O'Reilly Automotive Inc (ORLY) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your CSK Auto first-quarter 2005 financial results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to introduce your host, Maynard Jenkins.

Good morning, everyone. Thank you for joining us this morning. With 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 the call over to Randi, and she will address the forward-looking disclosure concerning this call, as well as an outline for the call. Randi?

Good morning, ladies and gentlemen, and welcome to our first-quarter 2005 conference call. Certain statements within this call are forward-looking statements. These statements discuss, among other things, expected growth, store development and expansion strategies, 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 overall condition of the economy; factors affecting the import of products; inflation; consumer debt levels; factors impacting consumer spending and (inaudible) habits; conditions affecting new store development; weather conditions; risks related to compliance with 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.

Unless otherwise 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, 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 for the first quarter ended May 1, 2005. Last year refers to the 13 comparable weeks for the first quarter of fiscal 2004 ending May 2, 2004. 2005 refers to the 52 weeks of this current fiscal year. 2004 refers to the 52 weeks for the last fiscal year ended January 30, 2005. Per-share refers to a fully diluted share of our common stock.

I would like now to provide you with an outline for today's call. First, Maynard will provide an overview of the first quarter. Next, Martin will discuss key operating results. Then Don will review our first-quarter financial results and address our financial outlook for 2005. Maynard will conclude with a discussion on key developments and key initiatives. We will then open up the call for your questions.

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

Thank you, Randi. We continue to make progress on our key goals and initiatives which over the long-term should drive both top-line and bottom-line growth. Total sales for the first quarter were essentially flat to last year, while our same-store sales declined 1.2%, compared to last year's first-quarter sales increase of 5.2%.

Our same store sales trends have improved over the past three quarters. Historically improvements in our retail business have followed improvements in our commercial sales trends. And our commercial sales trends have been improving. This trend is continuing, and we expect our same-store sales to turn positive during the second quarter.

Net income for the first quarter was $8 million or $0.18 a share which is on the high side of our previous guidance of $0.16 to $0.19 per share. We continue to be optimistic about our future results. For example, our cash position remains solid at 97.7 million, an increase of 54.1 million over last year's first quarter.

Our commercial business, which typically leads their retail business, continues to improve. Same-store sales to our commercial customers became positive toward the end of the third quarter of 2004 and have continued to accelerate through the first quarter of 2005.

The same-store commercial sales increase for the first quarter of 2005 was 5.6%. The increased sales of our core products to our commercial customer reinforces our belief in the strength and growth potential of our business.

The Company continues to focus on productivity of our merchandise inventory. We believe there are opportunities to reduce our inventory on a per store basis, to increase our inventory turns and create additional gross profit dollars without compromising the breadth and product assortments available to our customers.

Although we will continue to pursue additional expense control opportunities, I am pleased that the Company's expenses were flat to last year, even with 21 additional stores.

Acceleration of our new store growth remains on track. In addition, to our Checkers, Schuck's and Kragen stores and new store expansion in those areas, the Company is testing a new store concept called Pay N Save, which I will discuss later in this call. Despite what we believe to be short-term economic and business-related challenges, our long-term sales outlook remains positive. We're optimistic about the enthusiasm of and demand by our do-it-yourself and our commercial customers for our products, given the solid industry fundamental.

Although we have seen improvements in our same-store sales trends, we're not satisfied with our current sales performance. However, we're optimistic about our business for the remainder of 2005. We will continue to manage our business toward achievement of our long-term goals and key initiatives.

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

Thank you, Maynard, and good morning, everyone. As Maynard stated, although we're not satisfied with our 1.0% same-store sales decline in the first quarter, we are pleased to report that our sales trends have continued to improve. For example, our average retail ticket has continued to increase. Our commercial business, which typically leads our retail business relative to sales improvements, saw a same-store sales increase of 5.6% in the first quarter, on top of the 6.2% increase in the first quarter of last year.

We were also pleased with the sales of many of our core items such as breaks, shocks, batteries, fuel pumps, wiper blades, and coolant in the first quarter. We continue to see enthusiasm from our customers when offered new and exciting items such as new generation motorized wheel products and professional grade items such as generators and automatic diagnostic raiders.

We remain committed to our current merchandising strategies. We have continued to refine our core auto parts offerings, improving our selection and inventory performance. We continued to use our category management systems to optimize our sales, gross margin, and inventory investment. Transaction analysis has provided us with information on customers' market baskets. This is the product that they purchase together as the shop our stores. This information has resulted in improved planogram adjacencies, strategic add-on sales, incentive opportunities for our employees through great rewards programs and stronger vendor partnerships.

Our merchandise -- our merchants continue to introduce new and exciting items that maximize store productivity and bring value to our customers. These new items, together with our broader selection of core automotive products, enhance the customer experience inside the store, giving our customers additional reasons to shop at Checkers, Schuck's and Kragen.

As we mentioned in our last conference call, we recently implemented a new individual store associate incentive program called Great Rewards. Great Rewards was developed to give our customers and store associates the advantages that come with selling the complementary and accessory products to our customers. Our customers experience better service by receiving the full package of products in one trip to the store. In turn, our associates receive extra dollars for any sales they make from the Great Rewards program.

For example, when an associate sells an alternator, the associate receives a bonus if they also sell a fan belt to the customer as part of the transaction. The customer gets the complete package of products, and our store associate gets an incentive to ensure the customer is satisfied. It is truly a win-win situation.

This program will enhance customer loyalty, improve our relationships with our vendors, maximize store productivity, and reward our store associates for their great customer service.

The Company continues to develop new system initiatives to better service our customers. These include 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. We believe this technology can expand the parts business, especially in stores with lower volume, by improving store productivity.

In addition, the Company has developed a 5 inch touchscreen electronic catalog that attaches to the shelf on the sales floor. This unit gives customers access to easy application support for products such as filters, wipers, lighting and other application parts on the sales floor. Both projects are currently being tested at selected stores in all regions throughout the Company.

We recently enhanced our advertising and marketing initiatives to increase the reach of our media marketing programs. Television advertising in NASCAR and NHRA events has been introduced into our media mix in addition to cable television programs targeting DIYers and automotive enthusiasts. Television media in combination with radio and out of home advertising and CSK's extensive Major League Baseball sponsorships will work to build our brand recognition.

We're also continuing our strong print media advertising program, which is focused on weekly sales promotions.

Additional incentives have also been started in our Hispanic marketing program. This important and growing consumer segment is currently estimated to account for 25% of all auto parts shopping in our markets. It is estimated that the Hispanic consumer spending will grow by more than 40% by 2010.

To better serve the Hispanic market and to ensure that we are 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 grass-roots efforts for CSK. This enhanced marketing campaign launched in the spring of this year.

We continue to improve the support systems that integrate retail and commercial areas of our business to improve efficiency, productivity, and overall effectiveness as well as enhance our sales approach for both our retail and consumer customers -- 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 business by maximizing the following areas. Meeting our commercial and retail customers needs and expectations and providing them with the innovative products they want when they want them. We accomplish this by aggressively reviewing and tailoring our inventory mix to ensure that we're meeting the needs of our commercial and retail customers. Continue to drive the commercial sales program and our national accounts business with new and innovative merchandising and marketing programs and strategies. These strategies include tailored customer loyalty programs, and specific targeting of certain product categories designed to improve the commercial customer's business. Focus on reducing commercial delivery times, which provides enhanced customer satisfaction and gives us greater customer loyalty. Continuing to broaden the scope and functionality of our website, CSKproshop.com, allowing our commercial customers quick, convenient online shopping with prompt no hassle delivery. The continued focus on maximizing the shopping experience, broadening our commercial customer base, and accelerating the growth of our commercial operations. Continuing to focus on operational efficiencies such as shrink control, maximizing our payroll dollars, store expense control, and making the most of every customer dollar through our great customer service program. And finally, the Company continues to invest in its most valuable asset, our store associates. We will support and encourage all store associates to join our more than 2400 ASE certified associates.

We've also put in place a comprehensive plan called E-learning which will roll out in 2006. E-Learning is a computer-based training initiative designed to deliver training in an on demand fashion. These initiatives will continue to drive associate and customer enthusiasm for CSK.

The Company continues to look at opportunities to accelerate new store growth. At the end of the first quarter, we operated 1138 stores compared with 1117 stores at the end of the same quarter last year, an increase of 21 stores. During the first quarter we opened six new stores, relocated two stores, and closed two stores. We expect to open approximately 50 stores for 2005, consisting of approximately 40 new and 10 relocated stores in addition to the Pay N Save stores, which Maynard will discuss shortly. The Company expects to close approximately eight stores on or close to their lease expiration in 2005. This will result in a net store increase of approximately 32 stores or a 3% increase in square footage. Our long-term objective is to continue to accelerate our new store growth.

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

Thank, Martin, and good morning, everyone. Net sales for the first quarter were 397.2 million compared to 397.1 million last year. This represents a first-quarter same-store sales decline of 1.2%, which is comprised of a 2.6% decline in retail and a 5.6% increase in the commercial sales. This compares to a combined same-store sales increase of 5.2% for the first quarter of last year, which was comprised of a 5% increase in retail and a 6.2% increase in commercial.

Gross profit for the first quarter was 180 million or 45.3% sales compared to 188.7 million or 47.5% of sales for the last year. Operating administrative expenses for the quarter were 158.2 million or 39.8% of sales compared to 159 million or 40.1% of sales last year. This decline in operating expenses year-over-year is attributable to the improved management of our store expenses such as bad debt, supplies and utilities.

Operating profits for the first quarter were 21.8 million or 5.5% of sales compared to 29.7 million or 7.5% of sales last year. Interest expense for the first quarter was 8.6 million or flat to last year. This was due to lower outstanding debt offset by the higher interest rates. The effective tax rate for the first quarter of this year and last year was 39.1%.

The net income for the first quarter was 8 million or $0.18 per share compared to net income of 12.8 million or $0.27 per share last year. Some of our key financial performance measures for the first quarter and year-to-date are as follows. Net debt at the end of the first quarter, which it does include cash on hand, decreased by 73.4 million year-over-year to 397.9 million since the first quarter of last year. Free cash flow for the first quarter was 42.4 million compared to 10.3 million for the first quarter of last year.

At the end of the first quarter, we had no borrowings under our revolving credit facility other than an outstanding letter of credit used for collateral associated with worker' comp claims. Cash on hand increased 54.1 million to 97.9 million compared to the first quarter of last year. Our inventory to Accounts Payable leverage, which is one of our key initiatives for 2005, increased to 40% in the first quarter compared to 36% in the first quarter of last year. Free cash flow for the fiscal 2005 is expected to be between 80 and 90 million, which will primarily be used to pay down debt.

Our outlook for 2005 is as follows. We continue to forecast full-year same-store sales increases of approximately 2 to 3%. We expect to open or relocate approximately 50 stores in 2005, in addition to the Pay N Save stores, increasing our square footage by approximately 3%.

Now I will turn the call back over to Maynard.

Thanks, Don. Prior to taking any of your questions, I would like to inform you on a couple of key developments here at CSK Auto.

First, I am pleased to announce the reassignment of Dale Ward. Dale is currently in charge of our Commercial Sales area, and he will move over as a Senior Vice President of Merchandising and Marketing to run that area. Dale's leadership skills will lend to the Company's ability to bring new and innovative ideas to the business. Dale will continue to manage the commercial area until a replacement is identified.

Second, the Company has recently launched a new retail concept store named Pay N Save. Pay N Save, which targets a broader demographic than our CSK stores, represents one potential component of an important long-term growth strategy for CSK and is allowing us to develop new sourcing, particularly import sourcing for our merchandise.

Pay N Save will launch in four test stores in the Phoenix area market. The first two stores opened this month, and two additional stores are expected to be opened by the end of the summer. Pay N Save stores plan to offer a consistent core of value merchandise, and I want to stress value, consisting primarily of tools, hardware, housewares and other household goods, seasonal goods such as tents, outdoor furniture, water toys, and a constantly changing array of unusual merchandise, such as industrial popcorn machines, garden windmills, full-size leather barber chairs, all at incredibly low prices.

Pay N Save is expected to be a unique shopping destination, convenient, easy to shop and more importantly, fun. We also expect the Pay N Save experience, including our new sourcing opportunities to enhance our Checkers, Schuck's and Kragen stores. We are purchasing at a lot of exciting new merchandise for Pay N Save, some of which we also plan to offer in CSK stores. We anticipate that our continued broadening and refinement of our merchandise assortment in our CSK stores will further enhance our customer shopping experience in our stores and help drive our customer traffic as we develop the Pay N Save concept.

I want to assure everyone we understand our main focus is and will remain automotive parts at CSK. Our long-term strategy initiatives remain as follows.

First, we are 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.

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. We will continue to focus on maximizing the productivity of our existing stores. In addition, as the Pay N Save concept evolves, the opportunity exists to increase the Company's overall store count.

Third, we will continue to strengthen our vendor partnerships to reduce costs from our supply chain.

Fourth, we will continue to scrutinize all expense lines in our business for opportunities to reduce our expenses and further reduce our SG&A costs, without adversely impacting our key long-term objectives and initiatives.

Finally, we will continue to focus on our customers' needs through our ongoing improvements and our great customer service program.

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

(OPERATOR INSTRUCTIONS). Christopher Jones, Oppenheimer.

Just a few quick questions. In terms of overall guidance for 2005, are you still feeling comfortable with what you gave about a month ago? And maybe you could give us an update on where you think things will land for the second quarter?

Second question would be in terms of the Pay N Save concept, are there going to be any incremental costs associated with that? And just maybe a little bit more on what exactly made you decide that it was a better route than opening those additional CSK stores?

I will answer the second question first, and then Don will answer the first question. The costs of Pay N Save are all absorbed within our overall G&A targets. There is not going to be an incremental hit to the Company because of this concept. It is a test and right now a very small test, and we will see where it goes as we go forward.

This is Don. You know on our last conference call we gave annual guidance. The Company along with a lot of other publicly held companies are going away from quarterly guidance. We give annual guidance, and at this time we don't see any material change to that. So I think we should just leave it in place.

Michael Cox, Piper Jaffray.

My first question relates to the Accounts Payable, the inventory ratio improvement. I was wondering if you believe that is sustainable and where you hope to take that going forward?

One of the things that we are going to focus on is this Accounts Payable to inventory. We think there is some opportunity for a cash flow benefit for the year. We have said we would like to get 5% a year for the next couple of years to raise that ratio. We also stated that our Company does a lot of importing, so we are going to naturally have lesser percentages than some of our competitors for that reason because you prepay the product.

You also know that we had an increase in inventory, and if you take that increase in inventory and level it out, you are really at 38% of AP to inventory. But we believe by year-end with increased vendor terms, we can get that -- we can maintain 40 to 42 by year-end.

Could you give us any update on recent business trends? Months to date here? Have you seen that comp trend turn positive yet?

We as a practice don't give mid-quarter results of our sales trends. We will stay on our statement that we put in our press release and also in the call previously, and we will update you if anything changes dramatically.

One quick final question on the Pay N Save store concept. Could you give us any metrics in terms of store size, price points of this merchandise, any additional color would be helpful.

The overall strategy of Pay N Save is value. The stores are about 15,000 square feet in size. These are stores that are item stores as opposed to broad selections of category stores. We intend for these stores not to compete with the CSK stores.

As an example, there isn't a wide assortment of auto parts in the store. A customer should be able to come into these stores, identify a piece of merchandise, and by the selling price on the merchandise recognize it as a value and be happy shopping there.

We're taking a little different tack than the norm. We start out looking at an item with what we think the customer will deem that item priced at a value. And then we try to work back into the cost.

Matt Nemer, Thomas Weisel Partners.

The first question is just a follow-up on Pay N Save. Can you give us a sense of what the store economics are? What is the investment to open one of these stores? I know it is early days, but what kind of return are you looking for?

I think at this time if you would look about the costs of just opening a store, it is not much different than opening up a CSK. But some of the other things, you got to remember this is a two-store test. I think at this point in time giving you a lot of metrics is just not valuable to anybody. And at the end of July, we will be up to four stores. So I would expect that in the second-quarter conference call we can give you a little bit more information.

Just to follow-up on that, as you look at who your competitors are for this new concept, should we be thinking like a Tuesday Morning or a Dollar Store?

We don't think so. Maybe the value type statement or closeout mentality could enter into this whole thing, but I think you really have to see what the concept looked like to make a determination. These are clean, well merchandised stores. There will be some closeout merchandise infused into it. But as Don stated, we have a two-story test open right now, and it is going to four by the end of year.

Another key element in this whole test area is to be able to develop merchandise, frankly, from across the water for the CSK stores. So we think we can leverage one against the other. We think that Pay N Save will work long-term, and it will give us an additional spoke in the wheel of growth.

Got It.Two questions on the CSK stores. The first is, on operating expenses, they sort of had a similar move to your comp sales in the quarter. I'm wondering to what extent should we expect this for the rest of the year? Maybe you can remind us what the variable components are in that line.

Obviously the variable components are the payroll, which is the major -- the majority of the other expenses, rent, those type of things are expensed, are basically fixed.

What we said as we said on our year-end call, we're focusing heavy on the SG&A of our Company. I would expect from the second quarter of last year to the second quarter of this year no less than a 50 to 60 basis points improvement year-over-year. So what really comes out this summer in the neighborhood of a $5 million increase year-over-year.

Got It.And then lastly, one of your peers opened a new store in New Mexico which is a state that you have some exposure to. I'm wondering if your real estate people are seeing any increased activity in the markets that you operate in in terms of new store growth?

Just the normal penetration of competitors. As we backfill the marketplace and open those new stores, we have competition entering the marketplace, but not on a greater element than in the past.

Thanks very much.

Cid Wilson, Monarch Research.

Good morning. A couple of questions. First is, it seems like you have a lot of cash on hand, and I was wondering as we -- assuming that you're going to be using that to pay down debt, I was wondering if you can give us some guidance in terms of the timing of that and as it relates to interest expense as we are trying to forecast interest expense for the year?

Yes, we are in the process of evaluating that situation. The Company has a lot of opportunity with this. We are looking at ways to reduce that expense either through different credit facilities or to give us some more flexibility. But I think over the next 60 days to 90 days you will see changes in the way we have structured our credit facilities.

And then my next question is, how would you compare your merchandise in terms of your private-label versus your national products in terms of how they did? And then also if you can comment on just hard parts in general versus accessories and chemicals?

When you take a look at private-label, we think that private-label has a position within our Company. But having said that, there is really four criteria that we must achieve in that area. Number one, the item must be a tonnage item. It doesn't satisfy any egos to put -- have a CSK private-label item if it doesn't sell. Number two, the quality must be equal or better than the name brand. Number three, we must be able to buy it better. And number four and more importantly than everything, the customer must get a break at the retail price point.

Now if any one of those four fall out, then you got to ask yourself why would you even do it. In the area of hard parts, when you take a look at that area, there is parts, especially in the rebuild area that aren't name brands. They're built by rebuilders, and essentially you are private-label. You try to achieve that being a name brand in the eyes of the consumer.

As an example, one of the brands that is really proprietary to us in hard parts is Autolite, which is well-recognized in the country but available at CSK stores.

Also, can you, just so I know you're not updating -- giving second-quarter guidance -- but I guess if you are assuming your annual guidance, am I quick to assume that that assumes that second quarter is the first quarter where we start to see gross margin improvement?

Yes. We actually, and if you remember at the year-end conference call, we talked about the rebates and our changes of -- the change from LIFO to FIFO and some other things along the away, but we also said that we would expect gross profit to increase between 180 to 200 basis points from the first quarter to the second quarter.

My then last question is, that -- I am not sure if I heard this on that call before, but I guess in the last conference call I think you had given (inaudible) thought that comps might be somewhere around 2%. So are you still comfortable with that guidance for the second quarter?

Like we said, we don't give guidance by the quarter. Maynard did say in his conference call script that we expected to turn positive in the second quarter. And we also said that we expected the remainder of the year, not excluding the first quarter to be above 3% comp.

(OPERATOR INSTRUCTIONS). Reed Anderson, Friedman Billings.

This is Jeff Sun (ph). A quick question on inventory levels. Can you just shed some light on where you think that shakes out for the year? And then the Pay N Save concept, are there specific price point limits you're going to institute at the store, or is it just kind of a matter of what you can get your hands on and the deal you can provide back to the customer?

I will answer the Pay N Save question first. There is no maximum limit on price points, and here again it is value and item value as perceived by customers. That is what we're striving for and think we will achieve. Go ahead, Don.

When we took about the inventory, you'll notice from last year to this year there was an increase. There's a couple of things driving that. One, we have a little bit of investment in Pay N Save, not a lot.

But the other two things -- we got to remember (inaudible) 21 more stores year-over-year -- new stores. Plus we had about eight reloads that you put more inventory in there. That has been used.

And last of all, we have invested more inventory in specific, commercial stores. We have taken -- year-over-year our (inaudible) is up about 50. We have invested inventory in those commercial stores, and I think you're starting to see -- we're starting to see some pretty good returns. Full year, year-over-year inventory on a FIFO basis, after we have changed -- I think you can run from last year into this year-end virtually flat, which would give us point to turn increase.

John Tomlinson, Prudential Equity Group.

Most of my questions have been answered, but maybe you can just elaborate a little bit more on the improvement in comps that you expect for the course of the year. Do you expect most of that to come through customer count or a combination of that and ticket? Or can you just talk about those trends?

We have talked about this a little bit. Customer count has been negative for a little while. We have seen some improvement in there. But we think the plan would be to get customer flat year over year, and most of it coming out of dollar average increases.

Just one follow-up on the new store concept. Do you expect gross margin in that business to be anywhere close to what you're doing in the CSK stores? Or by the value nature would be any materially different?

No, we don't think it would be ultimately materially different. But you must remember in a new concept, when you get the marketing going and everything else, you'll go out with a lot of promotion in the initial phase. And then along with additional ongoing marketing, your customers through word-of-mouth will get the word around. And we think there's going to be plenty of margin at the end of a day in these stores.

Dax Vlassis (ph), Geats Capital Management (ph).

I was wondering, what is the CapEx expectations for the year?

We have expected somewhere in the neighborhood of 26 to 28 million in CapEx for the full year, which would include the four additional Pay N Save stores.

Does that include capital leases as well?

Yes.

You alluded to that you had provided some type of annual guidance in a previous call. Can you refresh my memory?

Yes, we basically had gave a range of $1.12 to (technical difficulty) and the first quarter of that was in a range of 16 to 19.

And how many stores had commercial service centers at the end of the quarter?

At the end of the quarter we were at 603.

And you said that was up 50 year-over-year?

(technical difficulty) 50. Year-over-year is actually 48.

What percentage of your sales is currently private label?

Very small. Private label in this would be less than 5%.

And your gross margin -- I guess I could ask it this way. In the second quarter would you expect there to be any difference between the product acquisition cost flowing through the P&L and your current acquisition costs?

No, we wouldn't. The margins dollars and rate, as we said on the year-end conference call, would be short-term affected from allowances year-over-year.

So the change in the accounting, would the layers that would be eating through of the higher cost inventory, will that have already flowed through the P&L after the first quarter?

Just so you understand how it works, it is first-in, first-out. When you receive vendor allowances they are capitalized into call it capitalized rebates. And as product turns and as you buy new product, when you buy new product the rebates associated with that go into this capitalization. And as you sell it, it comes out of the capitalization. (technical difficulty) that could move that is if you get higher rebates from one product type versus another, it will just flow through faster as your inventory turns faster.

I understand. And as far as your cash taxes go, do you expect to have another year where you essentially pay no cash taxes this year? And when would you expect to start paying cash taxes?

I would assume based on (technical difficulty) that we've given guidance it would probably be somewhere into the late third or fourth quarter.

(OPERATOR INSTRUCTIONS) Matthew Fassler, Goldman Sachs.

A couple of questions. First of all, looking back at Q1 to understand some of the moving pieces in sales, hopefully at least looking back retrospectively you can give us a sense as to the trend through the quarter, whether it was an accelerating or decelerating trend.

We have stated that our business has gotten better over the last three quarters. That continued. And we also said that -- we gave you the numbers on where the commercial business was comping and stated that generally the commercial business leads the retail business when you start talking about recovery.

As we try to understand the underlying demand here, weather was obviously a factor in retail broadly speaking, particularly in the month of March. Given your geography perhaps it was less of an issue for you. But do you see this having influenced the business in any way in the quarter?

No.

And I have a couple of follow-ups on Pay N Save. What is the market niche that you saw when you thought about the opportunity to launch a new concept? You have talked about what you're going to be selling product-wise, but what is the niche that you saw in the marketplace that you hope to fill with this concept?

We hope to fulfill a need for value across all segments of the demographics, and also a lot of fun. We invite anybody that wants to come out, we will take you on a tour because we think there are exciting ,stores and we think the customer is going to recognize them as exciting stores. But more importantly, the concept also is to source merchandise for the CSK stores wherever we don't have Pay N Save stores, and we've got a lot of them out there, and we are only going to have four Pay N Save stores by the end of the summer. So we just think that there is a niche out there for the CSK Company to acquire more female consumers. And we think that this value store is going to do that. And we're trying to get customer counts on the female side up into the 40 to 50% range.

I've got a couple of other items. One thing that will help everybody is by the time we file the Q, which is by June 10, it will have all of the restated quarters for last year, which can give you guys a little -- and ladies -- a little bit more color so you can follow the trends.

And in addition is on this Pay N Save, one thing we do is we do an awful lot of importing. And you've got 1138 stores that we look to buy for, and we have been a leader in innovative product. But we think that this is a great way to test items for a store concept for 1138 without having the investment. And I think it is going to pay some big dividends.

By the way, there is a website out there, paynsave.com, and maybe you would like to look at it.

On the restatements I would say hallelujah and thank you. Just a follow-up on Pay N Save. Who from management is going to be spending time on this?

We have an operational person here by the name of Cliff Sipes that is overseeing it. We have dedicated some resources in the merchandising area on the buying side. We brought an import expert into the Company months and month ago, and actually for the last six or seven months he has been in the Orient 100% of the time. And we're just doing a lot of work over there for both the CSK stores and this new concept.

Thank you.

Alan Rifkin, Lehman Brothers.

With respect to the Pay N Save, Maynard, if things go according to our plan you mentioned that you would like to use this as in avenue to source merchandise for CSK stores. Ultimately, if things go according to your plan, in terms of SKU count could we see the infiltration of these Pay N Save products into the core CSK stores?

I think that will evolve, and it's not like a -- we have already found items for CSK and there are items out there today. As an example, we have a water scooter that is in all the stores today that was originally looked at for the Pay N Save stores selling very well. And it is a little device like you would see in a James Bond movie, only it is for the pool, that will drag an adult around the pool at about one or two miles an hour.

The idea is ultimately to import quality merchandise -- some that will fit in CSK store, some that will drive business in the Pay N Save store -- and create growth in both segments of the business. And if you do that with your existing systems and warehouse and distribution and all the rest of the thing, it can be a win-win situation.

Just a follow-up, and then one more question. What do the lease commitments look like for these stores and what will they look like going forward?

We're not committed out for 15 years, if that is your question. As we have said, it is a test. We went into the lease negotiation with that in mind, and we will decide what we do with this overall operation. We will know six months from now a lot more than we know now because two of the stores have only been open a couple of weeks.

There are kick-out clauses in these stores.

One last question, if I may, for Martin. Martin, with respect to the Great Rewards Program, keeping all other things constant, what impact on your gross margins or SG&A do you think that this can aid you by?

We obviously hope to use the improve productivity through increase in dollar average. So as we increase our dollar average, that will give us increased productivity in the stores.

On the gross profit side, these are good gross profit items, just like the other items that we sell in relation to these things. Many of these add-on items are higher in gross margin dollars. Like for example, a fan belt (indiscernible) example I used, is a higher gross margin item. A little too early to tell exactly this program just rolled out. We will have more information as we get through the next quarter.

Thank you all very much.

Jeff Colbelars (ph), Citigroup.

Curious out of the Pay N Save stores, how much of the store is kind of a set planogram where you regularly restock merchandise? And how much is just merchandise that will just come in, just with a variety kind of flavor to it?

We do not have a set planogram in most of the gondolas in the store, and the idea is to move merchandise around a lot. Now, having said that, the tarp area, even though it doesn't have a set planogram, there are bins for tarps there, and you will probably see the tarps in the same corner of the store this time next year.

But there is in ever evolving array of merchandise coming into these stores. It will be seasonally affected. And merchandise will be moved around. Now where you see the power tools in the power tools section, it will continue to be power tools as a department, but a 2500 watt generator might now be in the same place three months from now.

Also in your commercial side can you say how much of your commercial same-store sales are due to say new customers that you have obtained by that store that offers commercial, and how much is due to increased sales to the same commercial customer?

Most of it is coming out of the same commercial customer. We had some economic issues with gas prices and all the rest of the thing, and our commercial customers felt that for a period of time. And we now see that maintenance work being done and our existing commercial customers are coming back to the table.

Austin Zalkin, ING.

This is the first time, I think as many analysts have alluded to on the call, that we have heard you guys talk about a new store concept. I was hoping that you could just help me understand the little more about how long management and the Board have been evaluating new store concepts, should we expect to see other types of new concept from you and why you decided to change the way test new products by opening a new type of store?

This concept has been in the works planning-wise probably a year or more. And it has been an evolution of what we have done with new products in the CSK stores, in addition to our commitment to import more merchandise for additional value for the customer with quality and also margin opportunity. So this wasn't a concept that anybody in the senior management team dreamed up a week ago and all of a sudden we have slapped it together. There has been a lot of work done this thing.

The question as far as a future concept, we're currently not working on an additional concept. As we stated, this was a twofold test -- number one, to see if we can create an additional growth vehicle with a lot of growth potential that will be exciting to the consumer; and additionally, a growth vehicle on maximizing the four wall box that we have and inserting new products that can be merchandise in both operations.

Just on the first issue, to follow-up about Pay N Save as an additional growth vehicle, you talked about the margins being similar to CSK's over time. Would you expect the working capital turns to be similar so that the returns on capital would be comparable?

I think that is a good assumption. Obviously you're going to have a little bit more inventory in a store, but not a lot. You've got a 15,000 square foot store versus our average CSK store of 7300 square feet. But remember, we have a lot less density of products. And in those stores, like I said, it is a four store test. We also know we do a very good job of importing. This is a great test vehicle for CSK auto.

And just one additional thing. We don't out of a 15,000 square foot box expect to get the same volume levels of the typical CSK store that is 7000 square feet.

Jeff Marsh (ph), Matador Capital.

Maybe just a couple of questions. Don, can you just maybe give us a little bit more breakdown on the free cash flow target this year in terms of what contribution you are expecting from working capital in the sources of that improvement, since I think the result this year is going to be a fairly significant departure from what working capital has provided to cash flow in the past? And maybe also, as a follow-on to that, just sort of talk about the sustainability of the free cash flow this year as you look forward to several more years. And the last question is in terms of the comp expectation for the second quarter, inclusive of the expectation for positive comps are you expecting both retail and commercial to be positive?

That was a lot of questions. The first question, we have said 80 to $90 million of free cash flow. If you assume the low end our guidance, well if you just take the net income, D&A and add it back in there, like we said there is about 18 to $20 million of deferred taxes that should flow through to help us, which says that working capital will be slightly positive, but not much. So we think this year we're going to focus heavily on inventory, receivables and AP as a percent of inventory. And we think that this number is sustainable for somewhere in the neighborhood of three to five years if the focus is there, and I think we'll get that.

If you just look at the goals for payables and improving that, the AP inventory ratio by about 5%, so assuming you achieved just that goal, though, it is fair to assume that the working capital contribution to cash flow will be much greater than what is targeted now as part of the 80 to $90 million guidance?

You've got to remember we are opening a lot of new stores. You've also got to remember we import a good percentage, so you've got to assume that the 5% happens over the course of the year. And if you get -- the answer is if you get 5% you'll generate more than the 80 to 90.

And the last question on retail comps?

On the retail comps, Maynard mentioned total comps. And if you are assuming for the remainder of the year 3% remainder of the year comps would indicate that both of them would have to be positive.

And that is speaking -- -- well, what about for the quarter? I guess that would imply the same right since commercial is only 17% of the mix?

We're only giving full year guidance at this time. So I don't want to get into individual how retail versus commercial is doing by specific quarters.

Just in speaking to retail, if I recall correctly, in the second quarter last year there were some unfavorable weather conditions. Temperatures where, I believe, unseasonably cooler than normal. Is that right?

Yes. And as we stated during the last call, I guess it was three weeks ago, if we get a normal weather trend we expect that to be beneficial to the Company.

One last question. Can you maybe speak about market share trends in some of the core markets since it is kind of difficult for us to view the results of the more nationally based players and compare the results (multiple speakers)

You've got to be very careful on market shares and where those statistics come from and whether they include supermarkets and all the rest of the things.

Right, but your assessment on what is happening in your markets, do you think you're keeping share, gaining share, losing share?

I don't think there has been a negative impact to our business because of penetration of higher market shares for our competitor.

Don, just one last question. New stores. If we take a look at maybe the last set of new stores to have opened up in maybe the last couple of quarters, what can we say about the performance of those new stores?

What I will tell you is you follow our presentations that had been posted on our website, we show the new store economics on that. And there's nothing to lead us to believe that any of those numbers have changed.

Thank you very much. Good luck this year guys.

Jay Marx (ph), Raymond James.

Just a quick follow-up on Jeff's question regarding the cash flows. If I add up the first quarter, you have got about 1 million depreciation over your capital expenditures and about 6 million of payables benefit versus inventories and about 8 million of net income. Where is the other in 25 million coming from? Is that that deferred tax that you are referring to, Don?

A little bit of it is deferred taxes, but you've got to remember we said that we went up 4% inventory to AP. So this is the last of it basically.

But the net out because you also had total inventories increasing, it was still about 6 million. That's why I'm only coming up with a lot lower number that is still not being accounted for. I guess we will find out in the Q?

Inventories were up 28 million, receivables were up 2 and accounts payable was up 46. Accrued expense up another 8.

Gary Murowitz (ph), Investment Counsel.

Just had a few quick questions. First, on Pay N Save, just wondering how much of senior management time is being allocated to that?

Pay N Save, as Maynard talked about, we have specific operational people allocated to that. And we also have specific merchandising, buying people allocated to that. And those are in our plan.

But you all aren't spending a lot of time on that?

As management obviously we have planned this out for a long period of time, and we have spent -- Martin; Maynard; myself; Lon, our CAO, have spent a lot of time looking and researching this, but --

If it is a homerun, Don is going to take all the credit.

Yes. If it is really good, the CFO is going to move over to Pay N Save. I think the bottom line is as management we have to look at returns for our shareholders and what we can do to grow the business. And we focus on that day in, day out. And if there is a new concept that we think is beneficial, we still have to focus on 1138 stores and then maybe we've got to add an hour a day to the rest of it to focus on this Pay N Save.

If you go back a couple of years and conference call, we have continually talked about our focus, and our focus was to make the four wall box more productive. And we are taking a look at this Company additionally as a four wall box, and this experiment is geared at making this Company more productive; more productive on the growth side, more productive on the profitability side. We have done a lot of work on this concept and we are excited about it, and we will know in the next six months whether we've got something the customers are excited about and how we can roll this thing out if possible.

Also, you guys have been talking about commercial leading retail. I'm just wondering how the logic works there and kind of why you think that make sense that that should work again this time around.

All we're talking about is in past experiences ever since we have been in the commercial business, whenever there's been an economic trend on the retail side of our stores to be a little bit soft, we have noticed that the do-it-for-me customer experiences that also. And business, when it is soft with our commercial customers, and we see their customers start coming back to them for whatever reason to get the maintenance done because ultimately it has to be done, generally the retail side of it follows. We think that is going to happen again.

Just last just quick one. On Great Rewards, have you rolled that out across the whole chain? And I guess, how do you dress the concerns that potentially come from your employees showing that incentive that they have?

It has rolled out across the whole chain. I'm not sure what your second question was.

I'm just wondering I guess if you want to play devil's advocate you could worry that your customer could get turned off by your employees having incentive to sell specific merchandise.

First of all, the customers should get turned on because essentially they need the product. To Martin's point earlier on selling of an alternator, it is well known that if a customer buys a V-belt or a belt to go along with a new alternator rather than using the old one, they're going to get about 20% more life minimum out of that new product that they would have just by using the old belt because it wears in different.

It is important to know, one of the ways that we came up with this program was by using our transaction analysis system or category management system and looking at the market basket and really looking at where our sales associates were falling short on selling the customer the complete job.

Just back to that example of the alternator and the fan belt, you know a commercial customer installs a fan belt well over 80% of the time, close to 90% of the time for every alternator they fix. It is just the right thing to do to do the job properly. We noted through our transaction analysis that we were only hitting the retail customer with a new fan belt about 7% of the time. That is not good for the customer and it's not good for CSK. We need to ensure that our customers are more satisfied than that, and get the complete job when they're in there and make sure that that new alternator is going to give them performance, A, through the fan belt not breaking sooner because it was worn into the old pulley; and also, just all the other issues that come with the installation itself, whether they break the belt during installation or whenever and have to come back.

All the items that are on this Great Rewards Program are designed to give the customer a better experience. For example, when they buy just brake pads our customers are incented to get them to turn their rotors. One of the main problems with selling brake pads is they squeak. That is a main customer complaint. If a customer turns his rotor he will be less likely to have that experience, so he is going to be happier. So all of these items that are on here are designed to maximize the benefit for both the customer and our employees.

Diane Keefe, Pax World Funds.

I got on the call a bit late, but could you give me a little bridge analysis of what the difference was in the year-over-year adjusted EBITDA going from 39 to 31? Was that product mix associated with the weakness in the comp store sales for retail? Or what exactly was that primarily?

As we stated, year over year the difference is on the vendor rebates year over year. And we discussed this at our year-end call also. And it is just how the vendor rebates move through the calculation of FIFO by category.

What determines the change in what was offered in vendor rebates from your older inventory to the newer inventory?

Understand, you have got to go back, and it is a long discussion year over year. But you've got to look at the way vendor rebate work, and FIFO vendor rebate work, and LIFO, and how they flow through the system.

Chris London (ph), Steadfast Financial.

The question has been asked. Thanks.

There are no further questions in the queue. Mr. Jenkins, please go ahead.

Thank you very much for participating today, and we will talk to again at the end of the next quarter results. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference and you may now disconnect. Everyone have a wonderful day.