O'Reilly Automotive Inc (ORLY) 2007 Q1 法說會逐字稿

Good morning. My name is Kanesha, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter press release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) I would like to turn the call over to Greg Henslee, company President and CEO of O'Reilly Auto Parts. Please go ahead, sir.

Thank you, Kanesha. Good morning, everyone. This is Tom McFall, and welcome to our conference call. Before I introduce Greg, our CEO, I would like to read a brief statement. The Company claims the protection of the 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, statement contained within this press release are not historical -- 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, that are not guarantees of future events and 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 acquire businesses, weather, terrorist activities, war, and 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 factors section of the company's Form 10-K for the year ended December 31, 2006 for more details. At this time, I would like to introduce Greg Henslee.

Good morning, everyone, and welcome to our first quarter 2007 conference call. Participating on the call with me this morning is Ted Wise, our Chief Operating Officer, and as Tom just spoke, our Chief Financial Officer. David O'Reilly, our Executive Chairman is also present, but won't be participating in the prepared comments.

I would like to start off by again thanking Team O'Reilly for their hard work and focus on customer service levels in our stores during the first quarter. Our team continues to offer the very best customer service in our business to both our professional installer customers, and our do-it-yourself customers and I'm extremely proud of the 6.8% comparable stores growth we were able to achieve in the first quarter. Especially considering the slow start we had, partly due to the negative effect from the ice storms we experienced in January, which paralyzed business for several days in many of our markets. As we discussed on our fourth quarter call at the end of February, business came on strong early in February and we anticipated a strong March, which we think can be partly attributed to a combination of some deferred maintenance that has taken place over the last several quarters, the warm spring weather, and an earlier change to daylight savings time. These factor contradicted to very strong sales performance in March on both the DIY and installer sides of our business. Our gross margin for the quarter came in at 43.9%, compared to 43.5% last year, 40 basis point improvement, and in line with our guidance of 43.8% to 44.2%. Our continued incremental gross margin improvements come from a couple of different initiatives.

First, and as I mentioned several times in the past, we continue to make investments in technology in our distribution centers which are incrementally driving our distribution costs down, without sacrificing the frequency in which we replenish other inventories or ship special orders on slowing moving SKUs, which is so important to the success of our commercial sales programs. Some of the more successful implementations that we've incrementally rolled across our distribution network include things like voice activated picking, which has had a very positive effect on both accuracy and productivity in our distribution centers, slotting optimization software, which evaluates individual product movement and optimizes the location of products throughout the distribution center to ensure pick efficiency, and onboard computers for our over the road freight trucks, which allow us to monitor the performance of our drivers and incentivize our drivers to maximize fuel efficiency.

Second, is our ongoing category management and pricing optimization efforts. Our merchandising team is very focused on making sure we have the right mix of products in each of our store locations and that we are competitively positioned on critical repair product categories in which we compete with both pure retailers and very savvy wholesale suppliers, with comparable products for each segment of the business. For example, in belts and hoses we carry an entry-level line with which we can compete with the pure retailers' product offering and still make solid gross margins. We of course don't have, have to cover the full breadth of the line with that type of product. For our wholesale customers, who demand a higher quality national brand product, we carry a full line of Gates belts and hoses which also serves as a sell up opportunity for our retail customers who might prefer the high quality product a professional technician would use.

We use a combination of private label and prominent national brands to offer a better-best, or in some cases a good-better-best strategy across key categories. This allows us to take advantage of the gross margin opportunities that come from importing products from lower cost countries where some of the aftermarket products are currently being manufactured. These lines are typically the more retail type product lines and at the same time, we maintain the breadth of coverage in the high quality national brands that are so critical to our success on the wholesale commercial side the business. We are also very focused on retail price optimization through our ongoing shops of competitors, and the analysis work that goes into setting the various price levels of our good, better, best offerings as well as our promotional prices. During the quarter, there were no significant changing in our competitive price position, and retail price changes we made were the result of our ongoing competitive shops.

Operating expenses for the quarter decreased ten basis points to 31.3% of sales, from 31.4% last year on better sales leverage. We continue to focus on every opportunity to decrease operating expenses without sacrificing the high level of customer service that our customers have come to expect. We have several initiatives underway, most of which we have talked about before, that are still generating incremental benefits as they come to full utilization. These initiatives include the rollout of our store energy management systems, our proprietary store staff scheduling system, several different energy management initiatives in our distribution centers, and our new point of sales system that is currently in ten stores and will be incrementally rolled out this summer. The new POS system will have a very positive effect, not only on the level of service we are able to provide our customers, but in our productivity and the time it takes to learn our POS system as a new O'Reilly team member. There's a long list of additional initiatives we have underway to keep our expenses in check, and I can assure you are, every team member of O'Reilly keeps expense control at the top of their mind as they go about their daily business.

For the quarter, we generated a first quarter record operating margin of 12.6%, up 50 basis points from 12.1% last year. These strong results were driven by all the efforts I've mentioned, that we have underway to maximize productivity, minimize unnecessary expenses, and to maximize gross margin while maintaining our competitive price position. Net income as a percent of sales came in at 7.9% for the quarter, compared to 7.6% last year, a 30 basis point improvement and again, a first quarter record for our company. During the quarter, we opened 47 additional new stores, bringing our new store, our store count to 1687 stores at the end of the quarter, well on track with our plan to open an additional 190 to 195 new stores for the year. These additions brought our inventory investment to $825 million, a 9.5% increase supported by a 14.3% increase in sales. We continue to leverage the advances inventory management systems that we've developed over the years to insure we have the correct inventory in each of of our store locations and distribution centers, based on a long list of variables that we've developed over time.

Inventory turn over remained equal compared to last year at 1.7 times on a total asset basis and 2.9 times on a net of payable basis. Our accounts payable as a percent of inventory increased 360 basis points from 41.5% last year, to 45.1% this year. This is the result of our ongoing effort to improve payment terms with our vendors, and we continue to work towards incremental improvements in our payment terms with each vendor as we continue to grow.

In looking back at our sales performance in the first quarter, we were very pleased with our results in February and March, coming out of a fairly soft fourth quarter in January. We feel the trend we were on the last two months of the quarter was reflective of some of the pent up demand we feel is present due to deferred maintenance over the past year or so as a result of higher fuel, interest and other energy prices. We remain very confident in the vehicle population dynamics that drive demand in our industry. While the number of miles driven each month compared to the same months the previous year continue to volley from a slight increase to a slight decrease, we ended '06 with an annual increase over '05 and all forecasts are that we'll see another increase in '07 compared to '06. This coupled with the fact that there are record number of vehicles on the road, and the average age of these vehicles are at record highs bodes well for '07 and we remain confident that the aftermarket will benefit from these factors in the coming months.

On our fourth quarter conference call at the end of February, I mentioned that we were hopeful that at the end of the first quarter, we would get back to our more normal comparable store sales guidance in 4% to 6% range for the second quarter. However, at the end of March, winter returned to many of our markets, following an early and very warm spring in March. Many markets saw record low temperatures for much of April, and while weather extremes can be good for our business at times, this time of year the cold weather isn't going to be cold enough or last long enough to create temperature-related demand, but will prevent some customers from getting outside and working on their cars. Weather coupled with the recent spike in fuel prices has again shown us that these factors have a short-term effect on our business, and comparable store sales has slowed for the first three weeks of April from the pace we were on at the end of March. For that reason, we think it's prudent to leave our comp guidance at 3% to 5% for the second quarter. However, we are maintaining our annual comp guidance at 4% to 6%. Again, we are very pleased with our team's performance in the first quarter, and I want to congratulate every member of Team O'Reilly on the great results as we celebrate the 50th anniversary of O'Reilly Auto Parts. We are looking forward to continuing a strong 2007 as we head towards summer, and focus on our continued expansion in several new markets.

To expand a little further on our growth plans and some other internal initiatives, I'll now turn the call over to Ted Wise, our Chief Operating Officer.

Thanks, Greg, and good morning, everyone. Just to quickly recap our store expansion program, we definitely had a productive first quarter that resulted in 47 new store installations. Our growth was spread throughout 18 different states, with a heavier schedule in Georgia, where we added eight stores, and Kentucky, South Carolina, and Indiana having four each. In addition, we moved four existing stores to new locations. Three of which were from the Midwest store group up North. We also had 11 major renovations and building additions, and we continued our interior decor upgrade program, completing another 70 stores during the first quarter. Our expansion team does an outstanding job coordinating this fast-paced schedule, and continues to refine its combined processes of selecting and developing the right sites, preparing the right inventory mix for each new market, and the demanding and physical part of the actual set-up and installation of the store. Of course, our field operation team stays out in front of the process, very focused on finding the right staff of team members and store managers to successfully open each store. Our second quarter installations are on call as well as our year end goal of adding 190 to 195 new stores.

Our first year of using our new store scheduling system is going well, as managers become more familiar and confident in using it. The combination of fine tuning our schedules, particularly on evenings and weekends, and increasing level of leadership and experience during the shift is resulting in a higher customer service level. The nature of our 50/50 wholesale retail business mix has always made it more challenging to schedule for the retail side of our business. Our operation team recognizes this as an opportunity to grow our sales and this is one of our most important areas of focus this year. Enhanced scheduling, our new computer based learning management system, and our upcoming new point of sale system will help us provide even higher levels of consistent customer service, and help us operate at a higher level of team member productivity. We have internally described this year's customer service goals with the acronym of PSP, which stands for people, service, and performance. Our management and team is focused on having the best training professional parts people offering outstanding customer service and improving our individual and company performance.

Our installer sales teams continue to successfully grow our business with our First Call program. With a special emphasis on sales call process for new markets ensuring that we get the dealer business off the ground as quickly as possible. Our certified auto repair program which helps our installer customers in their business, marketing and operations, continues to grow, with 1700 customers now in enrolled in the program. This type of partnership with our installers strengthens business relationships and helps us obtain first call status. We are also working with our national account customers in developing better relationships and preferred supplier status with--, and these are the multi location repair shops and tire chains both at the regional and national level.

Now, in the area of promotions. Our motor sports marketing program is in high gear. In the first quarter, we were the title sponsor for the O'Reilly Spring National NHRA race in Houston, the O'Reilly 300 NASCAR Busch race in Fort Worth, and the O'Reilly 250 NASCAR race in Kansas City. This year, at the grass roots local level, O'Reilly will be presented at over 1400 marketing events in the field. We will have track signage at over 400 local tracks, and will be a title sponsor of 33 race series. 33 different race series. And on the national level, we are the official auto parts stores for 14 NASCAR and NHRA tracks, while we are the title sponsor for 6 NHRA and 5 NASCAR events . Motor sports marketing at the local and national level continues to be a very effective tool in building O'Reilly brand with a serious auto parts customers. I would like to close by recognizing and thanking O'Reilly team for the hard work and the great customer service that resulted in this sales and profits of very outstanding first quarter. With that, I will return the call over to Tom McFall.

Thank you, Ted. As a recap for our income statement, sales were up 14.3% to $613 million for the quarter, with comps of 6.8% for stores open greater than 12 months, versus 3.8% for the first quarter of 2006. Sales to independent jobbers for the first quarter of $11.7 million were up 7.2% from the prior year. Gross profit was 43.9% of sales for the quarter, versus 43.5% in the prior year. The improvement was primarily due to improved product mix and distribution efficiencies. For 2007, we expect gross margin to be relatively consistent quarter to quarter. SG&A for the quarter was 31.3% of sales, versus 31.4% in the prior year. The improvement was a result of better sales leverage, partially offset by a 15 basis point increase in stock option expense. Operating income for the quarter was 12.6% of sales, versus 12.1% in the prior year. Increase was driven by better leverage on sales, and improved gross margin due to product mix and improved distribution leverage.

The tax provision was 37.3% of pretax income for the quarter, versus 37.1% in the prior year. This increase is the result of certain changes in state tax laws. The adoption of Fin 48 did not require a change to our contingent tax reserves, nor do we anticipate it affecting our effective take rate for the remainder of the year. Net income for the quarter was $48.4 million, 7.9 %of sales, versus $40.6 million, 7.6% of sales in the prior year. Diluted earnings per share for the quarter was $0.42 versus $0.35 in the prior year on 115.5 million shares, which is a 20% increase.

For the balance sheet inventory was $825 million, up $71 million from March 2006, this represents a 9.5% increase versus a 11% increase in store counts. Total assets were $2.1 billion, $292 million increase from March 2006. This increase is due to increased cash on hand of $35 million, and the growth in fixed assets and inventory related to store growth and distribution growth. Accounts payable of $372 million was an increase of $60 million over March 2006. A/P to inventory of 45.1%, increase from 41.5% at March 2006. The A/P to inventory ratio was positively impacted by the sales leverage and improved leverage of inventory at the store level and the newer DCs. Long term tax was $100 million at the ends of the quarter for 2007 and 2006. Debt to capitol was 6.6% with debt to EBITDA of 0.3 times. EBITDA for the quarter was $95 million, which was 15.6% of sales. Some other ratios. Return on equity for the quarter was 14.2%, returning on assets, 9.5%, return on investment capital, 13.4%. For some other financial information, the LIFO charge for the quarter was $0 .4 million, depreciation was $17.4 million, capital expenditures were $64 million for the quarter, and net interest expense was $0.7 million for the quarter. For the quarter cash flow from operating activities was $129 million, with $64.5 million in free cash flow. This extremely strong cash flow is driven by our large improvement in net inventory investment and the timing of certain tax payments. We anticipate probably half of the first quarter's free cash flow will reverse over the remainder of the year.

Now, for our guidance. As Greg mentioned, our same store sales guidance for the second quarter is 3% to 5%. Diluted earnings per share, $0.45 to $0.49 per share versus $0.43 in the second quarter of 2006. For the full year, CapEx $235 to $245 million, interest $3 to $4 million, depreciation for the year, $72 to $78 million, a tax rate of 37.2% to 37.4% of pretax income, free cash flow for the year is estimated at $25 to $35 million, revenues $2.5 to $2.6 billion. As Greg also mentioned earlier, we are maintaining our same store guidance for the year of 4% to 6%. And diluted earnings per share of $1.73 to $1.80 with stock option expense. At this time, I would like to ask Kanesha, our operator, to come back and we will be happy to answer your questions. Kanesha?

(OPERATOR INSTRUCTIONS) Your first question comes from Matthew Fassler from Goldman Sachs.

Thanks a lot, and congratulations obviously on a terrific quarter. I'll ask one question, I guess, and one follow-up. My core question relates to gross margin. You had told us earlier in the year that you were likely to try to take some of your accruals, I think, more evenly across the periods so that you wouldn't have the sequential ramp that we had typically seen in years past. I know you guided to sequentially flat gross margins essentially. But if you could talk about the changes that you made in your accrual tactics, and whether that followed throughs as per your thoughts on the last call.

Well, as we discussed on the fourth quarter call, estimating the full year rebate has been difficult over the last full years as we've hit new rebate plateaus and the large growth in sales, you know, we really feel like we have a better handle on the full-year numbers and come up with a better estimate quarter to quarter. Primarily, you know, the thing that should drive our gross margin change quarter to quarter, are product mix and leverage of DC, distribution costs. So we really feel like we are honing in on what the annual rebates are going to be and are going to be able to spread them across the year more effectively.

Got it. And just a follow up on the expense front. Obviously the quarter from earnings respective was phenomenal. The SG&A per foot, or per store if you will, was up a couple , which is more than we'd seen in some time. To some degree, did incentive compensation or something like that ramp up along with sales and you expect, you know, the underlying expense trends to resemble what it was in Q1, or is there some flexibility

The incentive of course is built on sales, so it didn't ramp up as a percentage of sales. It would stay relatively even with that. As Tom mentioned earlier we had about a 15 basis point increase in stock option expense so that had some effect, but other than that, it was just a normal business management.

Got it. Thank you so much.

You bet.

Your next question comes from Gary Balter from Credit Suisse.

Good morning, Gary.

Hi, good morning. It's actually Seth Basham. A couple of quick questions for you. Just following up on the last question regarding SG&A, the 15 basis points of stock option expense that you had this quarter, should we think about the rest of the year, a similar run rate?

Yes.

Okay. And regarding some of the investments that you are making in the business, when do we expect to see more productivity gains from those?

Well, they will happen incrementally, and then there's just so many of them, it's hard to say what effect and when that effect takes place, we evaluate each investment we make fully based on what we think the effect on the business will be, what the tests prove that they will be, and then the rollout and the actual effect of course varies. So, to be honest with you, there are so many things like that going on, I would have to say they will be incremental throughout the year, probably next year, you know, these things don't until have an on and off. They are a slow roll-in, and things like our point of sales system, while, when you initially roll it out, there will be kind of a learning curve, team members getting used to it. But over time, it will make a big difference, we think, in their productivity. But at the ends of the day, when a customer comes in a store, a transaction is going to take a certain amount of time, and you want your team members to spend, you know, a worthy amount of time on each transaction, so we are not expecting any huge gains, but we are expecting better customer services as a result of it, and more access to information quicker and things like that. So I would say any change you see is going to be in small pieces and incremental throughout this year and next.

Got you, thanks.

Can I just ask --this is Gary.

Hi, Gary.

Just on the six, the six-eight comp -- and I missed the beginning of the call, so I may have missed this, and then we got cut off. Could you talk about the DIY versus the do it for me business? And which was stronger?

Both were very strong. We were happy with both sides of the business first quarter. The do it for my comp was just slightly stronger than its do it yourself comp..

Okay. And the weakness you mentioned in April, is, you think, more weather related?

You know, it's hard to know for sure. I know that towards the ends of March, winter came back to most of our markets, and we had record low temperatures in a lot of the markets. Matter of fact, here in Springfield, most of the plants got killed by freezing temperatures, it got down to 17 after all the plants had bloomed and everything, and we had that for a couple of weeks, business slowed down during that time and at the same time, gas prices spiked, so I feel like it's a little bit of a combination of both, you know, I think consumers still get shocked when gas prices go up as quick as they did here recently. And while they are not as high as they have been in the past, still going from, a lot of our market areas from $2.20, something like that, up to almost $2.70, in such a short period of time is a little bit of a shock, so I would attribute a big part of it to the return of winter during the spring, in most of our markets, and part of it to just the shock of the gas prices having come up as quickly as they did.

But the return to winter now is behind us.

Yes, I think we are heading towards a good weather. Spring has got to come. So we are hopefully headed into spring and better business.

Okay, thank you.

Thanks.

Your next question comes from Tony Cristello from BB&T Capital Markets.

Thanks. Good morning, gentlemen. How are you guys doing?

Very good. How are you doing, Tony?

Good. This is a quick followup to that last question. When you look at your year-over-year compares, to the second quarter last year, you-- the toughest part of the quarter from a comps standpoint, was it not in the April, going into May, and then it sort of, sales started to see a little pressure as you moved throughout the quarter then, is that how you look at it?

Yes. We tailed off pretty good, you are talking about second quarter?

Yes. From last year, year over year.

Yes, second quarter last year we tailed off at the end of the quarter. June was the worst time of month.

And it's sort of once you hit the beginning of May or mid May, that's when you start to see more of the softness, April was a pretty good month from that standpoint.

That's correct.

Okay. And then shifting gears a little bit, when you look at the stores that you have opened up in the last year, and now as those are starting to enter the comp base, would you say that sales were perhaps a bit softer than normal, just due to the challenging environment that you had last year? And then if that's the case, does that perhaps imply that we could see a little bit faster progression along a maturity curve as the stores begin to catch up in a healthier environment?

This is Tom. Last year's stores, it was not a great year for auto parts in general, so the stores opened a little softer than what we would like, but still within the historic range if we look at our historical range of new store openings. You know, the years that are good for auto parts tend to have better new store opening productivity. A little early to tell if we are doing to see the bounce-back from that, our expectations are that we are going to see a normal maturity of those stores to the extent they were slightly below, we would expect them to be slightly above this year. But we were not, we are not outside of our normal range last year.

Okay. And then just one last question. When you look at the buying patterns of your customers, both on the DIY side as well as the commercial side, have you noticed any changes? I know, last year, a lot of deferrals, but in terms of products selection and terms of how they go about choosing the part this they want to repair their car with. And how does that relate into sort of your average ticket or the number of transactions that you are seeing?

Well, our average ticket continues to grow a little bit. You know, partly due to just inflation, but partly due to sell up efforts and so forth. From a category mix perspective, you know, a lot of what happens from a category mix perspective, we make it happen. You know, for instance, we recently or in the past 6 months or so, we changed from having most of our coverage, or more of our coverage in a branded brake drum and rotor program to having more of it in a lower end import program, we do a line along that now. Realizing a lot of our retail competitors carried the import brake rotors, and sell for substantially less, and we wanted to be more competitive, and we have transitioned some of that retail business over to those lower tickets, so you have things like that are really done by intent to gain market share or to shore up market share. But realizing that you are going to have to go a long ways to make up the dollars. And -- but you have to do it. So we have not seen anything from a, I guess a behavior standpoint from a consumer perspective that leads us to believe that they are moving to lower entry level categories without a change by us to drive them to that. You know, we work hard to drive ticket average up, and our traffic in the first quarter was up as well as our ticket average, and both were contributors, of course, to our comparable store sales.

Great. Okay, thanks, guys.

Your next question comes from Nancy Hoch from JPMorgan.

Great, thanks, and my congratulations as well.

Thank you.

To the extent we are seeing some catch up from deferred maintenance in the comp, it seems like the delay was longer than typical this cycle, and I was just curious on your thoughts as to why, and also how sustainable the pick-up, you think the pick up will be?

Well, and the reason I think it's taken longer, and again this is just a matter of opinion, is that the factor that drove consumers to have to defer maintenance hasn't necessarily went away. The higher fuel prices are there. Over time, you know, if consumers have to keep their cars running and have to maintain them well in order to get to maximized fuel mileage and have safe, reliable transportation, I think when fuel prices even have a slight relaxation like we saw earlier this year, you start seeing the benefit of some of that pent up demand, and then when you have a quick spike like we had, consumers go back to the same mind set at least, that they may be stretched from a budget standpoint, so I think that is probably the contributor to the links, or the withholding of some of the pent up demand, as far as the, you know, how long will we experience this, it really would just be a guess at this point. I don't know. I don't really, it's hard to know how much pent up demand there is out there, but you do know from talking to our installer customers who really is our best way of measuring the way our consumers are behaving, when a customer brings a car into a shop, they have a problem, the shop, the guy running the shop identifies what the problem is and gives them an estimate, and just their penetration rates on selling those repair jobs is a good way for us to measure that, and you know, even today, repairs shops will tell you it's tougher to sell jobs than it was two years ago when gas was lower priced. You know, consumers are still stretched. The end of the day, they have to fix their cars, and that's why we've so confident that over time this pent up demand will show up in sales growth for us.

Okay. Great. And then a question for Tom, your LIFO charge is the lowest it's been in a couple quarters, and just based on what you're seeing on the pricing front and how we should be thinking about LIFO going through the year?

Last year was one of our highest LIFO charges in the last ten years, and we saw quite a bit of price adjustments for the change in energy costs, and what we we're hoping to see is that we are much flatter this year, that we've kind of hit the plateau for those costs, Obviously we always try to push the costs down, but we are optimistic we will not see significant price increases on our existing lines.

Great. And then one other quick question, I understand that the challenges of trying to staff your stores for both your commercial and retail businesses and I'm just curious if based on your experience so far with your labor scheduling software, have you found the opportunities where you can take some hours out of system or are you really still looking at just a rebalancing?

At this point, especially going into the spring, it's more of a rebalancing.

Okay, great. Thank you.

Your next question comes from Sharon Zackfia from Williams Blair.

Hi. Good morning.

Good morning, Sharon.

I was wondering if you could comment on the acquisition environment? I know it's been I think close to two years since you bought Midwest, and it strikes me that acquisitions are increasingly crucial to maintaining that high teens earnings growth . So, if you could give us your thoughts on that, and also maybe give us an update on where Midwest is, now that we're close to two years since the

Ted, do you want to answer this?

Yes, yes. I'll take the Midwest. We are approximately two thirds of the way through on the relocations and remodel, so it's going well again up there, what you face is about five or six good months of building time, so it's been a little bit more challenging to find new sites and relocate them. Sales are doing very good up there. After kind of a slow start the first year, you know, due to change over process, and they are going good. Double digit comps this last quarter, which was fantastic, and we expect them to continue to do well. They have a lot of upside up there, because they weren't large volume stores so we have a lot of future there, I think. We are also relocating the warehouse in Minneapolis this next quarter, which is going to help from a service level, inventory availability standpoint. As far as expansion, we have, we are looking at some very small change at the moment, some single and double, triple stores that not really anything on the near future as far as anything major. We are always looking but nothing on the drawing board at this point. (Inaudible).

You know, as everybody knows, there's several smaller chains out there that would be in contiguous markets with us, and we are opportunists when it comes to acquisitions and many od our acquisitions are very small companies, as Ted mentioned. But as we expand, if we run into companies or meet the boundaries of companies that are a little larger that our interested in selling to O'Reilly, we look at them and if they make sense for us, then we will move forward, but as Ted said there are none on the burner right now.

And the way our distribution centers are set up now, we have pretty good capacity to grow Greenfield out of that number of DCs. So it's not necessarily something that we have to do, like Midwest, you know, when we bought Midwest, we not only did we get the store count, but we also got a distribution center, and really gave us more or less a new market to grow out of, but right now we have pretty good capacity out of Indianapolis, and Minneapolis and Atlanta, so you know, we've got good growth opportunity without feeling like we have to do an acquisition. (Inaudible).

Would you consider kind of leap frogging geographically, or do you have to do acquisitions in contiguous markets?

We would prefer to do them in contiguous markets. But again, we are opportunists from the acquisition standpoint, and if there was something we felt made sense both financially and operationally, it wouldn't go past us without due consideration, but we have not looked at any acquisitions that would require us to leap frogging the existing market.

Thank you.

Thank you.

Your next question comes from David Cumberland from Robert Baird.

Thanks. Good morning. On the gross margin guidance, the comment about being comparable quarter to quarter, was that in reference to sequentially, meaning similar to the 43.9 each of the remaining quarters?

The comment was more directed that we won't see large swings of 100 basis points that we've seen in the last couple of years.

More of a year to year type comment? Or just within the quarter, or within the year each quarter?

Within the year each water.

Would the prior guidance, the 43.8 to 44.2 still apply?

Absolutely, yes.

And on the sales to date in Q2, with the slowing, did you experience that more in DIY or in commercial?

It's both. Both side of the business were comping very well in February, March, and both sides with the change in weather and the things that have happened has slowed somewhat as compared to the pace that we were on mid and towards the ends of March.

Thank you.

Thank you.

Your next question comes from Alan Rifkin from Lehman Brothers.

Thank you. I'll add my congratulations as well. Most of my questions have been answered, but just had a couple. Greg, obviously if we segment the first quarter into two halves, obviously, and looking at the comp at 6.8%, one could infer that second half of the quarter was certainly much stronger. You went on to say that comps have slowed so far in April. Could we infer from that though that they slowed from what could be a 7% to 8% number in March and are still trending at the higher end, if not above the 3% to 5% guidance that you've outlined for the second quarter?

Yes, I'll tell you what, Alan, three weeks of any period is a very small period to look at, and make any assumptions for the effect that those three weeks would have on a longer period of time, like a quarter, and, but, no, I wouldn't infer that we had slowed from 8% or 9%, and we are still maybe up in the upper end of our 3% to 5% range. We are, maybe a little below that, but again I don't want to get too detailed on where we are at 3 weeks into the quarter, because there's just too many assumptions that can come from that. And three weeks is a small period of time to judge a retail business or to make assumptions looking forward for the performance of a retail business for a quarter.

Okay. Starting off, then, and more question if I may. With the improving operations and the improving cash flow, can you maybe give us an update on where the board stands with respect to either the implementation of a dividend or the implementation of a stock buy back?

Alan, this is Tom, this quarter all the moons lined up to generate the free cash flow that we did, and with our growth for this year, and the new distribution center, we still are looking at giving back half of that free cash flow for the year. We are going to continue to evaluate that, what we really want to do is make sure we are in a good position to make acquisitions that come up, that make sense for us. Until we feel like those prospects aren't good, we are going to continue -- when we get to a position where we think the prospects to make those types of acquisitions is not good, we will look at addressing what our capital structure is, so we are really in the same mind frame that we've been in right now.

Okay. So it sounds like you are ruling out over the next year or so either a dividend or stock buy-back. Is that fair to say?

Yes, it is.

Okay. Thank you.

Your next question comes from Mike Baker from Deutsche Bank.

Hi, and thanks. Real quick, just a bigger picture question. I think some of the auto manufacturers that have cars that say that, at least for new cars, they're recommending oil changes maybe every 7000 miles or 3500, versus it was years ago 3000 miles, so you know, is that something you've seen, that you're thinking about the potential that people might be coming to do oil chaining on their car less frequently, and you lose that kind of traffic driver? Is that a concern at all or anything in your mind? And one other question, one other question is just, wondering how commodity costs are this quarter. I think last year that may have pressured some of your gross margin and has that changed this year? Thanks.

Well, on the maintenance schedule that the new cars come with, you know, back several years ago, the maintenance schedules got extended from what was 2000 or 3000 mile oil changes to 7500 mile oil changes, and synthetic oils of course last longer than regular conventional oils, so that extends that to some degree. But that has been the case for a long time. That really isn't something that is new, except for the advent of synthetic oils, which allow the oil changes to go longer, but they are a much more extensive oil change and a better gross margin oil change. So we've not seen a change in the frequency in which is customers change their oil as a result of any manufacturer's recommendations, you know conventional motor oil, while it's incrementally improved over the years, there's been no drastic change in it, and the change is that synthetic oils have come about, but again they are a bigger ticket and better gross margin sale, so that's a good thing for the after market, we think. The mileage that manufacturers recommend periodic maintenance, if you read the manual, will say that it's in perfect conditions without dust and things like that, and there's just not many places like that. Most places have some level of dust and stop and go driving, and cold starts, and only drive for ten minutes and shut them off, that kind of thing. Those are all things that effect motor oil. If you drove a car straight down a highway on a clean road, you could probably change your oil every 7000 miles with conventional motor oil and be fine, but if you drive it like most of us do, you really can't do that long term. And commodities, we've not had any major changes in commodities this year from a cost standpoint. You know there have been oil priced changes and antifreeze has kind of went up and down a couple times, but nothing significant as compared to last year.

So last year those commodity costs going up actually hurt your gross margin, this year it sounds like it's more even year over year, so fair to say less gross margin pressure from the commodities?

When costs go up, we try to adjusts our prices, so I wouldn't say that last year we had pressure from it necessarily, I would say it would be comparable, because we react pretty quick to a cost change.

Michael, you are correct though on our LIFO charge, oil was a big impact on our LIFO charge in '06.

Okay, thank you guys.

Your next question comes from Rick Weinhart from BMO Capital Markets.

Hi. Good morning, gentlemen.

Good morning.

I had one question for you on the expenses. This year as you are rolling out the new point of sale and other projects you have, is there any guidance you can give us in terms of, or is there going to be any lumpiness to your, those expenses that are flowing through in the second and third quarter?

Hard to say when you get down to the tenths of percents, how they are going to flow through. We doesn't anticipate that right now. Most of the POS is going to be rolled out by our own field staff so that's an item that we don't go outside and hire somebody to implement or to install that in the stores.

Okay, just a follow-up on that. The actual point of sale, you will be replacing the hardware as well or is it just a software upgrade?

We actually don't have to replace the hardware. We've got it --the stores we have it running in right now, we haven't replaced the hardware, we are running it on its existing hardware, but we need to upgrade the hardware anyway, so we are planning to upgrade the main server in our stores to a quicker machine, that has a little bit more capability from just a processing standpoint, so we will be doing that and then also there's a small Linux server that attaches to that, that processes some of the graphical user interfaces that we use for our POS system, so, and that will be in addition. So we will putting those in, total CapEx for both of those is somewhere around $16 million range.

Okay. Thanks very much.

Thanks.

Your next question comes from Jeff Sonnek from FBR.

Thank you. Is there any regional nuances of note, and are the difficult Gulf region compares now behind us?

There's nothing new regional going on that's new, other than just different weather incidents that happen over weekends and stuff like that. But again, that levels out over time. As far as the Gulf, you know, we still haven't completely anniversaried the benefit that we saw from Katrina. You know, there's one region that would be the Gulf Coast down there, and for instance, if we were to take that region out of our comp base and then calculated our comps without them, we would have comped about 100 basis points higher than we did with them. So we still haven't anniversaried that. Sales down there have been very good, you know. We benefited a lot from Katrina, and over a 3 year run rate, we are extremely happy with where we are at today from a comparable stores sales perspective. But we haven't completely anniversaried the Katrina rebuild. But it is great -- it is much less than what it was last quarter and the quarter before that.

Your next question comes from Scott Stember from Sidoti and Company.

Morning.

Good morning.

Could you maybe just touch on the, basically the competitive environment? I think you touched on it regarding the quarter, but could you maybe talk about the two different businesses, if you've seen any of your competitors get a little bit more aggressive, and how that could curtail for the rest of the year?

Well, both sides are competitive, we've never had a time that, you know, with the do-it-yourself business and the do-it-for-me business wasn't competitive, you know there are, there's always a competitor coming up with something that is better than what we do, and we are trying to come up with stuff that is better than what they do. There really has not been a change necessarily. The do-it-for-me side in many of our markets, you know, we are up against some real savvy, we call them under car warehouses, they are kind of just off the beaten path, warehouses that supply quick delivery to the do-it-for-me side of the business, and they are very savvy competitors, and we run into those in a lot of new markets, and they're are probably some of our toughest buying market competitors, and then across the boards, there's a lot of good wholesale suppliers, and then our retail competitors are good retail competitors. But there's not been a change, it's a competitive business, and all of us that are at the table of the day, including our competitors are all, we've all developed our methods and we're pretty good at competing with each other.

Okay. Most of my other questions have been answered already. But as far as the guidance, for the quarter and for the year, that includes stock options again?

Yes, that includes the extensive stock options.

All right, that's all I have. Thank you.

Thanks.

Your next question comes from [Jack Bayles] from Focus Research.

All right. Regarding SG&A, that proportion of SG&A that is not incentive related that is more fixed, at what point do you get positive SG&A from that? What is the minimum comp store sales do you need to get a positive SG&A in the non-incentive related costs?

I think, Jack, it's 3.5% to 4%. What the leverage is, depends on what were the expenses last year, what lumpiness or timing differences do we have this year, but in general, 3.5.

So theoretically, if you were up say 4.5% to 5% comp in the second quarter, there would still be some positive SG&A leverage?

I'd have to look at second quarter, we had a pretty good SG&A quarter, second quarter of last year. So it should be flat to slightly up, without stock options.

Regarding expansion, is there a way for you to determine to what degree each year the locations that you are going into in terms of new stores might cannibalize sales from existing stores, and whether that, how would you make that comparison for '07, compared to '06?

Probably you know, it changes from quarter to quarter, year to year, but I would say 95% of our expansion doesn't even have any opportunities for cannibalization. I mean, most of our growth is in new markets, we go back into Texas and large markets are growing. And we backfill, but very rarely is it a problem of cannibalization.

Okay. Thank you very much.

If it is, obviously, it is planned and the stores are doing well, and actually need some relief, you might say.

Oh, excuse me. Just one quick question, Tom. What was your LIFO charge in the first quarter of '06?

Let me look that up for you, Jack. It was, it was $5.4 million.

Okay. Thank you very much.

Yep. Thanks.

Your final question comes from Orlando [Lopez] from Morgan Stanley.

Hi, good morning, everyone. Most of my questions have been answered, but just two quick ones. One, if you could just update us on what you are thinking, and I may have missed this on CapEx, for the year, and second, you talk about the voice activated picking, some of the material handling improvements. Where are we in terms of like the rollout across the different DCs. If you could just update us on that. And what the timing is of that. That would be great.

Tom, why don't you take this?

CapEx is $235 to $245 million which is up $10 million from the initial guidance, primarily related to the new POS servers in the stores.

And then on the some of the things that we are doing in our distribution centers, voice acted picking and the slotting stuff where we use is in, the voice activated picking is in about half of our distribution centers. And there's some other conversions that have to be made before we can roll it out to all of them, but we can get it to about three quarters of them before -- without having to do those other upgrades, so by the end of the year, we will have it in about three quarters of our district centers. This slotting software that we use, will -- it is used in about three quarters of our distribution centers today, and the upgrade that I mentioned earlier has to be made before we can roll it across the remaining DCs which are our smaller DCs that operate on more of a paper based system. And they operate pretty efficiently as they are, but next two years or so, they will be converted over to the system that would allow them to use the slotting optimization software and the voice activated picking software.

Okay. And then on the POS system, will that be rolled out to all the stores this year?

Yes. We are currently testing it in ten stores, and, you know, we developed the software ourselves, and it's a, it's obviously a very important piece of software and we want to test the heck of it before we put it in all stores. And also the installation process, because we install it ourselves, and do the hardware upgrade ourselves, so we've got to have very detailed and explicit instructions on how the install takes place, how the software conversion takes place, how the data conversions take place, and we're doing all that currently, but by probably mid third quarter into third quarter, we should have it in all stores.

Okay. Will you run parallel systems as you roll it out or --

Yes. Well, we currently, for all systems, we have ten stores on the new and the rest of the stores on the old. So yes, we will run both, and we will incrementally roll this across the company.

Okay. Great, thanks a lot, guys.

You bet. Thank you.

This are no further questions at this time.

Okay. Well, thanks everyone for your time this morning, we appreciate it, and we look forward to talking to you at the end of the second quarter. Thanks.

This concludes today's teleconference, you may now disconnect.