O'Reilly Automotive Inc (ORLY) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the CSK fourth-quarter 2004 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Maynard Jenkins, Chairman and CEO of CSK Auto, Inc. Sir, you may begin.

Thank you Matt, and good afternoon. And thank you all for joining us for our fourth-quarter conference call. Joining me on the call today is Martin Fraser, our President and Chief Operating Officer; Don Watson, our Chief Financial Officer; and Randi Morrison, our Vice President, Assistant General Counsel and Secretary.

At this time, I would like to turn it over to Randi, who will address the forward-looking disclosure concerning this call as well as provide an outline for the call. Randi?

Thank you, Maynard. Good afternoon ladies and gentlemen, and welcome to our fourth-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. These forward-looking statements are subject to risks, uncertainties and assumptions including but not limited to competitive pressures, demand for our products, the overall condition of the economy, factors affecting the import of products, inflation, consumer-debt levels, factors impacting consumer spending and driving habits, conditions affecting new store development and weather conditions, risks relating to compliance of Section 404 of the Sarbanes-Oxley Act, and litigation and regulatory matters. Actual results may differ from anticipated results described in these forward-looking statements.

Additional information regarding these and other risks is contained in the Company's periodic filings with the SEC. As we noted, the following financial information is presented on a GAAP basis. Maynard and Don will include in their remarks for purposes of assessing the comparability of our financial performance with prior periods, a discussion of free cash flow and net debt, which are non-GAAP measures. Corresponding GAAP measures and reconciliations with the non-GAAP numbers are available in the Company's earnings press release issued earlier today, which is posted on our website at www.CSKAuto.com under Investors and Press Releases.

I would like to define a few key terms that we will use during the call. Fourth quarter refers to the 13 weeks of fiscal 2004 ending January 30, 2005. Last year refers to the 13 comparable weeks for the fourth quarter of fiscal 2003. Full year or 2004 refers to the 52 weeks of fiscal 2004 ending January 30, 2005. Full year last year or 2003 refers to the 52 weeks of fiscal 2003 ending February 1, 2004. Per-share refers to a fully diluted share of our common stock.

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

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

Thank you Randi. Although we continue to make progress on our key initiatives, a challenging sales environment in 2004 continues to have an adverse impact on our fourth-quarter financial performance but has improved in the first quarter of 2005. Same-store sales declined 1.9% for the fourth quarter, which was in the range of our previous guidance. However, we also recognized the strength of our 2003 sales performance created extremely tough comparisons for 2004.

While in the short-term, the sales environment has been difficult. We have seen our sales improve slightly in the first quarter of 2005 with same-store sales negative at 1.2%. We remain optimistic about fiscal 2005 and the long-term prospects of our business.

For example, our commercial business, which typically leads our retail business continues to improve. The sales to the commercial customers became positive in October of 2004 and have continued to accelerate throughout the first quarter of 2005. The same-store sales increase for the first quarter of 2005 on commercial was 5.6%. The increased sales of core products to our commercial customers reinforces our belief in the strength and growth potential of our commercial business.

Our cash position remains very strong with 57 million of cash on hand at year-end. At year-end, we had no borrowings against our $145 million credit facility other than the standby letters of credit. Our cash on hand has continued to increase with the expected cash balance at the end of the first quarter expected to be approximately $90 million.

For the full year of January 2005, we generated 76.5 million of adjusted free cash flow, as defined in our press release. Our net debt, as defined in our press release, has decreased by 48.8 million during the year to 440.8 million.

The Company continues to focus on the management of merchandise inventory. During the fourth quarter of 2004 after a review of new municipal regulations and market conditions, the Company decided to exit the street scooter segment and certain other slack promotional merchandise. We have already aggressively priced and promoted these items for clearance. Although this decision had a negative impact on our fourth-quarter margins, we believe this decision conforms to our long-term strategy. And then, I will also say on this point, we are exiting the street scooter business and not the off-road scooter business, which we will continue to be in.

Effective in 2004, we made a voluntary change in our inventory accounting method from LIFO to FIFO. We believe that FIFO is a preferable inventory accounting method that better measures the cost of inventory, results in a better matching of revenues and the cost of sales, and more accurately reflects our financial position. Our expenses remained in line with our prior projection, even with our increased advertising expenditures and benefit-related expenses. I would like to extend a special thanks to our store operations group for their efforts in controlling store expenses during a challenging sales environment. We will continue to focus on opportunities to reduce expenses and improve efficiencies throughout the organization without sacrificing our long-term initiatives and objective.

Acceleration of our new store growth program remains on track. At the end of the fourth quarter, we operated 1,134 stores compared to 1,114 stores at the end of the same quarter last year, an increase of 20 stores. During the fourth quarter, we opened 6 new stores, relocated 4 stores and closed 1 store. For the full year, we opened 28 new stores, relocated 9 stores and closed 8 stores for a net increase of 20 stores.

We expect to open approximately 50 or relocated stores in 2005, consisting of approximately 40 new and 10 relocated stores. The Company expects to close approximately 8 stores at the close of their lease expirations in 2005. This will result in a net store increase of approximately 30 stores -- 32 stores or a 3% increase in total square footage. Our long-term objective is to continue to accelerate our new store growth. Despite what we believe to be short-term economic and business-related challenges, during the second half of fiscal 2004, our long-term sales outlook remains positive.

Over the long-term, favorable automotive aftermarket industry trends have a record number of vehicles on the road being driven more miles as well as an increasing influence of SUV's -- will result in increasing the average customer transaction, resulting in more dollars spent on automotive maintenance, repair and accessory-type items. We are optimistic about the enthusiasm of and demand by our Do-it-Yourself customer and commercial customers for our products given these solid industry fundamentals.

Although we are not at all satisfied with our current sales performance over the last 9 months of 2004, we are optimistic about our business for the remainder of 2005. We will continue to manage our business toward achievement of our longer-term goals and initiatives.

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

Thank you, Maynard, and good afternoon everyone. As Maynard stated, although we are not satisfied with our 1.9% same-store sales decline in the fourth quarter, we are pleased to report that our sales trends have continued to improve. For example, our average retail ticket continues to increase. Our commercial business, which typically leads our retail business relative to sales improvements, saw same-store sales of more than 4% in the fourth quarter on top of a 7.5% increase in the fourth quarter of last year.

Sales of many of our core items, such as breaks, drums, routers, batteries, battery accessories, shocks, plugs, cooling and fuel pumps trended well in the fourth quarter when compared to the previous quarters in 2004. As mentioned earlier, we have exited the street scooter business. The Company has however successfully transformed this category to an off-road mix of 2 and 4-wheel products.

We remain committed to our current merchandising strategies. We have continued to refine our core auto parts offering, improving our selection and inventory performance. Our merchants continue to introduce new and exciting items that maximize store productivity and bring value to our customers. These new items, along with our broader selection of core automotive products, enhance the customer experience inside the store, giving our customers additional reasons to shop.

In addition, we recently implemented a new individual store associate incentive program called "Great Rewards." This program will enhance customer loyalty, improve our relationships with our vendors, maximize store productivity, and more importantly, reward our store associates for great customer service.

The Company continues to innovate new system initiatives to better service our customers. This includes development of a new customer-friendly kiosk that gives our DIY customers the ability to look up even the most complicated of hard parts applications on their own. We believe this technology can revitalize the parts business, especially in stores with lower volume by improving store productivity.

In addition, the Company has developed a 5-inch touch screen electronic catalog that attaches to the shelf on the sales floor. This unit gives customers easy access to easy applications support products, such as filters, wipers, lining and other application parts on the sales floor. Growth projects are currently being tested in regions throughout the Company.

We recently implemented new advertising and marketing initiatives to increase the reach of our media marketing programs. Television advertising and NASCAR and in NHRA events has been introduced into our media mix in addition to cable television program targeting DIY'ers and automotive enthusiasts. Television media, in combination with radio, out-of-home advertising, and CSK's extensive major league baseball sponsorships will work to build brand recognition for the chain.

In addition, we are continuing our strong print media advertising program, which is focused on weekly sales promotions. New initiatives have also been undertaken in our Hispanic marketing program. This important and growing customer segment is currently estimated to account for 25% of all auto part shopping in our markets. It is estimated that Hispanic consumer spending will grow by more than 40% by 2010. To better serve the Hispanic market and to ensure that we're meeting the needs and expectations of this important customer group, we have recently joined forces with an advertising agency that specializes in Hispanic marketing to handle strategic and media planning, creative and grassroots efforts for CSK. The new integrated marketing campaign launched in the spring.

We continue to improve the support to integrate the retail and commercial areas of our business to improve our efficiency, productivity and overall effectiveness as well as enhance our sales approach for both our retail and commercial customers. Commercial sales continue to represent approximately 17% of our total sales. We believe strongly that our offering of a broad assortment of brand name products represents quality to our commercial customers. We remain committed to enhancing all aspects of our commercial sales program with new and innovative merchandising and marketing programs. We have developed additional marketing and merchandising strategies that recognize the unique needs and expectations of our commercial customers. These strategies include tailored customer loyalty programs and specific targeting of certain product categories designed to improve the commercial customer's visit. In fact, during March, we became the primary supplier to Big O Tires in all of our store coverage area.

We understand that the key to meeting our commercial customers' needs and expectations is to provide them with the products they want in a timely manner. We aggressively review and tailor our inventory mix to ensure that we're meeting the needs of our commercial customers. As we continue to focus on reducing our delivery times, we gain greater customer loyalty and enhanced customer satisfaction. Our commercial sales organization continues to take the business to our commercial customers increasingly satisfying their needs for product selection and mix at reasonable prices with maximum convenience.

For example, we continue to broaden the scope and functionality of our website, CSKProShop.com, allowing our commercial customers quick, convenient online shopping with prompt, no-hassle delivery.

Finally, consistent with our long-term strategy, we continue to grow our national accounts business, which we believe has benefited by our enhanced commercial marketing and merchandising strategies and initiatives. We will continue to focus on maximizing the shopping experience for all of our customers, broadening our commercial customer base and accelerating the growth of our commercial operations.

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. First, I would like to point out today's discussion on the financial statements -- reflects the restatements that were disclosed in our previously released 12V25 (ph) and Form 8-K and is detailed further in the Annual Report on the Form 10-K that was filed yesterday. The restatements reflect a voluntary change from LIFO to FIFO and required restatements relative to lease accounting, the change in the timing of recognition of vendor allowances, and the adjustments relative to previously recorded vendor allowances.

Our decision to change from LIFO to FIFO was made as a result of our belief that FIFO better measures the cost of inventories, results in the better matching of revenues and cost of sales, and more accurately reflects our financial position. In addition, the change will conform our book basis of accounting to the method used for our tax reporting and will promote additional efficiencies.

Net sales for the fourth quarter were 369.9 million compared to 372.3 million last year. This represents a fourth-quarter same-store sales decline of 1.9%, which is comprised of a 3% decline in retail and a 4.3% increase in commercial sales. Year-to-date total sales of 1.577 billion were essentially flat to the prior year. Same-store sales on a year-to-date basis decreased 0.7%. Gross profit for the fourth quarter was 163.1 million or 44.1% of sales on a GAAP basis compared to 172.8 million or 46.4% of sales for the last year. The year-to-date gross profit was 733.9 million or 46.5% of sales compared to 717.1 million or 45.4% of sales for the same period last year.

During 2004, gross profit improved due to the Company's ability to lower our acquisition costs of inventory and the improved inventory shrinkage. The margin improvements were offset slightly by a little bit lower vendor allowances. Operating and administrative expenses for the quarter were 157.3 million or 42.5% of sales compared to 156.9 million or 42.1% of sales the prior year.

Year-to-date operating and administrative expenses were 637.7 million or 40.4% of sales compared to 632.6 million or 40.1% of sales last year. The increase in year-over-year is attributable to higher advertising expenses and higher payroll and benefit-related costs.

Operating profits for the fourth quarter were 5 million or 1.4% of sales compared to 3.5 million or 1% of sales in the prior year. Year-to-date operating profits were 96.1 million or 6.1% of sales compared to 84.5 million or 5.4% sales the prior year. The year-over-year increase in gross profit for the reasons mentioned above were offset slightly by the increase in operating expenses.

Interest expense for the fourth quarter decreased by 3.1 million to 8.7 million compared to 11.8 million for the same period last year. Year-to-date interest decreased by 18.9 million to 33.5 million compared to 52.4 million for the same period of last year. The lower amount is due to the lower outstanding debt and the lower interest rate due to our refinancing in late 2003.

The net loss for the fourth quarter after giving effect of the restatements was 3.4 million compared to a net loss of 31.8 million the prior year. The year-to-date net income was 36.9 million or $0.80 per share compared to a loss of 9.6 million or $0.21 per share in the prior year. This is an increase of 46.5 million. Net income last year was negatively impact by 49.5 million of costs related to the debt retirement.

Some of our key financial performance measures in the fourth quarter and year-to-date are as follows. Net debt, which includes cash-on-hand, decreased by 48.8 million year-over-year to 440.8 million. Free cash flow, as Maynard mentioned earlier, was 75.6 million for the full year. At the end of the quarter, we had no borrowings under our credit facility -- revolving credit facility, other than letters of credit that are used for collateral of workers' comp claims. Cash-on-hand increased by 19.4 million to 56.5 million compared to last year. This number continues to improve with the first quarter cash-on-hand expected to be approximately 90 million. In accordance with our stock repurchase program announced in June, we have purchased approximately $23.7 million or 1.6 million shares of common stock outstanding.

Consistent with our long-term initiatives to reduce debt, during the fourth quarter, we redeemed the remaining 15 million outstanding balance of our 12% Senior Notes with existing cash-on-hand. Since early 2002, we have reduced our debt by just over 30%.

Our fiscal 2005 outlook is as follows. We're currently forecasting full year same-store sales increases of approximately 3%. We would expect to open or relocate approximately 50 stores in 2005. This will result in net new stores of 32 net new stores for the year, a square footage growth of approximately 3%. As a result, our net income for the full year is expected to be between 51.5 million and 57 million or $1.12 to $1.22 per fully diluted shares, assuming 46 million shares outstanding. The full year forecast does reflect a reduction of -- or an increase of 2.4 in lease accounting-related expenses, which reduces next year's number by about $0.04 a share.

First-quarter earnings per share expected to be between $0.16 and $0.19. Our forecast for free cash flow will be between 80 and 90 million, as compared to the free cash flow that we had this year of $75 million. We would expect to use the free cash flow primarily to further reduce our debt.

Now, I will turn the call back over to Maynard.

Thanks, Don. Prior to taking any of your questions, I'd like to update you on the status of our primary goals and key initiatives. First, we remain focused on reducing our debt, while at the same time utilizing our capital to maximize our return on investment and increase our cash flow from operations. Consistent with this objective, as Don indicated, we redeemed 15 million in the remaining balance of our 12% Senior Notes.

Second, we are accelerating our new store growth. We are targeting approximately 50 new or relocated stores in 2005, as compared to 25 in 2003 and 37 in 2004. Currently, we will continue to focus on maximizing the productivity in our existing stores. Third, we will continue to strengthen our vendor partnerships to reduce the costs of the supply chain. Fourth, we will continue to scrutinize all expense line in our business for opportunities to reduce our expenses and further reduce our SG&A cost without adversely impacting our key long-term initiatives and objective. Finally, we will continue to focus on our customers' needs through the ongoing improvements in our great customer service program.

In closing, I would like to once again -- to stress our commitment to our long-term business strategies and the growth potential of this business. Now, we would like to open it up to any questions you may have. Matt?

(OPERATOR INSTRUCTIONS). David Siino, Gabelli & Co.

Don, your free cash flow number -- if you're going to do a 55 net income, CapEx will be 10 million again in '05?

No, CapEx in '05 is expected to be about 28 million for the full year of 2005. And we would expect after that -- now remember, we don't own any of our stores, David, at this time. So that will generate about, after taking out those capital expenditures, probably closer to the 90 million.

Okay, so working capital will give you about 20 million or so?

Yes.

And just stepping back to the fourth quarter one last time, we hope, one time -- the gross margin was up for the year. Fourth quarter was down about 200 basis points. Were there any one-time items in the fourth quarter that knocked down the gross margin?

Yes, to answer that equation we did obviously have a charge associated with exiting the street scooter business. That was just over 4 million. In addition, we did revise our estimates and vendor allowances of just over 4 million in the fourth quarter.

8 million pre-tax then so --?

Yes.

So is that $0.80 for the full year? What is that about $0.10 in one-time items or so?

Yes. I mean one of the things that you have to remember, David, we've got to be careful here. Because we really restated the first 3 quarters of the year. And we really didn't restate the fourth quarter. So I am a little concerned trying to go through those numbers on a restated basis. I think if you take the year -- the easiest way to do that is to take the full year as disclosed in our K. And in addition to the K, you have the other 3 quarters adjusted, and you can back into that number.

Okay, good enough. And last question -- do you expect vendor allowances to be -- you mentioned that they depressed gross margin in '05 -- pardon me, '04. How will that play out in '05?

I think one thing you have to remember on the vendor allowances and that is why you see quite a bit of a downward movement in the first quarter of fiscal '05 -- remember when we switched from LIFO to FIFO -- in the LIFO basis, you have got to remember that those vendor credits come back to you a lot credit. So they are a lot quicker.

As you switch to FIFO, therefore you need to continue -- you get a number that I believe is disclosed on page 56 of the K of what is capitalize now -- like $60 million of vendor credit. You have to turn to your inventory now quicker. And as you turn the inventory -- remember we will now be turning inventory about 1.7 times -- you should see a much higher ramp-up of those vendor allowances in the second half of the year. (technical difficulty) your question?

Yes, it does.

Reed Anderson, FBR.

In terms of your first-quarter guidance, Don, what sort of comp does that bake in there? I'm assuming it still may be a little bit negative, or do you think it --?

Our first-quarter comp was 1.2% negative for the first quarter, which was pretty close to what we expected. And that was made up of 3% negative retail and 5.6 positive commercial.

I did not hear that; thank you. And then in terms of -- when you look at the expense side in '05, will you still see -- given what you are seeing for comps and stuff -- do you think that you still have SG&A de-leveraged throughout the year? Or is there an opportunity as we get later in the third and fourth quarter to maybe see a little year-over-year improvement?

I think the way -- one thing you need to focus on -- everybody should focus on is -- if you look at the restated numbers in '03 and '04, you end up with gross profit of 45.4% in '03, 46.5% in '04. And you get SG&A of 40.1 in '03 and 40.4 in '04. And that comes out with 6.1% operating profit. We would expect about 100 basis points improvement in operating profits next year coming probably half out of gross profit and half out of SG&A.

And by next year, you mean '05?

Yes, the one we are in now. February of '06, how about that?

That sounds good. And then last -- Martin, you talked about several of the kind of programs or things you're doing inside of the stores that sort of thing. I'm just curious are those officially in all stores? Are they in various test phases? Just kind of comment there -- give a little more color on that please.

The individual associates program I talked -- incentivize (sic) program I'd talked about is in all stores. The system developments of the kiosks and the small 5-inch electronic look-up catalogs are in test in all of our regions, so it's not in all stores.

So how many stores would you say it's in test in maybe?

Total, about 20.

Christina Boni, CSFB.

My first question just in terms of your EPS guidance -- could you translate us for that for fiscal '05 into EBITDA guidance?

Yes, if you take the full year of '05, that would translate into just over 151 million in EBITDA.

151 million, and that's at the low end in the point?

Yes, that's at the low end.

That is at the low end. Okay. And on the comps, obviously you showed some relative improvement in Q1. But given your 3% guidance for the year, how do you see that playing out in terms of the ramp-up throughout 2005?

One thing we should talk about -- if you look at last year, we had 5% positive comps in the first quarter, negative 3, negative 3, and then a negative 2. And when you look at the first quarter of a negative 1, you could see the progression continues to get better. We would expect that number to get up to -- it would probably go almost the exact same way, 2, 3, and then 4. You know, positive 2 in the second quarter and then 3 and then 4.

And then 3 and then 4. Okay. That is helpful. And also can you give us a sense on tax situation, it looks like you had a deferred tax benefit in 2004. Maybe if you just explain that, and what we should anticipate for 2005?

In the fourth quarter and actually it is a benefit due to California-enterprised zone credit that we got. Remember the number when you start looking at the restated number, about 400,000, moves your tax rate a lot. So we would expect a 39% tax rate going forward. And that is what it was in the first 3 quarters, excluding those tax credits.

Okay, great. And just for clarification -- I do not know if you could clarify just how you see Q4 EBITDA and the comparison to last year just to make sure we have got the right numbers.

I think you've got to look at the full year EBITDA of 147 million that can be calculated. And then go back and look at the first 3 quarters and back into it. We are just pretty restricted because of the changes in the fourth quarter to give you precise numbers in the quarter. But that should get you there.

Okay, but the 1.76, you talked about 8 million of add-backs. Is there anything else? You talked about 8 million in gross profit.

Remember that there is different calculations in the bank agreement of add-backs of accounting changes and a lot of other things. And I just don't think it's appropriate to do that reconciliation on the phone.

Okay, that is fair. And in terms of Q1, could you translate into EBITDA for Q1 in terms of your guidance of $0.15 to $0.19?

Yes, if you took the low end of our range, that would translate to 29.7 of EBITDA.

Michael Cox, Piper Jaffray.

I was wondering if you could comment on the timing of the leading indicator of your commercial sales and when we should expect retail sales to begin to pick up? And then a follow-up on the scooter business. I was wondering if you're adding SKUs to your off-road scooter mix, or if you're just simply clearing out the street scooter side?

I'll start with the scooters first. Because of local municipalities putting new regulations and ordinances against riding any of these type of unregistered scooters on the streets or the sidewalk, it changed the whole horizon. It was not that the customers did not want it. We made a calculated decision that maybe we ought to get out earlier rather than later. And a lot of times in the fashion business, the cliché is -- your first mark down is the best mark down. So importing a lot of this product, we took the bull by the horns and said, we are going to have to get out of that. Our mix is going to change. The scooter business is still good, but it's all going to be geared to the off-road segment -- and none of these regulations, other than the environmental regulations, where you cannot run them in national forests and things like that.

So, with that said, we're going to offer about 7 to 8 SKUs, broad mix of price ranges and quality, aiming at that marketplace and keeping the wheel good business strong.

Do you want me to do the comps now?

Yes.

Mike, on the comps, if you look at last year just to go back to that same analysis, second quarter was negative 3 in commercial. Then it went to 0, or flat, and then it went to positive 4, now positive 6. We have some really good things going, and we are continuing to take market share in the commercial side. What that would indicate is flat retail sales in the second quarter. And then, it would indicate probably somewhere around a positive 1 to 2. I don't have a crystal ball here, but that is what we are (technical difficulty) at this time.

If you remember, a year ago, second quarter, we said that our heat-related categories were under extreme pressure because we had not gotten any heat in all the marketplaces which we operate. We think that is going to turn around, and it is going to be a plus for us in the second and third quarter.

And then, if you go back and take a look at history -- and nobody wants to go that far back when you take a look comps sales -- but over a 2-year blend, we were running around 3% positive comps and a 3-year blend of about 4% positive comps, which is exactly in line with where all the experts say the industry is growing. We are not at all satisfied with our business on a comps side for 2004, but we think 2005 is going to rebound.

Okay, just one quick point of clarification -- Don, you had mentioned comps progressively getting better through '05. The numbers you gave, it would come out to sort of a year-end basis of about 2%. I was wondering if your numbers of 2, 3 and 4 in the back half of the year were on a 2-year basis or if that was --?

I think we were just staying at the -- we think we are going to end up -- -- you've got to remember on the comps, the second 2 quarters are much higher in dollars, which will tend to build that number up to 3 quicker. If you look at the third quarter of about 4% total comps, you are on a much higher base than you are on the first and fourth quarters.

Matthew Fassler, Goldman Sachs.

A couple of questions. First of all, just to dig a little deeper into sales -- if you look at the 2-year trend just adding together the numbers -- in Q4, you're up against a plus 8, you did a minus 2, so that's a 6. In Q1, you're up against the 5, and you are tracking towards a minus 1, so that is a 4. So you are seeing a little bit of 2-year deceleration in the 2-year run rate. So I guess, what gives you the confidence that you're going to see that 2-year run rate stabilize or pick up just a little bit to get your numbers? Do you still think there's something going on in the economy that you expect to change? Is there a market share dynamic that you would expect to change?

Well, I think we believe that if you look at last year, we had a tough summer along with everybody else with a lot of heat-related products. And then you really have to go back to the industry. If you look at the industry over the last 6 to 7 years, it's pretty consistent that over a period of time, you average 3% sales. And we are certainly not losing market share along the way.

So we believe if you look at what we talked about last year in the second quarter that we lost about $20 million of heat-related product compared to the prior year. Remember if you just get, let's say 60% of that back that we feel pretty confident that that gets you to your sales number.

And any impact from Pep Boys' remodels in San Diego or L.A. impacting your stores in those markets?

No, our comps in Southern California are doing fine.

Got you. Second question -- I want to dig into the gross margin kind of seasonality. Less looking to '04 and more kind of understanding '03 and then moving forward to '05. If you add back the rebate reversal and the scooter charge, you end up at about 46% for the fourth quarter, which brings you pretty close to your annual average. And the fluctuations through the year are not that great.

From the restatements that we got last night, it looks like gross margin ramped up sequentially like the first half was a lot softer than it looked initially relative to the rest of year. Can you just comment on what it was about the restatements? You talked about when you recognize rebates when you are on FIFO. Is that the issue? Or is there something else?

Remember, when you do a restatement of LIFO, we had to go month-by-month for 5 years on vendor credits. And you've got to remember, we have to put them back in on a FIFO basis versus a LIFO basis. And then as we talked about historically, we recognized vendor allowances October through September. So now, you have got to adjust those 3 periods. Over the period of time that is 3 years. We think if you trying to get to what the number is on a comp -- or on a '04 to '05 basis -- is that what you are trying to get to?

Well, I was kind of curious about what happened in '03. Because the contour has changed a lot. I know it is ancient history now, but it is important to understand. And I'm also looking at --

Skew (ph), if you actually go back to '03 and you look at the gross profit by quarters, it's going to be very consistent to what we say is going to happen in '05. Because remember, you had to go back and recognize the vendor credits on a FIFO basis. So if you looked at the first quarter of '03, it is 43.2 going to 45.3, going to 46.8, and then going to 46.4 for a full year blend of 45.4. Now, those trends are going to be almost identical to what happens in '05.

Why do you start the first quarter of '05?

Actually you don't -- we actually started in the first quarter of 2000.

I understand. But I guess I don't know what level of gross margin you would be guiding to for the first quarter of '05. But to get to kind of the $0.16 to $0.19 number, I guess would have to be something along the lines of 46%. Is that directionally kind of where it would be?

I think it's going to be somewhere closer to 45.2%.

So I guess the question is, is there some reason why seasonally it would be -- I would think that the rebate issue, there's no reason your gross margin should go down from Q4 to Q1 based on the rebate issue alone. Because you started working through those layers earlier on, so --

Go back and you just inherently calculate the gross profit percent in the fourth quarter of last year, it's 44.1 moving up to 45.1.

Of fourth quarter of '03 or of '04?

'04.

So you are saying it's 44.1. You are saying the 44.1 though was depressed by 200 basis points by factors that shouldn't repeat themselves?

That is right.

So then I would think that the starting point would kind of be 46 or so.

And you've got to remember there is a lot of things that are involved in here Matt. It's a lot of (technical difficulty) involved, and it's not just a global calculation anymore. It is a detailed calculation where it depends really on what moves through that and what turns through the products. And so, if you had -- and I don't want to get into the certain vendor categories of what has higher and lower vendor rebates associated with them. But it's just a matter of what sold in that period.

Got you. Two more very quick ones, and they are kind of related. You had some issues I guess with vendor rebates that you had recognized that you realized you weren't going to collect. And how sure are we that we are kind of through those?

And related to that, there was a lot of language about controls in the 10-K, both from yourselves and from your auditors and some steps that you were going to take to address some of the shortcomings of recent years that became apparent in the audit. If you could just give us sort of a discussion of what the pathway is towards addressing those, how far along you are towards some of the steps you have discussed?

Just so you know, in fiscal '04, we totally changed a lot of the things we did with vendor allowances. We hired two more account accountants associated with it, and we put legal contracts in place. And we have very strict guidelines as to how to manage vendor credit. You need to remember, as we did this, what happened is we had these credits that were embedded in the LIFO calculation. And as we went through there -- there was some contract language that was a little vague -- and we looked at it, and we made some corrections to it. And you've got to remember, it is very specific now. And it is a vendor-by-vendor calculation versus a global calculation that was done in the past.

So, in other words, those steps have been taken, and the remediation is kind of done.

I mean we really had the remediation, and this is something we worked on a lot over the last 2 years. Like I said, we brought in a couple people from outside the Company to do it, actually hired a new Vice President of Finance to help us put some of these things in place. We feel very comfortable in the '04 and '05 numbers. But you have to got to remember this is an awfully large number. And if you took these calculations of what we wrote off and you applied them to the total write-offs over the 5 years -- if you took all of the collections over 5 years and all the write-offs over those same 5 years, it is less than 1.5%, which I think is pretty good.

Less than 1.5% of sales and or 1.5% of rebates?

1.5% of the collections.

(OPERATOR INSTRUCTIONS). John Tomlinson, Prudential.

I might have missed this, and I apologize. Could you comment on your comps in the first quarter? What was the more important item, maybe traffic or ticket, I know they were down, but maybe could you comment on those? The trend you saw in the first quarter there?

Well, we talked about the negative 1.2. The commercial ticket or the dollar average continues to increase slightly. Customer accounts have continued to be down. But we have to remember we have done some things where we have added more advertising this year to help that bring up the customer traffic, which we think will be -- which should get back positive by the late second, early third quarter.

In addition, we have put together some employee spiff (ph) programs in place to continue to drive add-on tickets of other products. So if you are selling spark plugs, and you add-on wires. Or if you are selling alternators, and you are adding on belts. So we think that is very important once you have the customer in the store to capitalize on that.

And then you briefly mentioned that you believe you're gaining share in commercial. Can you expand on that? And maybe give some insight on who you think you are taking that share from? Is it some of the bigger players or maybe some of the jobbers, the mom-and-pops, and then maybe some color there?

I don't think he said we were gaining share in commercial. He said he didn't think we were giving up share to anyone. But what the key issue here is -- generally in the past, and the past being over the last 10 years -- whenever we have had a rough, tough topline issue, generally the commercial business returns to more of a norm or leader ahead of the retail business. And that is what we're seeing. And we think the retail increase is right around the corner based off what we're seeing in the commercial business.

For the first quarter, with sales being negative overall, our commercial sales were positive by over 5%.

Jerry Marks, Raymond James.

I just wanted to follow-up. In terms of your average ticket, you said it was higher in the quarter. I was just curious how you are getting that even with getting out of the higher ticket scooter business.

We said we were getting out of the street scooter business. But we are selling compressors, power washers, generators and some off-road stuff. But I think one of the important things here is this new spiff program that we have put in place for our employees -- has been generating incremental add-on sales throughout the Company in the first quarter. And that helped us.

I think that once again, it's important to note that the wheel category continues to be a very successful category for the Company. And we have successfully transitioned from the street scooter business into the off-road scooter business in the way of both 2 and 4-wheel off-road vehicles.

And your CapEx, it looks like based on the 37 stores that you expanded by or re-add, you spent about $700,000 in CapEx per store. Going up to 50 stores, I come up with more like a $35 million CapEx number. I am just wondering are you getting greater efficiency, or why it seems that you are going to be able to do it at a cheaper rate this year?

You need to remember, as we have done presentations in the past and you talk about -- your average costs of putting a new store up if you look at signage, soft costs, computer equipment and fixtures -- runs in the neighborhood of 225 to 230,000 a store. And we have leaseholds in only part of the store because most of those things are down by the landlord. So let's say that that is another 100,000 on average. I think you need to figure out, you are closer to 3.25 per store than your 700.

Okay, then my question would be -- how come that didn't seem to happen in FY '04 where you spent about 26 million in CapEx with only 37 stores? That comes out to about a $700,000 number.

Yes, but you have to got to assume the only thing we're doing is building stores. We do a lot of other maintenance CapEx type things; we remodel. We spend about $6 million a year just making sure we have systems in place. You do like I said, general stuff in our warehouses. So you have to take all of those things into consideration.

Okay, so I guess this coming year, there might be a little bit less maintenance CapEx required. There is a --

I mean this year, we said 26 that we just spent in the last year. And we will be between 28 and 30 next year. So you should assume a little less on maybe some paint and powder stuff but not much.

Don, the new distribution center expansion that you guys indicated in your 10-K, is that going to drag on the gross margins at all?

No, the build-out is being done by the landlord, right Martin?

Yes.

Yes.

Last, if I take your numbers that you indicate in the K, increased costs of sales due to the merchandising and scooters and vendor rebates and the adjustment to incentives of 3.6 million and the 1 million in debt write-down, I come up with about 9.7 million in what I guess I would call a one-time charge in 2004. Am I missing something else there?

If you are including the loss on debt retirement?

Yes.

I said it was almost 8. And you add 1, that gets to 9 in debt refinancing, so I think we're pretty close. I said there was margin charges of just over 8. And then 1 million in loss on debt retirement of 1 million. That's just over 9.

Okay, so we are talking about $0.13. But there's nothing else in the year? So from a base comparison, it would be more like $0.93?

Look, I think that's a question that I am not going to answer on this call. Because there's a lot of things that happen in a quarter that was not really restated. And when you make a decision to restate in the fourth quarter of this year, you can put in the numbers for the restatement for the first 3 quarters. But in the fourth quarter, you are really not permitted to say -- if we would have done this, then the LIFO change would have been this. Or that vendor allowances were going to be that.

You need to probably focus on where we are going to go next year. And you can back into that number. You can go through all of the -- if you go through all the tables and the footnotes, you can get back into that number.

We're showing no further questions at this time. I'll turn the conference back over to you.

Thank you all for participating today. And we will see you at the end of the next quarter call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now all disconnect. Have a great day.