O'Reilly Automotive Inc (ORLY) 2008 Q1 法說會逐字稿

Good morning. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the O'Reilly Automotive first-quarter 2008 earnings 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 now like to turn the call over to Mr. Tom McFall, CFO of O'Reilly Auto Parts. Sir, you may begin.

Thank you, Alicia. 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 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, statements contained within the 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 that are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions including but not limited to competition, products 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, war, and the threat of war. Actual results may materially differ from anticipated results described and 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, 2007, for more details. At this time, I'd like to introduce Greg Henslee.

Good morning, everyone, and welcome to our first-quarter 2008 conference call. Participating on the call with me this morning is Ted Wise, our Chief Operating Officer, and Tom McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman, is also present. I'd like to start off our call today by thanking all members of team O'Reilly for their commitment to our culture values and for the great levels of customer service we've worked so hard to provide. Our success happens one customer at a time, and I know that every member of team O'Reilly makes customer service their top priority. And I want to thank everyone for their efforts in the first quarter.

Now on to our first-quarter performance. When we had our year-end conference call in mid February, we were on a comparable store sales trend just better than the 2.1% comparable store sales rate at which we finished the fourth quarter. At that time, we provided comparable store sales guidance in the 1 to 3% range to reflect the trend we were on which we felt would likely continue through March. March turned out to be very sluggish, resulting in a negative 0.4% comparable store sales for the quarter. A couple of factors that we feel contributed to the softer comparable store sales in the quarter and especially in March are the strong 6.8% comparable store sales comparisons we had from first quarter last year with March being the strongest month of the three. Last year, our sales performance was enhanced by favorable early spring weather, the positive effect from the change made to the starting day of Daylight Savings Time, and the timing of the Easter holiday.

As with other retail sectors, our industry continues to feel the negative effect higher fuel prices is having on consumers. We continue to hear from our professional installer customers that there is a lot of vehicle maintenance that is being deferred and that many customers are doing the bare minimum to keep their vehicles road-worthy. I don't think anyone questions that most consumers are under a lot of financial pressure with higher fuel prices not only hitting them hard at the pump but also causing inflation of food prices and other consumable goods. Our customers are having to make tough decisions about vehicle maintenance and repairs, and we continue to see some of our lower priced private label entry-level products growing faster than our premium branded name products. Consumers frequently are making the choice to save a little now as opposed to paying for a premium product that would last longer and perform better.

In the first quarter, we had a very significant swing in the performance of some of our product categories as compared to others. For example, the battery category performed very well with double-digit comparable store sales, while temperature control, air conditioning, and heater parts, performed very poorly with double-digit negative comp store sales decline. I attribute this to a combination of the significant difference in the weather we've had so far this spring compared to last year, this year being much colder with spring arriving later in most markets as compared to last year, but also to the deferral mentality into which many customers currently are forced. If one's car won't start and needs a battery, the only options are to park the car and not drive it, or replace the battery, whereas if the air conditioner or heater isn't working correctly, the car can still be driven and the repair deferred.

Evidence of the stress consumers are under is also indicated by the tendency of vehicle owners to keep their cars longer, with the average age of vehicles on the road at record highs. In the long run, this is obviously a favorable trend for the automotive aftermarket. And while miles driven were slightly down in '07 to 3.003 trillion miles compared to a record high of 3.014 trillion in '06, we continue to feel strongly that we'll eventually benefit from the release of some of the pent-up demands that has been created over the past couple of years as households have continued to struggle to adjust the higher cost of fuel into their budgets.

We're obviously not pleased with our comparable store sales performance in the first quarter, and especially for the month of March. It's very clear that the very challenging economy in which we currently operate is putting a lot of pressure on our customers. However, we remain optimistic in our ability to grow comparable store sales in the second quarter and for the year. As we've mentioned before, we feel very strongly that over time this deferral of maintenance and repair creating pent-up demand will begin to release.

With three weeks of the second quarter behind us, our comparable store sales has significantly improved as compared to our performance in March and the first quarter. Spring is finally arriving in most of our markets, and business is incrementally picking up as it does every year with the initial onset of spring. Based on our performance so far this quarter, as well as softer comparisons to 2.0% comp store sales growth last year, which softened toward the end of the quarter, which is typically the highest volume portion of the second quarter, we're providing comparable store sales guidance of 3% to 5% for the quarter and for the remainder of the year. With three weeks behind us, we're currently comping in that range for the quarter.

We continue to feel very strongly about the advantages of our dual market strategy, our strong distribution network, and our unparalleled access to the parts our customers need to keep their cars and trucks on the road. Our business mix has been right at 50% retail, do-it-yourself, and 50% wholesale, do-it-for-me, for a long time now, with the first quarter finishing right up at 50/50. While we don't disclose our comparable store sales in each of our business segments, I can tell you that our perception has been that the retail, do-it-yourself side of our business seems to have been more negatively affected by this challenging economy. We assume this due to the fact that many of our DIY customers work on their own cars out of economic necessity, while a portion of our do-it-for-me business comes from customers who have the ability to do the work themselves, but have the option financially to have a professional technician do the work for them. This is very clearly indicated by our comparable store sales performance in the first quarter, with our commercial comps finishing up well into our comparable store sales guidance range and our DIY comps finishing up negative.

Now on to some more details about our first-quarter performance. Our gross margin for the quarter came in at 44.6% of sales compared to 43.9% last year, a 70 basis point improvement. We attribute our improvement in gross margin to our mix of business with growth in our private label offerings serving as a contributor. We also continue to work on improving our acquisition costs and in managing our selling prices to be competitive, yet yield a solid gross margin and are comfortable with our gross margin forecast for the year in the 44.4% to 44.7% range. Competitor pricing on both the retail and wholesale sides of our business remains relatively rational with no material changes to report in the first quarter.

Operating expenses for the quarter increased 190 basis points to 33.2% of sales from 31.3% last year. This increase is primarily attributed to the loss of leverage with a negative 0.4% comparable store sales compared to the 6.8% increase we achieved last year. On a per-store basis, our store operations team did an excellent job of managing payroll in a tough environment. Our company is geared for growth, and while it's difficult for us to quickly adjust to abrupt swings in our business in many areas of our operation, I think we've come a long way in the past six months in dialing in on the methods by which we manage our store payroll expense and our ability to forecast our staffing needs. Ted will be providing more detail on some of our efforts in this area in a moment. As a result of the decrease in leverage, our operating income came in at 11.5% of sales, compared to 12.6% in the first quarter of last year.

During the quarter, we opened an additional 37 new stores, bringing our store count to 1,867 stores. These additions brought our inventory investment to $893 million, an 8.2% increase, supported by a 5.4% increase in sales and a 10.7% increase in store count. Inventory turnover remained equal to last year at 1.6 times and our turnover net of payables improved from 2.8 times to 3.0 times as we continued to pursue mutually beneficial relationships with our vendors and to negotiate the best possible payment terms. Our accounts payable as a percent of inventory improved 160 basis points from 45.1% last year to 46.7% this year.

To summarize, we continue to work on improving the execution of our dual market strategy as we plan the acquisition of CSK Auto. This is a very exciting time for team O'Reilly as we start making plans for the combined companies. Over the past few weeks, we've done much exploration and planning, and there's still a lot to do before we're ready to talk publicly about more detailed integration plans. But I can tell you that we've been very excited and encouraged by the quality of the CSK Auto team and the prospects of the combined companies as we work to expand our dual market strategy coast to coast.

While there's a long list of things we need to do to integrate CSK over the next couple of years, following is a short list of things we'll focus on first.

People. We feel there's a great team currently in place at CSK, and we're looking forward to combining forces to provide the CSK store teams the tools they need to be successful, making sure we clearly outline the way we do business and the success we've had with our dual market strategy and the culture that's driven that success is key.

Systems. For us to execute our strategy, we have to have tightly integrated systems in place to manage distribution, inventory deployment, pricing, our commercial strategies, and a long list of other needs. Systems integration will be a primary initial focus.

Distribution. I don't think it's any secret that one of the keys to our past success is our ability to put inventory in our customers' hands quicker than our competitors. CSK's distribution strategy differs significantly from ours and we'll be working to beef up the distribution network in order to put us in a position to further penetrate the commercial side of the business and be much more competitive on the retail side.

Inventory. Having the right products in the right place is one of the fundamental keys to performance in our business. We feel we've developed excellent systems over the years to manage our inventories, and we're looking forward to further leveraging these systems as we integrate CSK. Key areas of focus will be evaluation of the coverage needed to service the vehicle population in the various markets, good, better, best philosophy, and the evaluation of the products -- the product brands necessary to maintain and grow the retail business while further penetrating the commercial business.

Brand and store display design. Over time, we'll evaluate the effectiveness of the four store brands currently used by CSK. Our goal will be to evaluate a possible rebrand of these stores to O'Reilly as we freshen up the store appearance and streamline the display merchandise in other to enable a national brand platform.

This short list is just touching on the high points as we begin the work of developing a detailed, step-by-step plan to combine the two companies. Our management team is thoroughly excited about this opportunity, and is working diligently to outline very specific plans to leverage the best of both companies into one national force. As was announced at the end of last week, we were able to get early HSR approval and are moving forward with the required filings to close this transaction this summer.

I'd like to again mention that we continue to believe that the macro economic conditions continue to drive many consumers to defer some of the vehicle maintenance items that can be deferred, and we continue to feel confident that we'll eventually benefit from the pent-up demand that is being created. Our team believes very strongly in our culture and our strategy, and I want to once again thank every member of team O'Reilly for their hard work and for their dedication to the success of our company. We're looking forward to a solid second-quarter performance and a strong second half to 2008. I'll now turn the call over to Ted Wise, our Chief Operating Officer.

Thanks, Greg. Now to quickly review the status of our new store schedule. We did complete installation of 37 new locations in the first quarter. These stores were distributed over 18 states, and once again Texas led with eight stores. South Carolina and Georgia had four stores, and the balance of the 21 stores were distributed in the 15 additional states. Servicing our stores from our 14 strategically located distribution centers allowed our expansion to be evenly spread across the company and provides our store sales and operations teams the time and the ability to better prepare for staffing and entry into each market. The Atlanta, Indianapolis, and St. Paul/Minneapolis DCs continue to have plenty of expansion capacity for our future growth in the upper Midwest and Southeast parts of the country. As previously announced, we are opening our new Lubbock distribution center in Lubbock, Texas this October, which will support our growth farther into west Texas, New Mexico, and southern California. Now with the addition of the CSK stores currently located in these markets, the Lubbock DC will open supporting a larger group of stores than previously planned, which will give us good expense leverage for the DC, and most importantly, improved inventory and service levels for this group of CSK stores.

We are also in the process of closing the purchase of a 300,000 square-foot distribution center located in Greensboro, North Carolina. This is a new building, but will require an extensive interior buildout, and our tentative plans call for an opening date of second quarter next year. This North Carolina DC will provide the much-needed relief for our Knoxville DC as well as redirecting some of our current and longer and much higher cost routes from a service standpoint out of our Atlanta DC. The addition of this distribution center will not only allow for us to more efficiently service our existing stores, but will open up continued expansion opportunities into the Carolinas, Virginia, and West Virginia.

In addition to the 37 new stores, we relocated 12 stores into new buildings during the first quarter, and completed 40 store renovations. We also installed another 85 store interior decor packages which brings us very close to completing this companywide project, which was basically a restriping, just basically a refreshing of the interior decor package of the entire company. In the second quarter, we have 58 to 60 planned new store openings which will bring us to over 95 stores for the year. This relatively aggressive schedule in the first half of the year is related to our previous goal of opening 205 new stores for the year, which will be adjusted back to 140 to 150 new stores with the CSK acquisition. We are in the very preliminary planning stages for the CSK integration, but obviously our installation teams will be involved in the conversion activity starting with the CSK stores in existing and adjacent markets. We will continue to evaluate our expansion plans within our existing footprint, and while we haven't determined the number, we expect it will be in the range of 150 stores in '09 and start ramping back up in 2010.

In regard to the sales results for this past quarter, while the results were disappointing, we can honestly say that it was not due to our lack of effort and overall execution of our dual market strategy programs by our sales team. We obviously began this year knowing that we were going to be faced with tough comparisons, especially in the first quarter. Our stores focused on giving the best customer service to both our retail and first-call installer customers. And we are very proud of the efforts that were made in the first quarter. Our company objective is to do everything possible to grow profitable business. As Greg outlined, higher fuel costs, along with a consumer uncertainty and the challenging economic conditions resulted in many DIY purchases and repairs for do-it-for-me customers being deferred. I want to thank our entire O'Reilly team for their commitment to customer service, and we are confident through our hard work and commitment to great customer relations, we will be able to continue to improve the sales trends we've seen so far in the second quarter.

In regard to expense management, increased emphasis and evaluation of our controllable expenses have been implemented throughout the entire company, particularly in payroll and staffing management. Our dual market business model is based on higher service levels, which require a higher ratio of full-time to part-time team members. This makes it much more difficult to manage payroll and sudden or short-term business swings. And typically, any extra time in the schedule is allocated to making additional sales calls, in-store training, and to step up current service levels to expand our customer base. This staffing philosophy has been the key to our past comparable store sales growth, with the ability to give the best customer service in our markets. We do realize additional opportunities for adding part-time team members to the staffing model to support the retail hours and give us more flexibility in scheduling for both slow and busy times while providing a stable schedule for full-time team members.

This past quarter we expected a challenging payroll situation with comparisons to the 6.8 comps we achieved last year. Our store management team reacted accordingly and maintained good control of labor costs. The result was a reduction in the average per-store per-day payroll dollars of 3.5%. Obviously this wasn't enough to offset the difference in our comparable store sales, compared to first-quarter last year, but did make a material difference. Our new scheduling system is proving to be a great tool to provide our managers the information and sales forecast necessary to help make the best scheduling decisions possible and to manage store productivity. In addition, we are implementing an enhanced payroll reporting tool to better inform district managers on a more timely basis. We continue to evaluate each individual market, and the level of competition to create a staffing strategy that will support the ongoing sales growth opportunities in each market.

As announced recently we completed the installation of our new Infinity parts system, our POS system, toward the end of last year. And we are receiving very positive comments from the field in terms of ease of use and especially for training our new parts specialists. The new graphical system gives us the ability to introduce sales tools by product images, specifications, and diagrams. We are currently enhancing the POS system with a new related sales tool which will automatically display specific related sales items on the look-up and seamlessly add these additional related sales to the invoice. Our intent is obviously to drive more related sales and provide the training to our team members to help customers from a service perspective and make sure they leave the store with everything they need to properly do the repair. We hope to have this new application tested and rolled out to the stores in the third quarter this year. We continue to look for additional enhancements to the system that will improve team member productivity and customer service levels.

In closing, I would like to say thank you to team O'Reilly. We are very excited and motivated by the upcoming acquisition of CSK, and look forward to the integration of our business plan and O'Reilly culture with CSK team. We do, however, realize that throughout the transition that our existing store base must continue to be aggressive and grow sales and profits, and will require an ongoing commitment from all of team O'Reilly. With this, I'll turn it over to Tom.

Thanks, Ted. Moving on to the numbers, sales were up 5.4% to $646 million for the quarter, with a comparable store sales decrease of 0.4% for stores open greater than 12 months, versus 6.8% comparable store growth for the first quarter of 2007. Sales to independent jobbers, team members, and equipment sales which are not included in our comparable store sales calculation were $16.2 million for the first quarter of 2008, which was a decrease of $1.2 million from the prior year, a 6.9% decrease. Gross profit was 44.6% for the quarter versus 43.9% in the prior year. The improvement was primarily due to mix of products and improved acquisition costs. SG&A for the quarter was 33.2% of sales versus 31.3% in the prior year. The deleverage was the result of significantly lower comparable store sales results and the addition -- I'm sorry, and the additional investment in new store technology made in the third quarter of 2007, which will anniversary in the third quarter of this year. To illustrate the deleverage impact sales had on SG&A, if comparable store sales would have been 1%, the bottom end of our comp guidance, SG&A as a percent of sales would have been 32.8%. If comps would have been 2%, SG&A would have been 32.5% of sales. And if comps would have been 3%, the top end of our comp guidance, SG&A would have been 32.2% of sales.

Operating income for the quarter was 11.5% of sales versus 12.6% in the prior year. The tax provision was 37.14% of pretax income for the quarter versus 37.28% in the prior year. Net income for the quarter was $46.3 million versus $48.4 million in the prior year. For the first quarter, net income was 7.2% of sales as compared to 7.9% in the prior year. Diluted earnings per share for the quarter was $0.40 per share, which was a $0.02 decrease from the prior year. First quarter of 2008 EPS is based on 116.3 million shares as compared to 115.4 million shares in the prior year.

Moving on to the balance sheet. Inventory was $893 million, up $67 million [of] March 2007. This represents an 8% increase over last year versus an 11% increase in store count over the same period. Total assets were $2.4 billion, a $304 million increase [of] March 2007. The increase is due to growth in fixed assets of $195 million, inventory related to store and distribution center growth of $67 million, and an increase in cash and investment in CSK stock of $44 million. Accounts payable of $417 million was an increase of $45 million over March 2007. AP to inventory of 46.7% increased 160 basis point from 45.1% at March 2007. The AP to inventory ratio was positively impacted by better vendor terms and improved leverage of the inventory store level and the newer DCs.

Debt levels were $100 million at the end of March 2008 versus $101 million at the end of March 2007, with a decrease attributable to capital leases. During the second quarter, $25 million of private placement notes [bearing] interest at 7.72% will become due. We plan to redeem these notes with cash on hand. EBITDA for the quarter was $97 million, 14.9% of sales, versus prior year of $95 million, 15.6% of sales.

A few other performance ratios. Return on equity was 12.2% at the end of the quarter, return on assets, 8.4%, and return on invested capital, 11.7%. For some other financial information, during the first quarter, the reserve for LIFO increased by $3.5 million versus $0.4 million increase in the first quarter of 2007. Depreciation was $21.5 million for the quarter versus $17.4 million in the prior year. Capital expenditures for the quarter were $59 million versus $64 million in the prior year. Interest expense was $1.4 million for the quarter versus $0.8 million in the prior year. Stock option expense for the quarter was $1.4 million versus $1.1 million in the prior year's quarter.

For the quarter, cash flow from operating activities was $119 million versus $129 million in the prior year. While the AP as a percent of inventory for the end of the first quarter 2008 improved 160 basis points over the prior year, the increase of the first quarter over the preceding fourth quarter was 350 basis points in 2008 versus 590 basis points in the prior year. This reduced rate of improvement drove the decrease in the cash flow from operating activities. Free cash flow for the quarter was $60 million versus $65 million in the prior year. The decrease was the result of decreased cash flow from operating activities, offset in part by lower levels of capital expenditure.

Moving on to guidance -- our guidance for both the full year and the quarter are based on our previously revised new store estimate of 140 to 150 new stores for 2008 and does not take into account the planned acquisition of CSK. For the full year, our capital expenditure guidance is $220 million to $230 million. Depreciation, $91 million to $94 million, with a tax rate of 37.0 to 37.2% of pretax income. Free cash flow for the year has been revised up to $75 million to $85 million for the year based on the 140 to 150 new stores. Gross margin guidance is 44.4% to 44.7% of sales, and revenue, $2.7 billion to $2.8 billion with a slight reduction for the reduced number of stores. Our same-store sales guidance for the year remains at 3% to 5%, and our diluted earnings per share guidance for the year is $1.81 to $1.85 with stock option expense on an estimated 117.4 million shares. For the quarter, our same-store sales guidance is 3% to 5%, and our diluted earnings per share guidance is $0.47 to $0.51 per share on an estimated 117.3 million shares. At this time, I'd like to ask Alicia, the operator, to come back. We will be happy to answer your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Tony Cristello of BB&T Capital Markets.

Good morning, Tony.

Good morning, gentlemen.

Good morning.

I guess I wanted to just ask a question on the guidance. And when you look at the 3% to 5% guidance versus what you had last year in the second quarter and Greg, I think you talked about from a seasonality or volume standpoint, you typically see volumes build as the quarter progresses. Last year you had flooding and certainly that impacted Texas and Oklahoma, and was that -- which months first did that really impact, and -- and I'll let you talk -- answer that and then second -- I just have some -- a quick followup to sort of my question on the quarter in terms of guidance, as well.

Okay. Well to speak of the flooding last year in Texas to be quite honest, Tony, I don't remember which month that actually had the most effect. I can tell you as I mentioned earlier, that to this point in the quarter we're within our guidance range. And the comparisons toward the end of the quarter are more favorable, and of course the volume increases toward the end of the quarter. So that led us to making -- leaving our comp guidance at 3% to 5%.

Is there any concern with or I guess maybe phrase it another way, when I look at 3% to 5% guidance, we talked about the DIY side of the business being softer than the commercial side. And correct me if I'm wrong, the temperature control business typically in the summer with respect to air conditioning is a bigger DIY business. If the consumer with higher gas prices or lower miles driven, is there some risk that you don't get as much benefit on an easier compare because of that reason?

Well, there's certainly some risk. Our comparisons to our DIY comp last year second quarter are pretty soft. The DIY business was stressed last year, as it is this year. Our feeling based on first-quarter performance and the weather that we've had in many of our markets so far this -- during the first quarter is that spring hasn't really sprung yet. And a lot of that business is being pushed into the second quarter that would have happened first quarter last year, which helped give us confidence in issuing the 3% to 5% comparable store sales guidance for the second quarter.

Okay. But in the temperature control category in itself, is that a -- one, that's a bigger ticket category for you. And is it a higher DIY category, as well?

No. It's really more -- it's more of a do-it-for-me category. There are minor things that DIYers do and there still are DIYers that try to put refrigerant in their system and they may do the component replacement and then take it to the shop to have the system evacuated and recharged. But for most part, that's a -- the overall hard parts category of that is more of a do-it-for-me business than it is DIY. Some of the ancillary items like DIY recharge kits and the leak test dyes and things like that, we do quite a bit of DIY business, but more of it's do it for me.

Okay. And do you -- when you put in your guidance, I just wanted to -- do you factor in the macro in terms of gas prices or any of that, or are you just basically looking from a comparative standpoint where from a demand standpoint how things were and what your expectation is in terms of how they will play out?

We look at our comparisons, kind of what trend we've been on. What weather effects we might have had coming into the quarter. Things like that. It's hard for us to gauge as it is for you all also, I know, to gauge the effect of higher gas prices. And I've seen the -- the observations that have been made by the people that focus intently on the cost of crude and the potential effect on gas prices and so forth as much as anyone else. And it's hard for us to predict what effect that will have. We know that in most of our markets people really don't have a choice but to use their cars for transportation. And most consumers, right, I feel like virtually all consumers want to use their cars. They want to use private transportation, and like the I guess luxury of having private transportation, the convenience of it, and they're willing to sacrifice some of the other things like going out to dinner and things like that in order to maintain that as opposed to sacrificing using their car when they might want to as opposed to carpooling, as opposed to using public transit systems in markets where they have public transit. Although I'm sure there are customers that will make the decision to use public transit to some degree in markets that they're available. But I guess I would say that we factor the effect of gas prices into our comp guidance to a lesser degree just because it's hard for us to accurately factor the effect of that. It's easier for us to deal with the things that we know and understand. And that are the trends that we've been on, the conditions that contributed to those trends and so forth.

Okay. Great. Thank you, guys.

You bet. Thanks, Tony.

Thank you.

Your next question comes from Dan Wewer of Raymond James.

Hey, guys. A bit confused with the sales performance during March. And then what you're seeing in April. I understand your comments that halfway through the first quarter same-store sales were in that 1 to 3% rate. But we had that very difficult comparison during the month of March. My question is, we knew that the comparison was difficult in March. So why was that not taken into account when that original guidance was provided?

Well, March wasn't that much more difficult. March improved quite a bit last year. But it wasn't -- it wasn't huge compared to the rest of the quarter. But it was the best quarter of the month last year. And it was taken into consideration to the degree that I feel it should have been. We were on a trend that led us to believe that our comps would end up in March in the 1 to 3% range, or we certainly wouldn't have expressed that we felt that our comps would end up in that range. And then of course March for various reasons and it's easy to look back at the things that might have caused comps to be soft in March. But comps were very soft for us in March. And whether they were soft for the whole industry or not, I don't know. I know that we feel like weather was a contributor to our comp performance in March because of the late spring. And that it was a tailwind last year with the change to Daylight Savings Time and in the favorable weather. And then also, you know, Easter Sunday fell in March this year, whereas it fell in April last year, and that, of course, is a soft day for us, which is a minor contributor. But I goes answer your question, we do the best we can based on the information that we have in our experience in the business to provide comp guidance that we feel like is accurate. And it's very difficult to do. It's almost a crystal ball-type thing when you are looking forward to a quarter and really all you have to lean on is our experience in the business and the trends that we're on, and the various macro trends that might affect it. And we do our best to keep comp guidance accurate. And we felt in the middle of February that 1 to 3 was accurate or we wouldn't have issued it at that.

Well, that leads into my followup question. The strong results you're seeing during the first three weeks of April sound similar to what NAPA was talking about last week. But how do you know that this recovery in April is not simply a head fake, and that what we saw in March may be more indicative of the future, particularly given the 30% increase in gasoline prices?

Well, obviously we don't know anything for sure relative to the future other than the fact that we know that there was a lot of business that didn't take place in March that will take place in the second quarter. And our feeling is that the spring coming late to many of our markets is pushing business into this quarter, and are hopeful. And we feel that our guidance is as accurate as we can be, coming up with the 3 to 5%. So far this quarter, that's where we're at. And we have softening comparisons toward the end of the quarter, which is the higher volume portion of the quarter. And for that reason, we feel comfortable with the guidance. Now to your point, if gas prices were to spike significantly and consumer behavior change significantly, then obviously that would have an effect. It wouldn't be necessarily baked into our comparable store sales guidance.

Then a final question I had for Tom. You noted where the expense ratio would have been had you made the original sales plan. I was very impressed with the 2% drop in your inventory per store. How much would the inventory per store decline had you actually made the original sales forecast?

Would have declined slightly more. We have a very real time inventory system where we look at what our demand is and what we project it to be, and replenish based on that. Most vendors have weekly or multiweek -- multiple times a week orders. So I wouldn't have anticipated a significant change in our inventory. Our inventory levels go where we think they need to be, to the extent we would have had higher sales, we would have filled the pipe and kept about the same number.

Okay. Great. Thanks.

Your next question comes from Matthew Fassler of Goldman Sachs.

Good morning. I want to ask you about the performance of your new stores. Comparing the gap between your total and comp store sales growth with your unit growth would suggest that for the second consecutive quarter that productivity remains under some pressure. And I'd like to get some color for you as to how you see new store performance, if they're on plan, and if in fact they are on plan whether that plan is lower than it would have been in the past. And how that impacts the returns that you expect to extract from those units.

In general, our new stores are performing as we'd expect. And they are within the guidance -- within the range of performance of past store years. Given the tough macro environment, they're not at the high end of that range. They'd be at the lower end of that range but still within our acceptable guidance. And we don't think it depicts for us that they aren't going to get to the mature level of sales that we think they should be at. From a performance standpoint, and how you guys measure that, that's why we changed our disclosure a little bit to include the independent jobber sales that team members and the equipment sales which are not included in comps. Those items were down 6.9% from the first quarter of last year, which when you take that into the noncomp base is a pretty significant amount and should help you with the calculation for our new store performance.

And that disclosure just to recap it, we're looking at in the text --

Yes. I'll repeat the numbers. The --

That would be helpful.

The noncomp sales as we disclosed in all our calculations, our jobber sales, team member sales, and equipment sales -- they were $16.2 million for the first quarter, down $1.2 million from the same time last year.

Okay. We'll run those numbers through. And get a sense as to what they look like. And just a followup. I mean, looking at your -- most of retail across the spectrum had easy comparison the first two weeks of April last year. My sense from looking at your weather trends (inaudible) specifically is that it kind of rained specifically in your states oddly enough to a much greater degree than it did for almost anyone else, pound for pound, through the second quarter. Does that jive with your recollection with the data that you monitor on the conditions in your market last year?

I think as Greg mentioned earlier, in most of our markets, we really don't feed like the onset of spring has really taken root.

I'm talking about last year, just as we think about comparisons -- one would expect that you'd start -- any retailer would start April doing well. The question is, if the weather compares get tougher, would that continue. It seems in your case like the weather compares don't get tougher. They stay pretty modest and give you some opportunity to maintain the momentum that you have.

Yes. I think that's -- that's right, Matt. So far this year, we've had some tough weather. As a matter of fact, all of us don't have to file our federal and state taxes until May 19 because this whole area has been declared a federal disaster area due to the floods. And as a result, we get an month extra to file our taxes. As do many of the markets in this area that have been so heavily impacted by the heavy rains. And not only the heavy rains, the heavy rains didn't last for just a few days, the heaviest of the rains. We've had a lot of rainy weather. But the biggest issue has just been cold. Spring has not come. The trees are starting to bud in many of the markets that would have normally bloomed back three weeks ago. And even though the days have gotten longer, people aren't working, and DIY customers aren't working on their cars and driveways in cold weather. They just kind of wait for weather to get better. So, yes, we feel feel like we have good comparisons, not only from a comp basis, but from a weather basis for the remainder of the quarter.

What would really help the aftermarket in general would be a really hot summer. It's been several years since we've had extreme temperature for whatever reason. And Tony was asking about air conditioning part sales. That's what drives air conditioning business -- the unbearable hot temperatures.

Yes. Something else that I wanted to mention also with regard to air conditioning sales is vehicles today maintain their value from a trade-in perspective longer than they did a few years back because they're roadworthy at higher mileages. If an air conditioner on a car doesn't work, it very significantly affects the trade-in value and resale value of the car. For that reason, air conditioning repair can be deferred for some period of time. For a consumer to get the value out of a car, they are forced into fixing the air conditioner or accepting the fact that they get much less for it on trade in or resale. And if they don't fix it or -- and sell it off for trade, typically the reseller of the car always fixes the air conditioner before it's resold because it's very hard to sell a car that has air conditioning that doesn't work because most consumers are aware that AC repair is a pretty expensive repair these days.

Got you. Thank you very much.

You bet.

Thanks, Matt.

Your next question comes from Scott Stember of Sidoti & Company.

Could you talk about the new stores that you talked about for 2009, which areas they would be in? Do you plan on opening any additional stores within CSK's footprint, or this is just in the traditionally O'Reilly footprint?

Scott, in '09, we'll just continue to fill out of our existing distribution points, and again, Greensboro will be opening up, in the second quarter of '09. So there will be more kind of northeast expansion. Now as far as existing CSK markets, the only new markets more than likely we'd be opening stores at would be in El Paso and Albuquerque and maybe southern Colorado where we'll be able to distribute out of our Lubbock DC.

Okay. And going back to fuel costs, I know you guys in the past have talked about some measures that you've taken to try to mitigate some of the impact on your costs with diesel fuel and so forth. Is there anything else that you're doing now that you can do to maybe accelerate some of those efforts?

Well, yes. What we're doing now is really -- it's working on the freight side of it where we ship products from our distribution centers to our stores. The computer systems that we put on the trucks and the incentive programs that we've put in place to encourage our drivers to be more fuel efficient, to drive the vehicles at the right RPM, to use the right shift patterns and not leave the truck idling while they're unloading and all of these various things. They're now incentivized and share in our savings on fuel. We've seen meaningful results. As a matter of fact, even with the softer comparable store sales in the first quarter, our distribution costs were right at the same cost that we were last year first quarter, and much of that is the result or could have been negatively impacted had we not had these measures in place. On the store side, we're using gasoline as opposed to diesel, and running hot shot deliveries. We do everything we can to make sure that we schedule and consolidate and route our deliveries as best we can. At the end of the day it becomes a customer service and customer satisfaction issue with our commercial customers. And our store managers and district managers try to balance that every day. But it's a significant expense increase that we continue to deal with and will hopefully get better at. But there's just so much you can do and still keep the level of customer service at the rate we feel it needs to be.

In the past we've used various small ranger trucks. We are in the process now of testing smaller vehicles that get better gas mileage. And would expect that we'll be adding a different delivery mix to our vehicle to improve our fuel economy there.

All right. Thank you. That's all I have.

All right. Thanks.

Your next question comes from Peter Benedict of Wachovia.

Good morning, Peter.

First on the inventory, how would you guys know kind of what the right level is? It's been coming down on a per-store basis. I know it was up faster than sales this last quarter. But talk to me about how you're thinking about that. Could that be impacting your sales at all, or do you feel like the [end] stocks are still in good shape?

Well, as you may know, Peter, we replenish our inventories five nights a week. We don't -- on some of the hard-to-find parts we don't have to have a lot of depth to service the demand. We're confident in the systems we use to not only define what goes into a market to begin with based on the vehicle population that's there and then these -- we dynamically in an ongoing way we do adjustments to not only the depth but also the breadth of inventory. And then we give our store managers the latitude to add things to inventory that they feel like they need. If for some reason they -- a certain fleet or whatever the case may be that we're servicing needs a certain product in place or they've modified something on the vehicle to cause it to take a different intake filter, whatever the case may be, the store managers have the latitude to do that. We certainly don't feel like that anything that we're doing to better manage our inventories is resulting in softer sales. As a matter of fact, just the opposite. I feel like the things that we do to put the right inventory in each store really is a contributor to our -- the penetration in each market. We have a system to log any [lost] sales that we have at the store. And that goes into our demand forecast. We've done this obviously for a long, long time. And all the stones that can be turned over relative to making sure that we have the right inventory in each store have been turned. Although we continue to work on ways to be better at everything we do. We feel like our inventory management systems are really second to none.

But Peter, I might add there that the best way to tell if you have a problem is to listen to the field because our folks are not bashful when they feel they have an inventory problem. And to Greg's point, the last couple three years we've enhanced our systems, it's very positive feedback from the stores as far as our inventory levels as compared to our competition.

Great. Thanks for that. On the tradedown that you talked about, the activity you're seeing in the stores, remind me, when did you start seeing that, and was it more pronounced in the first quarter than it has been previously?

I don't think it's more pronounced. And it's really kind of hard to measure on the softer comparable store sales relative to just the pure effect of the tradedown if we want to call it that. I would say probably the last 18 to 24 months, we've seen it incrementally -- the private labels pick up. In talking with some of our branded suppliers, we've been asked by some of them if we maybe aren't focusing on selling our brand as much as we once were, and the absolute opposite is true. We certainly still promote our brands very much to our installer customers and we use them as a sell up opportunity to our DIY customers. But without question and based on the data and input from the field, our private label products are currently growing stronger on the DIY side. And it's surprised us a little bit on the commercial side how many of our commercial customers are choosing in some cases to use our private label products as opposed to the branded products simply because they've got the same -- they're dealing with the same customers that we are to the same degree. And they've got to be price competitive when they quote the job. And they're quoting in many cases a private label option and a branded option to their end user. And evidently the end users are choosing in some cases to use the private label and lower cost option.

Thanks. One last one for Tom. I'll let you guys go. Any expense in the quarter for acquisition-related efforts, due diligence, et cetera -- Tom, can you break any of that out?

Not material numbers.

Perfect. Thank you very much.

Okay. Thanks.

Your next question comes from Seth Basham of Credit Suisse.

Just to clarify on the comp guidance, as we think about the rest of the year, clearly it's reasonable to expect a little bit of pent-up demand from the wet March to come through in Q2. But it's not like you're expecting a lot of pent-up demand for the rest of the year or the macro would help your sales going forward, right?

Well, I -- actually, at some point all this maintenance that's been deferred over the last 18 to 24 months -- that has to come to fruition at some point. Either that or we're going to have a lot of unsafe cars running around the United States. Our feeling is that incrementally we'll see some release in pent-up demand and that's going to help offset some of the economic pressure that our customers are under. So yes, we do -- we do consider the fact that there could be at any point -- especially if there's any relaxation in the -- withdrawal in the fuel prices that there could be some release in pent-up demand.

And to some degree if you've caught the new car sales report, domestic and imports -- import car sales are down. So that should mean people, they're keeping their cars, going to have to look at things that they need to do to keep them on the road versus trading them in.

From a comparison standpoint, we had a pretty good third quarter last year not by historical standards but by maybe the economy we're in standards. And then we had a soft fourth quarter. So that -- our comparisons were obviously taken into consideration with our guidance.

Okay. That makes sense. And from a macro standpoint, you're not expecting an improvement or significant improvement in the macro to help boost your sales going forward through the rest of the year, is that right?

No. No. And again, it's -- you guys probably know more than we do about the forecast of what's going to happen with the macro environment. But our perception would be that the economy we're in is going to last for a while. And without some meaningful change in the crude oil situation that might drive fuel prices down, we're not looking for any material change. We're hopeful, as I think everyone is, but not counting on it. And then we also are hopeful that the economic stimulus package that the federal government is in the process of pushing out will help some, too. There are a lot of customers that $1,200 to $1,500 depending on the number of children that they have could make a material difference in the things that they've deferred, whether it's home repair or auto repair, whatever the case may be.

And then on the gross margin side, clearly this mix shift trend has persisted for a bit of time. But based on your guidance and gross margins for the year, sort of seems like you expect gross margin improvement not to be as great going forward. How do you reconcile those two things, and is there a chance that we do see the strength in gross margins continue?

Well, a couple of things are going on in gross margin. Our distribution costs, we continue to feel pressure there, especially driven by diesel. The second item is we get a lot of support from our vendors for new stores. As we reduce that number of new stores, that's a pressure on gross margin. Obviously and offsetting help around the SG&A side. And there have been a lot of changes in prices from our suppliers, especially on the commodity side that add risk to what we can price products at.

And then one more if I may before I turn it over. Now, thinking a little longer term with CSK in the picture, as you sort of size up the synergies associated with that transaction and think about the buying power that you'll have as a larger company, how does that process work in negotiations with vendors? And when do you expect to realize some of those big synergies from buying power? Will we see some of that flow through in 2009?

Well, I'll start off with just kind of the process perspective. And then I'll let Tom speak to maybe the timing and the effect to what degree we can speak to that on our gross margin. From a process perspective, our vendors are very much a part of our growth. They want to grow with us. They participate in our new store growth every year, and this is a significant opportunity for the vendors that we have at O'Reilly now to possibly put their products in CSK stores and us benefit from the growth of CSK together. On the other hand, the CSKs established a lot of very valuable and well-known brands in their stores over the years. And we're going to consider the value of those brands in those stores before we abruptly make any changes and make sure that we're with the right brand. And there could even be changes that went back the other way, where there was a brand at CSK that we ended one at O'Reilly. We simply will back up and take a look at the performance of the products, and -- in both companies and make the decisions as to what makes sense going forward. The bottom line is that for the combined companies, we basically go back to the table with our vendors and say, hey, here's what we look at today. This is a significant piece of growth for both us and for your company. What's this mean to the efficiencies in which we can operate? And what's this mean for a cost of goods for us? And we work through a process coming up with a win-win situation for both us and our vendors to move forward as a larger, combined company that will have some favorable benefit to our gross margin performance. And Tom, you might speak to -- from timing standpoint.

From a timing standpoint, Seth, we're not prepared to give that information now. There's a number of items that from an antitrust standpoint that until we're a combined company, we won't have access to. Our assumptions based on the information we have is -- it's going to take a period of time. Some of the items where we have like products or the exact same product come a lot faster. To some extent, ultimately we won't see the total synergies until we've beefed up the distribution centers and implemented our full way of doing business, so it's going to take a period of time.

Okay. Fair enough. I appreciate it.

You bet. Thanks, Seth.

At this time we have elapsed for questions. I would like to turn the call over to Mr. Henslee for any closing remarks.

I want to say thanks for everyone's time this morning. You can bet that during the second quarter, team O'Reilly is going to be working very hard to generate solid results. We'll look forward to reporting our second-quarter performance in July, along with an update on the status of our acquisition of CSK. Thank you very much.

This concludes today's conference call. You may disconnect.