O'Reilly Automotive Inc (ORLY) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSK Auto Inc. first quarter 2004 earnings conference. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Maynard Jenkins. Sir, the floor is yours.

Good morning. Thank you, Ashley. Thank you for joining us on our first quarter conference call. Joining me today on the call is Martin Fraser, our President and Chief Operating Officer; Don Watson, our Chief Financial Officer; and Lon Novak, our Chief Administrative Officer.

At this time I would like Lon to address the forward-looking statements disclosure concerning this call, as well as provide an outline for the call. Lon?

Thank you, Maynard. Good morning, ladies and gentlemen. And welcome to our first quarter call. Certain statements within this call are forward-looking statements. These statements 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, including but not limited to, competitive pressures, demand for our product, 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 following financial information is presented on a GAAP basis. Don Watson our Chief Financial Officer, will include in his remarks for purposes of assessing the comparability with our financial performance with prior periods, a discussion of free cash flow, which is a non-GAAP measure. The corresponding GAAP measure on a reconciliation with the non-GAAP numbers are available in the company's earnings press release issued yesterday, which is posted on our website at www.cskauto.com under investors then press releases.

I would like to define a few key terms we will use during the call. First quarter refers to the 13 weeks of fiscal 2004, ending May 2, 2004. Last year refers to the 13 comparable weeks for the first quarter of fiscal 2003. 2004 refers to the 52 weeks for this current fiscal year. 2003 refers to the 52 comparable weeks for the prior fiscal year.

I would now like to provide you with an outline for today's call. First, Maynard will provide an overview of the first quarter and touch on some of our accomplishments. Next, Martin will discuss our key operating results. Third, Don will review our first quarter financial results and address our financial outlook. Maynard will conclude with our goals and key initiatives for 2004, and then we will open the call up for your questions.

I will now turn the call over to Maynard Jenkins our Chairman and Chief Executive Officer.

Thanks, Lon. We are pleased to report continued strong financial and operational results for the first quarter. Net income for the first quarter was 28 cents per fully diluted share, which is at the high end of our previous guidance issued on March 18, 2004, of 26 to 28 cents per share.

Total sales increased to 397.1 million from last year's 377.4 million. The company achieved the same-store sales increase of 5% for the quarter. At the same time, we reduced our FIFO inventory by over 10 million, or 2%. We are pleased with our ongoing efforts to improve the productivity of our merchandise inventory. This focused on our FIFO inventory is resulting in improved inventory turns and reduced inventory per square foot.

In addition to our strong sales increase, we have increased our gross profit margin rate by 110 basis points over last year. This represents an increase in our gross profit dollars of 8% or 13 million for the quarter, compared to the same quarter last year. Our net income for the quarter was 13 million or 28 cents per fully diluted share compared to 7.5 million, or 17 cents per fully diluted share for the same quarter last year. This represents a 72% increase in dollars, and a 65% increase in earnings per share year-over-year.

Our business continues to benefit from strong industry fundamentals. The size and age of the automotive fleet, number of miles driven annually per vehicle, and number of licensed drivers continues to increase. In addition, the number of light trucks, including SUVs continues to increase. These vehicles cost more to maintain than the average car, and this is very positive for our business, and the entire industry.

On a shorter-term basis, higher gas prices, though not desirable, present opportunities for promotion of vehicle repairs, maintenance and the products that reduce gasoline consumption. We continued to hold the Number 1 market position in 25 out of the 28 geographic markets in which we operate, based on store count.

At the end of the first quarter we operated 1,117 stores, including 586 commercial centers. Compared to 1,108 stores and 555 commercial centers at the end of the same quarter last year. During the quarter, we opened 7 new stores, relocated 2 stores, expanded 1 store, and closed 4 stores, for a net increase of 3 stores.

We are on track to meet or exceed our goal of approximately 45 stores for 2004 consisting of approximately 35 new stores and 10 relocated stores. The company expects to close a total of approximately 10 stores at or close to the end of their lease expirations in 2004. This will result in net store increase of approximately 25 stores or approximately 2% increase in square footage for 2004.

Now, I would like to turn this call over to Martin Fraser our President and Chief Operating Officer for his comments.

Thank you, Maynard. And good morning, everyone. As Maynard mentioned, we are pleased with our performance in the first quarter. I would like to take this opportunity to discuss some factors that drove our strong results. Our core products continued to drive our results. Of our first quarter same-store sales increase of 5%, 4% came from our retail business, and 1% came out of our commercial sales area.

Our merchandising department continues to introduce new and exciting products and exceptional values into our mix, to compliment our everyday core categories. These new items, along with a broader selection of core products, have enhanced the customer experience inside the store, giving our customers additional reasons to shop our stores.

We are continuously reviewing and updating our core product categories, such as batteries, brakes, shocks, starters and alternators to ensure that we are meeting our customers' expectations. For example, we have recently introduced a new battery line. Thus far, sales for this line have exceeded our expectations.

Our marketing program continues to drive strong sales through a comprehensive mix of advertising media, sales promotion, event marketing, and sports sponsorship. During the first quarter, we introduced our new "We Got It" ad campaign which speaks to our broad assortment of replacement parts and accessories. Our extensive print advertising program is supported this year with additional broadcast and outdoor advertising, reinforcing our "We Got It" message.

We've increased the flexibility of our ad plans to take better advantage of local market sales opportunities and seasonal trends which are important to a chain with our geographic range. We have continued to expand our sports sponsorship program to include major and minor league baseball sponsorships in markets across the chain. The baseball season runs right through the heart of our primary selling season. Our sponsorships build customer awareness and traffic through sales promotions while creating local market customer loyalty through our support of the home team.

CSK continues to use motor sports as a way to reach our customers. We are utilizing our major NHRA and NASCAR event sponsorships in chainwide consumer sweepstakes to increase store traffic and excitement. We are also working with the NHRA to address a serious public safety issue.

In March, we introduced our "Race on the track, never on the streets" public service program. In each CSK market visited by the NHRA championship series, our drivers visit high schools in association with local law enforcement agencies, to speak against illegal and dangerous street racing. The public and media response to this program has been extremely positive.

Comparable sales were strong in all regions of the company. Balanced growth across all regions shows the strength of our merchandising and operational model. The California area continues to lead the company comparable sales growth, but only by a small margin. Superior customer service has contributed to higher average tickets, fewer returns, and improved customer satisfaction. We remain committed to our great customer service program.

Strong synergies between retail and commercial areas of our business continue to improve our efficiency, productivity, and overall operating effectiveness, as well as enhance our sales approach for both our retail and our commercial customers. Commercial sales, which represent approximately 17% of our total sales, finished the quarter with a 6% same-store sales increase. We believe strongly that our offering of a broad assortment of brand name products represents quality to our commercial installers. We remain committed to offering the professional installer brand name products, supplemented by value-priced generic lines.

We also continue to focus on enhancing all aspects of our commercial sales program with new and innovative merchandising and marketing programs. We have developed more focused marketing and merchandising strategies which recognize the unique needs and expectations of our commercial customers. These strategies include specific targeting of chain product categories designed -- excuse me, a certain product categories designed to improve the commercial customers' business.

In addition, our commercial sales organization has done a terrific job of bringing the business to our customers, increasingly satisfying their needs, product selection, and mix at reasonable prices with maximum convenience. For example, our updated and exciting website, www.cskproshop.com allows our commercial customers quick, convenient online shopping with no hassle prompt delivery to their place of business. And our commercial customers have embraced our new electronic signature capture billing program for its ease and use.

We are committed to partnering with our commercial customers to make their businesses as productive as possible. Finally, our enhanced commercial marketing and merchandising strategies and initiatives have continued to improve our national accounts business which have exceeded our expectation for year-over-year growth.

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

Thank you, Martin. And good morning, everyone. We are pleased with the financial results for the first quarter. Net sales for the first quarter were 397.1 million, compared to 377.4 million last year. This represents a first quarter same-store sales growth of 5%. 4% of the same-store sales increase came from retail sales, and 1% of the same-store sales increase came from the commercial sales.

Sales of promotional, non-core products for the first quarter represented nearly 4% of our total sales, but less than 1% of our total same-store sales increase. Gross profit for the quarter was 188.6 million, or 47.5% of sales. Compared to 175 million or 46.4% of sales for the last year.

On a percentage point basis, the gross profit rate for the first quarter increased 110 basis points. This increase was achieved through our ability to negotiate better acquisition costs of our inventory, improvements in our balance of sales through our category management systems, and reduced inventory shrinkage through improved store procedures and enhanced inventory control systems.

Operating and administrative expenses for the quarter were 159.1 million, or 40% of sales, compared to 148.8 million or 39.4% of sales last year. This year-over-year increase on a percentage points basis is attributable to higher incentive payments and benefit costs associated with our employee compensation programs.

Operating profits increased to 29.5 million, or 7.4% of sales, compared to 26.2 million, or 6.9% of sales for last year. This is a 50 basis points increase which is slightly higher than the previous forecasted amount.

Interest expense for the first quarter decreased by 5.6 million, to 8.3 million, compared to 13.9 million for the same period last year. This decrease is a result of our new financing completed at the end of fiscal 2003, and our improved financial results that have reduced our borrowing needs.

Net income increased by 72% in the first quarter to 13 million, from 7.5 million last year. Earnings per fully diluted share for the first quarter increased to 28 cents per share on a base of 46.9 million shares, as compared to 17 cents on a base of 45.2 million shares for the first quarter last year. This represents the high end of our previous guidance, and an approximate 65% increase in our earnings per share over last year.

Some of the key financial performance measures for the quarter are as follows: Total debt year-over-year continues to decrease and decrease by 36 million year-over-year. Net debt at the end of the quarter was $465 million. Free cash flow was approximately 10 million. And at the end of the quarter, the company had no borrowings under its revolving credit facility.

Cash on hand increased 29 million year-over-year, to 44 million at the end of the first quarter from 15 million from the same period last year. Accounts payable increased 11 million during the first quarter. And our payables leverage continues to increase as a percent of our inventory.

Our outlook is as follows: Since the beginning of the second quarter, our same-store sales have been slightly softer than expected, but still remain positive. The lower sales reflect cooler West Coast temperatures over the past 3 weeks. But we also believe that the sales will begin to strengthen as the temperatures have begun to heat up. As a result, we continue to forecast same-store sales increases for the full year of approximately 3.5 to 4%.

We are also increasing our full-year net income guidance to a range of 67 to 70 million, or approximately $1.44 to $1.48 per diluted common share. This is up from the $1.42 to $1.47, assuming 47 million shares that the company gave at the beginning of the year. This is a full-year increase in net income of approximately 40% in dollars, and 35% increase in earnings per share. We are also forecasting free cash flow for the year of approximately 80 to 85 million.

So at this time, I will turn the call back over to Maynard.

Thanks, Don. As Lon mentioned at the start of the call, prior to taking your questions, I would like to share some of our primary goals and key initiatives which are already well underway for 2004.

First, we remain focused on reducing our debt while at the same time utilizing our capital to maximize our return on investment.

Second, we will accelerate our store growth. We are on track to open or relocate approximately 45 stores in 2004, as compared to 25 in 2003.

Third, we will continue to strengthen our vendor partnerships to reduce costs from the supply chain and reduce our merchandise inventory. This will improve the company's merchandise turn to an all-time high.

Fourth, we will continue to scrutinize and reduce all expense line on our business, and further reduce our SG&A costs.

And finally, we will continue to focus on our customers' needs through our ongoing improvements in our great customer service program.

Ashley? Now I would like to open it up for your questions.

Thank you, the floor is now open for questions. If you have a question, please press star, then 1 on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, that you pick up your handset to provide optimum sound quality. Once again to ask a question, please press star, then 1 on your touch-tone phone at this time.

Our first question is coming from Jacob Grossman of Goldman Sachs. Please go ahead with your question.

Good morning, gentlemen.

Good morning.

A question on the bonus and discretionary comp cost, I was wondering, do you expect that to recur in subsequent quarters?

Jacob, no, it is not going to.

Okay. Secondly, I was wondering if you could provide some detail on the inventory pull back and maybe some insight into whether that negatively impacted your comp in the quarter in any way?

Well, we're really not dissatisfied with our comps, and secondly, we told the industry and the Street quarter after quarter that we were continuing to review our merchandise mixes, and with adding incremental product, we were taking a look at slower-moving product, continuing to review our offerings, and remove nonproductive merchandise, and that's exactly what we've done. It did not hurt our comp sales at all.

Jacob, our category management systems have allowed us and are going to continue to allow us to better refine our product mixes on a per-store basis so we get better performance out of our inventory.

Okay. Thank you. That's helpful. And finally, if you could -- if there is any detail you could provide on how business progressed during the quarter?

Jacob, this is Don. We usually give pretty good guidance of where we're at for the full quarter, and what we expect for the full quarter. But I don't think it is beneficial to us or our competitors to tell you at this time whether February, March, or April was any different.

Okay. Fair enough. Thanks, guys.

Thank you. Our next question is coming from Matt Neemer from Thomas Weisel Partners. Please go ahead with your question.

Good morning, gentlemen.

Hi.

First question, can you get into a little more detail on what new products you have introduced during the quarter? And maybe specifically in kind of the non-core categories?

Well, as we've stated in the past, this is a continuing revision. It is not like a point in time where you had an incremental product a year ago, and it goes away and never comes back, we're continuing to review our line, as previous examples are jack and ramp category, as a complete category, is completely different than it was 2 years ago. A lot of that product was offered in the last year and a lot of that product remains stocking SKUs and every-day product today.

But I will give you an example. We have added in the last few months a 3,500 watt generator that is just flying out of our stores. And whether it is a 3,500-watt generator or a 3,000-watt generator, at this time next year, that SKU or merchandise offering will be a stocking SKU on a daily basis.

These items continue to really move into the core side of our business. I mean we introduced several new tool sets this year that have done very well. Maynard mentioned the generator. We also introduced our new line of auto life batteries which have exceeded our expectations. We've introduced a few new categories on our personal, wheel category business has done very well.

Okay. And then on the gross margin, can you give us any sense of what we should look for for the rest of the year? I mean you had a pretty strong increase this quarter. Should we sort of flow that through the rest of the year or what are you thinking?

No, Matt, I think if we look for the remainder of the year, we're not as promotional in the first quarter as the rest of the year, so we will see some of those higher ticket items increase, gross margin dollars, but lower gross margin rates for the rest of the year. But we would still expect about 15 basis points increase in gross profit margin year-over-year for the next 3 quarters. And somewhere in the neighborhood of 25 basis points increase year-over-year for the last 3 quarters of leverage and SG&A.

Okay. Great. That's helpful. And then lastly, your share count was down a little bit from the last quarter. I'm just wondering if you're buying back shares, and if you are, how much capability you have there?

Well, two things: One, the share number is down a little bit year-over-year. Just due to the fact that the price of the shares in the marketplace, so you don't have as many in the money type. And then second of all, we did go to our bank and get permission to do up to $25 million of a share buyback immediately if we so desire, and when our senior debt to EBITDA gets to 1.5 to 1, we can buy an additional $20 million of stock, over and above that, so we believe that we have the opportunity to buy back 45 million.

But to date the company has repurchased no stock.

Okay. But that option is available to you starting today?

Yeah.

That option is available starting Tuesday because we are in a closed window.

But the option is at hand here, but I must say that that is also an issue that we will deal with the Board on the share repurchase and go forward.

Okay. Great. Thanks very much.

Thank you. Our next question is coming from David Siino of Gabelli & Company. Please go ahead with your question.

Good morning. Don, a question on inventory. Was there any LIFO credit in the quarter?

Yeah, if you look at LIFO year-over-year, the company is still -- we still have got the ability to obtain lower prices, which is good for the industry.

Sure.

But on a comparable purpose -- comparison, this year we had $1.2 million of LIFO credits versus last year, it was almost 8 million.

Okay. And is there any indication that -- are you seeing any inflation in any lines?

Yeah, I think we have had a lot of cost decreases, but you also -- there would be an offset, I'm sure as everybody else has told you in oil and in steel, which hurts you in the other categories.

Okay. Thank you.

Thank you. Our next question is coming from Derrick Irwin of Advest, Inc. Please go ahead with your question.

Good morning. My question is sort of related to Matt's. If you can talk about the status of your strategy of high ticket low gross margin items going forward. As you mentioned, they represented a reasonably small piece of same-store sales for the quarter, which may have been due to promotional items, but is that still a focus for you guys in terms of driving sales going forward? Or should we expect to see more sales driven by core items like the brakes and what not?

It is a combination of really all of those things. I think to Don's point, the softening at the end of the quarter we got in sales had nothing to do with the promotional product or a lot of the core categories. It was really heat items, and as an example, our air conditioning and replacement, after-market replacement parts in those categories suffered a bit, but as things heat up, as an example, in the Southwest today, it is going to be 112, and we're starting to see some energy going to those categories.

Now, when you take a look at the overall strategy, the strategy continues to be, let's make the four-wall box more productive, and we're just not taking a strategy of offering high-price, low-margin merchandise to drive the top line. We are in the auto parts business. We will continue to be in the auto parts business. And some of the things that we have done were pointed at just making the boxes more productive, and we found out that there is a lot of product in this mix offering that we have today that our customers said they wanted to buy in an auto parts store.

Derrick, our promotional activity will continue to feature these items our customers want at great values. And we will continue to introduce new items and have new exciting items for our customers that we can promote. But on the core side of the business, I mean we're going to continue to drive our sales through availability, customer service, and our new category management systems that makes sure that we're in stock and have the offerings that our customer want when it comes to the part side of the business.

Okay. Thank you. Very quick question. You, I believe, raised guidance a little bit for Q2. Could you just comment on what was driving that? What you feel is driving your -- caused you to raise it?

Well, Derrick, at the beginning of the year, we said we would have a range of $1.42 to $1.47. We also had a little larger range in the second quarter of 37 to 39 cents. We did raise that to 38 to 40 cents for the quarter. We believe margins and the leverage of our SG&A will continue to be better. We continue to do a better job at lowering our debt, which helps our interest, and I think we still have a lot of opportunity to leverage the SG&A, although the SG&A in the first quarter was a little higher, due to the 3, just over 3 million of comp that we talked about earlier.

Okay. Then a couple more quick housekeeping things if I could. I was a little unclear, commercial comps versus retail comps, did you say -- what were they again?

Commercial comps were 6%, and retail were 5%.

Okay. Thank you. And D & A?

Depreciation and amortization was 8.4 million. 1 million in amortization and 7.4 in depreciation.

Great. Thanks so much.

Thank you. Our next question is coming from Wayne Cooperman of Covelle Capital. Please go ahead with your question.

Hey, guys. Just on the comps in the first quarter, could you -- what was that exactly? And does that -- I mean was that for last year? Shouldn't it be accrued into last year's numbers?

Well, here is what happened, Wayne. With our -- the way our bonus program is defined, there was no provision in there for one-time charges. The comp committee during the first quarter met and approved those comp charges in the first quarter, so they have to be expensed in that quarter, and by rules, you can't accrue a comp that hasn't been approved.

Right. But it was really for -- it was really an '03 type number?

Yes.

And for this year, the -- then that will be accruing based on -- ?

I mean we were always accruing based on exactly what we needed. And the comp committee had to make a decision to approve it.

Okay. Thanks.

Okay.

Thank you. Our next question is coming from Jack Balos of Midway Research. Please go ahead with your question.

Regarding your inventory, what is your in-stock position now versus last year, and what are your inventory turns?

The inventory turns have grown year-over-year about .2 basis points from 1.47 to 1.59.

Our in-stock position is just marginally better than it was last year. But our in-stock position is very good in our stores. We have an excellent perpetual inventory system that does automatic replenishment at the stores and warehouses and our in-stock position is extremely high. It is high 90s.

Okay. And regarding your in-stock position by store, do you customize it? Do you have data in terms of the vehicles that are registered and the store locations?

Yes, our category management system tailors the inventory on a per-store basis. So just by way of example, we know that in the San Jose area, that 54% of the cars that are looked up on those stores are import cars and in El Paso that number is more like 8%. So you would carry more import in San Jose than you would in El Paso. And that's all brands, makes, models.

And to your point as far as registered vehicles, you have to be a little bit careful there, we take a different slant on this whole thing, and mix each individual store by individual look-ups and what the customers are looking for.

You may have registered vehicles in south San Jose that a majority of the customers or a large percentage of the customers may be shopping in San Leandro, which is a different marketplace and they shop in a store because of their proximity to work and the way they commute back and forth. So we key things in on what is actually being looked up and asked for in an individual store on how we mix that store.

I see. But you also have, I guess, outside data in terms of what vehicles are registered in various places?

Yes, we do, but as Maynard said, we primarily use the data that we collect in our stores from the vehicles that are actually looked up in those stores.

Okay. And one last thing. Regarding your new battery line, is that supplement to what you have or is it new? And is it in the good, better or best category?

It replaces what we had, which we already had a good better best merchandise mix. But we took a look at the graphics, the quality of the batteries, and all those things, and through a normal line review, we upgraded the whole thing and we think we have a real winner.

Did you also have to upgrade your pricing for the better quality?

Well, actually, in some areas, we took our pricing down, because we didn't have to pay, as an example, royalties on the NASCAR line of batteries, that didn't prove that we were getting the results out of.

I see. Thank you.

Thank you. Our next question is coming from Michael Weisberg of ING. Please go ahead with your question.

Yeah, what does your guidance for the year imply in terms of your SG&A ratio for the year? Because I thought you had some recurring costs in California in terms of --

We looked at the first quarter and you exclude the comp charge, we would have been on a comparable basis 39.2 as a percent of sales versus 39.4 as a percent of sales. And as I stated a little earlier, we would expect year-over-year for the next three quarters, SG&A year-over-year, to leverage about 25 basis points.

Okay. What kind of a comp do you need to be able to drive that?

And as we stated, we think, we had 5% for the quarter, we still remain very confident that we will have a 3.5 to 4 for the full year, which would imply somewhere in the neighborhood of 3 to 3.5 full for the next three quarters. And you start looking at a two-year blend there for the rest of the year, it assumes a two-year blend between 4.5 to 5%, in an industry that is growing 1 to 1.5%, so it is an indication that we're still taking market share.

Okay. Are you doing anything -- one of the things I think you had talked about is a possibility of increasing your percent ownership in stores at some point. Are you doing anything in that regard?

Well, one thing we will look at that, we had a very strong strategy for the last couple of years to reduce our debt. Our debt is at a very comfortable level. We have no borrowings on the revolver. We would generate during the course of the year somewhere in the neighborhood of 80 to 90 million of free cash flow, which would primarily be used to reduce debt, but as Maynard stated earlier, when your stock is trading way below the industry, and at 11 times earnings, you got to say hey, you got to balance that and look at that option.

Do you have the freedom in terms of your debt covenants to buy stock back?

Yeah, we have 25 million immediately and at the end of the second quarter, we will have the ability to do another 20. So 45 million by the end of July, we'll have the ability.

Okay. You haven't indicated that you're actually going to buy. That's just what is allowable, is that right?

That's right. And it is also an issue that we discuss with our Board and we will get Board approval to have a share repurchase program.

Okay. It sounds like at this point -- with the stock here, that's a better use of cash than increasing the owned as opposed to to leased stores.

Yeah, we think right now, the paying down debt, or stock repurchase has a much better return for the shareholders than owning properties would be at the same time. But when you start comparing us to some of our competitors that own 90% or 50% of their stores, in one case, it gives them a 650 basis points difference in operating margin, and another large competitor owns about 50% of their stores, and it gives them a 350 basis points improvement. So look, right now, our debt to EBITDA is under 3. That is down from in excess of 5. We feel very comfortable running at this level. So, look, right now, like I said, it is a value on the Street and we are going to take that very serious, but then again we don't have an open window until Tuesday.

Right. Thanks a lot.

All right. Thanks.

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

Yes, it is actually Scott Nesson on Alan's behalf. Just a few questions actually. I was wondering if I can get a little more color on the inventory per square foot, where that might track for the year as you continue to streamline the mix. Any change in the pricing environment? How the comp was in proportion with traffic and ticket? And as a housekeeping question, your tax rate was up a little bit in the first quarter. How should we model that for the remainder of the year?

Well, there are a couple of things that are going on. Let's answer the tax rate question first. We have basically a certain amount of tax credits that are allocated to the company. When you start making a lot more money in the areas of California and Minnesota where the tax rates are higher, you have a higher tax rate offset by a flat amount of credits out there. We believe that 39 to 39.1 is a good rate going forward.

Okay.

The pricing environment has remained remarkably steady. There's really not a lot of pricing changes in the marketplace right now.

And back to the -- Scott, on the question of inventory per square foot, we would expect inventory year-over-year to be down between 25 to 30 million and you assume somewhere in the neighborhood of just over 8 million square feet in our stores, that that is about 3.5%.

Okay. Great. Thanks very much, guys.

Thank you. Our next question is coming from Gerald Marks of Raymond James. Please go ahead with your question.

Good morning.

Good morning.

I didn't catch it, did you give a shareholder's equity number?

Hold on here a second. Shareholder's equity is 344,971,000.

Okay.

Approximately.

And the other question I had was, did I catch it right, 10 million of free cash flow, Don?

Yeah, 10 million of free cash flow. And if you look year-over-year, we spent 4 million of capital expenditures in the first quarter, versus 500,000 in the first quarter last year. And that's because we have a more even store opening plan this year than we had last year.

But I guess it implies a use of working capital and I was just wondering with inventories going down and payables going up, kind of where that use came from.

If you look at, just off the top of my head, accounts payable was down, you have receivables up a little bit, and prepaid up a little bit, but you also, if you looked at operating cash flow, year-over-year, was 15.4 last year, 15.1 this year, so it is very consistent. The difference is that you have 4.5 million of capex this year and .5 million of capex last year.

Okay. Okay. That's the difference. Okay. Thanks.

All right.

Thank you. Our next question is coming from Michael Cox of Piper Jaffray. Please go ahead with your question.

Hi, guys. If you could provide some detail on the gross margin. I think you cited 3 factors that drove the improvement year-over-year. Could you quantify those 3 factors?

Well, in detail, I don't know competitively that that's the right strategy, but we gave 3 reasons, 1 is a better mix, 1 is lower inventory, improved pricing management, lower acquisition cost, and lower store shrinkage due to the store systems. You could assume that's about a third, a third, and a third.

Okay. Great. That's helpful. And then lastly on your store opening and closing schedule, I think you just mentioned it was going to be balanced. Do you have estimates for that for the next 3 quarters?

We will have Lon answer that question.

Again, we're targeting approximately 45 new or relocated stores for the full year, and we opened 10 in the first quarter, so our trend is looking like we're going to be in the 10 to 12 range for each of the next 3 quarters. So as Don mentioned, it is spread out fairly evenly over the 4 quarters.

And the same with the closings, I assume?

The closings, we have an estimate of 10 closings for the full year. We closed 4 in the first quarter. And we look to close approximately 2 in each of the next 3 quarters.

Great. Thank you very much.

Thank you. Our next question is coming from Keith Curtis of Brant Point Capital. Please go ahead with your question.

Yes, I'm sorry just to clarify something. Did you say you have the buyback authorization in place now or what is that 25, 45 million?

We have authorization from our banks to buy back up to 25 first quarter, when we're 1.5 to 1 senior debt to EBITDA, we can go from 25 to 45.

And but that doesn't mean we have the authorization from the Board today to buy the stock back. We will deal with the Board currently on that buyback program.

Will you ask the Board for an authorization?

Absolutely.

And when is the next Board meeting?

We don't have to wait for a meeting. We can have a telephone conversation with them. We can't buy any stock back anyway until the window opens, which is a couple days from now.

Right. Perfect. Thanks a lot.

At this time, there are no further questions in the queue. I would like to turn the floor back over to the presenters for any closing remarks.

Thank you all for participating today and we will talk to you at the end of the next quarter. Thanks a lot.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.