O'Reilly Automotive Inc (ORLY) 2008 Q2 法說會逐字稿

Good morning. My name is Kerry, and I will be your conference operator today. At this time I would like to welcome everyone to the O'Reilly Auto Parts 2008 second-quarter earnings release. (Operator Instructions). I would now like to turn the call over to Tom McFall, CFO. Sir, please go ahead.

Thank you, Terry. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, 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, statements contained within this press release that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs, and assumptions 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 acquired 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, 2007 for more details.

At this time, I would like to introduce Greg Henslee.

Good morning, everyone, and welcome to our second-quarter 2008 conference call. Participating on the call with me this morning is of course Tom McFall, our Chief Financial Officer and Ted Wise, our Chief Operating Officer. Ted is currently in Phoenix at the CSK headquarters but will be participating on the call remotely. David O'Reilly, our Executive Chairman, is also present.

Considering the continuation of the challenging economic environment we have experienced so far this year, we're very pleased with our second-quarter performance. Our team continues to focus on the fundamentals of providing the highest levels of customer service to both our professional customers and our do-it-yourself customers and we're very encouraged with the steadiness of our comparable store sales growth throughout the second quarter, resulting in a 3.4% increase. I'm also pleased to report that this steady comparable store sales trend has continued into the third quarter.

As our Company continues to aggressively expand, we're very focused on gaining market share in our newer markets, as well as defending and growing our share of business in our more established markets. We are extremely proud of the job our team is doing as we continue to grow the Company at a rapid pace and begin the integration of CSK Auto. Our ability to focus much of our senior management time and effort on the integration and conversion of CSK is only possible due to the outstanding store operations and distribution operations teams we have in our core markets. And I want to thank all the members of team O'Reilly for their effort in ensuring the continued success of our business and for the great levels of customer service we all work so hard to provide.

While 3.4% comparable store sales growth in the second quarter is a solid improvement over the first quarter, our core customers remain challenged economically due to inflationary pressures. We feel this continues to drive many of our customers to defer as much vehicle maintenance as they reasonably can. However, as I've said before, our business is very resilient to the consideration of deferment and the fact that new car sales have slowed bodes well for our business, as families under economic pressure make the decision to keep, maintain and drive their older cars as opposed to replacing them.

Based on the performance of some of our more discretionary categories, as well as the general feeling among our installer customers and our field sales force, we believe the mindset of our customers is starting to improve as people generally adjust to higher fuel costs.

Our air-conditioning parts business, which is a category that can be deferred and has performed relatively poorly over the past several quarters, while not performing as well as we would like, has shown significant improvement, as have some other categories, such as brakes, lubricants, filters, and other maintenance-related categories. As you know, it's hard to predict future sales. But based on the steadiness of the comparable store sales trend we experienced during the quarter, we feel the environment in our business is currently very stable.

And while there's obviously no question that we have an economic headwind, we feel reasonably insulated, due to consumer tendencies to defer purchasing new cars and to maintain their cars better to maximize fuel mileage, and also because of the nondiscretionary nature of the majority of our business.

With all this considered, we're providing comparable store sales guidance for the third quarter and the remainder of the year of 2% to 4% for the O'Reilly stores, excluding CSK. We feel that slightly more conservative guidance is warranted with the 4.3% comparisons we have from third quarter last year, as well as the continued economic headwinds. Three weeks into the quarter, we're currently well within that range.

For some time to come, we'll continue to report O'Reilly comparable store sales stand-alone, as well as our sales combined with the CSK stores we acquired on July 11th. Considering the comparable store sales performance of the CSK stores, which has been running in the negative 1% to negative 3% range since they reported their first-quarter results, we're providing combined Companies' guidance of 0% to 2% comparable store sales for the third quarter and for the year.

As I think everyone would assume, much of our comparable store sales performance at CSK depends on the pace at which we're able to make modifications to their business model and proceed with the conversion process.

Ted Wise will be talking about the detail and timing of our plan more in a moment but I want to simply outline that we're extremely excited about the opportunity we have with the acquisition of CSK. We feel very fortunate to have the opportunity to combine the complementary business models of CSK and O'Reilly. And we'll be working to put in place solutions to three primary areas that we feel will greatly enhance our performance in the CSK stores.

One, we would like to have a stronger distribution infrastructure in place. To be successful in our business, timely access to inventory is paramount. We will be working hard to add distribution infrastructure right away and to make more hard-to-find parts available quicker.

Two, the stores do not have the inventory coverage in the store that we feel they should have to compete in the various markets in which they do business. We'll be working to expand coverage at the store level with an improved merchandise mix.

Then three, we'll be modifying the pricing strategy used at the stores. We will not elaborate much on that for competitive reasons. But I will say that the CSK strategy was much different than the strategy we use, and we'll be trying to apply a different strategy as we enhance the CSK (technical difficulty) inventory availability.

As I mentioned, Ted will be providing a little more detail on our integration plans in his prepared comments in a moment. Now on to a little more detail about our second-quarter performance.

Our gross margin for the quarter came in at 45% of sales compared to 44.7% last year, a 30 basis points improvement. We attribute our continued gross margin improvements over the past several quarters to a combination of good, solid management of our distribution costs as well as our category management efforts.

We continue to see strong growth in some of our private-label product categories, which we typically position as entry-level products. These products in most cases generate a higher gross margin percentage, even though they sell for less than some of our premium brand products. And this was a positive contributor to our gross margin performance. The competitive pricing environment remains consistent, and we've not noticed any major changes in the pricing strategy of any of our major competitors.

Operating expenses for the quarter increased 50 basis points to 32.5% of sales from 32% last year. This increase can be attributed primarily to fuel costs, which have incrementally increased and increased depreciation due to the rollout of a new point-of-sale system and technology in our stores. These systems are contributing to improved levels of customer service as we continue to enhance them by adding content that is critical to helping our team members look up parts, suggest everything to our customers that is necessary to make the repair, and provide access to specifications and other information necessary to service the more technologically-oriented vehicles on the road today.

Operating margin came in at 12.5% of sales compared to 12.7% last year and net margin was 7.9%, compared to 8.1% last year. During the quarter, we opened an additional 51 new stores, bringing our new store openings for the year to 88 stores. And we ended the quarter with 1918 O'Reilly stores total, bringing our inventory investment to $904 million, a 6% increase over second quarter last year, supported by a 9.5% increase in sales. We continue to be very pleased with our ability to deploy the correct inventory in the various markets in which we opened stores and do business in and rely on some very robust systems that we've developed over the years.

Inventory turnover remained equal compared to last year at 1.6 times on a total asset basis. However, turnover net of payables improved to 3.1 times from 2.9 times second quarter last year due to our ongoing efforts to manage our payment terms with our merchandise vendors. And, our accounts payable as a percent of inventory increased 310 basis points from 46.2% last year to 49.3% this year.

To summarize, we're very encouraged by our performance in the second quarter. Our comparable store sales trend has been very consistent over the past several weeks and we feel that our sales performance in a tough environment is not only indicative of the strength of our somewhat unique business model but is a culture under which team O'Reilly does business. This culture emphasizes values like high levels of customer service, teamwork, and professionalism, just to name a few.

I'm also very proud of the quality of our sales growth. We're very disciplined in the manner in which we grow sales in order to ensure our continued profitability. This is exemplified by our continuing gross margin improvements over the past several quarters.

July 11 marked a very important day in the history of O'Reilly Auto Parts. We completed the acquisition of CSK Auto, which we pursued for a long time. This acquisition will create very meaningful opportunities for our Company to expand the reach of our unique strategy for years to come. Every member of our management team has been extremely encouraged by the potential for growth we will have as we establish the O'Reilly brand and the high levels of service that we provide our customers in all our new markets.

We are also very excited to have such a committed team in place at CSK that is operating the stores, distribution centers, and all the headquarters functions. We're looking forward to integrating our very complementary business models and building the O'Reilly brand in all of the Western US markets.

Our combined team is a force to be reckoned with. And I again want to welcome our newest team members to Team O'Reilly and thank all of Team O'Reilly for their great job and for their hard work during the first half of the year.

I will now turn to call over to Ted Wise, who is in Phoenix. So, he will be participating remotely, and Ted is our Chief Operating Officer. Thanks. Ted?

Thanks, Greg, and good morning, everyone. To start with I will quickly update our expansion for the year.

We finished the quarter with a gain of 51 new stores, giving us 88 new stores for the first half of this year. Last quarter's expansion pretty much mirrored the trend of the first quarter. Texas once again led with 10 new stores leading us up to 18 Texas stores for this year. (technical difficulty) Ohio valley and the Upper Midwest states were next in new store count. We had seven new stores in Ohio and five in Indiana. Both Ohio and Indiana are proving to be great expansion markets, and we have plenty of distribution capacity to handle this growth out of our Indianapolis DC. We installed four new stores in South Carolina and three stores in Georgia, three in Mississippi, and three in Virginia. The balance of the 51 stores last quarter were spread out in 11 more states, again giving us a good balance of growth within our markets and our distribution centers.

As mentioned in our call last time, our new Lubbock, Texas DC is scheduled to be open in this fourth quarter. Lubbock will service a large group of existing O'Reilly stores in West Texas, as well as the Texas and New Mexico Checker stores that we will be converting, starting in December.

We're also starting the build-out of our new distribution center in Greensboro, North Carolina. We have a goal of having it in operations during the second quarter of next year. The Greensboro distribution center will more efficiently service a number of stores currently being serviced out of our distribution centers in Knoxville and Atlanta, plus it will give us the ability to expand into markets in the Carolinas, Virginia, West Virginia and the eastern part of Kentucky.

Now, in regard to relocation stores, we had two more stores moved last quarter, bringing us to a total of 14 relocations for the year. In addition, our installation teams completed 20 store renovations for a total of 60 projects this year. Along with this, we completed another 60 interior upgrades, which gives us 145 for the year and just about finishes the store-wide interior upgrade program we've been on for the last couple of years.

Now, to comment on the balance of the year, our construction schedule is shaping up to have an additional 60 stores with the majority of them in the third quarter. We will finish with about 148 to 150 stores for the year. This will open up the fourth quarter for our expansion and installation teams to focus on starting the merger of the CSK Checker and Murray's store conversions.

Our new store growth will start back up in the first quarter of next year and we expect to have an expansion plan for another 145 to 150 stores, with a large percentage of them being in the Northeast and Southeast states.

Now, to briefly discuss our CSK conversion plans, as I mentioned, this quarter, we'll start the Phase I of a conversion of around 160 Checker stores. These stores are in our Northern markets that's being serviced out of their CSK Minneapolis DC, where we also have a DC. There will also be a large group of stores in West Texas and in New Mexico that will be serviced out of our Lubbock DC. Following the changeovers of these 160 stores, they will receive nightly delivery service out of our Minnesota, Billings, and Lubbock distribution centers. They will receive total inventory lists, new computer systems, and when there is an overlap with O'Reilly stores, the exterior signs will be changed to O'Reilly as soon as possible.

At this point, out of the 160 stores, we think there will only be about 38 to 40 stores that are overlapping, and these are mainly in our northern stores and we will either consolidate an O'Reilly store into CSK building or CSK into O'Reilly, depending on the situation. This phase is scheduled to be finished in early February.

Now, basically starting at the same time and following some minor work on our shipping lanes in our Indianapolis DC, we will start a second phase that will include approximately 60 Murray's stores that are located in the Chicago and surrounding market areas. Our Indianapolis DC will service these stores on a nightly schedule, and like the 160 Checker stores, they will have new inventory and computer systems installed. We hope to have these 60 stores finished by the first part of March.

Then, after taking the 60 stores that is being serviced from the CSK Detroit distribution center to Indianapolis, we'll approach the Chicago store -- after the store conversions is over in Chicago, this will allow us to have the ability to start working on the Detroit DC, as far as changing out their distribution system and the inventory. After that is finished, we'll be able to address the Detroit market, which is another 90 Murray's stores and change them to our systems and inventory. We hope to have this phase completed by the end of the second quarter next year.

The Detroit DC will then play a very important role in the O'Reilly new store expansion growth in the Michigan, Western Ohio, and the eastern part of Pennsylvania.

In regard to the rebranding of these first Checker and Murray's store changeovers, tentative plans will be to cobrand advertising and marketing with O'Reilly as soon as possible. Following the conversions and depending on the O'Reilly store presence in the surrounding markets, we will address exterior signage changes. We want to be sure that we are fully converted, team members are trained on new systems and product lines, prior to changing any exterior signage.

Now, for the Southwest and West Coast conversions, which is obviously a work in progress on these 1,000 approximately Checker, Schuck's and Kragen stores. When we start out with line evaluations from a product lineup, and then as quickly as possible, product line changeovers in the stores and the two servicing distribution centers in Phoenix, Arizona and Dixon, California. We are presently evaluating the number and the locations of the additional distribution centers that will be needed to cover all market areas under our distribution model.

Our goal, obviously, is to provide nightly stock replenishment and inventory availability to our stores as soon as possible. We believe that it will take three and possibly a fourth distribution center along with their current two distribution centers to provide this level of service and a distribution foundation to support the continued O'Reilly store expansion and dual market strategy on the West Coast.

Now, in regard to store inventories, as Greg mentioned, we feel these stores currently are under inventory. And our immediate plan is to evaluate all 1,000 stores, and on a priority basis, add the additional hard part, coverage, and mix that will allow us to grow both retail and installer sale. This is a line-by-line process, and cannot happen overnight. But we feel confident that as soon as we can make it happen, that the inventories will help see the sales grow at a nice level.

Along with the inventory upgrades, we will also do an in-depth market pricing evaluation and ensure that all markets are competitive on both the retail and the wholesale side of the business.

Now, in regard to branding of these West Coast stores, we feel that the CSK, Schuck's, Checker's, and Kragen brands are very good retail brands in their markets. And it is critical that our plans carefully transfer this brand equity to the O'Reilly brand. Similar to the Chicago and Detroit markets, we will begin cobranding CSK brands and O'Reilly on all advertising and marketing. And when it becomes obvious that we can consider going to the next step of changing exterior signs, again, it will be obvious and we will set a plan out to make those conversions. We expect that this could take up to two years, possibly, to get to that point. Again, at this time, it's really too early to forecast that.

I would like to end with just a couple of comments on some meetings we had with the CSK team. We are very excited about the auto parts experience and the tenure that we have found in the stores, the distribution centers and the corporate departments. Prior to closing and one of the very first things that we requested that we do was to have meetings with all their store managers, district managers, regional managers, and distribution management. Jeff Shaw, our Senior VP of Sales; Tony Bartholomew, our VP of Sales; and Greg Johnson, VP of Distribution, and myself, conducted over 16 group meetings in all the markets that took us about five weeks to get around to. It allowed us to meet and address in person the vast majority of their field management team.

The meetings went great. We found a tremendous amount of enthusiasm for the merger of the two companies and our plan to implement our dual market sales strategy.

Now, I would like to close by thanking our O'Reilly team for last quarter's performance. We gave a challenge to our teams to raise their level of focus on sales and go to the next level of providing great customer service and growing market share. But we always want and believe we can do better, considering the challenging market conditions that Greg described. We want to recognize and appreciate the hard work and commitment of our team for reaching the positive results that we had last quarter.

Now, I would like to turn it back to Tom. Thanks.

Thanks, Ted. Moving on to the numbers -- sales were up 9.5% to $704 million for the quarter, with a comparable store sales increase of 3.4% for stores opened greater than 12 months versus 2.0% comparable store sales growth for the second quarter of 2007. Year-to-date sales increased 7.5% to $1.4 billion on comparable store sales of 1.5% versus 4.3% in the prior year.

Sales to independent jobbers, team members, and equipment sales, which are not included in our comparable store sales calculation, were $19.2 million for the second quarter of 2008, which was a decrease of $0.1 million from the same period last year. Year to date, these non-comp, non-store sales were $35.4 million, down $1.3 million from the prior year. Gross profit for the quarter was 45.0% of sales versus 44.7% in the prior year. For the year, gross profit was 44.8% of sales versus 44.3% in the prior year. The improvement was primarily due to the mix of products and improved acquisition costs.

For the quarter, SG&A was 32.5% of sales versus 32.0% in the prior year. The deleverage was primarily the result of additional investments in store technology made in the third quarter of 2007, which have not anniversaried, and an increase in the cost of fuel relating to store-level deliveries. For the year, SG&A was 32.8% of sales versus 31.7% in the prior year. The deleverage was the result of the higher depreciation expense, fuel costs, and decrease in the year-to-date comparable store sales levels from 4.3% in 2007 to 1.5% in 2008.

Operating income for the quarter was 12.5% of sales versus 12.7% in the prior year. Year-to-date operating income was 12% of sales versus 12.6% in the prior year. Tax provision for the quarter was 37.4% of pre-tax income versus 37.0% in the prior year. The year-to-date tax rate was 37.3% of sales compared to 37.1% in the prior year. The increase is due to certain state tax law changes that occurred in mid-2007.

Net income for the quarter was $55.8 million versus $51.9 million in the prior year. For the second quarter, net income was 7.9% of sales as compared to 8.1% in the prior year. The year-to-date net income was $102 million, which was 7.6% of sales compared to 8.0% in the prior year.

Diluted earnings per share for the quarter was $0.48 per share, which is increase of $0.03 over the prior year. Second-quarter EPS is based on 116.5 million shares as compared to 116.1 million shares in the prior year. The year-to-date EPS was $0.88 per share, which is $0.01 increase over the prior year.

Moving on to the balance sheet, inventory was $904 million, up $51 million from June, 2007. This represents a 6% increase over last year versus an 11% increase in store count over the same period. Total assets were $2.5 billion, a $278 million increase over June 2007.

Accounts payable of $446 million was an increase of $52 million over June 2007. AP'ed inventory increased from 46.2% to 49.3%, a strong 310 basis points improvement. The improvement was primarily driven by better vendor terms and improved leverage on inventory at the store level in the newer DCs.

Debt levels were $75 million at June 2008 versus $101 million at the end of June 2007. During the second quarter, our $25 million private placement notes bearing 7.72% interest were repaid with cash on hand. On July 7, we entered into a $1.2 billion ABL led by Banc of America and Lehman Brothers to finance the CSK transaction.

EBITDA for the quarter was $112 million, 15.9% of sales versus the prior year $102 million, 15.8% of sales.

Now on to some other metrics. Return on equity was 12.0% at the end of the quarter. Return on assets, 8.3%. And return on invested capital, 11.62%.

For some other financial information, LIFO during the second quarter -- the reserve increased by $8.2 million, bringing the increase of the reserve to $11.6 million year-to-date. Depreciation for the quarter was $22 million, $44 million year-to-date. Capital expenditures were $66 million for the quarter and $125 million year-to-date. Interest expense was $800,000 for the quarter and $2.2 million year-to-date. Due to the acquisition of CSK, these amounts are not indicative of the interest expense for the remainder of the year, which we'll talk about later.

Stock option expense was $1.6 million for the quarter versus $1.5 million in the prior year. Year-to-date stock comp expense was $2.9 million versus $2.7 million in 2007.

For the quarter, cash flow from operating activities was $97 million versus $63 million in the prior year. Free cash flow for the second quarter was $30 million, versus a negative cash flow of $13 million in the prior year.

For the year, cash flow from operating activities was $215 million, which was a 12% increase over the same period in 2007. Free cash flow year-to-date was $90 million, an increase of $39 million over the same period in 2007. These strong results are due to lower CapEx and improved AP'ed inventory ratios.

Moving on to our guidance, our guidance includes the acquisition of CSK on July 11th. Due to the recent consummation of this transaction, we will only be providing full-year guidance at this time.

Full year CapEx guidance is $285 million to $300 million. This guidance is highly dependent on finding suitable distribution centers to expand our distribution network. Delays in finding locations or changes in the lease/own mix could reduce this level of investment. Depreciation is estimated at $110 million to $120 million. The tax rate is estimated at 37.4% to 37.7% of pre-tax income. Gross margin we estimate to be 45.3% to 45.9% of sales on $3.55 billion to $3.65 billion of revenues.

Our same-store sales guidance for the O'Reilly stores for the second half of the year is 2% to 4% and 2% to 3% for the full year. Comp store guidance for the CSK stores for the second half of the year is negative 3% to negative 1%. On a combined Company basis, our comp guidance is the same for both the full year and the second half of the year at 0% to 2%.

Moving on to diluted earnings per share, GAAP EPS for the full year of 2008 is projected to be $1.50 to 1.54 per share. Excluding one-time charges relating to the acquisition, what we're calling adjusted EPS, we're expecting earnings per share to be $1.57 to $1.61. Included in the adjusted EPS is an estimate of $3.2 million for non-cash amortization related to long-lived intangibles identified as part of the purchase price allocation.

It should be noted that this is an estimate and is subject to potentially significant adjustments based on the final valuation of purchase price allocation work. For 2008 we expect the acquisition to be dilutive by approximately $0.15. However, we continue to expect the acquisition to be slightly accretive to earnings per share in 2009 and to realize ongoing synergies of $100 million annually beginning in 2010. We are working very hard on finalizing our integration plan.

However, with only having full access to all of CSK's product information and team members for the past 11 days, it would be premature to give more guidance on synergies at this point. When the time is appropriate, we will share more detailed information on our planned synergies. So, if you could avoid asking questions related to the specifics of synergies today, we would appreciate it.

At this time, I would like to ask Kerry, the operator, to come back and we will be happy to answer your questions. Kerry?

(Operator Instructions). David Cumberland.

Within your guidance of dilution this year, to what extent does that reflect incremental costs related to the integration?

Well, we're going to focus on their cost structure is a big opportunity, we feel, for us. That would include all the costs we expect to incur through the end of the year for integration. To talk about the specifics would probably be premature at this point.

Thanks. And then on the timing of the three to four DCs that you could add in the Western US, what is the potential timing for that rollout?

David, we're currently looking for real estate. And again, we haven't gotten far enough to know even whether we'll end up owning the real estate or leasing it. We have in a couple of markets some good prospects but we've got people today working on that. And I would estimate -- and again, it depends on the situation with the buildings that we get. But, by the end of '10, we should be in a point that we would be open there -- maybe mid-'10 depending on the facility. It really depends a lot on the real estate and what kind of work has to be done inside the building from a material handling and storage perspective. But, hopefully by the end of '10, would be in a real strong distribution position there.

Sharon Zackfia.

Wow, that was not my last name. Zackfia. I appreciate that you just closed on CSK. So a lot of these things are probably in flux. But, I think Ted was talking about the inventory changes on the West Coast and the pricing strategy and that you'd do that line item or line by line as soon as you could. Is there a point where we can kind of -- is it first quarter of next year where we would expect everything to be done? I understand that is a transition. But, is there something we can kind of think of as a line in the sand where the West Coast is better priced and has a better inventory mix, at least for the do-it-yourself segment?

Yes; well, Sharon, it kind of happens in layers. And a lot of it depends on decisions that have not yet been made relative to products that will be carried on the West Coast from a product line perspective.

But let me say this and see if this maybe helps clarify what our general plan is. And that is, the stores to which we have current distribution reach, as we convert them, these will be full conversions; they will be converted over to our merchandise, and our pricing, and our strategy, and our systems. They will be O'Reilly stores. If you walked into one of them, it would feel just like an independent store that we might buy today that had been converted to O'Reilly. The West Coast stores, to which we don't have distribution reach, those stores will be -- as product line change decisions are made, those will be changed one line at a time. So, and that takes time. To move through that whole process, one line at a time, through all their distribution centers and all the stores, takes time. And I really don't even have a good estimate of the amount of time, but I can tell you that it would run well into the end of next year, at least.

But, in the meantime, we will enhance the existing inventories they have with some of the strategic products that we see are necessary to be successful on both sides of the business. And in many cases, these are private-label, price-sensitive type products that we feel they are not positioned as they should be.

And coinciding with the process of adding these products and the evaluation of the product lines and the timing relative to the changeovers, we'll make the decision by product line as to what pricing position we should take, either before or after the changeover. But, in the near future, right away, we will begin making price changes to lines that we view as key from a price perception standpoint, especially in a more challenging economy that we're in today.

Okay. And then secondarily, it was encouraging to hear you talk about some of the more discretionary products picking up, like the air-conditioning and so on. Is that -- I guess number one, is that still a drag on comps? I mean I am assuming that still comping at a less robust rate than the consolidated comp.

And then secondarily, we're not hearing a lot out there about consumers feeling better. So, what is your anecdotal thought as to why you are starting to see a pickup in some of these items that maybe could be deferred a bit longer?

Well, I think in, for instance air-conditioning, where we ran negative as a category for some categories. Negative from a comp store sales perspective. And still if I was to speak specifically to air-conditioning, I would tell you that it doesn't -- it's not running as well as our overall comp, and so it's a little bit of a drag on comps. But it's so much better than it was.

And my perception of that is that consumers have deferred things like air-conditioning repair; and maybe the economic stimulus package that the federal government provided helped some. But we have seen an improvement there. And just the general attitude and comments by some of our installer customers and our guys in the field is that some of the things that they feel like have been deferred are now starting to come to fruition a little better. They are starting to make repairs.

And our maintenance categories -- you know, I mentioned brakes and lubricants and oils and things like that. Those categories, while they weren't performing as poorly maybe as air-conditioning, but they are performing better. And those are just indications to me that maybe we are on the front end of many families adjusting to be higher prices of fuel and maybe building it into their budgets a little better.

Have you seen those improvements pretty broadly across your store portfolio?

Yes. By category. Actually I didn't look at it as closely as I could have by region. I know our comparable store sales by region -- while it varies depending on the region and some of the things we've done there. For instance, some of our northern regions are doing real well right now as we've really gotten traction following our Midwest acquisition and the opening of our distribution center up there. Maybe some of the southern regions are doing aren't doing quite as good, as we continue to deal with some of the changes that happened down there following hurricanes from years back; and just the general -- maybe a more depressed economy in some of those markets. But, I really don't have any specific comment relative to categories by region.

Scot Ciccarelli.

Now that you guys have had CSK stores at least for a few days here and it sounds like Ted has been out in the stores and some of his team, can you guys just give us kind of your assessment regarding the CSK stores, the condition of them? They have been starved of capital for a while, so I'm just kind of wondering what you guys think of the store base at this point?

Well, I will make a few comments and then Ted, if you have any additional comments, please add them when I'm finished.

My assessment would be that the stores are in pretty good shape, from a fixture standpoint and just the appearance of the store; there's typically some minor things that we would do to maintain the stores, being in a better capital position than maybe CSK has.

The biggest issue from my perspective that impacts their business is that they -- some of the stores, not all of the stores because some of the stores are in a pretty good inventory position from a SKU count perspective. But many of the stores are not in as competitive a position as we would like from a SKU count perspective. Some stores may just have say 12,000 to 14,000 SKUs and have an AutoZone across the street with 19,000 or 20,000.

And as I think Larry Mondry had spoke of, one of the things that he had done as the new CEO there was tested, putting more inventory in some of the stores to see what that would do to sales. And of course, it does positively affect sales, as many of us that have been in the business for a long time have learned over the years.

And one of the things that we will be looking at first is making the correct inventory investments in those stores to drive sales.

But, if I was to speak of anything that I feel has been maybe neglected due to lack of capital, it would be the inventory. Ted, do you have anything to add to that?

Well, just from a physical aspect, the stores look fine. Out front, their merchandising plan, they are well-kept. They are sharp-looking retail stores. To Greg's point, once you go behind the counter you realize that in a majority of the stores that over time they have pulled down the inventory on hard parts where they are just not competitive from just an in-stock situation.

And then obviously, out front their planograms -- I think they look good but they certainly need to be refreshened. And so, over time and as quick as possible, we're going to improve the back room. We'll go through a total remerchandising out front.

They have a tendency, I think, to add in a lot of import stuff, containers of old -- just little motorcycles, things like that for large ticket sales. So, we will transition back to a more auto parts mix, certainly in the back room.

From a stacking standpoint, again, they've got a lot of -- I was really surprised with the tenure they have; I mean folks that have been with the company forever out in the stores. Their staffing is lean right now because they've obviously -- with sales, they've kind of shortened up their staffing to where their service levels talking to some of the field op guys, they need to be enhanced and improved. So, again, with the inventory, with the better pricing, and with staffing stores to handle the business, we should really see some nice increase in store volumes, so.

And I guess related to that, how quickly do you guys expect to roll out commercial sales desks to the CSK stores? Obviously -- I forget the percentage -- but I know they only have commercial desks in I think a little over half of their stores.

Yes, and you know, honestly, where they have commercial sales desks and they've committed the inventory, they do a real nice volume with the installer business. So, currently, we're evaluating, we're having their field op people come back to us prioritize where they feel like commercial sales should be rolled out.

Again, it was the use of capital for them. It would take additional inventory, additional trucks. And so they sort of handcuffed themselves. They knew there was a number of markets that should have commercial sales. So we will address those first. And then, as time goes on and we get the inventories upgraded in the stores, we'll be more aggressive at rolling out trucks.

I don't expect that -- in some of the metro markets they operate in, they are so -- stores are pretty close from a retail standpoint and there will be probably a percentage of stores that we may elect not to roll commercial sales out because it just makes sense to have one big commercial store and then a couple retail stores around it. But again, that won't be very many stores. So, we hope to have commercial sales in the stores as we open up the distribution centers for sure in the next year or two. But, again, the priority ones, we're going to make them our highest priority and address those in the next six to eight months at a minimum.

So, just to be clear, the rollout of these desks will wind up nearing the rollout of the DC network?

Well, no, not totally. Again, we've prioritized the stores that we know are just absolutely great installer markets. And we will address those within -- well we're working on them right now, but we hope to have some additional commercial stores. They call them [cam] centers. We call them installer service centers. We will have those out as soon as possible. And then, we will address all the stores in total as we roll out the distribution centers or increase the hubs that can service the installer stores with availability of inventory.

Mike Baker.

Two real quick questions. One, not to get too specific on the synergies but, I'm wondering if that includes any paydown of debt and then therefore I guess the interest expense will go up originally. But then, I presume you will be able to pay down some debt and then take down the interest expense run rate that CSK has been running with? If you could comment on that.

And then come, my second question, so, you talked about potentially $285 million to $300 million in CapEx this year because of some new DCs. I guess the question is, how much does these three to four DCs, how much do each of them usually cost in terms of CapEx? And then I guess from that, we can back into understanding that it could change, but what the going plan is for new DCs in 2008.

Tom, do you want to answer the synergy question first?

Mike, the synergies would be excluding interest. We will project interest based upon our current deal. And to your point, we will work very hard on reducing that amount and reducing the interest drag on our earnings.

And then, Mike, the DCs, it varies, of course, depending on the square footage and the condition of the distribution center and whether it's a lease or buy, but somewhere in the $20 million to $40 million range a DC, something like that would be close. If they were larger than that, it could be a little more than that. But, that would be a range.

So, then, within the $285 million to $300 million CapEx plan this year -- is that about two of those DCs at that cost?

How many are you putting in there?

You know, we won't be able to complete any DCs this year. It would be probably a cost of one. If we could find two to buy, then we would have to fixture. That's what's in our plan right now.

One more comment on the DCs. The costs vary a lot depending on the location but also the size. Our DCs range in size from a little over 100,000 to 500,000 square feet. And how big they are is based on a formula we use of how many square feet we need per store. So that also drives the number.

Colin McGranahan.

I just wanted to follow up a little bit on Mike's question on CapEx and maybe approach it a little bit of a different way. It looks like the incremental CapEx this year is going to be maybe in the range of $60 million. You were at $220 million, $230 million before; now, $285 million to $300 million. And you're going to be converting something like 220 stores through kind of early March next year and kind of working on some DCs.

And if you take the incremental CapEx and divide by those stores, you work out at something like a $270,000 per store all-in conversion cost; so for the new store systems, the signage, in that portion of the store's DC. Does that make sense? Is that the way we should think about incremental CapEx going forward as you tackle the rest of the CSK store base?

And then additionally, just on inventory per store, what's the per unit -- and I know it varies dramatically by store, but on average, what do you think is a per-unit investment in inventory will be?

Well, on the CapEx, hard to say what to convert a store is. They are kind of across-the-board. It depends on the layout of the store, what type of fixtures are in the store, how old the store is. But our estimate right now is that on a per store basis, the average cost to convert will be $100,000.

On top of that, we have distribution costs as we expand the distribution and then we have IT infrastructure costs that also have to be borne. And in addition, we run our own trucks as opposed to CSK, which outsources their DC to store deliveries. So those items are all in there.

Your second question on the inventory, as you said, it's a store -- we look at store by store and vehicle registrations and sales history by store. The best thing I can point to you is look at our average inventory per store, and look at CSK's average inventory per store historically. And that difference is probably what we need. Now, that doesn't all go in the store. Some of that goes in the supporting distribution centers, but that should give you a general idea.

That's helpful. And just to clarify, the $100,000 is just the cost of the store. You're saying the IT, the DC, and the trucks is incremental to that $100,000?

Correct. And your math on our previous guidance on 150 stores and our combined guidance is good math.

Okay. And then just more broadly, we're looking at the miles driven trend, and it's kind of the worst trend we've seen probably since the 1970s. Your business seems pretty consistent. How do you reconcile those two? And how do you think about miles driven today in terms of any kind of a leading indicator for where demand is going?

Well, the information we get, Colin, is a little bit delayed on miles driven. As you know, it's been relatively soft this year and that obviously, isn't a macro driver for our business.

For us, our tack in each market is to try and take as much market share as we possibly can. The positive thing for this is that the age of vehicles is increasing because of new car sales being down. So, that creates more demand for each mile that's driven by these vehicles, so that's a driver. Technology has changed on these vehicles -- as I mentioned before several times, these vehicles are able to be driven at very high mileages, yet they require maintenance. And some of the maintenance at higher mileages, while the drive trains and interiors and exteriors of the cars are good, are emission systems and ignition systems, which contain components that can be relatively expensive; but once replaced, put the car in a good position to go a long way.

So, to me, I feel like if there is some mitigating effect of the softness in the miles driven relative to the age of the vehicles and the fact that most consumers are driven to try and keep their cars in good running order in order to maximize their fuel mileage.

Colin, one follow-up question or answer to your CapEx; is our incremental CapEx over previous guidance also includes maintenance CapEx for the new CSK stores.

Alan Rifkin.

A couple of questions if I may. Greg, the first question is for you. You hit your numbers in the second quarter, both with respect to earnings and comp. Top-line revenues were a little bit better than we expected and it looks like on a sequential basis, new stuff productivity actually improved. You're also saying that the performance of discretionary parts are getting better. Even as we look at miles driven and comparing let's say April to March, while it's not ideal, it certainly improved on a sequential basis. What exactly are you seeing going forward that's causing you to be a little bit more cautious on the core O'Reilly stores in the second half of this year?

Well, one is, as I mentioned, just the continued economic headwind that we -- that's talked about so often. And we see it; I'm hopeful that that continues to improve or starts improving I guess from some people's perspective. Again, our perspective has been that there has been some improvement. Additionally with the tougher comparisons third quarter this year to last year with a 4.3% performance last year, those things combined. Also -- and this is just a comment, but with our performance in the second quarter of 3.4% kind of being in the middle of the 2.2% to 4% guidance and that trend continuing, we just felt it was prudent to go ahead and maybe soften our guidance a little bit to 2% to 4%.

I can tell you right now, we are well in that guidance. And my hope is that we are being too conservative relative to our comparable store sales guidance. But based on what we know today and the factors that I just stated, we feel like that's the correct guidance at this time.

Okay. And then, a follow-up if I may. With respect to CSK, it certainly sounds like the first two phases are obviously going to be focused on stores that are currently supported by your existing DC infrastructure. Would you say at least for the next 12 months that the integration risks are probably less so than what is ahead of you in the second half of '09 and '10?

Well, to me, the integration risk for the overall Company is present, regardless of where we start first. I think the stores that we are going to convert right off the bat here, I think we're really good in these types of conversions, you know, these whole store conversions.

I mean part of our expansion plan as you know, Alan, has been to buy individual -- independent owned parts stores. And the teams that we have do know what they're doing, they can do it very quickly, and those are the teams that we're going to have to go out and convert these stores.

Because we have the distribution to these stores, our business model works perfectly for these stores. So yes, there is very low risk that we won't be successful in converting those stores.

Now, on the other hand, when you look at let's say thousand stores that are left on the West coast to which we don't have as solid a distribution as we would like, to me, once we have that distribution in place, the risk of our ability to execute the business model is very low. We've done this for a long, long time, and we do it today with over 1900 stores, and we're very confident the business model will work in those markets. It's just a matter of getting us in a position to where we can execute it. Yes, it takes more time. So there's more time involved in the conversions out there. But I think at the end of the day, what we'll end up with is a store that is supported and operates exactly as the stores that we'll convert where we currently have distribution reach.

One last question if I may. Ted, we appreciate all the color that you gave on the integration. But, is there any sort of preliminary number that maybe you can shed some light on with respect to potential EBITDA margins at the CSK stores let's say in 2010 relative to where they are now?

Alan, this is Tom. We're not prepared to give 2010 guidance. As I mentioned earlier, we have a lot of work to do to finalize our integration plan and it would be premature to give out that information.

But I would like to answer kind of a comment that was embedded in yours on new store productivity. Over the last three quarters, we've been I guess somewhat uncertain why the community looked at our new store productivity with such fluctuating variations on a quarter-to-quarter basis when we didn't see it with all the detailed information.

So, we polled a few of our analysts to look at their calculations and see why, when we look at the actual detailed information we're not getting the same reading that you are.

And I guess, the two comments or the way it looks like most of the outside world is looking at our new store productivity is, one, square footage is not as good a measure to use as units. Although our square footage does vary, especially when we take on existing space, the economics of having a slightly larger, smaller stores or much larger store if we find 14,000 square feet that are at the right rent rate to make our model work, don't significantly change our operating costs, especially when you consider the biggest operating costs at a store level is payroll. So, our first suggestion would be to use units.

The second item would be to make sure that you are excluding the non-store, non-comp sales, those team member, independent jobber and equipment sales. When we looked back historically, we started to disclose that middle of last year. So, what we'll do as supplemental disclosure here in our upcoming Q is give you the information further back to look at.

You know, that, although not a huge percent of our overall Company's sales are not core to our Company, affect that non-comp number quite a bit. Especially if you look historically when we bought Midwest they have a tremendous amount of independent jobber business, which we've talked about, that kind of a third of it we bought the stores, a third of it we still service and a third of it elected to have somebody else servicing them, who weren't competing against them. So, that historically has created quite a bit of variation in the numbers.

But when we look back and we look at the detail I guess the heart of what I'm saying is over the last three quarters, although it looks a lot better this quarter from the way historically analysts have done, it looks pretty consistent to us, and again within the acceptable and historic ranges of what we've seen.

We have reached the allotted time for today's call. Do you have any closing remarks?

Yes, I would just like to thank everyone for their time and attendance on the call this morning. As you know, we're very excited about this acquisition with CSK and the combination of the two companies.

And as we've outlined, we have some short-term plans and some longer-term plans to make these conversions and integrations. And as we proceed, we will be reporting on our success with that to the extent that as we get stores converted and we have enough time to start measuring the results, we will report the results of those stores that have been converted. So, we can I guess express our success with those conversions to help you in building your models and evaluating the potential for our Company into 2010 and beyond. So, thank you very much and we will look forward to talking to you following our third-quarter performance. Thanks.

This does conclude today's call. You may now disconnect.