O'Reilly Automotive Inc (ORLY) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the O'Reilly Auto Parts 2006 fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Tom McFall, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, I'd like to read a brief statement. The Company claims the protection of Safe Harbor for forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will, or similar words.

In addition, statements contained within this press release that are not historical facts are forward-looking statements such as statements discussing among other things expected growth, store development and expansion strategy, business strategies, future revenues, and future performance. These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events or results. Such statements are subject to risks, uncertainties, and assumptions including, but not limited to competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, or in the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the risk-factor section of the Company's Form 10-K for the year ended December 31, 2006 for more details. At this time, I'd like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to our fourth quarter 2006 conference call. Participating in the call with me this morning is Ted Wise, our Chief Operating Officer; and of course Tom McFall our Chief Financial Officer. David O'Reilly our Executive Chairman is also present but won't be participating in the prepared comments.

I'd like to start off by thanking Team O'Reilly for all their hard work during the fourth quarter. Our team continues to focus on providing the very best customer service levels in our business to both our professional installer customers and our do it yourself customers. While we're not satisfied with the 2.1% comparable store sales growth we achieved for the quarter, we certainly have to consider that we were up against a relatively challenging 7.4% comp growth from fourth quarter '05 which was fueled in part by the recovery effort in the Gulf states from the damage inflicted by hurricanes Katrina and Rita. We have two primary regions in our organizational structure that were affected by the hurricanes in '05. While we don't report comps by region, of course, to better explain our comp trends, we looked at comparable store sales excluding those two regions. Keep in mind, we have 18 different regions and these two represent approximately 14% of our business. Excluding those two regions, our quarterly comp store sales growth was 4.6%.

At the end of the day, our comparable store sales are what they are, but I wanted to make sure everyone understands the effect the recovery efforts had on the comps we recorded in fourth quarter of '05 and the comparisons those regions were up against this past quarter. 2006 was without question a challenging year for the automotive aftermarket. Higher gas prices and interest rates ate away at our customers discretionary cash resulting in fewer miles driven in the U.S. for several months during the summer compared to 2005. This drove many customers to make the decision to defer some automotive maintenance that wasn't absolutely necessary which made comparable store sales growth more challenging. We're reasonably optimistic that we'll see benefit from this deferred maintenance in the coming months. We feel categories like air conditioning repair, shock absorbers and other items that could have been deferred in many cases were and that we'll see a catch up in these categories as we move toward the summer months.

We're also very pleased to see that the number of miles driven according to the data provided by the automotive after market industry association rebounded nicely with the softening fuel prices this past fall and that we're on a more normal trend of miles driven increases month over month, which is obviously a key driver of our demand. As I mentioned, our comparable store sales increase for the fourth quarter was 2.1% bringing the year to 3.3% comp store sales growth. The sales trend that we were on in the fourth quarter carried into January of this year, however, February has rebounded very nicely and while comparable store sales growth is hard to predict, we have every reason to believe that we're at the beginning of a more robust comparable store sales growth period with the easier comparisons from last year, the potential of some pent up demand and the monthly miles driven increases that are being recorded.

All this considered, we're comfortable at this point with our comp store sales growth guidance at 3 to 5% for the first quarter, and are hoping that we can get back to more normalized guidance in the second quarter and remainder of the year at 4 to 6%. Our gross margin for the quarter came in at 44.6% compared to 44.9% last year. A 30-basis point decrease. As most of you know, last year's fourth quarter gross margin was a record high for us and was largely the result of exceeding some vendor performance incentive hurdles that were not fully anticipated. Resulting in higher gross margin for the quarter than sales made during the quarter generated. We have several vendor programs based on various performance criteria that we accrue for and try to apply as accurately as possible throughout the year. Our better than anticipated gross margin performance this past quarter is in part the result of a year end true up of some of our vendor performance incentive programs as well as our ongoing category management efforts.

Considering the distribution, purchasing, and transportation is included in our cost of goods sold, we're also very focused on improving productivity and efficiency in these areas. As I've mentioned before, our dual market strategy requires a higher level of service to our stores and customers in a pure retail model. This installer customer based inclination leads us to replenishing our store's inventories five nights a week and making a wide array of SKUs available on a same day basis to most stores. In worst cases an overnight basis to our more remote stores. This high level of service and access to inventory is obviously more expensive than what we would burden if we were using a pure retail model. For that reason, we put a lot of effort this past year into creating a more efficient distribution environment in our distribution centers. I talked about some of these initiatives before, but to remind you some of them, they include voice activated picking, material handling equipment improvements, on-board performance monitoring in our trucks, various energy conservation efforts and relentless focus on safety.

These initiatives have allowed us to maintain our '06 distribution expenses as a percent of sales equal to '05, which we feel is a very meaningful accomplishment considering the much higher fuel prices we experienced in '06 as well as the loss of sales leverage we experienced compared to '05. With all this in consideration, we're comfortable at this point forecasting gross margin in the 43.8 to 44.2% range. Operating expenses for the quarter increased to 33.1% compared to 32.7% a year ago. This 40 basis point increase is largely due to simple loss of sales leverage. On balance, we're very proud of the effort our team has put into closely managing every line of our expense detail. We have several initiatives underway which Ted will expand on which include our energy management system implementation and our store staffing software implementation.

For the quarter, we generated operating margins of 11.5% of sales and for the year, I'm very proud to announce that we set an all-time high operating margin of 12.4%. This is mainly the result of very diligent category management efforts including pricing optimization, both wholesale and retail, product assortment management, acquisition cost improvements, our related selling efforts as well as extensive attention to expenses in each of our stores, distribution centers, and our corporate offices.

Net income as a percent of sales came in at 7.2% for the quarter and 7.8% for the year. Down slightly from last year due to the one-time tax benefit we had in the third quarter of '05 due to the resolution of a tax uncertainty we had previously reserved for. This resulted in a one-time tax benefit of $6.057 million in 2005. During the quarter we opened an additional 44 new stores bringing our store count to 1640 stores. For the year, we opened 170 new stores. These additions as well as the opening of our distribution center in Indianapolis in mid 2006 brought our inventory value to 813 million at the end of the year. A 12.1% increase in line with our new store additions and our overall sales growth of 11.6%.

In the fourth quarter, we put a lot of focus on reducing overstocks in our distribution centers which were the result for most part of pretty aggressive sales forecast related to the strong sales year we had in 2005. These efforts were very effective. We ended the third quarter with 815 million in inventory and even with the addition of 44 new stores during the fourth quarter, we were able to reduce our inventory a little over $2 million to $813 million. Inventory turnover remained equal compared to last year at 1.7 times on a total asset basis and 2.8 times on a net of payable basis. Our accounts payable as a percent of inventory decreased 110 basis points from the fourth quarter last year to 39.2%. This is the result of slightly decreased merchandise purchasing activity related to our efforts to minimize overstocks in our distribution centers as I mentioned. We continue to focus on improving our merchandise payment terms while at the same time maintaining the high product quality and strength of some of the national brands our customers have come to expect.

In closing, we remain very confident in the pent up demand that we feel has been created in the tough economic environment of the past year. We think we'll see benefit of that as we move toward the summer months. We also remain very confident in the vehicle population dynamics that fuel our industry. There are a record number of vehicles on the road. The average age of these vehicles are at record highs and the number of miles they are driven continues to grow. The drive train, bodies, and interiors of these vehicles were built better than those of the past. This allows these vehicles to stay on the road longer and go through more heavy maintenance cycles as they reach much higher mileages, yet they are worthy of the maintenance investment due to the strength of the drive train, the longer lasting bodies, and the interiors.

We just completed our annual store manager's conference in Dallas, Texas. I can tell you we've got 1900 of the best store managers, district managers, and regional managers in our business. They're very technically oriented and customer service focused and are all looking forward to a strong 2007 into the rollout of our new point of sale system which is currently in testing in a few of our stores. We're very excited about the higher customer service levels this new system will bring as we work toward our year-end goal of opening 190 to 195 new store locations. To talk about our growth and some of our other internal initiatives I'll now turn the call over to Ted Wise.

Thanks, Greg, and good morning, everyone. I would like to review and give you some additional detail on this past year's expansion. As Greg mentioned, we ended up with a 1640 new locations. We installed 44 locations in the fourth quarter for a total of 170 new stores for the year. Acquisitions resulted in 12 new stores or approximately 7% of our unit growth and all were single-store purchases. We had another strong expansion year in Texas with 30 new stores followed by Georgia at 29 stores, and Indiana with 22 stores. The balance of our stores is spread out in our 25-state footprint, although definitely weighted heavier in the southeast serviced down at the Atlanta Distribution Center.

We also relocated two stores in the fourth quarter giving us a total of 17 store relocations for the year. We renovated 61 stores last year with the majority of these being the former Midwest stores. We're making good progress in remodels and relocations of these Midwest stores as well as finding additional new market opportunities in the surrounding markets. With the relocation of the Minneapolis, St. Paul, D.C. to a larger, more efficient building this summer, the new Indianapolis, D.C. opening this past summer and the Atlanta, D.C., we have good capacity to service new store growth across the Company. As announced earlier, our expansion goal for 2007 is for 190 to 195 new locations as well as a comparable number of store relocations as last year.

Our real estate and store installation team did a good job spreading our growth throughout the year which allowed store operations to spend the necessary and proper amount of time to recruit and train new team members that ensures the new store gets off to a great start. We continue to focus on improving the grand opening for retail customers and doing more installer sales work in the field for our dealer customers which combine -- it's critical to maximize our sales pace and growth in these new markets. We've expanded the number of real estate team members out in the field looking for new sites across our market area to reach our goal for last year as well as being necessary for to us build a bank of properties and building lease opportunities for the balance of '07 and into '08.

In today's development environment, the planning stage to buy property, develop the site and get stores opened can take up to two years. Our challenge continues to be to find the right locations at the right price in the customer's demographics to give the stores a great installer base as well as a strong do it yourself customer base. This year's expansion is off to a great start and on schedule to meet our goal.

The store design team has made a number of significant enhancements in our merchandising of out-front product categories along with upgrading our overall interior store image. Our new interior decor package consist of a lighter and brighter color scheme and updated wall graphics have been installed in over 600 stores. We plan to do another 400 stores by year end. Over the last couple of years, our approach has been to roll out a series of interior design enhancements that has improved the retail atmosphere of our stores. Today we feel very confident that our stores look and feel great to our customers.

In the area of store operations, we announced the development and implementation of several new systems last year. With equal split of our wholesale and retail sales volume, it can be very challenging to schedule in the stores. A new store scheduling program was introduced last year to assist the manager in the proper allocation of hours based on projected customer traffic and sales. Our immediate goal was to identify the times throughout the day and week that our staffing might not be adequate to get outstanding customer service. Based on the specific salary numbers for the stores, we can then either add more hours into the schedule or look for opportunities to move hours around within the existing schedule. Again, having a 50/50 business mix, we must use it as a tool to help the manager in making the right scheduling decision to grow the business. Compared to a more regimented scheduling plan of the pure retail business. Our managers are becoming more comfortable with the use of the system and we are confident that with the sales forecasting it will provide a very important tool to help our manager to manage the balance of the store productivity and customer service levels.

We have just finished the rollout of our new LMS system or computer based training program for store team members. All the paper based training material and programs have been converted to computer module. Each store has a train station which can also be accessed from all terminals in the store. All training activity is sent back to our training department to track and record team member participation. We're extremely confident that this will provide a significant improvement in the development of our new team members and continue to help improve store operational training, technical parts knowledge and customer service skills at the store level.

The development of our new point of sale system is complete and in the testing phase at the store level with the goal of having it installed in all stores by mid year. As we had mentioned before, this will move our stores from a legacy system green screen environment to a graphical interface that will be much easier to teach new team members and more efficient to use for all parts specialists. At the same time, we are introducing an updated electronic parts lookup catalog that will provide additional coverage of older vehicle application, VIN, or vehicle identification number cross reference data, product attributes and images and several other enhancements that will improve our parts specialist abilities to service the customer. This implementation also includes updated graphical programs for management functions that will provide quicker access to valuable data and overall make them more efficient in their new roles. It also reduces the learning curve for new management.

This new system built a foundation which allows us to add functionality in a quick and efficient manner as they are identified or become available through other resources. We are very focused on managing and looking for opportunities to control our operating expenses in the store. One example is the energy management system that we are installing in all new stores. Also, based on the store location and the best ROI, we have started a retro program in existing stores. These systems centralize the management of storage, electric, and gas usage. So far, the savings we've experienced are in the range of 18 plus percentage. Currently, we have approximately 400 stores installed with this system with the plans of having the majority of our stores retrofitted within the next six months.

Risk management in the stores in D.C. of our work comp and vehicle accidents has been a high priority for our team. Through employer awareness and extensive safety program, we have been successful at reducing the number of accidents and related risk expenses. We are seeing positive results in savings from our efforts as well as creating a safer and more productive working environment for our team members.

Now to finish my comments on sales. As Greg mentioned, we just got back from our annual manager and sales conference in Dallas. It always amazes me to see the excitement and momentum that comes out of this meeting. It's a perfect time for to us celebrate O'Reilly success and show the appreciation to our company leadership that has been responsible for our growth. This is a very productive meeting and managers actually work harder than if they were back in their stores or out in their sales territory. Basically three days of product education, internal operation sessions, and sales and marketing programs fill their schedule. The result is our management team leaves the conference very focused on what they must do to improve their business. This year, the conference theme was focused on developing our leadership skills and our number one competitive advantage, great customer service. We truly have a very committed management team leading over 24,000 great team members. We are confident that with this leadership we will make '07 a great year for the Company. I'll now turn the call over to Tom McFall.

Thank you, Ted. To recap our numbers, sales were up 11.6% to 2.28 billion for the year with comps of 3.3% for stores open greater than 12 months. For the quarter, sales increased 8.4% to 558 million with comps of 2.1% for stores open greater than 12 months. Sales to independent jobbers of $48 million in 2006 were flat with 2005. Gross profit for the year was 44.1% of sales versus 43.6% in the prior year. For the quarter, gross margin was 44.6% versus 44.9% in the prior year.

Year-to-date gross margin improvement was primarily due to improved acquisition costs which overcame a lot of additional costs in our distribution center from the cost of additional -- excuse me, our distribution center was able to stay flat as Greg mentioned and overcome the increased gas prices. On a quarterly basis, the decrease in gross margin as a percent of sales is primarily due to our annual vendor support programs as Greg discussed earlier. Absent growth and the impact of better than planned sales results, from these annual programs quarterly gross margin would be relatively comparable throughout the year. For the year, SG&A was 31.7% of sales versus 31.7% in the prior year. Quarterly results were 33.1% versus 32.7% in the prior year.

SG&A leverage factors came from lower than historical same-store sales results, and increased costs of vehicles, utilities, and advertising. These pressures were partially offset by a good year in the area of safety. Operating income for the year was 12.4% of sales versus 12.3% in the prior year, and 11.8% increase in dollars. For the quarter, we came in at 11.5% versus 12.3% in the prior year. 12.4% operating margin for the year was a record for Team O'Reilly. The quarterly decrease was due to the additional gross margin in the fourth quarter of 2005 related to the annual vendor support and the loss of leverage on lower same-store sales. Tax provision for the year and quarter were 36.9% of pretax income. The 2.3% increase in our effective tax rate over 2005 was a result of the one-time benefit of 6.1 million from the favorable tax resolution of prior year tax uncertainties recorded in the third quarter of 2005.

For the year, net income was 178.1 million, 7.8% of sales. On an adjusted basis excluding the favorable tax resolution in the prior year, net income increased 12.6% for the year. For the quarter, net income was 40.4 million, 7.2% of sales versus 39.5 million, 7.7% of sales in the prior year. Diluted earnings per share for the quarter were $0.35 versus $0.35 in the prior year and 115.4 million shares. Full-year results were $1.55 versus $1.45 in the prior year and 115.1 million shares. On an adjusted basis, excluding the favorable tax resolution in the prior year, EPS increased 10.7% over the prior year.

Moving on to some of the balance sheet numbers. Inventory ended the year at 812.9 million, which was down 2.5 million from the third quarter despite adding 44 new stores. Greg gave more details on that earlier. Total assets were 2 billion which was a $250 million increase from the last year due to new store growth and the addition of the Indianapolis, DC. Accounts payable were 318.4 million, which was an increase of 25.7 million. AP to inventory ended the year at 39.2% which was a decrease from last year's 40.3%. The AP to inventory ratio was negatively impacted in the second half of the year by our efforts to sell through excess inventory and improved turns. Long-term debt ended the year at $110 million. Debt to capital was 7.5% with a debt to EBITDA ratio of 0.3 times. EBITDA for the year was 351 million which is 15.4% of sales.

On to some other ratios. Return on equity ended the year at 14.2%. Return on assets 9.6%. Return on invested capital, 13.4%. For some other information, the LIFO charge for the quarter was $3 million and 19 million for the year. Depreciation was 17.6 million for the quarter and 64.9 million for the year. Capital expenditures for the fourth quarter, 54 million and 229 million for the year. Interest expense for the quarter was 1 million and 4.3 million for the year. For the quarter, cash flow from operating activities was $26 million with a negative $28 million free cash flow. For the year, cash flow from operations was 186 million with a $43 million negative free cash flow. The negative free cash flow was the result of the reduction of the AP to inventory ratio as previously discussed. A higher owned versus leased new store ratio than the average historical split and in accordance with 123R, the tax benefit of stock options exercised is now included in the financing section of cash flow statement where it had been previously included in the operating section. The change of classification reduced cash flow from operations by 8.6 million as compared to the prior year.

Moving on to our guidance. For the full year 2007, we forecast capital expenditures coming in between 225 and $235 million. Interest 4 to 5 million, depreciation, 72 to 78 million. Our tax rate we forecast to be 37.3 to 37.5%. The increase is due to the adoption of FIN 48 changes in certain state tax laws. This will result in a 1 to $2 million negative impact on earnings. Free cash flow for the year 15 to 25 million. Our revenue projections for 2007 are 2.5 to 2.6 billion. Same-store sales, 4 to 6%. Earnings per share, $1.71 to $1.78 with stock option expense and $1.75 to $1.82 without stock option expense. For the first quarter guidance, same-store sales 3 to 5% and EPS with stock options of $0.38 to $0.42 per share and $0.39 to $0.43 without stock options. At this time, I'd like to ask Mandy, the operator, to come back and we will be happy to answer questions. Mandy?

Yes, sir. [OPERATOR INSTRUCTIONS] Your first question, sir, comes from Scot Ciccarelli with RBC Capital Markets

Good morning, Scott.

Good morning. It sounds like from your commentary, obviously you had two regions that were down sharply. I estimated it was down in the high teens rate on a comp basis. Number one, is that a fair statement? And number two, is there anything else going on in those regions or is it just a function of difficult comparisons?

The -- Scot, the answer to that question, is last year's numbers were just extremely strong and we saw that carry through part of the first quarter, and we'll start anniversarying against those two regions outstanding performance where it's more normal end of the first quarter and into the second quarter.

Okay. All right. So you just think it's difficult comparisons there?

When you look at the numbers, yes.

Okay. Fair enough. And then it sounds like the acquisitions were down pretty significantly this year relative to what the historical norm has been, and yet that's occurred in a difficult environment. I guess logically, I would have thought that your acquisitions would be, up, or at least flat simply because if everyone's suffering, I would think that the mom and pop shops are getting squeezed, is there something else going on, on that end, Ted?

Well, Scot, we're being more selective. It's a fine line when you put a new store in a market what the value of an acquisition is, and there's a lot of independent jobbers that are for sale. That doesn't necessarily mean that they bring the value to consolidating into a new store. We've always felt like they've got to have -- there's two things. They got to have three things actually. They have got to have the business or the people or the location, and you've got to have two of those things to really make them attractive most of the time and we just didn't really find as many good acquisitions last year that brought value to the Company. We continue to look, I mean, we've looked at a bunch of them and walked away from them because we just felt like it wouldn't be a benefit to the store.

Okay. Then I guess the last question is, in terms of you guys had a true up here in the fourth quarter. That helped gross margin a little bit even if it wasn't as much as last year yet it occurred on a pretty modest comp. If you guys wind up hitting your 3 to 5 or 4 to 6 comp range, shouldn't we expect to see gross margins up maybe a little bit more than what you are suggesting at this point? Or is that just a function of being conservative?

Well, I think we're being realistic. This year we'll try to grow more or balance our gross margin more quarter to quarter by accruing more accurately for the year end true up that we've been through for several years. It's always a little bit of a crystal ball. We think the 43.8 to 44.2% guidance is pretty accurate. That's probably what you should do.

Thanks a lot, guys.

Thank you, Scot.

Your next question comes from the line of Bill Sims with Citigroup.

Thank you, good morning.

Good morning, Bill.

First question is, can you talk about the commercial atmosphere on the commercial side of the business? We've heard form some of your competitors in the past 24 hours that the promotional environment amongst the non retailers involved in the commercial business have gotten more significant as they attempt to win back the market share. Do you think this will prolong into the back half of the year? Do you see any of the promotional strategies of competitors being one time?

Bill, we've been in the commercial business our whole lives. My whole career, Ted's whole career, David's career. There has never not been a whole lot of competitors on the wholesale side of the business. There's always been promotions where various competitors promote commodities, stock up kits, things they want their shops to stock. We've not really seen anything that's been a significant change. We've been through several cycle where there just seems to be more promotions going on than there would be normally. Generally when you have a year like the aftermarket had last year where the economy put pressure on every company, companies start trying to do things to drive demand and promotions is one of those things of course.

This is Ted. The good installer customers that you really want to build your business on are not as much motivated by one-time promotions. They're more focused on getting a good competitive price and great service that helps them be profitable in turning their bays. So to Greg's point, I can't really say that we've seen a lot of pressure on price cutting from a promotional standpoint in the field.

If it is, it's on the items we really don't focus on much anyway which are commodity based and things like that.

Can you give us an update on your real estate strategy? I believe you suggested that you were seeing more Owens stores than Leap stores in your recent store openings. Is that a shift in what you've seen in the past and what is driving that shift?

Well, it's -- we feel like first of all to control our schedule and buy the right site and develop it and meet our time frames, it's a lot more efficient for us to own our own real estate to get the job done. Also, when we look at some of the -- at the end of the day what it costs the store kind of on a occupancy percentage. We can buy, develop, and own less than we can have developers to do build to suits or do lease spaces. So it's just more of a matter of the time to market and really just the expense standpoint that we feel like we're better off when we own at this point.

Then my last question is, I know you don't specifically break down commercial and retail comps but can you give us an idea which business was stronger than the other if thee was one business stronger than the other and to what general magnitude?

Like you said, we don't disclose the details but I would tell you that the do it for me or the commercial side was a little stronger than the retail side.

I appreciate it. Thank you.

You bet.

Your next question comes from the line of David Cumberland with Robert Baird.

Thanks. Good morning. You talked about a pickup in sales in February. Does that represent a better underlying trend across your markets or is that more about less impact from comparing to the hurricane-related repairs.

I think it's a little bit of both. I think we start tailing off of the hurricane recovery next month and into the spring. It maintains out there for a while. It's not as significant as it was. I think it reflects a little bit of that but also just an improving environment with some of the pent up demand we've been talking about. I think the consumers are recovering to some degree or at least getting used to fuel prices and they realize they've got to drive their cars this spring and summer. They are thinking about vacations, and as I said in my comments, I think that we're at the front end of maybe the release of some of this pent up demand that we feel like we experienced last year and that's one of the drivers.

Can you also talk about the impact of whether on your sales in Q4 and perhaps so far in Q1?

Well, in Q4 we started out not having much of a winter but the winter turned pretty serious late in the quarter and in the first part of this quarter in January through the central part of the U.S. there is one heck of an ice storm that really shut things down for a while which we feel like played against us in January because it just was so devastating and people were without power for weeks at a a time. It was a pretty big deal. Really, it's been in our opinion a little more of a normal winter than we've had for a long time because we have had the extreme cold in the northern states and so forth. We really don't have any speculation as to the impact of weather other than the ice storm that came through the Midwest, shut things down for a while. Business bounced back nice once things started clearing out.

Thanks. One more question on the last call, you talked about the Q4 calendar being unfavorable due to a Sunday replacing a Saturday. Did that hurt you and if so, can you estimate the impact of that?

Yes. That is a negative impact for us based on half of our business for the installers, the vast majority are not open on Sunday. That's about 50 basis points.

Thank you.

Your next question comes from the line of Alan Rifkin with Lehman Brothers.

Thank you very much. Just curious, as you look at the distribution costs that incurred in '06 both from Atlanta and then the opening of Indianapolis midway through, I was wondering if maybe you could quantify the impact on the annual expense line of those two line items, and maybe if you could even provide a little bit more color as to what positive effect you think that could mean to the expense line in '07 as efficiencies are gained in both DCs?

Well, again, those expenses are included in our cost of goods so we reflected in our gross margin and for the year, it's, I really don't have the information to articulate the excessive effect or the excessive capacity that these two distribution centers currently have that wouldn't be leveraged by sales. That incrementally as we move through '07 remedies as we add stores to those distribution centers, but there's no question that we have excess capacity right now in anticipation of our 190 to 195 stores that we're adding this year which at any point in time you have that. Sometimes we have distribution centers fill more stores than they really are set up to do. It can cost you a little bit in operating expense and in some cases you can do pretty well from a leverage standpoint by doing that. Today we're sitting with a distribution center in Indianapolis that we can add almost 200 stores to within the next couple of years and then Atlanta still has plenty of capacity, too. We are carrying some fixed expenses in those distribution centers that we normally wouldn't. I can't articulate the exact numbers.

Okay. And one question if I may. With the AP to inventory ratio ticking down 110 basis points, I know that you folks have had a goal, certainly higher than that. I was wondering maybe what your goal would be at year end '07 for the AP to inventory ratio?

Our target at the end of '07 is still 45%. Mike Swearengen is our Senior Vice President of Merchandise, and this year, what we did towards the end of the third quarter and fourth quarter really played against them. Again, it's part of the whole supply chain management scheme, but I think we did the right thing from the perspective that we needed to bring our distribution center inventories down a little bit, played against us from and AP to inventory standpoint. But from a distribution efficiency and just an investment standpoint, it was the right thing to do. We've not went backwards on our deals with our vendors and we continue to work to gain ground and we feel pretty comfortable with getting to 45% by the end of the year providing there's not some unusual event like we had this year where sales forecasts just simply were not met and our inventory forecasting system is set up to build inventory for those forecasts and the sales just didn't come to fruition.

Greg, just one more thing if you don't mind. Very comforting to see a company management out there that's actually looking for same-store sales to accelerate in '07 and obviously given your first quarter guidance relative to your full-year guidance of 4 to 6, just curious if you could maybe provide a little more color behind that? Is that just based on your belief that the macro environment vis-a-vis gas prices will be more benign than what we saw last year or are in your opinion more company-specific issues in addition to easier same-store sales that lead you to the brighter outlook even as we head further into '07?

Well, it's a combination of the things you just mentioned. It's the pent up demand. It's the -- maybe a little bit of more of a consumer recognition of where gas prices are and those being built into budgets. And the easier comparisons certainly play into that. We've been through several periods of maybe a year slower than -- a slow year. Generally followed by a better year providing conditions allow for it and assuming that part of the reason for the -- or part of the contributor to the slowdown was a deferring of maintenance and repairs that can be deferred. We feel like that's happened. We have close relationships with a lot of our installer customers. There's just too many comments out there that our territory sales managers hear form our customers about how tough it is to sell a job that's somewhat discretionary.

When it comes to you are doing a front end alignment and you tell the customer that his car really needs shock absorbers, you've got 100,000 miles on the original shocks, f it's not something that's going to cause a mechanical breakdown customers are deferring that, because of the economic position of their personal family financing situation. So I think this year will be a bounceback year and based on what we've seen so far this month, we feel that we're on the front end of that, and for that reason, we're comfortable with 3 to 5 for the first quarter. But based on all of the conditions, we have every reason to think for second quarter and the remainder of the year we should be able to get back to more normal comp guidance of 4 to 6%.

Congratulations. Thank you.

Thank you.

Your next question comes from the line of Tony Cristello with BB Capital Markets.

Good morning.

Good morning.

I want one question. Can you give an update on the sales trends at the Midwest stores? I know that had been last quarter you're starting to see some acceleration there and just wanted to know if the environment has sort of stalled that? Are you still see some progress?

We're still seeing progress. The Midwest stores when we originally bought them, they weren't as price competitive as we like to be. For that reason, we went in there and did what we normally do as far as making sure that the price that we offer is competitive in the marketplace and doing that really kind of aid our normal -- or denied us our normal comp growth for the first year. We have anniversaried those prices and now we're very pleased with the comp growth we're seeing up there and feel like we're gaining market share as we continue to establish the O'Reilly brand in those markets.

I believe in the fourth quarter as Greg mentioned before, it was a pretty mild winter the last half of the year up there, so we didn't have what they normally had as far as the cold driving the business. Even under those conditions that quarter, I think we double digit comp in those stores which that was a real positive indicator and this -- we're off to a good year, too. We've got a lot of work behind us. It was a tough transition changing those stores over and systems over. It's cold up there.

From a productivity standpoint, are they sort of catching up to where the core O'Reilly store would be at this point?

I think the productivity is improving. I think for to us see the same level productivity it's going to take some relocations and some moves that will come over time, but generally speaking, we're happy with the progress.

We still have a ways to go but we're happy with the progress to this point.

So there's clearly opportunity though?

You bet.

One other question. When you look at, and I don't know if you quantify, the vendor rebates helped you some again in Q4 '06. How much of it was vendor rebates on the margin versus how much was category managed in some of these other items?

This is Tom, Tony. I would anticipate that our margin would have come in in the fourth quarter in the 42 -- I'm sorry, in the 44.2, 44.3 range. A couple of tenths. 20 or 30 basis points.

One last question, when you looked at the sort of the two regions that underperformed relative to core regions, was the mix DIFM versus DIY, did one outperform versus the other? Did you see much more of a strength in the commercial side of the business versus the do it yourself?

You're talking strictly those two regions?

Yes.

No. The change there was pretty balanced with what the rest of the Company would have reflected. The strength was a little heavier on the do it for me side as compared to the do it yourself side. Would I like to add, those regions really didn't underperform.

They really didn't.

They were outstanding sales, it's just the year before because of the hurricane and the extraordinary event there, the sales were just blown off the top of the roof. If you look two year back, they comped pretty well on average. They just had a heck of a year last year and it would have been impossible basically to match up to those numbers.

Great. Thank you.

Your next question comes from the line of Rick Weinhart with O'Reilly.

Welcome to the team.

I had a couple of quick questions for you. Follow-ups actually. One, on the mix of stores there being bought out at versus your Greenfield and yourself, can you quantify or help us understand what the impact is from a sales standpoint of how they open versus--?

Did we lose Rick?

Yes, sir. Sir, if you're still on the line, please press star one again. Rick, you may proceed.

Can you hear me now, guys?

Got you.

Good, thanks. I'm not sure what part you heard of my question. So I'll repeat it. I'm just wondering if you can perhaps give us a little color as to the differences in sales for when you first grand open a store when you're purchasing it versus when you're opening it yourself as a percentage of what it looks like on a total store.

I'll tell you, that depends on the store. When we acquire a store, sometimes that may include a relocation and we wouldn't do the grand opening until we relocate it. Once you relocate some of these acquired stores, they really kick off. There's a big variance in any given new store as to the way it starts off, depending on the market, depending on how we penetrate the wholesale business. Then on the acquisition side, it depends a lot on how the family or individual that was running the business before was running the business. Sometimes these are pretty successful small businesses. There's just not a lot of business to gain initially. What you do is you -- when you buy them, you establish your core installer base. Then we start building on the retailer. Many of these companies aren't as focused on the retail side as what we would. But on balance if you took what the -- where the acquired stores start out at compare it to how our new stores grow from zero, of course our new stores grow faster. Just a percentage rate I would say it depends on the market. There would be not a good way to articulate one or the other.

It would be hard to establish a true trend there.

Thanks. The other question is on the stores that were hurt by the hurricane region, did you look at what the sales trends were excluding for example generators and other hurricane type merchandise?

No, we actually didn't. We track everything by line. We didn't go to the level looking at that in those regions. There was -- we at the time that hurricane happened, we really weren't that heavy in the generator business. We probably sold oh, four to six truckloads down there, something like that. If you didn't sell within the first three or four days, the market dwindled pretty quick. Everybody got them down there real quick and sold them real quick. I don't think that would have been a huge impact? We filled gas cans, batteries, some generators and things like that. I don't think the demand is coming as much from that kind of stuff as it was a population of people that went down there to work with the recovery effort. There were a lot more vehicles in the market than what there had been previously and would normally be. Those vehicles break just like all other vehicles do.

Great. One last question. This is kind of long term in nature but have you guys looked at all or seen the data if you're tracking it what perhaps the type of volumes you do with some of these new hybrid vehicles versus traditional car, what we can expect to see as those become a bigger percentage of the population?

Well, it's still a little bit early to tell. The battery and generator and so forth, those things are pretty long lasting so we're not looking for those to be an after-market item for maybe three or four years yet to come. I've talked with our battery supplier at our manager's conference, as a matter of fact about their ability to supply those batteries. They agree with me that we're still a ways off from replacing those. From a maintenance standpoint, the vehicles still stop the same way they do. They have the same type of breaking system, they have belts, and hoses, they still have an engine that runs when the car's not running on electric power. Most things are very similar. They still have emission controls, they still have all of the sensors that a regular fuel or gasoline-powered vehicle has. So from that perspective there's not a lot of difference. When it comes time to replace the battery or the generator that charges the battery or the generator that charges the battery, those are significant expenses and those have not been part of the after-market sales yet.

Thanks for your answers.

Okay, thanks.

Your next question comes from the line of Armando Lopez with Morgan Stanley.

Thank you, good morning. This is actually Charlotte Evans for Armando. Two questions here. One, in terms of private label, what is the opportunity for O'Reilly, and where's private label today? What do you think you can get it to? And somewhat related to that, how should we think about direct sourcing?

Well, our private label business is, and we have a lot of -- or several brands that we've built with individual private label names that we use both in the wholesale side of the business and the retail side of the business. Our private label mix is somewhere in the low 20% range of our total sales and that would include commodities and things like that. We could grow that to some degree and we look at that ongoing more as a entry level retail type product and then we sell up in many many cases to a, maybe a high quality private label or more cases the national brand. With our wholesale inclination or installer based inclination, many of those shops like using some of the national brand products that offer a product difference as compared to some of the private label products. Many of of the manufacturers of the best products in the aftermarket won't put those in a private label box. They want to put it in their brand box. The examples would be move, and velcro and maybe gates, belts, and hoses, things like that. And those brands mean something.

They mean a high quality item that the installers have confidence in and for that reason we don't think we can transition that business very easily over to private label and really don't try to do that. We stick with a national brand. From a direct importing basis, the same thing applies. With our distribution model it's probably not quite as big an opportunity for us as it would in a pure retail model. We've got 14 distribution centers that we run 1640 stores out of at the end of the quarter. So we have a deconsolidation issue with bringing in container loads of product that doesn't sell very fast. If you have something that every store needs and it can sell real quick then bring container loads into every DC makes sense. We do that to some degree. It's just not quite as big an opportunity for us as it is some pure retail models. We typically would use a company here in the U.S. that would help us warehouse and distribute some of the items that we import like hand tools and jacks, and jack stands, and car ramps and things like that.

Great. Then just last question here. In terms of the growth, sales growth, the growth that you've seen, how much of that was average ticket growth versus traffic volume?

We don't disclose that. We don't disclose the exact numbers. I can tell you that this past quarter, our average ticket grew just a little bit faster than when our traffic cam did.

Thank you so much.

Thank you.

Your next question comes from the line of Dan Wewer with O'Reilly Auto.

I joined as well.

Welcome, Dan.

You guys pay well?

Well, expense controlled. I don't know if your perspective of well would match ours but it's pretty good.

Tom, did you indicate that if you were to exclude the vendor rebates that gross margin rates were stable year-over-year in all of 2006?

My indication was that if we -- in the last two years we've had some positive adjustments on our annual programs where we get to the end of the year. Those really relate to all of the products sold throughout the year and we try to match those sales up with the gross margin. If we did that exactly right throughout the year my point was that the gross margin on a quarterly basis would be relatively the same. There would be minor fluctuations but the margin would be similar throughout the year.

But in reality I guess you care on the side of conservatism and then that's the reason why you get the catch up in 4Q?

Well, we always want to be conservative. We don't want to have a negative surprise at the end. We're trying to get as accurate as possible and we continue to improve on estimating those throughout the year.

When you think about your gross margin forecast for 2007, a flat to down 30 bips, is it envisioning a change in the mix that may work against you or competitive pricing issues or the volume rebate's not being as significant as in the past?

No. It's nothing like that. Actually, this is an increase in our guidance from what it was last year. Last year, we guided in the high 43s up to 44. So this is a little bit of an increase in our guidance. Gross margin is contingent on a lot of things including product mix, our ability to negotiate incentives with our vendors, some of which aren't all included in acquisition costs and are negotiated on an ongoing basis. So we of course don't want to overextend our guidance. At the same time, we want to be as accurate as we can. 44.1% last year. We think we might have a potential for a little bit of upside up to 44.2, that's a more comfortable thing. We have a 40 basis point range of 43.8 to 44.2.

Then just the last question I have. Obviously it's great news that you're seeing sales recovering during the month of February. Given the industry's been in a slump for 12 months and some of your competitors were a bit more cautious in their comments during the past few weeks, how do we know this is not a head fake that we're seeing in the month of February and that sales don't return to where they've been trending for the last year?

Well, you don't. We hope it's not. We have every reason to think that what we've seen, which has created a trend for the past few weeks for us of real nice comps. Based on when's happened this past year and our belief in the pent up demand and due to some of the deferred maintenance and so forth and based on our past experience where if we've had a relatively slow year, we have a balance back here the next year. I guess our hope is that this is the beginning of a longer lasting trend than just maybe a month or two months or something like that. Again, that's our speculation based on our experience in the business and what we're seeing today.

Makes sense. Great. Thanks and good luck.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Sir, do you have any closing remarks?

No, just thanks, everyone, for attending the call. We're looking forward to reporting our first quarter results in April. Thank you very much.

Thank you for participating in today's O'Reilly Auto Parts 2006 fourth quarter earnings release conference call. You may now disconnect.