of revenue growth, right?

Right.

And that's what I'm saying -- or 6.5%, versus the 8% comp and kind of where -- that's where you are suggesting the difference is in terms of 13 stores closed?

We had 13 stores close, plus during the course of the year, year-over-year, we had another 10 stores that were closed because they were unprofitable.

You show a net store increase of five?

Right.

Okay. Thanks.

Your next question --

Back to that answer, remember when you talk about a net store increase of five, the majority of those stores, five of those stores opened in the last week of the quarter. So you --

Oh, okay.

So we didn't get any sales increase for those.

Okay. So that's it, primarily there was a mix issue that you only had those open the last week of the quarter?

Yes.

Okay. Thanks.

And my time you look at the store opening schedule, you can't assume that the stores were opened in January or the first of February and you had the volume for the full year.

Your next question is coming from Derrick Irwin with Advest.

Hi, most of my questions have been answered.

With regard to the comp, I'm assuming most of that was higher average ticket and that sales were flat or were they up or down -- I'm sorry, traffic up or down?

We -- all of the increase came from dollar average with customer account being basically flat.

Okay. That's all I have at this point. Thanks.

I want to qualify that statement.

Okay.

In taking a look at our market basket approach, and our bull's eye marketing as far as targeting an individual SKU, there are some things that we found out through our marketing program that a customer might cherry pick a given store for, like oil. And we decided -- and we talked about this in the past -- that we're really not going to accommodate the customer that's not a great customer.

In other words cherry picks you for the commodity item and that only. So we took a strategy that said we're going to change our margins in our offering professionally on the oil product. When you take a look at the customer counts, the customer counts that were down to get to the flat were essentially the oil customers that weren't buying anything else in the store but coming in and buying oil and walking out. So our strategy is working and we're going in the right direction there, and our quality customers, when you take a look at that number and balance it, is actually up.

Okay.

Can I follow up on the previous question, that was just asked? You said there were five net stores for the year, five of which opened at the end of this quarter; is that correct?

The end of the fourth quarter.

The end of the fourth quarter that just ended?

Yes.

Okay. So really, effectively there was zero net stores added -- contributing revenue for the quarter?

Yes.

But they were -- so it still makes it a little confusing 8% comp and 6.5% sales growth. You would think that the 8% comp would exactly match up a -- would match up closer to the sales growth. The sales --

Yeah, but if you -- if you go in to that scenario and you say that there's 13 stores in last year's fourth quarter and not in this year's --

Okay. I understand. That's fine. That makes sense. Okay.

All right.

Thank you.

Your next question is coming from Sid Wilson from Whittaker Securities. Please pose your question.

Hi. Congratulations on strong comps.

My question is: Can you give us an idea in terms of how the comps trended month by month, whether, you know that 8% comp was -- was steady throughout the quarter or whether it's accelerated early or decelerated.

It was steady across the quarter month by month, and I think in the last conference call, we had stated that our numbers were running pretty strong five weeks into the quarter. So --

Yeah, there's less than a half percent difference by period.

Okay. And also can you -- are you -- can you comment on how sales are trending so far, or did I miss that?

We really didn't comment on that. But I can tell you based on the guidance we gave the Street, the comps are still running in that mid to upper single digit level.

Okay. And with regards to the new and/or relo that you will be having in 2004, what does that equate to in square footage?

If you assume that our average store opened -- that we open is about 7,000 square feet, times 25 net new stores, you know, that -- about 150,000, 175,000 square feet increase which is probably about 2%.

Okay. And my final question is.

Can you talk a little bit more about what you are doing in commercial, you know, it seems like, you know -- I think that you have an 8% comp in both retail and the commercial side. Is that something that we can expect this coming year and also this quarter?

Well in our --

Well, I guess on top of the divergence or the convergence between retail and commercial?

Well, in that mid single digit comp that we gave guidance on the call, we're expecting it to be the same in commercial and in retail.

Great. Thank you very much.

Okay. Thanks.

Once again to ask a question, please press the numbers one, followed by four, on your touch-tone telephone.

Our next question today is combing from Amy Norflus of Pilot Advisors. Please pose your question.

Hi. Good quarter. My question was just asked by Sid. Thank you.

Your next question is a follow-up question coming from Jacob Grossman of Goldman Sachs. Please pose your question.

It is Jake and Matt again.

One other question, I want to talk about the EBIT margin potential of the business. This quarter on a pro forma basis your EBIT margin was flatish, and it's the first EBIT margin that -- the first time this year that you didn't have a nice increase in EBIT margin and your numbers for next year do imply some additional leverage. How much more upside do you think you have here to your operating margin as you look forward to the next couple of years? And given that -- to the extent you see some, I would imagine that it would be expense driven given the mix shift you are seeing to the lower margin.

Matt, let me answer that.

If you go back to, you know, on these conference calls obviously everybody is familiar back in 2000, 2001 on the upside down balance sheet and so when we forecasted margins for 2002, we had a lot of -- a whole lot of step up allowances from vendors that it was more on a show me type nature in 2002, which made your gross margin for 2002 in the fourth quarter very strong.

Yeah.

So therefore, if you look at full year, year-over-year, those were more straight lined during the course of the year. So let's say if you got stepups where the vendor said, hey, look you prove to me that you are going to hit these volumes, I will give it. So in 2002, you got it in the fourth quarter. Because of our consistent increasing performance, those vendors allowed to us take it evenly during the course of the year. That's why year-over-year, in the fourth quarter you didn't see tons of increase, but you did see it on a full year basis.

Yeah.

Now, if you look at the years going forward, we've consistently stated that we think there's 40 to 60 basis points of improvement in our operating margins year over year and that's not, you know, pie in the sky. That's just getting back to the levels that we achieved back in '98, '99.

So we think, you know, if you look out the next three years we still there's 130 to 150 basis points improvement in operating margin, and, you know, depending open the balance of new products versus our existing products, which are doing very well, you know that could range from being a 10 to 30 basis points improvement in gross profit margin, or it could be flat on the gross profit margin and a 40 to 60 basis points improvement in your leverage of SG&A. It just is going to depend a little bit on your balance of sale.

But we still feel very strong that you are going to continue to get that 40 to 60 basis points, and, you know, that's kind of, you know, reflected in our numbers that said, hey, we're going to go from $1.08 to $1.42, to $1.47 next year which is another 35% increase in net income on top of 45% this year. You know, and then you've got to look out the next year another 40 basis points.

So to the extent that you didn't get it this quarter it's all about the timing of rebates a year ago and that should all be straight lined, you though at this --.

Yeah, you will see more consistency a year-over-year, you know because you had to prove yourself to the vendors.

Okay. Thank you.

All right.

Your next question is coming from Chris Kagoan of Millennium Partners.

Hi guys. You mentioned that same-store sales remained at the high single digits quarter to date.

I said -- I said a mid to high.

Okay. I guess could you remind us the monthly piece of sales in the first quarter of last year, just that we to anniversary the war and tougher weather -- we started to anniversary the war and the tougher weather conditions.

It tailed off the 14th of March for the rest of the quarter because of the CNN/Fox event where everybody was watching the bombs fly.

Yeah, we don't report comps on a monthly basis but if you remember a year ago, when we did our conference call, we told you the sales were running in -- and were consistent with the fourth quarter profit for year. And so I think you can figure that one out.

Okay, thank you, guys.

Your next question is coming from Jeff Kobilarrs.

Martin, you mentioned that customer service was up. Can you elaborate on that?

Yeah, we track our -- we have a Mr. Shopper program that tracks how our stores are doing on a -- on a basis of, you know, greeting the customer, taking care of the customer and our scores are up. There our store auto score is tracking performance in the stores is up. Our turnover remains at an all-time low in our stores, so our experience level in the store is higher and it has led to higher productivity and better service.

Okay. Good.

Do you have a feel for what the number of competitive openings against you will be in this current fiscal year?

It's -- it's varying, I would say in the total region, you know, between 40 and 60 stores, 20 -- be 19 to 20 states chainwide. Jeff, our Senior VP that runs the real estate group is here, and we always track, you know, obviously, they know what we are doing because the developers tell them and they tell us. But we -- from what we know right now, we don't see a significant increase in our market areas, versus the other ones. Is that correct?

Yes.

Okay. So do you have a feel versus last year, what the base of new openings --

No.

No, we really don't.

It -- it's -- it's stable. It's not like there's an onslaught coming.

Okay.

And do you have any general comment about deals from vendors, either at the front of the store or the back of the store? Are they heavier in supply these days and offering better deals? Or are they getting tiger with their inventory and don't need to offer as much?

Well, I can just state that to our stores our service levels, supplying product to the stores are at an all-time high.

Yeah, and Jeff, this is Don, if we think that the vendors relationship is, like Maynard says pretty equal between the replacement parts and the commodity-type guys, I think the focus with us is more of, you know, hey, what can we do with our vendors to improve profitability in the supply chain, so both the vendors and ourselves can both make money versus, you know, making it a one-sided thing and, we think that that helps the industry in general.

Right. Okay. Thanks very much.

The last question today is coming -- is a follow-up from Jack Balos with Midway Research.

Regarding your new stores that were opened last year what was their annualized volume? And how do they compare with new stores that opened in 2 802?

If, you know, when we do a new store, we assume that on a full-year basis they come out doing about $1 million a year. That has been up -- you know I've got to tell you that the real estate that opened in 2 803 came out of the ground doing better -- 2003 came out of the ground doing better than it did in 2002, which said that our real estate site selection did a very good job with the demographics to put the store on the right spot.

On a full-year run rate.

Right.

Now, assuming that they don't all open the 1st of February and then operate for the full 12 months.

Right, well, you can seasonally adjust and annualize, I assume.

Yes.

Of the stores that do have commercial delivery, do they have -- are those stores higher average volume per store than stores that do not?

Yes.

How much higher?

Yeah, I think what you've got to assume is that, you know, you've got about 250,000 to almost 300,000 of commercial sales in one of those stores, so you assume that it's about -- on a full-year annualized, it's about two, 250.

The reason why we don't have it in 1114 stores is the incremental costs that it takes to operate a commercial center, everything is charged to that commercial center and that location has to make money on an incremental basis.

It's cheaper to deliver.

And it's -- if it doesn't, we don't do it.

Okay. Thank you.

Thank you.

I would like to turn the floor back over to the speakers for any closing comments.

Thank you all for participating today and we'll talk to you at the end of next quarter, next reporting time. Thanks a lot.

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