O'Reilly Automotive Inc (ORLY) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the CSK Auto third quarter 2005 financial results 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. Mr. Jenkins, you may begin.

Thank you, Devon. Good afternoon, and thank you for joining us for our third quarter 2005 conference call. Joining me on the call today are Martin Fraser, our President and Chief Operating Officer, James Riley, Senior Vice President and Chief Financial Officer, Don Watson, Senior Vice President and Chief Administrative Officer, and Randi Morrison, Vice President, 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 third quarter 2005 conference call. Certain statements within this call are forward-looking statements. These statements discussed among other things expected growth, store development and expansion strategy, business strategies, future revenues, and future performance.

The forward-looking statements are subject to risks, uncertainties and assumptions including but not limited to: competitive pressures, the overall condition of the national and regional economies, factors affecting the import of products, factors impacting consumer spending and driving habits, such as high gas prices, war and terrorism, natural disasters, consumer debt levels and inflation, demand for our products, conditions affecting new store development, weather and regional 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 Jim may include in their remarks for purposes of assessing the comparability of our financial performance with prior periods, a discussion of non-GAAP measures. Corresponding GAAP measures and reconciliations with the non-GAAP numbers are available on our website at www.CSKAuto.com under Investors.

I would like to define a few key terms we will use during the call. Third quarter refers to the 13 weeks for the third quarter ending October 30, 2005. Last year refers to the 13 comparable weeks for the third quarter of fiscal 2004 ending October 31, 2004. Year-to-date refers to the 39 weeks of fiscal 2005 ending October 30, 2005. Year-to-date last year refers to the 39 weeks of fiscal 2004 ending October 31, 2004. Per share refers to a fully diluted share of our common stock.

I would now like to provide you with an outline for today's call. First Maynard will provide an overview of the third quarter. Next Martin will discuss key operating results. Jim will then review our third quarter and year-to-date financial results, and address our financial outlook for 2005. Finally Maynard will conclude with a discussion on key developments and 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. I would like to begin by welcoming Jim Riley as the Company's new Chief Financial Officer. Jim joined our team in late October, with over sixteen years experience as a Chief Financial Officer, in addition to serving in a variety of executive and management positions.

Don Watson, who has over 20 years of tenure and management experience with the Company, will leave the commercial and real estate areas of this business, in his capacity as our new Chief Administrative Officer. I am confident in Don's ability to further drive the commercial sales and accelerate the Company's new store growth program. These new appointments will strengthen our management team.

As reported last week, we are extremely excited about our pending acquisition of Murray's Discount Auto stores, with 110 automotive parts and accessory retail stores in Michigan, Illinois, Ohio, and Indiana. Murray's will complement our existing operation, expand the Company's market presence to 22 states in the western and midwestern United States, and facilitate our future growth into additional new market areas.

As a result of this planned acquisition, we expect to achieve significant synergies and increase retail and commercial sales growth potential and efficiencies, which will result in increased value to our shareholders. At the end of the third quarter, the Company operated 1,155 stores, including 4 Pay N Save stores, 3 main Distribution Centers, and 4 regional Distribution Centers.

During 2005, we expect to open 39 new stores, relocate 8 stores, expand 1 store and close 3 stores, resulting in 36 net new stores, bringing our total store account to approximately 1,170 stores at the end of 2005, excluding the Murray's stores. We are disappointed in our sales performance-to-date for 2005. However, we are financially strong and remain optimistic about our future growth potential, and ability to achieve our longer term goals.

For the quarter our total sales increased 1.7%, while our same store sales increased slightly. Our third quarter same store sales started out strong, with increases of approximately 3% year-over-year. However, as gas prices increased over the balance of the quarter, our same store sales declined, particularly in our West Coast markets where gas prices remained higher.

As gas prices have begun to moderate fourth quarter-to-date, same store sales have returned to the positive 3% range. That increase is made up of same store sales increase of approximately 2% in retail, and 9% in commercial. Some of our significant accomplishments include the companies continue to generate strong operating cash flow.

Our long-term debt has decreased more than 98 million, or 20% since the end of fiscal 2004. We continue to focus on the productivity of our merchandise inventory. We will continue to evaluate our inventory position by store, and make the necessary adjustments to foster a more productive retail box, based on our customers needs. We will continue to pursue additional expense control efficiencies in all areas, as we increase our top line growth. In addition to the pending Murray's acquisition, we will continue to accelerate our new store growth program.

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

Thank you, Maynard, good afternoon to everyone. Although our third quarter sales results were lower than anticipated, we have continued to focus on driving the top line, in both our retail and commercial areas. We are pleased with our sales of core items such as brakes, batteries, suspension, fuel pumps, oil and fluids.

In addition we continue to seek opportunities to integrate new and exciting lines into our merchandise mix to compliment our core items. Sales of discretionary items such as jacks, ramps and certain power tools declined. We believe this was in part a result of higher gas prices, and related to reduced discretionary income. We continue to refine our core auto parts offering, improving our selection and inventory performance.

New offerings such as our CSK Exclusive Pro-Excellent tool line that includes power tools, wrench sets, and other popular tool offerings, and our electric generator program, continue to create enthusiasm and strong demand by our customers. Our category management process continues to positively impact our plan-a-grams resulting in higher related sales, and improved inventory assortment by store.

Our market basket analyzer provides us with information on what add-on items our customers purchase. This has improved our product adjacencies, and makes our stores easier for our customers to shop. During the third quarter, the Company reacted to the higher fuel prices by launching the Save Fuel program, to provide the public with methods to cut fuel costs by getting more miles per gallon.

Driving tips, a checklist of fuel saving action items, and tips on maintenance and operation were included in the program, along with money saving coupons on fuel-saving, mileage enhancing product. The Save Fuel program was provided through print, broadcast, outdoor, and online advertising, as well as through instore display and signage. This program offset some of the negative effects of fuel pricing, and produced encouraging results in such areas as air filters, fuel filters, additives, and gas caps.

Beyond our extensive media marketing programs, event marketing has become an increasingly effective dimension of our brand building program, on both national and local market levels. CSK's November NASCAR Nextel Cup Checker Auto Parts 500 race at Phoenix International Raceway, once again broke all attendance records, and reached a record breaking 5.5 million U.S. households on NBC television. Over the course of the Checker Auto Parts race weekend, more than 200,000 race fans visited the PIR track.

Motorsports is a good way to reach our core customers. We continue to invest in our most valuable asset, our store associates. We continue to support and encourage all store associates to join the more than 2000 ASE certified associates.

Commercial sales for the third quarter continue to perform well at 7.5% same store sales increase, representing approximately 18% of our total sales. Commercial sales margins have increased over last year, through improved product offerings and a broad assortment of brand name products. Our national accounts business remains strong with the planned acquisition of Murray's, we expect this business to grow, and improve our ability to service our national accounts customers in our new markets.

I will now turn the call over to Jim Riley, the Company's Chief Financial Officer.

Thank you Martin. Good afternoon everyone. I'm pleased to be addressing you today. Net sales for the third quarter were 408.3 million, compared to 401.5 million for the same period last year. This represents a third quarter sales increase of 1.7%. Same store sales for the third quarter increased by 0.4%, consisting of 7.5% in commercial same store sales, and a decline of 1% in retail same store sales.

Gross profit for the third quarter was 188.2 million, or 46.1% of sales, compared to 187.9 million, or 46.8% of sales for last year. The decline in gross profit rate is due to a higher percentage of commercial sales, which carry lower gross profit rates, reduced realization of vendor allowances flowing through the balance sheet to the P&L, and approximately a 1.5 million customer return allowance negatively impacting gross profit recorded during the third quarter.

The customer return allowance negatively impacted third quarter gross profit by 36 basis points. We do not expect future period adjustments for this allowance to be material to gross profit. The gross profit rate from the second quarter to the third quarter was relatively flat.

Operating and administrative expenses for the quarter were 162.5 million, or 39.8% of sales, compared to 158.9 million, or 39.6% of sales last year. The increase in operating expense is primarily due to the addition of 26 net new stores since the same period last year, and expenses associated with the field associate sales conference, which is a timing difference, as we are now recognizing expense in the year the conference occurred.

Operating profits for the third quarter were 24.8 million, or 6.1% of sales, compared to 28.3 million, or 7.1% of sales last year. Operating profits were negatively impacted by the sales shortfall, decline in gross profit, and a moderate increase in expense.

Interest expense for the third quarter was 7.6 million compared to 8.2 million last year, primarily as a result of lower outstanding balances, which were partially offset by higher variable interest rates. Income tax expense for the quarter was 6.7 million, or an effective rate of 38.9%, as compared to 7.9 million, or 39.1% for the same period last year.

Net income for the third quarter was 10.5 million, or $0.24 per share, which included $0.02 cents for the customer return allowance, compared to net income of 12.2 million, or $0.27 per share last year. On a year-to-date basis, net sales for the 39 weeks ended October 30, 2005, increased 1.4% to approximately $1.225 billion from $1.208 billion for the 39 weeks ended October 31, 2004.

Same store sales for the first three quarters of fiscal 2005 were essentially flat, compared to the first three quarters of fiscal 2004, consisting of an increase of 7.8% commercial same store sales, and a decline of 1.4% in retail same store sales. Gross profit for the first three quarters of 2005 decreased by 9.5 million to 561.2 million, or 45.8% of net sales, compared to 570.7 million, or 47.3% of net sales for the first three quarters of 2004. The decline in gross profit is due to higher commercial sales which carry lower gross profit rates, the recording of the customer return allowance previously discussed, and lower vendor allowances with a portion residing in inventory at the end of the third quarter.

Operating and administrative expenses for the first three quarters of 2005 were 481.4 million, or 39.3% of net sales, compared to 478.1 million, or 39.6% of net sales for the first three quarters of 2004. Our operating expenses as a percent of sales decrease is attributable to ongoing cost savings initiatives, and lower employee benefit related costs, despite the addition of 26 net new stores since the same period last year.

Net income for the first three quarters of fiscal 2005 was 31.6 million, or $0.70 per share, compared to net income of 40.3 million, or $0.87 per share for the first three quarters of fiscal 2004. During the 39 weeks of fiscal 2005, we incurred charges of 1.6 million relating to the termination on the loss on the early debt retirement, resulting from our second quarter refinancing, approximately 700,000 of severance costs, and the previously mentioned customer return allowance. These charges net of income tax negatively impacted net income and earnings per share for the 39 weeks of fiscal 2005 by 2.3 million, and $0.05 respectively.

Some key financial performance measures for the third quarter and year-to-date are as follows: Total debt at the end of the third quarter decreased by 102.2 million to 395.1 million compared to the end of fiscal 2004. Free cash flow to date continues to remain strong at approximately 100 million. Accounts payable to inventory leverage increased to 36% in the third quarter from 33% in the third quarter of last year.

Our recent refinancing has given us enhanced flexibility to profitably grow our top line through the addition of new stores. At the same time we've increased our fixed rate debt from 60% to 69% at the end of the third quarter. We expect to initially finance the Murray's acquisition utilizing current and new bank debt, subject to replacing some of the bank debt with an alternative form of financing in the future. Our outlook for the remainder of the year is as follows: The Company is lowering its full year guidance range to $0.90 to $0.96 per share, which assumes same store sales increase of 1 to 2% during the fourth quarter.

The Company expects to be generate free cash flow in excess of 80 million, which is approximately 20 million less than where we stood at the end of the third quarter. Contributing to this reduction are $10 million of semi-annual interest payments, the opening of 15 new stores, which will result in an increase of working capital and almost 9 million in Capital Expenditures. As we previously said, we are looking at strong free cash flow for the year.

Now I will turn the call back over to Maynard.

Thank you, Jim. Our long-term strategic initiatives remain as follows: First, we are focusing on increasing our top line growth, generating cash flow from operations, and utilizing our capital to maximize our return on investment.

Second, we will continue to accelerate our new store growth program. We will continue to focus on maximizing the productivity in our existing stores, including the planned Murray's acquisition, CSK's store count is expected to increase by approximately 145 stores, or 13% for 2005.

Third, we will continue to scrutinize all expense lines 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 objectives.

Finally, we will continue to focus on our customers needs, through our ongoing improvements and our great customer service program. In closing, I would like once again to stress our commitment to our long-term business strategies, and the growth potential of our business.

Now we would like to open it up to any questions you may have. Devon?

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Jerry Marks from Raymond James.

Good afternoon. James, I'm curious, in terms of the cash flow, I saw before CapEx it was about 48.2 million. I look at your July balance sheet, payables seem to move commensurate with inventories offsetting other, so it didn't seem like there was much working capital movement. Where are you getting the extra cash flow from?

Jerry, this is Don. What happened as the Company cleaned up its balance sheet, and we have a strategic long-term plan in there with our debt facility, what has happened is we've been more successful in going out and getting better dating from our vendors. We are getting better long-term dating from our vendors. In addition, you also have to look and know that we have a deferred tax asset out there, that's giving us some free cash flow also.

So it's a tax asset? That's what I'm saying, inventories seemed to go down by about 10 million, and so did payables.

The other issue that's sitting out there is there was a significant reduction in the accounts receivable in the quarter.

Oh, okay.

And as you see the Q come out in the next couple of days, you will be able to see more of that on a quarterly basis. In addition to what Don was talking about here.

What it's allowed us to do, Jerry, our balance sheet is allowed to go back better, not only on the payable side, but we are getting a lot more things off from invoice, and turning the rebates quicker.

Okay. And I heard you mention stuff about commercial and Murray's, they are almost all retail, 99%, is that right, does that mean you are going to roll-out commercial debts there?

Maynard, why don't you preference where we are at with the Murray's deal.

I think we are probably expecting a lot of questions on the Murray's acquisition today, and with respect to everyone, we can't answer anything that isn't already out there as we currently sit here, we are a public company, and Murray's is a private company. And it's just not appropriate to comment on the acquisition until the acquisition is closed, other than to say the points that we've already said.

Jerry, and this is Don. In that release we did mention that Murray's has commercial sales of about 1% of their total sales. We did mention in there that we believe that that's a nice opportunity for us.

Okay. That's all I had. Thanks.

[OPERATOR INSTRUCTIONS]. Our next question comes from Matt Fassler from Goldman Sachs.

A couple questions. First of all on the Murray's front, do you plan on discussing potential financial impact or accretion from Murray's, once the acquisition is closed?

As we stated, we feel very strongly that the acquisition itself will be accretive in the FY 2006, and as Maynard said, we really can't talk too much more about their profitability, given their being a private enterprise.

I understand that, but once the acquisition is closed, towards the end of the year --

Matt , this is Don, one thing we did say, is look, we don't even get in there until January. I think we will discuss it on our year-end conference call of where it's going to be, but remember they are a private company, we are a public company. You really can't start converting them, or going forward until after January 31, which is our year-end, due to a lot of the Sarbanes-Oxley, and making them compliant. So we really would expect sometime in our conference call to discuss that, and as soon as we get in there and do it, we will tell you guys.

Fair enough. Second question I have is on the SG&A line. In the second quarter your expense dollars were essentially flat in the first quarter, they were down very slightly in the third quarter, they were up 2%. Jim spoke to the specific drivers of expense growth. I know that store growth played a role on that, but on a year-over-year basis the store growth was essentially level with where it was in the second level. Did you enter the quarter perhaps, with a more liberal approach to expenses, and have you perhaps tightened it up over the course of the third quarter, when you realized that the revenues were not going to be where you originally had hoped?

This is Jim, I think you will find that the ladies and gentlemen did an excellent job controlling the expenses, as the sales did not materialize at the same level they started off the approximately the first four, five weeks.

The biggest issue of what hit here was during the quarter we made the decision to effectively expense our sales conference for our associates. Normally it had been going out over the year, we are now incurring 100% of that within the calendar year, and that added almost $1 million to the pretax cost. And that's the single largest item. The rest of the things were controlled very well, given the lower than anticipated sales.

As you look forward to the fourth quarter, do you feel like you can keep your expenses more or less flat with the year ago level?

I think that right now with everything we see we can control it, yes.

It looks like it's going to be about flat but to add to how Jim here, remember, we have 1200 trucks out there commercial delivery trucks, and the cost of gas negatively impacted our costs, too.

Fair enough. That cost would have abated for you so far in the fourth quarter.

It's abating.

And my final question relates to the predictability of gross margins. The earnings miss if you will, versus guidance and consensus was pretty sharp relative to the sales miss, I guess some of that had to with vendor rebates and the recognition of vendor rebates, and this has sort of been a target we've all been chasing, since you switched your inventory accounting measure. Do you feel that some of the gross margin that didn't materialize perhaps related to that, is going to show up sort of later on as you work through a different inventory layers?

In the third quarter we basically hung up about $3 million of the rebates in the inventory as the inventory increased, and as we are on a FIFO system as you know, and as we go forward we should be pulling that out.

Got you. Thank you very much.

Thank you. Our next question comes from Richard Weinhart of Harris Nesbitt.

Hi, thanks very much. A couple of questions, one on the store opening schedule, I want to make sure I heard the numbers correctly, you are looking to open 15 additional, excluding the Murray's acquisition, is it 15 additional stores now in the fourth quarter?

Yes. What we expect is we will have 15 new, 4 relos and 3 additional closures for the year. So you are going to end up with a net new increase of 14 new stores.

Okay. I think that was a little bit lower than we were discussing earlier in the year. Is that a result of, first of all am I correct is that lower, and is that a result of the Murray's acquisition perhaps, or are there some other factors?

No, one of the things that's happened on the West Coast it is about 5 stores lower than we expected early on in the year. One of the things that's happened is there's still a big housing construction boom on the West Coast. It is delaying the time for us to get permits and some other things that are happening on the West Coast, and we expect that those stores will just rollover in the first quarter of next year.

That actually plays into my second question about the store opening schedule. Given the Murray's acquisition, should we be thinking about that as perhaps impacting the number of stores you open next year, or are you continuing to look at a 2, 3% growth?

I think it actually will help us. We are still expecting for next year to be between new, relos and expanded stores in the neighborhood of 55 to 60 stores next year. Understand when you start opening stores, you just can't get them in the pipeline, and obviously we've never opened stores in the Chicago, Milwaukee recently. So it may not take quite as long, but I think if anything it helps us. Murray's does have incremental stores but we can't, we are not prepared to talk about that yet.

Then one follow up on the SG&A question, I believe in second quarter, well, you talked about third being up about 1.5, so looks like you were right on target at least with your guidance even on the lower sales number, but looking at fourth quarter, you had talked about I think flat SG&A from third quarter. It sounds like you are hinting at that. Now that's not including anything from Murray's. Is that correct?

That's correct. The guidance that we are giving and that's a good point, the guidance that we gave is based on a CSK standalone through the balance of our FY ending January 28. To the extent as we said in our announcement, that we could close this transaction in December, it will modify what our guidance is for the year.

And that includes everything including your balance sheet items, such as cash flow as well, correct.

Correct. They are all, it would all be influenced with the consolidation of Murray into CSK.

That's all I have. Thanks very much.

Thank you. Our next question comes from Cid Wilson of Kevin Dann & Partners.

Good afternoon. My first question is can you give us any comments, in terms of you mentioned some of your discretionary items were underperforming, your core auto items. Any thoughts in terms of any inventory adjustments, given your historic strategy of keeping your at least a discretionary portion of your inventory fresh?

What we saw and we said was that the discretionary accessory type items, that would be things like tools, jacks, ramps, seat covers, we did see a drop-off compared to trend of where those were running. The core parts business propped up partially by the continuing good performance of the commercial sales continued to do quite well. As we said in previous calls, our inventory system is very dynamic and it adjusts automatically when these things happen, so I don't really see any big inventory issues that came out of that.

And in the past I know that I guess from previous comments, that the Pacific Northwest area of the country was the weakest area, and now it seems it's shifted more towards California because of the gas situation. Can you comment on the other regions of the country, as to how they were, and maybe you can give an idea of if gas was a factor there, or whether it was other issues?

The California area even though it softened because of the tremendous increase of fuel prices there, and we had areas in California that gasoline was over $3.60 per gallon, the Northwest was still, and weaker than the California marketplace, but with almost 500 stores in California softening there affected us greatly for the quarter.

And my last question is, can you in terms of your free cash flow that you think you may generate for 2006, and whether we might be making a shift of the strategy between debt paid down, and possibly accelerating square footage?

We have not given a number forecast for what we anticipate in 2006, but I think as Don and Maynard and others including myself have said, if we leverage to do this transaction in the short term, it would also be our objective to use cash that we would be generating to deleverage going into the future.

And, Cid, this is Don, one thing as a Company we've stood firm on we want to look at debt, look at what's the best return for the shareholders, but remember even in an all-debt deal, this keeps our balance sheet, our debt to EBITDA at 3.5 to 1, or lower.

Great. Thank you very much.

Next question comes from Scot Ciccarelli, RBC Capital Markets.

I have one basic question to start. What was that return allowance for $5 million?

It was for $1.5 million, the hit to the gross profit level. And what that was, is we booked up basically the difference between the sales and the opportunity that people have to return items. It's not that material, but it shows up in this quarter it was, had an impact of $0.02.

I'm sorry I thought had you mentioned something was 5.1 million. Did I misunderstand that?

Yes. It was 1.5 million.

1.5, I'm sorry. Okay. And can you repeat what I guess Maynard had said regarding the comp progress in the third quarter?

In the fourth quarter?

In the third quarter.

In the third quarter we started out as we said on our last conference call, the first of the quarter we were running in excess of 3% comps, and we had stated at that time at the end of the second quarter and beginning of the third quarter, our business had strengthened.

And then we had a big hurricane which we don't operate stores, and we are not blaming anything on Katrina, but the thing that happened on the Tuesday or Wednesday after the Katrina weekend is fuel prices spiked and spiked dramatically, and we saw a cloud come over our business that week, and it remained constant through the end of the third quarter, and we believe that the increase in fuel prices to $3 and above in most of the areas that we operate, affected our business week-on-week to the tune of 2 to 4%, depending upon the week. Thus we lost almost 3% comp from the first of the quarter, and ended up just marginally ahead of last year.

So they rebounded all the way back to --?

Since gas prices have started going the other way, we've seen an issue that has almost reversed from the gas prices spiking, our business has gotten better as each week has gone on, and our quarter-to-date, we are back at that 3% level that we were prior to Katrina hitting and the gas prices spiking.

Now having said that, we are just in the Christmas selling season and Martin talked about strength in categories, and he also talked about some weakness, and there's always a big question on the discretionary income, how Christmas is going to be, so we are just so far very positive, but it's a wait and see for the rest of the quarter.

And did you see much of a Delta on the commercial sales during that timeframe?

No.

All right. So that stayed pretty steady, it was primarily retail that had the volatility to it?

There was an effect ,but not the huge effect that we had on the DIY side

Scot, the commercial was like you said running 9.5%, dropped down to 4.5, 5% for a couple of weeks, but it didn't last near as long as the retail did, but you have to remember, there's a lot of miles driven in California, and just up until last week, California gas prices were still in excess of $3. They are starting to come down, but we don't like to use it as an excuse, but it makes a big difference.

And following up on a question that Matt had asked just so I understand the answer, should we see the vendor allowances being a bit more stable going forward, as opposed to the somewhat significant swings that we've seen?

The vendor allowances, I mean part of the issue that we talked about earlier was the $3 million of it was hung up in the inventory, which had come out as the inventory moves on a FIFO system.

The second piece of it is, we did reduce adjustments were made by Martin on the purchasing side, as the business did not materialize at the same level. But the fundamental underpinnings of it, which is the negotiations and agreements with the vendors, would provide on a steady-state basis returns.

But, Scot, to bring that up, as we've given guidance all the way through the year where we are at 45.3 in the first quarter of margin, 46.1 in the second, we said we were going to be up above 40 to 50 basis points in the third quarter, and if you exclude the $1.5 million return charge, we were actually up 40 basis points, so we've continued to make progress on the rebates and margin line.

Okay. Great. Thanks a lot, guys.

Our next question comes from Dax Vlassis of Gates Capital Management.

I want to make sure I understood the guidance correctly, you said the fourth quarter comps you expect to be at 1 to 2%, 80 million in real free cash flow from Ops minus CapEx, and then did you give net income guidance, or EPS guidance? I didn't hear that.

We gave, by default we gave it, because we said for the total year, our EPS guidance would be from $0.90 to $0.96 on a GAAP basis. We were sitting there at $0.70 at the end of the three quarters. So by default it's within that range.

Okay. And the CapEx for the full year is going to be 9 million in the fourth quarter?

That's correct.

So that was a higher number than you were expecting previously? For the full year, it's like 33 million?

For the full year we would still, we are going to expect about 33, just because we have upgraded some of our store systems a little quicker.

Okay. And then, your store plan for next year, you said 55 to 65 net?

No, I said 55 to 60 new, expanded, or relocated stores.

New expanded or relocated. Okay. And what was the commercial service centers total?

You are asking how many stores we had open.

How many stores had commercial service centers in them?

624.

624. Okay. And then the other thing that kind of was garbled when it came through, I don't know if there was something wrong with the phone or whatever, but did you say that pro forma you expect it to be 3.1 times leveraged?

No. What I said is, if we went with all bank debt on a pro forma basis, it would be less than 3.5 to 1.

Less than is the operative term.

Less than 3.5 times?

Correct.

Right.

And then what is your availability to repurchase stock under your bank and bond deals currently? How much availability under each of those do you have?

Our limitation really on the repurchase of stock is due to restrictive payments basket, so there's not going to be under the current arrangement a lot of additional repurchases.

What it allows you, Dax, is 50% of your net income is what it allows on the year-to-date usage, so it's just accumulative. So we used everything up to the third quarter. We have, we had 2 million left and another 5, so it's like 7 million right now.

It's 7 million under the bank deal.

Yes.

And the senior sub notes it was, let's see,

Dax, it's under the bond deal as Jim said, not the bank deal. The bank deal doesn't restrict us.

You just have to have availability of over 65 million.

65 million is to do the transaction. Other than that, we have the utilization. We have excess availability at 65, pro forma is when the transaction takes place.

Okay. Thanks.

Our next question comes from Michael Baker of Deutsche Bank.

Thanks, guys. So a couple of questions on the fourth quarter. So if I understand it correctly, then we should expect somewhere between $0.20 and $0.26 in the fourth quarter. So a couple of questions around that. First, what are the swing factors, that's a pretty big range, where do you think there's the most potential variance?

We are just going to be honest. We are going to as a stay with our range given as Maynard said, we started off last quarter with 3% comps and things happened. We are starting off and we are optimistic as we started off this quarter, at 3% comps but we are heading into the timeframe of the holidays and again as Maynard said, discretionary income in January, we are just going to stay with our range at the moment.

A couple other things then around that. So the 1 to 2% comp guidance versus sounds like you are ahead of that now that's just being conservative as you keep saying, in front of the holidays you are not sure what's going to happen, is that fair to say?

That's fair to say.

And the SG&A just to clarify a point that was made earlier, you think, I think you said you think you can hold it above flat. I took that to mean on a dollar basis versus 3Q '04, was that the correct interpretation?

That is approximately the same.

All right. Okay. Then I guess we can look at what that means for gross margin. One last question, did you spend any more marketing, Martin, you had mentioned some of the marketing things that you did, was there an increase in your marketing expenditures there?

No, it was just a reallocation.

From radio to TV, or something along those lines?

A reallocation of programs from what we were going to originally run, to run more of a Fuel Saver program.

Okay. I understand. Great. Those are all the questions. Thanks.

Our next question comes from Jeff Kobylarz of Citigroup.

Can you talk about Murray's, why do they have an AUV of 2.2 million, contrasted with your AUV, and how many SKUs do they carry ad --?

I mean, look, Jeff, one of the things we looked at is, look, we think they run a good company, but I think it's unfair at this point in time, to give only half of the information because we just, we've done all the due diligence, but this deal hasn't closed yet. We have to get HSR, and we have to make sure we are under the covers to see how it means, and we will go from there. I just don't think we should be giving out premature information. It can only hurt us.

I hear you. But the deal is going to close this month?

We expect it. It's supposed to, yes.

And the Pay N Save stores, can you tell us how those are doing, and how they are helping with sales, and --?

They are 4 in operation, and we will answer the question as we said previously, a year from now. It's a new experiment. We are finding out some things that are very positive, and are also finding out that the stores are far more promotional and ad driven than we gave it credit for in the beginning or our thought process, so we are working with them,, and we like a lot of the things that are going on and the key point here is we are finding some merchandise that's also applicable to the CSK stores.

What you just ended with, can you elaborate on that, is it material help at all to the product you put into the CSK stores?

When you take a look at 18,000 SKUs in a given store, and up to 70,000 in one of our Depos, an additional 200 items that apply from a Pay N Save to a CSK store, isn't going to be huge on the material scale, but it will enhance the overall operation as we go forward, and if you end up with 100 of those SKUs every six months that end up sticking and become standard merchandise over a period of time, your SKU counts and your total mix evolves, and we think very positively for the Company going forward.

Then lastly, Jim, the 3 million of rebates that were in inventory at the end of the third quarter that are going to come into the income statement in the fourth quarter, can you contrast that with do you know how much in rebates came through in the fourth quarter of last year?

To answer that, Jeff, that's a really complicated, we can talk about it later, but you would have to go through 6 years of restatements to get through to that number. This is why we changed from LIFO to FIFO.

Last year in the fourth quarter we were a LIFO inventory system, and now we've got FIFO. I do not have the numbers readily available to us, because at this point things have changed appreciably with the new accounting system. We did have a fourth quarter [revision] event last year.

Okay. All right. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

Our next question comes from Michael Cox of Piper Jaffray.

Good afternoon, thanks for taking my call. I was hoping you could first maybe just provide some specific examples of some of the expense control initiatives that you have in place, that you expect to drive better leverage as we look out to '06?

I think, Mike, this is a lot of things that we've been doing, obviously if you go back two or three years and look at the capital leases that we had out there how we restructured all of those where you amortize those over five years, but looking at them but just for, you don't want to get into specifics but we manage payroll by store, by week, every single week.

We manage our truck expense the same way and, Martin every week talks to every senior on Tuesday morning, to try and figure out where we can continue to focus on being the low cost provider, because that's our philosophy here. And we are just going to focus on every single line. Workers' Comp, for example, year-over-year is actually down because we put in safety programs. We are just going to continue to focus on those things.

I think one of the examples, it is a very good one is we did not see flow through the bottom line in the distribution side, a lot of the fuel expenses that were affecting it, because Martin was able to offset those by other things that were going on in the logistics area, which basically almost made our logistic costs flat, in a period of rising costs associated with it.

Okay. That's very helpful. I was also hoping you could give us an update on the Great Rewards program, and some of the kiosks that you have installed into some of your stores, are you seeing any difference, in terms of sales trends within some of the categories that are impacted by those?

The Great Rewards program continues to be extremely successful. We've been successful in converting balances within the categories that are on Great Rewards, two premium products and high quality products. We remain committed to that program because we believe in the long haul, it provides us with improved customer satisfaction, because these higher quality items are going to result in the customer being more satisfied with the purchases they make from CSK.

In addition to that our employees continue to love the program, just because they financially benefit from it. We continue on a quarterly basis to modify the items that are on that program, and it's done very, very well for us.

Thanks. My last question here is on the product and return allowance that you took this quarter. Was there something different in the return rates that that you were seeing to cause this allowance change, or what was the impetus on this?

No, that has no impact whatsoever, the Great Rewards program.

The sales return program.

The sales return as I said was just purely a recognition of effectively 60 days over a period of time where people could return their merchandise, is putting an allowance on our books one-time. That we will review on a quarterly basis but it should not move. ,

We had not had that allowance on our books before, and it was just an issue of what the Company felt was the proper accounting, and in conference with our auditors, we decided that it was time to put that on there so we did.

And it had nothing to do with warranty returns.

No.

Okay. Great. Thanks a lot, guys.

Our next question comes from Jeff Matthews of Ram Partners.

Hi, thank you. I'm wondering if you've seen any change in the marketing, promotional, or pricing activities at AutoZone in recent months?

No, not a significant thing. We've seen over the last six months more print than we were used to seeing by that competitor, but in the last six months they have had a broad approach to their marketing including print, radio and television, but it doesn't seem like they have stepped up or spent a lot more advertising dollars in our operating areas, but I guess that has to be answered by them, not us.

I think as we've said before, in an industry where the customer visits average three to four times a year, it's really impractical to try to drive that customer with shelf pricing. So we continue to see a very consistent pricing environment on the shelf side, and as various costs have changed in the marketplace, due to just raw materials costs that gets passed along to the consumer.

You can actually ask them that question yourself tomorrow morning on their conference call.

I plan to, but I don't know if they will answer it.

I don't think we should be answering it.

But the pricing environment remains very constant in the automotive after market.

And then how about the cost, not relating to AutoZone, but costs that you are seeing, is there a greater variability for vendors to pass through costs, or is it still tough, outside of spot fuel surcharge-type things?

The vendors cost to us, or the costs to the customer?

Well, vendor to you, you to the customer?

Yes, it remains tough for the vendors to give us increased costs, yes. I mean we do the prudent thing there. We negotiate tough on every item that we buy.

Sure. Okay. Thank you.

Our next question comes from Matt Fassler of Goldman Sachs.

I just have a quick follow up. I want to make sure I understand how we treat your share count for the converts that you just did. I see the share count was 44.1 million, presumably there's no if converted treatment for the convert. And I just want to get a sense as we do the EPS calculation into the fourth quarter and into next year, are we simply taking the diluted shares, excluding any impact of the convert, or should we actually be having that back in there with an interest add back?

Hey, Matt, the way that this works it's really like treating the shares in a treasury method. When they get into the money on the convert you treat them as like options outstanding, and we are going to try and help people through that next year.

Do you have any sense for what the appropriate share count would be in the fourth quarter?

It shouldn't change at all unless our stock gets over $26 in the fourth quarter.

Is there an interest add back commensurate with the proportion if you will of the convert that's in the money?

Well, no. What it is, is it's at a 3.375 rate period. Along the way it's a straight interest rate as the 125 million outstanding.

I'm just talking about doing the EPS calculation, to the extent that we add stock or shares to the denominator.

No, no.

Nothing like that.

No.

Okay. Thank you very much.

All right.

[OPERATOR INSTRUCTIONS]. Next question, Matt Nemer of Thomas Weisel Partners.

This is Katherine Hartell for Matt. Most of my questions have been answered, but I was wondering if you could give us a little bit more color on if there's any update on your test store in Arizona, and also the electronic kiosks, I'm not sure if you've commented on those?

We have electronic kiosks in approximately ten stores. Those are stores that are largely front room in nature, and they continue to perform very well. I wouldn't look to see a big roll-out on those with our current store layout, but we will use them as prudent. They do provide the customer with the opportunity to look hard-parts items up, in particular, on their own. So they work very well but we are working on some new technologies there, that I think you will see that move to the shelf, as opposed to a full large kiosk unit.

Katherine, I know you come out and tour the stores a lot, but at CSK, Martin and his group in merchandising are always testing different types of stores, and I'm not sure that it's prudent to take a one or two store tour store test, and bring that up on this call.

Okay. Thanks.

Our next question comes from Andrew Berg of Post Advisory Group.

One clarification because my phone line was garbled. Did you indicate that operating and admin expense would be roughly 160 in the fourth quarter? And second question is, were there any drawings on the revolver at the end of the quarter?

We had at the end of the quarter I believe $35 million drawn outstanding on the revolver.

Plus the LCs.

Exactly, 30 million plus the LCs outstanding.

What was the LC draw, do you guys recall?

Just over 30 million. I think it was $32 million at the time. That just touches availability. It doesn't have stats.

Right. Did I hear when you guys said that fourth quarter operating expense should approximate what third quarter's number was?

Relatively flat, yes.

Thank you, guys.

Our final question comes from Dax Vlassis of Gates Capital Management.

I was wondering, the accounts receivable, I mean that looked like it was a huge source of cash in the quarter, can you talk about what that was specifically, and if you expect the receivables, did you sell receivables, or were those collections? It looks like it was probably, you know, 30 to 40 million of cash, from what I can tell.

We did not sell receivables. We do not do any factoring, yes, they were collection of receivables.

Would you expect those to go back up, or is that a permanent reduction?

I wouldn't say it's a total permanent reduction, but we are collecting faster. And we may have some timing here, just at the end of the quarter also.

My last question is on the NOLs, when would you expect to be paying taxes closer to the provision that you, I guess it's like 30, what, 39% now?

Right.

When would you expect that to, how much in NOLs do you have, and would you expect the cash taxes would be closer to the provision?

We are virtually wiping out our NOL at this point in time in our FY 2005. And being the new kid on the block I've got some good work, because we will move into a significant tax paying posture for 2006.

Okay. That's and what sort of percentage of the provision would you expect that to be?

Dax, we can go through that later, but to ask us what we think in a crystal ball, and I just can't predict that, and Jim has been here now 4.5, 5 weeks, I don't think he can answer that yet, but we are going to try and get it as low as possible. That's the goal.

I understand. Thanks a lot.

I'm showing no further questions, sir.

Okay. Thank you all for participating, and we will see you at the year-end conference call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Thank you, and have a nice day.